UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(MARK
ONE)
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|
x
|
QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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|
For
the quarterly period ended June 30,
2007
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|
OR
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|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
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|
For
the transition period from ______________ to
______________
|
Commission
File No. 000-50888
AEROGROW
INTERNATIONAL, INC.
(Exact
Name of Registrant as Specified in its Charter)
NEVADA
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|
46-0510685
|
(State
or other jurisdiction of
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|
(I.R.S.
Employer
|
incorporation
or organization)
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|
Identification
Number)
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|
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6075
Longbow Drive, Suite 200
|
|
|
Boulder,
Colorado
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80301
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(Address
of principal executive offices)
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|
(Zip
Code)
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(303)
444-7755
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Registrant’s
telephone number, including area
code
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
Number
of shares of issuer's common stock outstanding as of August 1, 2007:
11,199,581
TABLE
OF CONTENTS
FORM
10-Q REPORT
June
30, 2007
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Page
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Part
I. Financial Information |
Item
1.
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3
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3 |
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4 |
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5 |
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6 |
Item
2.
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12
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Item
3.
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17
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Item
4.
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17 |
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Part
II. Other
Information |
Item
1.
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18
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Item
1A.
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18 |
Item
2.
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18
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Item
3.
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18
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Item
4.
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18
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Item
5.
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18
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Item
6.
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18
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PART
I - FINANCIAL
INFORMATION
CONDENSED
BALANCE SHEETS
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|
June
30,
|
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|
March
31,
|
|
|
|
2007
|
|
|
2007
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|
ASSETS
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|
(Unaudited)
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|
|
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|
Current
assets
|
|
|
|
|
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|
Cash
and cash equivalents
|
|
$
|
3,418,227
|
|
|
$
|
5,495,501
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|
Restricted
cash
|
|
|
85,036
|
|
|
|
84,363
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$56,597 and $80,695 at June 30, 2007 and March 31, 2007,
respectively
|
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|
2,197,609
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|
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|
1,884,743
|
|
Other
receivable
|
|
|
229,470
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|
|
|
182,221
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|
Inventory
|
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|
3,908,224
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|
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3,940,614
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Prepaid
expenses and other
|
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419,090
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|
|
|
480,990
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|
Total
current assets
|
|
|
10,257,656
|
|
|
|
12,068,432
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $408,267 and
$322,405 at
June 30, 2007 and March 31, 2007, respectively
|
|
|
953,067
|
|
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|
909,496
|
|
Intangible
assets, net of accumulated amortization of $8,599 and $6,659 at
June 30,
2007 and March 31, 2007, respectively
|
|
|
30,474
|
|
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|
28,723
|
|
Deposits
|
|
|
136,039
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|
35,155
|
|
|
|
|
166,513
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|
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63,878
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|
Total
Assets
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|
$
|
11,377,236
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|
|
$
|
13,041,806
|
|
|
|
|
|
|
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|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
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|
Current
liabilities
|
|
|
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|
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Due
to factor
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|
$
|
1,266,140
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|
$
|
645,151
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|
Accounts
payable
|
|
|
1,601,523
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|
|
|
3,192,734
|
|
Accrued
expenses
|
|
|
1,082,066
|
|
|
|
1,166,485
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|
Customer
deposit
|
|
|
910,847
|
|
|
|
-
|
|
Deferred
rent
|
|
|
57,283
|
|
|
|
53,531
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|
Total
current liabilities
|
|
|
4,917,859
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|
|
|
5,057,901
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|
|
|
|
|
|
|
|
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Stockholders'
equity
|
|
|
|
|
|
|
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Preferred
stock, $.001 par value, 20,000,000 shares authorized, none issued
or
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.001 par value, 75,000,000 shares authorized, 11,125,609
and
11,065,609 shares issued
and
outstanding at June 30, 2007 and March 31, 2007,
respectively
|
|
|
11,125
|
|
|
|
11,065
|
|
Additional
paid-in capital
|
|
|
38,263,145
|
|
|
|
37,765,003
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|
Accumulated
(deficit)
|
|
|
(31,814,893
|
)
|
|
|
(29,792,163
|
)
|
Total
Stockholders' Equity
|
|
|
6,459,377
|
|
|
|
7,983,905
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
11,377,236
|
|
|
$
|
13,041,806
|
|
See
accompanying notes to the condensed financial statements.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
|
Three
Months Ended
June
30,
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
|
|
|
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Product
sales, net
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|
$
|
6,278,685
|
|
|
$
|
821,938
|
|
|
|
|
|
|
|
|
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|
Operating
expenses
|
|
|
|
|
|
|
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|
Cost
of revenue
|
|
|
3,575,276
|
|
|
|
675,695
|
|
Research
and development
|
|
|
521,819
|
|
|
|
434,931
|
|
Sales
and marketing
|
|
|
2,920,987
|
|
|
|
960,474
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|
General
and administrative
|
|
|
1,255,008
|
|
|
|
856,040
|
|
Total
operating expenses
|
|
|
8,273,090
|
|
|
|
2,927,140
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,994,405
|
)
|
|
|
(2,105,202
|
)
|
|
|
|
|
|
|
|
|
|
Other
(income) expense, net
|
|
|
|
|
|
|
|
|
Interest
(income)
|
|
|
(37,859
|
)
|
|
|
(84,113
|
)
|
Interest
expense
|
|
|
66,184
|
|
|
|
101,800
|
|
Total
other (income) expense, net
|
|
|
28,325
|
|
|
|
17,687
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,022,730
|
)
|
|
$
|
(2,122,889
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
shares
outstanding, basic and diluted
|
|
|
11,085,389
|
|
|
|
9,116,832
|
|
See
accompanying notes to the condensed financial statements.
