aero-10q9302007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2007
|
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from to
Commission
File No. 000-50888
AEROGROW
INTERNATIONAL, INC.
(Exact
Name of Registrant as Specified in its Charter)
NEVADA
|
|
46-0510685
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
Number)
|
|
|
|
6075
Longbow Drive, Suite 200
|
|
|
BOULDER,
COLORADO
|
|
80301
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(303)
444-7755
|
Registrant’s
telephone number, including area
code
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required 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 November 1, 2007:
12,026,581
TABLE
OF CONTENTS
FORM
10-Q REPORT
September
30, 2007
|
|
Page
|
|
|
|
Part I.
|
|
3
|
|
|
3
|
|
|
4
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|
|
5
|
|
|
6
|
|
|
11
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|
|
17
|
|
|
17
|
|
|
|
Part II.
|
Other
Information
|
18
|
|
|
|
|
|
18
|
|
|
18
|
|
|
18
|
|
|
18
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18
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|
18
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|
18
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|
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|
CONDENSED
BALANCE SHEETS
|
|
September
30,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,193,987
|
|
|
$ |
5,495,501
|
|
Restricted
cash
|
|
|
85,712
|
|
|
|
84,363
|
|
Accounts
receivable, net of allowance for doubtful accounts
of $82,603
and
$80,695 at September 30, 2007 and March 31, 2007,
respectively
|
|
|
4,873,177
|
|
|
|
1,884,743
|
|
Other
receivables
|
|
|
180,449
|
|
|
|
182,221
|
|
Inventory
|
|
|
6,480,391
|
|
|
|
3,940,614
|
|
Prepaid
expenses and other
|
|
|
415,629
|
|
|
|
480,990
|
|
Total
current assets
|
|
|
18,229,345
|
|
|
|
12,068,432
|
|
Property
and equipment, net of accumulated depreciation of $502,875 and $322,405
at
September 30, 2007 and March 31, 2007,
respectively
|
|
|
1,138,965
|
|
|
|
909,496
|
|
Other
assets
|
|
|
|
|
|
|
|
|
Intangible
assets, net of $10,935 and $6,659 of accumulated
amortization
at September 30, 2007 and March 31, 2007, respectively
|
|
|
38,886
|
|
|
|
28,723
|
|
Deposits
|
|
|
69,242
|
|
|
|
35,155
|
|
|
|
|
108,128
|
|
|
|
63,878
|
|
Total
Assets
|
|
$ |
19,476,438
|
|
|
$ |
13,041,806
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current
portion - capital lease obligation
|
|
$ |
52,913
|
|
|
$ |
-
|
|
Due
to factor
|
|
|
3,577,447
|
|
|
|
645,151
|
|
Accounts
payable
|
|
|
4,036,087
|
|
|
|
3,192,734
|
|
Accrued
expenses
|
|
|
1,544,109
|
|
|
|
1,166,485
|
|
Customer
deposits
|
|
|
900,568
|
|
|
|
-
|
|
Deferred
rent
|
|
|
61,035
|
|
|
|
53,531
|
|
Total
current liabilities
|
|
|
10,172,159
|
|
|
|
5,057,901
|
|
Capital
lease obligation – long term portion
|
|
|
79,137
|
|
|
|
-
|
|
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,
12,018,581
and
11,065,609 shares issued and outstanding at
September
30, 2007 and March 31, 2007, respectively
|
|
|
12,018
|
|
|
|
11,065
|
|
Additional
paid-in capital
|
|
|
43,367,278
|
|
|
|
37,765,003
|
|
Accumulated
(deficit)
|
|
|
(34,154,154 |
) |
|
|
(29,792,163 |
) |
Total
Stockholders' Equity
|
|
|
9,225,142
|
|
|
|
7,983,905
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
19,476,438
|
|
|
$ |
13,041,806
|
|
See
accompanying notes to the condensed financial statements.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months ended September 30,
|
|
|
Six
Months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$ |
6,283,645
|
|
|
$ |
1,030,316
|
|
|
$ |
12,562,079
|
|
|
$ |
1,852,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
3,765,376
|
|
|
|
827,165
|
|
|
|
7,347,794
|
|
|
|
1,502,860
|
|
Research
and development
|
|
|
628,542
|
|
|
|
409,453
|
|
|
|
1,157,987
|
|
|
|
844,384
|
|
Sales
and marketing
|
|
|
3,156,414
|
|
|
|
1,359,797
|
|
|
|
6,091,537
|
|
|
|
2,320,271
|
|
General
and administrative
|
|
|
982,181
|
|
|
|
773,362
|
|
|
|
2,208,033
|
|
|
|
1,629,402
|
|
Total
operating expenses
|
|
|
8,532,513
|
|
|
|
3,369,777
|
|
|
|
16,805,351
|
|
|
|
