Information
included in this Registration Statement may contain forward-looking
statements
within the meaning of Section 27A of the Securities Act of 1933,
as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as
amended (the “Exchange Act”). This information may involve known and unknown
risks, uncertainties and other factors which may cause the actual
results,
performance, or achievements of AeroGrow International, Inc. (“AeroGrow”),
including its predecessor, Wentworth I, Inc. (“Wentworth”), to be materially
different from future results, performance, or achievements expressed
or implied
by any forward-looking statements. Forward-looking statements, which
involve
assumptions and describe future plans, strategies, and expectations
of AeroGrow,
are generally identifiable by use of the words “may,” “will,” “should,”
“expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project,” or the
negative of these words or other variations on these words or comparable
terminology. These forward-looking statements are based on assumptions
that may
be incorrect, and there can be no assurance that the projections
included in
these forward-looking statements will come to pass. Actual results
of AeroGrow
could differ materially from those expressed or implied by the forward-looking
statements as a result of various factors. Except as required by
applicable
laws, AeroGrow has no obligation, and does not intend, to update
publicly any
forward-looking statements for any reason, even if new information
becomes
available or other events occur in the future.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus.
You
should read this entire prospectus carefully before making an investment
decision, including the “Risk Factors” section
beginning on page 5 and our financial statements beginning on page F-1. We
refer to AeroGrow International, Inc. as “AeroGrow,” “Company,” “we,” “our” and
“us.”
AeroGrow
International
AeroGrow
was formed as a Nevada corporation on March 25, 2002. We are in the
business of developing, marketing, distributing, and selling advanced
indoor
aeroponic garden systems. Since formation and through our development stage,
which ended in February 2006, our principal activities consisted
of product
research and development, market research, business planning, and
raising the
capital necessary to fund these activities. We have completed development
of our
initial kitchen garden systems and related “bio-grow” seed pods. We have also
contracted with a third-party manufacturer who has commenced production
activities and a second manufacturer who commenced pilot production
in November
2006 and began shipments in January 2007. As of February 15, 2007,
we have
manufactured and taken delivery of over 100,000 units. We commenced
our initial
marketing and distribution of our products during March 2006 and
have expanded
these marketing
efforts to encompass retail, home shopping, catalogue, international,
and direct
to consumer sales channels.
Our
principal products are “kitchen garden” indoor growing systems and proprietary
seed kits under the brand name AeroGarden™ allowing consumers, with or without
gardening experience, the ability to grow cherry tomatoes, cilantro,
chives,
basil, dill, oregano, mint, flowers, chili peppers, and lettuce throughout
the
year. Our kitchen garden systems are designed to be simple, consistently
successful, and affordable. We believe that our focus on the design
and features
of our kitchen garden systems made them the first of their kind on
the consumer
market. We reached this conclusion on the basis of standard methods
of market
research that we conducted, including focus groups and potential
customer
interview techniques, review of potentially competitive products
offered at all
ranges of functionality and price, and testing of products that may
be
considered competitive in function although not necessarily competitive
in
market orientation.
We
have
filed 19 patent applications in the United States to potentially
protect our
core inventions. To date, no patents have been granted, and there
is no
assurance such applications will be granted. Although aeroponic technology
cannot in and of itself be patented, the patent applications include
aeroponic
technological advances described below as well as product, nutrient
and seed pod
inventions designed to enhance plant growth. Many of the patent-pending
companion technologies are based on our innovations in the fields
of biology,
plant physiology, chemistry, and adaptive learning computer science.
In
addition, we have developed certain trade secrets that simplify,
combine and
integrate our core technologies into our indoor kitchen garden
systems.
In
addition, AeroGrow has applied for and has been issued a trademark
for
AeroGarden™ and six other trademarks and is currently processing 21 other
trademark applications for trademarks for its products and product
slogans.
AeroGrow has also submitted applications to expand its AeroGarden™ trademark in
33 countries, all of which are pending. AeroGrow has also obtained
the domain
names for AeroGrow.com, AeroGarden.com, AeroGarden.net, AeroGarden.tv,
AeroGarden.biz, and Getthegarden.com, among others.
We
believe that our inventions and combined technologies will allow
almost anyone,
from consumers who have no gardening experience to professional gardeners,
to
produce year-round harvests of herbs, flowers, and vegetables provided
in our
seed kits regardless of season, weather, or lack of natural light.
We believe
that our kitchen garden systems’ unique and attractive designs make them
appropriate for use in almost any location, including kitchens, bathrooms,
living areas, and offices.
Our
kitchen garden system retails at approximately $149 with some variations
based
on the channel of distribution in which they are sold and the accessory
components included with the unit.
Until
March 2006, we were a development stage, start-up company, and we
did not
generate any revenues. Through March 1, 2006, we funded our operations
primarily
through the private sale of equity securities. Since commencing sales
of our
products, we have begun to increase our reliance on revenues generated
from such
sales for funding our operations. We had an accumulated deficit of
$27,795,605
through December 31, 2006. We expect to incur substantial additional
expenses and losses in the further implementation of our business
plan. Because
we are in the early stages of implementing our business plan, we
cannot predict
now if we will ever be profitable. Prior to March 2006 when we commenced
sales
of our aeroponic garden systems, we were considered a Development
Stage
Enterprise in accordance with Statement of Financial Accounting Standards
(“SFAS”) SFAS No. 7, Accounting and Reporting by Development Stage
Enterprises.
Our
principal office is located at 6075 Longbow Drive, Boulder, Colorado
80301. Our
telephone number is (303) 444-7755 and our fax number is (303) 444-0406.
We
maintain a website at www.aerogrow.com.
Information on our website is not part of this prospectus.
RECENT
DEVELOPMENTS
March
2007 Private Placement
On
March 16, 2007, AeroGrow completed a private offering in which AeroGrow
sold an aggregate of 833,400 shares of common stock and warrants
to purchase
833,400 shares of common stock (the "2007 Investor Warrants") in
the form of
units consisting of one share of common stock and one warrant per
unit (the
"2007 Offering"). The units were sold at a price of $6.00 per unit.
In addition,
warrants to purchase 83,340 shares of common stock were issued to
the placement
agent of the 2007 Offering (the "2007 Agent Warrants," and together
with the
2007 Investor Warrants, the "2007 Warrants").
Each
2007
Investor Warrant is exercisable for one share of common stock at
an exercise
price of $7.50 per share, and each 2007 Agent Warrant is exercisable
for one
share of common stock at an exercise price of $8.25 per share. Each
2007 Warrant
will be exercisable for five years from the closing of the 2007 Offering.
The
exercise price and number of shares of common stock underlying the
2007 Warrants
is subject to adjustment on certain events, including reverse stock
splits,
stock dividends and recapitalizations, combinations, and mergers
where AeroGrow
is not the surviving company. AeroGrow will at all times reserve
and keep
available, solely for issuance and delivery upon the exercise of
the 2007
Warrants, such shares of common stock underlying the 2007 Warrants,
as from time
to time shall be issuable upon the exercise of the 2007 Warrants.
The
Company has the right to require a holder of a 2007 Investor Warrant
to exercise
the 2007 Investor Warrant if our common stock is quoted on the NASDAQ
Capital
Market and, for a period of 20 consecutive trading days, the closing
bid price
of the common stock has been above $10.00 per share and the daily
trading volume
has been at least 50,000 shares, in each case on each of the 20 consecutive
trading days.
March
2007 Additional Private Placement
On
March
28, 2007, AeroGrow completed an additional private offering in which
AeroGrow
sold an aggregate of 333,360 shares of common stock and warrants
to purchase
333,360 shares of common stock in the form of units consisting of
one share of
common stock and one warrant per unit. The units were sold at a price
of $6.00
per unit. In addition, warrants to purchase 33,336 shares of common
stock were
issued to the placement agent of this private offering. The warrants
issued to
the investors and the placement agent have the same terms as the
2007 Investor
Warrants and the 2007 Agent Warrants, respectively.
SUMMARY
FINANCIAL DATA
The
following table presents summary financial data for the fiscal years
ended
December 31, 2005 and 2004, the three month transitional period ended
March 31,
2006 and the nine months ended December 31, 2006 and 2005. We derived the
summary statement of operations data for the years ended December
31, 2004 and
2005 and the three month transitional period ended March 31, 2006
and the
summary consolidated balance sheet data as of December 31, 2005 and
2004 and
March 31, 2006 from our audited financial statements. The summary
consolidated
balance sheet data as of December 31, 2006 and the summary statements of
operations data for the nine months ended December 31, 2006 and 2005 are
unaudited. We have prepared this unaudited information on the same
basis as the
audited financial statements and have included all adjustments, consisting
only
of normal recurring adjustments that we consider necessary for a
fair
presentation of our financial position and operating results for
such periods.
The results of operations for the nine months ended December 31, 2006 are
not necessarily indicative of the results that may be expected for
the full year
ending March 31, 2007 or any future period.
You
should read the following information together with the more detailed
information contained in “Management’s Discussion and Analysis and Plan of
Operation,” and our financial statements and accompanying notes included
elsewhere in this prospectus.
Statement
of Operations Data
|
|
Nine
months ended
|
|
Three
months ended
|
|
Year
ended
|
|
|
|
December
31
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
6,709,858
|
|
$
|
-
|
|
$
|
35,245
|
|
$
|
-
|
|
$
|
-
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
4,785,151
|
|
|
-
|
|
|
134,622
|
|
|
-
|
|
|
-
|
|
Research
and development
|
|
|
1,544,495
|
|
|
1,272,639
|
|
|
978,538
|
|
|
1,578,833
|
|
|
333,038
|
|
Sales
and marketing
|
|
|
4,285,849
|
|
|
555,622
|
|
|
2,548,583
|
|
|
583,897
|
|
|
79,811
|
|
General
and administrative
|
|
|
2,671,939
|
|
|
2,408,819
|
|
|
2,010,908
|
|
|
2,923,792
|
|
|
1,983,759
|
|
Total
operating expenses
|
|
|
13,287,434
|
|
|
4,237,080
|
|
|
5,672,651
|
|
|
5,086,522
|
|
|
2,396,608
|
|
Loss
from operations
|
|
|
(6,577,576
|
)
|
|
(4,237,080
|
)
|
|
(5,637,406
|
)
|
|
(5,086,522
|
)
|
|
(2,396,608
|
)
|
Total
other (income) expense, net
|
|
|
1,812,337
|
|
|
2,638,990
|
|
|
1,905,937
|
|
|
2,631,055
|
|
|
(7,564
|
)
|
Net
loss
|
|
$
|
(8,389,893
|
)
|
$
|
(6,876,070
|
)
|
$
|
(7,543,343
|
)
|
$
|
(7,717,577
|
)
|
$
|
(2,389,044
|
)
|
Net
loss per share, basic and diluted
|
|
$
|
(0.90
|
)
|
$
|
(1.39
|
)
|
$
|
(
0.84
|
)
|
$
|
(1.55
|
)
|
$
|
(0.56
|
)
|
Weighted
average number of common shares outstanding, basic and
diluted
|
|
|
9,304,380
|
|
|
4,958,842
|
|
|
8,956,353
|
|
|
4,971,857
|
|
|
4,252,626
|
|
Balance
Sheet Data
|
|
December
31,
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,740,327
|
|
$
|
8,852,548
|
|
$
|
949,126
|
|
$
|
1,916,842
|
|
Other
current assets
|
|
|
3,476,355
|
|
|
435,692
|
|
|
939,200
|
|
|
46,423
|
|
Property
and equipment, net
|
|
|
873,344
|
|
|
480,771
|
|
|
420,444
|
|
|
30,721
|
|
Total
other assets
|
|
|
59,134
|
|
|
71,998
|
|
|
234,828
|
|
|
4,484
|
|
|
|
$
|
6,149,160
|
|
$
|
9,841,009
|
|
$
|
2,543,598
|
|
$
|
1,998,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debentures, net of loan issue discounts
|
|
$
|
840,000
|
|
$
|
792,539
|
|
$
|
2,095,260
|
|
$
|
-
|
|
Mandatorily
redeemable common stock
|
|
|
-
|
|
|
310,000
|
|
|
310,000
|
|
|
-
|
|
Other
current liabilities
|
|
|
2,812,337
|
|
|
821,998
|
|
|
253,740
|
|
|
86,547
|
|
Total
stockholders’ equity (deficit)
|
|
|
2,496,823
|
|
|
7,916,472
|
|
|
(115,402
|
)
|
|
1,911,923
|
|
|
|
$
|
6,149,160
|
|
$
|
9,841,009
|
|
$
|
2,543,598
|
|
$
|
1,998,470
|
|
RISK
FACTORS
The
purchase of shares of our common stock involves a high degree of
risk. In
addition to the other information contained elsewhere in this prospectus,
you
should carefully consider the following factors when evaluating an
investment in
our securities. If any of the adverse events described below actually
occur, our
business, financial condition and operating results could be materially
adversely affected and you may lose part or all of the value of your
investment.
If you choose to invest in our securities, you should be able to
bear a complete
loss of your investment.
RISKS
RELATED TO OPERATIONS
Because
AeroGrow has a limited operating history, AeroGrow may not be able
to
successfully manage its business or achieve profitability.
AeroGrow
has a limited operating history upon which you can base your evaluation
of its
prospects and the potential value of its common stock. AeroGrow recently
has
begun to produce its garden systems and seed kits. AeroGrow is confronted
with
the risks inherent in a start-up company, including difficulties
and delays in
connection with the production and sales of its kitchen garden systems,
reliance
on a small number of products, operational difficulties and its potential
under-estimation of production and administrative costs. If AeroGrow
cannot
successfully manage its business, AeroGrow may not be able to generate
future
profits and may not be able to support its operations. We expect
to incur
substantial additional expenses and losses in the further implementation
of our
business plan. Because we are in the early stages of implementing
our business
plan, we cannot predict now if we will ever be profitable. We may
not be able to
improve operations and therefore may not become profitable.
AeroGrow
has incurred substantial losses since inception and may never achieve
profitability.
Since
AeroGrow commenced its operations in 2002 and through December 31,
2006,
AeroGrow has incurred substantial operating losses. For the nine
months ended
December 31, 2006, AeroGrow had a net loss of $8,389,893; for the
transition
period of the three months ended March 31, 2006, AeroGrow had a net
loss of
$7,543,343; for the twelve months ended December 31, 2005, AeroGrow
had a net
loss of $7,717,577; for the twelve months ended December 31, 2004,
AeroGrow had
a net loss of $2,389,044; and for the twelve months ended December
31, 2003,
AeroGrow had a net loss of $1,159,535. Since inception AeroGrow’s losses from
operations have resulted in an accumulated deficit of $27,795,605
as of December
31, 2006. AeroGrow expects that its operating expenses will outpace
revenues for
the near future and result in continued losses. The success of its
business will
depend on its ability to expand sales and distribution of its AeroGarden™
kitchen garden systems to consumers and develop new product extensions
and
applications.
AeroGrow
is subject to many of the risks common to developing enterprises,
including
undercapitalization, cash shortages, limitations with respect to
financial and
other resources, and lack of revenues to be self-sustaining. There
is no
assurance that AeroGrow will ever obtain profitability, which may
lead to the
loss of your entire investment.
If
AeroGrow’s kitchen garden systems fail to perform properly, its business could
suffer with increased costs and reduced income.
Although
AeroGrow has been internally testing its products in its laboratories
and with
users for three years, its products may fail to meet consumer expectations.
AeroGrow has only limited experience with returns and has no meaningful
history
with respect to warranty claims for its products. AeroGrow may be
required to
replace or repair products or refund the purchase price to consumers.
Failure of
AeroGrow’s products to meet expectations could:
· damage
its reputation,
· decrease
sales,
· incur
costs related to returns and repairs,
· delay
market acceptance of its products,
· result
in
unpaid accounts receivable, and
· divert
its resources to remedy the malfunctions.
The
occurrence of any of these events would have an adverse impact on
our results of
operations.
AeroGrow
will likely need additional capital to fund its growth.
AeroGrow
anticipates that it has sufficient capital to satisfy its requirements
for the
next 12 months. However, AeroGrow will likely require additional
capital to
support its growth and cover operational expenses as AeroGrow expands
its
marketing and product development. It is possible that none of AeroGrow’s
outstanding warrants will be exercised and the Company will therefore
not
receive any proceeds therefrom. AeroGrow may need to issue equity,
debt or
securities convertible into equity which will dilute the current
stock ownership
in AeroGrow. If AeroGrow cannot obtain additional financing on acceptable
terms,
AeroGrow may not have sufficient capital to operate its business
as planned and
would have to modify its business plan or curtail some or all of
its operations.
If
the holders of AeroGrow’s convertible notes choose repayment instead of
conversion or the extension of maturity, AeroGrow will not be able
to implement
its full plan of operation.
If
holders of AeroGrow's convertible notes choose to demand payment
rather than
converting their notes to common stock, up to $720,000 of principal
plus related
interest may have to be paid after giving effect to the conversions,
and
instructions to convert, after December 31, 2006. The maturity date of such
notes was previously extended to December 31, 2006. The Company’s note holders
further agreed to extend the maturity of these notes until March
31, 2007. Since
December 31, 2006 and as of March 16, 2007, $580,000 in principal
amount of the
$840,000 principal amount of convertible notes has elected to convert,
or has
instructed us to convert on March 31, 2007, such principal amount
of convertible
notes to 165,714 shares of common stock. If the holders choose
not to convert,
AeroGrow would use a portion of its current capital to repay the
convertible
notes instead of funding its full plan of operations, and AeroGrow
may not be
able to maximize revenues or profitability.
AeroGrow’s
intellectual property and proprietary rights give it only limited
protection and
can be expensive to defend.
AeroGrow’s
ability to produce and sell kitchen garden systems exclusively depends
in part
on securing patent protection for the components of its systems,
maintaining
various trademarks and protecting its operational trade secrets.
To protect its
proprietary technology, AeroGrow relies on a combination of patents
pending (and
if granted, patents), trade secrets, and non-disclosure agreements,
each of
which affords only limited protection. AeroGrow owns the rights to
19 United
States patent applications. However, these patent applications may
not result in
issued patents and even issued patents may be challenged. AeroGrow
is selling
its kitchen garden systems prior to receiving issued patents relating
to its
patent applications. All of AeroGrow’s intellectual property rights may be
challenged, invalidated or circumvented. Claims for infringement
may be asserted
or prosecuted against AeroGrow in the future and AeroGrow may not
be able to
protect its patents, if any are obtained, and intellectual property
rights
against others. AeroGrow’s former employees or consultants may violate their
non-disclosure agreements with AeroGrow, leading to a loss of proprietary
intellectual property. AeroGrow also could incur substantial costs
to assert its
intellectual property or proprietary rights against others.
AeroGrow’s
current or future manufacturers could fail to fulfill AeroGrow’s orders for
kitchen garden systems which would disrupt its business, increase
its costs, and
could potentially cause it to lose its market.
AeroGrow
currently depends on two contract manufacturers in China to produce
its kitchen
garden systems. These manufacturers could fail to produce the kitchen
garden
system to AeroGrow’s 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. AeroGrow
owns the
tools and dies used by its manufacturers. AeroGrow’s manufacturers operate in
China and may be subject to business risks that fall outside the
control of
AeroGrow, including but not limited to, political, currency and regulatory
risks, each of which may affect the manufacturer’s ability to fulfill AeroGrow’s
orders for kitchen garden systems. Any change in manufacturers could
disrupt our
ability to fulfill orders for kitchen garden systems. Any change
in
manufacturers could disrupt our business due to delays in finding
a new
manufacturer, providing specifications and testing initial production.
If
we are unable to assimilate our new managers and recruit 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.
Several
of our executive officers have recently joined us and therefore have
limited
experience in managing our company. In addition, to expand our business
we will
also need to attract, retain and motivate highly skilled design,
development,
management, accounting, sales, merchandising, marketing and customer
service
personnel. We plan to hire additional personnel in all areas of our
business.
Competition for many of these types of personnel is intense. 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 harm our business and results of operations.
We
rely on third parties for a significant portion of 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 many critical functions. For example, we
have
outsourced our manufacturing, warehouse, distribution, order processing,
and
fulfillment operations. Any disruption in our relationship with any
of our
vendors could cause significant disruption in our business and we
may not be
able to locate another party that can provide comparable services
in a timely
manner or on acceptable commercial terms. In addition, no assurance
can be made
that these relationships will be adequate to support our business
as we follow
our business plan.
RISKS
RELATED TO THE RELEVANT MARKET FOR OUR PRODUCT
AeroGrow’s
future depends on the financial success of its kitchen garden systems.
Since
AeroGrow is introducing entirely new products without comparable
sales history,
AeroGrow does not know if its kitchen garden systems and seed kits
will generate
wide acceptance by consumers.
AeroGrow
has introduced its kitchen garden systems and seed kits as new products
to
consumer markets unfamiliar with their use and benefits. In addition,
AeroGrow
currently has, and only contemplates having, one product line, indoor
garden
systems. AeroGrow cannot be certain that its products will generate
widespread
acceptance. If consumers do not purchase its products in sufficient
numbers,
AeroGrow will not be profitable and you may lose all of your investment.
Investors must consider AeroGrow’s prospects in light of the risks, expenses and
challenges of attempting to introduce new products with unknown consumer
acceptance.
AeroGrow’s
marketing strategies may not be successful, which would adversely
affect its
future revenues and profitability.
AeroGrow’s
revenues and future depend on the successful marketing of its kitchen
garden
systems. AeroGrow cannot give assurance that consumers will be interested
in
purchasing its products. AeroGrow plans to use direct marketing to
sell its
products via television commercials, infomercials, magazine and newspaper
advertising, and the Internet. Its infomercials and commercials may
not generate
sufficient income to continue to air them. If AeroGrow’s marketing strategies
fail to attract customers, its product sales will not produce future
revenues
sufficient to meet its operating expenses or fund its future operations.
If this
occurs, AeroGrow’s business may fail and investors may lose their entire
investment.
We
may face significant competition, and if we are unable to compete
effectively,
our sales may be adversely affected.
AeroGrow
believes that its simplified and complete kitchen garden systems
and planned
methods of distribution offer significant benefits as compared to
the
traditional hydroponic industry practices. AeroGrow recognizes, however,
that
there are companies that are better funded and have greater experience
in
producing hydroponic products in commercial markets, including, but
not limited
to, companies such as General Hydroponics and American Hydroponics.
These
companies could potentially decide to focus on the consumer market
with
competing products. AeroGrow could also face competition from gardening
wholesalers and large and profitable soil-based gardening companies,
including,
but not limited to, the Burpee Seed Company and Gardener’s Supply Company,
should they decide to produce a competitive product. In addition,
other consumer
products companies could develop products to compete with AeroGrow.
These
companies may use hydroponic technologies, and may have better consumer
acceptance. Such companies may be better funded than AeroGrow. If
any such
competing products are successful, their success may adversely impact
AeroGrow.
RISKS
RELATED TO AEROGROW’S CAPITALIZATION
If
an exemption from registration on which AeroGrow has relied for any
of its past
offerings of common stock or warrants were later challenged legally,
its
principals may have to spend time defending claims, and AeroGrow
would then risk
paying expenses for defense, rescission and/or regulatory
sanctions.
To
raise
working capital, AeroGrow offered common stock and warrants in private
transactions that AeroGrow believed to be exempt from registration
under the
Securities Act, as amended, and state securities laws. In 2004 AeroGrow
also
conducted a state registered offering in Colorado of common stock
and warrants
intended to be exempt from registration under the Securities Act,
as amended, as
an intrastate offering. However, because the Company is incorporated
in Nevada
it did not satisfy all of the requirements for an intrastate offering.
This
could result in investors or regulators asserting that the Colorado
offering
and/or the private transactions (if the private transactions were
integrated
with the Colorado offering) violated the Securities Act. There can
be no
assurance that investors or regulators will not be successful in
asserting a
claim that these transactions should not be integrated. In the event
that one or
more investors seeks rescission, with resulting return of investment
funds and
interest at a market rate, or that state or federal regulators seeks
sanctions
against AeroGrow or its principals, AeroGrow would spend time and
financial
resources to pay expenses for defense, rescission awards or regulatory
sanctions. The use of funds would reduce the capital available to
implement its
full plan of operation. No assurance can be given regarding the outcome
of any
such actions.
There
may be substantial sales of AeroGrow’s common stock by existing stockholders
which could cause the price of AeroGrow’s stock to fall.
Future
sales of substantial amounts of AeroGrow’s common stock in the public market, if
one develops, or the perception that such sales might occur, could
cause the
market price of its common stock to decline and could impair the
value of your
investment in AeroGrow’s common stock and AeroGrow’s ability to raise equity
capital in the future. As of December 31, 2006, AeroGrow had 9,607,631
shares of
common stock outstanding, of which 3,402,237 shares may be sold without
restriction. See the following risk factor for discussion of additional
shares
that are subject to issuance pursuant to outstanding warrants, options
and
convertible debt. Of the remaining shares, (i) 580,136 shares issued to
stockholders of Wentworth I, Inc. (“Wentworth”) in the Merger (as defined below
in “Merger with Wentworth”) have registration rights, but of these shares,
396,813 shares are subject to lockup restrictions for periods of
12 to 18 months
from the effective date of the Company's registration statement declared
effective on December 22, 2006 (the "2006 Registration Statement")
and the
holders of such shares have waived their right to be included in
that
registration statement in exchange for the obligation of the Company
to register
all such shares as soon as commercially reasonable after the filing
of the next
quarterly or annual report or after the declaration of effectiveness
of the this
registration statement, (ii) 332,876 of shares recorded as penalty shares,
(iii) 5,578,740 shares issued prior to December 31, 2005 that have
been held
more than one year and may be transferred and sold, subject to the
restrictions
under Rule 144 or Rule 701, depending on the status of the holder
and the
holding period as well as lockup agreements, and (iv) 148,931 shares
granted to employees and directors since December 31, 2005 under
the company’s
2005 Equity Compensation Plan. Of the shares identified in the last
two
categories above, 4,642,326 shares are subject to lockup agreements
for periods
of 12 to 18 months from the effective date of the 2006 Registration
Statement.
The lockup restrictions may be released by the agreement of AeroGrow
and Keating
Securities, LLC (“Keating Securities”). The shares of AeroGrow’s common stock
underlying the convertible notes and the warrants issued or to be
issued to the
holders of convertible notes are required to be registered for resale
by
AeroGrow and are not subject to lockup restrictions. The sales of
AeroGrow
common stock by these stockholders having registration rights or
even the
appearance that such holders may make such sales once a registration
statement
becomes effective may limit the market for the common stock or depress
any
trading market volume and price before other investors are able to
sell the
common stock. Moreover, a number of shareholders have held their
investment for
a substantial period of time and may desire to sell their shares,
which could
drive down the price of our common stock.
AeroGrow’s
outstanding warrants, options and convertible notes, and additional
future
obligations to issue AeroGrow securities to various parties, may
dilute the
value of your investment and may adversely affect AeroGrow’s ability to raise
additional capital.
As
of
December 31, 2006, AeroGrow is committed to issue up to 5,928,155
additional
shares of common stock under the terms of outstanding convertible
notes,
warrants, options and other arrangements, which does not include
the 916,740
additional shares of common stock issuable under the terms of the
2007 Warrants.
There are warrants and options outstanding issued prior to June 30,
2005 that
can be exercised for 818,858 shares of its common stock at exercise
prices
ranging from $0.005 to $15.00 per share. There are 2,143,000 shares
of common
stock issuable upon exercise of the outstanding warrants issued to
investors in
the Company's February 2006 private placement offering (the "2006
Offering")
exercisable at $6.25 per share. As of December 31, 2006, there were also
240,006 shares of common stock issuable upon conversion of the convertible
notes
in the principal amount of $840,000 at a conversion price of $3.50
by holders
who elected to extend the maturity of their notes to December 31,
2006. Since
December 31, 2006 and as of March 16, $580,000 in principal amount
of the
$840,000 principal amount of convertible notes has elected to convert,
or has
instructed us to convert on March 31, 2007, such principal amount
of convertible
notes to 165,714 shares of common stock. There are 600,000 shares
of common
stock issuable upon exercise of outstanding warrants held by the
initial holders
of the convertible notes with an exercise price of $5.00 per share.
There are
426,000 shares of common stock issuable upon exercise of warrants,
at an
exercise price of $6.00 per share, that were issued to holders that
elected to
convert notes in the principal amount of $2,130,000. As of December 31,
2006, there are 174,000 shares of common stock issuable upon the
exercise of
warrants to be issued upon conversion of convertible notes in the
principal
amount of $840,000 at an exercise price of $6.00 per share. There
are 60,000
shares of common stock issuable upon exercise of outstanding warrants
issued in
2005 to Keating Securities or its designees in connection with the
convertible
notes offering with exercise price of $6.00 per share and 214,800
shares of
common stock issuable upon exercise of outstanding warrants issued
to designees
of Keating Securities in the 2006 Offering with an exercise price
of $6.25. As
of December 31, 2006, the Company has granted 1,251,491 options to
purchase its
common stock pursuant to the Company’s 2005 Equity Compensation Plan. In
connection with the 2007 Offering, which closed in March 2007, the
Company
issued the 2007 Warrants under which 916,740 additional shares of
common stock
are issuable pursuant to the terms of the 2007 Warrants.
AeroGrow
has historically issued shares of its common stock or granted stock
options to
employees, consultants and vendors as a means to conserve cash, and
AeroGrow may
continue to grant additional shares of stock and issue stock options
in the
future. As of December 31, 2006, there are 129,646 shares of common
stock that
remain available for issuance under its 2005 Equity Compensation
Plan.
For
the
length of time these notes, warrants, and options are outstanding,
the holders
will have an opportunity to profit from a rise in the market price
of AeroGrow’s
common stock without assuming the risks of ownership. This may adversely
affect
the terms upon which AeroGrow can obtain additional capital. The
holders of such
derivative securities would likely exercise or convert them at a
time when
AeroGrow would be able to obtain equity capital on terms more favorable
than the
exercise or conversion prices provided by the notes, warrants or
options.
AeroGrow
expects to continue to be subject to the “penny stock” rules for the foreseeable
future.
The
market price of the shares may fluctuate greatly. Investors in the
company bear
the risk that they will not recover their investment.
Our
common stock trades on the OTC BB. The company’s trading symbol is AGWI.OB. No
assurance can be made that an active market will develop on the OTC
BB.
Currently, trading in our common stock on the OTC BB is very limited,
and the
per share price is likely to be influenced by the price at which
and the amount
of shares the selling stockholders are attempting to sell at any
time with the
possible effect of limiting the trading price or lowering the price
to their
offering price. Shares such as those of AeroGrow are also subject
to the
activities of persons engaged in short selling securities, which
generally has
the effect of driving the price down. Also, the common stock of emerging
growth
companies is typically subject to high price and volume volatility.
Therefore,
the price of AeroGrow’s common stock may fluctuate widely. A full and stable
trading market for AeroGrow’s common stock may never develop in which event any
holder of such shares may not be able to sell at the time he elects
or at all.
USE
OF PROCEEDS
All
of
the shares of common stock covered by this prospectus may be sold
or otherwise
disposed of for the account of the selling stockholders. AeroGrow
will not
receive any of the proceeds from the sale or other disposition of
the shares or
interests therein by the selling stockholders.
This
prospectus also covers the sale of shares of common stock issuable
upon exercise
of the 2007 Warrants. Assuming no adjustments to the exercise price
for
anti-dilution protection, then AeroGrow estimates that it would receive
approximately $6.9 million in gross proceeds in the event that all of the
2007 Warrants are exercised. Any proceeds received from the exercise
of the 2007
Warrants will be used for general corporate purposes.
Despite
the existence of the 2007 Warrants, it is possible that none will
be exercised
and the Company will therefore not receive any proceeds therefrom.
The 2007
Warrants will be exercised only if the price of the common stock
justifies the
exercise prior to their expiration.
DIVIDEND
POLICY
The
board
of directors of AeroGrow has never declared or paid any cash dividends
on the
common stock. We currently intend to retain any future earnings to
finance the
growth and development of our business and therefore do not anticipate
paying
any cash dividends in the foreseeable future. Our board of directors
will
determine any future payment of cash dividends depending on our financial
condition, results of operations, capital requirements, general business
condition and other relevant factors. Although we do not anticipate
issuing
preferred stock, if we do issue preferred stock it is possible that
the terms of
such stock will prohibit the payment of dividends on our outstanding
common
stock until all dividends then due on our preferred stock have been
paid.
MARKET
DATA
Our
common stock trades on the OTC BB. The Company’s trading symbol is AGWI.OB. No
assurance can be made that an active market will develop on the
OTC BB. The
closing price of our common stock on May 7, 2007 was
$7.30.
Our
common stock may be designated as “penny stock” and thus may be illiquid. The
SEC has adopted rules (Rules 15g-2 through l5g-6 of the Exchange
Act), which
regulate broker-dealer practices in connection with transactions
in “penny
stocks.” Penny stocks generally are any non-NASDAQ equity securities with
a
price of less than $5.00, subject to certain exceptions. The penny
stock rules
require a broker-dealer to deliver each month a standardized risk
disclosure
document to provide the customer with current bid and offer quotations
for the
penny stock, the compensation of the broker-dealer and its salesperson
in the
transaction, account statements showing the market value of each
penny stock
held in the customers account, and a special written determination
that the
penny stock is a suitable investment for the purchaser. A broker-dealer
must
receive the purchaser’s written agreement prior to the transaction. These
disclosure requirements may have the effect of reducing the level
of trading
activity, if any, in the secondary market. Since our common stock
is subject to
the penny stock rules, persons holding or receiving such shares may
find it more
difficult to sell their shares. The market liquidity for the shares
could be
severely and adversely affected by limiting the ability of broker-dealers
to
sell the shares and the ability of stockholders to sell their stock
in any
secondary market.
The
trading volume in our common stock is extremely limited. The limited
nature of
the trading market can create the potential for significant changes
in the
trading price of the common stock as a result of relatively minor
changes in the
supply and demand for our common stock and without regard to our
business
activities.
The
market price of our common stock may be subject to significant fluctuations
in
response to numerous factors, including: variations in our annual
or quarterly
financial results or those of our competitors; conditions in the
economy in
general; announcements of key developments by competitors; loss of
key
personnel; unfavorable publicity affecting our industry or us; adverse
legal
events affecting us; and sales of our common stock by existing
stockholders.
We
have
approximately 850 record holders of our common stock. We believe
that in
addition to the record ownership there are a limited number of beneficial
owners
who hold their shares in street name or through other nominees.
MANAGEMENT’S
PLAN OF OPERATION
The
following plan of operation provides information which AeroGrow’s management
believes is relevant to an assessment and understanding of AeroGrow’s business,
operations, and financial condition. The discussion should be read
in
conjunction with the audited financial statements and notes thereto
and the
unaudited financial statements for the period ending December 31,
2006, both of
which are included in this registration statement. This plan of operation
contains forward-looking statements that involve risks, uncertainties,
and
assumptions. AeroGrow’s actual results may differ substantially from those
anticipated in any forward-looking statements included in this discussion
as a
result of various factors, including those set forth in “Risk
Factors.”
Overview
AeroGrow
is in the business of developing, marketing, and distributing advanced
indoor
aeroponic garden systems. Since formation and through its development
stage that
ended March 1, 2006, AeroGrow’s principal activities have consisted of product
research and development, market research, business planning, and
raising the
capital necessary to fund these activities. AeroGrow has completed
development
of our initial kitchen garden systems and related “bio-grow” seed pods and has
contracted with a third-party manufacturer who has commenced production
activities and a second manufacturer who will commence production
in the first
quarter of calendar 2007. AeroGrow began sales activities as of March
2006. As
of February 15, 2006, AeroGrow had manufactured and taken delivery
of over
100,000 units. AeroGrow commenced initial marketing and distribution
of its
products during March 2006, and has expanded these marketing efforts
to
encompass retail, home shopping, catalogue, international, and direct
to
consumer sales channels. Prior to March 2006 when AeroGrow commenced
sales of
its aeroponic garden systems, AeroGrow was considered a Development
Stage
Enterprise in accordance with Statement of Financial Accounting Standards
(“SFAS”) SFAS No. 7, Accounting and Reporting by Development Stage Enterprises.
Liquidity
and Capital Resources
As
of
December 31, 2006, AeroGrow had a cash balance of approximately $1,740,000.
AeroGrow anticipates that existing cash resources will be sufficient
for the
next 12 months. However, AeroGrow has $840,000 in convertible notes
outstanding
for which the original maturity date of December 31, 2006 has been
extended
until March 31, 2007. AeroGrow does not know at this time whether
the holders of
these notes intend to convert to common stock at a price of $3.50
per share or
seek repayment of their notes. Since December 31, 2006 and as of
March 16,
$580,000 in principal amount of the $840,000 principal amount of
convertible
notes has elected to convert, or has instructed us to convert on
March 31, 2007,
such principal amount of convertible notes to 165,714 shares of common
stock. In
the event the majority of the holders of the remaining $720,000 notes
request
repayment, AeroGrow would need to seek additional debt or equity
financing to
fund its current business objectives.
AeroGrow
anticipates its principal sources of liquidity during the current
fiscal year
ended March 31, 2007 will be proceeds from sales of our products.
AeroGrow
intends to use its working capital principally to purchase inventory,
fund media
advertising, fund product promotion and trade show costs as well
as support
ongoing product development, overheads and operational costs. In
the event
retail and/or direct response sales accelerate more rapidly than
currently
anticipated, AeroGrow would need to support this growth through additional
asset-based financing or the raising of additional equity. However,
no assurance
that such financing will be available on attractive terms or at
all.
As
of
December 31, 2006, AeroGrow has generated net proceeds of $17,530,437
from the
sale of the following securities:
· $2,279,444
from private placements of 2,040,611 shares of its common stock during
2002,
2003 and 2004,
· $215,000
from the exercise of its redeemable $1.25 warrants and $2.50 warrants
for
164,000 shares of common stock in 2003, 2004 and through June 30,
2005,
· $2,307,737
from a Colorado registered offering of units consisting of 544,228
shares of
common stock and its redeemable $10.00 warrants and $15.00 warrants
during 2004,
· $2,591,554
from its debt offering of convertible notes and redeemable 2005 warrants
in
June, July, August and September 2005,
· $8,000
from the issuance of 1,600 shares of common stock pursuant to an
agreement with
an employee at $5.00 per share during the period June 30, 2005 through
September
30, 2005,
· $85,000
from the issuance of 38,000 shares of common stock pursuant to the
exercise of
$1.25 and $2.50 warrants,
· $962,500
from the exercise of outstanding $1.25, $2.50 and $5.00 warrants
for 395,000
shares of common stock during December 2005;
· $85,000
from the exercise of 34,000 outstanding $2.50 warrants and $31,250
from the
exercise of 5,000 outstanding $6.25 warrants during the six months
ended
September 30, 2006; and
· $8,964,952
in net proceeds from the sale of common stock and warrants in the
2006 Offering,
consummated February 24, 2006 and March 1, 2006. See “Private Placement in
Connection with Merger.”
AeroGrow
has used the funds raised to date to:
· complete
the research and development of its kitchen garden systems,
· commence
manufacturing of one model of our kitchen garden and ten varieties
of seed
kits.
· develop
our direct response marketing advertisements including one 30-minute
infomercial
and several 60-second television commercials, and
· launch
our public relations campaign.
Plan
of Operation
Having
launched its products through multiple channels including retail,
home shopping,
catalogue, international and direct to consumer sales, AeroGrow’s objective over
the next twelve months will be to expand its marketing efforts in
each of these
channels for its kitchen garden systems and peripheral products.
AeroGrow’s
infomercial, a thirty minute video presentation of the product, has
been
completed and commenced test airings on national cable and local
broadcast
television stations in September 2006.
In
order
to transition from the development stage to an operating company,
AeroGrow has
strengthened its management team with the addition in the last twelve
months of
a Vice President of Sales, a Vice President of Operations, a Vice
President of
Engineering and Manufacturing, a new Chief Financial Officer and
other
marketing, operations and administrative staff.
AeroGrow
is also expanding its product development activities to sustain operations
beyond its initial product offerings. Development has begun and,
in some cases
has been completed, for final design and tooling of new models of
AeroGrow’s
AeroGarden kitchen appliances, including models that include additional
features
and finishes which are designed to retail for higher price points
than
AeroGrow's current system as well models which will have smaller
growing
capacities and require smaller counter space designed to retail for
lower retail
price points. These lower priced products are intended to be introduced
into
specialty channels of distribution such as children’s products (the magic
garden), office products (office garden), pet market (the Cat Café for cat grass
and catnip), and home beauty and décor market (the scented, wild flower and baby
rose gardens). AeroGrow also continues to enhance its offerings of
seed kits and
accessories, with available seed kits growing from six that were
available in
March 2006 to over twelve by March 2007, including the sale and distribution
of
live strawberry plants developed to grow in the AeroGarden system.
AeroGrow has
also expanded its line of accessories to include the wall garden
- shelving
units that enable users to mount from one to three AeroGardens systems
on the
wall vertically in less than 16 inches. Consumers can mount up to
three of these
wall gardens (a total of nine units) next to each other using only
one
electrical outlet (collectively know as “The Wall Farm”), allowing consumers to
grow a large abundance of fresh homegrown produce year round.
AeroGrow
has completed development of many of its marketing materials, including
several
websites, product brochures, retail packaging, point of purchase
displays and
other retail collateral materials and public relations kits. We continue
to
dedicate financial and management resources to the improvement of
AeroGrow’s
marketing and sales materials and processes.
Manufacturing
AeroGrow
manufactures its products using contract manufacturing sources that
are
supervised by its internal engineering and manufacturing teams. Its
bio-grow
seed pods are manufactured and assembled in its production facilities
in
Longmont, Colorado.
On
September 30, 2005, AeroGrow entered into a manufacturing agreement
with Source
Plus, Inc. (“Source Plus”) an Alabama corporation, and Mingkeda Industries Co.,
Ltd. (“Mingkeda”), a Chinese company located in the Guangdong Province of China
that has primarily manufactured light fixtures in the past. This
agreement
supersedes a prior agreement with Mingkeda and Source Plus. Under
the terms of
this agreement, Source Plus advanced monies to Mingkeda for tooling
and molds to
build AeroGrow’s products. To reimburse Source Plus for its advance to Mingkeda,
AeroGrow issued 62,000 shares of its common stock to Source Plus
in October
2005. AeroGrow recorded a $310,000 asset for tooling, which AeroGrow
will
depreciate over a period of three years to reflect the estimated
useful life of
the tooling. AeroGrow and Source Plus have agreed to certain selling
restrictions on its sale of AeroGrow common stock. Further, in return
for a
$0.50 per unit price concession from Mingkeda for products AeroGrow
purchases,
AeroGrow issued 10,000 shares of its common stock to Mingkeda in
October 2005.
These shares are subject to the same selling restrictions as the
stock issued to
Source Plus. AeroGrow recorded a $50,000 expense for inventory which
AeroGrow
will charge to cost of sales for one year or at a rate of $0.50 per
unit for
each unit sold, whichever occurs sooner.