AEROGROW
INTERNATIONAL, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss)
|
|
$ |
(2,022,730 |
) |
|
$ |
(2,122,889 |
) |
Adjustments
to reconcile net (loss) to cash provided
|
|
|
|
|
|
|
|
|
(used)
by operations:
|
|
|
|
|
|
|
|
|
Issuances
of common stock and options under equity compensation
plans
|
|
|
123,202
|
|
|
|
170,426
|
|
Issuance
of common stock to landlord for rent
|
|
|
-
|
|
|
|
38,020
|
|
Depreciation
and amortization expense
|
|
|
87,802
|
|
|
|
40,344
|
|
Bad
debt expense (recoveries)
|
|
|
(24,099 |
) |
|
|
5,152
|
|
Amortization
of debt issuance costs
|
|
|
-
|
|
|
|
15,206
|
|
Amortization
of convertible debentures, beneficial conversion feature
|
|
|
-
|
|
|
|
27,188
|
|
Interest
expense from warrants issued with convertible debentures
|
|
|
-
|
|
|
|
38,406
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
in accounts receivable
|
|
|
(288,767 |
) |
|
|
(482,068 |
) |
(Increase)
in other receivable
|
|
|
(47,249 |
) |
|
|
-
|
|
Decrease
(increase) in inventory
|
|
|
32,390
|
|
|
|
(457,445 |
) |
Decrease
in other current assets
|
|
|
61,900
|
|
|
|
29,914
|
|
(Decrease)
in accounts payable
|
|
|
(1,591,211 |
) |
|
|
(56,142 |
) |
(Decrease)
increase in accrued expenses
|
|
|
(84,419 |
) |
|
|
6,760
|
|
Increase
in customer deposit
|
|
|
910,847
|
|
|
|
-
|
|
Increase
in deferred rent
|
|
|
3,752
|
|
|
|
-
|
|
(Increase)
in deposits
|
|
|
(100,884 |
) |
|
|
-
|
|
Net
cash (used) by operating activities
|
|
|
(2,939,466 |
) |
|
|
(2,747,128 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
(673 |
) |
|
|
(6,370 |
) |
Purchases
of equipment
|
|
|
(129,433 |
) |
|
|
(65,066 |
) |
Patent
expenses
|
|
|
(3,691 |
) |
|
|
(585 |
) |
Net
cash (used) by investing activities
|
|
|
(133,797 |
) |
|
|
(72,021 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Increase
in amounts due to factor
|
|
|
620,989
|
|
|
|
-
|
|
Proceeds
from exercise of warrants
|
|
|
375,000
|
|
|
|
25,000
|
|
Repayments
of convertible debentures
|
|
|
-
|
|
|
|
(30,000 |
) |
Net
cash provided (used) by financing activities
|
|
|
995,989
|
|
|
|
(5,000 |
) |
Net
increase (decrease) in cash
|
|
|
(2,077,274 |
) |
|
|
(2,824,149 |
) |
Cash,
beginning of period
|
|
|
5,495,501
|
|
|
|
8,852,548
|
|
Cash,
end of period
|
|
$ |
3,418,227
|
|
|
$ |
6,028,399
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non cash investingand financing
activities:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
66,184
|
|
|
$ |
21,000
|
|
Income
taxes paid
|
|
$ |
-
|
|
|
$ |
-
|
|
Accretion
of debt modification
|
|
$ |
-
|
|
|
$ |
39,773
|
|
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,
marketing, and distributing 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 consisted of product research and development,
market research, business planning, and raising the capital necessary to
fund
these activities. In December 2005, the Company commenced pilot production
of
its AeroGarden™ system and, in March 2006, began shipping these systems to
retail and catalogue customers. Prior to March 2006, the Company was
considered a Development Stage Enterprise in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by
Development Stage Enterprises.” Effective March 2006, the Company
ceased being considered a development stage enterprise. The Company is
headquartered in Boulder, Colorado.
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 was 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.
Interim
Financial Information
The
unaudited interim financial statements of the Company included herein have
been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (“SEC”) for interim reporting including the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. These condensed statements
do not include all disclosures required by accounting principles generally
accepted in the United States of America (“U.S. GAAP”) for annual audited
financial statements and should be read in conjunction with the Company’s
audited consolidated financial statements and related notes included in the
Company’s Annual Report on Form 10-KSB for the year ended March 31, 2007 as
filed with the SEC.
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 June 30, 2007, the
results of operations for the three months ended June 30, 2007 and 2006,
and the
cash flows for the three months ended June 30, 2007 and 2006. The results
of
operations for the three months ended June 30, 2007 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, 2007 is derived from the Company’s
audited financial statements.
Use
of
Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ
from those estimates.
Net
Income (Loss) per Share of Common Stock
The
Company computes net income (loss) per share of common stock in accordance
with
Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per
Share,” and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No.
128 requires companies with complex capital structures to present basic and
diluted earnings per share (“EPS”). Basic EPS is measured as the
income or loss available to common 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 the current period’s
presentation.
Segments
of an Enterprise and Related Information
SFAS
No.
131, "Disclosures about Segments of an Enterprise and Related Information"
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 No. 131 also requires disclosures about products and
services, geographic areas and major customers. At present, the
Company only operates in one segment.
Concentration
of Credit Risk
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 of cash the Company has on
deposit with a financial institution exceeded the $100,000 federally insured
limit as of June 30, 2007 and March 31, 2007. 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, accounts receivable and
accounts payable. The carrying values of all financial instruments approximate
their fair value.
Customers:
For
the
three months ended June 30, 2007, the Company had one customer who represented
17.7% of net product sales. At June 30, 2007, this customer accounted
for less than 1% of the total outstanding accounts receivable. In
addition, at June 30, 2007, the Company had two additional customers accounting
for 26.3%, and 19.7%, respectively, of total accounts receivable
outstanding.
For
the
three months ended June 30, 2006, the Company had two customers represent
46.6%
and 19.0%, respectively, of net product sales.
Suppliers:
As
of
June 30, 2007, the Company had one supplier that accounted for $160,413,
or
10.0%, of total outstanding accounts payable. For the three months
ended June 30, 2007, the Company purchased inventories and other inventory
related items from this supplier totaling $680,050, representing 19% of the
cost
of revenues for the three months ended June 30, 2007. In addition,
during the three months ended June 30, 2007, the Company purchased inventories
and other inventory related items from one additional supplier totaling
$1,046,621, representing 29% of the cost of revenues for the three months
ended
June 30, 2007. During the three months ended June 30, 2006, the
Company purchased inventory and other inventory related items from one supplier
totaling $1,063,007. During the three months ended June 30, 2007,
inventories and inventory related items from this vendor represented 44%
of the
cost of revenues for the period.