6,296,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,248,868 |
) |
|
|
(2,339,461 |
) |
|
|
(4,243,272 |
) |
|
|
(4,444,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(income)
|
|
|
(32,341 |
) |
|
|
(60,749 |
) |
|
|
(70,200 |
) |
|
|
(144,862 |
) |
Interest
expense
|
|
|
125,664
|
|
|
|
101,804
|
|
|
|
191,849
|
|
|
|
203,604
|
|
Other
income
|
|
|
(2,929 |
) |
|
|
-
|
|
|
|
(2,929 |
) |
|
|
-
|
|
Registration
rights penalty
|
|
|
-
|
|
|
|
1,028,250
|
|
|
|
-
|
|
|
|
1,028,250
|
|
Total
other (income) expense, net
|
|
|
90,394
|
|
|
|
1,069,305
|
|
|
|
118,720
|
|
|
|
1,086,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,339,262 |
) |
|
$ |
(3,408,766 |
) |
|
$ |
(4,361,992 |
) |
|
$ |
(5,531,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
$ |
(0.20 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.39 |
) |
|
$ |
(0.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding, basic and diluted
|
|
|
11,469,707
|
|
|
|
9,286,678
|
|
|
|
11,278,598
|
|
|
|
9,202,219
|
|
See
accompanying notes to the condensed financial statements.
AEROGROW
INTERNATIONAL, INC.
(Unaudited)
|
|
Six
Months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss)
|
|
$ |
(4,361,992 |
) |
|
$ |
(5,531,655 |
) |
Adjustments
to reconcile net (loss) to cash provided (used) by
operations:
|
|
|
|
|
|
|
|
|
Common
stock issued for registration rights penalty
|
|
|
-
|
|
|
|
1,028,250
|
|
Issuance
of common stock and options under equity compensation
plans
|
|
|
246,414
|
|
|
|
339,404
|
|
Issuance
of common stock not under equity compensation plan
|
|
|
-
|
|
|
|
38,020
|
|
Issuance
of warrants for services
|
|
|
23,003
|
|
|
|
-
|
|
Depreciation
and amortization expense
|
|
|
184,746
|
|
|
|
86,617
|
|
Allowance
for bad debt
|
|
|
1,908
|
|
|
|
6,684
|
|
Amortization
of debt issuance costs
|
|
|
-
|
|
|
|
30,412
|
|
Amortization
of convertible debentures, beneficial conversion feature
|
|
|
-
|
|
|
|
54,375
|
|
Interest
expense from warrants issued with convertible debentures
|
|
|
-
|
|
|
|
76,812
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
in accounts receivable
|
|
|
(2,990,342 |
) |
|
|
(409,241 |
) |
Decrease
in other receivable
|
|
|
1,772
|
|
|
|
-
|
|
(Increase)
in inventory
|
|
|
(2,539,777 |
) |
|
|
(1,199,771 |
) |
Increase
(decrease) in other current assets
|
|
|
65,361
|
|
|
|
(44,015 |
) |
(Increase)
decrease in deposits
|
|
|
(34,087 |
) |
|
|
(32,169 |
) |
Increase
in accounts payable
|
|
|
843,353
|
|
|
|
246,116
|
|
Increase
(decrease) in accrued expenses
|
|
|
377,624
|
|
|
|
(73,308 |
) |
Increase
in customer deposits
|
|
|
900,568
|
|
|
|
-
|
|
Decrease
in deferred rent
|
|
|
7,504
|
|
|
|
-
|
|
Net
cash (used) by operating activities
|
|
|
(7,273,945 |
) |
|
|
(5,383,469 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(1,349 |
) |
|
|
(18,389 |
) |
Purchases
of equipment
|
|
|
(273,417 |
) |
|
|
(82,905 |
) |
Patent
expenses
|
|
|
(14,438 |
) |
|
|
(4,325 |
) |
Net
cash (used) by investing activities
|
|
|
(289,204 |
) |
|
|
(105,619 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Increase
in amount due to factor
|
|
|
2,932,296
|
|
|
|
-
|
|
Stock
repurchase
|
|
|
-
|
|
|
|
(15,000 |
) |
Proceeds
from issuance of common stock, net
|
|
|
4,433,372
|
|
|
|
-
|
|
Proceeds
from exercise and issuance of warrants, net
|
|
|
890,937
|
|
|
|
56,250
|
|
Proceeds
from the exercise of stock options
|
|
|
9,503
|
|
|
|
-
|
|
Payments
on capital lease
|
|
|
(4,473 |
) |
|
|
-
|
|
Proceeds
from issuance of convertible debentures
|
|
|
-
|
|
|
|
(30,000 |
) |
Net
cash provided by financing activities
|
|
|
8,261,635
|
|
|
|
11,250
|
|
Net
increase (decrease) in cash
|
|
|
698,486
|
|
|
|
(5,477,838 |
) |
Cash,
beginning of period
|
|
|
5,495,501
|
|
|
|
8,852,548
|
|
Cash,
end of period
|
|
$ |
6,193,987
|
|
|
$ |
3,374,710
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
184,804
|
|
|
$ |
42,005
|
|
Income
taxes paid
|
|
$ |
-
|
|
|
$ |
-
|
|
Equipment
under capital lease
|
|
$ |
136,523
|
|
|
$ |
-
|
|
Accretion
of debt modification
|
|
$ |
-
|
|
|
$ |
76,812
|
|
See
accompanying notes to the condensed financial statements.