This
agreement provides for payment of the purchase price of products
manufactured by
Mingkeda as follows: 30% paid 25 days prior to shipment, 50% paid
upon shipment,
and the remaining 20% paid 20 days after shipment. The purchase price
is
determined based upon a fixed percentage for profit (14% for light
bulbs, 29%
for all other products); overhead and labor are applied to actual
component
costs. AeroGrow has also agreed to pay to Source Plus a commission
of 2% of the
total purchases of the product with such payments to be made using
the same
proportions as AeroGrow’s payments to Mingkeda. In addition, Source Plus is
entitled to receive 2% of all purchases by AeroGrow of kitchen gardens,
from all
sources, for a period of 18 months from the date of the initial shipment
from
Mingkeda. Mingkeda will manufacture and ship the products as and
when required
by AeroGrow and will maintain an agreed level of quality. Currently,
Mingkeda
has the capacity to produce 15,000 per month and has agreed to develop
sufficient capacity to manufacture up to 25,000 kitchen garden systems
per
month. AeroGrow will have the right to audit Mingkeda’s manufacturing
performance periodically and maintain an agent in the Mingkeda plant
to inspect
its production. AeroGrow believes that its products will be manufactured
to high
quality standards at acceptable costs.
The
manufacturing agreement with Mingkeda and Source Plus provides for
protection of
the intellectual property rights of AeroGrow. Under the agreement,
Source Plus
is specifically responsible for working as the liaison between AeroGrow
and
Mingkeda with responsibility for oversight of quality control in
the
manufacturing of the products, review of specifications and Mingkeda’s
compliance, monitoring of order fulfillment, and similar tasks related
to
quality of the finished goods. Source Plus receives a 2% commission
for their
work. Mingkeda manufactures the product to the specifications of
AeroGrow at a
predetermined line item component and assembly cost that will not
change unless
there are changes in exchange rate or cost of raw materials. Changes
in cost
must be pre-approved by AeroGrow.
In
order
to diversify its risk from having a single manufacturer, as well
as provide for
capacity beyond that of Mingkeda, AeroGrow identified and commenced
production
with an additional contract manufacturing source, Main Power Electrical
Factory
Ltd (Main Power). AeroGrow
has completed its initial set of tooling with Main Power and, in
February 2007,
authorized the building of a second set of tooling with Main Power
which will
increase Main Power’s capacity to 100,000 per month. During the first calendar
quarter of 2007, AeroGrow began receiving delivery of production
units built by
Main Power.
Future
production capacity at Main Power is estimated to be 50,000 units
per month for
each set of tools. Purchasing terms with Main Power are 100% payment
upon
shipment through commercial bills of exchange. As of December 31,
2006, AeroGrow
has recorded $203,845 in tooling costs related to tooling at Main
Power for two
models of its AeroGarden. AeroGrow has paid Main Power $8,032 in
deposits toward
tooling costs, with an additional $195,813 due as of December 31,
2006 payable
in lump sum payments of $51,632 with the balance of $144,581 to be
amortized at
the rate of $0.20 per unit. Additional tooling cost of approximately
$100,000
will be recorded in the first calendar quarter of 2007 related to
the additional
tooling discussed previously. These costs will be paid with approximately
$14,000 in a lump sum payment with the balance to be amortized at
the rate of
$0.20 per unit
In
addition, we are increasing research and development and AeroGrow
production
capacity for AeroGrow seed kits for AeroGrow kitchen garden systems
at
AeroGrow's facility in Longmont, Colorado. We expect to continue
to dedicate
financial and management resources to the improvement of operating
efficiencies
and production capacity at this facility.
Retail
Marketing and Sales
AeroGrow
began testing various direct marketing advertisements during the
third and
fourth calendar quarter of 2006 including:
· 60-second
television commercials,
· 30-minute
infomercials,
· home
shopping networks, and
· Internet
advertising.
AeroGrow
has completed the initial test airings of the infomercial it produced
and has
increased the frequency of the infomercial airings through March
2007, with
target monthly media expenditures of $500,000 to $750,000 per month
during this
period. AeroGrow expects that the exposure for its products and services
that
will be generated from the infomercial and other direct response
marketing
advertising will broaden the AeroGarden™ brand and product recognition in all
channels of distribution.
In
July
2006, the AeroGarden was featured on QVC, the world’s largest television
retailer, and have had four additional airings since that time, with
further
times scheduled through April 2007, including a scheduled airing
which will
feature a new model of AeroGarden throughout QVC’s broadcast day, a promotion
known as “Today’s Special Value” or “TSV”.
AeroGrow
has expanded its presence in catalogues from its catalogue launch
partner,
Frontgate, to multiple catalogues including Brookstone, Plow and
Hearth,
Improvements and others, all of which AeroGrow believes add to the
growing
consumer recognition of their products. AeroGrow also continues to
expand its
retail distribution with over 650 retail stores to date carrying
AeroGarden
products nationwide in multiple channels including housewares, culinary,
lawn
and garden and department stores. Included in the foregoing is an
initiative
launched in September 2006 which focused on generating a high level
of awareness
and product visibility in the New York metropolitan market. This
initiative
included securing high profile merchandising for AeroGrow’s products from
leading retailers in the New York area such as Macy’s, Bed, Bath and Beyond,
Linens ‘n Things and others for the 2006 holiday season. This initiative
was
promoted in New York using AeroGrow’s infomercial and other television media to
promote sales at the participating retail locations and has resulted
in several
of these major retailers electing to continue merchandising AeroGrow’s products
after the holiday season, as well as increasing the number of storefronts
carrying the AeroGarden product line. The AeroGarden has received
recognition
from retailers such as Amazon.com whose customers voted the AeroGarden
the “Most
Wished For” home and garden product of 2006, the media, including features in
nationally recognized television shows such as the “Today Show” and the “Ellen
Degeneres” show and the housewares industry, with the AeroGarden receiving "Best
in Category" from the International Housewares Association in the
"Food
Preparation" category based upon the AeroGarden’s innovative technology, user
benefits and market response.
AeroGrow
has developed a nationwide network of manufacturer sales representative
organizations with experience in each of these retail categories
to manage sales
activities for these channels. These sales representatives are independent
contractors compensated by commission based on the sales they generate.
Although
AeroGrow’s gross profit margins will be lower when selling through retail
channels, AeroGrow will not incur the relatively higher advertising
costs
associated with its direct response marketing. AeroGrow’s ability to continue to
expand and maintain sales through retail channels will depend on
the success of
its public relations and direct marketing campaigns in generating
awareness for
its products, the retailers’ ability and willingness to merchandise its
products, and continued consumer acceptance for its kitchen garden
systems.
Distribution
AeroGrow
had contracted with a third party service provider in Reno, Nevada
to fulfill,
store and ship its products through December 31, 2006. As of January
1, 2007,
AeroGrow terminated its relationship with the company in Reno, Nevada
and
relocated its warehousing and fulfillment to a new third party facility
in Chino
Hills, California. AeroGrow anticipates this change will reduce inbound
and
outbound freight costs as well as fulfillment and handling charges
and reduce
time to market as a result of its location near the major sea ports
of Los
Angeles and Long Beach California. This third party service provider
provides
warehousing, order packing, and shipping for the products sold (through
both
direct response channels and retail channels) on primarily a variable
cost
basis. Costs for warehousing, order packing, and shipping for the
products sold
through direct response channels are included in the shipping and
handling
charge paid by the direct response purchaser. For retail distribution,
the costs
for warehousing, order packing, and shipping are lower because of
the
efficiencies gained in shipping larger quantities per order. Freight
costs will
vary significantly depending upon quantity ordered and destination,
but they are
projected to range from 3% to 5% of sales net of reimbursement from
customers. A
different third party service provider also provides payment processing,
database management, and customer support services for the direct
response
sales. AeroGrow manages the majority of its consumer and retailer
customer
support from its own facilities.
AeroGrow
has contracted with two telemarketing companies, InPulse Response
Group, Inc.
and LiveOps, Inc. to provide operators who will take calls from consumers
responding to its direct response marketing. Both contracts may be
cancelled
upon 30 days notice. These orders and the orders received on its
website are
provided to our third party service provider daily to be fulfilled.
Telemarketing costs per order are approximating 4% of direct response
sales.
International
Sales
AeroGrow
has begun to build its international distributor network and has
entered into
agreements to date with distributors in Mexico and Canada. On September
1, 2006,
AeroGrow retained the services of a consultant in London to assist
in developing
AeroGrow’s international distributor network in Europe and Asia. AeroGrow
anticipates finalizing distribution agreements in key markets such
as Japan,
Germany and the United Kingdom by the end of March 2007 and having
models of
AeroGrow kitchen garden products, compatible with European and Asian
regulatory
and electrical requirements, completed and available for distribution
during the
early part of the second calendar quarter of 2007.
Inflation
and Seasonality
AeroGrow
does not expect inflation to have a significant effect on its operations
in the
foreseeable future. Because its kitchen garden systems are designed
for an
indoor gardening experience, it is possible that AeroGrow may experience
slower
sales in the United States during April through September when its
consumers may
tend to garden outdoors. In addition, AeroGrow has had increased
sales during
the holiday season in the fourth calendar quarter. With regard to
its
international distribution, AeroGrow intends to sell to its international
distributors in US Dollars thereby minimizing effects from currency
fluctuations. AeroGrow’s purchases from China may be effected by changes in
valuation of the US Dollar as compared to the Chinese Yuan.
Results
of Operations
The
nine
months ended December 31, 2006 represented our first nine months
of revenues
from operations. Initial shipments of our products began in March
2006. During
our first holiday selling season, we experienced higher than anticipated
demand
for our products and accordingly were unable to fully meet customer
demands both
from retailers (“Retail Sales”) as well as direct sales to consumer (“Direct
Sales”). As a result, we had orders from retailers totaling $305,000 and
direct
orders from consumers totaling $205,000 that we were unable to ship
by December
31, 2006. Further, during the months of November and December 2006,
we elected
to expedite shipping of 9,615 units of our AeroGarden units from
our factory in
China by air rather than by sea in order to satisfy customer demands
at an
incremental airfreight cost of $27 per unit, or a total additional
freight cost
of $259,600, which was included in Cost of Revenue for the three
and nine months
ended December 31, 2006.
For
the
three and nine months ended December 31, 2006, net sales totaled
$4,857,604 and
$6,709,858, respectively. There were no sales in the prior year.
Direct Sales
are generated as a result of airings of our infomercial, our websites
and other
direct to consumer advertisements. Retail Sales are generated through
sales to
“brick and mortar” retailers, catalogues and home shopping companies who in turn
sell to consumers. In regard to our Direct Sales, we offer our direct
customers
thirty days to evaluate the product paying only the shipping and
handling costs
for such products before making the required installment payments
after the
expiration of the thirty day trial period. Accordingly, we have not
recorded
$354,050 of revenue as of December 31, 2006 related to the unpaid
balance due
for such orders shipped prior to December 31, 2006. We also deferred
recognition
of $102,480 of product costs associated with the foregoing revenue
in as much as
the customer is required to return the product to us and we are able
to recover
these costs through resale of the goods. An analysis of our sales
is as
follows:
|
|
Three
months
|
|
Nine
months
|
|
|
|
ended
|
|
ended
|
|
|
|
December
31, 2006
|
|
Direct
Sales, net
|
|
$
|
1,314,174
|
|
$
|
1,673,483
|
|
Retail
Sales, net
|
|
|
3,543,430
|
|
|
5,036,375
|
|
|
|
$
|
4,857,604
|
|
$
|
6,709,858
|
|
During
the nine months ended December 31, 2006, we had two retail customers
who
accounted for 19% ($1,303,949) and 15% ($1,019,629), respectively,
of our net
sales. During the three months ended December 31, 2006, the same
two retail
customers accounted for 19% ($929,544) and 12% ($562,733), respectively,
of our
net sales.
Cost
of
revenues for the three and nine months ended December 31, 2006 totaled
$3,282,291 and $4,785,151, representing 68% and 71% of revenues,
respectively.
Cost of revenues include product costs for purchased and manufactured
products,
freight costs for inbound freight from manufacturers and outbound
freight to
customers, costs related to warehousing and the shipping of products
to
customers and duties and customs applicable to products imported.
Included in
cost of revenues for the three months ended December 31, 2006, is
approximately
$140,000 in incremental airfreight costs for the initial shipments
of our
products and approximately $259,600 in incremental airfreight costs
related to
expediting deliveries resulting from higher than expected demand
for our
products during the holiday season. This shipping practice is not
expected to be
a recurring method of transportation for our products. During the
nine months
ended December 31, 2006, product costs were also impacted by the
worldwide
increasing costs of plastics and copper. We have seen improvement
in the costs
of plastics in recent months and as a result have realized a 4% reduction
in our
product cost subsequent to December 31, 2006. Further, in as much
as inbound
freight from our manufacturers as well as outbound freight to our
customers both
are included in our cost of sales, we have determined that our third
party
warehouse and fulfillment facility based in Reno, Nevada was not
efficient in
minimizing such freight costs. Effective January 1, 2007, we terminated
our
agreement with the facility in Reno and entered into a new agreement
with a
warehouse facility near Los Angeles, California. We anticipate this
change will
result in savings of 10% to 15% in our freight and distribution costs.
We also
experienced higher than anticipated costs in the startup of our seed
kit
manufacturing operations which we anticipate will decline in future
periods as
efficiencies in manufacturing seed kits due to improvements in both
process and
volume are realized.
Gross
margins will vary based upon the ratio of Direct Sales, where we
recognize as
revenue the full purchase price for the product as opposed to Retail
Sales,
where we recognize as revenue the wholesale price for the product
charged to the
retailer. Media costs associated with Direct Sales are included in
Sales and
Marketing costs. Gross margins for the three and nine months ended
December 31,
2006 were $1,575,313 and $1,924,707 representing 32% and 29% of revenues,
respectively. Affecting gross margins for the three and nine months
ended
December 31, 2006, as discussed above, were airfreight costs of $259,600
and
$399,600, respectively, reducing gross margins by 5% and 6%, respectively.
With
the addition of the new manufacturing capability, we expect to have
sufficient
manufacturing capacity to avoid such airfreight costs in the future.
Also
affecting gross margins were increases in the manufactured costs
due to costs
associated with plastics of our AeroGarden as discussed above which
have
improved by 4% of current product cost manufactured in China from
that which was
incurred during the three and nine months ended December 31, 2006.
Further
reductions in manufacturing cost are anticipated for the next twelve
months
based upon new integrated microprocessors which would reduce the
cost of current
electronic components. There are further reductions possible from
obtaining
regulatory approval to produce selected seed kits in China to be
shipped with
the AeroGarden which would result in 60% cost savings for such seed
kits as
compared to current manufacturing costs in Colorado.
During
the three and nine months ended December 31, 2006 we incurred $700,111
and
$1,544,495 in research and development costs as compared to $584,074
and
$1,272,639 for the three and nine months ended December 31, 2005,
an increase of
$116,037 and $271,856, or 20% and 21%, respectively. We continue
to allocate
additional resources to the development, design and technology of
various new
prototype models as well as expansion of our greenhouse and laboratory
to
measure the success of various seeds, cuttings and nutrients under
different
conditions and testing new plant varieties for additional seed kits.
A
significant component of the increase for the nine months ended December
31,
2006 over the nine months ended December 31, 2005 is $329,595 in
non-cash
compensation expense recognized as a result of stock options granted
and common
stock issued during the period to personnel engaged in our research
and
development activities. Partially offsetting this increase is the
cost savings
associated with research and development resources available to us
through our
new manufacturer including resources for design, prototyping and
regulatory
approvals.
Sales
and
marketing costs for the three and nine months ended December 31,
2006 totaled
$1,965,578 and $4,285,849 as compared to $203,822 and $555,622 for
the three and
nine months ended December 31, 2005, an increase of $1,761,756 and
$3,730,227,
or 864% and 671%, respectively. Sales and marketing costs for the
nine months
ended December 31, 2006 include all costs associated with the media
cost for
airings of our infomercial and other direct response advertisements
which
totaled $630,714, $687,241 in costs associated with the production
of our
infomercial, $176,981 in advertising and other promotional allowances
granted to
our retail customers, $161,699 in public relations costs, $311,592
in
commissions to sales representatives for sales to our retail customers
and
$167,897 in other advertising and promotional costs. Further, a significant
component of the increase on sales and marketing for the nine months
ended
December 31, 2006 over the nine months ended December 31, 2005 is
$237,488 in
non-cash compensation expense recognized as a result of stock options
granted
and common stock issued during the period to personnel engaged in
our sales and
marketing activities.
General
and administrative costs for the three months ended December 31,
2006 totaled
$1,042,537 as compared to $976,234 for the three months ended December
31, 2005,
an increase of $66,303 or 7%. For the nine months ended December
31, 2006,
general and administrative costs totaled $2,671,939 as compared to
$2,408,819
for the nine months ended December 31, 2005, an increase of $263,120
or 11%.
Contributing to the increases for the three and nine months ended
December 31,
2006 are approximately $176,000 in legal and consulting costs associated
with
our efforts to complete the registration of the 6,700,900 shares
of common stock
and the shares of common stock underlying warrants and convertible
debt
associated with our 2005 convertible debt offering and our 2006 private
placement offering. Also impacting general and administrative costs
during the
three months ended December 31, 2006 were approximately $50,000 in
moving and
related costs as a result of our relocation to our new 21,012 square
foot
corporate headquarters.
In
the
next twelve months, we intend to continue researching and developing
new product
designs and product extensions including, but not limited to, product
line
extensions targeted at both higher and lower retail price points,
nutrient
delivery systems and additional seed varieties for our seed kits.
We also will
dedicate research and development resources to the improvement, expansion
and
automation of our in-house seed kit manufacturing capabilities.
On
July
27, 2006, we entered into a lease with Pawnee Properties, LLC, an
unrelated
company, to consolidate our operations, other than our seed kit manufacturing
operations, into a 21,012 square foot office space at 6075 Longbow
Drive,
Boulder, Colorado 80301, commencing November 2006. The initial rent
is $15,759
per month, plus our proportionate share of building taxes, insurance,
and
operating expenses. The initial term continues until January 31,
2012, unless
modified under specified circumstances. The lease contains other
standard office
lease provisions.
Future
cash payments under such operating lease for the upcoming five years
are as
follows:
Year
Ended
|
|
Rent
|
|
March
31, 2007
|
|
$
48,877
|
March
31, 2008
|
|
$296,848
|
March
31, 2009
|
|
$316,253
|
March
31, 2010
|
|
$325,152
|
March
31, 2011
|
|
$327,047
|
Off-Balance
Sheet Arrangements
AeroGrow
has certain current commitments under operating leases and has not
entered into
any capital leases or contracts for financial derivative instruments
such as
futures, swaps and options.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting
principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at
the date of
the financial statements and the reported amounts of revenues and
expenses
during the reporting period. Actual results could differ from those
estimates.
Research
and Development
The
costs
incurred to develop products to be sold or otherwise marketed are
currently
charged to expense. When a product is ready for general release,
its capitalized
costs will be amortized using the straight-line method of amortization
over a
reasonable period.
Inventory
Inventories
are valued at the lower of cost, determined by the first-in, first-out
method,
or market. Included in inventory costs where we are the manufacturer
are raw
materials, labor and manufacturing overhead. 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 delivered
cost.
Stock
Based Compensation
In
December 2004, the Financial Accounting Standards Board issued SFAS
No. 123R,
“Share-Based Payment.” Subsequently, the Securities and Exchange Commission
(“SEC”) provided for a phase-in implementation process for SFAS No. 123R,
which
required adoption of the new accounting standard no later than January 1,
2006. SFAS No. 123R requires accounting for stock options using a
fair-value-based method as described in such statement and recognize
the
resulting compensation expense in the Company’s financial statements. Prior to
January 1, 2006, the Company accounted for employee stock options using the
intrinsic value method under APB No. 25, “Accounting for Stock Issued to
Employees” and related Interpretations, which generally results in no employee
stock option expense. AeroGrow adopted SFAS No. 123R on January 1,
2006 and does
not plan to restate financial statements for prior periods. AeroGrow
plans to
continue to use the Black-Scholes option valuation model in estimating
the fair
value of the stock option awards issued under SFAS No. 123R. The
adoption of
SFAS No. 123(R) has increased net loss by $404,965 for the nine months
ended
December 31, 2006 as compared to using our prior method under APB
25.
Revenue
Recognition
AeroGrow
recognizes revenue from product sales, net of estimated returns,
when persuasive
evidence of a sale exists: that is, a product is shipped under an
agreement with
a customer; risk of loss and title has passed to the customer; the
fee is fixed
or determinable; and collection of the resulting receivable is reasonably
assured. The liability for sales returns is estimated based upon
historical
experience of return levels.
AeroGrow
records estimated reductions to revenue for customer and distributor
programs
and incentive offerings, including price markdowns, promotions, other
volume-based incentives and expected returns. Future market conditions
and
product transitions may require the Company to take actions to increase
customer
incentive offerings, possibly resulting in an incremental reduction
of revenue
at the time the incentive is offered. Additionally, certain incentive
programs
require the Company to estimate based on industry experience the
number of
customers who will actually redeem the incentive. AeroGrow also records
estimated reductions to revenue for end user rebate programs, returns
and costs
related to warranty services.
Warranty
and Return Reserves
AeroGrow
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, labor for periods up to one year.
Factors that
affect the Company’s warranty liability include the number of installed units
currently under warranty, historical and anticipated rates of warranty
claims on
those units, and cost per claim to satisfy the Company’s warranty obligation.
AeroGrow
reserves for potential returns from customers and associated refunds
or credits
related to such returns based upon historical experience.
Shipping
and Handling Costs
Shipping
and handling costs associated with inbound freight are recorded in
cost of
sales. Shipping and handling costs associated with freight out to
customers are
also included in cost of sales. Shipping and handling charges to
customers are
included in sales.
Beneficial
Conversion Feature of convertible notes
In
accordance with Emerging Issues Task Force No. 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, and Emerging Issues Task Force No. 00-27, “Application
of Issue No. 98-5 to Certain Convertible Instruments”, the Company
recognizes the advantageous value of conversion rights attached to
convertible
debt. Such rights gives the debt holder the ability to convert debt
into shares
of common stock at a price per share that is less than the fair market
value of
the common stock on the day the loan is made to the Company. The
beneficial
value is calculated as the intrinsic value (the fair market value
of the stock
at the commitment date in excess of the conversion rate) of the beneficial
conversion feature of the notes and the related accrued interest
and is recorded
as a discount to the related debt and an addition to additional paid
in capital.
The discount is subsequently amortized to interest expense over the
remaining
outstanding period of the related debt using the interest
method.
Registration
Rights Penalties
The
holders of securities issued in the Company’s 2006 Offering and 2005 Offering
(see Note 3 to the Company's Condensed Financial Statements) have
registration
rights for the common stock and for the common stock underlying the
convertible
debt and the warrants held by them. Liquidated damages for failure
to register
and maintain registration for such common stock are payable in common
stock of
the Company under certain circumstances and are limited to 1% of
the amount of
the outstanding convertible debt up to a maximum of 24% and 1% of
the amount of
the investment in the 2006 Offering up to a maximum of 18%. In each
case, the
amount is payable in shares of the Company’s common stock valued at a rate of
$2.00 per share. The Company has elected to recognize the impact
of such
registration rights penalties as incurred, which commenced after
July 23, 2006
(see Note 3 and Note 6). The Company completed the registration of
the foregoing
securities on December 22, 2006 and recognized five months of penalty,
resulting
in the recording of 332,876 shares of common stock to be issued at
a value of
$5.00 for a total of $1,664,380. On December 21, 2006, the FASB Financial
Statement Publication (“FSP”) EITF 00-19-2 that addresses the accrual and
accounting for registration rights penalties becomes effective for
the year
beginning December 15, 2006. The Company is assessing this FSP and
will adopt it
for fiscal 2007. The Company does not expect the adoption to have
a significant
difference in its current policy.
BUSINESS
Overview
AeroGrow
was formed as a Nevada corporation on March 25, 2002. AeroGrow’s principal
business is developing, marketing, distributing, and selling advanced
indoor
aeroponic garden systems designed and priced to appeal to the gardening,
cooking
and small kitchen appliance, healthy eating, and home and office
décor markets
worldwide. AeroGrow’s principal activities since its formation through February
2006 have consisted of product research and development, market research,
business planning, and raising the capital necessary to fund these
activities.
AeroGrow currently has 19 patent applications pending in the United
States, and
28 trademark applications, 7 of which have been allowed, (25 in the
United
States and 3 international). To date, AeroGrow has completed the
development of
two proprietary growing systems and nine proprietary seed kits. These
development activities included an iterative process of experimentation,
consumer testing, and adjustment in consultation with scientists
familiar with
the technology. AeroGrow’s experimentation included more than 500 internal tests
on nutrients, lighting, water quality, and seed varieties in our
greenhouses and
labs performed between August 2002 and December 2005. Often, these
tests were
combined with in-home use of our systems by sample consumers picked
from our
employees and investors. User feedback from these tests was often
incorporated
in next generation products and development.
During
2006 AeroGrow completed development of its initial kitchen garden
systems and
related “bio-grow” seed pods AeroGrow contracted with a third-party manufacturer
who commenced production activities and a second manufacturer who
will commence
production in the first quarter of calendar 2007. In March 2006,
AeroGrow began
sales activities. As of February 15, 2007, AeroGrow had manufactured
and taken
delivery of over 100,000 units of its AeroGarden™ kitchen garden units. AeroGrow
commenced initial marketing and distribution of its products during
March 2006
and has expanded these marketing efforts to encompass retail, home
shopping,
catalogue, international, and direct to consumer sales channels.
AeroGrow’s
principal products are “kitchen garden” indoor growing systems and proprietary
seed kits that allow consumers, with or without gardening experience,
the
ability to grow cherry tomatoes, cilantro, chives, basil, dill, oregano,
mint,
flowers, chili peppers, and lettuce throughout the year. AeroGrow’s kitchen
garden systems are designed to be simple, consistently successful,
and
affordable. AeroGrow believes that its focus on the design and features
of its
kitchen garden systems made them the first of their kind on the consumer
market.
This conclusion was reached on the basis of standard means of market
research,
including focus groups and potential customer interview techniques,
review of
potentially competitive products offered at all ranges of functionality
and
price, and testing of products that may be considered competitive
in function
although not necessarily competitive in market orientation.
AeroGrow
believes that its products will allow almost anyone, from consumers
who have no
gardening experience to professional gardeners, to produce year-round
harvests
of a variety of herbs, vegetables, and flowers, which are provided
in its seed
kits, regardless of season, weather, or lack of natural light. AeroGrow
believes
that its kitchen garden systems’ unique and attractive designs make them
appropriate for use in almost any location including kitchens, bathrooms,
living
areas and offices.
AeroGrow’s
kitchen garden system currently on the market retails at approximately
$149 with
variations based on the channel of distribution in which they are
sold and the
accessory components included with the unit.
Hydroponics
Industry - Background and Opportunity
Hydroponics
is the science of growing plants 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 enjoying 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 at regular intervals with nutrient solution.
AeroGrow believes that the aeroponic technology used in its kitchen
garden
systems is a technological advance over hydroponics because plant
roots are
suspended in a near 100% humidity enclosed air chamber and bathed
in a
nutrient-rich solution. We believe aeroponic methods ensure the plants
not only
have sufficient water, nutrients and oxygen, but the temperature
inside the root
chamber can be easily controlled, ensuring temperature stress of
the plant does
not limit growth. For this reason, we believe the use of a well designed
and
maintained aeroponic system can yield increases in growth rate and
plant
survival when compared to hydroponics systems.
From
August 2002 through July 2005, AeroGrow conducted research with approximately
500 individuals who were identified either because they (i) signed-up on
our website to pre-order the basic AeroGrow product, (ii) agreed to be beta
testers of the basic product, (iii) came to preview meetings concerning the
company, or (iv) were friends of employees and consultants of the Company.
Persons found the AeroGrow’s website through referrals, web searches, or as a
result of fund raising and hiring activities. The research consisted
of
face-to-face and internet interviews/surveys with potential consumers
and
standard focus group experiences. From some of the contacts, AeroGrow
obtained a
ten page questionnaire and in other instances the responses were
taped for later
review. Persons from approximately 35 states responded to the surveys
and focus
groups. A professional market research consultant assisted with the
design,
implementation and analysis of the focus groups, individual interviews,
and
surveys. From this research, AeroGrow believes that there is a potential,
sizeable national market for its countertop soil-less kitchen garden
systems for
use indoors in homes and offices. Until the development of AeroGrow’s kitchen
garden systems, significant barriers have 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.
· Consumers
generally do not possess the specialized knowledge required to select,
set up,
operate and maintain the varied indoor lighting systems that are
necessary to
grow plants in the absence of adequate indoor natural light.
· Consumers
are required to properly mix and measure complex hydroponic nutrient
formulas,
which change depending on the plant variety and the stage of plant
growth. In
addition, consumers must deal with the problem of nutrient
spoilage.
· Federally-mandated
water quality reports show that the water in many large cities is
not suitable
for hydroponic or aeroponic growing and requires chemical treatments.
Consumers
generally are unaware of how to adjust the water for healthy plant
growth.
AeroGrow
believes that these complexities have been accepted in existing hydroponic
market channels because its research has indicated that hydroponic
manufacturers
have generally focused their product development and marketing efforts
on
satisfying the needs of the commercial greenhouse and dedicated hobbyist
markets. AeroGrow’s research has indicated that the hydroponic growing equipment
currently available in these markets is bulky, expensive and comprised
of many
parts. These users are motivated to gain the specialized knowledge,
equipment
and experience currently required to successfully grow plants with
these
products.
AeroGrow
believes that the complexities of currently available commercial
hydroponic
products fail to address the needs and wants of the mass consumer
market,
leaving that market unserved. AeroGrow further believes that its
trade secrets,
patent-pending inventions and companion technologies have simplified
and
improved hydroponic and aeroponic technologies and enabled it to
create the
first indoor aeroponic gardening system appropriate for the mass
consumer
market.
Our
Proprietary Technology
AeroGrow
has spent almost four years innovating, simplifying, combining and
integrating
numerous proprietary technologies and inventions into a family of
“plug and
grow” aeroponic kitchen garden systems and related seed kits specifically
designed and priced for the mass consumer market. AeroGrow has filed
19 patent
applications in the United States to protect its inventions. Following
is a
description of AeroGrow’s proprietary technologies and inventions, which are
used together in its kitchen garden system and seed kits. The inventions
under
the patent applications have not been granted patents, and there
can be no
assurance that patents will be granted. See “Risk Factors - AeroGrow’s
intellectual property and proprietary rights give it only limited
protection and
can be expensive to defend.”
Rainforest
Nutrient Delivery System.
AeroGrow’s “rainforest” nutrient delivery system combines its patent-pending
technologies with features from several hydroponic or aeroponic methodologies
into a proprietary system designed to provide aeroponic plant growth.
These
hydroponic or aeroponic methodologies include:
· Drip
Technologies.
Drip
systems create nutrient irrigation by pumping nutrient solution from
a reservoir
up to the base of the plant and saturating a soil-less growing medium.
The
growing medium delivers nutrients and moisture to plant roots which
is similar
to rainwater as it drips through the soil and past plant roots.
· Ein
Gedi Aeroponic Technologies.
Plant
roots in aeroponic systems are suspended in an air chamber and bathed
at regular
intervals with nutrient solution. In the Ein Gedi variation of aeroponics,
plant
roots are allowed to grow directly into nutrient solution after passing
through
an air space.
AeroGrow’s
rainforest technology suspends plant roots into a 2 to 4 inch air
chamber above
an oxygenated nutrient solution. Nutrients are pumped from the nutrient
reservoir to the base of each plant where a regulated flow of nutrients
drips
down through plant roots.
Pre-Seeded
Bio-Grow Seed Pods.
AeroGrow’s proprietary bio-grow seed pods include pre-implanted seeds, a
bio-sponge growing medium, removable bio-dome covers and a grow basket
to assist
with the proper distribution of moisture. AeroGrow's seed pods were
designed to
be used in its kitchen garden systems. AeroGrow believes consumers
may use seeds
purchased from other sources for use in its kitchen garden system,
although
AeroGrow cannot provide any assurances on germination and growth
in such cases.
AeroGrow
selected the seeds to pre-implant in its initial bio-grow seed pods
after two
years of extensive research, which included:
· analyzing
thousands of seed varieties,
· growing
and testing several hundred varieties of plants in its greenhouse
and grow
laboratories, and
· testing
the taste and appearance of its grown vegetables, herbs and flowers
with
consumers.
AeroGrow
implants its selected seeds in a bio-sponge growing medium that,
based upon
research by AeroGrow, facilitates rapid germination and enhanced
root growth in
comparison to other mediums tested as well as supporting plant roots
from
germination through maturity and harvest. AeroGrow’s bio-grow domes create a
mini-greenhouse environment by covering the grow surface to create
a near-100%
humidity air chamber, which is optimal for most plant germination
and initial
growth. Bio-grow domes help regulate moisture and temperature to
levels optimal
for plant germination.
AeroGrow’s
proprietary bio-grow seed pods are a vital component of its kitchen
garden
system. AeroGrow’s bio-grow seed pods will be packaged along with nutrients in
its proprietary seed kits to being used in its kitchen garden systems.
These
seed kits currently include seeds for cherry tomatoes, salad greens,
cilantro,
chives, basil, dill, oregano, mint, chili peppers and flowers as
well as a
variety of international herbs for Italian, Japanese, and French
cooking. In
addition to pre-seeded pods, AeroGrow also plans to allow consumers
to purchase
unseeded pods to give them the opportunity to grow their own seeds
in AeroGrow’s
kitchen garden systems. Not all plants, however, are appropriate
to grow in the
kitchen garden system.
AeroGrow
has also begun development of methodology to cultivate and ship live
“starter”
plants in the grow pod mediums that will be able to grow in AeroGrow’s kitchen
garden systems. AeroGrow has started market testing this process
with
strawberries during the first quarter of calendar 2007
Microprocessor-Based
Control Panel and Nutrient Cycle Delivery System.
AeroGrow believes that certain common problems face both experienced
gardeners
and beginning gardeners, including:
· improperly
watering plants,
· improperly
feeding plants, and
· failing
to provide plants with sufficient light needed for healthy growth.
To
assist
consumers, especially inexperienced gardeners, AeroGrow has developed
two
patent-pending microprocessor-based technologies that address these
common
problems. These technologies are designed to:
· regulate
the lighting system,
· automatically
alert users when it is time to add water and nutrients,
· help
simplify and reduce consumers’ time and involvement in caring for
plants,
· reduce
the variables and errors often made by consumers in plant care, and
· enhance
plant growth.
AeroGrow
has developed two kitchen garden systems with different control systems
which
are described below at “AeroGrow’s Kitchen Garden Systems.” AeroGrow’s
microprocessor-based control panel will be available as an accessory
for its
basic kitchen garden system and is included as a standard feature
on its deluxe
kitchen garden system. This control panel includes an electronic
nutrient and
water reminder system and microprocessor-controlled lights that alert
consumers
to add water and nutrients when needed and help ensure that plants
are properly
fed and receive the proper lighting. Without the microprocessor control
panel,
the user is required to track the time since the last nutrient tablets
were
added and must monitor the system visually as to when to add water.
In
addition, AeroGrow’s deluxe kitchen garden system includes its
microprocessor-based nutrient cycle delivery system as a standard
feature. With
its nutrient cycle delivery system, the consumer selects from four
plant types
(lettuce, herbs, tomatoes or flowers) and the system then automatically
adjusts
and optimizes the nutrient, water and lighting cycles based on the
plant variety
selected.
Time-Release
Nutrient Tablets.
Plants
require a balanced mixture of nutrients for optimal growth. Certain
nutrient
combinations, including calcium nitrate and magnesium sulphate, generally
cannot
be combined, mixed, or stored in the same container due to specific
chemical
reactions that bind them together and renders them useless to plants.
Hydroponic
growers seek to solve this problem by packaging various nutrient
concentrations
in up to four separate containers, which are individually measured
and added as
needed by the consumer. These nutrient complexities require consumers
using
hydroponic systems to:
· understand
the blends of nutrient fertilizer that are best suited for the specific
variety
of plants they are growing,
· understand
the nutrient requirements for the specific plant variety at each
of three stages
of its growth and maturity,
· measure
and blend nutrients from up to four different concentrated solutions
and add
them to specific measured quantities of water, and
· monitor,
adjust and re-mix nutrient fertilizers over time.
AeroGrow
believes that current plant nutrition processes required for successful
hydroponic growing have created barriers to mass consumer use and
acceptance
because they are cumbersome and complex. To help overcome these barriers,
AeroGrow has spent nearly three years developing time-release nutrient
tablets
designed specifically to deliver the proper nutrients to the plants,
while
offering consumers a user-friendly nutrient system. The consumer
simply adds the
plant-specific nutrient tablets to the kitchen garden systems when
instructed by
the microprocessor-based nutrient cycle delivery system, usually
once every two
weeks. The nutrient tablets eliminate the need for measuring and
mixing
multi-part nutrient formulas and storing various nutrients in separate
containers. The nutrient tablets customize multiple nutrients and
minerals such
as calcium, magnesium and iron for specific plant varieties at different
stages
of their growth.
Water
Quality.
Tap
water as supplied by local municipalities often is not conducive
to aeroponic or
hydroponic growth. To address these problems, most hydroponic growers
monitor
and chemically adjust the water they use on a daily or weekly
basis.
AeroGrow
believes that the problems associated with the wide range of water
chemistry
found throughout the United States (and possibly internationally),
as well as
the complexities involved in monitoring water chemistry, are significant
barriers which limit the use of hydroponic gardening by the general
public.
AeroGrow has developed a patent-pending formula that automatically
adjusts and
balances the water to a level capable of sustaining healthy plant
growth in an
aeroponic environment. This formula is pre-mixed into AeroGrow’s time-release
nutrient tablet described above, which eliminates the need for consumers
to
understand water chemistry.
Integrated
and Automated Lighting System.
Hydroponic systems typically do not incorporate built-in lighting
systems.
Lighting systems must typically be purchased as separate components
and
assembled by the consumers. Hydroponic lighting systems generally
consist of a
ballast, reflector hood, lights and an electronic timer. The consumer
must
suspend the lighting system over the hydroponic unit and then continually
raise
the lights as the plants grow. Complete lighting systems often cost
hundreds of
dollars, which is considerably more than the cost of AeroGrow’s entire kitchen
garden system.
AeroGrow’s
kitchen garden systems include built-in adjustable grow lights with
ballast,
reflector hood, lights and an electronic timer. AeroGrow’s integrated lighting
systems include high-output compact fluorescent light bulbs that
deliver a
spectrum and intensity of light designed to help optimize plant growth
without
natural light. In addition, AeroGrow’s lighting system is fully automated and
controlled by its microprocessor-based control panel described
above.
Adaptive
Growth Software.
Through
research and testing in AeroGrow’s grow laboratory, AeroGrow’s plant scientists
have determined that better plant growth can be achieved if nutrients,
moisture
and lighting are adapted and customized to the specific stages of
the plants’
growth: germination, initial growth and advanced growth. AeroGrow
has developed
a proprietary software technology entitled “adaptive growth technology” which
automatically analyzes and adjusts the nutrient delivery schedules
based on
plant maturity. AeroGrow intends to introduce this technology into
an upgraded
kitchen garden system to be introduced in the second calendar quarter
of 2007 as
an added feature for specialty retailers in the future.
AeroGrow’s
Kitchen Garden Systems
AeroGrow
has developed two kitchen garden systems and has commenced marketing
one of
these models. The marketed model features the rainforest nutrient
delivery
system and an integrated lighting system (including the microprocessor-based
control panel), and a microprocessor-based nutrient cycle delivery
system. This
kitchen garden system retails at approximately $149 with variations
based on the
channel of distribution in which it is sold and the accessory components
included with the unit.
AeroGrow
plans to introduce two new models of its kitchen garden systems in
the second
half of calendar 2007. One new model will feature an upgraded unit
with a
stainless steel accented design and the adaptive growth technology
discussed
above. This model is expected to retail for $169 to $199 based on
the channel of
distribution in which it is sold and the accessory components included
with the
unit. In addition, AeroGrow plans to introduce a smaller version
of its current
kitchen garden system targeted to retail for a price of $99-$119
based on the
channel of distribution in which it is sold and the accessory components
included with the unit.
AeroGrow
is in the process of modifying its current units for compatibility
with Asian
and European electrical requirements for international distribution.
AeroGrow
anticipates continued development of new models of its kitchen garden
systems to
meet the demands of its customers and price points as required by
market
conditions.
AeroGrow’s
Seed Kits
AeroGrow
has developed and is producing a variety of seed kits to be used
in its kitchen
garden systems. These seed kits include pre-seeded bio-grow seed
pods and a
three- to six-month supply of nutrients, including its formula for
adjusting
water quality. AeroGrow expects its seed kits to retail at prices
ranging from
$14.99 to $19.99. Currently developed seed kits include:
· cherry
tomato garden,
· chili
pepper garden,
· gourmet
herb garden,
· salad
greens garden,
· grandiflora
petunia garden,
· international
basil garden,
· Japanese
herbs,
· French
Herbs, and
· Italian
herbs.
AeroGrow’s
seed kits, time-release nutrient tablets, and replacement light bulbs
are also
sold to consumers for use with its kitchen garden system. Additionally,
seed
pods are available for use by consumers who wish to try to grow their
own seeds,
but no assurance can be given that all varieties of plants will grow
with the
AeroGrow kitchen garden system.
Other
Accessories
To
compliment and expand the functionality of its kitchen garden systems,
AeroGrow
has developed a variety of accessory products. AeroGrow has developed
an Herb
Appeal Collection, consisting of an internally produced video and
guidebook on
the care and uses of herbs and a set of cutting boards. We have also
developed
two wall bracket systems designed to hold two or more kitchen garden
systems for
consumers who wish to grow more than one seed kit at a time. AeroGrow
is also
developing its own design of a battery operated herb blender and
salad dressing
maker. These products will be sold individually and will be used
as premium
“gifts with purchases” to enhance AeroGrow’s direct to consumer and retail
offerings.
Additional
Future Products
In
addition to its kitchen garden systems, AeroGrow is developing and
plans to
market in the future companion products designed to provide a successful
gardening experience for consumers of all experience levels while
providing a
potentially continuing and profitable revenue stream for it. AeroGrow’s
development and production of the following additional products will
depend in
large part on the revenues generated from future product sales and
the
availability of additional financings.
Magic
Garden.
AeroGrow’s children’s magic garden is designed for simplicity and ease of use.
AeroGrow anticipates introducing this garden system in the toy
market.
Decorator
Office Garden.
AeroGrow is developing a garden system designed specifically for
use in offices
and work stations to introduce decorative and fragrant living flowers
into the
workplace.
Professional
System.
A
larger-scale garden system is planned for small businesses, florists,
restaurants, large families and gardening enthusiasts who want to
grow large
quantities of vegetables, herbs and flowers.
Future
Seed Kits.