Restricted
Cash
The
Company has a restricted money market account to secure the activity related
to
its corporate credit card purchase account. The balance in this restricted
money
market account as of June 30, 2007 and March 31, 2007 was $85,036 and $84,363,
respectively.
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 Accounting Research Bulletin No. 43, Chapter 4, “Inventory
Pricing.” A majority of the Company’s products are manufactured
overseas and are recorded at cost.
|
|
June
30,
|
|
|
March
31,
|
|
|
2007
|
|
|
2007
|
Finished
goods
|
|
$ |
3,377,057
|
|
|
$ |
3,626,671
|
Raw
materials
|
|
|
531,167
|
|
|
|
313,943
|
|
|
$ |
3,908,224
|
|
|
$ |
3,940,614
|
The
Company determines inventory obsolescence reserve based on management’s
historical experience and establishes reserves against inventory according
to
the age of the product. As of June 30, 2007 and March 31, 2007, 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 and are recognized as revenue once the applicable
trial period has expired (see “Revenue Recognition” below). Sales to retailers
vary by customer, but are generally on net 30 days 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. The Company had recorded an allowance for
bad debts of $56,597 and $80,695, as of June 30, 2007 and March 31, 2007,
respectively.
Other
Receivable
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 June 30,
2007
and March 31, 2007, the balance in this reserve account was $229,470 and
$182,221, respectively.
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. Beginning with the quarter ended December 31, 2006, the
Company began to offer promotions to its direct sales consumers allowing
thirty
or thirty-six days for product evaluation, where the customer pays only the
shipping and handling costs for such products before making the required
installment payments after the expiration of the thirty or thirty-six day
trial
period. During the three months ended June 30, 2007, the Company offered a
thirty-six day trial period and accordingly, the Company did not record $294,715
as of June 30, 2007, related to the unpaid balance due for orders shipped
in
conjunction with this evaluation program. The Company also deferred, as of
June 30, 2007, recognition of $89,828 of product costs associated 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.
Additionally,
the Company did not record $910,847 of revenue as of June 30, 2007 related
to
inventory held by one of its retail shopping channel customers that was paid
in
full by the customer. Accordingly, the Company has also recorded a
customer deposit for $910,847 related to this transaction. The
Company has also deferred, as of June 30, 2007, recognition of $457,597 of
product costs associated with this sale, which have been included in
inventory.
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 June 30, 2007 and March 31, 2007, the Company had
accrued $148,089 and $65,385, 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 a provision for potential future warranty costs of $47,633 and
$15,593 at June 30, 2007 and March 31, 2007, respectively.
The
Company reserves for potential returns from customers and associated refunds
or
credits related to such returns based upon historical experience. The Company
has recorded reserves for customer returns of $166,159 and $238,569 at June
30,
2007 and March 31, 2007, respectively.
On
February 9, 2007, the Company entered into an agreement with Benefactor Group
Inc. (“Benefactor”) whereby Benefactor agreed to factor the company’s retail
accounts receivable invoices. The term of the agreement is for one year but
can
be terminated by the Company with 60 days written notice. In accordance with
the
terms of the agreement, Benefactor will purchase the invoices that it approves
for an initial payment of 85% of the amount of the invoice with the remaining
15% paid upon collection less any deductions from the customer. Benefactor
charges a commission of 1¼% of the gross amount of the invoice and a maintenance
fee equal to an annual rate of prime plus 3%, prime being determined by
Benefactor based upon either the prime rate published by Benefactor’s bank or
the Wall Street Journal, (11.25% at June 30, 2007 and March 31, 2007), charged
on a daily basis for the unpaid invoice amounts outstanding. The Company
has
agreed, beginning May 2007, to factor with Benefactor a minimum of $800,000
of
invoices monthly. The Company is responsible for any invoices that are unpaid
after 91 days or are subject to other defaults by the customer and this
obligation is secured by the Company with a security interest granted to
Benefactor on all assets. As of June 30, 2007, Benefactor had advanced the
Company $1,266,140 against invoices totaling $1,560,838. Fees paid to
Benefactor for interest, discounts and other services for the three months
ended
June 30, 2007 totaled $67,149. The receivables are considered
recourse and are shown at their gross value on the balance sheet.
4.
|
Stock
Based Compensation
|
Prior
to
January 1, 2006, the Company accounted for employee stock options using the
intrinsic value method under Accounting Principles Board (“APB”) Opinion 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, “Share-Based Payment” on January 1, 2006, and does not plan to restate
financial statements for prior periods.
For
the
three months ended June 30, 2007 and June 30, 2006, respectively, the Company
granted 0 and 125,000 options to purchase the Company’s common stock at an
exercise price of $5.00 per share under the 2005 Equity Compensation Plan
(“2005
Plan”).
For
the
option grants issued from January 1, 2006 through December 31, 2006, inclusive
of the three months ended June 30, 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 four years resulting
in a
value of $4.12 per option granted. In March 2007, in as much as the Company’s
stock had begun trading in the public market but trading history was limited,
the Company reviewed the assumptions utilized for the volatility
rate. This review included researching companies within the consumer
products category with comparable market capitalizations, comparable per
share
prices and with a minimum of five years of trading history, five years
representing the length of time the options are exercisable. Accordingly,
for
the options granted subsequent to December 31, 2006, the Company used the
following weighted average assumptions: no dividend yield; expected volatility
rate of 50.3%; risk free interest rate of 5%; and average lives of three
years.
As a result of recognizing compensation expense for stock options pursuant
to
the provisions of SFAS No. 123R, the net loss for the three months ended
June
30, 2007 and the three months ended June 30, 2006 was $123,202 and $42,925
greater, respectively, than if the Company had continued to account for stock
options under APB Opinion No. 25. In addition, both basic and diluted loss
per
share for the three months ended June 30, 2007 and the three months ended
June
30, 2006 was $0.01 and $0.00 greater, respectively, than if the Company had
continued to account for stock options under APB Opinion No. 25.
