Company Quick10K Filing
Aerogrow
Price1.70 EPS-0
Shares34 P/E-23
MCap58 P/FCF-495
Net Debt3 EBIT-2
TEV62 TEV/EBIT-28
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-03-31 Filed 2020-06-23
10-Q 2019-12-31 Filed 2020-02-11
10-Q 2019-09-30 Filed 2019-11-13
10-Q 2019-06-30 Filed 2019-08-13
10-K 2019-03-31 Filed 2019-06-25
10-Q 2018-12-31 Filed 2019-02-11
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-13
10-K 2018-03-31 Filed 2018-06-28
10-Q 2017-12-31 Filed 2018-02-13
10-Q 2017-09-30 Filed 2017-11-13
10-Q 2017-06-30 Filed 2017-08-14
10-K 2017-03-31 Filed 2017-06-26
10-Q 2016-12-31 Filed 2017-02-13
10-Q 2016-09-30 Filed 2016-11-10
10-Q 2016-06-30 Filed 2016-08-11
10-K 2016-03-31 Filed 2016-06-15
10-Q 2015-12-31 Filed 2016-02-11
10-Q 2015-09-30 Filed 2015-11-09
10-Q 2015-06-30 Filed 2015-08-10
10-K 2015-03-31 Filed 2015-06-29
10-Q 2014-12-31 Filed 2015-02-17
10-Q 2014-09-30 Filed 2014-11-10
10-Q 2014-06-30 Filed 2014-08-11
10-K 2014-03-31 Filed 2014-06-30
10-Q 2013-12-31 Filed 2014-02-11
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-14
10-K 2013-03-31 Filed 2013-07-01
10-Q 2012-12-31 Filed 2013-02-11
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-10
10-K 2012-03-31 Filed 2012-06-26
10-Q 2011-12-31 Filed 2012-02-13
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-09-01
10-K 2011-03-31 Filed 2011-08-15
10-Q 2010-12-31 Filed 2011-02-14
10-Q 2010-09-30 Filed 2010-11-10
10-Q 2010-06-30 Filed 2010-08-12
10-K 2010-03-31 Filed 2010-06-25
10-Q 2009-12-31 Filed 2010-02-17
8-K 2020-06-23
8-K 2020-02-11
8-K 2019-11-14
8-K 2019-11-12
8-K 2019-08-13
8-K 2019-06-24
8-K 2019-04-12
8-K 2019-02-11
8-K 2018-11-13
8-K 2018-10-04
8-K 2018-10-02
8-K 2018-08-13
8-K 2018-07-06
8-K 2018-06-26
8-K 2018-03-28
8-K 2018-03-12
8-K 2018-02-13
8-K 2015-08-10
8-K 2015-07-14
8-K 2015-07-06
8-K 2015-06-29
8-K 2015-02-17

AERO 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits, Financial Statement Schedules
Note 1 - Description of The Business and Summary of Significant Accounting Policies
Note 2 - Notes Payable and Long Term Debt
Note 3 - Scotts Miracle - Gro Transactions - Convertible Preferred Stock, Warrants and Other Transactions
Note 4 - Equity Compensation Plans and Employee Benefit Plans
Note 5 - Income Taxes
Note 6 - Related Party Transactions
Note 7 - Commitments and Contingencies
Note 8 - Leases
Note 9 - Segment Information
Note 10 - Subsequent Events
Item 16. Form 10 - K Summary
EX-31.1 ex_191078.htm
EX-31.2 ex_191079.htm
EX-32.1 ex_191080.htm
EX-32.2 ex_191081.htm

Aerogrow Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
604735231102012201420172020
Assets, Equity
20151162-22012201420172020
Rev, G Profit, Net Income
503112-7-26-452012201420172020
Ops, Inv, Fin

10-K 1 aerogrow20200331_10k.htm FORM 10-K aerogrow20200331_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549 

 


 

FORM 10-K

 


 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                    

         

(Commission File No.)  001-33531

 

AEROGROW INTERNATIONAL, INC.

 (Exact name of registrant as specified in its charter)

 

Nevada

 

46-0510685

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

5405 Spine Rd

Boulder, Colorado 80301

(303) 444-7755

 (Address, including zip code and telephone number, including area code, of registrant’s of principal executive office)

 

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

 

None

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

AERO

OTCQB

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐  No  ☒

 

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 to 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒ 

Smaller reporting company ☒

 

Emerging growth company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

 

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of September 30, 2019 was $6,762,964, the last day of our most recent second quarter.  For the purpose of the foregoing calculation only, all directors and executive officers of the registrant and owners of more than 5% of the registrant’s common stock are assumed to be affiliates of the registrant. This determination of affiliate status is not necessarily conclusive for any other purpose.

 

The number of shares of the registrant’s common stock outstanding as of June 15, 2020 is 34,328,036

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

 

 

AeroGrow International, Inc.

Annual Report on Form 10-K

Year Ended March 31, 2020

 

 

PART I

Page

Item 1.

Business

1

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

14

Item 2.

Description of Property

14

Item 3.

Legal Proceedings

14

Item 4.

Mine Safety Disclosures

14

 

PART II

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

Item 6.

Selected Financial Data

16

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 8.

Financial Statements

30

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

30

Item 9A.

Controls and Procedures

30

Item 9B.

Other Information

31

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

32

Item 11.

Executive Compensation

36

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

41

Item 13.

Certain Relationships and Related Transactions, and Director Independence

43

Item 14.

Principal Accountant Fees and Services

44

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

45

Item 16.

Form 10-K Summary

70

Signatures

71

 

 

NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 10-K (“Annual Report”) for AeroGrow International, Inc. (“AeroGrow,” the “Company,” “we,” “our” or “us”), including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “may,” “will,” “would,” “could,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” as well as variations of such words and similar expressions, are intended to identify such forward-looking statements. These forward looking statements may include, among others, statements concerning our expectations regarding our business, growth prospects, revenue trends, operating costs, working capital requirements, access to funding, competition, results of operations and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. These forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from expectations expressed or implied in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section entitled “Risk Factors” in Part I Item 1A of and elsewhere in this Annual Report, and in other reports we file with the SEC, including the most recent quarterly reports on Form 10-Q and current reports on Form 8-K. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

 

 

 

PART I

 

ITEM 1.  BUSINESS

 

Corporate History

 

AeroGrow International, Inc. (“AeroGrow,” the “Company,” “we,” “us” and “our”) was formed as a Nevada corporation in March, 2002. After more than three years of initial research and product development, we began sales activities in 2006. Our principal executive offices are located at 5405 Spine Rd., Boulder, Colorado 80301 and our main telephone number is (303) 444-7755.

 

Our Business

 

AeroGrow is a developer, marketer, direct-seller, and wholesaler of advanced indoor garden systems designed for consumer use and priced to appeal to the gardening, cooking, healthy eating, and home and office decor markets. We offer multiple lines of proprietary indoor gardens, grow lights, a patented nutrient formula, more than 40 corresponding proprietary seed pod kits, and various cooking, gardening and decor accessories, primarily in the United States and Canada, as well as selected countries in Europe. As of March 31, 2020, we have manufactured and shipped approximately 2.6 million AeroGarden® units and approximately 5.1 million seed pod kits to consumers worldwide, through the following two sales channels:

 

 

Retail Sales Channel, both online and in-store retail distribution (with about 2,100 brick and mortar store fronts carrying our products) in North America and in five European countries; and

 

Direct-to-Consumer Sales Channel, predominantly online via our website based upon traffic from our catalogues, commercials and other awareness campaigns.  In the fiscal year ended March 31, 2020 (“Fiscal 2020”), we mailed approximately 346,000 catalogues, tested and utilized several forms of digital advertising and ran some 30, 60 and 120 second television commercials.  In prior years, we also utilized direct television sales, including infomercials and 60 and 120 second television commercials, mall kiosks, and print and radio advertisements.

 

We commenced initial marketing and distribution of our products in March 2006 with an emphasis on our retail sales channel, which typically generates lower margins and requires much higher investments in inventory than our direct sales channel.  As a result of the downturn in the economy in 2009 and the corresponding lack of funding, we shifted our sales and marketing efforts away from retail distribution.  During the four-year period ending March 31, 2013, we emphasized our higher margin “direct-to-consumer” sales channels by utilizing in-house direct mail catalogues, e-mail marketing, and internet marketing, while continuing to sell to a limited number of international customers.  

 

Beginning in April 2013, we began to sell to retail customers again due to improving economic conditions and our strategic alliance with a subsidiary of The Scotts Miracle-Gro Company (“Scotts Miracle-Gro”).  In June 2019, Scotts Miracle-Gro provided us with up to $10.0 million of incremental working capital on an as needed basis.  Interest was charged at the stated rate of 10% per annum.  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.  See “April 2013 Scotts Miracle-Gro Strategic Alliance” below.

 

Our principal products are indoor gardens and proprietary seed pod kits that allow consumers, with or without gardening experience, to grow: (i) vegetables, such as tomatoes, chili peppers and salad greens; (ii) fresh herbs, including cilantro, chives, basil, dill, oregano, and mint; and (iii) flowers, such as petunias, snapdragons, geraniums and vinca. Consumers can also plant and grow their own seeds using our proprietary “grow anything” kits, or use their AeroGardens as seed starters for their outdoor gardens with our “seed starting” systems.

 

Our indoor gardens are designed to be simple, consistently successful, and affordable.  We believe that our products enable almost anyone, from consumers who have little or no gardening experience to those who are professional gardeners, to produce year-round harvests of a variety of herbs, vegetables, and flowers, regardless of season, weather, or availability of natural light. We believe that our unique and attractive designs make our indoor gardening products appropriate for use in almost any location, including kitchens, living areas, and offices.

 

Our indoor gardening units are designed to match customer needs and interests with the appropriate garden unit features and benefits at retail list prices ranging from approximately $50 to $700, depending on size, design elements, light intensity and other automated features.  As is customary, we sometimes offer temporary discounts and targeted promotions that are designed to generate new customer sales and higher sales volume.

 

 

April 2013 Scotts Miracle-Gro Strategic Alliance

 

In April 2013, the first month of the fiscal year ended March 31, 2014 (“Fiscal 2014”), we entered into a Securities Purchase Agreement and strategic alliance with a wholly owned subsidiary of Scotts Miracle-Gro. In conjunction with this transaction, we entered into several other agreements, including: (i) an Intellectual Property Sale Agreement; (ii) a Technology Licensing Agreement; (iii) a Brand Licensing Agreement; and (iv) a Supply Chain Management Agreement.  For further information on the strategic alliance with Scotts Miracle-Gro, please see Note 3 “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements.

 

Intellectual Property Sale Agreement.  Pursuant to the Intellectual Property Sale Agreement, we agreed to sell all intellectual property associated with our hydroponic products (the “Hydroponic IP”) developed prior to April 1 2013, other than the AeroGrow and AeroGarden trademarks, free and clear of all encumbrances, to Scotts Miracle-Gro for $500,000; we also agreed to pay 2% of our revenue to Scotts Miracle-Gro for a defined period, as discussed under the next section.  Scotts Miracle-Gro has the right to use the AeroGrow and AeroGarden trademarks in connection with the sale of products incorporating the Hydroponic IP.

 

Technology Licensing Agreement.  Under the Technology Licensing Agreement, Scotts Miracle-Gro granted us an exclusive license to use the Hydroponic IP in North America and certain European countries ( collectively, the “AeroGrow Markets”) in return for a royalty of 2% of annual net sales, as determined at the end of each fiscal year through March 2020. For the first four years of the agreement, we paid the royalty in shares of common stock.  The initial term of the Technology Licensing Agreement was five years, but is renewable for additional five-year terms by providing notice to Scotts Miracle-Gro at least six months in advance of the expiration of each five-year term. As disclosed in a Current Report on Form 8-K filed with the SEC on April 4, 2018, we renewed the Technology Licensing Agreement for an additional five-year term ending in March 2023.

 

Brand Licensing Agreement.  Under the Brand Licensing Agreement, we may use certain of Scotts Miracle-Gro’s trade names, trademarks and/or service marks to rebrand the AeroGarden, and, with the written consent of Scotts Miracle-Gro, other products in the AeroGrow Markets, in exchange for our payment to Scotts Miracle-Gro of an amount equal to 5% of incremental growth in net sales, as compared to net sales during the fiscal year ended March 31, 2013 (“Fiscal 2013”).  The initial term of the Brand Licensing Agreement was five years, but is renewable for additional five-year terms by providing notice to Scotts Miracle-Gro at least six months in advance of the expiration of each five-year term.  As disclosed in a Current Report on Form 8-K filed with the SEC on April 4, 2018, we renewed the Brand Licensing Agreement for an additional five-year term ending in March 2023.  Currently, we use only the Scotts Miracle-Gro trademark for seed pod kits, seed starting systems and nutrients, the net sales of which are subject to the 5 % royalty.

 

 

Supply Chain Services Agreement.  Under the Supply Chain Services Agreement, Scotts Miracle-Gro will pay AeroGrow an annual fee equal to 7% of the cost of goods of all products and services requested by Scotts Miracle-Gro during the term of the Technology Licensing Agreement (referenced above), thereby assisting AeroGrow in exploiting the Hydroponic IP internationally (outside of the AeroGrow Markets).

 

Recent Proposal by Scotts Miracle-Gro Strategic Alliance

 

In a Schedule 13D/A filed by Scotts Miracle-Gro with the SEC on March 2, 2020, Scotts Miracle-Gro made an unsolicited proposal to AeroGrow recommending a range of operational adjustments for consideration by the AeroGrow’s Board of Directors that would effectively outsource most of Issuer’s operations to Scotts Miracle-Gro or an affiliate of Scotts Miracle-Gro. The proposal and related transactions may pose conflicts of interest and may result in: (i) cessation of AeroGrow’s status as a publicly traded company and SEC-reporting company; and (ii) may result in the liquidation of common stock held by minority shareholders at a price that may not represent the full future economic value of the common stock. See Item 1A. Risk Factors.

 

Hydroponics and Aeroponics Industry - Background

 

Hydroponics is the science of growing plants using nutrients suspended in water instead of soil. Used commercially worldwide, hydroponics is considered an advanced and often preferred crop production method. Hydroponics is typically used inside greenhouses to give growers the ability to better regulate and control nutrient delivery, light, air, water, humidity, pests, and temperature. Hydroponic growers benefit by producing crops faster and with higher crop yields per acre than traditional soil-based growers.

 

Aeroponic technology is derived from hydroponics and occurs when plant roots are suspended in an air chamber and bathed with a nutrient solution. We believe that the aeroponic technology used in our indoor gardening products is a technological advance over most hydroponic growing systems because plant roots are partially suspended in air and allowed direct access to oxygen, while being bathed in a highly oxygenated, nutrient rich solution.  For these reasons, we believe the use of a well-designed and maintained aeroponic system can yield increases in growth rates and plant survival when compared to most hydroponic or soil-based systems.

 

 

Until the development of our indoor gardening products, certain barriers prevented hydroponic or aeroponic technology from being incorporated into mainstream, mass-marketed consumer products, including:

 

 

Consumers generally lack the specialized knowledge required to select, set up, operate, and maintain the various components for a typical hydroponic or aeroponic system, including growing trays, irrigation channels, growing media, nutrient reservoirs, and nutrient delivery systems consisting of electronic timers, pumps, motors, tubing, and nozzles;

 

 

In the absence of adequate natural light, consumers generally do not possess the specific knowledge required to select, set up, operate, and maintain the varied indoor lighting systems that are necessary to grow plants indoors;

 

 

Consumers are often unable to properly mix and measure complex hydroponic nutrient formulas, which change depending on the plant variety and the stage of plant growth;

 

 

Consumers are unable to deal with the problem of nutrient spoilage; and

 

 

Federally mandated water quality reports show that the water in many large cities is not suitable for hydroponic or aeroponic growing and requires treatments in order to sustain growth.

 

Our research leads us to believe that these complexities have been accepted in existing hydroponic market channels because manufacturers have generally focused their product development and marketing efforts on satisfying the needs of the commercial greenhouse and dedicated hobbyist markets. These users are motivated to gain the specialized knowledge, equipment and experience currently required to successfully grow plants with these products.  Our research also indicates that the hydroponic growing equipment currently available in these markets is bulky, expensive and comprised of many, often unintegrated, parts.

 

We believe that the complexities of currently available commercial hydroponic and aeroponic products fail to address the needs and wants of the mass consumer market, leaving that market underserved. We further believe that our patented inventions, companion technologies, and trade secrets have simplified and improved hydroponic and aeroponic technologies and have enabled us to create an indoor hydroponic and aeroponic gardening system appropriate for the mass consumer market.

  

Proprietary Technology and Intellectual Property

 

Since our inception in 2002, we have been innovating, simplifying, and integrating proprietary technologies and inventions into a family of “plug and grow” indoor gardening products and related seed pod kits specifically designed and priced for the mass consumer market. We have used this technology platform to develop four different models of indoor gardens with many different sub models within each category, each with different features and technology groupings, with list prices ranging from approximately $50 to $700.  Multiple patent applications have been filed in the United States and internationally to protect the inventions that are exclusively used in our indoor garden system and seed pod kits, and seven patents have been issued (four in the United States and three internationally).  We have also obtained access to, both domestically and internationally, trademarks and certain domain names, including AeroGrow.com, AeroGarden.com, AeroGarden.net, AeroGarden.tv, AeroGarden.biz, and Getthegarden.com, among others.