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.
2. Basis
of Presentation
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 September 30, 2007,
the
results of operations for the three and six months ended September 30, 2007
and
2006, and the cash flows for the six months ended September 30, 2007 and 2006.
The results of operations for the three and six months ended September 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.
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 September 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 September 30, 2007, the Company had two customers who
represented 24.0% and 17.8%, respectively of net product sales. For the
three months ended September 30, 2006, the Company had one customer who
represented 24.0% of net product sales. For the six months ended September
30,
2007, the Company had one customer who represented 12.0% of net product
sales. For the six months ended September 30, 2006, the Company had
one customer who represented 24.0% of net product sales.
At
September 30, 2007, the Company had three customers each of which accounted
for
in excess of 10% of total accounts receivable consisting of 10.8%, 31.6% and
24.9%, respectively, of the total outstanding accounts receivable. As of March
31, 2007, the Company had four customers each of which accounted for in excess
of 10% of total accounts receivable consisting of 14.7%, 13.4%, 11.3% and 11.3%,
respectively, of total outstanding accounts receivable.
Suppliers:
As
of
September 30, 2007, the Company had one supplier that accounted for in excess
of
10% of total accounts payable consisting of $1,630,034, or 40.4%, of total
outstanding accounts payable. As of March 31, 2007, the Company had
two suppliers each of which accounted for in excess of 10% of total accounts
payable consisting of $942,758 and $383,976, or 29.5% and 12.0% respectively,
of
total outstanding accounts payable.
During
the three months ended September 30, 2007, the Company purchased inventories
and
other inventory related items from two manufacturers totaling $1,382,769 and
$2,240,978, representing 36.7% and 59.5%, respectively, of the cost of revenues
for the three months ended September 30, 2007. During the six months ended
September 30, 2007, the Company purchased inventories and other inventory
related items from two manufacturers totaling $2,062,819 and $3,287,599,
representing 28.1% and 44.7% respectively of the cost of revenues for the six
months ended September 30, 2007.
During
the six months ended September 30, 2006, the Company utilized one manufacturer
for 100% of its manufacturing of its aeroponic garden systems which accounted
for $784,040, or 52%, of cost of revenues. As of September 30, 2006, the Company
had paid cash deposits to this manufacturer for goods not yet shipped totaling
$157,417 which are included in prepaid expenses, and had outstanding accounts
payable to this manufacturer as of September 30, 2006 of $139,896 or 19% of
the
accounts payable balance.
Restricted
Cash
The
Company has secured with a cash deposit in restricted money market account
the
activity related to its corporate credit card purchase account with a restricted
money market account. The balance in this restricted money market account as
of
September 30, 2007 and March 31, 2007 was $85,712 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.
|
|
|
|
|
|
Finished
goods
|
|
$ |
5,501,595
|
|
|
$ |
3,626,671
|
Raw
materials
|
|
|
978,796
|
|
|
|
313,943
|
|
|
$ |
6,480,391
|
|
|
$ |
3,940,614
|
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 September 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 30-60 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. The Company had recorded an allowance for
bad debts of $82,603 and $80,695, as of September 30, 2007 and March 31, 2007,
respectively.
Other
Receivables
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 September 30,
2007 and March 31, 2007, the balance in this reserve account was $180,449 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 six months ended September 30, 2007, the Company
offered a thirty-six day trial period and accordingly, the Company did not
record as of September 30, 2007 $280,493 related to the unpaid balance due
for
orders shipped in conjunction with this evaluation program. The Company
also deferred, as of September 30, 2007, recognition of $84,507 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.