The
following table summarizes the total stock-based compensation expense for
the
three months ended June 30, 2007 and the three months ended June 30, 2006
from
all of the Company’s stock compensation plans, included in the Unaudited
Condensed Statements of Operations:
|
|
For
the three months ended June 30,
|
|
|
2007
|
|
|
2006
|
General
and administrative
|
|
$ |
7,210
|
|
|
$ |
-
|
Research
and development
|
|
|
69,876
|
|
|
|
-
|
Sales
and marketing
|
|
|
46,116
|
|
|
|
42,925
|
|
|
$ |
123,202
|
|
|
$ |
42,925
|
There
were no exercises, grants or forfeitures of stock options under the Company’s
equity compensation plans for the three months ended June 30,
2007. At June 30, 2007, the Company had granted options for 119,870
shares of the Company’s common stock that are unvested that will result in
$463,517 of compensation expense in future periods if fully vested.
Information
regarding all stock options outstanding under the 2005 Plan as of June 30,
2007
is as follows:
|
|
|
OPTIONS
OUTSTANDING
|
|
OPTIONS
EXERCISABLE
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Weighted-
|
|
|
|
|
|
|
average
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
average
|
|
Aggregate
|
|
|
|
|
Remaining
|
|
|
average
|
|
Aggregate
|
Exercise
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
Intrinsic
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
Intrinsic
|
price range
|
|
|
Options
|
|
|
Life (years)
|
|
|
Price
|
|
Value
|
|
Options
|
|
|
Life (years)
|
|
|
Price
|
|
Value
|
Over
$0.00 to $0.50
|
|
|
|
24,141
|
|
|
|
1.31
|
|
|
$ |
0.06
|
|
|
|
|
24,141
|
|
|
|
3.08
|
|
|
$ |
0.06
|
|
|
Over
$0.50 to $2.50
|
|
|
|
136,259
|
|
|
|
1.48
|
|
|
$ |
1.57
|
|
|
|
|
136,259
|
|
|
|
3.08
|
|
|
$ |
1.57
|
|
|
|
$5.00
|
|
|
|
1,116,660
|
|
|
|
3.74
|
|
|
$ |
5.00
|
|
|
|
|
1,013,282
|
|
|
|
3.72
|
|
|
$ |
5.00
|
|
|
|
$5.90
|
|
|
|
60,300
|
|
|
|
4.72
|
|
|
$ |
5.90
|
|
|
|
|
43,808
|
|
|
|
5.00
|
|
|
$ |
5.90
|
|
|
|
|
|
|
|
1,337,360
|
|
|
|
3.51
|
|
|
$ |
4.34
|
|
$ 1,870,297
|
|
|
1,217,490
|
|
|
|
3.40
|
|
|
$ |
4.34
|
|
$1,765,270
|
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes.” FIN
48 clarifies the accounting for uncertainty in income taxes recognized in
an
enterprise’s financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. This Interpretation defines the minimum recognition threshold
a tax position is required to meet before being recognized in the financial
statements. The Company adopted FIN 48 on April 1, 2007. As a result of the
implementation, the Company recognized no material adjustment in the liability
of unrecognized income tax benefits. At the adoption date of April 1, 2007,
the
Company had $4.0 million of unrecognized tax benefits, all of which would
affect
the Company’s effective tax rate if recognized. It is reasonably possible that
the Company’s unrecognized tax benefit could change; however, the Company does
not expect any such change to be material.
The
Company is subject to U.S. federal income tax as well as income tax of several
state jurisdictions including primarily Colorado and California. The Company
has
concluded all U.S. federal income tax matters for the year ended December
31,
2002. Substantially all material state and local income tax matters have
been
concluded through December 31, 2002, depending on the statute of limitations
for
a given jurisdiction. Federal and state income tax returns for 2003 through
2006
remain available for examination by the applicable jurisdictions.
6.
|
Related
Party Transactions
|
During
the three months ended June 30, 2007, the Company paid fees totaling $2,000
per
month, a total of $6,000, to one director as a retainer for general legal
services.
During
the three months ended June 30, 2007 and June 30, 2006, the Company paid
consulting fees totaling $19,014 and $23,019, respectively, to a former director
in the 2007 period who served as a director in the 2006 period. The
services paid in both periods relate to expanding the Company’s marketing
efforts and new areas of distribution for the Company’s products.
Also
during the three months ended June 30, 2007 and June 30, 2006, the Company
incurred fees totaling $58,995 and $113,175, respectively to MedEd Architects
LLC, a video production company owned 33% by Randy Seffren, the Company’s Chief
Marketing Officer.
In
June
2007, the Company received gross proceeds of $375,000 from the exercise of
warrants to purchase 60,000 shares of the Company’s common stock at $6.25 per
share.
A
summary
of the Company’s warrant activity for the period from April 1, 2007 through June
30, 2007 is presented below:
|
|
|
|
|
Weighted
|
|
Aggregate
|
|
|
Warrants
|
|
|
Average
|
|
Intrinsic
|
|
|
Outstanding
|
|
|
Exercise
Price
|
|
Value
|
Outstanding,
April 1, 2007
|
|
|
5,724,094
|
|
|
$ |
7.21
|
|
|
Granted
|
|
|
-
|
|
|
$ |
-
|
|
|
Exercised
|
|
|
(60,000 |
) |
|
$ |
6.25
|
|
|
Expired
|
|
|
-
|
|
|
$ |
-
|
|
|
Outstanding,
June 30, 2007
|
|
|
5,664,094
|
|
|
$ |
7.23
|
|
$ 9,803,010
|
As
of June 30, 2007, the Company had the following outstanding warrants to purchase
its common stock:
|
|
|
Weighted
|
|
|
Weighted
|
Warrants
|
|
|
Average
|
|
|
Average
|
Outstanding
|
|
|
Exercise
Price
|
|
|
Remaining
Life
|
|
32,098
|
|
|
$ |
2.50
|
|
|
|
0.90
|
|
15,000
|
|
|
$ |
5.00
|
|
|
|
0.90
|
|
600,000
|
|
|
$ |
5.01
|
|
|
|
3.45
|
|
654,000
|
|
|
$ |
6.00
|
|
|
|
3.87
|
|
2,297,800
|
|
|
$ |
6.25
|
|
|
|
3.90
|
|
1,283,436
|
|
|
$ |
7.57
|
|
|
|
4.99
|
|
390,880
|
|
|
$ |
10.00
|
|
|
|
0.75
|
|
390,880
|
|
|
$ |
15.00
|
|
|
|
0.75
|
|
5,664,094
|
|
|
$ |
7.23
|
|
|
|
3.64
|
In
July
2007, the Company received gross proceeds of $60,000 and issued 10,000 shares
of
common stock from the exercise of 10,000 warrants at an exercise price of
$6.00
per share.