AeroGrow plans to complete development and begin production of additional
seed
kits in 2007. AeroGrow currently anticipates that these seed kits
could include
a cilantro garden, sunny flower garden, baby bell peppers, Asian
hot peppers,
and a salsa garden with cherry tomatoes, jalapenos, and cilantro,
as well as new
varieties of salad greens for international markets. AeroGrow has
also begun
development of methodology to cultivate and ship live “starter” plants in the
grow pod mediums that will be able to grow in AeroGrow’s kitchen garden systems.
AeroGrow anticipates market testing this process with strawberries
during the
first quarter of calendar 2007.
Development
of these products are included in the budgeted research and development
expenses
for the future. For other product expansions and new products, AeroGrow
has not
budgeted amounts for their research and development at this time,
and in
connection therewith may need to raise additional capital. However,
no assurance
can be given that such products will be successful.
Markets
Based
on
AeroGrow’s informal market research, consisting of individual consumer
interviews, focus groups and Internet survey responses, AeroGrow
believes that
its kitchen garden systems will appeal to a broad spectrum of the
people in the
United States and internationally, including Europe and Japan. AeroGrow
believes
that its products will appeal to at least four major market
segments:
· experienced
gardeners,
· novice
and “want-to-be” gardeners,
· the
kitchen products and small appliances market, and
· the
office and home décor markets.
Further,
based on its discussions with potential distributors, AeroGrow believes
that its
kitchen garden systems also present opportunities in the specialized
toy,
educational, gift and hydroponic hobbyist markets.
Gardener
Market.
The
2002 National Gardening Survey conducted by the National Gardening
Association
states that gardening was America’s number one hobby with more than 70 million
active gardeners. Based upon this survey, there were estimated to
be 27 million
vegetable gardeners with one out of every four households having
a vegetable
garden, over 15 million fresh herb gardeners and over 20 million
flower
gardeners. AeroGrow believes that its kitchen garden systems and
related
products can 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 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 AeroGrow’s kitchen garden systems,
· the
reasonable assurance that crops can grow successfully by significantly
reducing
potential obstacles such as uncertain weather and garden pests,
· the
ease
of growing hydroponically in contrast to the toil associated with
traditional
gardening, including preparing the soil, planting, thinning, weeding
and
watering.
“Want-to-be”
Gardener Market.
AeroGrow believes that many people have an interest in gardening
but lack the
knowledge, confidence, available space, equipment, or time to garden.
AeroGrow
has observed the following barriers to beginning to garden:
· 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 older
people or
people with limited mobility or health issues,
· buying
the necessary equipment to garden can be expensive, and
· gardening
requires knowledge and expertise.
AeroGrow
believes that its kitchen garden systems overcome many of these barriers
and
provide a simple, convenient way for many current non-gardeners to
begin to
garden.
Kitchen
Products and Small Appliances Market.
AeroGrow believes that many Americans now enjoy cooking as a form
of
entertainment or hobby and that these people repeatedly purchase
new kitchen
appliances and will be motivated to purchase AeroGrow’s kitchen garden systems
and related seed kits. Consumers in this potential market include:
· people
interested in cooking who would appreciate the convenience and satisfaction
of
having a readily available supply of fresh-cut herbs and basils to
flavor soups,
salads and other dishes,
· people
who prefer the distinctive texture and taste of freshly picked, vine-ripened
tomatoes, basils, lettuces and other vegetables over days-old supermarket
produce, and
· people
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.
AeroGrow
believes that its kitchen garden systems will be embraced in this
market by
people who understand the value of having an ongoing supply of fresh
herbs and
vine-ripened produce throughout the year.
Office
and Home Decor Market.
Flowers
are frequently used to brighten homes and offices around the world.
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. AeroGrow’s kitchen
garden systems enable colorful and fragrant flowers to be easily
grown indoors
year-round. Flowers grown with its kitchen garden systems 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, work stations, waiting rooms and
lobbies. In
addition, professional plant caretakers may be motivated to include
AeroGrow’s
kitchen garden systems among their traditional plant options because
of the
relatively low cost and ease of maintenance of AeroGrow’s systems.
Specialty
Markets.
We
believe that several specialized markets potentially exist for AeroGrow’s
kitchen garden systems in the future, including:
· toy
market for a children’s “root-viewing” garden,
· classroom
market for student education relating to plant growth,
· gift
market,
· hydroponic
enthusiast market, and
· international
markets, particularly in large cities with limited outdoor garden
space.
Marketing
and Sales Strategy
AeroGrow
began launching its kitchen garden system in the United States during
the first
quarter of 2006 with a nationwide public relations campaign. Initial
test
marketing shipments to retail launch partners, including Sur La Table,
Frontgate, and others commenced in March 2006. As launch partners,
the Company
had agreed to feature Sur La Table and Frontgate in the Company’s public
relations efforts. In addition, the Company agreed to pay to Sur
La Table a
$30,000 fee for full page advertisement in Sur La Table’s catalogue distributed
to over one million consumers. The Company granted exclusive rights
to Frontgate
as a catalogue retailer through December 1, 2006, in exchange for
Frontgate’s
agreement to provide full page advertisements within their catalogues
for the
AeroGarden through the end of 2006. To date, AeroGrow has developed
many of its
marketing materials, including its website, product brochures, retail
packaging
and other retail collateral materials, public relations kits, in-store
point of
purchase supplies, infomercial, and short-form television show. AeroGrow’s
planned marketing strategy is to follow its initial launch with sales
of its
products through direct marketing vehicles and then expanded distribution
through retail channels. AeroGrow plans to expand its marketing and
distribution
internationally in the second calendar quarter of 2007. AeroGrow’s planned
direct marketing activities include 30-minute infomercials, 60-second
television
spots, home shopping networks, print advertising, and Internet-based
advertising. AeroGrow’s plan is designed to educate prospective customers while
creating widespread awareness of its kitchen garden systems and generating
direct sales in four key target markets: the experienced gardener
market, the
“want-to-be” gardener market, the kitchen products and small appliances markets,
and the office and home décor market.
Competition
Aeroponic
and hydroponic technologies have historically been limited to ardent
hobbyists
and commercial growing facilities worldwide. AeroGrow believes that
it is the
first company to develop and offer a simple soil-less 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.
AeroGrow
believes that these products are substantially more expensive than
the proposed
selling prices of the Company’s products.
AeroGrow
believes that its simplified and complete kitchen garden systems
and planned
methods of distribution offer significant benefits from these traditional
hydroponic industry practices. However, AeroGrow recognizes that
there are
companies that are better funded and have greater experience in producing
hydroponic products in commercial markets, including, but not limited
to,
companies such as General Hydroponics and American Hydroponics. These
companies
could potentially decide to focus on the consumer market with competing
products. AeroGrow could also potentially face competition from gardening
wholesalers and large and profitable soil-based gardening companies,
including,
but not limited to, the Burpee Seed Company and Gardener’s Supply Company,
should they decide to produce a competitive product. These companies
may have
better consumer acceptance and may be better funded than
AeroGrow.
Manufacturing
AeroGrow
manufactures its products using contract manufacturing sources that
are
supervised by its internal engineering and manufacturing teams. Its
bio-grow
seed pods will initially be produced and assembled in its laboratory
facilities
in Longmont, Colorado.
AeroGrow
has signed a tri-party manufacturing agreement with Source Plus,
Inc. (“Source
Plus”), an Alabama corporation, and Mingkeda Industries Co., Ltd. (“Mingkeda”),
a Chinese company, for the initial manufacture of its kitchen garden
systems and
accessories. Source Plus assisted AeroGrow in identifying companies
in China
that had the capability to manufacture AeroGrow’s kitchen garden systems. Source
Plus advanced monies to Mingkeda for tooling and molds to build AeroGrow’s
products. To reimburse Source Plus for its advances to Mingkeda for
tooling,
AeroGrow issued 62,000 shares of its common stock to Source Plus
in October
2005. AeroGrow recorded a $310,000 asset for tooling. Source Plus
is also
obligated to provide quality control inspection services at Mingkeda’s factory
for AeroGrow. Mingkeda has informed AeroGrow that it can currently
produce
15,000 kitchen garden systems per month and will eventually be able
to produce
approximately 25,000 kitchen garden systems per month with its existing
set of
tools. To date, AeroGrow has received approximately 85,000 units
from Mingkeda
with over 20,000 additional units in process. Mingkeda estimates
that it can add
the additional set of tools and presses within 60 to 90 days following
AeroGrow’s notification. There is no assurance that Mingkeda will be able
to
meet the projected estimated deliveries. If it is not able to meet
the orders,
the Company's sales will be adversely affected. In addition to the
Mingkeda
plant, AeroGrow is exploring relationships with other manufacturers
located in
China as an alternative supply source should sales volumes require
added
production. In the event Mingkeda in unable to meet its anticipated
production
capacity before AeroGrow is able to develop additional contract manufacturing
sources, sales could be adversely affected if sales demand exceed
production
capacity.
AeroGrow’s
manufacturing costs for its initial model of the AeroGarden are anticipated
to
allow AeroGrow to achieve gross margins before selling expenses from
wholesale
sales ranging from 40% to 50% once manufacturing volumes are at a
sufficient
level to enable AeroGrow to: (i) achieve economies of scale in its seed kit
production; (ii) obtain volume discounts for parts and components related
to the manufacture of its kitchen garden systems; and (iii) minimize
transportation and logistics costs. However, no assurance can be
given that that
the price of our products will not be subject to downward price pressure,
or
that our margins will be attained or maintained.
AeroGrow
has completed its initial set of tooling and in February 2007 authorized
the
building of a second set of tooling with a second contract manufacturer,
Main
Power Electrical Factory Ltd., which is located in China (“Main Power”). During
the first calendar quarter of 2007, AeroGrow began receiving delivery
of
production units built by Main Power.
Production capacity at Main Power is estimated to be 50,000 units
per month for
each set of tools.
AeroGrow
produces and assembles its bio-grow seed pods in its laboratory facilities
in
Longmont, Colorado. The seed pods and kitchen garden systems are
shipped to a
fulfillment center in Reno, Nevada. A third party service provider
provides
warehousing, order fulfillment, and shipping for AeroGrow’s products. See also
“Distribution” above.
Product
Returns and Warranties
AeroGrow
has had limited sales to date and thus has limited experience dealing
with
returns. AeroGrow currently processes returns at a third party distribution
center, but intends to allow products to be returned to its facilities
in
Longmont, Colorado in the near future. AeroGrow anticipates that
it will send
unopened returned products to back into inventory and repair defective
products
to sell as refurbished products. Mingkeda will provide AeroGrow with
replacement
part assemblies for products which are deemed defective due to materials
or
manufacturing complications. 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, labor
for periods up to one year. Factors that affect the Company’s warranty liability
include the number of installed units currently under warranty, historical
and
anticipated rates of warranty claims on those units, and cost per
claim to
satisfy the Company’s warranty obligation.
Intellectual
Property
AeroGrow
has filed 19 patent applications in the United States to protect
its
technologies and products. These applications are for:
· seed
germination pods that transport, support and germinate seedlings
in aeroponic or
hydroponic devices and support the growth of the plant to maturity,
filed in
November 2003, application serial number 10/714,786, and responded
to examiner’s
second action,
· use
of
infrared beams to measure plant roots which creates a basis for the
regulation
of nutrients, oxygen and plant growth, filed in December 2003, application
serial number 10/748,321, and responding to examiner’s second
action,
· PONDS
(passive, osmotic nutrient delivery system) technology, which is
a nutrient
delivery system using no moving parts, filed in March 2005, application
serial
number 11/079,054,
· RAIN
(rain-aerated ionized nutrient) system technology, which hyper-oxygenates
and
ionizes plant roots in AeroGrow’s kitchen garden systems, filed in March 2005,
application serial number 10/528,110,
· rainforest
growing dome for maximizing germination, filed in April 2005, application
serial
number 11/098,176, and responded to examiner’s second action,
· growing
basket for optimizing liquid and nutrient delivery, filed in April
2005,
application serial number 11/111,553, and responding to examiner’s second
action,
· methods
for growing plants using seed germination pods, filed in April 2005,
application
serial number 11/112,269, and responding to examiner’s second
action,
· devices
and methods for growing plants by measuring liquid or nutrient usage
rate, the
adaptive growth learning technologies, filed in December 2005, application
serial number 11/321,368,
· time-release
oxygen generating nutrient compositions and methods for growing plants,
filed in
December 2005, application serial number 11/321,910,
· pH
buffered plant nutrient compositions and methods for growing plants,
filed in
December 2005, application serial number 11/321,023,
· apparatus
and methods for delivering photoradiation to plants, filed in June
2006,
application serial number 60/814,853,
· smart
garden devices and methods for hydroponic gardens, filed in June
2006,
application serial number 11/455,364,
· indoor
gardening appliance, filed in August 2005, application serial number
29/235,880,
· master
gardener baskets and methods for growing plants, filed in August
2006,
application serial number 60,840,575,
· devices
and methods for growing plants, filed in January 2007, application
serial number
11/653,121,
· indoor
gardening appliance, filed in January 2007, application serial number
29/271,260,
· indoor
gardening appliance, filed January 2007, application serial number
29/271,259,
and
· systems
and methods for controlling liquid delivery and distribution to plants,
filed
January 2007, application serial number 11/654,164.
AeroGrow
believes that these patent applications do not infringe on issued
patents owned
by others. AeroGrow believes that if it fails to receive patents
for any one of
these patent applications, its operations will not be substantially,
adversely
affected. AeroGrow believes that failure to obtain patents, however,
will make
it easier for competitors to bring competitive products to market.
If such
competitive products performed better and/or were marketed by companies
with
greater financial and distribution resources than AeroGrow, such
competitive
products may adversely affect AeroGrow’s operations. In addition to the patents
being sought, AeroGrow maintains some crucial information about its
products as
trade secrets, which information is closely guarded. The inventions
under the
patent applications have not been granted patents, and there can
be no assurance
that patents will be granted.
AeroGrow
has filed 28 trademark applications in the United States (7 of which
have been
allowed) and three trademark applications designating 33 countries,
which it
intends to prosecute to protect its products and brand equity. The
applications
are for:
· Farmers
Market Fresh, filed in July 2005, application serial number 78671280,
and
allowed,
· Kitchen
Harvest filed in December 2005, application serial number 78781094,
· AeroGarden
filed in December 2005, application serial number 78781935, and
allowed,
· Farmer’s
Market in Your Kitchen, filed in March 2006, application serial number
78836826,
and allowed,
· Off
the
Plant and Into the Pot, filed in March 2006, application serial number
78836758,
and allowed,
· Cut
&
Cook, filed in March 2006, application serial number 78836736, and
allowed,
· Bio-Dome,
filed in March 2006, application serial number 78836718, and
allowed,
· AeroPod,
filed in March 2006, application serial number 78836577, and
allowed,
· AeroGarden,
filed in Mexico in June 2006, application serial number 790722, and
responding
to examiner’s action,
· AeroGarden,
filed in 31 countries under the Madrid Protocol in June 2006, application
serial
number A0005030,
· AeroGarden,
filed in Canada in June 2006, application serial number 1,305,822,
· International
Gourmet, filed in May 2006, application serial number 78874379, and
about to
publish,
· Farmer’s
Market Fresh, filed in May 2006, application serial number 78882877,
and
responding to examiner’s action,
· AeroGrow,
filed in April 2005, application serial number 78614573, responded
to examiners
first action and suspended,
· MiniGarden,
filed in August 2006, application serial number 78955672,
· GrowNow,
filed in August 2006, application serial number 78955692, and responding
to
examiner’s action,
· Green
Thumb Guarantee, filed in September 2006, application serial number
77007729,
· BioTransport,
filed in September 2006, application serial number 77009465,
· Herb
Appeal, filed November 2006, application serial number 77045636,
· Strawberry
Patch, filed November 2006, application serial number 77045993
· Sweet
Rubies, filed December 2006, application serial number 77058522,
· Plug
& Grow, filed December 2006, application serial number
77058534,
· Even
Better Than Organic, filed December 2006, application serial number
77070519,
and responding to examiner’s action,
· AeroGarden,
filed December 2006, application serial number 77073259, and responding
to
examiner’s first action,
· AeroGarden,
filed December 2006, application serial number 77073339, and responding
to
examiner’s first action,
· AeroGarden,
filed December 2006, application serial number 77073345, and responding
to
examiner’s first action,
· AeroGarden,
filed December 2006, application serial number 77073362,
· AeroGarden,
filed December 2006, application serial number 77073424,
· AeroGarden,
filed December 2006, application serial number 77073448, and
· Herb
`n
Serve, filed January 2007, application serial number 77095536.
Each
of
AeroGrow’s employees, independent contractors and consultants has executed
assignment of application agreements and nondisclosure agreements.
The
assignment of application agreements grant to AeroGrow the right
to own
inventions and related patents which may be granted in the United
States. The
nondisclosure agreements generally provide that these people will
not disclose
AeroGrow’s confidential information to any other person without its prior
written consent. AeroGrow has also obtained the domain names for
AeroGrow.com,
AeroGarden.com, AeroGarden.net, AeroGarden.tv, AeroGarden.biz, and
Getthegarden.com, among others.
Governmental
Regulation and Certification
To
the
best of its knowledge, AeroGrow believes that it is complying with
United States
regulations concerning the shipping and labeling of seeds and nutrients.
Currently, the components for the kitchen garden system are UL certified.
AeroGrow has filed initial applications for UL certification and
ETL
certification for the kitchen garden system as a whole. 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.
AeroGrow
believes that its costs and effects of compliance with environmental
laws will
not be material.
Personnel
As
of
January 31, 2007, AeroGrow employed approximately 68 persons - 56
full-time and
12 part-time. In addition, AeroGrow contracts for the services of
part-time and
project consultants on an “as needed” basis. AeroGrow believes that its employee
relations are good. AeroGrow believes that it will hire additional
employees
and/or consultants in the future as its operations grow. AeroGrow
is planning to
outsource some activities, in whole or part, such as manufacturing,
telemarketing, public relations, infomercial production, fulfillment,
and
shipping.
Facilities
On
July
27, 2006 the Company entered into a lease with Pawnee Properties,
LLC to
consolidate its operations, other than its seed kit manufacturing
operations,
into a 21,012 square foot office space at 6075 Longbow Drive, Boulder,
Colorado
80301. Pawnee Properties, LLC, and its controlling persons, are not
affiliates
of the Company. The initial rent is $15,759 per month, plus the Company’s
proportionate share of building taxes, insurance and operating expenses.
The
initial term continues until January 31, 2012, unless modified under
specified
circumstances. The agreement contains other standard office lease
provisions
AeroGrow
also rents 1,800 square feet of laboratory, prototyping and manufacturing
space
in Longmont, Colorado, pursuant to a month-to-month rental agreement.
The rental
agreement requires AeroGrow to pay monthly rent in the amount of
$1,200.
AeroGrow use this space to manufacture its seed pods.
While
its
facilities appear adequate for the foreseeable future, AeroGrow may
add space to
meet future growth as needed. Upon expiration of its current leases,
AeroGrow
believes that it will be able to either renew its existing leases
or arrange new
leases in nearby locations on acceptable terms. AeroGrow believes
that these
properties are adequately covered by insurance.
Legal
Proceedings
AeroGrow
is not a party in any bankruptcy, receivership or other legal proceeding,
and to
the best of AeroGrow’s knowledge, no such proceedings by or against AeroGrow
have been threatened.
MERGER
WITH WENTWORTH
History
of Wentworth
Wentworth
I, Inc., a Delaware corporation (“Wentworth”), and AeroGrow entered into an
Agreement and Plan of Merger (the “Merger Agreement”) on January 12, 2006,
which was consummated on February 24, 2006. Under the Merger Agreement,
Wentworth merged with and into AeroGrow, and AeroGrow was the surviving
corporation (“Merger”). The certificate of incorporation and by-laws of AeroGrow
prior to the Merger are now those of the surviving company, and the
surviving
company is governed by the corporate law of the State of Nevada.
Wentworth
was organized under the laws of the State of Delaware on March 6, 2001. Its
business plan was to seek, investigate and, if such investigation
warranted,
enter into a business combination with a target operating company
that primarily
desired to seek the perceived advantages of a U.S. reporting company
under the
Securities Exchange Act of 1934, as amended (“Exchange Act”). Wentworth’s
principal business objective was to seek long-term growth potential
through the
acquisition of a business rather than immediate, short-term earnings.
Its search
was not restricted to any specific business, industry, or geographical
location.
Wentworth was one of a number of shell companies with nominal assets
and
operations owned, in part, by Keating Securities and its
affiliates.
Wentworth
filed a registration statement on Form SB-2 with the SEC in order
to undertake a
public offering of 50,000 shares of its common stock at a purchase
price of
$1.00 per share, which registration statement was declared effective
on
August 12, 2001. Wentworth successfully completed the offering and,
pursuant to Rule 419 of the Securities Act, the offering proceeds, less
10%, (which was retained by Wentworth to cover its expenses), were
placed in an
escrow account together with the shares of common stock issued in
the public
offering.
In
February 2003, when Wentworth determined that it was unable to consummate
a
business combination within the 18 month time period from the date
of the
effectiveness of its registration statement as required by
Rule 419(e)(2)(iv), all funds held in escrow were returned to the investors
who had purchased common stock in the offering and the 50,000 shares
of common
stock held in the escrow account were returned as treasury stock.
A
post-effective amendment to the registration statement was filed
on
March 25, 2003, to remove from registration all shares of common stock
that
were sold in the offering and to confirm the withdrawal of the registration
statement.
Wentworth
was dormant after March 2003, but management elected to continue
the
implementation of its original business plan and sought a business
combination
with an operating company. On August 4, 2004, Wentworth filed Form 10-SB to
register its shares of common stock under Section 12(g) of the Exchange
Act. At the time of the Merger, Wentworth was a reporting company
under
Section 12(g) of the Exchange Act and was current in its reporting under
the Exchange Act.
Wentworth
and ENECO, Inc., a Utah corporation (“Eneco”), entered into an Agreement and
Plan of Merger (the “Eneco Merger Agreement”) on October 28, 2005, by which
Wentworth agreed to merge with and into Eneco, with Eneco being the
surviving
corporation. Effective January 3, 2006, Wentworth terminated the Eneco
Merger Agreement due to the failure of the transactions contemplated
thereunder
to have been consummated by January 1, 2006. It was only after termination
of the Eneco Merger Agreement that Wentworth was available as a vehicle
for
AeroGrow. The decision to negotiate a merger between Wentworth and
AeroGrow was
made after the termination of the Eneco Merger Agreement.
Certain
Transactions by Wentworth
During
2002, Wentworth borrowed a total of $8,500 from Kevin R. Keating, its then
president. The amount loaned plus interest at 6% was due and payable
upon the
completion of a business combination. For the years ended December 31, 2005
and 2004, interest on this loan of $510 each year is included in
operations. At
December 31, 2005, the principal balance of this loan together with accrued
interest totaled $10,290.
Wentworth’s
president, with two other shareholders, granted Keating Reverse Merger
Fund, LLC
(“KRM Fund”) an option to acquire an aggregate of 1,000,000 shares of Wentworth,
owned by them, until January 30, 2005, at a total purchase price of
$125,000. This option expired unexercised.
On
April 9, 2003 and August 7, 2003 Timothy Keating paid invoices on
behalf of Wentworth in an aggregate of $1,861. Timothy Keating is
the managing
member of Keating Investments, LLC (“Keating Investments”).
On
June 10, 2004, Wentworth entered into a contract with Vero Management,
L.L.C. (“Vero Management”) for managerial and administrative services. Vero
Management was not engaged to provide, and did not render, legal,
accounting,
auditing, investment banking, or capital formation services. Kevin R.
Keating is the manager of Vero Management. The term of the contract
was for one
year. In consideration of the services provided, Vero Management
was paid $1,000
for each month in which services were rendered. For the years ended
December 31, 2005 and 2004, a total of $12,000 and $7,000, respectively,
was included in results of operations as a result of the agreement.
Wentworth
entered into a financial advisory services agreement with Keating
Securities, an
affiliate of Keating Investments, the managing member of Wentworth’s controlling
stockholder, and engaged Keating Investments to act as a financial
advisor in
connection with the business combination between Wentworth and AeroGrow
for
which it earned an advisory fee of $350,000 upon completion of the
Merger. The
$350,000 was in addition to the sale price of Wentworth. The services
included
introduction of Wentworth to AeroGrow and advising Wentworth on the
Merger. The
advisory fee was paid at the closing of the Merger. Keating Securities
made no
assurances regarding completion of the private placement or the
merger.
Keating
Securities filed a Form 211 with the NASD to cause the common stock
to be traded
on the OTC BB. We have received confirmation that our stock has been
cleared for
trading on the OTC BB. As part of that filing, Keating Securities
has indicated
that it will act as a market maker in the common stock at the time
of its
initial trading. There can be no assurance that Keating Securities
will continue
to act as a market maker for the common stock of the Company. To
the knowledge
of the Company, Keating Securities does not intend to provide any
other after
market support to the common stock of the Company.
Ownership
of Wentworth prior to Merger
Immediately
prior to the Merger, the stock ownership of Wentworth was as set
forth below in
the table of ownership. The number of shares includes those that
were issued and
outstanding and not adjusted for the conversion formula to be applied
at the
consummation of the Merger.
Name
|
Number
of Shares of Wentworth Common Stock Beneficially
Owned
|
Percent
of Shares
|
Kevin
R. Keating
936A
Beachland Blvd., Suite 13
Vero
Beach, Florida 32963 (1), (2)
|
743,000
|
19.8%
|
Keating
Investments, LLC
c/o
Timothy J. Keating, Manager
5251
DTC Parkway, Suite 1090
Greenwood
Village, Colorado 80111
|
565,000
|
15.1%
|
Bertrand
T. Ungar
1362
South Elizabeth
Denver,
Colorado 8023 (4)
|
192,000
|
5.1%
|
Garisch
Financial, Inc.
c/o
Frederic M. Schweiger, President
1753
Park Ridge Pointe
Park
Ridge, Illinois 60068 (5)
|
250,000
|
6.7%
|
Keating
Reverse Merger Fund, LLC
c/o
Timothy J. Keating, Manager
5251
DTC Parkway, Suite 1090
Greenwood
Village, Colorado 80111 (6)
|
2,000,000
|
53.3%
|
_____________________________
(1)
|
Kevin R.
Keating was the President, Secretary, Treasurer and sole
director of
Wentworth.
|
(2)
|
Kevin R.
Keating is not affiliated with and has no equity interest
in Keating
Reverse Merger Fund, LLC or Keating Investments, LLC and
disclaims any
beneficial interest in the shares of Wentworth’s common stock owned by
Keating Reverse Merger Fund, LLC or Keating Investments,
LLC.
|
(3)
|
Timothy J.
Keating exercises voting and dispositive power of the shares
held by
Keating Investments, LLC. Keating Investments, LLC is not
owned by or
affiliated with Kevin R. Keating and disclaims any beneficial
interest in the shares of Wentworth’s common stock owned by Kevin R.
Keating.
|
(4)
|
Held
in the name of PG Ventures, LLC (153,600 shares) and Carmel
Capital, LLC
(38,400 shares), both of which are owned and controlled
by
Mr. Ungar.
|
(5)
|
Frederic M.
Schweiger is the sole officer, director and stockholder
of Garisch
Financial, Inc. and exercises voting and dispositive power
of such shares
held by Garisch Financial, Inc.
|
(6)
|
Timothy J.
Keating exercises voting and dispositive power of the shares
held by
Keating Reverse Merger Fund, LLC. Keating Reverse Merger
Fund, LLC is not
owned by or affiliated with Kevin R. Keating and disclaims any
beneficial interest in the shares of Wentworth’s common stock owned by
Kevin R. Keating.
|
Effect
of Merger
As
a
result of the Merger, AeroGrow became a “successor issuer” to Wentworth within
the meaning of Rule 12(g)-3 under the Exchange Act. As a “successor
issuer,” AeroGrow is a Section 12(g) reporting company under the Exchange
Act. As a result, the shares of common stock of AeroGrow are now
registered
securities under Section 12(g) of the Exchange Act.
In
the
Merger, each of the Wentworth’s 3,750,000 shares of outstanding common stock
(“Wentworth common stock”) was converted into the right to receive 0.154703
shares of AeroGrow common stock resulting in the issuance of 580,136
shares of
AeroGrow’s common stock to the Wentworth stockholders representing 6.5% of
the
issued and outstanding common stock of AeroGrow immediately after
the Merger,
the 2006 Offering, and the Note Conversion (as defined below).
Each
share of AeroGrow common stock issued to the Wentworth’s stockholders in the
Merger is restricted stock, and the holder may not sell, transfer,
or otherwise
dispose of such shares without registration under the Securities
Act or an
available exemption therefrom. The Merger Agreement contains piggy-back
registration rights that allow each Wentworth stockholder to include
his, her,
or its shares in any registration statement filed for the public
offering or
resale of its securities in the future. This registration right is
required to
satisfy certain positions taken by the SEC in connection with shares
issued to
persons that may be considered promoters. The SEC’s position is that the shares
held by promoters may not be publicly sold pursuant to Rule 144, but may
only be publicly sold by the promoter pursuant to an effective resale
registration statement. It has been determined by the Company that
KRM Fund,
Kevin R. Keating, and Keating Investments are promoters under this
definition. The other shareholders of Wentworth, Garisch Financial,
Inc., and
Bertrand T. Unger are not promoters. As part of the 2006 Offering, AeroGrow
agreed to register for resale the shares of AeroGrow’s common stock issued to
the investors in the 2006 Offering (together with the shares of AeroGrow’s
common stock underlying the warrants issued in the 2006 Offering)
on a
registration statement to be filed with and declared effective by
the SEC. The
holders of 396,813 of such shares have waived their right to be included
in this
registration statement in exchange for the obligation of the company
to register
all such shares as soon as commercially reasonable after the filing
of the next
quarterly or annual report after the declaration of effectiveness
of the this
registration statement, and the Company has agreed to use its commercially
reasonable efforts to have such replacement registration statement
declared
effective as soon as practicable.
Pursuant
to the Merger Agreement, KRM Fund entered into a lockup agreement
respecting
309,406 shares of common stock under which it will be prohibited
from selling or
otherwise transferring: (i) any of its shares of AeroGrow’s common stock
for a period of 12 months following the effective date of the resale
registration statement that includes the common stock issued in 2006,
and
(ii) 50% of its shares of AeroGrow’s common stock for a period of 18 months
following the effective date of such registration statement. Approximately
87,407 shares of AeroGrow’s common stock held by Keating Investments, the
managing member of KRM Fund and the 90% owner of Keating Securities,
are also
subject to lockup restrictions similar to those that apply to the
KRM Fund
shares. The foregoing lockup restrictions may be released by the
mutual
agreement of AeroGrow and Keating Securities, the exclusive placement
agent for
the 2006 Offering.
As
post-closing covenants to the Merger Agreement, AeroGrow agreed that,
unless it
has the consent of KRM Fund, it will not issue any securities until
February 28,
2007 to its officers and directors or 10% or greater stockholders,
consultants,
service providers, or other parties, except for issuances with respect
to
outstanding options, warrants, and convertible securities and pursuant
to
existing obligations, grants pursuant to stock option and similar
plans approved
by the board and stockholders, capital raising requirements approved
by the
board, or third party, arms-length transactions. AeroGrow is also
obligated to:
(i) remain a 12(g) reporting company and comply with the reporting
requirements under the Exchange Act, (ii) use its commercially reasonable
efforts to obtain and maintain a quotation of its shares of AeroGrow
common
stock on the OTC
BB
or
Nasdaq, and (iii) within 30 days following the Closing, procure key man
life insurance policies on certain officers of AeroGrow. AeroGrow
also was
obliged to satisfy the independence, audit, and compensation committee
and other
corporate governance requirements under the Sarbanes-Oxley Act of
2002, the
rules and regulations promulgated by the SEC, and the requirements
of either
Nasdaq or American Stock Exchange (“AMEX”) (as selected by AeroGrow), whether or
not AeroGrow’s common stock is listed or quoted, or qualifies for listing or
quotation, on Nasdaq or AMEX. On March 28, 2006, AeroGrow elected to use
the requirements of Nasdaq for its corporate governance standards.
Accounting
Treatment for Merger
The
Merger, for accounting and financial reporting purposes, was accounted
as an
acquisition of Wentworth by AeroGrow. As such, AeroGrow was the accounting
acquirer in the Merger, and the historical financial statements of
AeroGrow
before the merger will continue to be the financial statements for
AeroGrow
following the Merger.
Private
Placement in Connection with Merger
In
its
2006 Offering, AeroGrow conducted a private placement offering of
its common
stock and common stock purchase warrants (the “2006 Warrants”) to institutional
investors and other high net worth individuals on a best efforts
$5,000,000
minimum, $12,000,000 maximum basis as a condition to consummation
of the
Merger.
The
2006
Offering was commenced February 6, 2006, and there were closings on
February 24, 2006, and March 1, 2006. AeroGrow received gross proceeds
of $10,740,000. Pursuant to investor subscription agreements, AeroGrow
sold
2,148,000 shares of its common stock and warrants to purchase 2,148,000
shares
of its common stock. Each unit in the offering consisted of 1 share
of common
stock and a warrant to purchase 1 share of common stock expiring
February 2011, at an exercise price of $6.25 per share. The price per unit
was $5.00. AeroGrow received net proceeds of $8,964,952 after commissions
and
offering expenses.
Keating
Securities was the exclusive placement agent for the 2006 Offering.
For their
services, they were paid a fee of 10% of the gross proceeds, or $1,074,000.
AeroGrow also paid Keating Securities a non-accountable expense allowance
of 3%
of the gross proceeds, or $322,200. In addition, AeroGrow issued
to Keating
Securities and its designees warrants to purchase an aggregate of
214,800 shares
of common stock expiring February 2011, at an exercise price of $6.25 per
share (“Agent Warrants”). The Agent Warrants are fully vested and may be
exercised on a cashless or net issuance basis. The holders of the
Agent Warrants
were granted the same registration rights as the investors in the
2006 Offering
(see below).
AeroGrow
is required to register its shares of common stock issued to the
investors in
the 2006 Offering and the shares of common stock underlying the Warrants
and
Agent Warrants for resale by the investors pursuant to a registration
statement
declared effective by the SEC under the Securities Act. If AeroGrow
does not
have an effective registration statement under the Securities Act
that registers
for resale the above listed common shares within 150 days of the
closing date,
then AeroGrow must pay each of the investors (but not the holders
of 2006
Warrants or Agent Warrants) 1% of the purchase price paid by such
investor for
the common stock for each month thereafter that the investor cannot
publicly
sell the shares of common stock pursuant to an effective registration
statement
or other exemptions from the federal securities laws. This penalty
is payable in
shares of common stock at a deemed price of $2.00 per share. The
Company filed
the required registration statement within the 45 days. Through September
30,
2006, the Company has recorded penalties for untimely registration
of 161,100
shares of common stock issued in the 2006 Offering and booked a corresponding
expense of $805,500. The holders of 85,000 shares of our common stock
issued in
the 2006 Offering have waived their right to be included in this
registration
statement in exchange for the obligation of the company to register
all such
shares as soon as commercially reasonable after the filing of the
next quarterly
or annual report after the declaration of effectiveness of the this
registration
statement, and the Company has agreed to use its commercially reasonable
efforts
to have such replacement registration statement declared effective
as soon as
practicable.
Copies
of
the form of Subscription Agreement, Placement Agreement, Form of
Common Stock
Purchase Warrant, and Form of Agent Warrant are filed as exhibits
to this
registration statement.
The
issuance of shares of AeroGrow’s common stock and the 2006 Warrants to the
investors in the 2006 Offering was completed pursuant to an exemption
from
registration contained in Regulations D and S, only to accredited
investors. The shares of AeroGrow’s common stock, the 2006 Warrants, and the
shares of common stock underlying the 2006 Warrants may not be offered
or sold
in the United States unless they are registered under the Securities
Act, or an
exemption from the registration requirements of the Securities Act
is
available.
Modification
of Convertible Notes
In
connection with the Merger, AeroGrow sought to modify the terms of
the
outstanding convertible notes issued in the private placement conducted
from
July to September 2005. The convertible notes were sold as part of
300 units
offered at a price of $10,000 per unit, consisting of a 10% unsecured
convertible note (“Convertible Note”) and 2,000 warrants with an exercise price
of $5.01 per share and an expiration date of September 13, 2010 (“Debt
Warrant”). The notes were originally due and payable on June 30, 2006. The
outstanding principal amount of notes originally issued was $3,000,000.
The note
holders of this debt were offered the opportunity to convert the
principal and
interest at a reduced conversion rate, extend the maturity for a
lesser reduced
conversion rate than immediate conversion, or maintain the current
terms
unchanged.
Holders
of convertible notes representing $2,130,000 in principal amount
converted their
notes into AeroGrow common stock at a conversion price of $3.00 per
share, a
reduction from the original conversion price of $4.00 per share.
Accordingly, at
the closing of the Merger and 2006 Offering, AeroGrow issued 710,009
shares of
its common stock (rounded up for fractional shares) to converting
note holders
(“Note Conversion”). The converting note holders also were issued, pursuant to
the terms of the note offering, additional warrants to purchase 426,000
shares
of AeroGrow’s common stock expiring February 2011, at an exercise price of
$6.00 per share (“Conversion Warrants”). Each share of AeroGrow’s common stock
and each Debt Warrant and Conversion Warrant is a restricted security
and the
holder thereof may not sell, transfer or otherwise dispose of such
securities
without registration under the Securities Act or an available exemption
therefrom. AeroGrow agreed to file a registration statement with
the SEC under
the Securities Act to register for resale the shares of AeroGrow’s common stock
issued to converting note holders (together with the shares of common
stock
underlying the Debt Warrants and Conversion Warrants).
Holders
of convertible notes representing $840,000 in principal amount agreed
to extend
the maturity under their notes from June 30, 2006 to December 31,
2006 in
exchange for a reduction in their conversion price from $4.00 per
share to $3.50
per share. The Company’s note holders further agreed to extend the maturity of
these notes until March 31, 2007. The remaining holders of convertible
notes,
representing $30,000 in principal amount, did not elect to convert
or extend the
maturity of their notes and were paid in cash on June 30, 2006. Since
December 31, 2006 and as of March 16, $580,000 in principal amount
of the
$840,000 principal amount of convertible notes has elected to convert,
or has
instructed us to convert on March 31, 2007, such principal amount
of convertible
notes to 165,714 shares of common stock. We do not know at this time
whether the
holders of the remaining $260,000 of convertible notes intend to
convert to
common stock at a price of $3.50 per share or seek repayment of their
convertible notes.
For
those
holders of convertible notes who elected to convert or extend the
maturity of
their notes as described above, (i) AeroGrow eliminated the 180 day lockup
provisions on the shares of common stock underlying the convertible
notes, Debt
Warrants, and Conversion Warrants; (ii) AeroGrow eliminated the redemption
provisions of the Debt Warrants; and (iii) the holders of the Convertible
Note waived any registration penalties that they had in connection
with any late
filing or absence of effectiveness under the registration rights
provisions of
their original subscription for the notes.
Liquidated
damages resulting from AeroGrow’s failure to file and have declared effective a
registration statement that would include the common stock issued
as a result of
the convertible notes and the shares of common stock underlying the
Debt
Warrants and Conversion Warrants must be settled through the issuance
of
additional common stock valued at a price of $2.00 per share. AeroGrow
has
recorded penalties for an Effectiveness Default with regard to the
convertible
notes through December 31, 2006, of 332,876 shares of common stock
and booked a
corresponding expense of $1,664,048.
Keating
Securities acted as the placement agent for the offering of the convertible
notes and related warrants. Keating Securities did not provide any
services and
did not receive any fees in connection with the modification of the
convertible
notes.
MANAGEMENT
Directors
and Officers
The
following table shows the names and ages of our directors and executive
officers
and the positions they hold with AeroGrow. Our bylaws provide that
directors are
generally elected at our annual shareholders meeting and hold office
until the
next annual shareholders meeting and until their successors are elected
and
qualified. Our bylaws provide that the board of directors shall consist
of such
number of members as the board may determine from time to time, but
not less
than one and not more than fifteen. Our board of directors currently
consists of
five individuals. Executive officers are selected by the board of
directors and
serve at its discretion.
Name
|
Age
|
Position
with AeroGrow
|
Serving
as a Director
Since
|
W.
Michael Bissonnette
|
58
|
Chief
Executive Officer, President and Director
|
2002
|
Richard
A. Kranitz
|
62
|
Director
|
2002
|
Wayne
Harding
|
52
|
Director
|
2005
|
Jack
J. Walker
|
72
|
Director
|
2006
|
Kenneth
Leung
|
62
|
Director
|
2006
|
Mitchell
B. Rubin
|
52
|
Chief
Financial Officer
|
n/a
|
Randall
Lee Seffren
|
49
|
Chief
Marketing Officer
|
n/a
|
W. Michael
Bissonnette
is our
founding shareholder and has served as chief executive officer, president
and a
director of AeroGrow since July 2002. Concurrently, he has served
as chief
executive officer, president, and a director of our former parent
company,
Mentor Capital Consultants, Inc. since March 2000. Mentor Capital
currently has
no active operating business. From 1994 through 2000, Mr. Bissonnette was a
private investor. From 1989 to 1994, he was the founder, chief executive
officer, president, and a director of Voice Powered Technology International,
Inc., an international consumer electronics company. From 1977 to
1989,
Mr. Bissonnette was the founder, chief executive officer and president
of
Knight Protective Industries, Inc., an international consumer security
products
company. Prior to 1977, he was founder, chief executive officer and
president of
Shagrila Carpets, Inc., a multi-store retailer of commercial and
home carpeting.
Both Voice Powered Technology International, Inc. and Knight Protective
Industries, Inc. specialized in the funding, development, and marketing
of
technology-based consumer products.
Richard A.
Kranitz
has been
a director of AeroGrow since July 2002. He has also served as a director
of
Mentor Capital since March 2000. Mr. Kranitz has been an attorney in
private practice since 1970, emphasizing securities, banking and
business law.
From 1990 to the present he has been an attorney in Kranitz & Philipp
in Grafton, Wisconsin. Previously, following the death of a partner
in 1976, he
formed the Law Offices of Richard A. Kranitz. From 1982 to 1983 he also was
a member of Fretty & Kranitz and from 1977 to 1978 he was also a member
of Habush, Gillick, Habush, Davis, Murphy, Kraemer & Kranitz. He was a
member of McKay, Martin & Kranitz from 1973 to 1976, and was employed
by Reinhart, Boerner, Van Deuren, Norris & Reiselbach, s.c. from 1970
to 1973. Mr. Kranitz served as Law Clerk to the Honorable Myron L.
Gordon in the U.S. District Court (E.D. Wisconsin) from 1969 to 1970.
Mr. Kranitz has served as a director of the Grafton State Bank from 1990
to
present. He served as a venture capital consultant to, and director
of, various
companies, and he has served at various times as a director of various
professional, civic, or charitable organizations.