 

Our success and ability to compete are substantially dependent upon our exclusive access to technology and expertise.  While we rely on patent, copyright, trade secret, and trademark law to protect the use of such technology, we also believe that factors such as the technological and creative skills of our personnel, new product developments, product enhancements, and reliable product maintenance are essential to establishing and maintaining a technology leadership position. There can be no assurance, however, that others will not develop technologies that are similar or superior to our technologies.  Each of our employees, independent contractors, interns, and consultants has executed assignment of rights to intellectual property agreements and nondisclosure agreements. The assignment of application rights to intellectual property agreements grant us the right to own inventions and related patents which may be granted in the United States and throughout the world. The nondisclosure agreements generally provide that these people will not disclose our confidential information to any other person without our prior written consent.

 

Following is a description of the proprietary technologies, all of which were sold to Scotts Miracle-Gro, and inventions that are exclusively used in our indoor garden system and seed pod kits.  Scotts Miracle-Gro owns all Hydroponic IP developed through April 2013, as well as Lighting Product (“LP”) IP and Large Scale Product (“LSP”) IP - internally known as the “Cabinet” – developed through July 2019. 

 

Rainforest Nutrient Delivery System. The “rainforest” nutrient delivery system combines technologies with features from several hydroponic and aeroponic methodologies into a proprietary system that leaves plant roots suspended in an air gap.  Plant roots take oxygen directly out of the air and, in testing of aeroponic systems by multiple different sources, including lettuce studies by NASA Small Business Innovation Research, plants grow faster as a result.

 

 

Advanced Growing System. The Advanced Growing System (“AGS”) is available on several of our indoor gardens and combines features from the rainforest delivery system with technologies that deliver increased nutrient oxygenation, faster and healthier root growth, decreased consumer maintenance requirements, and increased product reliability.  With AGS, plant roots are suspended in air in a 100% humid aeroponic chamber and then grow into a continuously oxygenated nutrient bath.

 

Pre-Seeded Bio-Grow Seed Pods. The proprietary bio-grow seed pods include specially selected, pre-implanted seeds, a growing medium, removable bio-dome covers, and a grow basket.

 

Microprocessor-Based Control Panel and Nutrient Cycle Delivery System. The microprocessor-based controls include automated grow lights to ensure that plants receive the proper amount of lighting, and feature nutrient and water reminder systems that alert consumers to add water and nutrients when needed.  In addition, some systems allow consumers to select from multiple plant types (for example, lettuce, herbs, tomatoes, or flowers) and the system then automatically adjusts the nutrient, water and lighting cycles to optimize growth.  In addition, some systems take into account stage of growth of the specific plants when optimizing these factors. Our ULTRA gardens, which were first introduced in Fiscal 2013, include a display screen that walks consumers step-by-step through planting, tending and harvest, and allows for complete customization of all aspects of the grow cycle, including photo period, pump cycle and nutrient cycle.

 

Custom Nutrients and Automatic pH Adjustment. The patented nutrient solutions have been designed specifically to deliver the proper nutrients to plants, while offering consumers a user-friendly application methodology. Plant specific nutrients are included with each seed pod kit, and consumers simply add them when instructed by the microprocessor-based nutrient reminder. The pre-measured and mixed nutrients eliminate the need for mixing multi-part nutrient formulas and storing various nutrients in separate containers. A proprietary buffer has been formulated and included into the nutrients that automatically adjusts tap water from around the country to the right pH ranges for plant growth.  Without this adjustment, tap water from many areas in the country will severely limit or inhibit plant growth in most aeroponic and hydroponic systems.

 

Integrated and Automated Lighting System. Hydroponic systems typically do not incorporate built-in lighting systems. Our indoor gardening products include built-in adjustable grow lights with ballast, reflector hood, grow bulbs and an electronic timer. The integrated lighting systems include proprietary high-output compact fluorescent light LED bulbs that deliver a spectrum and intensity of light designed to optimize plant growth without supplemental sunlight needed. In addition, the lighting system is fully automated and controlled by a microprocessor-based control panel described above. Variations in lighting are a differentiator in our product lines, and we have several gardens on the market with “50% more light and twice the height” of our initial gardens, thereby allowing consumers to grow larger plants such as full-sized tomatoes in our indoor gardens, and deliver higher yields.

  

New Technologies in Development.  We continue to develop improvements in lights, nutrients, oxygenation, seed variety selection, and style and design innovations, each of which are applied to our products on an ongoing basis.

 

Business Segments

 

We divide our business into the following reportable segments:

 

 

Direct-to-Consumer

 

Retail

 

This division of reportable segments is consistent with how the segments report to and are managed by our Chief Executive Officer (the chief operating decision-maker of the Company). Financial information about these segments for the fiscal year ended March 31, 2020 is presented in Note 9 - “Segment Information” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.  The products described throughout this form are not mutually exclusive to a specific segment.  The description of products and processes throughout this form are applicable to both segments.

 

Markets

 

Based on our historical sales and our existing channels of distribution, and supplemented by our own formal and informal market research consisting of individual consumer interviews, focus groups, blog monitoring, customer modeling, and Internet survey responses, we believe that our indoor gardening products appeal to a broad spectrum of consumers across multiple areas of interest.  We believe that our products appeal to at least four major market segments:

  

 

Gardener Market. A recent study conducted by the National Gardening Association states that gardening is America’s number one hobby with more than 81 million households active in gardening.  Based upon this survey, there were estimated to be 36 million households participating in food gardening and 13 million households participating in fresh herb gardening.  We believe that our indoor gardening products and related products offer both expert and novice gardeners several major benefits not readily available through traditional gardening methods, including:

 

 

the ability to grow fresh herbs, lettuces, vegetables, tomatoes, and flowers year-round, regardless of indoor light levels or seasonal weather conditions;

 

 

the ability to easily start growing plants indoors during colder months and then transplant them outdoors at the onset of the outdoor growing season;

 

 

the ability to use stem cuttings to propagate multiple reproductions of the desired plants in our indoor gardening products; and

 

 

the ease of growing in our indoor gardens, in contrast to the toil associated with traditional gardening, including preparing the soil, planting, thinning, weeding, watering, and removing pests.

 

“Want-to-be” Gardener Market. We believe that many people have an interest in gardening but lack the knowledge, confidence, available space, equipment, or time to garden. We have observed the following barriers that often prevent people from gardening:

 

 

gardening requires an ongoing time commitment;

 

 

apartment, high-rise, and condominium dwellers often lack the land needed for a traditional garden;

 

 

gardening requires physical work, which can be a significant barrier to people with limited mobility or health issues;

 

 

buying the necessary equipment to garden can be expensive; and

 

 

gardening requires knowledge and expertise.

 

We believe that our indoor gardening products overcome many of these barriers and provide a simple, convenient way for many current non-gardeners to begin to garden.

 

Cooking and Healthy Eating Market. Many customers enjoy cooking as a hobby, including those who:

 

 

are interested in cooking and appreciate the convenience and satisfaction of having a readily available supply of fresh-cut herbs to flavor soups, salads, and other dishes;

 

 

prefer the distinctive texture and taste of freshly picked, vine-ripened tomatoes, basil, lettuces, and other vegetables over days-old supermarket produce; and

 

 

are interested in healthy, pesticide-free foods for themselves and their families, reflecting both the rapidly growing interest in naturally and organically grown foods and the increasing number of people who, for health or weight concerns, include salads and fresh vegetables as part of their families’ diets.

 

We believe that our indoor gardening products are embraced in this market by people who understand the value of having an ongoing supply of fresh herbs and fresh produce throughout the year.

 

Home and Office Decor Market. Flowers are frequently used to brighten homes and offices worldwide. It is difficult to readily grow flowers indoors due to a lack of sufficient light and growing knowledge. As a result, people often use cut flowers, which are expensive, short-lived, and require ongoing maintenance. Our indoor gardening products enable colorful and fragrant flowers to be easily grown indoors year round and at a lower cost. Flowers grown with our indoor gardening products will last for months with minimal care and maintenance. Flowers can be grown in a wide variety of indoor locations, including kitchen and bathroom countertops, living rooms, bedrooms, family rooms, offices, workstations, waiting rooms, and lobbies.

 

 

Products

 

AeroGarden Indoor Gardens.  We offer four different indoor garden models with list prices ranging from approximately $50 to $700 and differentiated based on size, design, light intensity, degree of automation, inclusion of Adaptive Growth Technology or Advanced Growing Systems, height potential of light hoods, and inclusion of plant support systems.

 

Our AeroGarden product line is divided into four main categories:

 

 

AeroGarden Sprout Series – The AeroGarden Sprout series features the Advanced Growing System, grow lights, a smaller footprint, and an attractive, slim, elegant design that makes it suitable for use as a decorative feature throughout the home or office.  AeroGarden Sprouts fit easily on kitchen counters, nightstands, and end tables. Some models include upgraded trim and designs such as the red and blue garden targeted at all-family usage.  List prices start at $89.95.

 

 

AeroGarden Harvest Series – The AeroGarden Harvest series has a compact, beautiful design that has a smaller footprint and is perfect fit for a kitchen counter-top with energy efficient LED lighting. It has a smaller footprint than the Bounty and as a result features six pods for planting. It features a variety of trim and touch screen control panels.  The starting list price is $149.95.

 

 

AeroGarden Bounty Series – A nine pod garden with a more powerful LED lighting system to deliver higher yields and the ability to grow more plants.  This garden includes and interactive LCD display panel that utilizes screen prompts to walk users through the planting process.  Some models also include stainless steel trim.  List prices start at $349.95.

 

 

AeroGarden Farm Series – A twenty-four pod garden, the biggest garden to date, with a more powerful LED lighting system to deliver higher yields and the ability to grow more plants.  This garden includes and interactive LCD display panel that utilizes screen prompts to walk users through the planting process and two independently adjustable lighting panels.  List prices start at $599.95.

 

AeroGarden Seed Pod Kits.  We offer more than 40 seed pod kits for use in our indoor gardening products. These seed pod kits include pre-seeded bio-grow seed pods and a three-to-six-month supply of nutrients, including our patented formula for adjusting water quality. Our seed pod kits have list prices ranging from $13 to $30, and include:

 

 

Vegetable Gardens: tomato, pepper, and salsa garden.

 

 

Herb Gardens: gourmet herbs, Italian herbs, and pesto basil.

 

 

Flower Gardens: cascading petunias, English cottage, scented blooms, and mountain meadow.

 

 

Salad Gardens: salad greens, romaine lettuce.

 

Our seed pod kits are sold to consumers for use with our indoor gardening products.  Individual seed pod kits are grown by consumers for three to six months and then new seed pod kits may be purchased for replanting.

 

AeroGarden Seed-Starting Systems and “Grow Anything” Kits.  Our line of Garden Starter Systems and Grow Anything Kits are designed to allow consumers to plant and grow their own seeds in the AeroGarden.  With our Garden Starter Systems, consumers can start up to 66 seedlings in our indoor gardens for transplant into their outdoor gardens when weather allows.  With the Grow Anything Kits, consumers can grow their own seeds to maturity in the AeroGarden, or transplant seeds outdoors when weather allows, including plant nutrients, nutrient dispensers, and other products.

 

Other Accessories.  To complement and expand the functionality of our indoor gardening products, we have developed a variety of accessory products.

 

Future Products.  The core technology platform can be leveraged by bundling different components into new products with a wide variety of features and price points that then can be sold through a variety of direct and retail channels for use in different settings around the home or office.  Examples include significantly larger, modular gardens, and less expensive, more decorative gardens. Additionally, the core technology is being used to develop our largest single plant growing product.

 

 

Integrated Marketing and Sales Channel Strategy

 

We consider our products to be an entirely new product category and our primary objective has been to maximize the exposure of the product and educate consumers on the benefits of indoor gardening through an integrated marketing and distribution strategy.  We launched our products in 2006 with a nationwide public relations campaign, and received extensive media exposure, with multiple features on national talk shows as well as local television coverage, local and national print articles and blog and Internet pieces.  We combined the public relations launch with a retail and direct-to-consumer strategy focusing on high visibility partners and media, including product sales through retailers, national catalogues, home shopping channels, direct television commercials, our own in-house catalogues, internet sales, and inbound and outbound telemarketing. 

 

Direct-to-Consumer Sales.  In 2007, we began mailing our own in-house, direct mail product catalogue, which tested successfully with a mailing of approximately 60,000 catalogues.  In Fiscal 2020, we mailed approximately 346,000 catalogues.  With our catalogue sales, we focus on remarketing to current customers and also prospecting for new customers using database marketing techniques.

 

We established our first consumer product website in the fall of 2006 and supplemented this website in late 2007 with search engine advertising, banner advertising, email campaigns and web affiliate programs.  In the fall of 2008, we took on in-house management of many of these programs from third-party providers and have seen resulting increases in efficiency.

 

A key focus of our web and catalogue marketing is to maximize the lifetime value of AeroGrow customers through repeat sales of our seed pod kits, light bulbs and accessories. During Fiscal 2020, direct-to-consumer sales represented 34.0% of our total net sales.

 

Retail Sales.  Initial shipments to retailers commenced in March 2006.  Over the next several years, we rapidly grew our retail distribution and as of March 31, 2009 our products were being sold through approximately 7,500 stores in North America.  We then began to reduce our sales to retailers (as discussed above) and as of March 31, 2013 our products were only sold through 72 stores in North America.  Since March 31, 2013, we have renewed our focus on reaching the end-consumer through select retail markets and increased our visibility in stores.

 

As of March 31, 2020, our products were offered in approximately 2,100 storefronts in North America, as well as through select online retailers such as Amazon.com, bedbathandbeyond.com and Kohls.com, and sales to retailers represented 64.3% of our total net sales. We plan to expand and revise our retail presence during the coming fiscal year as our trials with specific retailers and brick and mortar stores are revised and examined.

 

During Fiscal 2020, sales to Amazon.com, Inc. represented approximately 56.9% of our retailer sales and approximately 36.6% of our total sales. As we continue our expansion of our retail sales efforts during the coming fiscal year, we expect to continue our sales with strong retailers as a result of our strategic alliance with Scotts Miracle-Gro.  For further information on the strategic alliance with Scotts Miracle-Gro, please see Note 3 “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements.

 

International Sales.   In Fiscal 2020, international sales have been conducted through third-party distributors but we have begun to focus efforts on new retailers such as Amazon.co.uk, Amazon France, Amazon Germany, Amazon Italy and Amazon Spain.  During Fiscal 2020, international sales represented 1.7% of our total net sales, as we continued to test the European market and focus on viability and profitability of each account, including the United Kingdom, France, Germany, Italy and Spain.

 

Competition

 

Aeroponic and hydroponic technologies have historically been limited to ardent hobbyists and commercial growing facilities.  We believe that we are the first company to develop and offer a simple dirt-free indoor growing system for the mass consumer market.

 

Typical hydroponic manufacturers offer a range of equipment and accessories through distributors or small independent “hydro-shops” in a trade-oriented manner similar to plumbing or electrical suppliers. Purchasers typically mix and match equipment from various suppliers in an “a la carte” fashion to individually customize a large system that they then assemble on their premises.  We believe that these products are substantially more expensive than our products.

 

 

We believe that our simplified and complete indoor gardening products and current and planned methods of distribution offer significant benefits from these traditional hydroponic industry practices.  To date, we have discovered a few kitchen design firms that have tried to introduce an indoor growing system into the market, but we do not believe they have a significant presence in the market.  In our laboratory tests, these systems have performed at levels far below our own systems in terms of germination success, longevity, speed-of-growth and overall yields.  However, we recognize that there are other companies that are better funded and have greater experience in producing hydroponic products in commercial markets, or that have been more successful in manufacturing or selling consumer products or soil-based gardening products.

 

Manufacturing and Operations

 

We source our AeroGarden products and accessory items from contract manufacturing companies that manufacture products using tooling we own, in accordance with our specifications, and subject to our intellectual property rights provided by the Technology Licensing Agreement with Scotts Miracle-Gro.  We have four Chinese manufacturers of our garden products.  Several are capable of manufacturing multiple garden models.  We believe the existing production capacity of these manufacturers is more than sufficient to meet our garden requirements for the short-to-medium term.  In addition, capacity expansion is available in a reasonable period of time with a nominal tooling investment.  We also try to have multiple, dual-sourced manufacturers of our many component parts and accessories.  Indoor gardening products are shipped from China to the third-party fulfillment center in Missouri, as well as to third-party distribution facilities in countries outside North America. 

 

Product Returns and Warranties

 

To date, product returns have been within our expectations for both retail and direct-to-consumer sales.  At retail, we generally use a “destroy in field” methodology as the cost of shipping a used product back to us often does not justify the value of the recovered unit.  We record warranty liabilities at the time of sale for the estimated costs that may be incurred under our 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 our 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 our warranty obligation.

 

Governmental Regulation and Certification

 

We believe that we are in compliance with regulations in the United States and Canada concerning the shipping and labeling of seeds and nutrients. Currently, the components for the indoor garden system are Electrical Testing Laboratories “ETL” certified. These certifications confirm that the products have been tested and conform to a recognized level of fire and other safety standards for consumers. Such independent third-party certification is required for sales of products through many major retailers.