In
July
2007, the Company received gross proceeds of $381,250 and issued 61,000 shares
of common stock from the exercise of 61,000 warrants at an exercise price
of
$6.25 per share.
The
discussion contained herein is for the three months ended June 30, 2007 and
June
30, 2006. The following discussion should be read in conjunction with the
financial statements of AeroGrow International, Inc. (the “Company, ” “we,” or
“our”) and the notes to the financial statements included elsewhere in this
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007.
The
following discussion contains 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”), including statements that include words such as “anticipates,”
“expects,” “intends,” “plans,” “believes,” “may,” “will,” or similar expressions
that are intended to identify forward-looking statements. In addition, any
statements that refer to expectations, projections or other characterizations
of
future events or circumstances, including any underlying assumptions, are
forward-looking statements. Such statements include, but are not limited
to,
statements regarding our intent, belief or current expectations regarding
our
strategies, plans and objectives, our product release schedules, our ability
to
design, develop, manufacture and market products, our intentions with respect
to
strategic acquisitions, the ability of our products to achieve or maintain
commercial acceptance and our ability to obtain financing for our obligations.
Such statements are not guarantees of future performance and are subject
to
risks, uncertainties and assumptions that are difficult to predict. Therefore,
the Company’s actual results could differ materially and adversely from those
expressed in any forward-looking statements as a result of various factors.
Factors that could cause or contribute to the differences are discussed in
“Risk
Factors” and elsewhere in the Company’s annual report on Form 10-KSB filed on
June 29, 2007 with the Securities and Exchange Commission (the “SEC”) and the
Form SB-2/A filed with the SEC May 8, 2007. Except as required by applicable
law
or regulation, the Company undertakes no obligation to revise or update any
forward-looking statements contained in this Quarterly Report on Form 10-Q
for
the quarterly period ended June 30, 2007. The information contained in this
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007
is
not a complete description of the Company’s business or the risks associated
with an investment in the Company’s common stock. Each reader should carefully
review and consider the various disclosures made by the Company in this
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007
and
in the Company’s other filings with the SEC.
Overview
We
are in
the business of developing, marketing, and distributing advanced indoor
aeroponic garden systems. Since formation and through our development stage
that
ended March 1, 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 and have contracted with
a third-party manufacturers who have commenced production activities. We
began
sales activities as of March 2006. As of March 31, 2007, we had manufactured
and
taken delivery of over 140,000 units of our kitchen garden systems and had
manufactured over 400,000 seed kits. We commenced 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. 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”) No. 7, “Accounting and Reporting by Development Stage
Enterprises.”
Our
Critical Accounting Policies
Inventory
Inventories
are valued at the lower of cost, determined by the first-in, first-out method,
or market. When we are the manufacturer, we include in inventory costs 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 as prescribed under
Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing.” A majority
of our products are manufactured overseas and are recorded at cost.
We
will
determine an inventory obsolescence reserve based on historical experience
and
will establish reserves against inventory according to the age of the product.
As of June 30, 2007 and March 31, 2007, we had determined that no inventory
obsolescence reserve was required.
Revenue
Recognition
We
recognize 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 fees are
fixed or determinable; and collection of the resulting receivable is reasonably
assured. Accordingly, the Company did not record $294,719 of revenue as of
June
30, 2007 related to the unpaid balance due for orders shipped in conjunction
with the Company’s direct sales to consumers which allow the consumer 36 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 36-day trial period. The Company also deferred, as of June 30, 2007,
recognition of $89,828 of product costs associated the foregoing such 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.
Additionally,
the Company did not record $910,847 of revenue as of June 30, 2007 related
to
inventory held by one of its retail shopping channel customers which was
paid in
full by the customer. Accordingly, the Company has also recorded a
customer deposit for $910,847 related to this transaction. The
Company has also deferred, as of June 30, 2007, recognition of $457,597 of
product costs associated this sale which have been included in
inventory.
We
record
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 us to take actions
to increase customer incentive offerings, possibly resulting in an incremental
reduction of revenue at the time the incentives are offered. Additionally,
certain incentive programs require us to estimate based on industry experience
the number of customers who will actually redeem the incentive. At June 30,
2007
and March 31, 2007, the Company had accrued $148,089 and $65,385, 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 a provision for potential future warranty costs of $47,633 and
$15,593 at June 30, 2007 and March 31, 2007, respectively.
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 sales.
Stock
Based Compensation
In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123R,
“Share-Based Payment.” Subsequently, the 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 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. We adopted SFAS No. 123R on January 1, 2006 and do not plan to restate
financial statements for prior periods. We plan 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 has
increased net loss by $121,202 and $42,925 for the three months ended June
30,
2007 and the three months ended June 30, 2006, respectively, as compared
to
using our prior method under APB No. 25.
Results
of Operations
The
following table sets forth, as a percentage of sales, our quarterly financial
results for the three months ended June 30, 2007 and the three months ended
June
30, 2006:
|
|
For
the Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
|
|
|
|
|
Product
sales- retail
|
|
|
65.8 |
% |
|
|
84.4 |
% |
Product
sales- direct to consumer
|
|
|
34.2 |
% |
|
|
15.6 |
% |
Total
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating
expenses
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
56.9 |
% |
|
|
82.2 |
% |
Research
and development
|
|
|
8.3 |
% |
|
|
52.9 |
% |
Sales
and marketing
|
|
|
46.5 |
% |
|
|
116.9 |
% |
General
and administrative
|
|
|
20.0 |
% |
|
|
104.1 |
% |
Total
operating expenses
|
|
|
131.7 |
% |
|
|
356.1 |
% |
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
-31.7 |
% |
|
|
-256.1 |
% |
For
the
three months ended June 30, 2007 and June 30, 2006, net sales totaled $6,278,685
and $821,938, respectively, an increase of $5,456,747 or 664%. The three
months
ended June 30, 2006 was the first full calendar quarter of our operations.