Wayne
Harding
has been
a director since October 2005. He has served as vice president business
development of Rivet Software since December 2004. From August 2002
to December
2004 Mr. Harding was owner and President of Wayne Harding &
Company CPAs and from 2000 until August 2002 he was director-business
development of CPA2Biz. He provided consulting services for AeroGrow
from
December 2003 through March 2004. Mr. Harding is a certified public
accountant licensed in Colorado. He is past president of the Colorado
Society of
CPAs and past member of the Governing Council for the American Institute
of
CPAs.
Jack J.
Walker has
been
a director since the February 23, 2006, annual meeting of shareholders. He
has served as president of English & Continental Properties, Inc., a
real estate investment and development company, since 1980 to present.
From 1976
to 1985, Mr. Walker was president of March Trade & Finance, Inc.,
a private investment company. From 1974 to 1976, Mr. Walker acquired
control of Charles Spreckly Industries, Town & Commercial Properties
and Associated Development Holdings. In 1961 he started English &
Continental Property Company, and became joint Managing Director
of this
commercial development company until 1976. Mr. Walker began his career in
1957 as a lawyer in London, England specializing in real estate,
financing,
international tax, and corporate affairs. Mr. Walker has served as a
director of Megafoods Stores Inc. from 1984 to 1993. In addition,
since 1975
through the present, he has served as a venture capital consultant
to companies
on financial and pre-IPO strategies. In addition, he created the
Walker
Foundation for Charitable Activities and he has served at various
times as a
director of various professional, civic, and charitable
organizations.
Kenneth
Leung
has been
a director since the February 23, 2006, annual meeting of shareholders.
From 1995 to the present he has been Managing Director of Investment
Banking-Environmental and the Chief Investment Officer of the Environmental
Opportunities Fund at Sanders Morris Harris. Previously Mr. Leung served as
Managing Director Research-Environmental at Smith Barney from 1978
to 1994. He
was Vice President Research-Environmental with F. Eberstadt & Co. from
1974 to 1978. From 1968-1974 he was an Assistant Treasurer with Chemical
Bank.
Mr. Leung served on the boards of American Ecology since February 2005,
Caprius, Inc. since December, 2006, and SystemOne Technologies since
June 2000,
all of which are public companies. He has served at various times
as a director
of various civic and charitable organizations.
Description
of Other Executive Officers of the Corporation
All
of
the officers of the corporation are appointed by the board of directors
to serve
until
their
termination or resignation or appointment of a successor. The current
officers,
in addition to Mr. Bissonette, are:
Mitchell
Rubin was
elected chief financial officer and treasurer of AeroGrow on February
23, 2006.
Prior to joining AeroGrow, from January 2003 through February 2006,
Mr. Rubin
was an independent financial consultant. From July 1999 to December
2002, Mr.
Rubin was the Chief Financial Officer of Web-Ideals LLC, a privately
owned
application service provider that offered a web-based application
for managing
direct to consumer commerce. From January 1994 to June 1999, Mr.
Rubin held
various positions including Chief Financial Officer, Chief Executive
Officer,
and
director with Voice Powered Technology International Inc., a publicly
held
developer and manufacturer of consumer electronic products. From
July 1991 to
December 1993, Mr. Rubin served as Executive Vice President and Chief
Operating
Officer of Regal Group, Inc., a television direct-response company.
Mr. Rubin
began his career as a certified public accountant.
Randy
Seffren
has been
chief marketing officer of AeroGrow since April 2004 on a consulting
basis
through Prometheus Communications Group, a company of which he is
the principal
owner, and through which he has billed AeroGrow and as an employee
since July
2006. From 1999 to 2004, Mr. Seffren headed the marketing efforts
for healthcare
communications companies, including Orbis Broadcast Group and MedEd
Architects.
From 1993 to 1999, he was executive vice president with Reebok Home
Fitness/DP
Fitness/Body By Jake Fitness/Kent & Spiegel Direct. From 1989 to 1993, Mr.
Seffren led the marketing, communications and product development
efforts as
director of marketing communications with Life Fitness, a fitness
equipment
company.
Board
Committees and Meetings
AeroGrow
has established two standing committees so that some 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. These two committees
each
operate under a written charter. The board has affirmatively determined
that
Mr. Channer, who was elected by the board and appointed Chairman of these
two committees on April 16, 2007, is independent as defined by applicable
securities law and NASDAQ corporate governance guidelines. As of
March 28, 2006,
AeroGrow elected to comply with the corporate governance requirements
of NASDQ
which satisfied its obligation pursuant to the Merger Agreement.
Following is a
description of both of these committees.
Audit
Committee.
The
current members of our audit committee are Mr. Channer (chairman),
Mr. Jack
Walker and Mr. Kenneth Leung. Mr. Channer is considered a financial
expert and
Messrs Walker and Leung are considered financially literate under
the rules of
the SEC for audit committee members. Each of these persons is an
independent
director. As AeroGrow adds additional independent members to our
board of
directors as required by applicable securities law or exchange listing
guidelines, such independent directors may be appointed to our audit
committee
or the membership of the committee may be changed. This 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, the
company compliance with legal and regulatory requirements,
its 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
Mr. Channer (chairman) and Mr. Jack Walker and Mr. Kenneth Leung. Each of
these persons is an independent director. This 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
officer,
and
|
|
·
|
administer
the equity performance plans of
AeroGrow.
|
Meetings.
During
fiscal year ended March 31, 2007 the board of directors met 8 times.
Each
director attended all of the meetings held by the board during the
period that
he served as a director of AeroGrow
Code
of Ethics. We
have
adopted a Code of Ethics that applies to each of our employees, executive
officers and directors. A copy is available free of charge in the “Investor”
section at www.aerogrow.com. Any amendment to or waiver of the Code of
Ethics
will be disclosed promptly following the date of such amendment or waiver
in a
Current Report on Form 8-K filing with the SEC.
Director
Compensation
Current
and Historical Compensation Program
In
2004
and 2005 each director received 2,000 shares of common stock for his
service as
director. Mr. Bissonnette has agreed to forgo any future stock-based
compensation for serving as a director of AeroGrow. AeroGrow compensates
directors $500 for attending meetings and reimburses them for their
out-of-pocket expenses for attending meetings. On March 28, 2006, AeroGrow
granted to each of its four outside directors 2,500 shares of the Company’s
common stock at a value of $5.00 per share for a total of $12,500 for
each
director, or an aggregate total of $50,000, and 10,000 fully vested
five-year
options to purchase AeroGrow common stock at an exercise price of $5.00
per
share for services for the fiscal year ending March 31, 2007. In addition,
Messrs. Walker, Harding and Leung received grants of 1,250 shares for
service on
the Audit Committee and 750 shares for service on the Governance Committee.
On
March 22, 2007, AeroGrow granted to three of its four outside directors,
Messrs. Leung, Walker and Kranitz, 2,500 shares of the Company’s common stock at
a market value of $5.90 per share for a total of $14,750 for each director,
or
an aggregate total of $59,000, and 10,000 fully vested five-year options
to
purchase AeroGrow common stock at an exercise price of $5.90 per share,
the
price per share equal to the fair market value of the Common Stock
on the date
of the option grant, for services on the board for the calendar year
ending
December 31, 2007. In addition, on March 22, 2007, Messrs. Walker and
Leung
received grants of 1,250 shares for service on the Audit Committee
and 750
shares for service on the Governance Committee. Also, Mr. Harding,
the previous
Chairman of the audit and governance committees, received a grant on
March 22,
2007 for services rendered of 3,500 shares of the Company’s common stock at a
market value of $5.90 per share for a total of $20,650 and 5,000 fully
vested
five-year options to purchase AeroGrow common stock at an exercise
price of
$5.90 per share, the price per share equal to the fair market value
of the
Common Stock on the date of the option grant. Mr. Harding resigned
from the
board effective April 16, 2007.
Director
Compensation Table
The
following table sets forth information regarding all forms of compensation
received by directors of the Company during the fiscal year ended March
31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Directors
Fees Earned or
Paid
in Cash
|
|
Stock
Awards
|
|
Option
Awards
|
|
All
Other Compensation
|
|
Total
|
|
Michael
Bissonnette (Chairman)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
Wayne
E. Harding, III, Director
|
|
$
|
2,000
|
|
$
|
30,650
|
|
$
|
25,850
(1
|
)
|
$
|
69,650
(2
|
)
|
$
|
128,150
|
|
Richard
A. Kranitz, Director
|
|
$
|
2,000
|
|
$
|
14,750
|
|
$
|
51,700
(1
|
)
|
$
|
24,000
(3
|
)
|
$
|
92,450
|
|
Kenneth
Leung, Director
|
|
$
|
2,000
|
|
$
|
36,550
|
|
$
|
51,700
(1
|
)
|
$
|
-
|
|
$
|
90,250
|
|
Jack
J. Walker, Director
|
|
$
|
2,000
|
|
$
|
36,550
|
|
$
|
51,700
(1
|
)
|
$
|
-
|
|
$
|
90,250
|
|
(1) |
Valued
using the Black Scholes option pricing model using the following
assumptions: no dividend yield; expected volatility rate of
132%; risk
free interest rate of 5% and an average life of 5 years resulting
in a
value of $5.17 per option granted.
|
(2) |
Represents
consulting fees paid to Wayne Harding & Co. for various projects
including oversight of a pilot kiosk sales program, investigation
of
international sales prospects and other new business opportunities.
|
(3) |
Represents
fees for legal services paid to Kranitz and Philip, a law firm
of which
Mr. Kranitz is a partner.
|
Executive
Compensation
Executives
and Employment Arrangements
The
following discussion and table relates to compensation arrangements
on behalf
of, and compensation paid by the Company to Mr. Bissonnette, our chief
executive officer, Mr. Rubin, our Chief Financial Officer, Mr. Brainard,
our
Vice President of Sales, Mr. Seffren, our Chief Marketing Officer, Mr.
Wolfe, our Vice President of Operations and Mr. Robertson, our Vice
President of
Engineering and Manufacturing for the fiscal year ended March 31, 2007.
Employment
Contracts
AeroGrow
has entered into employment agreements with W. Michael Bissonnette,
Mitchell B. Rubin, Randall (Randy) L. Seffren, Jeff Brainard, W. Terry
Robertson
Jr. and J. Michael Wolfe.
W. Michael
Bissonnette
The
employment agreement of Mr. Bissonnette, dated as of March 1, 2006,
provides that he will be employed as the chief executive officer of
AeroGrow for
an initial term of 24 months, renewable automatically for successive
one year
terms. He will be paid a base salary of $225,000. Mr. Bissonnette will also
be able to participate in equity compensation plans as determined by
the
compensation committee. Mr. Bissonnette will be reimbursed car and home
office expenses at the rate of $2,500 per month and participate in
regular
employee benefit plans as provided by the Company. If Mr. Bissonnette is
terminated without cause by the Company or Mr. Bissonnette terminates under
certain circumstances constituting a breach of the agreement by the
Company, he
will be paid his base salary, medical benefits, and pro rata portion
of the
bonus for one year. If he terminates his employment without cause,
he will be
paid his salary to the end of the month of such notice. Mr. Bissonnette has
agreed to regular confidentiality provisions and agreed not to compete
with
AeroGrow in the area of aeroponics products and business for two years
after the
termination of employment. Any inventions, including modifications,
are assigned
to the Company by the terms of the agreement.
Mitchell
B. Rubin
The
employment agreement of Mr. Rubin, dated as of March 1, 2006, provides that
he will be employed as the chief financial officer of the Company.
He will
devote his entire business time to the affairs of the Company, provided
that for
the first four months of his employment he was permitted to devote
a limited
amount of time to non-competitive business activities during the work
day in
transition from his prior consulting business. The initial term is
two years and
renewable for successive one year terms. Mr. Rubin shall receive base
compensation of $200,000 per year and a bonus per fiscal year of not
less than
1.5% of EBITDA. If Mr. Rubin is terminated without cause by the Company or
Mr. Rubin terminates under certain circumstances constituting a breach
of
the agreement by the Company, Mr. Rubin shall be entitled to receive
severance compensation equivalent to six months base salary and the
pro rata
bonus. In addition, in the event of a change in control of AeroGrow,
including a
change in chief executive officer, Mr. Rubin shall be entitled to receive
severance for one year. The agreement also provides for medical, vacation
and
other benefits commensurate with the policies and programs as adopted
by
AeroGrow for its senior executives. Further, the agreement provides
for
Mr. Rubin to receive a grant of options to purchase 125,000 shares of
AeroGrow’s common stock under AeroGrow’s 2005 Plan at an exercise price of not
greater than $5.00, which was granted on March 28, 2006. These options
shall:
(i) were fully vested on the grant date; (ii) shall not expire in less
than five years from the date of grant; (iii) be subject to other standard
terms and conditions under the 2005 Plan. (iii) be subject to other
standard terms and conditions under the 2005 Plan; and; (iv) have other
terms and conditions no less favorable than that granted to other senior
executives of the Company. Mr. Rubin has agreed to regular confidentiality
and inventions assignment provisions and agreed not to compete with
AeroGrow for
two years after the termination of employment.
Randall
(Randy) L. Seffren
The
employment agreement of Mr. Seffren provides that he will be employed
as Chief
Marketing Officer of the Company. He will devote all of his business
time to the
affairs of the Company working half time from an office in Chicago,
Illinois and
the balance of his time traveling on Company business. The initial
term is two
years ending July 31, 2008, and renewable for successive one year terms.
Mr. Seffren will receive base compensation of $200,000 per year and a bonus
per fiscal year in an amount not less than 1.5% of the EBITDA of the
Company, as
determined by the Company’s annual financial statements and pro rated for any
portion of such annual period covered under this Agreement. The bonus
is subject
to adjustment so that it is no less favorable than granted to other
senior
executives. The agreement also provides for medical, vacation, and
other
benefits commensurate with the policies and programs as adopted by
AeroGrow for
its senior executives. Further, the agreement confirms the option grant
awarded
to Mr. Seffren as of March 28, 2006, consisting of an option to purchase
125,000
shares of AeroGrow’s common stock under AeroGrow’s 2005 Equity Compensation Plan
at an exercise price of $5.00 per share, which were fully vested as
of that
grant date and are subject to other standard terms and conditions under
the 2005
Equity Compensation Plan. Mr. Seffren has agreed to regular confidentiality
and
inventions assignment provisions and agreed not to compete with AeroGrow
during
employment and for 24 months thereafter. If his employment is terminated,
he
will be entitled to receive severance pay equal to six months of his
base salary
as in effect immediately before his termination, and the payment by
the Company
of medical benefits until the 12th month following termination, and
the pro rata
portion of his bonus as of the nearest quarter end financial statements
of the
Company.
Jeff
Brainard
The
employment agreement of Mr. Brainard, dated as of March 31, 2006,
provides that he will be employed as the vice president, sales of the
Company.
He will devote his entire business time to the affairs of the Company,
working
from his home office in Lexington, Massachusetts. The initial term
is two years
and renewable for successive one year terms. Mr. Brainard shall receive
base
compensation of $150,000 per year and a bonus per fiscal year in an
amount not
less than the greater of: (i) $50,000; (ii) 0.5 per cent of retail net
sales, net of all customer deductions including but not limited to
returns,
allowances, bad debts and other deductions; or (iii) 1.5% of the EBITDA of
the Company as determined by the Company’s annual financial statements and pro
rated for any portion of such annual period covered under this Agreement.
Such
bonus shall be payable for the initial year in two installments, $25,000
to be
paid six months following the initial date of the agreement, an additional
$25,000 12 months following the date of the agreement, and the balance
not later
than 120 days after the end of the each of the Company’s fiscal years covered
under the agreement. The agreement also provides for medical, vacation,
and
other benefits commensurate with the policies and programs adopted
by AeroGrow
for its senior executives. Further, the agreement provides for Mr. Brainard
to receive a grant of 125,000 options to purchase AeroGrow’s common stock under
AeroGrow’s 2005 Plan at an exercise price of not greater than $5.00. The options
shall: (i) vest pursuant to a schedule that provides for vesting of at
least of 33% of the amount of the grant at the date granted and 33%
per each
12-month period from the date of grant; (ii) not expire in less than five
years from the date of grant; and (iii) be subject to other standard terms
and conditions under the 2005 Plan. The agreement also required that
Mr.
Brainard be granted shares of AeroGrow common stock equal in value
to $25,000
semi-annually until such time as the salary is at a rate of $200,000
annually.
The first 5,000 shares (valued at a price of $5.00 per share) were
granted
immediately upon Mr. Brainard’s joining AeroGrow, with 5,000 additional shares
six months thereafter. Effective March 31, 2007, the salary was increased
to
$200,000 annually. Mr. Brainard has agreed to regular confidentiality and
inventions assignment provisions and agreed not to compete with AeroGrow
for a
period equal to the term employed after the termination of employment.
If
Mr. Brainard is terminated without cause by the Company or
Mr. Brainard terminates under certain circumstances constituting a breach
of the agreement by the Company, Mr. Brainard shall be entitled to receive
severance compensation equivalent to six months base salary and the
pro rata
bonus. In addition, in the event of a change in control of AeroGrow,
including a
change in chief executive officer, Mr. Brainard shall be entitled to
receive severance for one year.
W.
Terry Robertson Jr.
The
employment agreement of Mr. Robertson, dated as of April 15, 2006, provides
that he will be employed as the Vice President of Engineering, Manufacturing
and
Quality of the Company. He will devote his entire business time to
the affairs
of the Company. The initial term is two years and renewable for successive
one
year terms. Mr. Robertson shall receive base compensation of $150,000 per
year, a bonus of 5,000 shares of the Company’s common stock upon Employee’s
relocation to the Boulder, Colorado area, and a bonus per fiscal year
of not
less than 1.5% of EBITDA. If Mr. Robertson is terminated without cause by
the Company or Mr. Robertson terminates under certain circumstances
constituting a breach of the agreement by the Company, Mr. Robertson shall
be entitled to receive severance compensation equivalent to six months
base
salary and the pro rata bonus. The agreement also provides for medical,
vacation
and other benefits commensurate with the policies and programs adopted
by
AeroGrow for its senior executives. Further, the agreement provides
for
Mr. Robertson to receive a grant of 125,000 options to purchase AeroGrow’s
common stock under AeroGrow’s 2005 Plan at an exercise price of not greater than
$5.00. The options, which were granted on March 28, 2006, shall: (i) vest
50% 12 months from the anniversary date hereof and an additional 12.5%
per each
three-month period thereafter until fully vested; (ii) not expire in less
than five years from the date of grant; and (iii) be subject to other
standard terms and conditions under the 2005 Plan. Mr. Robertson has agreed
to regular confidentiality and inventions assignment provisions and
agreed not
to compete with AeroGrow for a period equal to the term employed after
the
termination of employment. In addition, in the event of a change in
control of
AeroGrow, including a change in chief executive officer, Mr. Robertson
shall be entitled to receive severance for one year. On November 15,
2006, Mr.
Robertson’s annual salary was increased to $165,000 per year and he received
a
retroactive salary adjustment of $10,000.
J.
Michael Wolfe
The
employment agreement of Mr. Wolfe, dated as of March 15, 2006, provides
that he will be employed as the Vice President of Operations of the
Company. He
will devote his entire business time to the affairs of the Company.
The initial
term is two years and renewable for successive one year terms. Mr. Wolfe
initially received base compensation of $135,000 per year and a bonus
per fiscal
year of not less than 0.5% of EBITDA. If Mr. Wolfe is terminated without
cause by the Company or Mr. Wolfe terminates under certain circumstances
constituting a breach of the agreement by the Company, Mr. Wolfe shall be
entitled to receive severance compensation equivalent to six months
base salary
and the pro rata bonus. The agreement also provides for medical, vacation
and
other benefits commensurate with the policies and programs adopted
by AeroGrow
for its senior executives. Further, the agreement provides for Mr. Wolfe to
receive a grant of options to purchase 125,000 shares of AeroGrow’s common stock
under AeroGrow’s 2005 Plan at an exercise price of not greater than $5.00, which
was granted on March 28, 2006. These options: (i) were fully vested on the
grant date; (ii) shall not expire in less than five years from the date of
grant; (iii) be subject to other standard terms and conditions under the
2005 Plan. Mr. Wolfe has agreed to regular confidentiality and inventions
assignment provisions and agreed not to compete with AeroGrow for a
period equal
to the term employed after the termination of employment. In addition,
in the
event of a change in control of AeroGrow, including a change in chief
executive
officer, Mr. Wolfe shall be entitled to receive severance for one year.
Effective April 7, 2007, Mr. Wolfe’s annual salary was increased to $175,000 per
year and the bonus to 1.5% of EBITDA.
Except
as
set forth above, the other employees of AeroGrow are employed on an
“at will”
basis subject to varying lengths of severance agreements and, to the
extent
specific agreements exist; such agreements are not deemed
material.
Summary
Compensation Table
The
following table sets forth information regarding all forms of compensation
received by the named executive officers during the fiscal year ended
March 31,
2007:
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Stock
Awards
|
|
Option
Awards
|
|
All
Other Compensation
|
|
Total
|
|
W.
Michael Bissonnette,
CEO,
President and Director(1)
|
|
|
2007
|
|
$
|
225,000
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
23,063(1
|
)
|
$
|
248,063
|
|
Mitchell
B. Rubin,
Chief
Financial Officer
|
|
|
2007
|
|
$
|
200,000
|
|
$
|
5,000
|
|
$
|
25,000
(2
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
230,000
|
|
Randy
Seffren,
Chief
Marketing Officer
|
|
|
2007
|
|
$
|
150,000
|
|
|
|
|
$
|
$
--
|
|
$
|
--
|
|
$
|
53,828
(3
|
)
|
$
|
203,528
|
|
Jeff
Brainard,
Vice
President Sales
|
|
|
2007
|
|
$
|
150,000
|
|
$
|
63,462
|
|
$
|
25,000
(4
|
)
|
$
|
9,604(4
|
)
|
$
|
--
|
|
$
|
248,066
|
|
W.
Terry Robertson Jr.
Vice
President of Engineering, Manufacturing and Quality
|
|
|
2007
|
|
$
|
159,375
|
|
|
|
|
$
|
$
25,000 (5
|
)
|
$
|
515,000
(5
|
)
|
$
|
--
|
|
$
|
699,375
|
|
J.
Michael Wolfe
Vice
President, Operations
|
|
|
2007
|
|
$
|
157,500
|
|
|
|
|
$
|
$
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
157,500
|
|
(1)
|
In
accordance with the employment agreement entered into as
of March 1, 2006,
Mr. Bissonette has a non-accountable expense allowance of
$2,500 per month
as reimbursement for his auto expenses, home office expenses
and other
expenses.
|
(2)
|
Represents
5,000 shares of the Company’s common stock granted to Mr. Rubin in
December 2006 valued by the Company at $5.00 per
share.
|
(3)
|
Represents
consulting fees paid to Prometheus Communications Group,
LLC (“PCG”) of
which Mr. Seffren is the 100% owner and managing member prior
to the
effective date of Mr. Seffren’s employment
agreement.
|
(4)
|
In
accordance with Mr. Brainard’s employment agreement, the Company issued
5,000 shares of the Company’s common stock on January 3, 2007 valued by
the Company at $5.00 per share. In addition, in December
2006, Mr.
Brainard was granted five year options to purchase the Company’s common
stock at an exercise price of $5.00 per share which will
vest monthly
pro-rata over a two year period. The
Company valued the foregoing options using the Black Scholes
option
pricing model using the following assumptions: no dividend
yield; expected
volatility rate of 129.67%; risk free interest rate of 5%
and an average
life of 4 years, resulting in a value of $4.12 per option
granted.
|
(5)
|
The
Company issued 5,000 shares of the Company’s common stock on January 3,
2007 valued by the Company at $5.00 per share. In accordance
with Mr.
Robertson’s employment agreement, the Company granted in June 2006
125,000
options to purchase the Company’s common stock at an exercise price of
$5.00 per share, which will vest 50% during the initial twelve
months from
the date of the grant and 12.5% for each of the next four
three month
periods thereafter. The Company valued these options using
the Black
Scholes option pricing model using the following assumptions:
no dividend
yield; expected volatility rate of 129.67%; risk free interest
rate of 5%
and an average life of 4 years, resulting in a value of $4.12
per option
granted.
|
The
following table provides information with respect to the named executive
officers concerning unexercised stock options held by them at March
31, 2007.All
options granted to date are unexercised and, based upon the closing
price of the
stock as of April 30, 2007 of $6.35 per share, are considered to
be “in the
money”.
Name
|
Number
of Securities Underlying
Unexercised
Options
(Exercisable)
(1)
|
Number
of Securities Underlying
Unexercised
Options
(Unexercisable)
|
Exercise
Price per Share
|
Expiration
Date
|
Randy
Seffren,
|
125,000
|
-
|
$5.00
|
27-Mar-2011
|
Mitchell
Rubin
|
3,768
|
-
|
$0.50
|
31-Dec-2010
|
Mitchell
Rubin
|
125,000
|
-
|
$5.00
|
27-Mar-2011
|
Terry
Robertson
|
46,875
|
78,125
(2)
|
$5.00
|
27-Jun-2011
|
Jeff
Brainard
|
83,329
|
41,671(3)
|
$5.00
|
27-Mar-2011
|
Jeff
Brainard
|
1,166
|
1,166(4)
|
$5.00
|
14-Dec-2011
|
Outstanding
Equity Awards at Fiscal Year End
(1) |
Though
vested and exercisable, and shares common stock received
from such
exercise are subject to lock-up agreements limiting the sale
of such
shares to 100% of aggregate share holdings through December
22, 2007 and
50% of aggregate share holdings through June 22,
2008.
|
(2) |
Will
vest 50% during the initial twelve months from the date of
the grant, June
28, 2006, and 12.5% for each of the next four three month
periods
thereafter.
|
(3) |
Will
vest monthly pro-rata over a two year period from the date
of grant, March
28,2006.
|
(4) |
Will
vest monthly pro-rata over a two year period from the date
of grant,
December 14,2006.
|
Compensation
Plans
Amended
2003 Stock Option Plan. On
January 3, 2003, the board of directors adopted a stock option plan for key
employees (including key employees who are directors), non-employee
directors,
consultants and investors which provided that an aggregate of 400,000
shares of
our common stock may be granted under the plan (“2003 Plan”).As of
December 31, 2005, there were options for 204,869 shares outstanding at
exercise prices ranging from $0.01 to $5.00 and the remaining 195,131
options
were merged into the 2005 Equity Compensation Plan and the 2003 Plan
no longer
separately exists. Vesting schedules are determined individually
for each grant
and were all fully vested as of December 2005.
Administration.
The
plan is administered by our Governance, Compensation and Nominating Committee,
and in the past was administered by the board. The plan provides that it
may be
administered by either the committee or board, and in its administration
it
may:
· select
participants,
· determine
the date of grant, exercise price and other terms of options,
· establish
rules and regulations to administer the plan,
· amend,
suspend, or discontinue the plan subject to applicable shareholder
approval,
· interpret
the rules relating to the plan, and
· otherwise
administer the plan.
Stock
Options.
The plan
provides that the committee may grant both incentive stock options, which
can
result in potentially favorable tax treatment to the participant, and
non-qualified stock options. The committee determines the terms and vesting
provisions, including the exercise price. The maximum term of each option
and
the times at which each option will be exercisable generally are fixed
by the
committee, except that no option may have a term exceeding ten years. Shares
subject to options that expire or otherwise terminate remain available
for
awards under the plan. Shares issued under the plan may be either newly
issued
shares or shares which AeroGrow has reacquired.
2005
Equity Compensation Plan. In
August
2005 AeroGrow adopted the 2005 Equity Compensation Plan (“2005 Plan”) to promote
the interests of AeroGrow and our shareholders by attracting, retaining,
and
motivating our key officers, employees, directors, and consultants. The
Plan was
approved by our stockholders at the annual meeting of stockholders held
February
23, 2006. Our 2003 stock option plan was merged into this plan in August
2005,
which modification was approved by the stockholders in February 23, 2006;
the
2003 Plan no longer separately exists. The options for the 204,869 shares
issued
under the 2003 Plan continue to be governed by their grant agreements
but are
administered under the 2005 Plan. A total of 1,505,000 shares of our
common
stock were available for grant under the 2005 Plan pursuant to stock
options or
awards of shares of restricted stock. As of March 31, 2007, we have issued
1,343,554 options to purchase common stock at exercise prices ranging
from $5.00
to $5.90 and 339,123 shares of common stock at valued at prices ranging
from
$5.00 to $5.90 and there remain 33,386 unallocated shares that may be
the
subject of awards in the future.
Shares
Available for Awards.
Shares
subject to an award that is cancelled, expired unexercised, forfeited,
settled
in cash or otherwise terminated remain available for awards under the plan.
Shares issued under the 2005 Plan may be either newly issued shares or
shares
which AeroGrow has reacquired. The plan imposes individual limitations
on the
amount of certain awards in order to comply with Section 162(m) of the
Internal Revenue Code of 1986. Under these limitations no single participant
may
generally receive awards in any calendar year that relate to more than
$1
million. Awards may generally be adjusted to prevent dilution or enlargement
of
benefits when certain events occur such as a stock dividend, reorganization,
recapitalization, stock split, combination, merger, or
consolidation.
Eligibility.
Our
employees, directors and consultants may be granted awards under the
plan.As of
March 31, 2007, approximately 65 individuals were eligible to
participate.
Administration.
The
plan is administered by the Governance, Compensation and Nominating Committee.
Awards to directors serving on the committee are determined and administered
by
the full board of directors. The committee may:
|
·
|
determine
the type and number of awards to be
granted,
|
|
·
|
determine
the exercise or purchase price, vesting periods and any performance
goals,
|
|
·
|
determine
and later amend the terms and conditions of any
award,
|
·
interpret
the rules relating to the plan, and
|
·
|
otherwise
administer the plan.
|
Stock
Options.
The
committee may grant both incentive stock options, which can result in
potentially favorable tax treatment to the participant, and non-qualified
stock
options. The committee determines the terms and individual vesting schedules
for
each grant including the exercise price which may not be less than the
fair
market value of a share of common stock on the date of the grant.
Restricted
Shares.
The
committee may grant restricted shares of common stock. Restricted shares
are
shares of common stock with transfer restrictions. These restrictions lapse
on
the basis of performance and/or continued employment as determined in advance
by
the committee. They may be forfeited by participants as specified by the
committee in the award agreement. A participant who has received a grant
of
restricted shares will be eligible to receive dividends and have the right
to
vote those shares. Restricted shares may not be transferred, encumbered
or
disposed of during the restricted period or until after the restrictive
conditions are met.
Other
Terms.
All
outstanding awards vest, become immediately exercisable or payable, and
have all
restrictions lifted immediately when AeroGrow experiences a change in control.
The Board may amend or terminate the plan subject to applicable stockholder
approval. The committee may not amend the terms of previously granted options
to
reduce the exercise price or cancel options and grant substitute options
with a
lower exercise price than the cancelled options. The committee also may
not
adversely affect the rights of any award holder without the award holder’s
consent.
In
addition to option grants, during the year ended March 31, 2007, we granted
under the 2005 Plan a total of 98,194 shares of common stock at a value
of $5.00
to $5.90 per share consisting of 5,000 shares issued to our Chief Financial
Officer, 5,000 shares issued to our Vice President of Engineering and
Manufacturing, 18,044 shares issued to other employees, 49,150 shares
granted to
consultants for services, 21,000 shares granted to directors for service
on the
Board of Directors, Audit Committee and on the Governance Committee.
All of the
foregoing were charged to operating expenses for the year ended March
31, 2007
resulting in a total charge of $516,170.
Information
regarding the Company’s equity compensation plans at March 31, 2007 is as
follows:
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 approved by security holders
|
|
|
1,337,360
|
|
$
|
4.58
|
|
|
33,386
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
Total
|
|
|
1,337,360
|
|
$
|
4.58
|
|
|
33,386
|
|
At
March
31, 2007 the Company has granted options for 131,462 shares of the Company’s
common stock that are unvested that will result in $643,881 of compensation
expense in future periods if fully vested.
Employment
Contracts
AeroGrow
has entered into employment agreements with W. Michael Bissonnette,
Mitchell Rubin, Randy Seffren, Jeff Brainard, and Terry Robertson.
The
employment agreement of Mr. Bissonnette, dated as of March 1, 2006,
provides that he will be employed as the chief executive officer of AeroGrow
for
an initial term of 24 months, renewable automatically for successive one
year
terms. He will be paid a base salary of $225,000. Mr. Bissonnette will also
be able to participate in equity compensation plans as determined by the
compensation committee. Mr. Bissonnette will be reimbursed car and home
office expenses at the rate of $2,500 per month and participate in regular
employee benefit plans as provided by the Company. If Mr. Bissonnette is
terminated without cause by the Company or Mr. Bissonnette terminates under
certain circumstances constituting a breach of the agreement by the Company,
he
will be paid his base salary, medical benefits, and pro rata portion of
the
bonus for one year. If he terminates his employment without cause, he will
be
paid his salary to the end of the month of such notice. Mr. Bissonnette has
agreed to regular confidentiality provisions and agreed not to compete
with
AeroGrow in the area of aeroponics products and business for two years
after the
termination of employment. Any inventions, including modifications, are
assigned
to the Company by the terms of the agreement.
The
employment agreement of Mr. Rubin, dated as of March 1, 2006, provides that
he will be employed as the chief financial officer of the Company. He will
devote his entire business time to the affairs of the Company, provided
that for
the first four months of his employment he was permitted to devote a limited
amount of time to non-competitive business activities during the work day
in
transition from his prior consulting business. The initial term is two
years and
renewable for successive one year terms. Mr. Rubin shall receive base
compensation of $200,000 per year and a bonus per fiscal year of not less
than
1.5% of EBITDA. If Mr. Rubin is terminated without cause by the Company or
Mr. Rubin terminates under certain circumstances constituting a breach of
the agreement by the Company, Mr. Rubin shall be entitled to receive
severance compensation equivalent to six months base salary and the pro
rata
bonus. The agreement also provides for medical, vacation and other benefits
commensurate with the policies and programs as adopted by AeroGrow for
its
senior executives. Further, the agreement provides for Mr. Rubin to receive
a grant of options to purchase 125,000 shares of AeroGrow’s common stock under
AeroGrow’s 2005 Plan at an exercise price of not greater than $5.00, which was
granted on March 28, 2006. These options shall: (i) vest pursuant to a
schedule that provides for vesting of at least 50% of the amount of each
grant
within 12 months from the grant date; (ii) not expire in less than five
years from the date of grant; (iii) be subject to other standard terms and
conditions under the 2005 Plan; and; (iv) have other terms and conditions
no less favorable than that granted to other senior executives of the Company.
Mr. Rubin has agreed to regular confidentiality and inventions assignment
provisions and agreed not to compete with AeroGrow for two years after
the
termination of employment.
The
employment agreement of Mr. Seffren provides that he will be employed as
Chief
Marketing Officer of the Company. He will devote all of his business time
to the
affairs of the Company working half time from an office in Chicago, Illinois
and
the balance of his time traveling on Company business. The initial term
is two
years ending July 31, 2008, and renewable for successive one year terms.
Mr. Seffren will receive base compensation of $200,000 per year and a bonus
per fiscal year in an amount not less than 1.5% of the EBITDA of the Company,
as
determined by the Company’s annual financial statements and pro rated for any
portion of such annual period covered under this Agreement. The bonus is
subject
to adjustment so that it is no less favorable than granted to other senior
executives. The agreement also provides for medical, vacation, and other
benefits commensurate with the policies and programs as adopted by AeroGrow
for
its senior executives. Further, the agreement confirms the option grant
awarded
to Mr. Seffren as of March 28, 2006, consisting of an option to purchase
125,000
shares of AeroGrow’s common stock under AeroGrow’s 2005 Equity Compensation Plan
at an exercise price of $5.00 per share, which were fully vested as of
that
grant date and are subject to other standard terms and conditions under
the 2005
Equity Compensation Plan. Mr. Seffren has agreed to regular confidentiality
and
inventions assignment provisions and agreed not to compete with AeroGrow
during
employment and for 24 months thereafter. If his employment is terminated,
he
will be entitled to receive severance pay equal to six months of his base
salary
as in effect immediately before his termination, and the payment by the
Company
of medical benefits until the 12th month following termination, and the
pro rata
portion of his bonus as of the nearest quarter end financial statements
of the
Company.
The
employment agreement of Mr. Brainard, dated as of March 31, 2006,
provides that he will be employed as the vice president, sales of the Company.
He will devote his entire business time to the affairs of the Company,
working
from his home office in Lexington, Massachusetts. The initial term is two
years
and renewable for successive one year terms. Mr. Brainard shall receive
base
compensation of $150,000 per year and a bonus per fiscal year in an amount
not
less than the greater of: (i) $50,000; (ii) 0.5 per cent of retail net
sales, net of all customer deductions including but not limited to returns,
allowances, bad debts and other deductions; or (iii) 1.5% of the EBITDA of
the Company as determined by the Company’s annual financial statements and pro
rated for any portion of such annual period covered under this Agreement.
Such
bonus shall be payable for the initial year in two installments, $25,000
to be
paid six months following the initial date hereof, an additional $25,000
12
months following the date hereof, and the balance not later than 120 days
after
the end of the each of the Company’s fiscal years covered under the agreement.
The agreement also provides for medical, vacation, and other benefits
commensurate with the policies and programs adopted by AeroGrow for its
senior
executives. Further, the agreement provides for Mr. Brainard to receive a
grant of 125,000 options to purchase AeroGrow’s common stock under AeroGrow’s
2005 Plan at an exercise price of not greater than $5.00. The options shall:
(i) vest pursuant to a schedule that provides for vesting of at least of
33% of the amount of the grant at the date granted and 33% per each 12-month
period from the date of grant; (ii) not expire in less than five years from
the date of grant; and (iii) be subject to other standard terms and
conditions under the 2005 Plan. Mr. Brainard has agreed to regular
confidentiality and inventions assignment provisions and agreed not to
compete
with AeroGrow for a period equal to the term employed after the termination
of
employment. In addition, in the event of a change in control of AeroGrow,
including a change in chief executive officer, Mr. Brainard shall be
entitled to receive severance for one year.
The
employment agreement of Mr. Robertson, dated as of April 15, 2006, provides
that he will be employed as the vice president of Engineering, Manufacturing
and
Quality of the Company. He will devote his entire business time to the
affairs
of the Company. The initial term is two years and renewable for successive
one
year terms. Mr. Robertson shall receive base compensation of $150,000 per
year, a bonus of 5,000 shares of the Company’s common stock upon Employee’s
relocation to the Boulder, Colorado area, and a bonus per fiscal year of
not
less than 1.5% of EBITDA. If Mr. Robertson is terminated without cause by
the Company or Mr. Robertson terminates under certain circumstances
constituting a breach of the agreement by the Company, Mr. Robertson shall
be entitled to receive severance compensation equivalent to six months
base
salary and the pro rata bonus. The agreement also provides for medical,
vacation
and other benefits commensurate with the policies and programs adopted
by
AeroGrow for its senior executives. Further, the agreement provides for
Mr. Robertson to receive a grant of 125,000 options to purchase AeroGrow’s
common stock under AeroGrow’s 2005 Plan at an exercise price of not greater than
$5.00. The options, which were granted on March 28, 2006, shall: (i) vest
50% 12 months from the anniversary date hereof and an additional 12.5%
per each
three-month period thereafter until fully vested; (ii) not expire in less
than five years from the date of grant; and (iii) be subject to other
standard terms and conditions under the 2005 Plan. Mr. Robertson has agreed
to regular confidentiality and inventions assignment provisions and agreed
not
to compete with AeroGrow for a period equal to the term employed after
the
termination of employment. In addition, in the event of a change in control
of
AeroGrow, including a change in chief executive officer, Mr. Robertson
shall be entitled to receive severance for one year. On November 15, 2006,
Mr.
Robertson’s annual salary was increased to $165,000 per year and he received a
cash bonus of $10,000.
Except
as
set forth above, the other employees of AeroGrow are employed on an “at will”
basis subject to varying lengths of severance agreements and, to the extent
specific agreements exist; such agreements are not deemed material.
Scientific
Advisory Board
We
have a
Scientific Advisory Board currently composed of three experts in aeroponics
and
hydroponics. Each member meets with us as needed regarding the development
of
our products.
Dr.
Henry A. Robitaille, Ph.D.,
is known
for his contributions to the science of hydroponics, primarily through
his 20
years of work at Walt Disney World’s exhibit, “The Land,” at the Epcot Center in
Florida, and his work on the Biosphere project. As Epcot’s Director of Science
and Technology and Agricultural Manager for “The Land,” Dr. Robitaille was
primarily responsible for designing, developing and managing “The Land” exhibit.
“The Land” is a 2-acre working greenhouse which demonstrates cutting edge,
“future world” soil-less plant-growing techniques and farm and crop production.
“The Land” receives millions of visitors each year, and produces more than
20,000 pounds of vegetables and herbs annually for use in Disney’s upscale
restaurants. In addition, it provides a valuable research laboratory for
exploring new and improved soil-less growing methodologies and alternative
technologies and methods for increasing food production for impoverished
regions
of the world. Dr. Robitaille was also a consultant involved with the research
and development of Biosphere 2, the world’s largest controlled environment
growth and measurement facility available for earth systems research. The
Biosphere encloses a complete ecosystem which includes a rainforest, an
ocean
with a coral reef, a desert, a savannah and a marshland. Dr. Robitaille
received
a Ph.D. in Horticulture and Plant Physiology from Michigan State
University.
Dr.
Howard Resh, Ph.D.,
is an
international leader on soil-less growing technologies. Dr. Resh has written
four books and dozens of scientific and popular papers on growing plants
without
soil. His best-selling published books include the 500+ page Hydroponic
Food Production,
now in
its 6th edition. Dr. Resh was pictured on the cover of the world’s leading
magazine for soil-less gardening, The Growing Edge (September 2002), for
his
work in designing, developing and managing a hydroponic greenhouse that
grows
gourmet food for a CuisinArt resort complex in Anguilla, British West Indies.
Dr. Resh worked for decades as technical director and manager for a variety
of
hydroponic crop production facilities in the United States, Canada, Taiwan,
Venezuela and the British West Indies. He received his Ph.D. in Plant Science
from the University of British Columbia.
Mike
Morton
is the
owner and president of HGI Worldwide, Inc. (Hydro Gardens), an international
horticultural nutrient development and greenhouse supply company. For the
past
30 years, Mr. Morton has been at the leading edge of hydroponic nutrient
development and biological pest control methods. He directed the construction
and installation of major greenhouse projects and indoor growing systems
in the
United States and internationally. Mr. Morton is also the inventor of several
new technologies for accelerated plant growth and seedling production.
Since the
early 1980s, he has worked jointly with the U.S. Department of Agriculture
and
many universities and customers across the United States to research the
use of
biological pest controls. Mr. Morton is a frequent guest speaker at
universities and conferences across the United States.
The
members of our scientific advisory board receive shares of our common stock
for
services rendered to the AeroGrow. In 2004, Mr. Morton received 500 shares,
Dr.
Robitaille received 1,890 shares and Dr. Resh received 1,220
shares.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
following transactions were entered into with our executive officers, directors
and 5% or greater shareholders. These transactions may or will continue
in
effect and may result in conflicts of interest between us and these individuals.