 

We believe that our costs of compliance with environmental laws will not be material.

 

Personnel

 

As of March 31, 2020, AeroGrow employed 40 full-time employees.  In addition, we contract the services of part-time and project consultants on an “as needed” basis.  We believe that our employee relations are good.  Historically, our outsourced business also included manufacturing, telemarketing, infomercial production, fulfillment and shipping.   Additional employees and/or consultants may be hired in the future as our operations merit.

 

 

ITEM 1A.  RISK FACTORS

 

Our business, future performance and forward-looking statements are affected by general industry and market conditions and growth rates, general economic and political conditions in the United States, Canada and worldwide, competition, interest rate and currency exchange rate fluctuations and other events. The following items are representative of the risks, uncertainties and other conditions that may impact our business.

 

Risks Related to the Market for our Securities

 

Scotts Miracle-Gro owns more than 80% of AeroGrow’s common stock and has effective control over the Board of Directors and all matters affecting the Company.

 

As disclosed above, Scotts Miracle-Gro currently owns more than 80% of the Company’s outstanding common stock and has effective control of the Company’s Board of Directors. The Company’s Board of Directors is comprised of three members who are affiliated with Scotts Miracle-Gro and two members who are not affiliated with Scotts Miracle-Gro (the “Independent Directors”).  As a result, Scotts Miracle-Gro has effective control over all matters affecting the Company, including the power to approve or reject significant corporate matters, such as mergers, acquisitions, dividends, loans, security issuances and all matters that require shareholder approval. Among other things, Scotts Miracle-Gro’s controlling interest could make it more difficult for a third party to acquire us, even if a proposed acquisition would be beneficial to you, and you may not realize the premium return that stockholders may realize in conjunction with corporate takeovers.

 

In addition, Scotts Miracle-Gro has control over our business strategy, operations, managerial decisions and potential capital transactions. Your ability to influence key corporate decisions has been significantly diminished and you may disagree with decisions made by Scotts Miracle-Gro. The price of our common stock may be adversely affected and your ownership may be subject to substantial dilution.

 

Scotts Miracle-Gro has proposed potential transactions that may pose serious conflicts of interest, may result in cessation of the Company’s status as a publicly traded company and SEC-reporting company, and may result in liquidation of the common stock held by minority shareholders at a price that may not represent the full future value of your common stock.

 

As disclosed above, Scotts Miracle-Gro currently owns more than 80% of the Company’s outstanding common stock and has effective control of the Company’s Board of Directors. The Company’s Board of Directors is comprised of three members who are affiliated with Scotts Miracle-Gro and two members who are not affiliated with Scotts Miracle-Gro (the “Independent Directors”).

 

As disclosed in a Schedule 13D/A filed with the SEC by Scotts Miracle-Gro on March 2, 2020, Scotts Miracle-Gro has discussed, with both our Board of Directors and our management team, the Company’s operating model and ownership structure, which Scotts Miracle-Gro deems to be complex, and the costs incurred as a result of these perceived complexities. As described in the Scotts Miracle-Gro Schedule 13D/A, Scotts Miracle-Gro made an unsolicited proposal that recommended a range of operational adjustments for consideration by the AeroGrow Board (including the Independent Directors) that would effectively outsource most of AeroGrow’s operations to Scotts Miracle-Gro or an affiliate of Scotts Miracle-Gro. Scotts Miracle-Gro believes that the outsourcing of most of AeroGrow’s operations to Scotts Miracle-Gro or an affiliate of Scotts Miracle-Gro would: (i) simplify AeroGrow’s organizational structure; (ii) significantly reduce AeroGrow’s operating expenses and selling, general and administrative expenses; (iii) result in the liquidation of all or a significant amount of AeroGrow’s working capital and tangible assets; and (iv) significantly decrease the Company’s need for financing.

 

With regard to AeroGrow’s ownership structure, Scotts Miracle-Gro’s proposal discussed the burdens imposed on the Company as a result of its status as a publicly-traded and SEC-reporting company. At the Board Meeting, Scotts Miracle-Gro suggested that AeroGrow’s Board (including the Independent Directors) consider consummating a reverse stock split pursuant to Section 78.207 of the Nevada Revised Statutes, which could be effected by AeroGrow’s Board without stockholder approval. The consummation of a reverse stock split would decrease the number of outstanding shares of Common Stock held by each record holder and the number of authorized shares of Common Stock by a factor determined by the Company’s Board.

 

Pursuant to the Scotts Miracle-Gro proposal, after giving effect to the reverse stock split, any stockholders holding fractional shares of Common Stock, would receive cash in exchange for their fractional shares based on the value of the Common Stock, as determined in good faith by the Company’s Board. The consummation of a reverse stock split would reduce the number of record stockholders to a number that would cause the Common Stock to (i) cease being quoted on the OTCQB and (ii) become eligible for termination of registration by the SEC under the federal securities laws (commonly referred to as a “going private” transaction).

 

 

After receiving Scotts Miracle-Gro’s unsolicited proposal, the Board formed a special committee (the “Special Committee”) consisting of the Independent Directors to consider and evaluate any proposals offered by Scotts Miracle-Gro, including the potential “going-private” transaction described in Scotts Miracle-Gro’s Schedule 13D/A filing. Although the Independent Directors did initially discuss and ask questions relating to Scotts Miracle-Gro’s proposal and other potential alternatives, the Independent Directors have not agreed to pursue Scotts Miracle-Gro’s proposal or any other course of action. The Special Committee has retained independent legal and financial advisors to assist in its review and evaluation of the Scotts Miracle-Gro proposed transaction to identify and evaluate potential alternatives. The Special Committee intends to use such advisors to consider and evaluate the terms of any current or future proposal offered by Scotts Miracle-Gro, as well as any other potential alternatives.

 

The Board cautions the Company’s stockholders and others considering trading in the Company’s securities that the Board and the Special Committee are in process of reviewing and evaluating the Scotts Miracle-Gro proposal as well as potential alternatives and have not made any decisions with respect to the Scotts Miracle-Gro proposal or any potential alternatives. There can be no assurance that any agreement with respect to the proposed transaction will be executed or that this or any other transaction will be approved or consummated. There is a risk that there will be situations when interests of Scotts Miracle-Gro (or its affiliated persons and entities) and the Company or the Company’s minority shareholders will differ, creating the possibility of a conflict of interest.

 

Although the Special Committee, when considering and making investment decisions, shall take into account the information presented to it about potential or existing conflicts of interest, and shall strive to ensure that the Company’s minority shareholders are treated fairly, there can be no assurance that the minority shareholders will receive the full economic value of their shares.

 

The market price of our shares may fluctuate greatly. Investors in AeroGrow common stock bear the risk that they will not recover their investment.

 

Our common stock, like that of many emerging growth companies, is typically subject to price and volume volatility. Trading in our common stock is limited, and the price per share is likely to be influenced by the price at which and the amount of shares that selling security holders are attempting to sell at any time.  If a large stockholder, including Scotts Miracle-Gro and its affiliates, decided to sell its shares, the price of our common stock would decline. Our common stock may also be subject to the activities of persons engaged in short selling securities, which generally has the effect of driving the price down. The price of our common stock has fluctuated, and may continue to fluctuate, widely. A full and stable trading market for our common stock may never develop and, as a result, stockholders may not be able to sell their shares at the time they elect, if at all.

 

We can issue debt securities and shares of preferred stock without approval of common stockholders, which could adversely affect your rights and undermine the value of your shares.

 

Our Articles of Incorporation allow our Board of Directors to approve the terms and conditions of debt securities and preferred stock for issuance by the Company, including but not limited to voting rights, conversion privileges and liquidation preferences, without the approval of common stockholders.  The rights of the holders of our common stock may be adversely impacted as a result of the rights that could potentially be granted to holders of debt securities or preferred stock that we may issue.  As a result, the price of our common stock may be adversely affected by future issuances of debt or preferred stock.

 

Risks Related to our Business, Products and Markets

 

We have incurred substantial net losses since inception and are starting to optimize operations and achieve profitability.

 

Since we commenced operations in 2002, and through March 31, 2020, we incurred substantial losses, however, for the current year we have a net income of $57,000 for the twelve month period ended March 31, 2020.  As of March 31, 2020, our losses have resulted in an accumulated deficit of $128.3 million.  The future success of our business will depend in part on our ability to use the Scotts Miracle-Gro partnership to: (i) profitably expand sales of our AeroGarden indoor garden systems, seed pod kits and accessory products; (ii) develop new product extensions and applications; and (iii) efficiently spend marketing dollars to gain customer acceptance.

 

Our financial condition may limit our ability to borrow funds or to raise additional equity as may be required to fund our future operations.

 

Our ability to borrow funds or raise additional equity may be limited by our financial condition.  In addition, a failure to obtain additional funding to support our working capital and operating requirements could prevent us from making expenditures that are needed to allow us to grow our operations.  In the event we cannot raise additional funding to fulfill working capital needs, we will have to scale back on our operating plans for the current and future fiscal years.  There can be no assurance that we will be able to secure the additional capital in an amount and in time to support all of our operating plans.

 

 

As we grow our sales into the retail channel and increase sales through individual retailers, the loss or significant reductions in orders from our top retail customers could have a material adverse impact on our business.

 

In Fiscal 2020, our net sales to one retail customer, Amazon.com, Inc., totaled 56.9% of our total net sales to retailers and 36.6% of our total net sales.  The loss of this customer or other significant customers, or a significant decline in orders, could materially affect our sales of indoor garden systems, seed pod kits and accessories, and could therefore have a material adverse effect on our business, prospects, results of operations, and financial condition.

 

We do not have long-term sales agreements with, or other contractual assurances as to future sales to any of our current or planned major retail customers. In addition, our business may be negatively affected by changes in the policies of our retailers, such as payment terms, shelf space limitations, price demands and other conditions.

 

Our future success is completely dependent on our ability to market our indoor garden systems, seed pod kits and accessory products and generate consumer acceptance on a broader scale.

 

We have introduced our indoor garden systems and seed pod kits as new products to consumer markets unfamiliar with their use and benefits.  Although we believe that we have penetrated only a small portion of the potential market for our products, our marketing efforts may not generate widespread consumer adoption.  If our marketing strategies fail to attract customers, our product sales may not produce future revenue sufficient to meet our operating expenses or fund our future operations.  Our business, prospects, results of operations, and financial condition will be materially and adversely affected.

 

A worsening of the economy, particularly in the United States and Canada, could materially adversely affect our business.

 

The success of our business operations depends significantly on consumer confidence and discretionary spending, which deteriorated during the worldwide economic downturn in 2008-2012.  A recurrence of the economic downturn, COVID-19 pandemic and the consequent impact on consumer spending, particularly in the United States and Canada, could adversely impact our revenue, ability to market our products, build customer loyalty, or otherwise implement our business strategy.  In particular, changes in the level of consumer demand resulting from national health epidemics, such as the recent COVID-19 virus, could result in a material adverse effect on our business, prospects, results of operations, and financial condition.

 

Our revenue and level of business activity are highly seasonal, requiring us to staff our operations, incur overhead and marketing costs, purchase and manufacture inventory, and incur other operating costs in advance of having firm customer orders for our products.  A material variance in actual orders relative to anticipated orders could have an adverse impact on our business.

 

For the fiscal year ended March 31, 2020, approximately 60.6% of our total net sales occurred during four consecutive calendar months (October through January).  We must therefore estimate sales in advance of the anticipated peak months and operate our business during the balance of the year in such a way as to insure that we can meet the demand for our products during the peak months.  This requires us to incur significant operating, marketing, and overhead expenses, and to utilize cash and other capital resources to invest in inventory in advance of having certainty as to the ultimate level of demand for our product during the peak months.  Shortfalls in the supply of our products could result in a significant loss of revenue due to lack of adequate product inventory.  Possible demand could decline if events such as the global COVID-19 pandemic adversely affect our customers. For example, the cobranding of our product with the “Miracle-Gro AeroGarden” trade name caused a delay in available inventory during the first six months of Fiscal 2014.  Additionally, during the third and fourth quarters of Fiscal 2013, a labor strike in the ports of Los Angeles and Long Beach delayed the delivery of AeroGarden inventory during the critical pre-Christmas season and caused a decline in sales during that time period. Alternatively, a shortfall in actual demand for our products, relative to forecast, during peak months could cause us to liquidate excess inventory at a loss or at substantially lower margins.  In any of these cases, we may not generate enough revenue to cover expenses incurred throughout the balance of the year.  Our business prospects, results of operations and financial condition would be materially and adversely affected.

 

 

Our current or future manufacturers could fail to fulfill our orders for indoor garden systems, which would disrupt our business, increase our costs, and could potentially cause us to lose our market.

 

We currently depend on four contract manufacturers in China to produce our indoor garden systems. These manufacturers could fail to produce the indoor garden system to our specifications or in a workmanlike manner and may not deliver the systems on a timely basis. Our manufacturers must also obtain inventories of the necessary parts and tools for production. Although we own the tools and dies used by our manufacturers, our manufacturers operate in China.  As a result, our manufacturers may be subject to business risks that fall outside our control, including but not limited to, political, global COVID-19 pandemic, currency, regulatory and shipping/transportation risks, each of which may affect the manufacturer’s ability to fulfill our orders for indoor garden systems. As discussed in the preceding risk factor, the December 2012 labor strike in the ports of Los Angeles and Long Beach delayed the delivery of AeroGarden inventory during the critical pre-Christmas season and caused a decline in sales during the third and fourth quarters of Fiscal 2013. In addition, port congestion in October 2014 backed up deliveries and delayed ground transportation during the third quarter of Fiscal 2015.  Pandemics, weather or natural disasters in China could disrupt our supply of product.  Any change in manufacturers could disrupt or delay our ability to fulfill orders for indoor garden systems while we search for alternative supply sources, provide specifications, and test initial production.  Our business prospects, results of operations and financial condition would be materially and adversely affected.

 

Our current AeroGarden manufacturers are located in China and therefore our product costs may be subject to fluctuations in the value of the dollar against the Chinese currency and increases in Chinese labor rates.

 

Although we purchase our AeroGarden products in U.S. dollars, the prices charged by our factories are predicated upon their cost for components, labor and overhead. Therefore, increases in Chinese labor rates and changes in the valuation of the U.S. dollar in relation to the Chinese currency may cause our manufacturers to raise prices of our products, which could reduce our profit margins and have a material adverse effect on our business prospects, results of operations and financial condition.

 

Increases in tariffs or other taxes on our products or equipment and supplies could have an adverse impact on our operations.

 

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.

 

We are highly reliant upon a single distribution and assembly facility.  Any material disruption to the operation of this facility could adversely affect our business.

 

All of our North American fulfillment and distribution operations, and the entirety of our seed pod kit assembly operations are located in a third-party-managed facility based in Mexico, Missouri.  Any material disruption to the operation of this facility, whether caused by internal or external factors could have a material adverse effect on our business prospects, results of operations and financial condition.

 

We rely on third-party providers in our manufacturing, warehouse, distribution, order processing, and fulfillment operations. If these parties are unwilling to continue providing services to us, or are unable to adequately perform such services for us on a cost effective basis, our business could be materially harmed.

 

We engage third parties to perform certain critical functions supporting our business operations.  Any disruption in our relationship with any of our vendors could cause significant disruption to our business and we may not be able to locate another party that can provide comparable services in a manner that is timely, consistent with our business plan, or on acceptable commercial terms.   Our business prospects, results of operations and financial condition would be materially and adversely affected.

 

We may face significant competition, and if we are unable to compete effectively, our sales may be adversely affected.

 

We believe that our complete indoor garden systems offer significant benefits over traditional hydroponic industry products.  However, there are companies in a variety of related markets, including but not limited to, consumer electronics, commercial hydroponics, gardening wholesale, and soil-based gardening that are larger, better funded, and have experience in our channels of distribution.  These companies may decide to develop products to compete with our products. These companies could use hydroponic technologies, and could achieve better consumer acceptance.  The success of any competing products may have a material adverse effect on our business prospects, results of operations and financial condition.

 

 

Increases in energy prices, resulting from general economic conditions, or other factors, may raise our cost of goods sold and adversely affect our business, results of operations and financial condition.

 

Energy costs, especially gasoline and fuel costs, are significant expenses in the delivery of our products. Increased costs resulting from general economic conditions, war, acts of nature, or other factors, may result in declining margins and operating results if market conditions prevent us from passing these increased costs on to our customers through timely price increases on our products.  Our business prospects, results of operations and financial condition would be materially and adversely affected.

 

If our indoor garden systems fail to perform properly, our business could incur increased warranty-related costs and reduced income.

 

From our inception through March 31, 2020, we have sold approximately 2.6 million AeroGardens and have provided a limited warranty with each garden sold.  In addition, our indoor garden systems are “guaranteed to grow.”  We therefore may be required to replace or repair products or refund the purchase price to consumers.  Failure of our products to meet expectations could damage our reputation, decrease sales, increase costs related to returns and repairs, delay market acceptance of our products, result in unpaid accounts receivable, and divert our resources to remedy the malfunctions.  The occurrence of any of these events would have a material adverse effect on our business prospects, results of operations and financial condition.

 

If we are unable to recruit, train and retain key personnel necessary to operate our business, our ability to successfully manage our business and develop and market our products may be harmed.