Our
AeroGarden products are sold through two sales methods. 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. A summary of these two sales categories for the three
months
ended June 30, 2007 and 2006 is as follows:
|
|
For
the Three Months Ended June 30,
|
Revenue
|
|
2007
|
|
|
2006
|
Product
sales- retail
|
|
$ |
4,129,853
|
|
|
$ |
693,610
|
Product
sales- direct to consumer
|
|
|
2,148,832
|
|
|
|
128,328
|
Total
sales
|
|
$ |
6,278,685
|
|
|
$ |
821,938
|
In
regard
to our direct sales, we offer our direct customers 36 days to evaluate the
product (“Trial Sales”) paying only the shipping and handling costs for such
products before making the required installment payments after the expiration
of
the 36- day trial period. Accordingly, we did not record $294,719 of revenue
from these Trial Sales as of June 30, 2007. We also deferred, as of June
30,
2007, recognition of $89,828 of product costs associated with the foregoing
Trial Sales in as much as the customer is required to return the product
and we
are 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.
Also,
we
did not record $910,847 of revenue as of June 30, 2007 related to products
held
by one of our retail shopping channel customers under a guaranteed sale
arrangement which was paid in full by the customer. Accordingly, we
have also recorded a customer deposit for $910,847 related to this
transaction. We have also deferred, as of June 30, 2007, recognition
of $457,597 of product costs associated this sale which have been included
in
inventory.
For
the
three months ended June 30, 2007, we had one customer who represented 17.7%
of
our net product sales. For the three months ended June 30, 2006, we had two
customers representing 46.6% and 19.0%, respectively, of our net product
sales.
Cost
of
revenues for the three months ended June 30, 2007 and June 30, 2006 totaled
$3,575,276 and $675,695, respectively, representing 56.9% and 82.2% of revenues
for the respective periods. 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, credit card processing fees for direct sales and
duties and customs applicable to products imported. Since our product launch,
we
continue to strive to improve both manufacturing costs and transportation
costs.
Included in cost of revenue for the three months ended June 30, 2006 are
costs
associated with expedited shipping of 5,000 of our AeroGarden units from
our
factory in China by air rather than by sea in order to expedite our initial
deliveries in April 2006, at an incremental airfreight cost of $27 per unit.
We
also experienced higher than anticipated costs in the startup of our seed
kit
manufacturing operations during the three months ended June 30, 2006. These
manufacturing costs have improved since inception as efficiencies in
manufacturing seed kits due to improvements in both process and volume were
realized. With the additional factory capacity that enables more efficient
component purchasing, manufacturing cost reductions related to integration
of
electrical components, relocation of our distribution facilities to California
improving inbound and outbound freight costs and the ability to maintain
adequate inventory levels thereby avoiding air freight costs, we
anticipate further reductions in costs of revenues in the next 12 months.
Gross
margins vary based upon the factors impacting cost of revenue discussed above
as
well as the ratio of direct sales versus retail sales. In a direct to consumer
sale, 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 months
ended
June 30, 2007 were $2,703,409, representing 43.1% of revenues, as compared
to
$146,243, representing 17.8% of revenues for the three months ended June
30,
2006.
Sales
and
marketing costs for the three months ended June 30, 2007 totaled $2,920,987,
as
compared to $960,474 for the three months ended June 30, 2006, an increase
of
$1,960,513 or 204%. Sales and marketing costs include all costs associated
with
the marketing sales and distribution of our products and consist of the
following:
|
|
Three
months ended June 30,
|
|
|
2007
|
|
|
2006
|
Advertising
|
|
$ |
1,266,994
|
|
|
$ |
-
|
Salaries
and related expenses
|
|
|
621,997
|
|
|
|
299,084
|
Stock
based compensation
|
|
|
44,121
|
|
|
|
42,925
|
Infomercial
production costs
|
|
|
99,796
|
|
|
|
132,034
|
Sales
commissions
|
|
|
236,693
|
|
|
|
49,212
|
Consulting
fees
|
|
|
145,012
|
|
|
|
163,179
|
Public
relations
|
|
|
69,302
|
|
|
|
98,091
|
Trade
Shows
|
|
|
110,501
|
|
|
|
45,006
|
Telemarketing
|
|
|
104,586
|
|
|
|
-
|
Other
|
|
|
221,985
|
|
|
|
130,943
|
|
|
$ |
2,920,987
|
|
|
$ |
960,474
|
Advertising
is primarily comprised of media costs for airing of our infomercial which
we
consider a key component of our marketing strategy in that it helps build
awareness and therefore consumer demand for all channels of distribution
as well
as generating revenues from direct to consumer sales. We anticipate continued
airing of our current infomercial through December 2007. Included in
advertising costs above for the three months ended June 30, 2007 is $1,178,000
in television media expenses for airing of our infomercial which began airing
in
September 2006, hence there was no media expenditure for the three months
ended
June 30, 2006.
We
plan
to produce two new infomercials during the remainder of calendar year 2007
focused on our next generation of product, a three pod AeroGarden utilizing
a
new aeroponic technology. This new technology is anticipated to reduce
manufacturing costs with no loss of efficacy. The two infomercials will feature
this new unit in conjunction with accessory components that result in a product
targeted at the cooking market to be called “Chef in the Box” and a separate
offering targeted at the market for year round, fresh home flowers called
“Florist in the Box”. We plan to test market these two product offerings on
television in the fourth calendar quarter of 2007 with a targeted retail
price
of $99-$129 based the accessory components included with the offer.