Although our executive officers and directors have fiduciary duties to
us and
our shareholders, we cannot assure that these conflicts of interest will
always
be resolved in our favor or in the favor of our shareholders.
AeroGrow
granted to its founder, W. Michael Bissonnette, 10,000 shares of common
stock
from December 2002 through September 30, 2005, with a weighted value of
$3.87
per share or $38,700 in the aggregate, as partial payment for services
provided
since inception. In December 2002, Mr. Bissonnette purchased 50,000 shares
of
our common stock for $0.50 per share, or $25,000 in the aggregate, in one
of our
private offerings. We granted Mr. Bissonnette 2,000 shares for serving
as our
chairman of the board during 2005 under our 2005 plan on December 31,
2005.
AeroGrow
granted to the current chief financial officer, Mitchell Rubin, options
to
purchase 1,366 shares of our common stock at an exercise price of $0.50
per
share under the 2003 Plan and 2,402 shares of our common stock at an exercise
price of $0.50 per shares under the 2005 Plan. On March 28, 2006, Mr. Rubin
was
granted a fully vested stock option to purchase 125,000 shares our common
stock
at an exercise price of $5.00 per share, which expires on the fifth anniversary
of such date. In December 2006, Mr. Rubin was granted 5,000 shares of restricted
common stock.
Richard
Kranitz, one of our directors, is a member of the law firm of Kranitz and
Philipp which provides legal services to us. During the years ended December
31,
2005 and December 31, 2004, AeroGrow paid legal fees to Kranitz and Philipp
in
the amount of $37,438 and $24,000, respectively, and issued shares of common
stock for services provided valued at $10,000 and $83,250, respectively.
During
the nine months ended December 31, 2006, AeroGrow paid Mr. Kranitz legal
fees of
$17,593
AeroGrow
granted to AeroGrow’s chief marketing officer, Randy Seffren, 45,800 shares of
AeroGrow’s common stock in 2004 and 2005 with a value of $5.00 per share, or
$229,000 in the aggregate, as partial payment for services provided since
inception. AeroGrow granted Mr. Seffren 28,520 shares under AeroGrow’s 2005 plan
on December 31, 2005. On March 28, 2006, Mr. Seffren was granted a fully
vested
option to purchase 125,000 shares of our common stock at an exercise price
of
$5.00 per share.
Wayne
Harding, one of AeroGrow’s directors, provided consulting services for us prior
to his becoming a director from December 2003 through March 2004. He received
stock options for 3,910 shares of common stock with an exercise price of
$2.50
per share.
Mentor
Capital
Mentor
Capital Consultants, Inc. (“Mentor Capital”) was formerly our parent
corporation. Mr. Bissonnette is the principal shareholder and chief executive
officer of Mentor Capital. Mr. Gutterman is the chief financial officer,
secretary and a director of Mentor Capital. Mr. Kranitz is a director of
Mentor
Capital.
On
October 15, 2002, Mr. Bissonnette exchanged 1 million shares of Mentor
Capital’s
common stock for 600,000 common shares of our common stock, (after taking
into
account the one-for-five reverse stock split to shareholders of record
on
May 31, 2005). We recorded this transaction as a $300,000 compensation
expense.
On
December 31, 2004, Mentor Capital made a pro rata liquidating distribution
to
its shareholders of all 6,000,000 shares of our common stock held by it.
These
shares were issued with the restriction that 25% may be sold beginning
six
months after a public offering, 25% may be sold beginning one year after
a
public offering, 25% may be sold beginning 18 months after a public offering
and
the remaining 25% may be sold beginning 24 months after a public offering.
In
addition, these shareholders entered into a lockup agreement under which
they
will be prohibited from selling or otherwise transferring: (i) any of their
shares of common stock for a period of 12 months following the effective
date of
the registration statement and (ii) 50% of their shares of common stock
for a
period of 18 months following the effective date of the registration statement.
From
inception until May 31, 2005, AeroGrow our furniture, computers and other
office
equipment leased from Mentor Capital for a rental payment of $2,500 per
month.
For each of the years ended December 31, 2004 and 2003, AeroGrow paid
$30,000 to rent the equipment. This lease was terminated as of May 31,
2005.
From January through April 2005 AeroGrow made interest-free unsecured loans
totaling $41,000 to Mentor Capital to allow Mentor Capital to redeem some
of its
stock from a shareholder who is not affiliated with AeroGrow. The lease
payments
for the furniture of $2,500 per month were being used to offset a portion
of
this loan. We acquired the fixed assets under the furniture lease in full
payment of the loan on May 31, 2005. At the time of these transactions,
Michael
Bissonnette owned 41.4% of Mentor Capital.
Mentor
Capital entered into a research and development contract in 2002 with AgriHouse,
Inc. (“AgriHouse”) that provided for development of a nutrient delivery system
using proprietary aeroponic technology which could be used in a low cost
consumer product. Mentor Capital was granted the exclusive worldwide marketing
rights for any product developed, subject to the duty to pay a royalty
to
AgriHouse of 10% of the manufacturing cost of each unit. Mentor Capital
assigned
its rights under this contract to AeroGrow shortly after AeroGrow was formed,
and AeroGrow agreed to assume the royalty payment obligations. Subsequently,
AeroGrow developed a fractionator bar technology, applied for two patents,
and
was granted one patent. The fractionator bar technology uses a spinning
cylinder
to disperse water to the roots of plants in an aeroponic growing system.
In May
2005 we entered into an agreement with AgriHouse, consented to by Mentor
Capital, to collaborate on the development of an aeroponic product employing
the
fractionator bar technology (the “FB Product”) which agreement: (i) assigned all
ownership and manufacturing rights to the FB Product to AgriHouse along
with two
related patents, drawings, molds and other materials; (ii) granted AeroGrow
exclusive marketing rights to the FB Product; (iii) required the payment
of
$25,000 to AgriHouse by AeroGrow for AgriHouse to act as a consultant to
determine the feasibility of commercializing the FB Product; and (iv) superseded
and terminated the 2002 agreement thereby releasing AeroGrow from all
obligations related thereto. The May 2005 agreement with AgriHouse was
terminated by AeroGrow in accordance with its terms by AeroGrow electing
not to
proceed with the FB Product and thereby assigning all rights to such product
and
technology associated therewith to AgriHouse. AeroGrow had determined that
the
fractionator bar technology was not feasible for mass production for consumer
use and therefore believes the loss of this technology did not and will
not have
a material effect on AeroGrow’s operations.
Wentworth
During
2002, Wentworth borrowed a total of $8,500 from Kevin R. Keating, its then
president. The amount loaned plus interest at 6% is due and payable upon
the
completion of a business combination. For the years ended December 31,
2005 and
2004, interest on this loan of $510 each year is included in operations.
At
December 31, 2005, the principal balance of this loan together with accrued
interest totaled $10,290.
Wentworth’s
president, with two other shareholders, granted KRM Fund an option to acquire
an
aggregate of 1,000,000 shares, owned by them, until January 30, 2005, at
a total
purchase price of $125,000. This option expired unexercised.
On
April
9, 2003 and August 7, 2003 Timothy Keating paid invoices on behalf of Wentworth
in an aggregate of $1,861. Timothy Keating is the managing member of Keating
Investments.
Kevin
R.
Keating, is the father of the principal member of Keating Investments.
Keating
Investments is the managing member of KRM Fund, which was the majority
stockholder of Wentworth. Keating Investments is also the managing member
and
90% owner of Keating Securities, a registered broker-dealer. Kevin R. Keating
is
not affiliated with and has no equity interest in Keating Investments,
KRM Fund,
or Keating Securities and disclaims any beneficial interest in the shares
of the
Company’s Common Stock owned by KRM Fund. Similarly, Keating Investments, KRM
Fund, and Keating Securities disclaim any beneficial interest in the shares
of
the Company’s Common Stock currently owned by Kevin R. Keating.
On
June
10, 2004, Wentworth entered into a contract with Vero Management for managerial
and administrative services. Vero Management was not engaged to provide,
and
Vero Management did not render, legal, accounting, auditing, investment
banking
or capital formation services. Kevin R. Keating is the manager of Vero
Management. The term of the contract was for one year. In consideration
of the
services provided, Vero Management was paid $1,000 for each month in which
services were rendered. For the years ended December 31, 2005 and 2004,
a total
of $12,000 and $7,000, respectively, was included in results of operations
as a
result of the agreement.
Wentworth
engaged Keating Securities, an affiliate of Keating Investments, the managing
member of Wentworth’s controlling stockholder, to act as a financial advisor in
connection with the business combination between Wentworth and AeroGrow
for
which it earned an advisory fee of $350,000 upon completion of the Merger.
The
services included introduction of Wentworth to AeroGrow and advising Wentworth
on the Merger transaction. The advisory fee was paid at the closing of
the
Merger.
Keating
Securities, LLC
In
connection with the private placement of notes and warrants by AeroGrow
in the
period from July 2005 to September 2005, Keating Securities was paid $300,000
and was issued a warrant to purchase up to 60,000 shares of common stock
at an
exercise price of $6.00 per share, exercisable for five years.
In
connection with the private placement of common stock and warrants by AeroGrow
with closings on February 24, 2006 and March 1, 2006, Keating Securities
was
paid $1,775,048 and its designees were issued warrants to purchase up to
214,800
shares of common stock at $6.25 per share, exercisable for five
years.
Keating
Securities and Keating Investments did not receive any compensation in
connection with the modification of the notes sold in July to September
2005.
Other
Related Party Transactions
During
the three months ended March 31, 2006, we incurred $131,894 in expenses
to Med
Ed Architects, a company which is 33% owned by Randy Seffren, our Chief
Marketing Officer, for video production, printing, duplication, and web
design.
During the nine months ended December 31, 2006, AeroGrow incurred fees
totaling
$600,094 for various video and web projects, including production of AeroGrow’s
infomercial to promote its products, to MedEd Architects LLC, a video production
company owned 33% by Randy Seffren, AeroGrow’s Chief Marketing Officer. AeroGrow
may incur additional costs in subsequent calendar quarters to MedEd Architects
LLC, for editing and production of additional infomercials featuring AeroGrow’s
products and related video-based products.
During
the three-month transition period ended March 31, 2006, the Company paid
to Mr.
Walker, a director, $12,500 in consulting fees in connection with our corporate
presentation used for our private placement in February 2006.
During
the nine months ended December 31, 2006, AeroGrow paid Mr. Harding, a director,
consulting fees totaling $62,922 for services related to the development
of an
international channel of distribution for the Company’s products and other
consulting services.
During
the nine months ended December 31, 2006, AeroGrow paid Mr. Kranitz, a director
of the Company, who is a partner in a law firm, legal fees of
$17,593.
In
August
2006, each of the Company’s five directors received $1,000 representing
compensation for attendance at two Board of Director meetings at the rate
of
$500 each meeting.
PRINCIPAL
SHAREHOLDERS
The
following table sets forth certain information regarding our common stock
beneficially owned on March 16, 2007 by:
|
·
|
each
shareholder we know to be the beneficial owner of 5% or more
of our
outstanding common stock,
|
·
each
of
our executive officers and directors, and
·
all
executive officers and directors as a group.
In
general, a person is deemed to be a “beneficial owner” of a security 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. The table assumes a total of 10,550,030
shares
of
common stock outstanding.
Name
of Beneficial Owner (1)
|
Amount
of
Beneficial
Ownership
|
Percent
Beneficial
Ownership
|
W.
Michael Bissonnette
c/o 6075 Longbow Dr. Suite 200
Boulder,
CO 80301
|
956,297
|
9.10%
|
Mitchell
Rubin
c/o 6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (2)
|
133,768
|
1.30%
|
Jeff
Brainard
c/o
6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (3)
|
136,000
|
1.30%
|
Richard
A. Kranitz
1238 Twelfth Avenue
Grafton,
WI 53024 (4)
|
67,579
|
0.60%
|
Randy
Seffren
c/o 6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (3)
|
209,320
|
2.00%
|
Wayne
Harding
5206 South Hanover Way
Englewood,
CO 80111 (5)
|
151,673
|
1.40%
|
Jack
J. Walker
c/o
6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (6)
|
229,908
|
2.20%
|
Kenneth
Leung
c/o
6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (7)
|
14,500
|
0.10%
|
Terry
Robertson
c/o 6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (8)
|
130,000
|
1.20%
|
All
AeroGrow Executive Officers and Directors as a Group (8 Persons)
(9)
|
2,029,045
|
19.20%
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC,
which
include holding voting and investment power with respect to the
securities. Shares of common stock subject to options or warrants
currently exercisable, or exercisable within 60 days, 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.
|
(2)
|
Includes
options to purchase 3,768 shares of AeroGrow’s common stock at an exercise
price of $0.50 per share and options granted on March 28, 2006
to purchase
125,000 shares of AeroGrow’s common stock at an exercise price of $5.00
per share.
|
(3)
|
Includes
options granted on March 28, 2006 to purchase 125,000 shares
of AeroGrow’s
common stock at an exercise price of $5.00 per
share.
|
(4)
|
Includes
46,546 shares owned by Cedar Creek Ventures, LLC, of which Mr.
Kranitz is
a 50% owner and managing member. Also includes 10,000 fully vested
five-year options to purchase AeroGrow’s common stock at an exercise price
of $5.00 per share and 2,500 shares of common stock valued at
$5.00 per
share granted as of March 28, 2006.
|
(5)
|
Includes
options to purchase 3,910 shares of AeroGrow’s common stock at an exercise
price of $2.50 per share, and warrants to purchase 5,000 shares
of
AeroGrow’s common stock at an exercise price of $2.50 per share. Also
includes 10,000 fully vested five-year options to purchase AeroGrow’s
common stock at an exercise price of $5.00 per share and 2,500
shares of
common stock valued at $5.00 per share granted as of March 28,
2006, for
services as a director and 2,000 shares of common stock valued
at $5.00
per share granted for services on the audit and compensation
committees.
|
(6)
|
Includes
96,122 shares held of record by March Trade & Finance, Inc. of which
Mr. Walker is a controlling person and 34,286 shares issuable
under a
convertible note in principal amount of $120,000 that will be
converted by
March 31, 2007 and 24,000 shares underlying immediately exercisable
warrants at $5.00 per share and 24,000 shares underlying warrants
issuable
and exercisable upon conversion of the note at $6.00 per share.
March
Trade & Finance, Inc. holds 42,000 of these shares on behalf of an
unrelated third party. Also
includes 12,000 shares underlying immediately exercisable warrants
at
$6.25 per share, 10,000 fully vested five-year options to purchase
AeroGrow’s common stock at an exercise price of $5.00 per share and 2,500
shares of common stock valued at $5.00 per share granted as of
March 28,
2006 and 2,000 shares of common stock valued at $5.00 per share
granted
for services on the audit and compensation
committees.
|
(7)
|
Includes
10,000 fully vested five-year options to purchase AeroGrow’s common stock
at an exercise price of $5.00 per share and 2,500 shares of common
stock
valued at $5.00 per share granted as of March 28, 2006, and 2,000
shares
of common stock valued at $5.00 per share granted for services
on the
audit and compensation committees.
|
(8)
|
Includes
options granted in June, 2006 to purchase 125,000 shares of AeroGrow’s
common stock at an exercise price of $5.00 per share that will
vest 50% 12
months from the anniversary date hereof and an additional 12.5%
per each
three-month period thereafter until fully
vested.
|
(9)
|
Includes
options and warrants to acquire 451,678 shares of common stock
and 34,286
shares issuable on conversion of an outstanding
note.
|
DESCRIPTION
OF SECURITIES
General
The
articles of incorporation provide that AeroGrow is authorized to issue
up to
75,000,000 shares of common stock, par value $0.001 per share, and 20,000,000
shares of preferred stock, par value $0.001 per share. As of March 16,
2007, AeroGrow had 10,550,030 shares of common stock outstanding. No shares
of
preferred stock were issued and outstanding. Nevada law allows AeroGrow
board of
directors to issue shares of common stock and preferred stock up to the
total
amount of authorized shares without obtaining the prior approval of
shareholders.
The
following description of AeroGrow’s common stock, preferred stock, convertible
notes and various warrants summarizes the material provisions of each and
is
qualified in its entirety by the provisions of AeroGrow’s articles of
incorporation, bylaws, convertible notes and warrant agreements, copies
of which
will be provided by us upon request.
Common
Stock
Holders
of AeroGrow’s outstanding common stock, have the following rights and privileges
in general:
|
·
|
the
right to one vote for each share held of record on all matters
submitted
to a vote of the stockholders, including the election of
directors,
|
|
·
|
no
cumulative voting rights, which means that holders of a majority
of shares
outstanding can elect all of AeroGrow’s
directors,
|
|
·
|
the
right to receive ratably dividends when, if and as may be declared
by
AeroGrow’s board of directors out of funds legally available for such
purposes, subject to the senior rights of any holders of preferred
stock
then outstanding,
|
|
·
|
the
right to share ratably in the net assets legally available for
distribution to common stockholders after the payment of AeroGrow’s
liabilities on its liquidation, dissolution and winding-up,
and
|
|
·
|
no
preemptive or conversion rights or other subscription rights,
and no
redemption privileges.
|
All
outstanding shares of AeroGrow’s common stock are fully paid and
nonassessable.
Debt
Warrants
In
June,
July, August and September 2005, AeroGrow sold in a private placement debt
offering to accredited investors 300 units consisting of convertible notes,
described below, and its redeemable warrants. The warrants are exercisable
for
the purchase of an aggregate 600,000 shares of its common stock, assuming
an
exercise price of $5.00 per share.
The
warrants are exercisable in whole at any time or in part from time to time
prior
to September 13, 2010, at an exercise price of $5.01 per share. Upon the
expiration of the warrant exercise period, unless extended, each warrant
will
expire and become void and of no value.
The
holder of each warrant is entitled, upon payment of the exercise price,
to
purchase one share of AeroGrow’s common stock. The number and kind of securities
or other property for which the warrants are exercisable are subject to
adjustments in certain events, such as mergers, reorganizations or stock
splits,
to prevent dilution. AeroGrow may redeem the warrants at any time on 15
days
prior written notice at a redemption price of $0.0001 per share of common
stock
underlying the warrant, provided a registration statement is in effect
covering
the common shares underlying the warrant, and further provided that for
a period
of not less than 20 consecutive trading days the closing bid price as quoted
on
the Nasdaq Capital Market or NASD OTC BB has been at least $7.50 per share
of
common stock and the average daily trading volume exceeds 50,000 shares
per day.
All of the outstanding warrants must be redeemed if any are redeemed. The
holders of the warrants will not possess the rights that AeroGrow’s shareholders
have unless and until the holders exercise the warrants and then only as
a
holder of the common stock.
The
shares of common stock underlying the redeemable 2005 warrants have registration
rights and these shares were included in an SB-2 Registration Statement
which
was declared effective December 22, 2006.
For
additional information on the Debt Warrants described above, see “Convertible
Note Modification Agreement” below.
Convertible
Notes and Conversion Warrants
AeroGrow
issued $3,000,000 in aggregate principal face amount of 10% unsecured
convertible notes as part of its debt offering in July, August and September
2005 along with the Debt Warrants described above. The principal amount
is
convertible into its common stock at the option of the note holders, at
any
time, at an initial conversion price of $4.00 per share. If not converted,
these
notes and all accrued interest became repayable on demand by the note holders
on
June 30, 2006. The notes bear interest at the rate of 10% annually which
is
payable quarterly beginning September 30, 2005. Prior to the modification
described below, the principal was due on June 30, 2006. AeroGrow could
not
prepay the notes without the holder’s prior consent.
On
conversion of the notes each holder shall also receive five-year warrants
to
purchase 2,000 shares of common stock for each $10,000 principal amount
converted. These conversion warrants may be exercised at any time at an
exercise
price equal to $6.00 per share. AeroGrow may not redeem these conversion
warrants.
The
shares of common stock underlying the convertible notes and the conversion
warrants have registration rights. See “Registration Rights” below.
For
additional information on the convertible notes and Conversion Warrants
described above, see “Convertible Note Modification Agreement”
below.
Convertible
Note Modification Agreement
In
connection with the Merger, AeroGrow sought to modify the terms of certain
outstanding convertible notes issued in 2005 with an outstanding principal
balance of $3,000,000 due June 30, 2006. The note holders of this debt
were
offered the opportunity to convert the principal and interest at a reduced
conversion rate, extend the maturity for a lesser reduced conversion rate
than
immediate conversion, or maintain the current terms unchanged.
The
holders of convertible notes representing $2,130,000 in principal amount
have
converted their notes into AeroGrow common stock at a conversion price
of $3.00
per share, a reduction from the original conversion price of $4.00 per
share.
Accordingly, at the closing of the Merger and 2006 Offering, AeroGrow issued
710,009 shares of its common stock to converting note holders (rounded
up for
fractional shares). The converting note holders also were issued, pursuant
to
the terms of the note offering, warrants to purchase 426,000 shares of
AeroGrow’s common stock at an exercise price of $6.00 per share, which expire in
February 2011.
Holders
of convertible notes representing $840,000 in principal amount agreed to
extend
the maturity under their notes from June 30, 2006 to December 31, 2006
in
exchange for a reduction in their conversion price from $4.00 per share
to $3.50
per share. The Company’s note holders further agreed to extend the maturity of
these notes until March 31, 2007 The remaining holders of convertible notes,
representing $30,000 in principal amount, did not convert or extend the
maturity
of their notes and were paid in cash on June 30, 2006.
For
those
Convertible Note holders who elected to convert or extend the maturity
of their
notes as described above, (i) AeroGrow eliminated the current 180-day lockup
provisions on the shares of common stock underlying the convertible notes
and
related warrants; (ii) AeroGrow eliminated the redemption provisions of
the
$5.00 warrants issued to holders at the time of the issuance of the notes;
and
(iii) holders waived any registration penalties that they may have in connection
with any late filing or effectiveness under the registration rights provisions
of their original subscription for the notes.
As
of
December 31, 2006, the convertible notes and the warrants issued or to
be issued
to convertible note holders can be summarized as follows:
|
·
|
710,009
shares of common stock were issued at the Closing of the 2006
Offering to
holders of convertible notes in the principal amount of $2,130,000
who
have elected to convert such notes at $3.00 per share;
|
|
·
|
240,006
shares of common stock will be issuable upon conversion of convertible
notes (rounded up for fractional shares) in the principal amount
of
$840,000 at a conversion price of $3.50 by holders who elected
to extend
the maturity of their notes to December 31, 2006. The Company’s note
holders further agreed to extend the maturity of these notes
until March
31, 2007.
|
|
·
|
600,000
shares of common stock will be issuable upon exercise of outstanding
warrants held by the initial holders of the convertible notes
with
exercise price of $5.01 per share, of which 6,000 warrants held
by those
not electing to extend the maturity of their convertible notes
to December
31, 2006 are redeemable;
|
|
·
|
426,000
shares of common stock issuable upon exercise of warrants, at
an exercise
price of $6.00 per share, that were issued to holders that elected
to
convert notes in the principal amount of $2,130,000;
and
|
|
·
|
174,000
shares of common stock issuable upon the exercise of warrants
that may be
issued if convertible notes in the principal amount of $840,000
are
converted in the future, which warrants would be exercisable
at $6.00 per
share.
|
Since
December 31, 2006 and as of March 16, $580,000 in principal amount of the
$840,000 principal amount of convertible notes has elected to convert,
or has
instructed us to convert on March 31, 2007, such principal amount of
convertible notes to common stock.
$10.00
Redeemable Warrants and $15.00 Redeemable Warrants
In
2004
AeroGrow completed a Colorado registered offering of 544,228 shares of
its
common stock, redeemable warrants to purchase 390,880 shares of its common
stock
at an exercise price of $10.00 and redeemable warrants to purchase 390,880
shares of its common stock at an exercise price of $15.00. The $10.00 redeemable
warrants and $15.00 redeemable warrants became exercisable on July 1, 2005,
provided that at least 100 shares must be purchased on each exercise. These
warrants expire on December 31, 2007.
AeroGrow
may redeem all of these warrants at any time after its common stock is
quoted on
the OTC BB or a recognized exchange on 15 days prior written notice at
a
redemption price of $0.05 per share, provided that the closing bid or sale
price
of its common stock exceeds $12.50 per share for the $10.00 redeemable
warrants
and $17.50 per share for the $15.00 redeemable warrants for 20 consecutive
trading days ending within 15 days of the date the notice of redemption
is
given.
$5.00
Non-Redeemable Warrants, $2.50 Non-Redeemable Warrants and $1.25 Non-Redeemable
Warrants
From
December 2002 through July 2004 AeroGrow sold in a private placement:
|
·
|
$5.00
non-redeemable warrants to purchase 30,000 shares of its common
stock at
an exercise price of $5.00 per share. As of September 30, 2006,
warrants
to purchase 5,000 shares have been exercised and warrants to
purchase
25,000 have expired.
|
|
·
|
$2.50
non-redeemable warrants to purchase 501,098 shares of its common
stock at
an exercise price of $2.50 per share. As of September 30, 2006,
warrants
to purchase 400,000 shares have been exercised and warrants to
purchase
111,098 shares remain outstanding and are exercisable during
2006.
|
|
·
|
$1.25
non-redeemable warrants to purchase 170,000 shares of its common
stock at
an exercise price of $1.25 per share. As of September 30, 2006,
all of
these warrants were exercised.
|
Stock
Options
AeroGrow
has outstanding options to purchase 1,251,491 shares of AeroGrow common
stock at
exercise prices ranging from $0.005 to $5.00 per share.
2007
Warrants
In
connection with the 2007 Offering, the Company issued 2007 Investor Warrants
pursuant to which 833,400 shares of common stock are issuable under the
terms
thereof at an exercise price of $7.50 per share and 2007 Agent Warrants
pursuant
to which 83,340 shares of common stock are issuable under the terms thereof
at
an exercise price of $8.25 per share. Each 2007 Warrant is non-redeemable
and is
exercisable for five years following the applicable closing date of the
2007
Offering. The exercise price and number of shares of common stock under
the 2007
Warrants will be subject to adjustment on certain events, including reverse
stock splits, stock dividends and recapitalizations, combinations, and
mergers
where AeroGrow is not the surviving company. AeroGrow will at all times
reserve
and keep available, solely for issuance and delivery upon the exercise
of the
2007 Warrants, such shares of common stock underlying the 2007 Warrants
as from
time to time shall be issuable upon the exercise of the 2007 Warrants.
The
Company has the right to require a holder of a 2007 Investor Warrant to
exercise
the 2007 Investor Warrant if our common stock is quoted on the NASDAQ Capital
Market and, for a period of 20 consecutive trading days, the closing bid
price
of the common stock has been above $10.00 per share and the daily trading
volume
has been at least 50,000 shares, in each case on each of the 20 consecutive
trading days. The shares of the common stock underlying the 2007 Warrants
have
registration rights. See “Registration Rights” below.
2006
Warrants
In
connection with the 2006 Offering, there were issued common stock purchase
warrants to purchase up to 2,362,800 shares of common stock at an exercise
price
of $6.25 per share. Of this amount, warrants for 2,148,000 shares were
issued to
investors and warrants for 214,800 shares were issued to the placement
agent of
the offering. Each warrant is non-redeemable and is exercisable until February
24, 2011. The exercise price and number of shares of common stock under
the
warrants will be subject to adjustment on certain events, including reverse
stock splits, stock dividends and recapitalizations, combinations, and
mergers
where AeroGrow is not the surviving company. AeroGrow will at all times
reserve
and keep available, solely for issuance and delivery upon the exercise
of the
warrants, such shares of common stock underlying the warrants as from time
to
time shall be issuable upon the exercise of the warrants. The warrants
held by
the Keating Securities and its designees also may be exercised on a net
cashless
basis. In
July
2006, a warrant holder with warrants from the AeroGrow’s 2006 Offering exercised
warrants to purchase 5,000 shares of the Company’s common stock at $6.25 per
share.
The
shares of the underlying common stock had registration rights and these
shares
were included in an SB-2 Registration Statement which was declared effective
December 22, 2006.
2005
Placement Agent Warrants
In
connection with its services as placement agent for AeroGrow’s 2005 debt
offering of units consisting of convertible notes and redeemable warrants,
AeroGrow sold to Keating Securities for a nominal consideration five-year
warrants to purchase 60,000 shares of AeroGrow’s common stock. These warrants
will be exercisable at any time after September 13, 2006, at a price equal
to
$6.00 per share on a net-issuance or cashless basis.
The
shares of common stock underlying the above placement agent warrants have
registration rights and these shares were included in an SB-2 Registration
Statement which was declared effective December 22, 2006..
Registration
Rights
AeroGrow
has agreed to register (i) 833,400 shares of common stock issued to investors
in
the 2007 Offering and (ii) the 916,800 shares of common stock underlying
the
2007 Warrants issued to investors and the placement agent in the 2007 Offering,,
on a registration statement to be filed by AeroGrow (“2007 Registration
Statement”). This Prospectus is part of the 2007 Registration
Statement.
In
addition, AeroGrow had agreed to register: (i) 2,148,000 shares of common
stock
issued to investors in the 2006 Offering; (ii) 2,148,000 shares of common
stock
underlying the Warrants issued to investors in the 2006 Offering; and (iii)
214,800 shares of common stock underlying the warrants issued to the Keating
Securities in the 2006 Offering on a registration statement to be filed
by
AeroGrow. AeroGrow has filed, and the SEC has declared effective, the 2006
Registration Statement covering these shares and other shares for which
holders
had previously existing registration rights.
Certain
security holders who beneficially own 947,618 shares of our common stock
have
waived their right to be included in the previously filed registration
statement
described above in exchange for the obligation of the company to register
all
such shares as soon as commercially reasonable after the filing of the
next
quarterly or annual report after the declaration of effectiveness of the
this
registration statement, and the Company has agreed to use its commercially
reasonable efforts to have such replacement registration statement declared
effective as soon as practicable.
There
can
be no assurance that the shares of common stock subject to registration
rights,
but not included in this registration statement, as specified above will
become
registered under the Securities Act.
Lockup
Agreements
Stockholders
of Wentworth holding an aggregate of 396,813 shares of common stock entered
into
a lockup agreement under which they will be prohibited from selling or
otherwise
transferring: (i) any of their shares of common stock for a period of 12
months
following the effective date of the registration statement, and (ii) 50%
of its
shares of common stock for a period of 18 months following the effective
date of
the Registration Statement.
Further,
as a condition of the closing of the Merger Agreement, 4,792,428 shares
of
AeroGrow’s common stock held by existing AeroGrow stockholders (including all
shares of AeroGrow held by AeroGrow’s current officers and directors discussed
elsewhere in this Report) and 1,831,067 shares of common stock underlying
AeroGrow’s existing warrants and options outstanding entered into lockup
agreements with the same transfer restrictions as set forth above and applicable
to the stockholders of Wentworth.
As
of
December 31, 2006, the following shares of common stock (or shares of common
stock underlying warrants and options) will not be subject to any lockup
agreement restrictions:
|
·
|
Approximately
544,228 shares of common stock held by investors in AeroGrow’s Colorado
intrastate offering (“Colorado Offering Shares”). The Colorado Offering
Shares will be freely tradable without
restriction.
|
|
·
|
370,319
shares of outstanding common stock held by existing AeroGrow
stockholders.
These shares of common stock may be freely tradable without restriction
following the 2006 Offering depending on how long the holders
thereof have
held these shares depending on the requirements of Rules 144
and 701.
|
|
·
|
115,000
shares of common stock underlying existing warrants, and 20,944
shares of
common stock underlying outstanding options issued to employees,
consultants and vendors. Upon exercise of these warrants by the
holders
thereof, the shares will be restricted shares subject to the
restrictions
on transfer imposed under Rule 144 and Rule 701 promulgated under
the
Securities Act, which have different holding periods and volume
limitations depending on the status of the holder and the time
period that
the holder has held the securities.
|
|
·
|
183,323
shares of common stock held by
Wentworth.
|
In
addition, none of the shares of common stock issued in the 2006 Offering,
issued
upon or underlying the conversion of the convertible notes, underlying
the 2006
Warrants or 2007 Warrants (including, in each case, warrants issued to
the
placement agent), or underlying the warrants issued or to be issued to
Convertible Note holders (including placement agent warrants) are subject
to
lockup restrictions.
Dividend
Policy
AeroGrow
has not declared or paid any cash dividends on its common stock. It intends
to
retain any future earnings to finance the growth and development of its
business, and therefore it does not anticipate paying any cash dividends
on the
common stock in the future. The board of directors will determine any future
payment of cash dividends depending on the financial condition, results
of
operations, capital requirements, general business condition and other
relevant
factors. If the company issues preferred shares, although not currently
anticipated, no dividends may be paid on the outstanding common stock until
all
dividends then due on the outstanding preferred stock will have been
paid.
Transfer
Agent and Registrar
AeroGrow
has appointed Corporate Stock Transfer, Denver, Colorado, as its registrar
and
transfer agent and registrar of its common stock. The mailing address of
Corporate Stock Transfer is 3200 Cherry Creek South Drive, Denver, Colorado
80209-3246.
Director
Liability and Indemnification
Under
Nevada law and the AeroGrow’s bylaws, AeroGrow is required to indemnify its
officers, directors, employees and agents in certain situations. In some
instances, a court must approve indemnification. As permitted by Nevada
statutes, the articles of incorporation eliminate in certain circumstances
the
monetary liability of its directors for a breach of their fiduciary duties.
These provisions do not eliminate a director’s liability for:
|
·
|
a
willful failure to deal fairly with us or our shareholders in
connection
with a matter in which the director has a material conflict of
interest,
|
|
·
|
a
violation of criminal law unless the director had reasonable
cause to
believe that his or her conduct was lawful or no reasonable cause
to
believe that his or her conduct was
unlawful,
|
|
·
|
a
transaction from which the director derived an improper personal
profit,
and
|
As
to
indemnification for liabilities arising under the Securities Act for directors,
officers or persons controlling the company, AeroGrow has been informed
that, in
the opinion of the SEC, such indemnification is against public policy and
therefore unenforceable.
Shareholder
Action
Under
our
bylaws, the affirmative vote of the holders of a majority of the shares
of
common stock represented at a meeting at which a quorum is present is sufficient
to authorize, ratify or consent to any action required by the common
shareholders, except as otherwise provided by the Nevada General Corporation
Law. Under the Nevada General Corporation Law and our bylaws, our shareholders
may also take actions by written consent without holding a meeting. The
written
consent must be signed by the holders of at least a majority of the voting
power, except that if a different proportion of voting power is required
for a
specific action, then that proportion. If this occurs, we are required
to
provide prompt notice of any corporate action taken without a meeting to
our
shareholders who did not consent in writing to the action.
Antitakeover
Provisions
Our
articles of incorporation and the Nevada General Corporation Law include
a
number of provisions that may have the effect of encouraging persons considering
unsolicited tender offers or other unilateral takeover proposals to negotiate
with our board of directors rather than pursue non-negotiated takeover
attempts.
We believe that the benefits of these provisions outweigh the potential
disadvantages of discouraging these proposals because, among other things,
negotiation of the proposals might result in an improvement of their
terms.
PLAN
OF DISTRIBUTION
We
are
registering the shares of common stock previously issued in the 2007 Offering
and the shares of common stock issuable upon exercise of the 2007 Warrants
to
permit the resale of these shares of common stock by the holders of the
common
stock and warrants from time to time after the date of this prospectus.
We will
not receive any of the proceeds from the sale by the selling stockholders
of the
shares of common stock. We will bear all fees and expenses incident to
our
obligation to register the shares of common stock.
The
selling stockholders may sell all or a portion of the shares of common
stock
beneficially owned by them and offered hereby from time to time directly
or
through one or more underwriters, broker-dealers or agents. If the shares
of
common stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions
or
agent's commissions. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of
the
sale, at varying prices determined at the time of sale, or at negotiated
prices.
These sales may be effected in transactions, which may involve crosses
or block
transactions,
|
·
|
on
any national securities exchange or quotation service on which
the
securities may be listed or quoted at the time of
sale;
|
|
·
|
in
the over-the-counter market;
|
|
·
|
in
transactions otherwise than on these exchanges or systems or
in the
over-the-counter market;
|
|
·
|
through
the writing of options, whether such options are listed on an
options
exchange or otherwise;
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal
to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
sales
pursuant to Rule 144;
|
|
·
|
broker-dealers
may agree with the selling securityholders to sell a specified
number of
such shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
If
the
selling stockholders effect such transactions by selling shares of common
stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or commissions
from
purchasers of the shares of common stock for whom they may act as agent
or to
whom they may sell as principal (which discounts, concessions or commissions
as
to particular underwriters, broker-dealers or agents may be in excess of
those
customary in the types of transactions involved). In connection with sales
of
the shares of common stock or otherwise, the selling stockholders may enter
into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of common stock in the course of hedging in positions
they
assume. The selling stockholders may also sell shares of common stock short
and
deliver shares of common stock covered by this prospectus to close out
short
positions and to return borrowed shares in connection with such short sales.
The
selling stockholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
The
selling stockholders may pledge or grant a security interest in some or
all of
the 2007 Warrants or shares of common stock owned by them and, if they
default
in the performance of their secured obligations, the pledgees or secured
parties
may offer and sell the shares of common stock from time to time pursuant
to this
prospectus or any amendment to this prospectus under Rule 424(b)(3) or
other
applicable provision of the Securities Act, amending, if necessary, the
list of
selling stockholders to include the pledgee, transferee or other successors
in
interest as selling stockholders under this prospectus. The selling stockholders
also may transfer and donate the shares of common stock in other circumstances
in which case the transferees, donees, pledgees or other successors in
interest
will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholders and any broker-dealer participating in the distribution
of
the shares of common stock may be deemed to be "underwriters" within the
meaning
of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering
of the
shares of common stock is made, a prospectus supplement, if required, will
be
distributed which will set forth the aggregate amount of shares of common
stock
being offered and the terms of the offering, including the name or names
of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
Under
the
securities laws of some states, the shares of common stock may be sold
in such
states only through registered or licensed brokers or dealers. In addition,
in
some states the shares of common stock may not be sold unless such shares
have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There
can
be no assurance that any selling stockholder will sell any or all of the
shares
of common stock registered pursuant to the registration statement, of which
this
prospectus forms a part.
The
selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act
of 1934,
as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing
of
purchases and sales of any of the shares of common stock by the selling
stockholders and any other participating person. Regulation M may also
restrict
the ability of any person engaged in the distribution of the shares of
common
stock to engage in market-making activities with respect to the shares
of common
stock. All of the foregoing may affect the marketability of the shares
of common
stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.
We
will
pay all expenses of the registration of the shares of common stock pursuant
to
the registration rights agreement, estimated to be $50,000 in total, including,
without limitation, Securities and Exchange Commission filing fees and
expenses
of compliance with state securities or "blue sky" laws; provided, however,
that
a selling stockholder will pay all underwriting discounts and selling
commissions, if any. We will indemnify the selling stockholders against
liabilities, including some liabilities under the Securities Act, in accordance
with the registration rights agreements, or the selling stockholders will
be
entitled to contribution. We may be indemnified by the selling stockholders
against civil liabilities, including liabilities under the Securities Act,
that
may arise from any written information furnished to us by the selling
stockholder specifically for use in this prospectus, in accordance with
the
related registration rights agreements, or we may be entitled to
contribution.
Once
sold
under the registration statement, of which this prospectus forms a part,
the
shares of common stock will be freely tradable in the hands of persons
other
than our affiliates.
SELLING
SECURITY HOLDERS
In
March
2007, we completed the 2007 Offering in which we sold an aggregate of 833,400
shares of common stock and the 2007 Investor Warrants to purchase 833,400
shares
of common stock in the form of units consisting of one share of common
stock and
one warrant per unit. In addition, we issued the 2007 Agent Warrants to
purchase
83,340 shares of common stock to the placement agent of the 2007
Offering.
The
following table presents certain information known to us as of March 16,
2007, relating to the people who are selling common stock pursuant to this
offering. During the past three years, none of the selling security holders
held
any position or office with us. Beneficial ownership of the common stock
by the
selling security holders, which term includes their transferees, pledgees,
donees and successors, after the offering will depend on the number of
shares of
common stock sold by each selling security holder.
|
Beneficial
Ownership of
Common
Stock Before Offering
|
Maximum
Number
of
Shares to
be
Sold
|
Beneficial
Ownership
of Common Stock
AfterOffering
|
Name
of Selling Security Holder*
|
Number
|
Percentage**
|
|
Number
|
Percentage***
|
Accelera
Private Equity Limited(1)
|
83,340
|
-
|
83,340
|
0
|
-
|
Accelera
Ventures Ltd.(1)
|
66,672
|
-
|
66,672
|
0
|
-
|
Jeff
L. Andrews*
|
23,839
|
-
|
23,839
|
0
|
-
|
Christopher
P. Baker
|
33,336
|
-
|
33,336
|
0
|
-
|
Beachcomber
Investments, LLC
|
83,340
|
-
|
83,340
|
0
|
-
|
Margie
L. Blackwell*
|
5,000
|
-
|
5,000
|
0
|
-
|
Pablo
Felipe Serna Cardenas*
|
3,750
|
-
|
3,750
|
0
|
-
|
CL
nr. 1 ApS
|
25,002
|
-
|
25,002
|
0
|
-
|
Denis
Culverwell*
|
500
|
-
|
500
|
0
|
-
|
Rexford
Appenteng Darko
|
8,334
|
-
|
8,334
|
0
|
-
|
Richard
Kofi Darko
|
33,336
|
-
|
33,336
|
0
|
-
|
Justin
Davis*
|
10,000
|
-
|
10,000
|
0
|
-
|
Diamond
Opportunity Fund, LLC
|
100,008
|
-
|
100,008
|
0
|
-
|
Dynamic
Decisions Strategic Opportunities(2)
|
100,008
|
-
|
100,008
|
0
|
-
|
Freedom
Ride, LLC(3)
|
16,668
|
-
|
16,668
|
0
|
-
|
Banca
Gesfid
|
50,004
|
-
|
50,004
|
0
|
-
|
Brett
Green*
|
2,500
|
-
|
2,500
|
0
|
-
|
Green
Drake Capital Corp.*
|
3,038
|
-
|
3,038
|
0
|
-
|
Randy
Haag*
|
2,977
|
-
|
2,977
|
0
|
-
|
John
U. Harris, Jr.
|
8,334
|
-
|
8,334
|
0
|
-
|
Steven
J. Henricks*
|
3,959
|
-
|
3,959
|
0
|
-
|
H.L.
Severance, Inc. Pension Plan and Trust(4)
|
6,670
|
-
|
6,670
|
0
|
-
|
H.L.