 

To maintain our business position, we will need to attract, retain, and motivate highly skilled design, development, management, accounting, sales, merchandising, marketing, and customer service personnel.  Competition for many of these types of personnel can be intense, depending on general economic conditions, alternative employment options, and job location.  As a result, we may be unable to successfully attract or retain qualified personnel. Additionally, any of our officers or employees can terminate their employment with us at any time. The loss of any key employee, or our inability to attract or retain other qualified employees, could have a material adverse effect on our business, prospects, results of operations, and financial condition.

 

From time to time, we may be subject to litigation that, if decided adversely to us, could have a material adverse impact on our financial condition.

 

From time to time, we are a party to various litigation matters, in most cases involving ordinary and routine claims incidental to our business.  We cannot estimate with certainty our ultimate legal and financial liability with respect to such litigation.  Although we do not believe that any current litigation poses a material threat to our business, defense of any lawsuits or proceedings, even if successful, may require management to spend a substantial time and attention on the part of our management personnel that otherwise would be spent on other aspects of our business, and may require the expenditure of significant amounts for legal fees and other related costs. Settlement of lawsuits also may result in significant payments and modifications to our operations. In addition, we also may be subject to adverse publicity as a result of litigation. Any of these events could have a material adverse effect on our business, prospects, results of operations, and financial condition.

 

Cyber-attacks targeting systems and infrastructure used by our Company may adversely impact our operations.

 

Our business has become increasingly dependent on digital technologies to conduct certain development, operating and sales activities. We depend on digital technology to communicate with our employees, third-party manufacturers, partners and customers. We have been the subject of cyber-attacks on our internal systems and through those of third parties. Nevertheless, unauthorized access to our proprietary or commercially sensitive information could lead to leaks of customer-sensitive information, data corruption, communication interruption, or other disruptions in our sales, product development, and production or planned business transactions, any of which could have a material adverse impact on our results of operations. Further, as cyber-attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyber-attacks. In Fiscal 2019, we discovered that certain of our information technology systems had been the target of an external cyber-attack, as more fully described under Note 7, “Commitments and Contingencies,” to our audited consolidated financial statements included in Part II, of this Annual Report on Form 10-K.

 

 

Risk Factors Related to the COVID-19 Pandemic

 

An occurrence of an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations. A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and distribution. These factors, in turn, may not only impact our operations, financial condition and demand for our goods and services but our overall ability to react timely to mitigate the impact of this event that could adversely affect the economies and financial markets of many other companies and countries, resulting in an economic downturn that could affect demand for our products including access to brick and mortar store locations and significantly impact our operating results. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission.

 

As the result of current restrictions put in place to address COVID-19, we have had limited access to our corporate offices and our corporate staff has been required to work remotely, disrupting interactions among our staff, with our customers and suppliers, and with our accountants, consultants and advisors. The extent to which our results may continue to be affected by COVID-19 will largely depend on future developments which cannot be accurately predicted, including the duration and scope of the pandemic, governmental and business responses to the pandemic and the impact on the global economy, our customers’ demand for our products, and our ability to provide our products and access our offices and facilities. While these factors are uncertain, the COVID-19 pandemic or the perception of its effects could continue to have a material adverse effect on our business, financial condition, results of operations, or cash flows.

  

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  DESCRIPTION OF PROPERTY

 

Effective June 1, 2019, we agreed to lease a 14,630 square feet of office space in Boulder, Colorado, with a monthly rent of $21,000, subject to annual increases of 3.5%.  We moved into the new office space during the second quarter of Fiscal 2020. The new lease expires on September 30, 2026 and contains other standard office lease provisions. We also continued to lease our prior 11, 182 square foot office space at a rate of $12,000 per month through September 2019, when the prior lease was scheduled to terminate.

 

While our facilities appear adequate for the foreseeable future, we may add space to meet future growth as needed. Upon expiration of our current leases, we believe that we will be able to either renew our existing leases or arrange new leases in nearby locations on acceptable terms. We believe that these properties are adequately covered by insurance.

 

ITEM 3.  LEGAL PROCEEDINGS

 

From time to time, we are party to various litigation matters, in most cases involving ordinary and routine claims incidental to our business.  We cannot estimate with certainty our ultimate legal and financial liability with respect to any such pending litigation matters.  However, based on our examination, we believe of such matters, that our ultimate liability, if any, will not have a material adverse effect on our financial position, results of operations or cash flows.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Our common stock is listed on the OTCQB market tier under the symbol “AERO.”

 

Holders

 

As of June 15, 2020, we had approximately 491 holders of record of our common stock.  A substantially greater number of stockholders are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions. See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for additional information about holders of our common stock.

 

Dividends

 

We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future.  Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to compliance with covenants under any existing financing agreements, which may restrict or limit our ability to declare or pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant.

 

Equity Compensation Plan Information

 

The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Part III of this Annual Report under the heading “Equity Compensation Plan Information.”

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

We did not have any unregistered issuances of equity securities during Fiscal Year 2020.

 

Issuer Purchases of Equity Securities

 

We did not repurchase any shares of our common stock during Fiscal Year 2020.

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

Statements of Operations Data

 
   

Fiscal Years ended March 31,

 

(in thousands, except per share data) 

 

2020

   

2019

 

Revenues

  $ 39,214     $ 34,366  

Cost of revenue

    25,185       22,395  

Gross profit

    14,029       11,971  

Operating Expenses

               

Research and development

    877       590  

Sales and marketing

    8,852       8,462  

General and administrative

    3,992       2,913  

Total operating expenses

    13,721       11,965  

Income from operations

    308       6  

Other income (expense)

    (251

)

    (297

)

Net income (loss)

  $ 57     $ (291

)

                 

Net income (loss) per share, basic and diluted

  $ 0.00     $ (0.01

)

Weighted average number of common shares outstanding, basic and diluted

    34,328       34,328  

Weighted average number of common shares outstanding, diluted

    34,328       34,328  

 

Balance Sheet Data

               

(in thousands) 

 

2020

   

2019

 

Cash and cash equivalents and restricted cash

  $ 9,061     $ 1,756  

Total assets

  $ 22,047     $ 16,859  

Total liabilities

  $ 9,538     $ 4,407  

Total stockholders’ equity

  $ 12,509     $ 12,452  

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Annual Report on Form 10-K (“Annual Report”), including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “may,” “will,” “would,” “could,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward looking statements may include, among others, statements concerning our expectations regarding our business, growth prospects, revenue trends, operating costs, results of operations, working capital requirements, access to funding, competition and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. These forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from expectations expressed or implied in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled “Risk Factors” in Item 1A of Part I and elsewhere, and in other reports we file with the SEC, specifically the most recent reports on Form 10-Q. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

Executive Overview

 

We are in the business of developing, marketing, and distributing advanced indoor aeroponic and hydroponic garden systems. After several years of initial research and product development, we began sales activities in March 2006. Since that time we have expanded our operations and currently offer four different indoor garden models with many sub models with each model category, more than 40 seed pod kits, and various gardening and kitchen accessories.  Although our business is focused on the United States and Canada, our products are available in other countries and we have continued to expand our market into Europe, including the United Kingdom, France, Germany, Italy and Spain.

 

 

Background of Scotts Miracle-Gro Alliance – Fiscal Years 2014-2019

As disclosed above under the caption “Item 1. Business,” we entered into a Securities Purchase Agreement and strategic alliance in April 2013 with a wholly owned subsidiary of Scotts Miracle-Gro.  Pursuant to the Securities Purchase Agreement, we issued (i) 2,649,007 shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock); and (ii) a warrant to purchase shares of our common stock for an aggregate purchase price of $4.0 million.  In November 2016, Scotts Miracle-Gro converted all of its Series B Preferred Stock and exercised all of its warrants, thereby increasing its equity ownership to approximately 80% of the Company’s outstanding common stock. 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 in which we agreed to sell all intellectual property associated with our hydroponic products, other than the AeroGrow and AeroGarden trademarks, free and clear of all encumbrances, to Scotts Miracle-Gro for $500,000; (ii) a Technology Licensing Agreement; (iii) a Brand License Agreement; and (iv) a Supply Chain Management Agreement. In addition to the initial working capital infusion of approximately $4.5 million in Fiscal Year 2014 from the Securities Purchase Agreement and Intellectual Property Sale Agreement, as well as ongoing seasonal term loans to fund operations through Fiscal Year 2020, we believe that the strategic alliance affords us the use of 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 have used the opportunities provided by our strategic alliance with Scotts Miracle-Gro to re-establish our presence in the retail sales channels.  During the first six months of Fiscal 2014, we cobranded our products with the Miracle-Gro AeroGarden trade name.  We have since renewed our focus in growing the business via retail markets.  

 

Recent Proposal by Scotts Miracle-Gro

In a Schedule 13D/A filed by Scotts Miracle-Gro with the SEC on March 2, 2020, Scotts Miracle-Gro made an unsolicited proposal to AeroGrow recommending a range of operational adjustments for consideration by the AeroGrow Board of Directors that would effectively outsource most of Issuer’s operations to Scotts Miracle-Gro or an affiliate of Scotts Miracle-Gro. The proposal and related transactions may pose conflicts of interest and may result in: (i) cessation of AeroGrow’s status as a publicly traded company and SEC-reporting company; and (ii) may result in the liquidation of common stock held by minority shareholders at a price that may not represent the full future economic value of the common stock. See Item 1A. Risk Factors.

 

New Developments – Fiscal Year 2020

During Fiscal 2020, we continued our strategic growth initiative by offering our products in approximately 2,100 stores and we also enhanced the depth and breadth of our direct sales distribution channels by distributing approximately 346,000 direct mail catalogues, significantly increasing our web-selling presence and developing a robust e-mail marketing program. In Fiscal 2020, approximately 66.0% of our total sales were to retail customers and approximately 34.0% of our total sales were to direct customers.  Amazon.com, Inc., our largest retailer customer, comprised approximately 56.9% of our sales to retailers and 36.6% of our total sales during Fiscal 2020.

 

The cobranding of products with Scotts Miracle-Gro on seed pod kits remains in place. In June 2019, we also entered into a $10.0 million Term Loan Agreement with Scotts Miracle-Gro in order to provide incremental working capital in advance of our peak selling season. Interest was charged at the stated rate of 10% per annum. 

 

During the fourth quarter Fiscal 2020 the impact of the ongoing COVID-19 pandemic began to affect our operations and financial results as there were changes to general economic and retail conditions. We began to see an increase in sales from the COVID-19 pandemic but also saw some risk in retail conditions as retailers temporarily closed storefronts, however, consumers shifted purchasing behavior to online purchases. As consumers shift to online purchases our product is well suited for sales as consumers can shop and research at their leisure.

 

 

Our Critical Accounting Policies

 

Inventory

Inventories are valued at the lower of cost, as determined by standard pricing, 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.  We record 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 our products are manufactured overseas and are recorded at cost, which includes product costs for purchased and manufactured products, and freight and transportation costs for inbound freight from manufacturers.

 

   

March 31,

   

March 31,

 
   

2020

   

2019

 

Inventory (in thousands)

               

Finished goods

  $ 3,191     $ 7,071  

Raw materials

    1,597       1,369  
    $ 4,788     $ 8,440  

 

The Company determines an inventory obsolescence reserve based on management’s historical experience and establishes reserves against inventory according to the product lifecycle.  As of March 31, 2020 and 2019, the Company reserved $151,000 and $126,000, respectively, for inventory obsolescence.  The increase in the inventory obsolescence is attributable to examining aged inventory, including seeds, displays and replacement part and offset by disposing of the inventory that had been reserved.

 

Revenue Recognition

The Company currently has two operating and reportable segments: (i) the Direct-to-Consumer segment, which is composed 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 at a point in time as the products are homogenous and can be sold to a variety of customers and 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 March 31, 2020 or March 31, 2019. 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.

 

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 retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and range 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 in which 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 historical industry experience. As of March 31, 2020 and 2019, the Company recorded a $744,000 reduction in and $1.2 million of accrued expenses, respectively, as an estimate for the foregoing deductions and allowances within the “accounts receivable, net” line of the balance sheets, respectively.

 

 

The Company reserves for known and potential returns and associated refunds or credits related to such returns based upon historical experience. In certain cases, customers are provided a fixed allowance, usually in the 1% to 2% range, to cover returned goods. This allowance is deducted from payments made to us by such retailers.  As of March 31, 2020 and 2019, the Company recorded a reserve for customer returns of $430,000 and $313,000, respectively.

 

Warranty

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 our 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 our warranty obligation.  Based upon the foregoing, the Company recorded a provision for potential future warranty costs of $226,000 and $166,000, as of March 31, 2020 and 2019, respectively.

 

Shipping and Handling Costs

Shipping and handling costs associated with inbound freight are recorded in cost of revenue and are capitalized in inventory until the inventory is sold.  Shipping and handling costs associated with freight out to customers are also included in cost of revenue.   Shipping and handling charges paid by customers are included in net revenue.

 

Stock Based Compensation

The Company accounts for share-based payments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718-10-55 Shared-Based Payment.  The Company uses the Black-Scholes option valuation model to estimate the fair value of stock option awards issued.  For the years ended March 31, 2020, and 2019, equity compensation in the form of stock options and grants of restricted stock that vested totaled $0.

 

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, we record media and marketing costs related to our 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 340-20-25 Capitalized Advertising Costs. As prescribed by ASC 340-20-25, direct response 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 re-entered the retail distribution channel, it has expanded advertising into online gateway and portal advertising, as well as placement in third party catalogues.

 

Advertising expenses for the years ended March 31, 2020 and March 31, 2019, were as follows:

 

   

Fiscal Year Ended March 31,

(in thousands)

 
   

2020

   

2019

 

Direct-to-consumer

  $ 797     $ 674  

Retail

    3,007       3,093  

General

    1,190       317  

Total advertising expense

  $ 4,994     $ 4,084  

 

As of March 31, 2020 and March 31, 2019, the Company deferred $84,000 and $3,000, respectively, related to such media and advertising costs, including capitalized pay-per-click, catalogue costs (as described above) and commercial production costs.  The costs are included in the prepaid expenses and other line of the balance sheets.

 

Research and Development

Research, development, and engineering costs are expensed as incurred.  Research, development, and engineering expenses primarily include payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and development support.

 

 

New Accounting Pronouncements

 

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 consolidated 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 right-of-use (“ROU”) asset 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, Condensed Statements of Operations and accounting policies for leases but did not have an impact on the Statements of Cash Flows. See Note 8 for additional information regarding the new standard and its impact on the Company’s Financial Statements.

 

Inflation, Seasonality and Currency Fluctuations

 

We do not currently expect inflation to have a significant effect on our operations. Because our garden systems are designed for indoor gardening use, we experience slower sales in the United States and Canada during the late spring and summer months when our consumers may tend to garden outdoors.  In addition, we have experienced increased sales during the four-month holiday season beginning in October and continuing through January.  We sell to our international distributors in U.S. dollars thereby minimizing effects from currency fluctuations.  We purchase our gardens and other accessory products from Chinese manufacturers, and these purchases are denominated in U.S. dollars.  However, over time, the cost of the products we procure from China may be affected by changes in the value of the U.S. dollar relative to the Chinese currency and/or by labor and material cost increases faced by our Chinese manufacturers.

 

Results of Operations

 

The following table sets forth, as a percentage of sales, our financial results for the last two fiscal years:

 

   

Fiscal Years Ended March 31,

 
   

2020

   

2019

 

Net revenue

               

Direct-to-consumer

    34.0

%

    23.5

%

Retail

    64.3

%

    72.4

%

International

    1.7

%

    4.1

%

    Total net revenue

    100.0

%

    100.0

%

                 

Cost of revenue

    64.2

%

    65.2

%

    Gross profit

    35.8

%

    34.8

%

                 

Operating expenses

               

Research and development

    2.2

%

    1.7

%

Sales and marketing

    22.6

%

    24.6

%

General and administrative

    10.2

%

    8.5

%

        Total operating expenses

    35.0

%

    34.8

%

                 

Income from operations

    0.8

%

    0.0

%

                 

    Total other income/(expense), net

    (0.6

%)

    (0.9

%)

                 

Net income (loss)

    0.2

%

    (0.9

%)

 

 

Fiscal Years Ended March 31, 2020 and March 31, 2019

 

Summary Overview

Our net revenue in Fiscal 2020 totaled $39.2 million, an increase of 14.1% from Fiscal 2019 revenues.  This increase was primarily due to our increased focus on driving sales with more targeted advertising campaigns, which led to: (i) increased Direct-to-consumer sales; (ii) continued sales through broader channels in store and web/internet channels (Amazon.com, woot!, Good Morning America, Macy’s, etc.); and (iii) expanded sales through customer department stores (namely Macy’s, and Kohl’s).  Additionally, the sales increase resulted from newly acquired retail accounts, including tests with Mediocre Corporation and Wayfair.  In summary, we believe increased targeted and general advertising drove sales increases in all of our channels.

 

Our sales to retailer customers increased by 1.4% to $25.2 million during Fiscal 2020.  Retailer sales encompass sales to both traditional in-store and on-line retailers.  The increase in sales to retailers reflected continued sales to the existing Amazon.com, woot! and Macy’s accounts, as well as newly acquired retail accounts such as Meh.com and Wayfair. While we limited the number of sales into retail stores during FY20, improved advertising generated better product awareness and increased sales to end users, which resulted in less reserves for discounts and actual returns. We spent $3.0 million in advertising in the retail distribution channel, including more targeted campaigns such as pay per click and banner ads, catalogues, and continued to promote general brand awareness. 