Sales
and
marketing salaries and related costs shown above consist of salaries, payroll
taxes, employee benefits and other payroll costs for our sales, customer
service
operations, graphics and marketing departments. Stock based compensation
represents charges related to the granting of stock options and grants to
employees and consultants who service the foregoing
departments. Infomercial production costs represent costs related to
the development, production, editing and revision of our 30-minute infomercial
and short form (0:60 and 1:20 second) television commercials. Sales commissions
reflect commissions equal to 7% of collections from net retail sales to
retailers, which were paid to sales representative organizations that assisted
us in opening and maintaining our retail customers. We have recently
renegotiated the agreements with our sales representative organizations to
sliding scales based upon the size of the customers and, as a result, anticipate
the aggregate percentage rate of these commissions to decline in the next
12
months.
General
and administrative costs for the three months ended June 30, 2007 totaled
$1,255,008 as compared to $856,040 for the three months ended June 30, 2006,
an
increase of $398,968 or 47%. General and administrative costs have increased
in
most areas as we have positioned our organization to manage the sales growth
over the last twelve months. Increases in general and administrative costs
include $134,000 in recruiting costs, $40,000 in legal and accounting fees,
$20,000 in facility rent, $30,000 in corporate governance costs and $170,000
in
bad debt allowance costs.
Research
and Development
During
the three months ended June 30, 2007, we incurred $521,819 in research and
development costs, as compared to $434,931 for the three months ended June
30,
2006, an increase of $86,888 or 20%. The period over period increase was
due to
an approximate $20,000 increase in personnel costs for our plant labs and
an
approximate $70,000 increase in personnel costs for engineering, which includes
$45,000 in non cash compensation related to option grants to engineering
personnel.
In
the
next 12 months we intend to continue researching and developing new product
designs and product extensions including, but not limited to, nutrient delivery
systems and additional seed varieties for our seed kits. We have also
begun development of a methodology to cultivate and ship live “starter” plants
in the grow pod mediums that will be able to grow in our kitchen garden systems.
We started market testing this process with strawberries during the first
quarter of calendar 2007 and continue to refine and develop this
process.
Liquidity
and Capital Resources
On
March
12 and March 15, 2007, we completed a private offering of 833,400 units of
our
common stock and warrants to purchase common stock and on March 29, 2007,
we
completed a private offering of 333,360 units of our common stock and warrants
to purchase common stock (the “2007 Offerings”). Each unit in the 2007 Offerings
consisted of one share of common stock, par value $0.001, and one five-year
warrant to purchase one share of common stock at an exercise price of $7.50
per
share. The units were sold at a per unit price of $6.00. We raised an aggregate
of $7,000,000 from the 2007 Offerings, less placement agent fees of $700,000
and
approximately $100,000 in other expenses. The holders of securities issued
in
the 2007 Offerings had registration rights for the common stock and for the
common stock underlying the warrants held by them. Liquidated damages for
failure to register and maintain registration for such common stock were
payable
in cash under certain circumstances and were limited to 1% of the amount
of the
investment per 30-day period made up to a maximum of 10%. We completed the
registration of $5.0 million of the 2007 Offerings on May 11, 2007 and we
intend
to file a registration statement for the remaining $2.0 million of the 2007
Offerings within the 150 days required time for filing such registration
statement.
As
of
June 30, 2007, we had a cash balance of approximately $3,418,000. We anticipate
our principal sources of liquidity during the next 12 months will be proceeds
from sales of our products. We intend to use our working capital principally
to
purchase inventory, fund infomercial production costs and media
advertising, fund product promotion and trade show costs as well as support
ongoing product development, overhead and operational costs. During July
2007,
we were able to negotiate more favorable payment terms with both of our
manufacturing sources in China which will improve cash utilization for inventory
purchases. Accordingly, we anticipate that existing cash resources will be
sufficient for the next 12 months. However, in the event retail and/or direct
response sales accelerate more rapidly than currently anticipated, we would
need
to support this growth through additional asset-based or other debt financing
or
the raising of additional equity. However, no assurance that such financing
will
be available on attractive terms or at all.
For
the
three months ended June 30, 2007, cash used in operations was $2,939,466
as
compared to cash used in operations for the three months ended June 30, 2006
of
$2,747,128, an increase of $192,338. The principal use of cash in operations
was
the net loss, which, after add back of non cash items, equaled $1,836,000,
reductions in accounts payable and accrued expenses of $1,676,000 and increases
in accounts receivable of $289,000, offset by increases in customer deposits
for
goods under guaranteed sale arrangements of $911,000.
Cash
used
by investing activities totaled $133,797 for the three months ended June
30,
2007, as compared to $72,021 used in investing activities for the three months
ended June 30, 2006. The principal use of cash in investing activities was
the
purchase of $61,000 in computer equipment, $20,000 in manufacturing equipment
and $48,000 in new tooling.
Cash
provided by financing activities was $995,989 for the three months ended
June
30, 2007, as compared to cash used by financing activities of $5,000 for
the
three months ended June 30, 2006. Cash provided by financing activities included
$620,000 of net advances from our accounts receivable factoring facility
and
$375,000 in proceeds from exercise of 60,000 outstanding warrants to purchase
our common stock at an exercise price of $6.25 per share.
Off-Balance
Sheet Arrangements
We
have certain current commitments under operating leases and have not entered
into any capital leases or contracts for financial derivative instruments
such
as futures, swaps and options.
We
do not
have any assets or liabilities which, in our view, impose upon us significant
market risk except for our credit facility from our accounts receivable factor
which has a variable rate of interest generally consisting of stated premiums
above prime. At June 30, 2007, we had $1,266,140 in outstanding borrowings
under
this credit facility as compared to $645,151 at March 31, 2007. As short-term
interest rates fluctuate, the interest expense we incur on our credit facility
will change resulting in either a positive or negative effect on our financial
position, results of operations and cash flows. At this borrowing level for
our
credit facility, a one percentage point increase in interest rates would
have an
unfavorable impact on our net loss of $12,660 on an annual basis; however,
because our excess cash is generally invested in short-term, high quality
interest bearing investments, a comparable increase in interest income would
offset much of the unfavorable impact.
We
purchase the majority of our inventory from vendors in China in transactions
that are U.S. dollar denominated transactions. Because the percentage of
our
international purchases denominated in currencies other than the U.S. dollar
is
small, any currency risks related to these transactions are immaterial to
us.