Severance, Inc. Profit Sharing Plan and Trust(4)
|
10,000
|
-
|
10,000
|
0
|
-
|
Insignia
Partners, LP
|
30,004
|
-
|
30,004
|
0
|
-
|
Iroquois
Master Fund Ltd.(5)
|
66,672
|
-
|
66,672
|
0
|
-
|
Joint
Glory International, Ltd.
|
125,010
|
-
|
125,010
|
0
|
-
|
Rhonda
Jordan and Kerry Anderson JTTEN
|
8,334
|
-
|
8,334
|
0
|
-
|
Sheldon
Kahn and Sarah Liron JTTEN
|
33,336
|
-
|
33,336
|
0
|
-
|
Michael
J. Keating*
|
2,500
|
-
|
2,500
|
0
|
-
|
Timothy
J. Keating*
|
13,200
|
-
|
13,200
|
0
|
-
|
John
K. Kopra
|
33,336
|
-
|
33,336
|
0
|
-
|
Timothy
G. Lawrence
|
16,668
|
-
|
16,668
|
0
|
-
|
Lazarus
Investment Partners, LLLP(6)
|
200,016
|
-
|
200,016
|
0
|
-
|
LKCM
Private Discipline Master Fund, SPC
|
83,340
|
-
|
83,340
|
0
|
-
|
Reed
Madison*
|
1,370
|
-
|
1,370
|
0
|
-
|
Robert
Maloney*
|
1,500
|
-
|
1,500
|
0
|
-
|
Ranjit
P. Mankekar*
|
10,000
|
-
|
10,000
|
0
|
-
|
Carolyn
A. Meske and Rajeeb Pradhan JTWROS
|
8,334
|
-
|
8,334
|
0
|
-
|
Christopher
McCarty & Jennifer McCarty
|
8,334
|
-
|
8,334
|
0
|
-
|
John
Micek, III
|
25,002
|
-
|
25,002
|
0
|
-
|
Ronald
and Linda Nash
|
36,800
|
-
|
36,800
|
0
|
-
|
Northwood
Capital Partners LP
|
50,004
|
-
|
50,004
|
0
|
-
|
Joseph
Michael O’Brien
|
25,002
|
-
|
25,002
|
0
|
-
|
Steve
Olore*
|
500
|
-
|
500
|
0
|
-
|
Steve
Osello*
|
1,370
|
-
|
1,370
|
0
|
-
|
Charles
R. Percy
|
10,758
|
-
|
8,334
|
2,424
|
-
|
Jerry
Peterson IRA
|
25,002
|
-
|
25,002
|
0
|
-
|
Porter
Partners, LP(7)
|
66,672
|
-
|
66,672
|
0
|
-
|
Russ
C. Rauhauser
|
8,334
|
-
|
8,334
|
0
|
-
|
Rock
Associates
|
16,668
|
-
|
16,668
|
0
|
-
|
Kyle
L. Rogers*
|
5,000
|
-
|
5,000
|
0
|
-
|
Allan
Rothstein
|
8,334
|
-
|
8,334
|
0
|
-
|
Steven
Rothstein
|
8,334
|
-
|
8,334
|
0
|
-
|
Don
Russell, Jr.
|
8,334
|
-
|
8,334
|
0
|
-
|
Leonard
Samuels IRA, Charles Schwab & Co., Inc. Custodian
|
16,668
|
-
|
16,668
|
0
|
-
|
John
B. Sanderson*
|
8,334
|
-
|
8,334
|
0
|
-
|
Pamela
A. Solly*
|
2,500
|
-
|
2,500
|
0
|
-
|
Luca
Toscani*
|
5,000
|
-
|
5,000
|
0
|
-
|
Jonathan
Ungar
|
33,336
|
-
|
33,336
|
0
|
-
|
Laurence
Verbeck
|
75,336
|
-
|
33,336
|
42,000
|
-
|
The
Vintox Fund, LP
|
33,336
|
-
|
33,336
|
0
|
-
|
Chris
Wrolstad*
|
1,370
|
-
|
1,370
|
0
|
-
|
(*) The
selling security holders identified with an asterisk have identified that
they
are, or are affiliates of, registered broker-dealers. These selling security
holders have represented that they acquired their securities in the ordinary
course of business and, at the time of the acquisition of the securities,
had no
agreements or understandings, directly or indirectly, with any person to
distribute the securities. To the extent that we become aware that any
such
selling security holders did not acquire its securities in the ordinary
course
of business or did have such an agreement or understanding, we will file
a
post-effective amendment to registration statement of which this prospectus
is a
part to designate such person as an “underwriter” within the meaning of the
Securities Act of 1933.
(**) Based
on
10,550,030 shares outstanding as of March 16, 2007. Unless
otherwise noted, none of these selling security holders beneficially own
1% or
more of our outstanding common stock.
(***) Calculated
based on Rule 13d-3 of the Securities Exchange Act of 1934, Based
on
10,550,030 shares outstanding as of March 16, 2007.
In
calculating these percentages for each security holder, we also treated
as
outstanding that number of shares of common stock issuable upon exercise
of the
2007 Warrants held by such security holder. However, we did not assume
the
exercise of any other security holder’s 2007 Warrants. Unless otherwise noted,
none of these selling security holders would beneficially own 1% or more
of the
outstanding shares of our common stock following the sale of securities
in the
offering.
(1) Mr.
Dennis Kam Thai Leong, a director, has the investing and voting control
over
such securities.
(2) Mr.
Alberto Micalizzi, chairman, has investing and voting control over such
securities.
(3) Todd
Stewart has the investing and voting control over such securities.
(4) H.
Leigh
Severance, as trustee, has investing and voting control over such securities.
Excludes shares held individually.
(5) Joshua
Silverman has investing and voting control over such securities.
(6) Mr.
Justin Borus, manager, has investing and voting control over such
securities.
(7) Mr.
Jeffrey H. Porter, general partner, has investing and voting control over
such
securities.
CHANGES
IN CERTIFYING ACCOUNTANT
On
February 24, 2006, AeroGrow dismissed Hein & Associates LLP (“Hein”), the
former accountants for Wentworth (the company which merged with and into
AeroGrow), as its independent registered public accounting firm. The decision
was approved by the board of directors of AeroGrow. AeroGrow is the “successor
issuer” to Wentworth within the meaning of Rule 12(g)-3 under the Securities
Exchange Act of 1934, as amended (“Exchange Act”) and became a Section 12(g)
reporting company under the Exchange Act.
The
reports of Hein on Wentworth’s financial statements for the fiscal years ended
December 31, 2005 and 2004 did not contain an adverse opinion or disclaimer
of
opinion and were not modified as to uncertainty, audit scope, or accounting
principles, except the report did contain an explanatory paragraph related
to
Wentworth’s ability to continue as a going concern. During Wentworth’s fiscal
years ended December 31, 2005 and 2004, there were no disagreements with
Hein on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not
resolved
to the satisfaction of Hein would have caused Hein to make reference to
the
subject matter of the disagreements in connection with its report on the
financial statements for such years. Wentworth requested that Hein furnish
it
with a letter addressed to the SEC stating whether or not it agrees with
Wentworth’s statements. A copy of the letter furnished by Hein in response to
that request, dated February 27, 2006, was filed as Exhibit 16.1 to the
Form 8-K
reporting the change.
On
February 24, 2006, Wentworth engaged Gordon Hughes & Banks, LLP as the new
independent registered public accounting firm to audit AeroGrow’s financial
statements. The appointment of Gordon Hughes & Banks, LLP was approved by
the Board of Directors of AeroGrow. Gordon Hughes & Banks, LLP acted as the
independent registered public accounting firm for AeroGrow prior to its
merger
with Wentworth.
LEGAL
MATTERS
The
validity of the shares of common stock offered through this prospectus
will be
passed upon for us by Kranitz & Philipp. As further described under
"Certain Relationships and Related Transactions," Richard Kranitz, one
of our
directors and one of our stockholders, is a member of the law firm of Kranitz
and Philipp.
EXPERTS
Gordon,
Hughes & Banks, LLP, Greenwood Village, Colorado, an independent registered
public accounting firm, has audited the AeroGrow financial statements as
of
March 31, 2006, December 31, 2005 and 2004, and for the three-month period
ended
March 31, 2006 and two years ended December 31, 2005 and December 31, 2004,
as
set forth in their report. We have included our financial statements in
this
prospectus in reliance upon the report of Gordon, Hughes & Banks, LLP, given
on their authority as experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We
file
annual reports, quarterly reports, special reports, and other information,
including a registration statement on Form SB-2 of which this prospectus
forms a
part, with the SEC, or SEC. As permitted by the rules and regulations of
the
SEC, this prospectus does not contain all of the information included in
the
registration statement and in the exhibits thereto. The statements contained
in
this prospectus as to the contents of any contract or other document referenced
herein are not necessarily complete, and in each instance, if the contract
or
document was filed as an exhibit, reference is hereby made to the copy
of the
contract or other document filed as an exhibit to the registration statement
and
each statement is qualified in all respects by the reference. Our SEC filings
and the registration statement, including exhibits and schedules filed
with it,
are available to the public over the Internet at the SEC’s web site at
http://www.sec.gov. You may also read and copy any document that we file
with
the SEC at the SEC’s public reference room located at 100 F Street, N.E.
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference room.
We
will
provide without charge to you, upon written or oral request, a copy of
any
information incorporated by reference in this prospectus, excluding exhibits
to
information incorporated by reference unless these exhibits are themselves
specifically incorporated by reference.
Any
requests for copies of information, reports or other filings with the SEC
should
be directed to AeroGrow International, Inc. at 6075 Longbow Dr. Suite 200,
Boulder, Colorado 80301, telephone (303) 444-7755. We maintain a website at
www.aerogrow.com.
Information contained on our website is not incorporated by reference into
this
prospectus and you should not consider information contained on our website
to
be part of this prospectus.
AEROGROW
INTERNATIONAL, INC.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Balance
Sheets - March 31, 2006, December 31, 2005 and December 31,
2004
|
F-3
|
Statements
of Operations - Three Months Ended March 31, 2006 and 2005 (Unaudited)
and
Years Ended December 31, 2005 and 2004
|
F-4
|
Statements
of Changes in Stockholders’ Equity - Three Months Ended March 31, 2006 and
Years Ended December 31, 2005 and 2004
|
F-5
|
Statements
of Changes in Cash Flows - Three Months Ended March 31, 2006
and 2005
(Unaudited) and Years Ended December 31, 2005 and 2004
|
F-7
|
Notes
to Financial Statements - Three Months Ended March 31, 2006 and
2005
(Unaudited) and Years Ended December 31, 2005 and 2004
|
F-8
|
Interim
Financial Statements
|
F-22
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
AeroGrow
International, Inc.
Boulder,
CO
We
have
audited the accompanying balance sheets of AeroGrow International, Inc.
(the
“Company”) as of March 31, 2006, December 31, 2005 and 2004 and the related
statements of operations, changes in stockholders’ equity (deficit) and cash
flows for the three months ended March 31, 2006 and each of the two years
ended
December 31, 2005 and 2004. These financial statements are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged
to
perform, an audit of its internal control over financial reporting. Our
audit
included consideration of internal control over financial reporting as
a basis
for designing audit procedures that are appropriate in the circumstances,
but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An
audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statement presentation. We believe
that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of AeroGrow International, Inc.
as of
March 31, 2006, December 31, 2005 and 2004, and the consolidated results
of its
operations and its cash flows for the three-month period ended March 31,
2006
and the years ended December 31, 2005 and 2004, in conformity with accounting
principles generally accepted in the United States of America.
Gordon,
Hughes & Banks, LLP
Greenwood
Village, Colorado
May
19,
2006
AEROGROW
INTERNATIONAL, INC.
BALANCE
SHEETS
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
8,852,548
|
|
$
|
949,126
|
|
$
|
1,916,842
|
|
Subscriptions
receivable
|
|
|
|
|
|
-
|
|
|
840,000
|
|
|
41,000
|
|
Accounts
receivable
|
|
|
|
|
|
43,156
|
|
|
-
|
|
|
-
|
|
Inventory
|
|
|
|
|
|
192,946
|
|
|
19,480
|
|
|
-
|
|
Prepaid
expenses and other
|
|
|
|
|
|
199,590
|
|
|
79,720
|
|
|
5,423
|
|
Total
current assets
|
|
|
|
|
|
9,288,240
|
|
|
1,888,326
|
|
|
1,963,265
|
|
Property
and equipment, net of accumulated depreciation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$102,431,
$61,599 and $7,840 at March 31, 2006,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005 and 2004, respectively
|
|
|
|
|
|
480,771
|
|
|
420,444
|
|
|
30,721
|
|
Debt
issuance costs, net of $373,853 and $209,734 accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
at March 31, 2006 and December 31, 2005, respectively
|
|
|
|
|
|
45,618
|
|
|
209,737
|
|
|
|
|
Intangible
assets, net of $1,071 and $0 of amortization at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006 and December 31, 2005, respectively
|
|
|
|
|
|
21,696
|
|
|
20,407
|
|
|
|
|
Deposits
|
|
|
|
|
|
4,684
|
|
|
4,684
|
|
|
4,484
|
|
Total
other assets
|
|
|
|
|
|
71,998
|
|
|
234,828
|
|
|
4,484
|
|
Total
assets
|
|
|
|
|
$
|
9,841,009
|
|
$
|
2,543,598
|
|
$
|
1,998,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
$
|
487,474
|
|
$
|
196,840
|
|
$
|
46,969
|
|
Accrued
expenses
|
|
|
|
|
|
334,524
|
|
|
56,900
|
|
|
27,745
|
|
Convertible
debentures, net of loan issue discounts of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$196,781
and $904,740 at March 31, 2006 and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005, respectively
|
|
|
|
|
|
792,539
|
|
|
2,095,260
|
|
|
-
|
|
Mandatorily
redeemable common stock
|
|
|
|
|
|
310,000
|
|
|
310,000
|
|
|
-
|
|
Accrued
compensation
|
|
|
|
|
|
-
|
|
|
-
|
|
|
11,833
|
|
Total
current liabilities
|
|
|
|
|
|
1,924,537
|
|
|
2,659,000
|
|
|
86,547
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 20,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
none
issued or outstanding
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Common
stock, $.001 par value, 75,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,102,622,
5,580,740 and 4,882,908 shares issued and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at March 31, 2006, December 31, 2005 and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004, respectively
|
|
|
|
|
|
9,103
|
|
|
5,579
|
|
|
4,883
|
|
Additional
paid-in capital
|
|
|
|
|
|
27,313,081
|
|
|
11,741,388
|
|
|
5,761,832
|
|
Accumulated
(deficit)
|
|
|
|
|
|
(19,405,712
|
)
|
|
(11,862,369
|
)
|
|
(3,854,792
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
|
|
|
7,916,472
|
|
|
(115,402
|
)
|
|
1,911,923
|
|
Total
liabilities and stockholders’ equity (deficit)
|
|
|
|
|
$
|
9,841,009
|
|
$
|
2,543,598
|
|
$
|
1,998,470
|
|
See
accompanying notes to the financial statements
AEROGROW
INTERNATIONAL, INC.
STATEMENTS
OF OPERATIONS
|
|
Three
months ended
|
|
Year
Ended
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
35,245
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
134,622
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Research
and development
|
|
|
978,538
|
|
|
306,194
|
|
|
1,578,833
|
|
|
333,038
|
|
Sales
and marketing
|
|
|
2,548,583
|
|
|
28,275
|
|
|
583,897
|
|
|
79,811
|
|
General
and administrative
|
|
|
2,010,908
|
|
|
514,973
|
|
|
2,923,792
|
|
|
1,983,759
|
|
Total
operating expenses
|
|
|
5,672,651
|
|
|
849,442
|
|
|
5,086,522
|
|
|
2,396,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(5,637,406
|
)
|
|
(849,442
|
)
|
|
(5,086,522
|
)
|
|
(2,396,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
modification expense
|
|
|
-
|
|
|
-
|
|
|
1,446,200
|
|
|
-
|
|
Interest
expense
|
|
|
1,813,278
|
|
|
-
|
|
|
1,225,961
|
|
|
(7,564
|
)
|
Interest
income
|
|
|
(39,919
|
)
|
|
(7,935
|
)
|
|
(41,106
|
)
|
|
-
|
|
Loss
on modification of debt
|
|
|
132,578
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
other (income) expense, net
|
|
|
1,905,937
|
|
|
(7,935
|
)
|
|
2,631,055
|
|
|
(7,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,543,343
|
)
|
$
|
(841,507
|
)
|
$
|
(7,717,577
|
)
|
$
|
(2,389,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
$
|
(0.84
|
)
|
$
|
(0.17
|
)
|
$
|
(1.55
|
)
|
$
|
(0.56
|
)
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding,
basic and diluted
|
|
|
8,956,353
|
|
|
4,898,686
|
|
|
4,971,857
|
|
|
4,252,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the financial statements
AEROGROW
INTERNATIONAL, INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
(Deficit)
|
|
Total
|
|
Balances,
January 1, 2004
|
|
|
3,747,570
|
|
$
|
3,748
|
|
$
|
2,411,345
|
|
$
|
(1,755,748
|
)
|
$
|
659,345
|
|
Issuance
of common stock for cash from
|
|
|
40,000
|
|
|
40
|
|
|
49,960
|
|
|
-
|
|
|
50,000
|
|
January
1 to January 30, 2004 at $1.25 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash during private placement from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
1 to June 30, 2004 at $1.665 per share
|
|
|
360,458
|
|
|
360
|
|
|
600,140
|
|
|
-
|
|
|
600,500
|
|
Issuance
of common stock for cash during public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
July 30 to December 31, 2004 at $5.00 per share,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of $185,240 in offering costs
|
|
|
498,596
|
|
|
498
|
|
|
2,307,239
|
|
|
-
|
|
|
2,307,737
|
|
Issuance
of additional shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
private placement investors
|
|
|
27,700
|
|
|
28
|
|
|
(28
|
)
|
|
-
|
|
|
-
|
|
Issuance
of additional shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
public offering investors
|
|
|
45,632
|
|
|
46
|
|
|
(46
|
)
|
|
-
|
|
|
-
|
|
Issuance
of common stock for services provided (4,000 shares at $0.05
per share;
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
shares at $1.25 per share; 38,332 shares at $1.65 per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
And
97,550 shares at $5.00 per share)
|
|
|
144,882
|
|
|
145
|
|
|
557,301
|
|
|
-
|
|
|
557,446
|
|
Exercise
of common stock warrants at $1.25 per share
|
|
|
12,000
|
|
|
12
|
|
|
14,988
|
|
|
-
|
|
|
15,000
|
|
Issuance
of stock options to non-employees for services provided
from
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2004 to December 31, 2004
|
|
|
-
|
|
|
-
|
|
|
80,939
|
|
|
-
|
|
|
80,939
|
|
Issuance
of common stock to Board of Directors at $5.00 per share
|
|
|
6,000
|
|
|
6
|
|
|
29,994
|
|
|
-
|
|
|
30,000
|
|
Net
(loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,389,044
|
)
|
|
(2,389,044
|
)
|
Effects
of 1 for 5 reverse stock split
|
|
|
70
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balances,
December 31, 2004
|
|
|
4,882,908
|
|
|
4,883
|
|
|
6,051,832
|
|
|
(4,144,792
|
)
|
|
1,911,923
|
|
(Continued)
See
accompanying notes to the financial statements
AEROGROW
INTERNATIONAL, INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
(Continued)
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
(Deficit)
|
|
Total
|
|
Exercise
of common stock warrants from August
to
December 31, 2005 at $1.25 per share
|
|
|
40,000
|
|
|
40
|
|
|
47,460
|
|
|
-
|
|
|
47,500
|
|
Exercise
of common stock warrants from June to
December
31, 2005 at $2.50 per share
|
|
|
390,000
|
|
|
390
|
|
|
974,610
|
|
|
-
|
|
|
975,000
|
|
Exercise
of common stock warrants at December 31,
2005
at $5.00 per share
|
|
|
5,000
|
|
|
5
|
|
|
24,995
|
|
|
-
|
|
|
25,000
|
|
Issuance
of common stock for cash in August at $5.00
per
share
|
|
|
1,600
|
|
|
2
|
|
|
7,998
|
|
|
-
|
|
|
8,000
|
|
Issuance
of common stock for services provided,
rent
and equipment purchases from January to December 31, 2005 at
$5.00 per
share
|
|
|
261,232
|
|
|
261
|
|
|
1,305,875
|
|
|
|
|
|
1,306,136
|
|
Issuance
of stock options to non-employees for services
provided
|
|
|
-
|
|
|
-
|
|
|
72,936
|
|
|
-
|
|
|
72,936
|
|
Issuance
of warrants to debt holders of convertible
debentures
|
|
|
-
|
|
|
-
|
|
|
1,059,480
|
|
|
-
|
|
|
1,059,480
|
|
Intrinsic
value of convertible debentures, beneficial
conversion
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
-
|
|
|
750,000
|
|
Effects
of variable accounting on the modification of
terms
of outstanding warrants
|
|
|
-
|
|
|
-
|
|
|
1,446,200
|
|
|
|
|
|
1,446,200
|
|
Net
(loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,717,577
|
)
|
|
(7,717,577
|
)
|
Balances,
December 31, 2005
|
|
|
5,580,740
|
|
|
5,581
|
|
|
11,741,386
|
|
|
(11,862,369
|
)
|
|
(115,402
|
)
|
Common
stock issued in private placement
|
|
|
2,148,000
|
|
|
2,148
|
|
|
8,807,787
|
|
|
-
|
|
|
8,809,935
|
|
Common
stock issued for conversion of convertible
debentures
|
|
|
710,009
|
|
|
710
|
|
|
2,129,290
|
|
|
-
|
|
|
2,130,000
|
|
Common
stock issued in exchange for stock of
Wentworth
1
|
|
|
580,136
|
|
|
580
|
|
|
(580
|
)
|
|
-
|
|
|
-
|
|
Common
stock issued under equity compensation plans
|
|
|
83,737
|
|
|
84
|
|
|
418,600
|
|
|
-
|
|
|
418,684
|
|
Stock
options issued under equity compensation plans
|
|
|
-
|
|
|
-
|
|
|
3,315,840
|
|
|
-
|
|
|
3,315,840
|
|
Beneficial
conversion value due to modification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
the terms of the convertible debentures
|
|
|
-
|
|
|
-
|
|
|
900,758
|
|
|
-
|
|
|
900,758
|
|
Net
(loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,543,343
|
)
|
|
(7,543,343
|
)
|
Balances,
March 31, 2006
|
|
|
9,102,622
|
|
$
|
9,103
|
|
$
|
27,313,081
|
|
|
($19,405,712
|
)
|
$
|
7,916,472
|
|
See
accompanying notes to the financial statements
AEROGROW
INTERNATIONAL, INC.
STATEMENTS
OF CASH FLOWS
|
|
Three
months ended
|
|
Year
Ended
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,543,343
|
)
|
$
|
(841,507
|
)
|
$
|
(7,717,577
|
)
|
$
|
(2,389,044
|
)
|
Adjustments
to reconcile net loss to cash provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(used)
by operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock and options under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
compensation plans
|
|
|
3,734,525
|
|
|
218,805
|
|
|
1,349,072
|
|
|
668,385
|
|
Depreciation
and amortization expense
|
|
|
41,514
|
|
|
1,898
|
|
|
53,759
|
|
|
5,920
|
|
Amortization
of debt issuance costs
|
|
|
164,119
|
|
|
-
|
|
|
209,737
|
|
|
-
|
|
Amortization
of convertible debentures, beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
feature
|
|
|
1,180,937
|
|
|
-
|
|
|
375,000
|
|
|
-
|
|
Interest
expense associated with warrants issued with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debentures
|
|
|
414,522
|
|
|
-
|
|
|
529,740
|
|
|
-
|
|
Effects
of variable accounting for modification of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrant
terms
|
|
|
-
|
|
|
-
|
|
|
1,446,200
|
|
|
-
|
|
Loss
on modification of debt
|
|
|
132,578
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in subscriptions receivable
|
|
|
840,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(Increase)
in accounts receivable
|
|
|
(43,156
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
(Increase)
in inventory
|
|
|
(173,466
|
)
|
|
-
|
|
|
(19,480
|
)
|
|
-
|
|
(Increase)
in other current assets
|
|
|
(119,870
|
)
|
|
37,866
|
|
|
(873,297
|
)
|
|
(3,323
|
)
|
(Increase)
in deposits
|
|
|
-
|
|
|
(200
|
)
|
|
(200
|
)
|
|
(2,484
|
)
|
Increase
in accounts payable
|
|
|
290,634
|
|
|
(2,800
|
)
|
|
149,871
|
|
|
39,480
|
|
Increase
in accrued expenses and mandatorily redeemable stock
|
|
|
277,624
|
|
|
(21,657
|
)
|
|
339,155
|
|
|
18,469
|
|
(Decrease)
in accrued compensation
|
|
|
-
|
|
|
(11,833
|
)
|
|
(11,833
|
)
|
|
(25,770
|
)
|
Net
cash (used) by operating activities
|
|
|
(803,382
|
)
|
|
(619,428
|
)
|
|
(4,169,853
|
)
|
|
(1,688,367
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of equipment
|
|
|
(100,771
|
)
|
|
(3,103
|
)
|
|
(413,482
|
)
|
|
(11,556
|
)
|
Patent
expenses
|
|
|
(2,360
|
)
|
|
-
|
|
|
(20,407
|
)
|
|
-
|
|
Net
cash (used) by investing activities
|
|
|
(103,131
|
)
|
|
(3,103
|
)
|
|
(433,889
|
)
|
|
(11,556
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
in due to parent company
|
|
|
-
|
|
|
(28,500
|
)
|
|
-
|
|
|
(17,884
|
)
|
Proceeds
from issuance of common stock, net
|
|
|
8,809,935
|
|
|
-
|
|
|
1,055,500
|
|
|
3,002,237
|
|
Proceeds
from issuance of convertible debentures
|
|
|
-
|
|
|
-
|
|
|
3,000,000
|
|
|
-
|
|
Issuance
costs associated with debentures
|
|
|
-
|
|
|
-
|
|
|
(419,474
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
8,809,935
|
|
|
(28,500
|
)
|
|
3,636,026
|
|
|
2,984,353
|
|
Net
increase (decrease) in cash
|
|
|
7,903,422
|
|
|
(651,031
|
)
|
|
(967,716
|
)
|
|
1,284,430
|
|
Cash,
beginning of period
|
|
|
949,126
|
|
|
1,916,842
|
|
|
1,916,842
|
|
|
632,412
|
|
Cash,
end of period
|
|
$
|
8,852,548
|
|
$
|
1,265,811
|
|
$
|
949,126
|
|
$
|
1,916,842
|
|
Supplemental
disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
32,700
|
|
$
|
-
|
|
$
|
111,487
|
|
$
|
324
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Issuance
of common stock for equipment purchases
|
|
$
|
-
|
|
$
|
-
|
|
$
|
30,000
|
|
$
|
-
|
|
Convertible
debentures converted to common stock
|
|
$
|
2,130,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
See
accompanying notes to the financial statements
AEROGROW
INTERNATIONAL, INC.
Notes
to the Financial Statements
Note
1 - Description of the Business and Summary of Significant Accounting
Policies
Description
of the Business
AeroGrow
International, Inc. (“the Company”) was incorporated in the State of Nevada on
March 25, 2002. The Company’s principal business is developing and marketing
advanced indoor aeroponic garden systems designed and priced to appeal
to the
gardening, cooking and small kitchen appliance markets worldwide. The Company’s
principal activities since its formation through March 2006 have consisted
of
the development of the Company’s products business planning and raising the
capital necessary to fund these activities. In December 2005, the Company
commenced pilot production of its AeroGarden™ system and, in March 2006, began
shipping these systems to retail and catalogue customers. Prior to March
2006
when the Company commenced sales of its aeroponic garden systems, the Company
was considered a Development Stage Enterprise in accordance FAS No. 7,
Accounting and Reporting by Development Stage Enterprises. Effective March
2006,
the Company ceased being considered a development stage enterprise.
On
January 12, 2006, the Company and Wentworth I, Inc., a Delaware corporation
(“Wentworth”), entered into an Agreement and Plan of Merger (the “Merger
Agreement”) which was consummated on February 24, 2006. Under the Merger
Agreement, Wentworth merged with and into the Company, and the Company
was the
surviving corporation (“Merger”). The Merger, for accounting and financial
reporting purposes, has been accounted as an acquisition of Wentworth by
the
Company. As such, the Company is the accounting acquirer in the Merger,
and the
historical financial statements of the Company will be the financial statements
for the Company following the Merger.
In
two
closings, held on February 24, 2006 and March 1, 2006, the Company completed
the
sale of shares of its common stock and common stock purchase warrants in
a
private placement (the “2006 Offering”). The Company sold 2,148,000 shares of
its common stock and warrants to purchase 2,148,000 shares of its common
stock.
Each unit in the offering consisted of one share of common stock and a
five-year
warrant to purchase one share of common stock at an exercise price of $6.25
per
share. The price per unit was $5.00. The Company received net proceeds
of
$8,964,952 from the 2006 Offering after the commission and offering
expenses.
Significant
Accounting Policies
Use
of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Net
Income (Loss) per Share of Common Stock
The
Company computes net income (loss) per share of common stock in accordance
with
SFAS No. 128, “Earnings per Share,” and Securities and Exchange Commission Staff
Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with
complex capital structures to present basic and diluted EPS. Basic EPS
is
measured as the income or loss available to common stock shareholders divided
by
the weighted average shares of common stock outstanding for the period.
Diluted
EPS is similar to basic EPS but presents the dilutive effect on a per share
basis of potential common stock (e.g., convertible securities, options
and
warrants) as if they had been converted at the beginning of the periods
presented. Potential shares of common stock that have an anti-dilutive
effect
(i.e., those that increase income per share or decrease loss per share)
are
excluded from the calculation of diluted EPS.
Reclassifications
Certain
prior year amounts have been reclassified to conform to current year
presentation.
The
accompanying Statement of Operations for the year ended December 31, 2005
reflects a reclassification of $375,000 in expense from general and
administrative expense to interest expense related to the beneficial conversion
feature of convertible debentures issued by the Company (see Note 3, Convertible
Debentures) and $1,446,200 in expense from general and administrative expense
to
a segregated item under other income and expense that was related to
modification of the terms of certain of the Company’s outstanding warrants (see
Note 8, Shareholders Equity).
Cash
and cash equivalents
The
Company considers all highly liquid investments with an original maturity
of
three months or less when purchased to be cash equivalents.
Concentration
of Credit Risk and Financial Instruments
Statement
of Financial Accounting Standards (“SFAS”) No. 105, “Disclosure of Information
About Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk”, requires disclosure of
significant concentrations of credit risk regardless of the degree of such
risk.
Financial instruments with significant credit risk include cash. The amount
on
deposit with a financial institution exceeded the $100,000 federally insured
limit as of March 31, 2006, December 31, 2005 and 2004. However, management
believes that the financial institution is financially sound and the risk
of
loss is minimal.
Financial
instruments consist of cash and cash equivalents, subscriptions receivable
and
accounts payable. The carrying values of all financial instruments approximate
their fair value. The carrying value of the convertible debentures approximate
their fair value based on the current interest rate of 5%.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation for financial accounting
purposes
is computed using the straight-line method over the estimated lives of
the
respective assets. Office equipment and computer hardware are depreciated
over
five years. The Company has purchased and built its own manufacturing equipment
and tools. The equipment is being amortized over a period of seven years
commencing July 1, 2003. Direct internal labor incurred in the manufacturing
of
the equipment totaled $12,714 as of December 31, 2005, and $6,240 as of
December
31, 2004, and has been capitalized. The Company does not capitalize any
overhead
or other administrative costs in conjunction with the manufacturing of
equipment.
Property
and equipment consist of the following as of:
|
|
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Manufacturing
equipment and tooling
|
|
$
|
425,482
|
|
$
|
402,639
|
|
$
|
11,772
|
|
Computer
hardware
|
|
|
88,681
|
|
|
40,973
|
|
|
17,575
|
|
Office
equipment
|
|
|
68,651
|
|
|
38,431
|
|
|
9,214
|
|
|
|
|
582,814
|
|
|
482,043
|
|
|
38,561
|
|
Less:
accumulated depreciation
|
|
|
(102,043
|
)
|
|
(61,599
|
)
|
|
(7,840
|
)
|
Property
and equipment, net
|
|
$
|
480,771
|
|
$
|
420,444
|
|
$
|
30,721
|
|
Intangible
assets and goodwill
Intangible
assets, to date, have consisted of the direct costs incurred for application
fees and legal expenses associated with patents and trademarks on the Company’s
products. The Company periodically reviews the recoverability from future
operations using undiscounted cash flows. To the extent carrying values
exceed fair values; an impairment loss will be evaluated for possible
recording. The Company amortizes its patent and trademarks costs on a
straight line basis over their estimated useful of 5 years.
Intangible
assets consist of the following:
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Patents
|
|
$
|
15,913
|
|
$
|
15,503
|
|
$
|
-
|
|
Trademarks
|
|
$
|
6,854
|
|
|
4,904
|
|
|
-
|
|
|
|
|
22,767
|
|
|
20,407
|
|
|
-
|
|
Less:
accumulated amortization
|
|
|
(1,071
|
)
|
|
-
|
|
|
-
|
|
Intangible
assets, net
|
|
$
|
21,696
|
|
$
|
20,407
|
|
$
|
-
|
|
Inventory
Inventories
are valued at the lower of cost, determined by the first-in, first-out
method,
or market. Included in inventory costs where the Company is the manufacturer
are
raw materials, labor and manufacturing overhead. The Company records the
raw
materials at delivered cost. Standard labor and manufacturing overhead
costs are
applied to the finished goods based on normal production capacity as prescribed
under ARB No. 43. A majority of the Company’s products are manufactured overseas
and are recorded at cost.
The
Company will determine inventory obsolescence reserve based on management’s
historical experience and establishes reserves against inventory according
to
the age of the product. As of March 31, 2006 and December 31, 2005, the
Company
had determined that no inventory obsolescence reserve was required.
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company sells its products to retailers and consumers. Consumer transactions
are
paid primarily by credit card. Retailer sales vary by customer, however,
generally are net 30 days. Accounts receivable is reported at net realizable
value and net of allowance for doubtful accounts. The Company uses the
allowance
method to account for uncollectible accounts receivable. The Company’s estimate
is based on a review of the current status of trade accounts receivable.
There
was no allowance recorded at March 31, 2006.
Research
and Development
The
costs
incurred to develop products to be sold or otherwise marketed are currently
charged to expense. When a product is ready for general release, its capitalized
costs will be amortized using the straight-line method of amortization
over a
reasonable period. During the three months ended March 31, 2006 and March
31,
2005 (unaudited) and the years ended December 31, 2005 and 2004, no research
and
development costs have been capitalized.
Stock
Based Compensation
In
December 2004, the Financial Accounting Standards Board issued SFAS No.
123R,
“Share-Based Payment.” Subsequently, the Securities and Exchange Commission
(“SEC”) provided for a phase-in implementation process for SFAS No. 123R, which
required adoption of the new accounting standard no later than January
1, 2006.
SFAS No. 123R requires accounting for stock options using a fair-value-based
method as described in such statement and recognize the resulting compensation
expense in the Company’s financial statements. Prior to January 1, 2006, the
Company accounted for employee stock options using the intrinsic value
method
under APB No. 25, “Accounting for Stock Issued to Employees” and related
Interpretations, which generally results in no employee stock option expense.
The Company adopted SFAS No. 123R on January 1, 2006 and does not plan
to
restate financial statements for prior periods. The Company plans to continue
to
use the Black-Scholes option valuation model in estimating the fair value
of the
stock option awards issued under SFAS No. 123R. The adoption of SFAS No.
123R
will have a material impact on our results of operations. For the three
months
ended March 31, 2006, equity compensation in the form of stock options
and
grants of restricted stock totaled $3,734,525 and is included in the Statement
of Operations in the following categories:
General
and administrative
|
|
$
|
1,332,540
|
|
Research
and development
|
|
|
651,417
|
|
Sales
and marketing
|
|
|
1,724,940
|
|
Cost
of Sales
|
|
|
25,628
|
|
|
|
$
|
3,734,525
|
|
Income
taxes
The
Company accounts for deferred income taxes in accordance with the liability
method as required by Statement of Financial Accounting Standards No. 109
“Accounting for Income Taxes” (“SFAS 109”). Deferred income taxes are recognized
for the tax consequences in future years for differences between the tax
basis
of assets and liabilities and their financial reporting amounts at the
end of
each period, based on enacted laws and statutory rates applicable to the
periods
in which the differences are expected to affect taxable income. Any liability
for actual taxes to taxing authorities is recorded as income tax
liability. The
effect on deferred tax assets and liabilities of a change in tax rates
is
recognized in income in the period that includes the enactment date. A
valuation
allowance is established against such assets where management is unable
to
conclude more likely than not that such asset will be realized. For the
three
months ended Mach 31, 2006 and March 31, 2005 (unaudited) and for the years
ended December 31, 2005 and 2004 the Company recognized a valuation allowance
equal to 100% of the net deferred tax asset balance.
Comprehensive
Income
Statement
of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”
requires the presentation and disclosure of all changes in equity from
non-owner
sources as “Comprehensive Income”. The Company had no items of comprehensive
income for the three months ended March 31, 2006 and March 31, 2005 (unaudited)
and for the years ended December 31, 2005 and December 31,
2004.
Revenue
Recognition
The
Company recognizes revenue from product sales, net of estimated returns,
when
persuasive evidence of a sale exists: that is, a product is shipped under
an
agreement with a customer; risk of loss and title has passed to the customer;
the fee is fixed or determinable; and collection of the resulting receivable
is
reasonably assured. The liability for sales returns is estimated based
upon
historical experience of return levels.
The
Company records estimated reductions to revenue for customer and distributor
programs and incentive offerings, including price markdowns, promotions,
other
volume-based incentives and expected returns. Future market conditions
and
product transitions may require the Company to take actions to increase
customer
incentive offerings, possibly resulting in an incremental reduction of
revenue
at the time the incentive is offered. Additionally, certain incentive programs
require the Company to estimate based on industry experience the number
of
customers who will actually redeem the incentive. The Company also records
estimated reductions to revenue for end user rebate programs, returns and
costs
related to warranty services.
Shipping
and Handling Costs
Shipping
and handling costs associated with inbound freight are recorded in cost
of
sales. Shipping and handling costs associated with freight out to customers
are
also included in cost of sales. Shipping and handling charges to customers
are
included in sales.
Segments
of an Enterprise and Related Information
Statement
of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS 131”) replaces the industry segment
approach under previously issued pronouncements with the management approach.
The management approach designates the internal organization that is used
by
management for allocating resources and assessing performance as the source
of
the Company’s reportable segments. SFAS 131 also requires disclosures about
products and services, geographic areas and major customers. At present,
the
Company only operates in one segment.
Debt
Issuance Costs
Debt
issuance costs consist of consideration paid to third parties with respect
to a
$3.0 million debt financing in July 2005, including cash payments for legal
fees
and placement agent fees. Such costs are being deferred and were to be
amortized
over the term of the related debt, which was one year. On February 24,
2006,
$2,130,000 of the debt associated with these costs converted to 710,009
shares
of the common stock (See Note 3, Convertible Debentures). The pro rata
costs
associated with the $2,130,000 which converted to common stock was expensed
as
interest as of the date converted. The amortization of the remaining debt
issuance costs will be amortized over the remaining life of the
debt.
Beneficial
Conversion Feature of Debentures
In
accordance with Emerging Issues Task Force No. 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, and Emerging Issues Task Force No. 00-27, “Application of
Issue No. 98-5 to Certain Convertible Instruments”, the Company recognizes the
advantageous value of conversion rights attached to convertible debt. Such
rights gives the debt holder the ability to convert debt into shares of
common
stock at a price per share that is less than the fair market value of the
common
stock on the day the loan is made to the Company. The beneficial value
is
calculated as the intrinsic value (the fair market value of the stock at
the
commitment date in excess of the conversion rate) of the beneficial conversion
feature of the debentures and the related accrued interest and is recorded
as a
discount to the related debt and an addition to additional paid in capital.
The
discount is subsequently amortized to interest expense over the remaining
outstanding period of the related debt using the interest method.
Registration
Rights Penalties
The
holders of securities issued in the Company’s February 2006 private placement
offering and the convertible debt offering in 2005 (Note 3) have registration
rights for the common stock and for the common stock underlying the convertible
debt and the warrants held by them. Liquidated damages for failure to register
and maintain registration for such common stock are payable in common stock
of
the Company under certain circumstances and are limited to 1% of the amount
of
the outstanding convertible debt up to a maximum of 24% and 1% of the amount
of
the investment in the 2006 Offering up to a maximum of 18%. In each case,
the
amount is payable in shares of the Company’s common stock valued at a rate of
$2.00 per share. Until such time as there has been a consensus reached
on
Emerging Issues Task Force Issue No. 05-4, “The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF Issue No.
00-19,
‘Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock,’ ” the Company has elected to recognize the
impact of such registration rights penalties as incurred, which commenced
after
July 22, 2006.
New
Accounting Pronouncements
In
June
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
replacement of APB No. 20, and FAS No. 3.” SFAS No. 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections.
It
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of
explicit
transition requirements specific to the newly adopted accounting principle.
SFAS
No. 154 also provides guidance for determining whether retrospective application
of a change in accounting principle is impracticable and for reporting
a change
when retrospective application is impracticable. The correction of an error
in
previously issued financial statements is not an accounting change. However,
the
reporting of an error correction involves adjustments to previously issued
financial statements similar to those generally applicable to reporting
an
accounting change retrospectively. Therefore, the reporting of a correction
of
an error by restating previously issued financial statements is also addressed
by SFAS No. 154. SFAS No. 154 is required to be adopted in fiscal years
beginning after December 15, 2005. The Company does not believe adoption
of SFAS
No. 154 will have a material impact on its financial position, results
of
operations or cash flows.
In
February 2006, the Financial Accounting Standard Board (“FASB”) issued SFAS No.
155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and 140”. This Statement resolves issues addressed in
Statement 133 Implementation Issue No. D1, “Application of Statement 133 to
Beneficial Interest in Securitized Financial Assets.” This pronouncement will be
effective on the fiscal year beginning after September 15, 2006. Currently,
the
Company does not have any derivative instruments or participate in any
hedging
activities, and therefore the adoption of SFAS No. 155 is not expected
to have a
material impact on the Company’s financial position or results of operations.
In
March
2006, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 156,
“Accounting for Servicing of Financial Assets, an amendment of FASB Statement
No. 140”. This Statement requires recognition of servicing a financial asset by
entering into a servicing contract in certain situations. This pronouncement
will be effective on the fiscal year beginning after September 15, 2006.
Currently, the Company does not have any servicing asset or liability,
and
therefore the adoption of SFAS No. 156 is not expected to have a material
impact
on the Company’s financial position or results of operations.
Note
2 - Merger and Private Placement
The
Company entered into a Letter of Intent on January 4, 2006, and a Merger
Agreement on January 12, 2006, with Wentworth I, Inc., a Delaware
corporation. Wentworth was a non-operating entity without significant assets.
On
January 12, 2006, Wentworth’s Board of Directors and its shareholders approved
the Merger Agreement and the Company’s Board of Directors approved the Merger
Agreement. Under the Merger Agreement, Wentworth merged with and into the
Company, and the Company was the surviving corporation (“Merger”). The Merger,
for accounting and financial reporting purposes, has been accounted as
an
acquisition of Wentworth by the Company.