 

Direct-to-consumer sales during Fiscal 2020 increased to $13.3 million, or 64.6%, in the face of alternative on-line retailer outlets (primarily Amazon.com). This increase resulted primarily from our efficiency of our promotional campaigns, scheduled promotional calendar and a redesigned and effective website. We believe that our increased presence on Amazon, and other select online retailers , as well as continued momentum from our general advertising and marketing campaign and an expanded user-base, led to greater customer visibility.   

 

International sales during Fiscal 2020 decreased to $685,000, a decrease of 51.3%, as we continue to balance profitability and the desire to test the international markets and understand the trends and acceptance of our product in international markets. The international markets consisted primarily of sales to Amazon platforms in the United Kingdom, France, Germany, Italy and Spain.

 

For the year ended March 31, 2020, total gross dollar sales of AeroGardens and seed pod kit accessories increased by 1.8% and 34.5%, respectively.  AeroGarden sales, net of allowances, represented 72.1% of total revenue, as compared to 76.4% in the prior year period.  This percentage decrease, on a product line basis, was primarily attributable to growth in customers purchasing more seed pod kits and accessories and the decreased number of gardens sold into stores for the holiday season during Fiscal 2020.  Seed pod kit and accessory gross sales increased as a percent of the total sales from 23.6% in Fiscal 2019 to 27.8% in Fiscal 2020, primarily as a result of the continued popularity of AeroGardens that have been placed in service over the past few years.  

 

For Fiscal 2020, we incurred $5.0 million in advertising expenditures, a 22.3% year-over-year increase compared to the Fiscal Year ended 2019, which included $812,000 in general television, YouTube, Facebook and other media advertising.  The Company views this investment as a long term commitment to increasing awareness of the AeroGarden brand and indoor gardening category to support growth in both our direct-to-consumer and retail channels.  Overall advertising efficiency (measured as total revenue per dollar of advertising expense) decreased from $8.42 to $7.85 for the years ended March 31, 2019 and March 31, 2020, respectively, due to a strategic focus on retail advertising along with more measurable general advertising and brand awareness through digital channels. These expenditures included:

 

 

Direct-to-consumer advertising increased 18.3% to $797,000 in Fiscal 2020 from $674,000 in Fiscal 2019, primarily as a result of increased pay-per-click, catalogues, social media expenditures and targeted advertising.  Efficiency, as measured by dollars of direct-to-consumer sales per dollar of related advertising expense, increased to $16.71, or 39.2%, for Fiscal 2020, as compared to $12.00 for Fiscal 2019.

 

Retail advertising decreased $85,000 to $3.0 million in Fiscal 2020, as we focused on driving product awareness on behalf of our retail partners and invested in: (i) platforms made available by our retailers; (ii) fewer promotional programs to increase product awareness with our housewares channel of retail accounts, including catalogues and email campaigns; and (iii) web-based advertising programs (e.g. retail catalogues, website banner ads, email blasts, targeted search campaigns, etc.). We believe that the advertising in the retail channel will be more targeted and generate greater direct-to-consumer sales through improved customer awareness.

 

Finally, in support of driving increased levels of category and brand awareness during Fiscal 2020, we spent over $985,000 in general television, media production and public relations.  The Company views this investment as a long-term commitment to increasing awareness of the AeroGarden brand.

 

 

The combination of all of the factors cited above helped drive a year-over-year increase in total net revenues of 14.1% to $39.2 million in Fiscal 2020.

 

Our gross margin for Fiscal 2020 was 35.8%, up from 34.8% in the prior fiscal year.  This increase was caused by: (i) an increase in sales through more profitable retailers and continued significant growth in higher margin direct-to-consumer sales; (ii) increased focus on pricing with existing retail accounts; (iii) removal of costs in the production process associated with older product lines; (iv) the introduction of new products with higher margins; and (v) the impact of the lower return reserve and discounts with retailers due to better sell-through. The increase in our margins was partially offset by frictional cost associated with reduced returns in the retail channel and decreased sales into European market, which entails additional up-front and delivery costs.  Long term, we also believe that creating increased brand awareness through advertising will help us maintain higher prices and deliver better margins.   

 

Operating expenses for Fiscal 2020 totaled $13.7 million, an increase of 14.7% or $1.8 million over the prior fiscal year.  As a percentage of total revenue, operating expenses increased 0.2% year-over-year. Gross spending increased in the following areas:

 

 

A $911,000 increase in advertising, primarily related to participation in linear TV, Online TV, Connected TV, general TV, YouTube, Facebook and other media advertising; and

 

A $761,000 increase in personnel expenses driven by the company-wide incentive program and an increase in employee headcount;

 

A $412,000 increase in general expense categories such as depreciation, bad debt, insurance, repairs and maintenance, offices supplies, equipment; and

 

A $128,000 increase in one-time expenses for outside contractors relating to e-commerce security investments.

 

The increases in operating expenses were partially offset by a $517,000 decrease due to a changes in general categories such as product testing and certification fees, public relations, trade shows, promotions and market research. 

 

General and administrative expense totaled $4.0 million during Fiscal 2020, an increase of 37.0% or $1.1 million as compared to the prior year, primarily due to increases in (i) payroll-related expenses, including incentive programs, salaries, bonuses and employee benefits; (ii) consulting and legal fees associated with a cyber security program, a previous credit card breach, and web hosting investments due to increased volume, electronic data processing, and network consulting and software troubleshooting fees; (iii) office rent relating to new accounting guidance on leases and relocation of the corporate headquarters; and (iv) estimates for the allowance for bad debt and depreciation.

 

Research and development costs also increased 48.6% year-over-year, or $287,000 in Fiscal 2020.  Research and development spending increased in Fiscal 2020, particularly due to: (i) the addition of full-time employees to expedite our new product development process; (ii) the company-wide incentive program; (iii) market research; and (iv) investments in new product and prototype development, including our largest most advanced product system, that we anticipate introducing to the market in the next fiscal year, along with related testing certifications; and (v) termination of a collaboration expense offset program with Scotts Miracle-Gro. In prior years, Scotts Miracle-Gro offset a portion of the Company’s product development expenses.

  

Our income from operations totaled $308,000 for Fiscal 2020, as compared to income of $6,000 in the prior year, primarily as a result of the $4.8 million increase in sales and increased gross margin, partially offset by increased sales and operating expenses (as discussed above).

 

Other loss for Fiscal 2020 totaled $251,000, as compared to other loss of $297,000 in the prior year, primarily as a result of lower principal and interest payments on the Term Loan with Scotts Miracle-Gro.  In the prior year, we incurred increased debt under the Scotts Miracle-Gro Term Loan.   

 

Our net income for Fiscal 2020 totaled $57,000, a $348,000 improvement over the net loss of $291,000 in Fiscal 2019, primarily due to increased sales volumes and operating margins as we continued to refine our selling strategy, partially offset by increased operating expenses.  

 

 

Revenue

The table set forth below shows quarterly revenues by sales channel for the fiscal years ended March 31, 2020, and March 31, 2019:

 

Fiscal 2020

 

Quarters ended

 

 

Year ended

 

(in thousands) 

 

30-Jun-19

 

 

30-Sep-19

 

 

31-Dec-19

 

 

31-Mar-20

 

 

31-Mar-2020

 

Sales – direct-to-consumer

 

$

1,902

 

 

$

1,628

 

 

$

4,665

 

 

$

5,127

 

 

$

13,322

 

Sales – retail

 

 

2,443

 

 

 

2,725

 

 

 

13,579

 

 

 

6,459

 

 

 

25,206

 

Sales – international

 

 

130

 

 

 

70

 

 

 

282

 

 

 

204

 

 

 

686

 

 

 

$

4,475

 

 

$

4,423

 

 

$

18,526

 

 

$

11,790

 

 

$

39,214

 

 

Fiscal 2019

 

Quarters ended

   

Year ended

 

(in thousands) 

 

30-Jun-18

   

30-Sep-18

   

31-Dec-18

   

31-Mar-19

   

31-Mar-19

 

Sales – direct-to-consumer

  $ 1,454     $ 1,154     $ 3,010     $ 2,473     $ 8,091  

Sales – retail

    2,254       7,376       9,136       6,101       24,867  

Sales – international

    35       46       795       532       1,408  
    $ 3,743     $ 8,576     $ 12,941     $ 9,106     $ 34,366  

 

In Fiscal 2020, revenue totaled $39.2 million, an increase of $4.8 million, or 14.1%, from Fiscal 2019.  Sales to retailer customers for Fiscal 2020 totaled $25.2 million, up $339,000, or 1.4%, from the same period a year earlier, principally reflecting AeroGarden sales to the existing retailer web/internet channels of Amazon.com, and woot! and in store accounts of Macy’s, as well as newly acquired retail accounts such as Meh.com and Wayfair.  Direct-to-consumer revenue totaled $13.3 million in Fiscal 2020, as compared to $8.1 million in Fiscal 2019, principally reflecting our redesigned and better functioning website and our focus on advertising that drives sales brand awareness.  International sales totaled $686,000, a decrease of $722,000, as we test international markets in the United Kingdom, France, Germany, Italy and Spain primarily through the Amazon platforms.  

 

The following table presents our quarterly sales by product category, in U.S. dollars and as a percent of total net revenue, for Fiscal 2020 and Fiscal 2019. 

 

Fiscal 2020

 

Quarters ended

   

Year ended

 

(in thousands) 

 

30-Jun-19

   

30-Sep-19

   

31-Dec-19

   

31-Mar-20

   

31-Mar-20

 

Product Revenue

                                 

AeroGardens

  $ 3,406     $ 3,403     $ 18,845     $ 9,070     $ 34,724  

Seed pod kits and accessories

    1,681       1,644       3,498       4,085       10,908  

Discounts, allowances and other

    (612

)

    (624

)

    (3,817

)

    (1,365

)

    (6,418

)

Total

  $ 4,475     $ 4,423     $ 18,526     $ 11,790     $ 39,214  

% of Revenue

                                       

AeroGardens

    76.1

%

    76.9

%

    101.7

%

    76.9

%

    88.6

%

Seed pod kits and accessories

    37.6

%

    37.2

%

    18.9

%

    34.7

%

    27.8

%

Discounts, allowances and other

    (13.7

)%

    (14.1

)%

    (20.6

)%

    (11.6

)%

    (16.4

)%

Total

    100.0

%

    100.0

%

    100.0

%

    100.0

%

    100.0

%

 

Fiscal 2019

 

Quarters ended

   

Year ended

 

(in thousands) 

 

30-Jun-18

   

30-Sep-18

   

31-Dec-18

   

31-Mar-19

   

31-Mar-19

 

Product Revenue

                                 

AeroGardens

  $ 2,806     $ 9,885     $ 13,925     $ 7,490     $ 34,106  

Seed pod kits and accessories

    1,162       1,449       2,715       2,784       8,110  

Discounts, allowances and other

    (225

)

    (2,758

)

    (3,699

)

    (1,168

)

    (7,850

)

Total

  $ 3,743     $ 8,576     $ 12,941     $ 9,106     $ 34,366  

% of Revenue

                                 

AeroGardens

    75.0

%

    115.2

%

    107.6

%

    82.2

%

    99.2

%

Seed pod kits and accessories

    31.0

%

    16.9

%

    21.0

%

    30.6

%

    23.6

%

Discounts, allowances and other

    (6.0

)%

    (32.1

)%

    (28.6

)%

    (12.8

)%

    (22.8

)%

Total

    100.0

%

    100.0

%

    100.0

%

    100.0

%

    100.0

%

 

 

AeroGarden unit revenue totaled $34.7 million in Fiscal 2020, up $618,000 from $34.1 million, or 1.8%, from a year ago, principally due to: (i) the increase in direct-to-consumer channel sales; (ii) the increased focus on advertising to drive sales and general brand awareness; and (iii) the increase in the retail channel sales.  Sales of seed pod kits and accessories increased by $2.8 million, or 34.5%, resulting from an overall increase in brand awareness and growth of the existing customer base.  In Fiscal 2020, sales of seed pod kits and accessories represented 27.8% of our total net revenue, an increase from 23.6% in the prior fiscal year, reflecting the expansion of AeroGarden sales in retail markets.  Discounts, allowances and other revenue (expense), which is comprised of items that are not specifically identifiable to a product, such as grow club revenue, shipping revenue, accruals and deductions, decreased as a percentage of total revenue from (22.8)% in Fiscal 2019 to (16.4)% in Fiscal 2020 due to decreases in revenue deductions for potential returns, sales allowances and discounts.

 

Cost of Revenue

Cost of revenue for Fiscal 2020 totaled $25.2 million, a 12.5% increase from the prior fiscal year.  Cost of revenue includes product costs for purchased and manufactured products, freight costs for inbound freight from manufacturers and outbound freight to customers, costs related to warehousing, credit card processing fees for direct sales, and duties and customs applicable to imported products.  The dollar amount of cost of revenue increased in conjunction with the 14.1% increase in total sales, along with increased supply chain costs.  As a percent of total revenue, cost of revenue was 64.2% in Fiscal 2020, as compared to 65.2% in the year earlier period.  The decrease in costs as a percent of revenue resulted from:

 

 

Revenue mix shift to some higher margin customers from some lower margin retail customers, along with reductions in certain product costs; and

 

Reductions in operating costs for orders as we focused on optimization of quantity and capacity of moving goods.

  

The decrease in cost of revenues, as a percent of revenue, was partially offset by increases in:

 

 

Certain supply chain costs such as domestic and international shipping;

 

The cost of product storage in several domestic and international locations and changes to the warehouses to position us for long-term growth.

 

Gross Margin

Our gross margin varies based upon the factors affecting net revenue and cost of revenue as discussed above, as well as the mix of our revenue from high- and low-margin customers.  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, with fluctuations attributable to the mix of on-line and brick and mortar customers.  Gross margins also vary based on specific products, as well as the maturity and size of the customer relationship. Media costs associated with direct sales are included in sales and marketing costs.  Overall, the gross margin for Fiscal 2020 was 35.8% as compared to 34.8% in the prior year.  The increase in our gross margin was primarily attributable to decreases in product costs, and increases in the revenue mix attributable to better margin customers, partially offset by increased supply chain expenses, one-time fees related to establishing new retail customers and inventory storage and order processing costs.

 

Research and Development

Research and development costs totaled $877,000 for Fiscal 2020, an increase of $287,000, or 48.6% from the prior fiscal year. Research and development costs are comprised of payroll, travel and other costs associated with (i) development of new AeroGarden models and technologies; (ii) our plant laboratories that research new plant varieties and growing technologies; (iii) new technologies, such as improved lighting and nutrient formulation; and (iv) costs to enhance the performance of our products.  Our research and development spending increased in Fiscal 2020, particularly related to the addition of full-time employees to expedite our new product development process, the company-wide incentive program, market research, new product and prototype development, (which we anticipate introducing in the next fiscal year), testing certifications, and the termination of a collaboration expense offset program with Scotts Miracle-Gro.

 

 

Sales and Marketing

Sales and marketing costs for Fiscal 2020 totaled $8.9 million, an increase of $390,000, or 4.6%, from the prior fiscal year.  Sales and marketing costs include all costs associated with the marketing, sales, operations, customer support, and sales order processing for our products.  The following table breaks down the components of our sales and marketing costs for Fiscal 2020 and Fiscal 2019:

 

   

Fiscal Years Ended March 31,

 
   

2020

   

2019

 

 (in thousands)

               

 Advertising

  $ 4,994     $ 4,084  

 Salaries and related expenses

    2,172       2,200  

 Sales commissions

    81       83  

 Trade shows

    14       52  

 Travel

    235       238  

 Media production and promotional products

    75       80  

 Quality control and processing fees

    206       240  

 General brand marketing

    364       788  

 Other

    711       697  

 Total

  $ 8,852     $ 8,462  

 

Advertising is principally composed of the costs of developing and airing our commercials, the costs of development, production, printing, and postage for our catalogues, and mailing and web media costs for search and affiliate web marketing programs and retail support placement.  Each of these are key components of our integrated marketing strategy because they help build awareness of, and consumer demand for, our products in all our channels of distribution (retail and direct-to-consumer). Advertising expense totaled $5.0 million for Fiscal 2020, a year-over-year increase of 22.3%, or $910,000, primarily because of our increased use of more measurable pay-per-click advertising, including general television, YouTube, Facebook and other general media advertising.

 

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.  Personnel costs for sales and marketing in Fiscal 2020 were $2.2 million, relatively flat from Fiscal 2019 levels.

 

Sales commissions, which generally include 1-7% of cash collections from some of our retailer customers, are paid to third-party sales representatives that assist us in developing and maintaining relationships with certain retailers.  Sales commission expense totaled $81,000 for the fiscal year ended March 31, 2020, a decrease of 1.6% from the prior fiscal year as a result of lower overall sales to customers represented by third-party sales representatives.

 

Other marketing expenses decreased $410,000, or 27.7%, year-over-year primarily as a result of decreases in a variety of other marketing initiatives, including direct marketing consulting with several retailers, general marketing programs to develop brand recognition and understand target market customers, changes in overall promotional programs, market research and retailer marketing programs, and use of contractors to help drive sales.