However, a decline in the relative value of the U.S. dollar to other foreign
currencies, particularly the Chinese Ren Min Bi, could lead to increased
purchasing costs. In order to mitigate this exposure, we make virtually all
of
our purchase commitments in U.S. dollars.
(a)
Evaluation of Disclosure Controls and Procedures
Disclosure
controls and procedures are designed to ensure that information required
to be
disclosed in the reports filed or submitted by the Company under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the rules and forms of the SEC. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange
Act
is accumulated and communicated to the Company’s management, including its
principal executive and financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
The
Company carried out an evaluation, under the supervision and with the
participation of its management, including its principal executive officer
and
principal financial officer, of the effectiveness of the design and operation
of
the Company’s disclosure controls and procedures as of the end of the period
covered by this report. Based upon and as of the date of that evaluation,
the
Company’s principal executive officer and financial officers concluded that the
Company’s disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms.
(b)
Changes in Internal Controls
There
were no changes in the Company’s internal controls or in other factors that
could have significantly affected those controls during the period ended
June
30, 2007.
PART
II - OTHER INFORMATION
None.
During
the three months ended June 30, 2007, there have not been any material changes
in risk factors previously disclosed.
None.
None.
During
the three months ended June 30, 2007 there were no matters brought to a vote
of
the security holders.
None.
3.1
|
Articles
of Incorporation of the Registrant (incorporated by reference to
Exhibit
3.1 of our Current Report on Form 8-K/A-2, filed November 16,
2006)
|
3.2
|
Certificate
of Amendment to Articles of Incorporation, dated November 3, 2002
(incorporated by reference to Exhibit 3.2 of our Current Report
on Form
8-K/A-2, filed November 16, 2006)
|
3.3
|
Certificate
of Amendment to Articles of Incorporation, dated January 31, 2005
(incorporated by reference to Exhibit 3.3 of our Current Report
on Form
8-K/A-2, filed November 16, 2006)
|
3.4
|
Certificate
of Change to Articles of Incorporation, dated July 27, 2005 (incorporated
by reference to Exhibit 3.4 of our Current Report on Form 8-K/A-2,
filed
November 16, 2006)
|
3.5
|
Certificate
of Amendment to Articles of Incorporation, dated February 24, 2006
(incorporated by reference to Exhibit 3.5 of our Current Report
on Form
8-K/A-2, filed November 16, 2006)
|
3.6
|
Amended
Bylaws of the Registrant (incorporated by reference to Exhibit
3.6 of our
Current Report on Form 8-K/A-2, filed November 16,
2006)
|
31.1
|
Certifications
of the Chief Executive Officer Under Section 302 of the Sarbanes-Oxley
Act**
|
31.2
|
Certifications
of the Chief Financial Officer Under Section 302 of the Sarbanes-Oxley
Act**
|
32.1
|
Certifications
of the Chief Executive Officer Under Section 906 of the Sarbanes-Oxley
Act**
|
32.2
|
Certifications
of the Chief Financial Officer Under Section 906 of the Sarbanes-Oxley
Act**
|
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
AeroGrow
International Inc.
|
|
|
|
|
|
Date:
August 14,
2007
|
By:
|
/s/
Michael
Bissonnette |
|
|
|
Michael
Bissonnette |
|
|
|
Chief
Executive Officer
(Principal Executive Officer) and Director |
|
|
|
|
|
Date:
August 14, 2007
|
By:
|
/s/ Mitchell
B. Rubin |
|
|
|
Mitchell
B. Rubin |
|
|
|
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
|
|
EXHIBIT
31. 1
CERTIFICATIONS
OF THE CHIEF EXECUTIVE OFFICER
UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT
I,
Michael Bissonnette certify that:
1.
I have
reviewed this report on Form 10-Q for the period ended June 30, 2007 of
AeroGrow
International Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a
material
fact or omit to state a material fact necessary to make the statements
made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of,
and
for, the periods presented in this report;
4.
The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange
Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period
covered
by this report based on such evaluation; and
(c)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the small business issuer’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting;
and
5.
The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
|
|
|
Date: August
14, 2007
|
By:
|
/s/
Michael Bissonnette
|
|
|
Michael
Bissonnette
|
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
EXHIBIT
31.2
CERTIFICATIONS
OF THE CHIEF FINANCIAL OFFICER
UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT
I,
Mitchell B. Rubin, certify that:
1.
I have
reviewed this report on Form 10-Q for the period ended June 30, 2007 of
AeroGrow
International Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a
material
fact or omit to state a material fact necessary to make the statements
made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of,
and
for, the periods presented in this report;
4.
The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange
Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period
covered
by this report based on such evaluation; and
(c)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the small business issuer’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting;
and
5.
The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
|
|
|
Date: August
14, 2007
|
By:
|
/s/
Mitchell B. Rubin
|
|
Mitchell
B. Rubin
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|
EXHIBIT
32.1
CERTIFICATIONS
OF THE CHIEF EXECUTIVE OFFICER
UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT
In
connection with the Quarterly Report of Aerogrow International Inc. (the
“Company”) on Form 10-Q for the period ended June 30, 2007 (the “Report”), as
filed with the Securities and Exchange Commission, I, Michael Bissonnette,
Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the
Securities Exchange Act of 1934; and
(2)
The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company as of
and for
the period covered by this Report.
|
|
|
Date: August
14, 2007
|
By:
|
/s/
Michael Bissonnette
|
|
Michael
Bissonnette
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
EXHIBIT
32.2
CERTIFICATIONS
OF THE CHIEF FINANCIAL OFFICER
UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT
In
connection with the Quarterly Report of Aerogrow International Inc.
(the
“Company”) on Form 10-Q for the period ended June 30, 2007 (the “Report”), as
filed with the Securities and Exchange Commission, I, Mitchell B. Rubin,
Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
The Report fully complies with the requirements of Section 13(a) or
15(d) of the
Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company as of
and for the period covered by this Report.
|
|
|
Date: August
14, 2007
|
By:
|
/s/
Mitchell B. Rubin
|
|
Mitchell
B. Rubin
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|