As
a
condition of the closing of the Merger Agreement, the Company was required
to
complete a private placement offering of its common stock shares and common
stock warrants with gross proceeds of not less that $5 million (the “Offering”).
Under the terms of the Merger Agreement, the Company paid a financial advisory
fee of $350,000 to Keating Securities, Wentworth’s financial advisor in the
transaction.
The
closing of the Merger Agreement occurred on February 24, 2006 and closings
of
the Offering occurred on February 24, 2006 and March 1, 2006. The Company
received gross proceeds of $10,740,000 in the Offering. Pursuant to Subscription
Agreements entered into with these Investors, the Company sold 2,148,000
units
(“Unit(s)”) in the Offering; each Unit consisted of one share of common stock
and a five-year warrant to purchase one share of common stock at an exercise
price of $6.25 per share. The price per Unit in the Offering was $5.00.
After
commissions, expenses and the reverse merger fee payable to Keating Securities,
AeroGrow received net proceeds of $8,964,952 in the Offering. This offering
required registration of the common stock issued and the shares of common
stock
underlying the warrants. Liquidated damages are payable to investors under
the
following circumstances: (a) if a registration statement is not filed by
the AeroGrow on or prior to 45 days after the closing date (such an event,
a
“Filing Default”); (b) if the registration statement is not declared
effective by the SEC on or prior to the 150th day after the Closing Date
(such
an event, an “Effectiveness Default”); and/or (c) if the Registration
Statement (after its effectiveness date) ceases to be effective and available
to
investors for any continuous period that exceeds 30 days or for one or
more
periods that exceeds in the aggregate 60 days in any 12-month period (such
an
event, a “Suspension Default” and together with a Filing Default and an
Effectiveness Default, a “Registration Default”). In the event of a Registration
Default, AeroGrow shall pay as Liquidated Damages, for each 30-day period
of a
Registration Default, an amount equal to 1% of the aggregate purchase price
paid
by the investors up to a maximum of 18% of the aggregate purchase price
paid,
provided that liquidation damages in respect of a Suspension Default shall
not
be payable in relation to any securities not owned by the investors at
the time
of the Suspension Default and, provided further, that no liquidated damages
are
due in respect of the warrants. In the event of a Filing Default or an
Effectiveness Default, the Liquidated Damages shall be paid by the issuance
of
additional Common Stock at the rate of the amount of the liquidated damages
due
divided by $2.00. In the event of a Suspension Default, the liquidated
damages
shall be paid in cash. The Company filed the required Registration Statement
within the 45 days pursuant to (a) above and the effectiveness of such
registration is pending.
In
the
Merger each of the Wentworth’s 3,750,000 shares of outstanding common stock was
converted into the right to receive 0.154703 shares of AeroGrow common
stock
resulting in the issuance of 580,136 shares of AeroGrow’s common stock to the
Wentworth stockholders representing 6.4% of the issued and outstanding
common
stock of AeroGrow immediately after the Merger, the Offering and the Note
Conversion. Immediately after the closing of the Offering, the investors
owned
2,148,000 shares of AeroGrow’s common stock representing 23.7% of the issued and
outstanding common stock immediately after the Merger, the Offering and
the Note
Conversion.
Note
3 - Convertible Debentures
On
May
27, 2005, the Company entered into an exclusive Placement Agreement with
Keating
Securities, LLC to solicit up to $3,000,000, through a private placement
offering consisting of up to 300 Units at an offering price of $10,000
per Unit.
Each Unit is comprised of a convertible debenture evidenced by a 10% unsecured
convertible promissory note in the principal amount of $10,000, and 2,000
five-year warrants, each warrant providing for the purchase of one share
of the
Company’s common stock at the exercise price of $5.01 per share. Interest is
payable quarterly beginning September 30, 2005. The principal was originally
due
on June 30, 2006. During the fifteen days following the completion of an
additional financing, each note holder has the opportunity to request full
payment of the principal amount of the notes and interest instead of converting
their convertible notes into shares of common stock and convertible warrants.
The Company received proceeds of $3,000,000 from this private placement
less
$419,471, in directly incurred debt issuance costs. In
addition to the foregoing, for each share of common stock issuable upon
conversion, each note holder shall receive an additional five-year warrant
to
purchase one share of the common stock at an exercise price of $6.00 per
share.
The Company had agreed to registration rights related to both the shares
underlying the convertible debt and the related warrants associated with
this
offering. In the event the Company fails to fulfill in registration obligations
the Company hereby agrees to pay liquidated damages under the following
circumstances: (a) if the registration statement is not filed by the Company
on
or prior to 60 days after the final closing of the offering (such an event,
a
“Filing Default”); (b) if the registration statement is not declared effective
by the SEC on or prior to 150 days after the final Closing in the offering
(such
an event, an “Effectiveness Default”); or (c) if the Company does not file its
required periodic reports under the Exchange Act when due (such an event,
a
“Reporting Default” and together with a Filing Default and an Effectiveness
Default, a “SEC Default”). In the event of an SEC Default, the Company shall as
liquidated damages pay, for each 30-day period of an SEC Default, an amount
equal to 1% of the principal amount of the notes up to a maximum aggregate
of 24
months of SEC Defaults. The Company shall pay the Liquidated Damages in
shares
of Common Stock, priced at $2.00 per share as follows: (i) in connection
with a
Filing Default, on the 61st day after the initial closing, and each 30th
day
thereafter until the registration statement is filed with the SEC; (ii)
in
connection with an Effectiveness Default, on the 151st day after the initial
closing, and each 30th day thereafter until the Registration Statement
is
declared effective by the SEC; or (iii) in connection with a Reporting
Default,
on the 31st consecutive day of after a Reporting Default has occurred,
provided
that if the Reporting Default has been cured, then such days during which
a
Reporting Default were accruing will be added to any future Reporting Default
period for the purposes of calculating the payment of the liquidated damages
provided for in this provision.
In
conjunction with this $3,000,000 private placement, the Company recognized
at
the time of issuance $750,000 of beneficial conversion costs, representing
the
value of the beneficial conversion rights of the Convertible Debentures,
determined by calculating the difference of the fair market value of the
stock
at the commitment date, or $5.00 per share, less the conversion exercise
price
of $4.00 times the number of shares to be issued upon conversion or 750,000
shares. This value is recorded as a discount to the Convertible Debentures
and
an addition to additional paid in capital. This discount was to be amortized
over the term of the Convertible Debentures which were originally due,
if not
converted, by June 30, 2006.
Also
in
conjunction with this $3,000,000 private placement, the Company recognized
at
the time of issuance $1,059,480 representing the fair value of the five-year
warrants issued with the Convertible Debentures. The value of these warrants
was
determined in accordance with the Black-Scholes pricing model utilizing
a
historic volatility factor of 129.67%, a risk free interest rate of 5.0%
and an
expected life for the warrants of five years, resulting in a value of $2.73
per
warrant. This value was recorded as an additional discount to the Convertible
Debentures and an addition to additional paid in capital. This discount
was to
be amortized to interest expense over the term of the Convertible Debentures
which were originally due if not converted by June 30, 2006.
Prior
to
the closings of the Merger and the Offering but contingent upon their successful
completion, in February 2006, the Company entered into agreements with
the
convertible debt holders whereby debt holders converted $2,130,000 of their
outstanding debt obligations into common stock of the Company at a conversion
price of $3.00 per share (the “Note Conversion”) and certain other debt holders
agreed to extend the maturity dates of $840,000 of debt obligations from
June
30, 2006 to December 31, 2006. The $2,130,000 of debt that converted immediately
resulted in additional beneficial conversion expense of $887,500 to account
for
the additional fair value attributed to the additional shares of common
stock
which were issued as a result of the change in the conversion price change
to $3
per share from the originally issued $4 per share. The fair value of the
foregoing additional shares was based upon a price of $5.00 per share.
The
converting note holders also were issued, pursuant to the terms of the
original
note offering, five-year warrants to purchase 426,000 shares of the Company’s
common stock at an exercise price of $6.00 per share.
With
respect to the $840,000 of convertible debentures that were modified by
extension of the due date from June 30, 2006 to December 31, 2006 and
modification of the embedded conversion feature from a conversion price
of $4.00
per share to a conversion price of $3.50 per share, based on the significant
change in the terms of these $840,000 in debentures, the original debt
is deemed
extinguished and a debt extinguishment loss was recognized. This loss is
based
on the fair value of the new debt instrument in accordance with EITF 96-19,
Debtor’s Accounting for a Modification or Exchange of Debt Instruments and EITF
05-07, Accounting for Modifications to Conversion Options Embedded in Debt
Instruments and Related Issues. The Company recognized a loss on extinguishment
of debt of $132,578. This loss was determined by calculating the change
in net
present value of the cash flows from the convertible debt, inclusive of
the
change in the embedded conversion feature determined by comparing the fair
value
of the conversion option immediately following such modification with its
fair
value immediately prior to the modification. This loss was recorded as
of
February 2006 with a corresponding increase in fair value of the modified
convertible debenture balance and is being amortized over the remaining
term of
these debentures to additional paid in capital.
Of
the
original amount of $3,000,000 in convertible debentures disclosed as outstanding
as of December 31, 2005, $2,130,000 converted to common stock, $30,000
is due on
June 30, 2006 and $840,000 is due December 31, 2006.
The
holders of securities issued in the private placement offering and the
convertible debt offering have registration rights under the common stock
and
for the common stock underlying the warrants held by them. Liquidated damages
for failure to register and maintain registration for the common stock
and for
the common stock underlying the warrants held by investors are payable
under the
following circumstances: (a) if a registration statement is not filed by
the
AeroGrow on or prior to 45 days after the closing date (such an event,
a “Filing
Default”); (b) if the registration statement is not declared effective by the
SEC on or prior to the 150th day after the Closing Date (such an event,
an
“Effectiveness Default”); and/or (c) if the Registration Statement (after its
effectiveness date) ceases to be effective and available to Investor for
any
continuous period that exceeds 30 days or for one or more period that exceeds
in
the aggregate 60 days in any 12-month period (such an event, a “Suspension
Default” and together with a Filing Default and an Effectiveness Default, a
“Registration Default”). In the event of a Registration Default, the AeroGrow
shall pay to Investor as Liquidated Damages, for each 30-day period of
a
Registration Default, an amount equal to 1% of the aggregate purchase price
paid
by Investor pursuant to this Agreement up to a maximum of 18% of the aggregate
purchase price paid by the Investor, provided that liquidation damages
in
respect of a Suspension Default shall not be payable in relation to any
securities not owned by the Investor at the time of the Suspension Default
and,
provided further, that no liquidated damages are due in respect of the
warrants.
In the event of a Filing Default or an Effectiveness Default, the Liquidated
Damages shall be paid by the issuance of additional Common Stock at the
rate of
the amount of the liquidated damages due divided by $2.00. In the event
of a
Suspension Default, the liquidated damages shall be paid in cash. In summary,
the liquidated damages are either settled with common stock in the case
of a
delay in filing having declared effective a registration statement, or
in cash
but only related to actual stock issued (excluding common stock underlying
warrants) for failure to maintain effectiveness of a registration. The
Company
filed the required Registration Statement within the 45 days pursuant to
(a)
above and the effectiveness of such registration is pending.
The
balance presented for the Convertible Debentures, net of discounts, as
of March
31, 2006 and December 31, 2005 is as follows:
|
|
March
31,
2006
|
|
December
31,
2005
|
|
Convertible
debentures outstanding
|
|
$
|
870,000
|
|
$
|
3,000,000
|
|
Loss
on modification of debt, net of $13,258 accretion to additional
paid in
capital as of March 31, 2006
|
|
|
119,320
|
|
|
-
|
|
Discount
as a result of beneficial conversion feature, net of amortization
of
$668,437 and $375,000 as of March 31, 2006 and December 31, 2005,
respectively
|
|
|
(81,563
|
)
|
|
(375,000
|
)
|
Discount
as a result of fair value of warrants issued, net of amortization
of
$944,262 and $529,740 as of March 31, 2006 and December 31, 2005,
respectively
|
|
|
(115,218
|
)
|
|
(529,740
|
)
|
Net
balance
|
|
$
|
792,539
|
|
$
|
2,095,260
|
|
The
Company evaluated both the warrants and the conversion features implicit
in the
Convertible Debentures as to whether the were derivatives under FAS 133
“Accounting
for Derivative Instruments and Hedging Activities”
and EITF
00-19 “Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled
in, a
Company’s Own Stock”
and
determined that they had been properly recorded and that the value ascribed
to
the Beneficial Conversion Feature and the Warrants are properly classified
as
equity.
Note
4 - Equity Compensation Plans
In
2003,
the Company’s Board of Directors approved a Stock Option Plan (the Plan)
pursuant to which nonqualified stock options are reserved for issuance
to
eligible employees, consultants and directors of the Company. The Plan
is
administered by the Board of Directors, which has the authority to select
the
individual’s to whom awards are to be granted, the number of shares of common
stock to be covered by each award, the vesting schedule of stock options,
and
all other terms and conditions of each award. The Company has granted
nonqualified stock options to purchase shares of common stock to certain
employees at exercise prices ranging from $0.05 to $5.00 per share. In
August
2005, the Plan was merged into the 2005 Equity Compensation Plan and it
no
longer separately exists. However, options issued and outstanding under
this
Plan continue to be governed by their grant agreements but are administered
under the 2005 Equity Compensation Plan.
In
August
2005, the Company’s Board of Directors approved the 2005 Equity Compensation
Plan (the 2005 Plan) pursuant to which both qualified and nonqualified
stock
options as well as restricted shares of common stock are reserved for issuance
to eligible employees, consultants and directors of the Company. A total
of
1,505,000 shares of our common stock may be granted under the 2005
Plan.
The
2005
Plan is administered by the Company’s compensation committee which has the
authority to select the individual’s to whom awards are to be granted, the
number of shares of common stock to be covered by each award, the vesting
schedule of stock options, and all other terms and conditions of each award.
The
Company has granted qualified stock options to purchase shares of common
stock
to certain employees at exercise prices ranging from $2.50 to $5.00 per
share.
Prior
to
January 1, 2006, the Company accounted for employee stock-based compensation
under the recognition and measurement principles of Accounting Principles
Board
Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related
Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based
Compensation”. Under the recognition principles of APB No. 25, compensation
expense related to restricted stock and performance units was recognized
in the
financial statements. However, APB No. 25 generally did not require the
recognition of compensation expense for stock options because the exercise
price
of these instruments was generally equal to the fair value of the underlying
common stock on the date of grant, and the related number of shares granted
were
fixed at that point in time.
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
SFAS No. 123(R), “Share-Based Payment”. In addition to recognizing compensation
expense related to restricted stock and performance units, SFAS No. 123(R)
also
requires recognition of compensation expense related to the estimated fair
value
of stock options. The Company adopted SFAS No. 123(R) using the
modified-prospective-transition method. Under that transition method,
compensation expense recognized subsequent to adoption includes:
(a) compensation cost for all share-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the values estimated in
accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted subsequent to January 1, 2006,
based
on the grant-date fair values estimated in accordance with the provisions
of
SFAS No. 123(R). Consistent with the modified-prospective-transition method,
the
Company’s results of operations for prior periods have not been adjusted to
reflect the adoption of FAS 123(R).
For
the
three months ended March 31, 2006, the Company granted 888,153 options
to
purchase the Company’s common stock at an exercise price of $5.00 per share
under the 2005 Plan as follows:
Employees
|
|
|
810,700
|
|
Consultants
|
|
|
40,000
|
|
Directors
|
|
|
37,453
|
|
|
|
|
888,153
|
|
For
the
option grants issued during the three months ended March 31, 2006, the
Company
used the following weighted average assumptions:
no
dividend yield, expected volatility rate of 129.67%; risk
free
interest rate of 5%; and average lives of 4 years resulting in a value
of $4.12
per option granted. As
a
result of recognizing compensation expense for stock options pursuant to
the
provisions of SFAS No. 123(R), the net loss for the three months ended
March 31,
2006, was $3,315,840 greater, than if the Company had continued to account
for
stock options under APB No. 25. In addition, both basic and diluted loss
per
share for the three months ended March 31, 2006 was $0.37 greater than
if the
Company had continued to account for stock options under APB No.
25.
The
following table illustrates the effect on net income and EPS for the three
months ended March 31, 2005 if the Company had applied the fair value
recognition provisions of SFAS No. 123R:
|
|
Three
months ended
|
|
|
|
March
31, 2005,
|
|
|
|
(Unaudited)
|
|
Net
loss, as reported |
|
$ |
(841,507 |
) |
Net
income (loss) per share, basic and diluted, as reported
|
|
|
($0.17
|
)
|
Deduct:
Stock-based compensation expense, as determined under fair-value
based
method for all employee awards
|
|
|
(48,000
|
)
|
Pro
forma net loss
|
|
$
|
(889,507
|
)
|
Pro
forma net income (loss) per share, basic and diluted
|
|
|
($0.18
|
)
|
For
purposes of calculating fair value under SFAS 123, the fair value of each
option
grant for the years ended December 31, 2005 and 2004 was estimated on the
date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: no dividend yield, expected volatility rate
of
129.67%; risk
free
interest rate of 5%; and average lives of 5 years.
A
summary
of option activity in the 2005 Plan is as follows:
|
|
|
|
Exercise price
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Options
|
|
Low
|
|
High
|
|
average
|
|
Balance
unexercised at January 1, 2004
|
|
|
106,662
|
|
$
|
0.01
|
|
$
|
2.50
|
|
$
|
1.05
|
|
Granted
|
|
|
77,767
|
|
$
|
0.05
|
|
$
|
5.00
|
|
$
|
2.11
|
|
Exercised
|
|
|
-
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
Forfeited
|
|
|
-
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
Balance
unexercised at December 31, 2004
|
|
|
184,429
|
|
$
|
0.01
|
|
$
|
5.00
|
|
$
|
1.47
|
|
Granted
|
|
|
67,070
|
|
$
|
0.50
|
|
$
|
5.00
|
|
$
|
4.22
|
|
Exercised
|
|
|
-
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
Forfeited
|
|
|
(18,229
|
)
|
$
|
0.05
|
|
$
|
1.25
|
|
|
-$0.62
|
|
Balance
unexercised at December 31, 2005
|
|
|
233,270
|
|
$
|
0.01
|
|
$
|
5.00
|
|
$
|
2.34
|
|
Granted
|
|
|
888,153
|
|
$
|
5.00
|
|
$
|
5.00
|
|
$
|
5.00
|
|
Exercised
|
|
|
-
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
Forfeited
|
|
|
(4,154
|
)
|
$
|
5.00
|
|
$
|
5.00
|
|
$
|
5.00
|
|
Balance
unexercised at March 31, 2006
|
|
|
1,117,269
|
|
$
|
0.01
|
|
$
|
5.00
|
|
$
|
4.44
|
|
In
addition to stock options granted to employees, the
Company granted options to purchase shares of common stock to certain
consultants in exchange for services provided. The compensation cost of
these
options, measured by the fair value of the options provided in lieu of
cash, has
been included in general and administrative expense. The assumptions utilized
to
value employee options in accordance with the disclosure requirements of
SFAS
No. 123 were also used to value the options issued to the consultants.
For the
three months ended March 31, 2006 and March 31, 2005 (unaudited), the Company
has recognized consulting expense related to the non-employee options of
$154,306 and $151,797, respectively. For the years ended December 31, 2005,
and
December 31, 2004, the Company has recognized consulting expense related
to the
non-employee options of $72,936 and $80,939, respectively.
Information
regarding all stock options outstanding under the 2005 Plan as of March
31, 2006
is as follows:
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted-
|
|
Weighted-average
|
|
|
|
|
|
|
|
average
|
|
Remaining
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
Contractual
|
|
|
|
price range
|
|
Options
|
|
Price
|
|
Life (years)
|
|
Options
|
|
Over
$0.00 to $0.50
|
|
|
30,618
|
|
$
|
0.08
|
|
|
2.92
|
|
|
30,618
|
|
Over
$0.50 to $2.50
|
|
|
137,259
|
|
$
|
1.57
|
|
|
2.72
|
|
|
137,259
|
|
$5.00
|
|
|
949,392
|
|
$
|
5.00
|
|
|
4.94
|
|
|
866,055
|
|
|
|
|
1,117,269
|
|
$
|
4.44
|
|
|
4.38
|
|
|
1,033,932
|
|
In
addition to option grants, during the year ended December 31, 2005 and
the three
months ended March 31, 2006 the Company granted and issued under the 2005
Equity
Compensation Plan a total of 83,737 and 157,192 shares, respectively, of
common
stock at a $5.00 per share to directors, consultants and employees for
services
provided. The fair value of these shares was determined based upon sales
of
other stock transactions in the private market just prior to the services
being
provided as follows:
|
|
Shares
Granted
|
|
|
|
Three
Months ended March 31, 2006
|
|
Year
ended December 31, 2005
|
|
Employees
|
|
|
34,000
|
|
|
30,431
|
|
Consultants
|
|
|
39,737
|
|
|
126,761
|
|
Directors
|
|
|
10,000
|
|
|
-
|
|
|
|
|
83,737
|
|
|
157,192
|
|
Accordingly,
a total of 351,671 shares are available for future grants under the 2005
Plan.
Note
5 - Income Taxes
The
Company did not record any provision for federal and state income taxes
for the
three months ended March 31, 2006 and March 31, 2005 and for the years
ended December 31, 2005, and December 31, 2004. Variations from the federal
statutory rate are as follows:
|
|
Three
Months Ended
|
|
Years
Ended
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Expected
income tax benefit at
|
|
|
|
|
|
|
|
the
statutory rate of 34%
|
|
$
|
2,179,733
|
|
$
|
1,559,071
|
|
$
|
794,910
|
|
Less
valuation allowance
|
|
|
(2,179,733
|
)
|
|
(1,559,071
|
)
|
|
(794,910
|
)
|
Net
tax expense
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Deferred
income tax assets result from cumulative federal and state operating loss
carryforwards in the amounts of $7,758,420, and $3,777,190 at December
31, 2005
and 2004, respectively. For the three months period ended March 31, 2006,
a
shortened tax period resulting from the change of the Company’s fiscal year, the
Company incurred additional federal and state operating loss carryforwards
of
$2,650,857. The loss carry forwards will begin to expire in 2022. At March
31,
2006, December 31, 2005 and 2004, the Company has research and development
tax
credit carryforwards of $118,285, $118,285 and $83,942, respectively, which
begin to expire in 2022.
Net
deferred tax assets consist of the following as of:
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Tax
effect of net operating loss carryforwards
|
|
$
|
4,021,104
|
|
$
|
2,997,078
|
|
$
|
1,459,129
|
|
Tax
effect of employee equity compensation
|
|
|
1,157,638
|
|
|
-
|
|
|
-
|
|
Tax
effect of other temporary differences
|
|
|
(22,348
|
)
|
|
(20,417
|
)
|
|
(7,196
|
)
|
Research
and development tax credit
|
|
|
118,285
|
|
|
118,285
|
|
|
83,942
|
|
Less
valuation allowance
|
|
|
(5,274,679
|
)
|
|
(3,094,946
|
)
|
|
(1,535,875
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
In
assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some or the entire deferred tax
asset
will not be realized. The Company believes that sufficient uncertainty
exists
regarding the realizability of the deferred tax assets such that valuation
allowances equal to the entire balance of the deferred tax assets are necessary.
In accordance with Sections 382 and 383 of the Internal Revenue Code, a
change
in ownership of greater than 50% of a corporation within a three-year period
will place an annual limitation on our ability to utilize our existing
tax loss
and tax credit carryforwards.
Note
6 - Related Party Transactions
During
the years ended December 31, 2005 and December 31, 2004, the Company retained
one member of their board as a consultant who was granted shares of common
stock
and fees for services provided ,
which
services AeroGrow recorded at an aggregate expense of
$286,167
and $46,723, respectively. During the years ended December 31, 2005 and
December
31, 2004, the Company paid legal fees to a director in the amount of $37,438
and
$24,000, respectively, and issued shares of common stock for services provided
,
which
services AeroGrow recorded at an aggregate expense of
$10,000
and $83,250, respectively. During the three months ended March 31, 2006
and
March 31, 2005 (unaudited), the Company paid $44,472 and $10,000, respectively,
to this same director for legal services. The Company also issued shares
of
common stock to its Board of Directors for services provided valued at
$30,000
for both of the years ended December 31, 2005 and December 31, 2004. On
March
28, 2006, the Company granted to each of its four outside directors 2,500
shares
of the company’s common stock at a value of $5.00 per share for a total of
$12,500 for each director, or an aggregate total of $50,000, and 10,000
fully
vested five-year options to purchase the Company’s common stock at an exercise
price of $5.00 per share for services for the fiscal year ending March
31, 2007.
Also, during the three months ended March 31, 2006, the Company paid to
a
director $12,500 in consulting fees for his assistance in the Company’s fund
raising activities in Europe.
The
Company leased their office space during the year ended December 31, 2005
from a
landlord who is a minority shareholder. The Company paid rent to the shareholder
in the amount of $30,408 and issued shares of common stock for rent
provided,
which
rent AeroGrow recorded at an aggregate expense of
$76,036.
Thru July 2005, the Company leased certain laboratory space from an employee.
Rent expense paid to the employee totaled $7,574 and $5,200 for the years
ended
December 31, 2005 and 2004, respectively.
The
Company was renting office furniture, office equipment, and computers from
its
former parent, Mentor Capital Consultants, Inc., at the rate of $2,500
per
month. For the year ended December 31, 2004, the Company paid $30,000 to
rent
the equipment. For the first five months of 2005, the Company continued
to rent
equipment from its parent for a total of $12,500. On May 31, 2005, the
Company
acquired these fixed assets for their net book value of $33,901.
Note
7 - Operating Leases
The
Company leases certain facilities and office space under month to month
operating lease agreements. Rent expense for the years ended December 31,
2005,
and December 31, 2004, was approximately $106,444 and $91,741, respectively.
This includes the fair value of 15,208 shares and 15,531 shares of common
stock
granted to the landlord for the years ended December 31, 2005 and December
31,
2004, respectively. For the three months ended March 31, 2006 and March
31, 2005
(unaudited), rent expense was $33,458 and $28,560, respectively.
One
of
the Company’s operating leases ended on December 31, 2005. The Company
renegotiated a new operating lease and is on an annual basis at a rent
of $1,000
per month through December 31, 2006. In addition, the Company is on a
month-to-month basis with the same landlord for additional space beginning
in
November at the rate of $700 per month.
The
Company leased certain laboratory space under a month-to-month lease beginning
November 2005 at the rate of $600 per month.
The
Company leased certain production space under a month-to-month lease beginning
in August 2005, at the rate of $1,315 per month.
Note
8 - Shareholders’ Equity
During
the years ended December 31, 2004 and 2003, the Company continued a private
placement offering initiated in 2002, and issued shares of common stock
to new
investors at $0.50 per share for 90,000 shares, and at $1.25 per share
for
880,800 shares. On August 1, 2003, the Company initiated a new private
placement
offering, and issued shares of common stock to new investors at $1.665
per share
for 175,763 shares. During the year ended December 31, 2004, an additional
360,458 shares were issued at $1.665 per share. In conjunction with the
continuing and new private placement offerings, certain investors who purchased
minimum amounts of shares of common stock were provided with additional
bonus
shares of common stock. If investors contributed a minimum of $15,000,
to the
Company, they were awarded 10% bonus common stock award. In total, 27,700
and
81,888 shares of common stock were issued as bonus shares for the years
ended
December 31, 2004 and December 31, 2003, respectively.
The
Company also issued shares of common stock to its Board of Directors for
services provided valued at $30,000 for the years ended December 31,
2004.
As
of
December 31, 2004, in conjunction with the private placement offerings,
certain
investors who purchased a minimum of $25,000, of shares of common stock
were
provided warrants to purchase additional shares of common stock. One hundred
seventy seven thousand (177,000) warrants were issued at $2.50 per share.
The
warrants are exercisable over a period not to exceed two years commencing
immediately at the time of issuance. All
of
the foregoing warrants were initially exercisable for a two-year period
from
date of issue, did not require registration of the common stock underlying
the
warrants nor was registration of shares issued upon exercise
required.
During
the year ended December 31, 2004, the Company issued a total of 144,882
shares
of common stock to landlords and consultants. Four thousand (4,000) shares
were
issued at $0.05, 5,000 shares at $1.25, 38,332 shares at $1.665, and 97,550
shares at $5.00 for legal, information technology, marketing, administrative,
and research and development services provided. These shares were priced
based
on the fair value at which shares were being issued, based on private placement
offerings, at the time services were rendered.
On
July
1, 2004, the Company was approved for an initial public offering in the
State of
Colorado, and issued shares of common stock to new investors at $5.00 per
share
for 498,596 shares. In conjunction with the Colorado public offering, certain
investors who purchased minimum amounts of shares of common stock were
provided
with additional bonus shares of common stock. If investors contributed
a minimum
of $15,000, to the Company, they were awarded 10% bonus stock award. In
total,
45,633 shares of common stock were issued as bonus shares for the year
ended
December 31, 2004. Also, in conjunction with the public offering, certain
investors who purchased a minimum of $25,000 of shares of common stock
were
provided two warrants to purchase additional shares of common stock. One
warrant
is exercisable to purchase a share of common stock at the price of $10.00
per
share and the other warrant is exercisable at $15.00 per share. In total,
390,880 warrants were issued at the exercise price of $10.00, and the same
total
was issued at the exercise price of $15.00 in conjunction with the public
offering for year ended December 31, 2004. None of the warrants were exercised
during 2005 and 2004. These
warrants are exercisable in whole at any time or in part after the earlier
of
date on which registration of the shares under the Securities Exchange
Act of
1934 is declared effective (if such registration is sought) and the shares
are
quoted on the Bulletin Board and/or listed on one or more recognized
exchanges, or July 1, 2005, through and including December 31, 2007, at
the
exercise price of $10.00 and $15.00 per share of Common Stock purchased,
respectively. These warrants may not be transferred, except to Colorado
residents, during the period in which the common stock unless (i) such
warrants
and are registered under the Securities Act of 1933 and applicable state
securities laws, or exempt from such registration; or (ii) such transfer
is
exempt from registration. All
of
the foregoing warrants were initially exercisable for a five-year period
from
date of issue, did not require registration of the common stock underlying
the
warrants nor was registration of shares issued upon exercise
required.
As
of
December 31, 2004, the Company has recorded subscriptions receivable of
$41,000,
for shares sold. This amount was subsequently collected in cash.
On
January 31, 2005, the State of Nevada approved the Board of Director’s amendment
to the articles of incorporation which increased the authorized shares
of the
Company’s common stock from 40,000,000 shares to 75,000,000 shares. On May 31,
2005, the Company’s Board of Directors approved a one-for-five reverse stock
split of all outstanding shares. The historical share and per share amounts
included in the accompanying financial statement have been retroactively
adjusted to reflect the split.
On
September 2, 2005, the Board approved the modification of 504,098 warrants
whereby the expiration dates of the aforementioned warrants was extended
from
various dates throughout 2005, through and including December 31, 2005.
The
Company recorded the effects of the modification of these terms of the
warrants
in accordance with variable accounting. This modification resulted in additional
expense of $1,446,200 being recorded in the year ending December 31, 2005.
The
Company accounted for this modification in warrant terms in accordance
with
variable accounting in that the extension of the expiration dates of the
outstanding warrants results in a new measurement of compensation cost
as if the
award were newly granted. Therefore, in applying variable accounting, the
Company revalued the warrants as if they were granted on September 2, 2005
and
recognized as compensation expense the difference between the fair value
determined on September 2, 2005 and the fair value of the warrants determined
when originally issued in 2002 and 2003. The warrants, when originally
issued,
were determined to have a fair value of $198,844. The warrants, when re-valued
on September 2, 2005, were determined to have a fair value of $1,645,044,
or a
difference of $1,446,200. This modification resulted in additional expense
of
$1,446,200 being recorded in the year ending December 31, 2005. The
Black-Scholes valuation model was utilized to value the warrants in accordance
with fair value as of both the original warrant issuance date and September
2,
2005. All
of
the foregoing warrants were initially exercisable for a two- to five-year
period
from date of issue, did not require registration of the common stock underlying
the warrants nor was registration of shares issued upon exercise
required.
During
the year ended December 31, 2005, 1,600 shares of common stock were sold
at
$5.00 per share to an employee per an employment agreement. In addition,
38,000
warrants were exercised at $1.25 per share and 64,000 warrants were exercised
at
$2.50 per share. As of December 31, 2005, the Company has recorded subscriptions
receivable of $840,000 representing the exercises of 326,000 warrants at
$2.50
per share and 5,000 warrants at $5.00 per share. This amount has subsequently
been collected in cash in January 2006.
Also
during 2005, the Company issued a total of 104,040 shares of common stock
at a
$5.00 per share value to vendors (17,100 shares), landlords (15,208 shares),
consultants (62,705 shares) and employees (9,027 shares) for various services
provided. The fair value of these shares was determined based upon sales
of
other stock transactions in the private market just prior to the services
being
provided.
During
the three months ended March 31, 2006, the Company issued 2,148,000 shares
of
common stock valued at $5.00 per share and warrants in conjunction with
a
private placement (Note 2 - Merger and Private Placement).
During
the three months ended March 31, 2006, the Company issued 710,009 shares
of
common stock valued at $5.00 per share and warrants in exchange for conversion
of convertible debentures (Note 3 - Convertible Debentures).
During
the three months ended March 31, 2006, the Company issued 580,136 shares
of
common stock in conjunction with a merger with Wentworth I (Note 2 - Merger
and
Private Placement).
The
Company’s Articles of Incorporation authorize the issuance of 20,000,000 shares
of preferred stock with $.001 par value. The preferred stock may be issued
from
time to time with such designation, rights, preferences and limitations
as the
Board of Directors may determine by resolution. As of March 31, 2006, December
31, 2005 and 2004, no shares of preferred stock have been issued.
A
summary
of the Company’s warrant activity for the period from Inception through December
31, 2005 is presented below:
|
|
|
|
Weighted
|
|
|
|
Warrants
|
|
Average
|
|
|
|
Outstanding
|
|
Exercise
Price
|
|
Outstanding,
January 1, 2004
|
|
|
404,098
|
|
$
|
2.53
|
|
Granted
|
|
|
958,760
|
|
$
|
10.65
|
|
Exercised
|
|
|
(12,000
|
)
|
$
|
1.25
|
|
Outstanding,
December 31, 2004
|
|
|
1,350,858
|
|
$
|
8.31
|
|
Granted
|
|
|
660,000
|
|
$
|
5.10
|
|
Exercised
|
|
|
(433,000
|
)
|
$
|
1.25
|
|
Expired
|
|
|
(25,000
|
)
|
$
|
5.00
|
|
Outstanding,
December 31, 2005
|
|
|
1,552,858
|
|
$
|
8.64
|
|
Granted
|
|
|
2,962,800
|
|
$
|
6.20
|
|
Outstanding,
March 31, 2006
|
|
|
4,515,868
|
|
$
|
7.04
|
|
As
of
March 31, 2006, the Company had the following outstanding warrants to purchase
its common stock:
Exercise
Price
|
|
Warrants
Outstanding
|
$
2.50
|
(1)
|
111,098
|
$
5.00
|
(2)
|
600,000
|
$
6.00
|
(2)
|
600,000
|
$
5.00
|
(3)
|
60,000
|
$
6.25
|
(5)
|
2,148,000
|
$
6.25
|
(6)
|
214,800
|
$
10.00
|
(4)
|
390,880
|
$
15.00
|
(4)
|
390,880
|
|
|
4,515,658
|
Warrants
granted in 2003 and 2004. All of the foregoing warrants were initially
exercisable for a two to five-year period from date of issue, did not require
registration of the common stock underlying the warrants nor was registration
of
shares issued upon exercise required.
Warrants
granted in conjunction with Convertible Debt Offering (Note 9 -Convertible
Debentures).
require
registration of the common stock underlying the warrants
Placement
agent warrants granted in conjunction with Convertible Debt Offering (Note
9
-Convertible Debentures).
require
registration of the common stock underlying the warrants
Warrants
granted in conjunction with the Company’s Colorado Public Offering, exercisable
after the earlier of date on which registration of the shares under the
Securities Exchange Act of 1934 is declared effective (if such registration
is
sought) and the shares are quoted on the Bulletin Board and/or listed on
one or
more recognized exchanges, or July 1, 2005, through and including
December 31, 2007, at the exercise price of $10.00 and $15.00 per share of
Common Stock purchased, respectively. These warrants may not be transferred,
except to Colorado residents, during the period in which the common stock
unless
(i) such warrants and are registered under the Securities Act of 1933 and
applicable state securities laws, or exempt from such registration; or
(ii) such
transfer is exempt from registration.
Warrants
granted in conjunction with the 2006 Offering (Note -Merger and Private
Placement). require registration of the common stock underlying the
warrants
Placement
agent warrants granted in conjunction with the 2006 Offering (Note -Merger
and
Private Placement). require registration of the common stock underlying
the
warrants
Note
9 - Mandatorily Redeemable Common Stock
On
September 30, 2005, the Company entered into a manufacturing agreement
with
Source Plus, Inc. (“Source Plus”) and Mingkeda Industries Co. Ltd. (“Mingkeda”).
Source Plus advanced monies to Mingkeda for tooling and molds to build
the
Company’s products. To reimburse Source Plus for its advances to Mingkeda, the
Company issued 62,000 shares of common stock to Source Plus in October
2005 with
an estimated market value of $5.00 per share. The Company recorded a $310,000
asset for tooling which is being depreciated over a period of three years
to
reflect the estimated useful life of the tooling. If an offering or other
transaction to enable Source Plus an ability to register their issued shares
is
not completed on or before June 1, 2006, Source Plus may require the Company
to
repay $310,000 in exchange for its return of the shares of common stock.
In
accordance with SFAS No. 150, the Company has recorded the shares issued
as a
liability until such time as the registration contingency can be
removed.
The
tooling is located in China and the Company holds title to the tooling
equipment
and is able to move the tooling to another manufacturer, if required, in
future
periods.
Further,
in return for a future $0.50 per unit price concession from Mingkeda for
products the Company will purchase, the Company issued 10,000 shares of
common
stock to Mingkeda in October 2005 with an estimated market value of $5.00
per
share. The Company also agreed to pay to Source Plus a commission of 2%
of the
total purchases of the product with such payments to be made using the
same
terms as payments to Mingkeda.
10. Segment
Information and Concentrations
The
Company’s only operating segment consists of sales of its aeroponic garden
systems and peripheral products.
AeroGrow
International, Inc.
TABLE
OF CONTENTS
FORM
10-QSB REPORT
December
31, 2006
PART
I - FINANCIAL INFORMATION
|
Page
|
|
|
Item
1. Interim Financial Statements (Unaudited)
|
|
Condensed
Balance Sheets as of December 31, 2006 (Unaudited) and
March 31, 2006
|
3
|
Condensed
Statements of Operations for the Three and Nine Months Ended
December 31,
2006 and
December 31, 2005 (Unaudited)
|
4
|
Condensed
Statement of Stockholders’ Equity for the Nine Months Ended December 31,
2006 (Unaudited)
|
5
|
Condensed
Statements of Cash Flows for the Nine Months Ended December 31,
2006
and
December 31, 2005 (Unaudited)
|
6
|
Notes
to the Condensed Financial Statements
|
7
|
Item
2. Management's Discussion and Analysis of
Financial Condition and Plan of Operation
|
17
|
|
|
Item
3. Controls and Procedures
|
23
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
24
|
|
|
Item
2. Unregistered Sale of Equity Securities
|
24
|
|
|
Item
3. Defaults Upon Senior Securities
|
24
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
24
|
|
|
Item
5. Other Information
|
24
|
|
|
Item
6. Exhibits
|
24
|
|
|
Signatures
|
25
|
PART
I - FINANCIAL INFORMATION
AEROGROW
INTERNATIONAL, INC.
CONDENSED
BALANCE SHEETS
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2006
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
|
|
$
|
1,740,327
|
|
$
|
8,852,548
|
|
Restricted
cash
|
|
|
161,609
|
|
|
-
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
|
|
|
|
|
of
$14,627 and $0 at December 31, 2006 and March 31, 2006,
respectively
|
|
|
1,636,722
|
|
|
43,156
|
|
Inventory
|
|
|
1,334,126
|
|
|
192,946
|
|
Prepaid
expenses and other
|
|
|
343,898
|
|
|
199,590
|
|
Total
current assets
|
|
|
5,216,682
|
|
|
9,288,240
|
|
Property
and equipment, net of accumulated depreciation of
|
|
|
|
|
|
|
|
of
$235,197 and $102,043 at December 31, 2006 and March 31, 2006,
respectively
|
|
|
873,344
|
|
|
480,771
|
|
Other
assets
|
|
|
|
|
|
|
|
Debt
issuance costs, net of $419,471 and $373,853 accumulated
|
|
|
|
|
|
|
|
amortization
at December 31, 2006 and March 31, 2006, respectively
|
|
|
-
|
|
|
45,618
|
|
Intangible
assets, net of $4,851 and $1,071 of accumulated
|
|
|
|
|
|
|
|
amortization
at December 31, 2006 and March 31, 2006, respectively
|
|
|
22,565
|
|
|
21,696
|
|
Deposits
|
|
|
36,569
|
|
|
4,684
|
|
Total
other assets, net
|
|
|
59,134
|
|
|
71,998
|
|
Total
Assets
|
|
$
|
6,149,160
|
|
$
|
9,841,009
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,534,410
|
|
$
|
487,474
|
|
Accrued
expenses
|
|
|
1,255,888
|
|
|
334,524
|
|
Deferred
rent
|
|
|
22,039
|
|
|
-
|
|
Convertible
debentures, net of discounts of
|
|
|
|
|
|
|
|
$0
and $196,781 at December 31, 2006 and March 31, 2006,
respectively
|
|
|
840,000
|
|
|
792,539
|
|
Mandatorily
redeemable common stock
|
|
|
-
|
|
|
310,000
|
|
Total
current liabilities
|
|
|
3,652,337
|
|
|
1,924,537
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 20,000,000 shares authorized,
|
|
|
|
|
|
|
|
none
issued or outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $.001 par value, 75,000,000 shares authorized,
|
|
|
|
|
|
|
|
9,607,631
and 9,102,622 shares issued and outstanding
|
|
|
|
|
|
|
|
at
December 31, 2006 and March 31, 2006, respectively
|
|
|
9,607
|
|
|
9,103
|
|
Additional
paid-in capital
|
|
|
30,282,821
|
|
|
27,313,081
|
|
Accumulated
deficit
|
|
|
(27,795,605
|
)
|
|
(19,405,712
|
)
|
Total
Stockholders' Equity
|
|
|
2,496,823
|
|
|
7,916,472
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
6,149,160
|
|
$
|
9,841,009
|
|
See
accompanying notes to the condensed financial statements
AEROGROW
INTERNATIONAL, INC.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
months ended
December
31,
|
|
Nine
months ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Product
sales, net
|
|
$
|
4,857,604
|
|
$
|
-
|
|
$
|
6,709,858
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
3,282,291
|
|
|
-
|
|
|
4,785,151
|
|
|
-
|
|
Research
and development
|
|
|
700,111
|
|
|
584,074
|
|
|
1,544,495
|
|
|
1,272,639
|
|
Sales
and marketing
|
|
|
1,965,578
|
|
|
203,822
|
|
|
4,285,849
|
|
|
555,622
|
|
General
and administrative
|
|
|
1,042,537
|
|
|
976,234
|
|
|
2,671,939
|
|
|
2,408,819
|
|
Total
operating expenses
|
|
|
6,990,517
|
|
|
1,764,130
|
|
|
13,287,434
|
|
|
4,237,080
|
|
Loss
from operations
|
|
|
(2,132,913
|
)
|
|
(1,764,130
|
)
|
|
(6,577,576
|
)
|
|
(4,237,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(income)
|
|
|
(12,646
|
)
|
|
(13,542
|
)
|
|
(157,508
|
)
|
|
(33,171
|
)
|
Interest
expense
|
|
|
101,841
|
|
|
675,891
|
|
|
305,445
|
|
|
1,225,961
|
|
Loss
on modification of debt
|
|
|
-
|
|
|
110,769
|
|
|
-
|
|
|
1,446,200
|
|
Registration
rights penalty
|
|
|
636,130
|
|
|
-
|
|
|
1,664,380
|
|
|
-
|
|
Total
other (income) expense, net
|
|
|
725,325
|
|
|
773,118
|
|
|
1,812,317
|
|
|
2,638,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,858,238
|
)
|
$
|
(2,537,248
|
)
|
$
|
(8,389,893
|
)
|
$
|
(6,876,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
$
|
(0.30
|
)
|
$
|
(0.48
|
)
|
$
|
(0.90
|
)
|
$
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and
diluted
|
|
|
9,501,095
|
|
|
5,257,042
|
|
|
9,304,380
|
|
|
4,958,842
|
|
See
accompanying notes to the condensed financial statements
AEROGROW
INTERNATIONAL, INC.