 

General and Administrative

General and administrative expense for the fiscal year ended March 31, 2020 totaled $4.0 million, an increase of 37.0% or $1.1 million, as compared to the prior year.  This increase was principally due to increases in payroll-related expenses, including incentive programs, salaries, bonuses and employee benefits, consulting and legal fees associated with investments in credit card security, web hosting, electronic data processing, network consulting and software troubleshooting fees, office rent relating to new accounting guidance on leases and relocation of the corporate headquarters, and estimates for the allowance for bad debt and depreciation.

 

Operating Income and Loss

The income from operations totaled $308,000 in Fiscal 2020, an increase of $301,000, or 4,525.8%, from the prior year, primarily as a result of an increase in revenue, gross profit and gross margin, partially offset by increases in specific advertising programs and general television, YouTube, Facebook and other general media advertising.

 

 

Other Income and Expense

Other expense for Fiscal 2020 totaled $251,000, as compared to other expense of $297,000 in the prior year, primarily due to lower borrowings and interest payments under the Term Loan with Scotts Miracle-Gro. 

 

Net Loss

Our net income for Fiscal 2020 was $57,000, a $348,000 improvement over our net loss of $291,000 in Fiscal 2019, primarily attributable to increased sales volumes and an increase in operating margins, as we continued to refine our selling strategy, partially offset by increased operating expenses.  

 

Segment Results

We report our segment information in the same way that management assesses the business and makes decisions 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 Segments include the nature of the business activities, the reports provided to the Company’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’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. 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.

 

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 maker of the Company.  The Company evaluates performance based on the primary financial measure of contribution margin (“segment profit”). Segment profit reflects the income or loss from operations before corporate expenses, non-operating income, net interest expense, and income taxes.

 

   

Fiscal Year Ended March 31, 2020

 

(in thousands) 

 

Direct-to-consumer

   

Retail

   

Corporate/Other

   

Consolidated

 

Net sales

  $ 13,322     $ 25,892     $ -     $ 39,214  

Cost of revenue 

    8,537       16,648       -       25,185  

Gross profit

    4,785       9,244       -       14,029  

Gross profit percentage

    35.9

%

    35.7

%

    -       35.8

%

Sales and marketing (1)

    1,376       3,302       1,480       6,158  

Segment profit

    3,409       5,942       (1,480

)

    7,871  

Segment profit percentage

    25.6

%

    22.9

%

    -       20.1

%

 

(1) Sales and marketing includes advertising, trade shows, media production and promotional products, general brand marketing and other as discussed in the sales and marketing section.

 

   

Fiscal Year Ended March 31, 2019

 

(in thousands) 

 

Direct-to-consumer

   

Retail

   

Corporate/Other

   

Consolidated

 

Net sales

  $ 8,091     $ 26,275     $ -     $ 34,366  

Cost of revenue 

    5,737       16,658       -       22,395  

Gross profit

    2,354       9,617       -       11,971  

Gross profit percentage

    29.1 %     36.6 %     -       34.8 %

Sales and marketing (1)

    802       3,575       1,324       5,701  

Segment profit

    1,552       6,042       (1,324 )     6,270  

Segment profit percentage

    19.2 %     23.0 %     -       18.2 %

 

(1) Sales and marketing includes advertising, trade shows, media production and promotional products, general brand marketing and other as discussed in the sales and marketing section.

 

 

Liquidity and Capital Resources

 

After adjusting the net income for non-cash items and changes in operating assets and liabilities, net cash provided by operating activities totaled $7.1 million in Fiscal 2020, as compared to net cash used by operating activities of $4.8 million in the prior fiscal year.

 

Non-cash items, consisting of depreciation, amortization, bad debt allowances, accretion of debt association with sale of intellectual property, and changes in inventory allowances totaled a net loss of $1.1 million in Fiscal 2020, as compared to a net loss of $520,000 in the prior fiscal year.

 

Changes in current assets provided cash of $3.2 million during Fiscal 2020, primarily due to decreases in accounts receivable and inventory, partially offset by an increase in other current assets.  In Fiscal 2019, changes in these assets used $4.2 million, reflecting increases in accounts receivable and inventory, partially offset by a decrease in other current assets.  As of March 31, 2020, the inventory balance was $4.8 million, representing approximately 70 days of sales activity during Fiscal 2020.  Net accounts receivable totaled $3.4 million as of March 31, 2020, representing approximately 46 days of net retail sales activity at the average daily rate of sales recognized during Fiscal 2020.  The days of sales in receivables and inventory calculations can fluctuate, and are greatly impacted by our seasonality and the timing of sales and inventory receipts during the period.

 

Current operating liabilities increased $2.9 million during Fiscal 2020, because of a $3.0 million increase in accounts payable and accrued liabilities.  In the prior year period, current operating liabilities decreased $864,000 primarily due to increases in accounts payable and accrued liabilities, including accrued interest and customer deposits. Accounts payable as of March 31, 2020 totaled $4.7 million, representing approximately 44 days of daily expense activity at the average daily rate of expenses incurred during Fiscal 2020.

 

Net investment activity used $862,000 of cash, primarily due to purchases of equipment to manufacture our new products, as compared to cash used of $854,000 in the prior year.  

 

Net financing activity, including the borrowing and repayment of debt, provided cash of $857,000 during Fiscal 2020, as compared to cash used of $21,000 in the prior fiscal year.

 

As of March 31, 2020, we had a cash balance of $9.1 million, of which $15,000 was restricted as collateral for our various corporate obligations.  This compares to a cash balance of $1.8 million as of March 31, 2019, of which $15,000 was restricted.

 

As of March 31, 2020 and March 31, 2019, the outstanding balance of our debt is as follows:

 

   

For the Fiscal Years Ended March 31,

 
   

2020

   

2019

 

(in thousands) 

               

Notes payable and debt-related party

  $ 915     $ -  

Sale of intellectual property liability (see Note 3)

    24       48  

Total debt

    939       48  

Less current portion

    39       25  

Long term debt

  $ 900     $ 23  

 

As of March 31, 2020, we have $900,000 of debt requiring cash payments.  The remaining debt in the current liability is related to the Scotts Miracle-Gro transaction, for further information see Note 3 to our financial statements.

 

We use, or have used, a variety of debt funding sources to meet our liquidity requirements, including the following:

 

Borrowing Agreements

During Fiscal 2020, we entered into a Working Capital Term Loan Agreement in the principal amount of up to $10.0 million with Scotts Miracle-Gro and Real Estate Term Loan of up to $1.5 million. As of March 31, 2020, the outstanding balance of our note payable and debt, including accrued interest, was $900,000 as discussed in more detail in Note 2.

 

 

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 $9.1 million ($15,000 of which is restricted as collateral for our various corporate obligations) as of March 31, 2020;

 

our cash of $10.3 million, ($15,000 of which is restricted as collateral for our various corporate obligations) as of June 15, 2020;

 

continued support of, and extensions of credit by, our suppliers and previous lenders, including Scotts Miracle-Gro;

 

our historical pattern of increased sales between September and March, and lower sales volume from April through August;

 

the level of spending necessary to support our planned initiatives; and

 

our sales to consumers, retailers, and international distributors, and the resulting cash flow from operations, which will depend in great measure on acceptance of our products by retail distribution customers and the success of planned direct-to-consumer sales initiatives.

 

During Fiscal 2020 we took a number of actions to address our liquidity needs.  Most importantly, we concentrated on increasing our margin by eliminating some production costs despite a shipping related problem in our domestic and international channels.  Specifically, we utilized more targeted pay-per-click advertising along with general brand awareness marketing and strategically expanded sales to major retailers that have proven to be the best and most profitable business partners.  

 

In first quarter of Fiscal 2020, the Company entered into a Term Loan Agreement in the principal amount of up to $10.0 million with Scotts Miracle-Gro with a maturity date of March 31, 2020. The Term Loan Agreement was secured by a lien on the assets of the Company.  Interest was charged at the stated rate of 10% per annum.  The funding provided general working capital and was used for the purpose of acquiring inventory to support our expansion into retail and its direct-to-consumer sales channels in advance of our peak selling season. The principal and accrued interest on the Term Loan were repaid in full during the fourth quarter of Fiscal 2020.

 

Based on these facts and assumptions, we believe our existing cash and cash equivalents, along with the cash generated by our anticipated results from operations, will be sufficient to meet our needs for the next twelve months from the filing date of this report based on current cash on hand and financing from Scotts Miracle-Gro similar to the last few years.  However, we may need to seek additional debt or equity capital to provide a cash reserve against contingencies, address the seasonal nature of our working capital needs, and to purchase inventory and incur other expenses in an attempt to increase the scale of our business.  There can be no assurance we will be able to raise this additional capital. 

 

 

Results of Operations

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 customers;

 

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 during the fall and winter months (September through March);

 

a continued, uninterrupted supply of product from our third-party manufacturing suppliers in China; and

 

the success of the Scotts Miracle-Gro relationship.

 

Off-Balance Sheet Arrangements

 

We do not have current commitments under capital leases and have not entered into any contracts for financial derivative such as futures, swaps, and options other than those disclosed in this Annual Report.

 

Obligations and Commitments

 

As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts, such as leases and the timing and effect that such commitments are expected to have on our liquidity and cash flow in future periods.  The following is a summary of these obligations as of March 31, 2020.

 

   

Less than 1 year

   

1 -3 years

   

More than 3 years

   

Total

 

(in thousands) 

                               

Capital leases

  $ 30     $ -     $ -     $ 30  

Operating leases

  $ 185     $ 825     $ 755     $ 1,765  

Totals:

  $ 215     $ 825     $ 755     $ 1,795  

 

See Note 2, Note 3 and Note 7 to our financial statements for additional information related to our notes payable and long term debt and operating leases, respectively.

 

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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 the value of those. Due to the short-term nature of our cash equivalents, we have concluded that a change in interest rates does not pose a material market risk to us with respect to our interest income. However, as discussed above, if we acquire additional debt changes in the general level of market interest rates could impact our interest expense during the terms of future debt arrangements.  In this regard, interest on our Term Loan with Scotts Miracle-Gro was charged at the stated rate of 10% per annum.

 

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 Asian 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.

 

ITEM 8.  FINANCIAL STATEMENTS

 

Our financial statements appear in a separate section at the end of this Annual Report. Such information is incorporated herein by reference.

 

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

We conducted an evaluation under the supervision and with the participation of our management team, including our Chief Executive Officer and Senior Vice President, Finance and Accounting, of the effectiveness of the design and operation of our disclosure controls and procedures.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on our assessment, management has concluded that, as of March 31, 2020, our disclosure controls and procedures were effective.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2020.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission’s Internal Control-Integrated Framework (2013).

 

Based on our assessment, management has concluded that, as of March 31, 2020, our internal control over financial reporting was effective based on those criteria.

 

 

Management is responsible for establishing and maintaining adequate internal controls over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f), promulgated under the Securities Exchange Act of 1934, as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

 

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and dispositions of the assets;

 

 

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

 

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.  Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failure.  Internal control over financial reporting can also be circumvented by collusion or improper management override.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process.  Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

Attestation Report of the Independent Registered Public Accounting Firm

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year ended March 31, 2020 that have or are reasonably likely to materially affect our internal control over financial reporting identified in connection with the previously mentioned evaluation.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 

 

PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Executive Officers

 

The following sets forth certain information with respect to our executive officers and significant employees, as of the filing date of this report.  The executive officers have employment contracts with the Company as discussed in Item 11 below.  All other employees are considered at-will.

 

Name

 

Age

 

Position with AeroGrow

J. Michael Wolfe

 

61

 

President and Chief Executive Officer

Grey H. Gibbs

 

53

 

SVP – Finance and Administration

John K. Thompson

 

59

 

EVP, Sales & Marketing and Secretary

 

J. Michael Wolfe, age 61, became our Chief Operating Officer in January 2010, our President on February 9, 2011, and our Chief Executive Officer on March 31, 2011.  He previously served as Vice President of Operations since April 2006.  Prior to joining AeroGrow, Mr. Wolfe was an independent consultant.  From 1992 to 2002, he was President and Chief Operating Officer of Concepts Direct and was its Chief Executive Officer from 2000 to 2001.  At Concepts Direct, Mr. Wolfe oversaw the development, launch and operations of seven independent catalogues.  From 1987 to 1992, Mr. Wolfe served as Vice President of Wiland Services, Inc., a database management company where he oversaw the redesign of the company’s product line, its sales and investor relations.  The Board believes that Mr. Wolfe’s leadership experience, combined with his extensive direct-to-consumer marketing background, his executive experience at a variety of direct-to-consumer companies, and his knowledge of AeroGrow’s history and business, qualifies him to serve as President and Chief Executive Officer.

 

Grey H. Gibbs, age 53, has been employed by AeroGrow since November of 2007.  He has served as Senior Vice President – Finance and Accounting since May 2015 and previously served as: (i) Vice President of Finance and Accounting from June 2014 to May 2015; (ii) Vice President of Accounting from February 2011 to June 2014; and (iii) Controller from November 2007 to June 2011.  Before joining AeroGrow, Mr. Gibbs was employed by Swift Company, an animal protein processor, as Director of Sarbanes-Oxley Compliance from 2006 to 2007 and Assistant Corporate Controller from 2004 to 2006.  From 2003 to 2004, Mr. Gibbs was the Chief Financial Officer of JCIT International, an educational and consulting firm in lean manufacturing.  From 1994 to 2002, Mr. Gibbs served in a range of strategic and financial roles for Agilent Technologies and Hewlett Packard, including New Product Introduction Program Manager, Outsourcing Program Manager, Site Finance Manager, Planning and Reporting Analyst and Senior Internal Auditor.  Mr. Gibbs was also an Audit Supervising Senior for KPMG LLP from 1991 to 1994.

 

John K. Thompson, age 59, became Executive Vice President of Sales and Marketing in April 2014.  Mr. Thompson joined AeroGrow in 2002 and has served in a variety of senior management positions at AeroGrow, including his position as Vice President of Marketing from October 2009 to April 2014.  Mr. Thompson also served as the Company’s International Division General Manager and Vice President of Investor Relations, and was instrumental in the research activities leading to the development and launch of the Company’s AeroGarden product line.  Prior to joining AeroGrow, Mr. Thompson was Director of Marketing for Productivity Point International, a direct marketing and direct sales company, and Sales and Marketing Manager for CareerTrack, a direct marketing company that sold personal and professional growth products to the consumer and commercial markets.

 

Board of Directors

 

Our Board of Directors oversees the management of AeroGrow on your behalf. Among other things, the Board reviews our long-term strategic plans and exercises direct decision-making authority on key issues, including the appointment of our executive officers and setting the scope of their authority in managing AeroGrow’s day-to-day operations.  Our Board is currently comprised of Chris Hagedorn (Chairman), H. MacGregor Clarke, David B. Kent, Cory J. Miller and Patricia M. Ziegler.  Messrs. Hagedorn, Miller and Ms. Ziegler are representatives of Scotts Miracle-Gro. Biographical information for Messrs. Hagedorn, Clarke, Kent, Miller and Ms. Ziegler is presented below, along with Albert Messina and Peter Supron, who served as Board members during Fiscal 2020, prior to their resignation in April 2019.

 

 

H. MacGregor Clarke, age 59, has been a director since April 2019 and previously served as a director from July 2009 to March 2013.  Mr. Clarke has served as Senior Vice President and Chief Financial Officer of Johns Manville, a Berkshire Hathaway company, since March 2013 and previously served as AeroGrow’s Chief Financial Officer from May 2008 through March 2013.  From 2007 to 2008, Mr. Clarke was President and Chief Executive Officer, and from 2006 to 2007, Chief Financial Officer, of Ankmar, LLC, a garage door manufacturer, distributor and installer.  From 2003 to 2006, Mr. Clarke was a senior investment banker with FMI Corporation, a management consulting and investment banking firm serving the building and construction industry.  At FMI Corporation, Mr. Clarke was responsible for delivering consulting and investment banking services to clients, and for marketing to prospective clients in the financial services industry.  The Board believes that Mr. Clarke’s extensive financial and executive experience, in particular his prior service as an executive officer of four companies, among other factors, qualifies him to serve as a director.

 

Chris J. Hagedorn, age 35, has been a director since 2013 and Chairman of the Board since November 2016.  Mr. Hagedorn was appointed the General Manager of The Hawthorne Gardening Company in October 2014 and was previously appointed Director of Indoor Gardening at Scotts Miracle-Gro in May of 2013. From 2011 to 2013, Mr. Hagedorn served as a Marketing Manager for the North Region at Scotts Miracle-Gro. Mr. Hagedorn was initially appointed to the Board by Scotts Miracle-Gro pursuant to a provision of the Securities Purchase Agreement between AeroGrow and Scotts Miracle-Gro which allowed Scotts Miracle-Gro, as holder of the Series B Preferred Convertible Stock, to appoint one member to the Board of Directors for so long as the convertible stock remained outstanding.   For more details regarding the Securities Purchase Agreement, the Series B Preferred Stock, the Warrant, and related agreements, refer to Note 3. “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements.  The Board believes that Mr. Hagedorn’s business experience and ties to Scotts Miracle-Gro, particularly in light of AeroGrow’s strategic alliance with Scotts Miracle-Gro, qualifies him to serve as a director.  

 

David B. Kent, age 61, has been a director since April 2019.  Mr. Kent has served in various senior managerial roles and is currently Co-Founder of Darcie Kent Vineyards.  Mr. Kent served as a Brand Manager for Procter & Gamble, the world’s foremost consumer package goods company. Mr. Kent served as CEO of the Wine Group LLC from 2000 to 2012. The Board believes that Mr. Kent’s extensive experience in marketing, retail and brand building, among other factors, qualifies him to serve as a director.

 

Cory J. Miller, age 46, has been a director since April 2020. Cory Miller joined the AeroGrow Board in 2020 and is currently the Vice President of Finance & Information Technology at The Hawthorne Gardening Company. The Hawthorne Gardening Company is a whole-owned subsidiary of the Scotts Miracle-Gro Company. Cory began his career at Scotts Miracle-Gro in 2000 and has held several roles of increasing responsibility. Previous leadership roles at Scotts include VP of Finance, Merger & Acquisition Integration; VP of Finance, Chief Internal Auditor; VP of Finance, Sales; and VP of Finance, Marketing. Prior to joining Scotts, Mr. Miller was a member of the audit practice of Ernst and Young. The Board believes that Mr. Miller’s business experience and ties to Scotts Miracle-Gro, particularly in light of AeroGrow’s strategic alliance with Scotts Miracle-Gro, qualifies him to serve as a director.

 

Patricia M. Ziegler, age 55, has been a director since April 2020. Patti Ziegler joined the AeroGrow Board in 2020 and is currently the Chief Digital and Marketing Services Officer at Scotts Miracle-Gro. Patti began her career at Scotts Miracle-Gro in 2011 and has held several roles within the marketing team with brand, advertising, and digital leadership responsibilities. Currently, Patti is responsible for driving growth with direct to consumer. Before joining the company, Patti held several leadership positions within an advertising agency holding company across a broad range of categories including Consumer Packaged Goods, Retail, Financial Services, Spirits, Healthcare, Restaurants, Utilities, and Tourism. The Board believes that Ms. Ziegler’s marketing and advertising experience, creativity and entrepreneurial approach, and ties to Scotts Miracle-Gro, particularly in light of AeroGrow’s strategic alliance with Scotts Miracle-Gro, qualifies her to serve as a director.

 

Former Board Members

 

As stated above, Albert Messina and Peter Supron, who served as Board members during Fiscal 2020 prior to their resignation in April 2019.

 

Albert (Bert) Messina, age 51, served as a director from November 2016 to April 2020.  Mr. Messina has served in various senior managerial roles at the Hawthorne Gardening Company, a whole-owned subsidiary of the Scotts Miracle-Gro Company, since 2014.  He previously served as Finance and Strategy Lead at Hawthorne from 2014-2019.  From 2012 to 2013, Mr. Messina served as a Senior Director of Strategy & Development for Source Interlink Media.  Prior to that, Mr. Messina served as a Managing Director for DeSilva & Phillips Investment Bank.  

 

 

Peter Supron, age 51, served as a director from November 2016 to April 2020. Mr. Supron currently serves as Chief of Staff to the President and Chief Operating officer of Scotts Miracle-Gro.  In this role, Mr. Supron partners with the business units in strategy development and has played a key role in Scotts Miracle-Gro’s entry into the Internet of Things market for lawn & garden, as well as Scotts Miracle Gro’s entry into the direct-to-consumer space.  Previously, Peter led Scott Miracle-Gro’s corporate strategy & mergers & acquisitions function, its procurement team, as well has held various roles in finance. 

 

Board Committees and Meetings

 

We have established two standing committees so that certain matters can be addressed in more depth than may be possible in a full Board meeting: an Audit Committee and a Governance, Compensation and Nominating Committee.  The two committees each operate under a written charter.

 

Audit Committee.  The current members of our Audit Committee are Messrs. Clarke (chairman), Hagedorn and Miller.  Mr. Messina, who resigned from the Board in April 2019, served as a member of the committee during Fiscal 2019 and the first month of Fiscal 2020. The members were elected to the committee, and the chairman was appointed by the Board.  The Board has determined that Mr. Clarke is considered an “audit committee financial expert,” as defined by Item 407(d)(5)(ii) of Regulation S-K, due to his extensive financial background and experience (as summarized in the biographical information for Mr. Clarke disclosed above).  The Board has affirmatively determined that Mr. Clarke is an independent director as defined by applicable securities law and NASDAQ corporate governance guidelines.  Due to their positions as representatives of Scotts Miracle-Gro, the Company’s most significant stockholder, Messrs. Hagedorn and Miller and Ms. Ziegler are not independent directors.  The Audit Committee’s charter provides that the committee shall:

 

 

oversee the accounting and financial reporting processes and audits of the financial statements;

 

assist the Board with oversight of the integrity of our financial statements, our compliance with legal and regulatory requirements, our independent auditors’ qualifications and independence, and the performance of the independent auditors; and

 

provide the Board with the results of its monitoring.

 

Governance, Compensation and Nominating Committee.  The current members of the Governance, Compensation and Nominating Committee are Ms. Ziegler (chairman), Messrs. Kent and Hagedorn.  Mr. Supron, who resigned from the Board in April 2019, served as chairman of the committee during Fiscal 2019 and the first month of Fiscal 2020. The members were elected to the committee, and the chairman was appointed, by the Board.  The Governance, Compensation and Nominating Committee’s charter provides that the committee shall:

 

 

recommend to the Board the corporate governance guidelines to be followed;

 

review and recommend the nomination of Board members;

 

set the compensation for the chief executive officer and other officers; and

 

administer the equity-based performance compensation plans of AeroGrow.

 

The Governance, Compensation and Nominating Committee does not have a formal policy concerning stockholder recommendations to the Board of Directors and we did not receive any recommendations from stockholders requesting that the Board consider a candidate for inclusion as a nominee.  The Committee has determined that it is appropriate to not have such a policy given the infrequency of such recommendations.  The absence of such a policy does not mean, however, that a recommendation would not have been considered had one been received. The Committee would consider any candidate proposed in good faith by a stockholder on the same basis as a candidate proposed directly by the Board. To do so, a stockholder should send the candidate’s name, credentials, contact information, and the candidate’s consent to be considered to the Governance, Compensation and Nominating Committee, c/o Corporate Secretary, AeroGrow International, Inc., 5405 Spine Rd., Boulder, Colorado, 80301. The proposal should be received by the due date for a stockholder proposal, as set forth below under the caption heading “Submission of Stockholder Proposals,” in order to be considered timely for consideration by the Committee prior to the Annual Meeting of Stockholders or, in lieu of an annual meeting, for an action by written consent of the stockholders.  The proposing stockholder should also include his or her contact information and a statement of his or her share ownership (how many shares owned and for how long).

 

In evaluating director nominees, the Governance, Compensation and Nominating Committee considers the appropriate skills and personal characteristics needed in light of the makeup of the current Board, including considerations of character, background, professional experience, education, skill, qualifications for committee membership, independence, race, gender, national origin, differences in viewpoint, and other individual qualities and attributes. Other than the foregoing, there are no stated minimum criteria for director nominees, although the Committee may also consider such other factors as it may deem are in the best interests of the AeroGrow and its stockholders.  The Committee does, however, believe it is appropriate for a member or members of AeroGrow’s management to participate as members of the Committee.

 

 

The Governance, Compensation and Nominating Committee identify nominees by first evaluating the current members of the Board willing to continue in service.  Current members of the Board with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination.  If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Committee then identifies the desired skills and experience of a new nominee in light of the criteria above.  Current members of the Board would be polled for suggestions as to individuals meeting the criteria described above.  The Committee may also engage in research to identify qualified individuals.  To date, we have not engaged third parties to identify or evaluate or assist in identifying potential nominees, although we reserve the right in the future to retain a third-party search firm, if appropriate.

 

Meetings.  During Fiscal 2020 the Board held eight meetings.  A quorum of directors attended all of the meetings held by the Board during the period that each person served as a director of AeroGrow.  Also during Fiscal 2020, the Audit Committee held four meetings and the Governance, Compensation and Nominating Committee held two meetings.  Each director attended, either in person or by telephone conference, at least 75% of the Board and committee meetings held while serving as a director or committee member in Fiscal 2020.

 

The Company encourages all incumbent directors, as well as all nominees for election as director, to attend the annual stockholder meetings, but they are not required to do so.  We did not hold an annual meeting last year.

 

Code of Ethics

 

The Board of Directors has adopted a Code of Ethics to provide guidance to all of our directors, officers and employees, including our principal executive officer, principal financial and accounting officers, and persons performing similar functions.  The Code of Ethics is posted on our website at www.aerogrow.com, and may be found by linking to “Investors” and then “Code of Ethics.”  We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website.

 

Board Structure and Risk Oversight

 

Chris Hagedorn serves as Chairman of the Board.  Scotts Miracle-Gro is the largest investor in AeroGrow and its financial support was instrumental in allowing AeroGrow to persevere through a very difficult economic period. Messrs. Hagedorn, Messina and Supron were representatives of Scotts Miracle-Gro and they are involved in setting the strategic direction for the Company.  

 

Our Board has overall responsibility for risk oversight. Throughout the year, the Board dedicates a portion of their meetings to review and discuss specific risk topics in greater detail. Strategic and operational risks are presented and discussed in the context of the President’s report on operations to the Board at regularly scheduled board meetings and at presentations to the Board by our other employees and consultants. The Board’s risk oversight process builds upon management’s risk assessment and mitigation processes. The small size of AeroGrow allows our Board to develop in-depth knowledge of different facets of the business. This in-depth knowledge, coupled with exposure to and frequent communication with our management, assists the Board in performing its oversight responsibilities, including risk management, in an effective manner.

 

Communications with the Board of Directors

 

Stockholders and other interested parties may communicate with the Board or any individual director, by writing to:

 

AeroGrow International, Inc.

Attention: Board of Directors

c/o Corporate Secretary

5405 Spine Rd.

Boulder, Colorado 80301

 

If the letter is from a stockholder, the letter should state that the sender is a stockholder. Under a process approved by the Board, depending on the subject matter, management will:

 

 

forward the letter to the director or directors to whom it is addressed; or

 

attempt to handle the matter directly (as where information about our business or our stock is requested); or

 

not forward the letter if it is primarily commercial in nature or relates to an improper or irrelevant topic.

 

 

A summary of all relevant communications that are received after the last meeting of the full Board and which are not forwarded will be presented at each Board meeting along with any specific communication requested by a director.

 

All communications will be handled in a confidential manner, to the degree the law allows. Communications may be made on an anonymous basis; however, in these cases the reporting individual must provide sufficient details for the matter to be reviewed and resolved. The Company will not tolerate any retaliation against an employee who makes a good faith report.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our executive officers and directors, and persons who own more than 10% of our common stock (herein collectively, our “Section 16 insiders”) to file with the SEC certain forms reporting their ownership and changes in beneficial ownership of our common stock and other equity with the SEC, and to furnish us with copies of these filings.

 

To our knowledge, based solely upon a review of the copies of such forms furnished to us and written representations that no other reports were required, we believe that, during the fiscal year ended March 31, 2020, all such filings required to be made by our Section 16 insiders were timely filed in accordance with the requirements of the Exchange Act.

 

ITEM 11.  EXECUTIVE COMPENSATION

             

Compensation Philosophy

 

The Governance, Compensation and Nominating Committee of our Board is responsible for guiding and overseeing the formulation and application of the compensation and benefit programs for our executive officers and our directors.  A description of compensation for our non-employee directors is included below under the caption “Director Compensation.”  The Committee acts pursuant to a charter that has been approved by our Board.

 

The Governance, Compensation and Nominating Committee believes that the most effective compensation program is one that is designed to reward the achievement of specific annual, long-term, and strategic goals by AeroGrow, and which aligns executives’ interests with those of the stockholders by rewarding performance above established goals, with the ultimate objective of increasing stockholder value.  The Governance, Compensation and Nominating Committee evaluates both performance and compensation to ensure that AeroGrow maintains its ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies.  Accordingly, the Governance, Compensation and Nominating Committee believes executive compensation packages provided by AeroGrow to its executives, including the executive officers, should include salary compensation and annual cash incentives based on the Company’s ability to pay and fundamental measures of financial performance.

 

We compensate our executives through a mix of base salary and bonus compensation designed to be competitive with comparable employers and to align management’s incentives with the long-term interests of our stockholders.  We have not utilized equity compensation since our 2005 Equity Compensation Plan expired in Fiscal 2016. In making compensation decisions, the Governance, Compensation and Nominating Committee, may compare certain elements of total compensation against other comparable publicly traded and privately held companies that compete in our markets.  A significant percentage of total compensation is allocated to incentive compensation as a result of the philosophy mentioned above.  There is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation.  Rather, the Governance, Compensation and Nominating Committee reviews information such as that referenced above with respect to our peers and our major shareholder, SMG, Scotts Miracle-Gro, to determine the appropriate level and mix of incentive compensation.  Income from such incentive compensation is realized as a result of the performance of AeroGrow or the individual, depending on the type of award.

 

Compensation Process

 

Generally, base salaries and annual incentive awards will be reviewed at the end of each fiscal year with changes made to the base salaries effective April 1 of the following fiscal year.  Whether an individual’s salary and incentive awards are increased or decreased depends on the individual’s performance as well as the overall performance of AeroGrow.

 

Although we have not issued stock options and other stock grants in the last several fiscal years, such equity grants are reviewed and approved at meetings of the Governance, Compensation and Nominating Committee and the full Board.  By establishing the meeting schedule and agenda for these grants in advance, AeroGrow diminishes any opportunity for manipulation of exercise prices on option grants to the extent any recipients are in possession of non-public information at the time of the meetings.  Approval of grants for any newly hired or promoted executives during the course of the year generally occurs at the Governance, Compensation and Nominating Committee’s meeting immediately following the hiring or promotion.

 

 

Role of Executive Officers in Compensation Decisions

 

The Governance, Compensation and Nominating Committee make all compensation decisions for the executive officers and approve recommendations regarding equity awards to all elected officers.  The Chief Executive Officer annually reviews the performance of each Named Executive Officer (other than the Chief Executive Officer, whose performance is reviewed by disinterested members of the Governance, Compensation and Nominating Committee).  As a “smaller reporting company,” our “Named Executive Officers” include our (i) Chief Executive Officer; and (ii) other two most highly compensated executive officers based on SEC regulations.  Compensation ranges for our Named Executive Officers are based on the individual’s experience and prior performance, as well as AeroGrow’s operating performance.  The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, are presented to the Governance, Compensation and Nominating Committee.  The Governance, Compensation and Nominating Committee can exercise its discretion in modifying any recommended adjustments or awards to executives.

 

Components of Total Compensation

 

In Fiscal 2020, the principal components of compensation for executive officers were:

 

 

base salary;

 

performance-based annual incentive awards (cash bonuses); and

 

benefits and other perquisites.

 

Each component is designed to achieve a specific purpose and to contribute to a total package that is competitive, appropriately performance-based, and valued by AeroGrow’s executives. Although we did not issue stock options in Fiscal 2020, we have utilized equity compensation in prior years and may again in the future.

 

Base Salaries

 

We provide executive officers and other employees with base salary to compensate them for services rendered during the fiscal year.  Base salary ranges for executive officers are determined for each executive based on his or her position and responsibility.  During its review of base salaries for executives, the Governance, Compensation and Nominating Committee primarily considers:

 

 

individual scope of responsibility;

 

years of experience;

 

market data, such as that obtained from a review of other similarly situated companies;

 

internal review of the executive’s compensation, both individually and relative to other officers; and

 

individual performance of the executive.

 

Salary levels are typically considered annually as part of our performance review process as well as upon a promotion or other change in job responsibility.

 

Performance-Based Annual Incentive Compensation

 

Though markets dictate that base salaries must be competitive, we are moving toward basing a greater proportion of our executive compensation on the achievement of measurable individual and company results through the award of annual incentive bonuses.  These bonuses are often tied to performance against AeroGrow’s sales growth and EBIT objectives.  By increasing variable pay as a percentage of total compensation, the Governance, Compensation and Nominating Committee believes that executive compensation will be more aligned with value delivered to our stockholders.  This limits fixed costs and also results in higher pay occurring only in years when merited by high performance.  Due to company-wide improvements on sales and operations, we paid an aggregate of $30,000 in discretionary cash bonuses to our Named Executive Officers in Fiscal 2020.  We accrued $194,000 in performance-based bonuses during Fiscal 2020 for payments that are to be paid to our Named Executive Officers during Fiscal 2021.

 

 

Long Term Stock-Based Compensation

 

This category of awards covers options granted to executives out of equity plans, and that vest over time, at different rates for different executives.  Although we did not issue stock options in Fiscal 2020, we have utilized equity compensation in prior years and may again in the future. Because these awards vest over time and become more valuable to the recipient only as our stock price increases, the Governance, Compensation and Nominating Committee believes these are a useful form of long-term incentive compensation, with the potential to directly align the interests of shareholders and management.  During Fiscal 2020, we granted options to purchase 0 shares of common stock.  For more details about outstanding stock options held by our Named Executive Officers, please refer to the table below entitled “Outstanding Equity Awards at Fiscal Year End.”

 

At March 31, 2020, no options to purchase shares of our common stock were unvested. These options will result in $-0- of compensation expense.