CONDENSED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
(Deficit)
|
|
Total
|
|
Balances,
April 1, 2006
|
|
|
9,102,622
|
|
$
|
9,103
|
|
$
|
27,313,081
|
|
$
|
(19,405,712
|
)
|
$
|
7,916,472
|
|
Exercise
of common stock warrants at $2.50
|
|
|
34,000
|
|
|
34
|
|
|
84,966
|
|
|
-
|
|
|
85,000
|
|
Exercise
of common stock warrants at $6.25
|
|
|
5,000
|
|
|
5
|
|
|
31,245
|
|
|
-
|
|
|
31,250
|
|
Common
stock issued under equity compensation plans to employees
|
|
|
24,544
|
|
|
24
|
|
|
120,196
|
|
|
-
|
|
|
120,220
|
|
Common
stock issued under equity compensation plans to
consultants
|
|
|
34,650
|
|
|
35
|
|
|
175,715
|
|
|
-
|
|
|
175,750
|
|
Common
stock issued under equity compensation plans to directors
|
|
|
6,000
|
|
|
6
|
|
|
29,994
|
|
|
-
|
|
|
30,000
|
|
Common
stock issued to landlord as rent
|
|
|
8,872
|
|
|
9
|
|
|
44,351
|
|
|
-
|
|
|
44,360
|
|
Repurchase
of common stock
|
|
|
(3,000
|
)
|
|
(3
|
)
|
|
(14,997
|
)
|
|
-
|
|
|
(15,000
|
)
|
Stock
options issued under equity compensation plans
|
|
|
-
|
|
|
-
|
|
|
404,965
|
|
|
-
|
|
|
404,965
|
|
Accretion
of loss on modification of debt
|
|
|
-
|
|
|
-
|
|
|
119,319
|
|
|
-
|
|
|
119,319
|
|
Common
stock to be issued for registration rights penalty
|
|
|
332,876
|
|
|
332
|
|
|
1,664,048
|
|
|
-
|
|
|
1,664,380
|
|
Mandatory
redeemable common stock converted
|
|
|
62,000
|
|
|
62
|
|
|
309,938
|
|
|
-
|
|
|
310,000
|
|
Adjustment
for error in prior period warrant exercise
|
|
|
67
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
(loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,389,893
|
)
|
|
(8,389,893
|
)
|
Balances,
December 31, 2006
|
|
|
9,607,631
|
|
$
|
9,607
|
|
$
|
30,282,821
|
|
$
|
(27,795,605
|
)
|
$
|
2,496,823
|
|
See
accompanying notes to the condensed financial statements
AEROGROW
INTERNATIONAL, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
months ended
|
|
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(8,389,893
|
)
|
$
|
(6,876,070
|
)
|
Adjustments to reconcile net loss to cash provided
|
|
|
|
|
|
|
|
(used) by operations:
|
|
|
|
|
|
|
|
Registration
rights penalty
|
|
|
1,664,380
|
|
|
-
|
|
Issuance
of common stock and options under
|
|
|
|
|
|
|
|
equity
compensation plans
|
|
|
730,935
|
|
|
1,130,267
|
|
Issuance
of common stock to landlord for rent
|
|
|
44,360
|
|
|
-
|
|
Depreciation
and amortization expense
|
|
|
136,935
|
|
|
51,861
|
|
Allowance
for bad debt
|
|
|
14,627
|
|
|
-
|
|
Amortization
of debt issuance costs
|
|
|
45,618
|
|
|
209,737
|
|
Accretion
of convertible debentures
|
|
|
81,563
|
|
|
375,000
|
|
Interest
expense associated with warrants issued with convertible
debentures
|
|
|
115,218
|
|
|
529,740
|
|
Effects
of variable accounting for modification of warrant terms
|
|
|
-
|
|
|
1,446,200
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(1,608,193
|
)
|
|
-
|
|
Increase
in inventory
|
|
|
(1,141,180
|
)
|
|
(19,480
|
)
|
Increase
in other current assets
|
|
|
(144,308
|
)
|
|
(911,163
|
)
|
Increase
in deposits
|
|
|
(31,885
|
)
|
|
-
|
|
Increase
in accounts payable
|
|
|
1,046,936
|
|
|
152,671
|
|
Increase
in deferred rent
|
|
|
22,039
|
|
|
-
|
|
Increase
in accrued expenses
|
|
|
921,364
|
|
|
360,812
|
|
Net
cash used by operating activities
|
|
|
(6,491,484
|
)
|
|
(3,550,425
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(161,609
|
)
|
|
-
|
|
Purchases
of equipment
|
|
|
(525,729
|
)
|
|
(410,379
|
)
|
Patent
expenses
|
|
|
(4,649
|
)
|
|
(20,407
|
)
|
Net
cash used by investing activities
|
|
|
(691,987
|
)
|
|
(430,786
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Stock
repurchase
|
|
|
(15,000
|
)
|
|
-
|
|
Increase
in due to parent company
|
|
|
-
|
|
|
28,500
|
|
Proceeds
from issuance of common stock, net
|
|
|
-
|
|
|
1,055,500
|
|
Proceeds
from exercise of warrants
|
|
|
116,250
|
|
|
-
|
|
Repayments
of convertible debentures
|
|
|
(30,000
|
)
|
|
-
|
|
Proceeds
from issuance of convertible debentures
|
|
|
-
|
|
|
3,000,000
|
|
Issuance
costs associated with convertible debentures
|
|
|
-
|
|
|
(419,474
|
)
|
Net
cash provided by financing activities
|
|
|
71,250
|
|
|
3,664,526
|
|
Net
decrease in cash
|
|
|
(7,112,221
|
)
|
|
(316,685
|
)
|
Cash,
beginning of period
|
|
|
8,852,548
|
|
|
1,265,811
|
|
Cash,
end of period
|
|
$
|
1,740,327
|
|
$
|
949,126
|
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
63,500
|
|
$
|
111,487
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
Accretion
of debt modification
|
|
$
|
119,319
|
|
$
|
-
|
|
Issuance
of common stock for equipment purchases
|
|
$
|
-
|
|
$
|
30,000
|
|
Conversion
of manditorily redeemable common stock
|
|
$
|
310,000
|
|
$
|
-
|
|
See
accompanying notes to the condensed financial statements
AEROGROW
INTERNATIONAL INC.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Description
of the Business
|
AeroGrow
International, Inc. ("the Company") was incorporated in the State of Nevada
on
March 25, 2002. The Company’s principal business is developing and marketing
advanced indoor aeroponic garden systems designed and priced to appeal
to the
gardening, cooking and small kitchen appliance markets worldwide. The Company’s
principal activities since its formation through March 2006 have consisted
of
the development of the Company’s products, business planning and raising the
capital necessary to fund these activities. In March 2006, the Company
commenced
initial marketing and distribution of its products and has expanded these
marketing efforts to encompass retail, home shopping, catalogue, international,
and direct to consumer sales channels. Prior to March 2006, the Company
was
considered a Development Stage Enterprise in accordance FAS No. 7, Accounting
and Reporting by Development Stage Enterprises. Effective March 2006, the
Company ceased being considered a development stage enterprise.
On
January 12, 2006, the Company and Wentworth I, Inc., a Delaware corporation
(“Wentworth”), entered into an Agreement and Plan of Merger (the “Merger
Agreement”) which was consummated on February 24, 2006. Under the Merger
Agreement, Wentworth merged with and into the Company, and the Company
was the
surviving corporation (“Merger”). The Merger, for accounting and financial
reporting purposes, has been accounted as an acquisition of Wentworth by
the
Company. As such, the Company is the accounting acquirer in the Merger,
and the
historical financial statements of the Company before the merger will continue
to be the financial statements for the Company following the
Merger.
In
two
closings, held on February 24, 2006 and March 1, 2006, the Company completed
the
sale of shares of its common stock and common stock purchase warrants in
a
private placement (the “2006 Offering”). The Company sold 2,148,000 shares of
its common stock and warrants to purchase 2,148,000 shares of its common
stock.
Each unit in the offering consisted of one share of common stock and a
warrant
to purchase one share of common stock expiring February 2011 at an exercise
price of $6.25 per share. The price per unit was $5.00. The Company received
net
proceeds of $8,964,952 from the 2006 Offering after the commission and
offering
expenses.
Interim
Financial Information
The
unaudited interim financial statements of the Company included herein have
been
prepared in accordance with the instructions for Form 10-QSB under the
Securities Exchange Act of 1934, as amended, and Item 310 of Regulation
S-B
under the Securities Act of 1933, as amended. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations relating to interim financial
statements.
In
the
opinion of management, the accompanying unaudited interim financial statements
reflect all adjustments, including normal recurring accruals, necessary
to
present fairly the financial position of the Company at December 31, 2006,
the
results of operations for the three and nine months ended December 31,
2006 and
2005, and the cash flows for the nine months ended December 31, 2006 and
2005.
The results of operations for the three and nine months ended December
31, 2006
are not necessarily indicative of the expected results of operations for
the
full year or any future period. The balance sheet as of March 31, 2006
is
derived from the Company’s audited financial statements. These financial
statements should be read in conjunction with the financial statements
and
footnotes included in the Company’s Annual Report on transitional Form 10-KSB
for the period ended March 31, 2006 as filed with the Securities and Exchange
Commission (“SEC”).
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Net
Income (Loss) per Share of Common Stock
The
Company computes net income (loss) per share of common stock in accordance
with
SFAS No. 128, “Earnings per Share,” (“EPS”) and Securities and Exchange
Commission SEC Staff Accounting Bulletin (“SAB”) No. 98 (“SAB 98”). SFAS No. 128
requires companies with complex capital structures to present basic and
diluted
EPS. Basic EPS is measured as the income or loss available to common stock
shareholders divided by the weighted average shares of common stock outstanding
for the period. Diluted EPS is similar to basic EPS but presents the dilutive
effect on a per share basis of potential common stock (e.g., convertible
securities, options and warrants) as if they had been converted at the
beginning
of the periods presented. Potential shares of common stock that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
Reclassifications
Certain
prior period amounts have been reclassified to conform to current period’s
presentation.
Concentration
of Credit Risk
Financial
instruments consist of cash and cash equivalents, subscriptions receivable
and
accounts payable. The carrying values of all financial instruments approximate
their fair value. The carrying value of the convertible debentures approximate
their fair value based on the current interest rate of 10%.
Restricted
Cash
In
conjunction with the Company’s processing of credit card transactions and for
its direct to consumer sales activities and as security with respect to
the
Company’s performance for required credit card refunds and chargebacks, the
Company is required to maintain a cash reserve with Litle and Company,
the
Company’s credit card processor. This reserve is equal to 5% of the credit card
sales processed over the previous six months of activity. As of December
31,
2006, the balance in this reserve account was $78,161. In addition, the
Company
has secured activity related to its corporate credit card purchase account
with
a restricted money market account. The balance in this account as of December
31, 2006 was $83,448.
Inventory
Inventories
are valued at the lower of cost, determined by the first-in, first-out
method,
or market. Included in inventory costs where the Company is the manufacturer
are
raw materials, labor and manufacturing overhead. The Company records the
raw
materials at delivered cost. Standard labor and manufacturing overhead
costs are
applied to the finished goods based on normal production capacity. A majority
of
the Company’s products are manufactured overseas and are recorded at delivered
cost.
The
Company determines inventory obsolescence reserve based on management’s
historical experience and will establish reserves against inventory according
to
the age of the product. As of December 31, 2006 and March 31, 2006, the
Company
had determined that no inventory obsolescence reserve was
necessary.
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company sells its products to retailers and consumers. Consumer transactions
are
paid primarily by credit card and are recognized as revenue once our applicable
trial period has expired (See “Revenue Recognition”). Sales to retailers vary by
customer, however, generally are on net 30 day terms. Accounts receivable
are
reported at net realizable value and net of allowance for doubtful accounts.
The
Company uses the allowance method to account for uncollectible accounts
receivable. The Company's estimate is based on a review of the current
status of
trade accounts receivable. There was no allowance recorded at March 31,
2006. As
of December 31, 2006, the Company had recorded an allowance for bad debts
of
$14,627.
Advertising
and Production Costs
The
Company expenses the costs of all production costs related to advertising
as
incurred. The Company expenses all costs related to actual advertising
such as
print, television, and radio advertisements when the advertisement has
been
broadcast or otherwise distributed.
Research
and Development
Research,
development, and engineering costs are expensed as incurred, in accordance
with
SFAS No. 2, “Accounting for Research and Development Costs”. 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.
Stock
Based Compensation
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, “Share-Based Payment.” Subsequently, the SEC provided for a phase-in
implementation process for SFAS No. 123(R), which required adoption of
the new
accounting standard no later than January 1, 2006. SFAS No. 123(R) requires
accounting for stock options using a fair-value-based method as described
in
such statement and recognition of the resulting compensation expense in
the
Company’s financial statements. Prior to January 1, 2006, the Company accounted
for employee stock options using the intrinsic value method under Accounting
Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees” and
related interpretations, which generally results in no employee stock option
expense. The Company adopted SFAS No. 123(R) on January 1, 2006 and does
not
plan to restate financial statements for prior periods. The Company plans
to
continue to use the Black-Scholes option valuation model in estimating
the fair
value of the stock option awards issued under SFAS No. 123(R).
Income
Taxes
The
Company accounts for deferred income taxes in accordance with the liability
method as required by SFAS No. 109 "Accounting for Income Taxes". Deferred
income taxes are recognized for the tax consequences in future years for
differences between the tax basis of assets and liabilities and their financial
reporting amounts at the end of each period, based on enacted laws and
statutory
rates applicable to the periods in which the differences are expected to
affect
taxable income. Any liability for actual taxes to taxing authorities is
recorded
as income tax liability. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in income in the period that includes
the
enactment date. A valuation allowance is established against such assets
where
management is unable to conclude more likely than not that such asset will
be
realized. For the nine months ended December 31, 2006 and December 31,
2005 the
Company recognized a valuation allowance equal to 100% of the net deferred
tax
asset balance.
Revenue
Recognition
The
Company recognizes revenue from product sales, net of estimated returns,
when
persuasive evidence of a sale exists: that is, a product is shipped under
an
agreement with a customer; risk of loss and title has passed to the customer;
the fee is fixed or determinable; and collection of the resulting receivable
is
reasonably assured. Accordingly, the Company did not record $354,050 of
revenue
as of December 31, 2006 related to the unpaid balance due for orders shipped
in
conjunction with the Company’s direct sales to consumers which allow the
consumer thirty days to evaluate the product paying only the shipping and
handling costs for such products before making the required installment
payments
after the expiration of the thirty day trial period. The Company also,
as of
December 31, 2006, did not record $102,480 of product costs associated
with the
foregoing revenue in as much as the customer is required to return the
product
and the Company is therefore able to recover these costs through resale
of the
goods. The liability for sales returns is estimated based upon historical
experience of return levels.
The
Company records estimated reductions to revenue for customer and distributor
programs and incentive offerings, including, promotions and other volume-based
incentives. Future market conditions and product transitions may require
the
Company to take actions to increase customer incentive offerings, possibly
resulting in an incremental reduction of revenue at the time the incentive
is
offered. Additionally, certain incentive programs require the Company to
estimate based on industry experience the number of customers who will
actually
redeem the incentive. At December 31, 2006 and March 31, 2006, the Company
had
accrued $212,268 and $0, respectively, as its estimate for the foregoing
deductions and allowances.
Warranty
and Return Reserves
The
Company records warranty liabilities at the time of sale for the estimated
costs
that may be incurred under its basic warranty program. The specific warranty
terms and conditions vary depending upon the product sold but generally
include
technical support, repair parts and labor for periods up to one year. Factors
that affect the Company’s warranty liability include the number of installed
units currently under warranty, historical and anticipated rates of warranty
claims on those units, and cost per claim to satisfy the Company’s warranty
obligation. Both manufacturers of the Company’s products provide replacement
parts for any defective components free of charge up to 2% of the total
units
purchased. Based upon the foregoing, the Company has recorded as of December
31,
2006 a provision for potential future warranty costs of $5,850.
The
Company reserves for potential returns from customers and associated refunds
or
credits related to such returns based upon historical experience. As of
December
31, 2006, the Company has recorded a reserve for customer returns of
$173,030.
Shipping
and Handling Costs
Shipping
and handling costs associated with inbound freight are recorded in cost
of
revenue. Shipping and handling costs associated with freight out to customers
are also included in cost of revenue. Shipping and handling charges to
customers
are included in product sales.
Deferred
Rent
In
July
2006, the Company entered into a facility lease with a term through January
2012, for its corporate offices in Boulder, Colorado. At December 31, 2006,
the
Company had recorded deferred rent related to this agreement in the amount
of
$22,039, based on the difference between rent expense recorded and the
rent
payment obligation.
Registration
Rights Penalties
The
holders of securities issued in the Company’s 2006 Offering and 2005 Offering
(see Note 3) have registration rights for the common stock and for the
common
stock underlying the convertible debt and the warrants held by them. Liquidated
damages for failure to register and maintain registration for such common
stock
are payable in common stock of the Company under certain circumstances
and are
limited to 1% of the amount of the outstanding convertible debt up to a
maximum
of 24% and 1% of the amount of the investment in the 2006 Offering up to
a
maximum of 18%. In each case, the amount is payable in shares of the Company’s
common stock valued at a rate of $2.00 per share. The Company has elected
to
recognize the impact of such registration rights penalties as incurred,
which
commenced after July 23, 2006 (see Note 3 and Note 6). The Company completed
the
registration of the foregoing securities on December 22, 2006 and recognized
five months of penalty, resulting in the recording of 332,876 shares of
common
stock to be issued at a value of $5.00 for a total of $1,664,380. On December
21, 2006, the FASB Financial Statement Publication (“FSP”) EITF 00-19-2 that
addresses the accrual and accounting for registration rights penalties
becomes
effective for the year beginning December 15, 2006. The Company is assessing
this FSP and will adopt it for fiscal 2007. The Company does not expect
the
adoption to have a significant difference in its current policy.
3.
|
Convertible
Debentures
|
On
May
27, 2005, the Company entered into an exclusive Placement Agreement with
Keating
Securities, LLC to raise up to $3,000,000, through a private placement
offering
consisting of up to 300 units at an offering price of $10,000 per unit
(the
“2005 Offering”). Each unit is comprised of a convertible debenture evidenced by
a 10% unsecured convertible promissory note in the principal amount of
$10,000
(a total of $3,000,000), and 2,000 five-year warrants (a total of 600,000
warrants), each warrant providing for the purchase of one share of the
Company's
common stock at the exercise price of $5.01 per share. The Unsecured Convertible
Promissory Notes bear interest at the rate of 10% per annum which is payable
quarterly beginning September 30, 2005. The principal was originally due
on
September 30, 2006. During the fifteen days following the completion of
an
additional financing, each note holder had the opportunity to request full
payment of the principal amount of the notes and interest instead of converting
their convertible notes into shares of common stock and convertible warrants.
The Company received proceeds of $3,000,000 from this private placement
less
$419,471 in directly incurred debt issuance costs. In addition to the foregoing,
for each share of common stock issuable upon conversion, each note holder
received an additional five year warrant to purchase one share of the common
stock at an exercise price of $6.00 per share. The Company had agreed to
registration rights related to both the shares underlying the convertible
debt
and the related warrants associated with this 2005 Offering. In the event
the
Company failed to fulfill its registration obligations the Company agreed
to pay
liquidated damages under the following circumstances: (a) if the registration
statement was not filed by the Company on or prior to 60 days after the
final
closing of the 2005 Offering (such an event, a “Filing Default”); (b) if the
registration statement was not declared effective by the SEC on or prior
to 150
days after the final Closing of the offering (such an event, an “Effectiveness
Default”); or (c) if the Company did not file its required periodic reports
under the Exchange Act when due (such an event, a “Reporting Default” and
together with a Filing Default and an Effectiveness Default, a “SEC Default”).
In the event of an SEC Default, the Company shall as liquidated damages
pay, for
each 30-day period of an SEC Default, an amount equal to 1% of the principal
amount of the notes up to a maximum aggregate of 24 months of SEC Defaults.
The
Company shall pay the Liquidated Damages in shares of common stock, priced
at
$2.00 per share as follows: (i) in connection with a Filing Default, on
the 61st
day after the initial closing, and each 30th day thereafter until the
registration statement is filed with the SEC; (ii) in connection with an
Effectiveness Default, on the 151st day after the initial closing, and
each 30th
day thereafter until the Registration Statement is declared effective by
the
SEC; or (iii) in connection with a Reporting Default, on the 31st consecutive
day of after a Reporting Default has occurred, provided that if the Reporting
Default has been cured, then such days during which a Reporting Default
were
accruing will be added to any future Reporting Default period for the purposes
of calculating the payment of the liquidated damages provided for in this
provision. The Company has recorded penalties for an Effectiveness Default
with
regard to the 2005 Offering through December 22, 2006, the effective date
of the
registration, of 74,250 shares of common stock valued at $371,250.
In
conjunction with this $3,000,000 private placement, the Company recognized
at
the time of issuance $750,000 of beneficial conversion costs, representing
the
value of the beneficial conversion rights of the convertible debentures,
determined by calculating the difference of the fair market value of the
stock
at the commitment date, or $5.00 per share, less the conversion exercise
price
of $4.00 times the number of shares to be issued upon conversion or 750,000
shares. This value is recorded as a discount to the convertible debentures
and
an addition to additional paid- in capital. This discount was completely
amortized as interest expense over the term of the convertible debentures
which
were originally due, if not converted, by June 30, 2006.
Also
in
conjunction with this $3,000,000 private placement, the Company recognized
at
the time of issuance $1,059,480 representing the fair value of the five
year
warrants issued with the convertible debentures. The value of these warrants
was
determined in accordance with the Black-Scholes pricing model utilizing
a
historic volatility factor of 129.67%, a risk free interest rate of 5.0%
and an
expected life for the warrants of five years, resulting in a value of $2.73
per
warrant. This value was recorded as an additional discount to the convertible
debentures and an addition to additional paid-in capital. This discount
was
completely amortized to interest expense over the term of the convertible
debentures which were originally due if not converted by June 30,
2006.
Prior
to
the closings of the Merger and the 2006 Offering but contingent upon their
successful completion, in February 2006, the Company entered into agreements
with the convertible debt holders of the 2005 Offering whereby certain
debt
holders converted $2,130,000 of their outstanding debt obligations into
common
stock of the Company at a conversion price of $3.00 per share and certain
other
debt holders agreed to extend the maturity dates of $840,000 of debt obligations
from June 30, 2006 to December 31, 2006. The $2,130,000 of debt that converted
immediately resulted in additional beneficial conversion expense of $887,500
to
account for the additional fair value attributed to the additional shares
of
common stock which were issued as a result of the change in the conversion
price
to $3 per share from the original conversion price of $4 per share. The
fair
value of the foregoing additional shares was based upon a price of $5.00
per
share. The converting note holders also were issued, pursuant to the terms
of
the original note offering, five-year warrants to purchase 426,000 shares
of the
Company’s common stock at an exercise price of $6.00 per share.
With
respect to the $840,000 of convertible debentures that were modified by
extension of the due date from June 30, 2006 to December 31, 2006 and
modification of the embedded conversion feature from a conversion price
of $4.00
per share to a conversion price of $3.50 per share, based on the significant
change in the terms of these $840,000 in debentures, the original debt
is deemed
extinguished and a debt extinguishment loss was recognized. This loss is
based
on the fair value of the new debt instrument in accordance with EITF 96-19,
“Debtor’s Accounting for a Modification or Exchange of Debt Instruments and EITF
05-07, Accounting for Modifications to Conversion Options Embedded in Debt
Instruments and Related Issues”. The Company recognized a loss on extinguishment
of debt of $132,578. This loss was determined by calculating the change
in net
present value of the cash flows from the convertible debt, inclusive of
the
change in the embedded conversion feature determined by comparing the fair
value
of the conversion option immediately following such modification with its
fair
value immediately prior to the modification. This loss was recorded as
of
February 2006 with a corresponding increase in fair value of the modified
convertible debenture balance and is being amortized over the remaining
term of
these debentures to additional paid in capital. As of December 31, 2006,
the
Company has accreted $132,578 of the recognized loss on extinguishment
of debt
to additional paid in capital.
Of the
original amount of $3,000,000 in convertible debentures disclosed as outstanding
as of December 31, 2005, as of December 31, 2006 $2,130,000 converted to
common stock, $30,000 was due on June 30, 2006 and was repaid on that date
and
$840,000 was due on March 31, 2007 after the Company granted and the investors
accepted an additional three month extension of the previously modified
maturity
date.
The
balance presented for the convertible debentures, net of discounts, as
of
December 31, 2006 and March 31, 2006 is as follows:
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2006
|
|
Convertible
debentures outstanding
|
|
$
|
840,000
|
|
$
|
870,000
|
|
Loss
on modification of debt, net of $132,578 and $13,258 accretion
to
additional paid in capital as of December 31, 2006 and March
31, 2006,
respectively
|
|
|
-
|
|
|
119,320
|
|
Discount
as a result of beneficial conversion feature, net of amortization
of
$750,000 and $668,437 as of December 31, 2006 and March 31, 2006,
respectively
|
|
|
-
|
|
|
(81,563
|
)
|
Discount
as a result of fair value of warrants issued, net of amortization
of
$1,059,480 and $944,262 as of December 31, 2006 and March 31,
2006,
respectively
|
|
|
-
|
|
|
(115,218
|
)
|
Net
balance
|
|
$
|
840,000
|
|
$
|
792,539
|
|
4.
|
Equity
Compensation Plans
|
In
2003,
the Company's Board of Directors approved a Stock Option Plan (the "Plan")
pursuant to which nonqualified stock options are reserved for issuance
to
eligible employees, consultants and directors of the Company. The Plan
was
administered by the Board of Directors, which had the authority to select
the
individuals to whom awards are to be granted, the number of shares of common
stock to be covered by each award, the vesting schedule of stock options,
and
all other terms and conditions of each award. The Company has granted
nonqualified stock options to purchase shares of common stock to certain
employees at exercise prices ranging from $0.05 to $5.00 per share. In
August
2005, the Plan was merged into the 2005 Equity Compensation Plan (the “2005
Plan”) and it no longer separately exists. However, options issued and
outstanding under the Plan continue to be governed by their grant agreements
but
are administered under the 2005 Plan.
In
August
2005, the Company’s Board of Directors approved the 2005 Plan pursuant to which
both qualified and nonqualified stock options as well as restricted shares
of
common stock are reserved for issuance to eligible employees, consultants
and
directors of the Company. A total of 1,505,000 shares of our common stock
may be
granted under the 2005 Plan.
The
2005
Plan is administered by the Company’s compensation committee which has the
authority to select the individuals to whom awards are to be granted, the
number
of shares of common stock to be covered by each award, the vesting schedule
of
stock options, and all other terms and conditions of each award. The Company
has
granted qualified stock options to purchase shares of common stock to certain
employees at exercise prices ranging from $2.50 to $5.00 per share.
Prior
to
January 1, 2006, the Company accounted for employee stock-based compensation
under the recognition and measurement principles of APB No. 25, “Accounting for
Stock Issued to Employees,” and related Interpretations, as permitted by SFAS
No. 123, “Accounting for Stock-Based Compensation”. Under the recognition
principles of APB No. 25, compensation expense related to restricted stock
and
performance units was recognized in the financial statements. However,
APB No.
25 generally did not require the recognition of compensation expense for
stock
options because the exercise price of these instruments was generally equal
to
the fair value of the underlying common stock on the date of grant, and
the
related number of shares granted were fixed at that point in time.
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
SFAS No. 123(R), “Share-Based Payment”. In addition to recognizing compensation
expense related to restricted stock and performance units, SFAS No. 123(R)
also
requires recognition of compensation expense related to the estimated fair
value
of stock options. The Company adopted SFAS No. 123(R) using the
modified-prospective-transition method. Under that transition method,
compensation expense recognized subsequent to adoption includes: (a)
compensation cost for all share-based payments granted prior to, but not
yet
vested as of January 1, 2006, based on the values estimated in accordance
with
the original provisions of SFAS No. 123, and (b) compensation cost for
all
share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair values estimated in accordance with the provisions of SFAS
No.
123(R). Consistent with the modified-prospective-transition method, the
Company’s results of operations for prior periods have not been adjusted to
reflect the adoption of FAS 123(R).
On
June
28, 2006, the Company granted to one employee options to purchase 125,000
shares
of the Company’s common stock at an exercise price of $5.00 per share under the
2005 Plan which will vest 50% on the 12 month anniversary of the grant
and 12.5%
for each of the next four three-month periods. On September 25, 2006, the
Company granted to one employee options to purchase 10,000 shares of the
Company’s common stock at an exercise price of $5.00 per share under the 2005
Plan which will vest pro rata over a two year period. In December 2006,
the
Company granted to two employees options under the 2005 Plan to purchase
4,000
shares of the Company’s common stock at an exercise price of $5.00 per share
which will vest pro rata over a two year period and 3,500 shares of the
Company’s common stock at an exercise price of $5.00 per share which were vested
upon issuance. The Company valued the foregoing options using the Black
Scholes
option pricing model using the following assumptions: no dividend yield;
expected volatility rate of 129.67%; risk free interest rate of 5% and
an
average life of 4 years resulting in a value of $4.12 per option
granted.
As
a
result of recognizing compensation expense for stock options previously
granted
pursuant to the provisions of SFAS No. 123(R), the net loss for the nine
months
ended December 31, 2006 was $404,965 greater than if the Company had continued
to account for stock options under APB No. 25.
Information
regarding employee stock options outstanding as of December 31, 2006 is
as
follows:
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Weighted-
|
|
average
|
|
|
|
|
|
|
|
average
|
|
Remaining
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
Contractual
|
|
|
|
price range
|
|
Options
|
|
Price
|
|
Life (years)
|
|
Options
|
|
Over
$0.00 to $0.50
|
|
|
30,618
|
|
$
|
0.08
|
|
|
2.42
|
|
|
30,618
|
|
Over
$0.50 to $2.50
|
|
|
137,259
|
|
$
|
1.57
|
|
|
2.22
|
|
|
137,259
|
|
$5.00
|
|
|
1,083,614
|
|
$
|
5.00
|
|
|
4.47
|
|
|
952,152
|
|
|
|
|
1,251,491
|
|
$
|
4.51
|
|
|
4.00
|
|
|
1,120,029
|
|
In
addition to option grants, during the nine months ended December 31, 2006
the
Company granted under the 2005 Plan a total of 65,194 shares of common
stock at
a fair value of $5.00 per share, consisting of 24,544 shares granted and
issued
to employees, 34,650 shares granted to consultants for services, 1,250
shares
granted to each of three directors for service on the Audit Committee and
750
shares granted to each of three directors for service on the Governance
Committee. All of the foregoing were charged to operating expenses for
the nine
months ended December 31, 2006 resulting in a total charge of
$325,970.
Information
regarding the Company’s equity compensation plans at December 31, 2006 is as
follows:
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 approved by security holders
|
|
|
1,251,491
|
|
$
|
4.51
|
|
|
129,646
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
Total
|
|
|
1,251,491
|
|
$
|
4.51
|
|
|
129,646
|
|
At
December 31, 2006, the Company has granted options for 131,462 of the Company’s
common stock that are unvested that will result in $584,530 of compensation
expense in future periods if fully vested.
The
following table illustrates the effect on net income and EPS for the nine
months
ended December 31, 2005 if the Company had applied the fair value recognition
provisions of SFAS No. 123(R):
|
|
Nine
months ended
|
|
|
|
December
31, 2005,
|
|
|
|
(Unaudited)
|
|
Net
loss, as reported
|
|
$
|
(6,876,070
|
)
|
Net
income (loss) per share, basic and diluted, as reported
|
|
$
|
(1.39
|
)
|
Deduct:
Stock-based compensation expense, as determined under fair-value
based
method for all employee awards
|
|
$
|
(177,127
|
)
|
Pro
forma net loss
|
|
$
|
(7,053,197
|
)
|
Pro
forma net income (loss) per share, basic and diluted
|
|
$
|
(1.42
|
)
|
5.
|
Related
Party Transactions
|
During
the nine months ended December 31, 2006, the Company paid consulting fees
totaling $62,922 to one of its director for services related to the development
of an international channel of distribution for the Company’s products and other
consulting services.
Also
during the nine months ended December 31, 2006, the Company incurred fees
totaling $600,094 for various video and web projects, including production
of
the Company’s infomercial to promote its products, to MedEd Architects LLC a
video production company owned 33% by Randy Seffren, the Company’s Chief
Marketing Officer. The Company may incur additional costs in subsequent
calendar
quarters to MedEd Architects LLC, for editing and production of additional
infomercials featuring the Company’s products and related video-based
products.
For
the
nine months ended December 31, 2006 and December 31, 2005, a director of
the
Company, who is a partner in a law firm, was paid legal fees of $17,593
and
$18,000, respectively (for each period).
During
the nine month period ended December 31, 2005, the Company retained one
member
of its board as a consultant who was granted stock options, common stock
and
fees for financial services provided totaling $264,291.
The
Company rented office furniture, office equipment and computers from its
former
parent company, Mentor Capital Consultants, Inc., for the first two months
of
the nine months ended December 31, 2005 at $2,500 per month. On May 31,
2005,
the Company acquired these fixed assets for their net book value of
$33,901.
Each
of
the Company’s four directors not employed by the Company received $1,500
representing compensation for attendance at three Board of Director meetings
at
the rate of $500 each meeting.
In
June
2006, a warrant holder with warrants expiring June 30, 2006 exercised warrants
to purchase 10,000 shares of the company’s common stock at $2.50 per
share.
In
July
2006, a warrant holder with warrants from the Company’s 2006 Offering exercised
warrants to purchase 5,000 shares of the Company’s common stock at $6.25 per
share.
The
Company purchased 3,000 shares of its own common stock at a price of $5.00
per
share in July 2006 that had been previously issued as compensation to a
consultant based upon an agreement to allow such consultant to convert
such
stock to cash if the consultant so elected prior to June 30, 2006.
In
December 2006 a warrant holder with warrants expiring December 31, 2006
exercised warrants to purchase 24,000 shares of the company’s common stock at
$2.50 per share.
During
the nine months ended December 31, 2006, the Company issued 65,194 shares
of
common stock under its 2005 Plan including 5,000 shares to the Company’s Chief
Financial Officer as additional compensation, 18,044 shares to other employees
and 36,150 shares to consultants.
During
the nine months ended December 31, 2006, the Company issued 8,872 shares
of
stock to a landlord and recorded $44,360 as additional rent expense. During
the
nine months ended December 31, 2005, the Company issued 11,403 shares of
stock
to a landlord and recorded $57,015 as additional rent expense.
The
holders of securities issued in the private placement offering, as well
the
convertible debt offering as described in Note 3, have registration rights
under
the common stock and for the common stock underlying the warrants held
by them.
Liquidated damages for failure to register and maintain registration for
the
common stock and for the common stock underlying the warrants held by investors
are limited and payable under the following circumstances: (a) if a registration
statement is not filed by the Company on or prior to 45 days after the
closing
date (such an event, a “Filing Default”); (b) if the registration statement is
not declared effective by the SEC on or prior to the 150th day after the
closing
of the 2006 Offering (such an event, an “Effectiveness Default”); and/or (c) if
the registration statement (after its effectiveness date) ceases to be
effective
and available to investors for any continuous period that exceeds 30 days
or for
one or more period that exceeds in the aggregate 60 days in any 12-month
period
(such an event, a “Suspension Default” and together with a Filing Default and an
Effectiveness Default, a “Registration Default”). In the event of a Registration
Default, the AeroGrow shall pay to the investor as liquidated damages,
for each
30-day period of a Registration Default, an amount equal to 1% of the aggregate
purchase price paid by such holder pursuant to this Agreement up to a maximum
of
18% of the aggregate purchase price paid by such holder, provided that
liquidation damages in respect of a Suspension Default shall not be payable
in
relation to any securities not owned by such holder at the time of the
Suspension Default and, provided further, that no liquidated damages are
due in
respect of the warrants. In the event of a Filing Default or an Effectiveness
Default, the Liquidated Damages shall be paid by the issuance of additional
Common Stock at the rate of the amount of the liquidated damages due divided
by
$2.00. In the event of a Suspension Default, the liquidated damages shall
be
paid in cash. In summary, the liquidated damages are either settled with
common
stock in the case of a delay in filing having declared effective a registration
statement, or in cash but only related to actual stock issued (excluding
common
stock underlying warrants) for failure to maintain effectiveness of a
registration. The Company filed the required Registration Statement within
the
45 days pursuant to (a) above and such registration was declared effective
on
December 22, 2006. The Company recorded penalties for (b) above with regard
to the 2006 Offering through December 22, 2006, the date the registration
was
declared effective, of 258,626 shares of common stock valued at $1,293,130
which, when added to the similar penalties incurred for the convertible
debt
offering as described in Note 3 total. 332,876 shares of common stock with
a
total value of $1,664,380.
7.
|
Commitments
and Contingencies
|
On
July
27, 2006 the Company entered into a lease with Pawnee Properties, LLC to
consolidate its operations, other than its seed kit manufacturing operations,
into a 21,012 square foot office space at 6075 Longbow Drive, Boulder,
Colorado
80301, commencing no later than December 1, 2006. Pawnee Properties, LLC,
and
its controlling persons, are not affiliates of the Company. The initial
rent is
$15,759 per month, plus the Company’s proportionate share of building taxes,
insurance and operating expenses. The initial term continues until January
31,
2012, unless modified under specified circumstances. The agreement contains
other standard office lease provisions.
Future
cash payments under such operating lease for the upcoming five years are
as
follows:
Year
Ended
|
|
Rent
|
|
March
31, 2007
|
|
$
|
48,877
|
|
March
31, 2008
|
|
$
|
296,848
|
|
March
31, 2009
|
|
$
|
316,253
|
|
March
31, 2010
|
|
$
|
325,152
|
|
March
31, 2011
|
|
$
|
327,047
|
|
8.
|
Segment
Information and
Concentrations
|
The
Company’s only operating segment consists of sales of its aeroponic garden
systems and peripheral products.
During
the nine months ended December 31, 2006, the Company utilized one manufacturer
for 100% of its manufacturing of its aeroponic garden systems which accounted
for $2,573,464 or 54% of cost of sales. Goods produced by this manufacturer
in
inventory at December 31, 2006 totaled $721,878 or 54% of inventory. As
of
December 31, 2006, the Company had paid cash deposits to this manufacturer
for
goods not yet shipped totaling $214,196 which are included in prepaid expenses,
and had outstanding accounts payable to this manufacturer as of December
31,
2006 of $280,882 or 18% of the accounts payable balance.
During
the nine months ended December 31, 2006, the Company had two customers
which
accounted for 19% ($1,303,949) and 15% ($1,019,629), respectively, of its
product sales. During the three months ended December 31, 2006, the same
two
customers accounted for 19% ($929,544) and 12% ($562,733), respectively,
of its
product sales. These same two customers accounted for 15% ($248,466) and
19%
($314,643) of the Company’s outstanding accounts receivable at December 31,
2006.
On
March
16, 2007, the Company completed a private offering in which the Company
sold an
aggregate of 833,400 shares of common stock and warrants to purchase 833,400
shares of common stock (the "2007 Investor Warrants") in the form of units
consisting of one share of common stock and one warrant per unit (the "2007
Offering"). The units were sold at a price of $6.00 per unit. In addition,
warrants to purchase 83,340 shares of common stock were issued to the placement
agent of the 2007 Offering (the "2007 Agent Warrants," and together with
the
2007 Investor Warrants, the "2007 Warrants").
Each
2007
Investor Warrant is exercisable for one share of common stock at an exercise
price of $7.50 per share, and each 2007 Agent Warrant is exercisable for
one
share of common stock at an exercise price of $8.25 per share. Each 2007
Warrant
will be exercisable for five years from the closing of the 2007 Offering.
The
exercise price and number of shares of common stock underlying the 2007
Warrants
is subject to adjustment on certain events, including reverse stock splits,
stock dividends and recapitalizations, combinations, and mergers where
the
Company is not the surviving company. The Company will at all times reserve
and
keep available, solely for issuance and delivery upon the exercise of the
2007
Warrants, such shares of common stock underlying the 2007 Warrants, as
from time
to time shall be issuable upon the exercise of the 2007 Warrants.
The
Company has the right to require a holder of a 2007 Investor Warrant to
exercise
the 2007 Investor Warrant if our common stock is quoted on the NASDAQ Capital
Market and, for a period of 20 consecutive trading days, the closing bid
price
of the common stock has been above $10.00 per share and the daily trading
volume
has been at least 50,000 shares, in each case on each of the 20 consecutive
trading days.
On
March
28, 2007, the Company completed an additional private offering in which
the
Company sold an aggregate of 333,360 shares of common stock and warrants
to
purchase 333,360 shares of common stock in the form of units consisting
of one
share of common stock and one warrant per unit. The units were sold at
a price
of $6.00 per unit. In addition, warrants to purchase 33,336 shares of common
stock were issued to the placement agent of this private offering. The
warrants
issued to the investors and the placement agent has the same terms as the
2007
Investor Warrants and the 2007 Agent Warrants, respectively.