 

Executives and Employment Arrangements 

 

The following discussion and table relate to compensation arrangements on behalf of, and compensation paid by us during Fiscal 2020, to our Named Executive Officers who were employed by AeroGrow as of March 31, 2020.

 

Employment Contracts

 

We have employment agreements with J. Michael Wolfe and John K. Thompson.

 

J. Michael Wolfe

 

Effective as of March 4, 2012, AeroGrow and J. Michael Wolfe entered into an employment agreement (the “Wolfe Agreement”) that provides that he will be employed as the Chief Executive Officer and must devote substantially all of his working time and efforts to our business.  The Wolfe Agreement superseded and replaced a previous agreement between the parties dated as of February 9, 2009.  The Wolfe Agreement has an initial one year term, with automatic one year renewals unless advance notice is given by either party.  Pursuant to the Wolfe Agreement, Mr. Wolfe’s annual base salary was set at $200,000 until September 2, 2012, at which time his annual base salary increased to $226,923.  Beginning on April 1, 2013, and each April 1 thereafter, Mr. Wolfe’s annual base salary will be increased by 3%, or such higher percentage as may be determined by our Board of Directors.  During Fiscal 2020, Mr. Wolfe’s annual base salary was $281,849. In addition, Mr. Wolfe will receive an automobile allowance of $750 per month during the term of the Wolfe Agreement.  Mr. Wolfe is eligible to participate in our annual cash incentive compensation plan for senior managers and any equity compensation plans (if applicable), each as determined by the Board of Directors from time to time.  The Wolfe Agreement also provides for medical, vacation, and other benefits commensurate with the policies and programs adopted by the Board of Directors for our senior executives.  In the event that we terminate the employment of Mr. Wolfe without cause (as determined under the Wolfe Agreement), Mr. Wolfe will be entitled to receive his base salary for 12 months following the date of termination, plus a prorated portion of his annual cash bonus.  In the event that we breach any term of the Wolfe Agreement and such breach is not cured within thirty days of notice being given, then Mr. Wolfe can terminate his employment and be entitled to receive his base salary for 12 months following the date of termination, plus a prorated portion of his annual cash bonus.  The Wolfe Agreement also requires Mr. Wolfe to comply with certain restrictive covenants including but not limited to a covenant not to compete during the term of the Wolfe Agreement and for a period of twelve months following the termination of the Wolfe Agreement.

 

 

John K. Thompson

 

Effective as of March 4, 2012, AeroGrow and John K. Thompson entered into an employment agreement (the “Thompson Agreement”) that provides that he will be employed as the Senior Vice President, Sales and Marketing and must devote substantially all of his working time and efforts to our business.  The Thompson Agreement superseded and replaced a previous agreement between the parties dated as of January 26, 2009.  The Thompson Agreement has an initial one year term, with automatic one year renewals unless advance notice is given by either party.  Pursuant to the Thompson Agreement, Mr. Thompson’s annual base salary was set at $150,000 until September 2, 2012, at which time his annual base salary increased to $167,307.  Beginning on April 1, 2013, and each April 1 thereafter, Mr. Thompson’s annual base salary will be increased by 3%, or such higher percentage as may be determined by our Board of Directors.  During Fiscal 2020, Mr. Thompson’s annual base salary was $212,615. Mr. Thompson is eligible to participate in our annual cash incentive compensation plan for senior managers, and any equity compensation plans (if applicable), each as determined by the Board of Directors from time to time.  The Thompson Agreement also provides for medical, vacation, and other benefits commensurate with the policies and programs adopted by the Board of Directors for our senior executives.  In the event that we terminate the employment of Mr. Thompson without cause (as determined under the Thompson Agreement), then Mr. Thompson will be entitled to receive his base salary for 12 months following the date of termination, plus a prorated portion of his annual cash bonus.  In the event that we breach any term of the Thompson Agreement and such breach is not cured within thirty days of notice being given, then Mr. Thompson can terminate his employment and be entitled to receive his base salary for 12 months following the date of termination, plus a prorated portion of his annual cash bonus.  The Thompson Agreement also requires Mr. Thompson to comply with certain restrictive covenants including but not limited to a covenant not to compete during the term of the Thompson Agreement and for a period of twelve months following the termination of the Thompson Agreement.

 

Other Company officers who do not qualify as Named Executive Officers are employed on an “at will” basis, subject to varying lengths of employment agreements and severance agreements.

 

Summary Compensation Table

 

 The following table sets forth information regarding all forms of compensation received by the Named Executive Officers during Fiscal 2020 and Fiscal 2019:

 

Name and Principal Position

 

Fiscal Year

 

Salary Paid

 

 

 

Bonus

 

 

Stock Awards

 

 

Option Awards (1)

 

 

All Other Compensation

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

J. Michael Wolfe, President and CEO

 

2020

 

$

290,467

 

(1)

 

$

-

 

 

$

-

 

 

$

-

 

 

$

9,000

 

(2)

 

$

299,467

 

 

 

2019

 

$

281,849

 

(1)

 

$

163,721

 

 

$

-

 

 

$

-

 

 

$

9,375

 

(2)

 

$

454,945

 

John K. Thompson, EVP, Sales and Marketing

 

2020

 

$

220,000

 

(1)

 

$

30,000

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

$

250,000

 

 

 

2019

 

$

212,615

 

(1)

 

$

88,392

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

$

301,007

 

Grey H. Gibbs, SVP of Finance and Administration

 

2020

 

$

172,201

 

(1)

 

$

13,000

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

$

185,201

 

 

 

2019

 

$

164,073

 

(1)

 

$

57,920

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

$

221,993

 

 

(1)

Salaries are computed and disclosed on a cash basis.  The executive officers did receive a pay increase in Fiscal 2020 (as determined by the employment agreements with respect to Messrs. Wolfe and Thompson).

(2)

Beginning in March 2012, Mr. Wolfe was paid an automobile allowance of $750 per month in accordance with his employment agreement.

 

The Named Executive Officers have no unexercised stock options held by them at March 31, 2020.  During the year ended March 31, 2020, no options granted to the Named Executive Officers were exercised.

 

 

Compensation Committee Interlocks and Insider Participation

 

Disclosure under this section is not required for a “smaller reporting company.”

 

Report of the Compensation Committee

 

Disclosure under this section is not required for a “smaller reporting company.”

 

Director Compensation

 

The following table provides information on AeroGrow’s compensation practices during the fiscal year ended March 31, 2020 for non-employee directors:

 

Non-Employee Director Compensation Information

 

Annual retainer for all non-employee directors (paid in quarterly installments)

 

$

30,000

 

Stock options granted for annual service on the Board by non-employee directors (1)

 

 

-

 

Stock options granted for annual service on the Audit Committee (1)

 

 

-

 

Stock options granted for annual service on the Governance, Compensation, and Nominating Committee (1)

 

 

-

 

Additional stock options granted for annual service as Board Chairman (1)

 

 

-

 

Reimbursement for expenses attendant to Board membership

 

Yes

 

 

(1)

The options vest pro-rata monthly (one-twelfth per month) on the last day of each month throughout the term of service.  If a director is unable to finish his or her term of service by reason of death or disability, the director options vest immediately.

 

Only Messrs. Clarke, and Kent, received non-employee director compensation during the fiscal year ended March 31, 2020.  Chris J. Hagedorn, a full-time employee of The Scotts Miracle-Gro Company, was appointed to the Board and to both committees of the Board in April 2013 and was appointed as Chairman of the Board in November 2016.  Under the terms of the Scotts Miracle-Gro transaction, Mr. Hagedorn is not entitled to receive non-employee Board compensation.  Albert Messina and Peter Supron were also appointed to the Board in November 2016 and continued to serve until each retired from the Board in April 2019.  Under the terms of the Scotts Miracle-Gro transaction, Messrs. Messina and Supron were not entitled to receive non-employee Board compensation. We maintain $10 million of director and officer liability insurance and we have entered into indemnification agreements with each director

 

Summary of Board and Committee Composition

 

Current Directors

 

Board

 

 

Audit

 

 

Governance, Compensation, and Nominating

 

 

 

 

 

 

 

 

 

 

 

Chris J. Hagedorn, Chairman (1)

 

X

 

 

X

 

 

X

 

H. MacGregor Clarke (2)

 

X

 

 

X

 

 

 

 

David B. Kent (2)

 

X

 

 

 

 

 

X

 

Cory J. Miller (3)

 

X

 

 

X

 

 

 

 

Patricia M. Ziegler (3)

 

X

 

 

 

 

 

X

 

Albert Messina (4)

 

X

 

 

X

 

 

 

 

Peter Supron (4)

 

X

 

 

 

 

 

X

 

 

(1)

Chris J. Hagedorn was appointed to the Board and to both committees of the Board in April 2013 and was appointed as Chairman of the Board in November 2016, concurrently with Scotts Miracle-Gro’s exercise of the warrant to purchase 80% of the Company’s outstanding common stock.  

(2)

Messrs. Clarke and Kent were appointed to the Board on April 1, 2019.

(3)

Mr. Miller and Ms. Ziegler were appointed to the Board on April 1, 2020.

(4)

Messrs. Messina and Supron were appointed to the Board in November 2016, upon exercise of the warrant held by Scotts Miracle-Gro, and served until their respective resignations in April 2019.

 

 

Director Compensation Table during Fiscal 2020

 

The following table sets forth information regarding all forms of compensation received by members of our Board of Directors during Fiscal 2020:

 

Director

 

Director Fees Earned

or Paid in Cash

 

 

Stock Awards

 

 

Option Awards (1)

 

 

Warrant Awards

 

 

All Other Compensation

 

 

Total

 

H. MacGregor Clarke, Director 

 

$

30,000

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

30,000

 

David B. Kent, Director  

 

$

30,000

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

30,000

 

Chris J. Hagedorn, Chairman (2)

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Cory J. Miller, Director (2)

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Patricia M. Ziegler, Director (2)

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 (1)

Represents the aggregate grant date fair value of stock option awards, as computed in accordance with FASB ASC Topic 718.

 (2)

As an employee of The Scotts Miracle-Gro Company, Messrs. Hagedorn, Miller and Ziegler did not receive compensation for their service on the Board of Directors.

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Stock Ownership

 

The following table sets forth certain information as of June 15, 2020 regarding our common stock owned of record or known by the Company to be owned beneficially by: (i) each director, (ii) each executive officer named in the Summary Compensation Table (the “Named Executive Officers”), (iii) all those known by the Company to beneficially own more than 5% of the Company’s common stock, and (iv) all directors and Named Executive Officers as a group.

 

In general, a person is deemed to be a “beneficial owner” of a security under SEC Rule 13d-3 if that person has or shares the power to vote or direct the voting of such security, or the power to dispose or to direct the disposition of such security.  A person is also deemed to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within 60 days.  To the best of our knowledge, subject to community and marital property laws, all persons named have sole voting and investment power with respect to such shares except as otherwise noted.  For purposes of calculating percent of class ownership, the table below assumes a total of 34,328,036 shares of common stock outstanding.  However, shares of our common stock subject to convertible preferred stock, warrants and stock options that are convertible or exercisable within 60 days of June 15, 2020 are deemed outstanding for purposes of computing the percentage ownership of the person holding such convertible preferred stock, warrants and stock options, but are not deemed outstanding for computing the percentage of any other person.

 

 

Name of Beneficial Owner

 

Number of Common Shares Beneficially Owned (1)

 

 

Number of Common Shares Acquirable Within 60 Days (2)

 

 

Percent Beneficial

Ownership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5% Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SMG Growing Media, Inc. (4), (6)

 

 

27,639,294

 

 

 

-

 

 

 

80.52

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors and Named Executive Officers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

H. MacGregor Clarke (3)

 

 

-

 

 

 

-

 

 

 

*

 

Chris J. Hagedorn (3) (5)

 

 

-

 

 

 

-

 

 

 

*

 

David B. Kent (3)

 

 

-

 

 

 

-

 

 

 

*

 

Cory T. Miller (3)

 

 

-

 

 

 

-

 

 

 

*

 

Patricia M. Ziegler (3)

 

 

-

 

 

 

-

 

 

 

*

 

J. Michael Wolfe (3)

 

 

106,790

 

 

 

-

 

 

 

*

 

Grey H. Gibbs (3)

 

 

-

 

 

 

-

 

 

 

*

 

John K. Thompson (3)

 

 

1,166

 

 

 

-

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All AeroGrow Named Executive Officers and Directors as a Group (8 Persons)

 

 

107,956

 

 

 

 

 

 

 

*

 

 

*

Represents less than 1% of our outstanding common stock as of June 15, 2020.

 

(1)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, which include holding voting and investment power with respect to the securities.  Shares of common stock that are acquirable within 60 days, though conversion of preferred stock or exercise of options or warrants, are deemed outstanding for computing the percentage of the total number of shares beneficially owned by the designated person, but are not deemed outstanding for computing the percentage for any other person.  Beneficial ownership is based on holdings known to the Company and may not include all shares of common stock beneficially owned but held in street name or reflect recent sales or purchases of securities that have not been made known to the Company.

(2)

The number of shares acquirable within 60 days includes any shares issuable upon conversion of convertible preferred stock or upon exercise of options or warrants that are currently exercisable or exercisable within the next 60 days.  This number is included in the number of shares beneficially owned.

(3)

The address of the beneficial owner is 5405 Spine Rd., Boulder, CO 80301. 

(4)

Beneficial ownership is based on holdings known to the Company and includes information provided in a Schedule 13D filed with the SEC on August 30, 2019. SMG Growing Media, Inc. is a wholly-owned subsidiary of The Scotts Miracle-Gro.  The address of SMG Growing Media, Inc. and The Scotts Miracle-Gro is 14111 Scottslawn Road, Marysville, Ohio 43041.  The shares beneficially owned by SMG Growing Media, Inc. include shares of common stock that were issued on November 29, 2016 upon Scotts Miracle-Gro’s exercise of the Warrant and conversion of all outstanding Series B Convertible Preferred Stock. For further information refer to Note 3, “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements. 

(5)

Messrs. Hagedorn and Miller and Ms. Ziegler were elected to the Board by representative of SMG Growing Media, Inc.  Mr. Hagedorn does not hold voting or investment power over the shares owned by SMG Growing Media, Inc. and therefore disclaims beneficial ownership over such shares. 

(6)

The number referenced as acquirable within 60 days assumes the issuance of shares in accordance with the Scotts Miracle-Gro agreements discussed above.

 

 

Equity Compensation Plan Information

 

The following table summarizes information about our equity compensation plans as of March 31, 2020.

 

Plan category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

 

Weighted average exercise price of outstanding options, warrants and rights

 

 

Number of securities remaining

available for future issuance

 

Equity compensation plans

 

 

11,300

 

 

$

1.55

 

 

 

12,531,422

 

Equity compensation plans not approved by security holders

 

 

-

 

 

$

-

 

 

 

-

 

Total

 

 

11,300

 

 

$

1.55

 

 

 

12,531,422

 

 

At March 31, 2020 the Company has no unvested options, and no future compensation expense.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Certain Relationships and Related Transactions

 

Review, Approval or Ratification of Transactions with Related Parties

 

Since April 1, 2019, the beginning of Fiscal 2020, our Board of Directors reviewed and did not object to any of the related party transactions reported in this Annual Report on Form 10-K. Our Board recognizes that related party transactions present a heightened risk of conflicts of interest and/or improper valuation (or the perception thereof) and therefore follows the procedures as described below to address such risks.

 

Our Board of Directors is required to review all related party transactions. AeroGrow is prohibited from entering or continuing a material related party transaction that has not been reviewed and approved or ratified by the Board. Additionally, in transactions where an executive officer is considered to be a related party of any provider of our goods or services, the Board of Directors must approve the transaction. In reviewing a related party transaction, the Board of Directors considers all of the relevant factors surrounding the transaction including:

 

 

whether there is a valid business reason for us to enter into the related party transaction consistent with the best interests of AeroGrow and its stockholders;

 

whether the transaction is negotiated on an arm’s length basis on terms comparable to those provided to unrelated third parties or on terms comparable to those provided to employees generally; 

 

whether the Board of Directors determines that it has been duly apprised of all significant conflicts that may exist or may otherwise arise on account of the transaction, and it believes, nonetheless, that we are warranted in entering into the related party transaction and have developed an appropriate plan to manage the potential conflicts of interest;

 

whether the rates or charges involved in the transaction are determined by competitive bids, or the transaction involves rates or charges fixed in conformity with law or governmental authority; and/or

 

whether the interest of the related party or that of a member of the immediate family of the related party arises solely from the ownership of our class of equity securities and all holders of our equity securities received the same benefit on a pro-rata basis.

 

During the fiscal year ended March 31, 2020, and in prior years, we relied upon a variety of debt funding sources to meet our liquidity requirements, including transactions that: (i) involved members of our Board, management team and certain stockholders that beneficially own more than five percent of our outstanding voting securities and (ii) are required to be disclosed pursuant to Item 404 of Regulation S-K.  In each case, these related parties received the same terms and conditions as other third-party investors.  These transactions are disclosed above under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation– Liquidity and Capital Resources” and in Note 2, “Notes Payable and Long Term Debt,” Note 6 “Related Party Transactions,” and Note 8 “Stockholders’ Equity,” to our financial statements.