Additionally,
the Company did not record $883,632 of revenue as of September 30, 2007 related
to the wholesale sales value of 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 $883,632 related to this
transaction. The Company has also deferred, as of September 30, 2007,
recognition of $510,462 of product and freight costs associated with this sale,
which have been included in inventory.
The
Company records estimated reductions to revenues for customer and distributor
sales programs and incentive offerings, including, promotions, general
advertising, merchandising 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 September
30,
2007 and March 31, 2007, the Company had accrued $372,788 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 $49,424 and $15,593
at September 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 $139,019 and $238,569 at September
30, 2007 and March 31, 2007, respectively.
3. Capital
Lease Obligations
The
Company has capitalized lease obligations for computer equipment and licensed
software due on various dates through August 2010 of $132,050 as of September
30, 2007. The interest rates range from 12% to 15% per annum. These lease
obligations are collateralized by the related assets with a net book value
of
$132,731 as of September 30, 2007. In addition, recorded as Deposits, is a
security deposit of $26,667 which will be released upon the Company achieving certain
financial requirements. The leases also require $11,046 in prepaid
rents.
Maturities
of capital lease obligations as of September 30, 2007, are as
follows:
Year
ended March 31, 2008
|
|
$ |
36,564
|
|
Year
ended March 31, 2009
|
|
|
73,128
|
|
Year
ended March 31, 2010
|
|
|
38,471
|
|
Year
ended March 31, 2011
|
|
|
5,715
|
|
Total
minimum lease payments
|
|
|
153,878
|
|
Less
- amount related to interest
|
|
|
(21,828 |
) |
Principal
portion of future obligations
|
|
|
132,050
|
|
Less
- current portion
|
|
|
(52,913 |
) |
|
|
$ |
79,137
|
|
The
following table summarizes the assets included in property and equipment that
were acquired under the capital leases:
Class
of property:
|
|
|
|
Computer
equipment
|
|
$ |
58,618
|
|
Software
|
|
|
77,905
|
|
|
|
|
136,523
|
|
Accumulated
depreciation
|
|
|
(3,792 |
) |
|
|
$ |
132,731
|
|
4. Due
to Factor
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, (10.75% at September 30, 2007 and 11.25% at 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 September 30, 2007, Benefactor had advanced
the
Company $3,577,447 against invoices totaling $4,188,573. Fees paid to
Benefactor for interest, discounts and other services for the three and six
months ended September 30, 2007 totaled $97,732 and $164,881,
respectively. The receivables are considered recourse and are shown
at their gross value on the balance sheet.
5. 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
six months ended September 30, 2007 and September 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 six months ended September 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 six months ended September
30, 2007 and the six months ended September 30, 2006 was $246,414 and $182,404
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 six months ended September 30, 2007 and the six months ended
September 30, 2006 was $0.02 and $0.02 greater, respectively, than if the
Company had continued to account for stock options under APB Opinion No.
25.
There
were no additional grants or forfeitures and exercises of 4,872 shares of stock
options under the Company’s equity compensation plans for the six months ended
September 30, 2007. At September 30, 2007, the Company had granted options
for
88,498 shares of the Company’s common stock that are unvested that will result
in $340,314 of compensation expense in future periods if fully
vested.
Information
regarding all stock options outstanding under the 2005 Plan as of September
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
|
|
|
|
21,169
|
|
|
|
1.10
|
|
|
$ |
0.06
|
|
|
|
|
21,169
|
|
|
|
3.08
|
|
|
$ |
0.06
|
|
|
Over
$0.50 to $2.50
|
|
|
|
136,259
|
|
|
|
1.23
|
|
|
$ |
1.57
|
|
|
|
|
136,259
|
|
|
|
3.08
|
|
|
$ |
1.57
|
|
|
$ |
5.00
|
|
|
|
1,114,760
|
|
|
|
3.49
|
|
|
$ |
5.00
|
|
|
|
|
1,039,466
|
|
|
|
3.72
|
|
|
$ |
5.00
|
|
|
$ |
5.90
|
|
|
|
60,300
|
|
|
|
4.47
|
|
|
$ |
5.90
|
|
|
|
|
47,096
|
|
|
|
5.00
|
|
|
$ |
5.90
|
|
|
|
|
|
|
|
1,332,488
|
|
|
|
3.27
|
|
|
$ |
4.35
|
|
$5,048,551
|
|
|
1,243,990
|
|
|
|
3.40
|
|
|
$ |
4.35
|
|
$
4,759,543
|
6. Income
Taxes
In
September 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
have not yet been examined by the applicable jurisdictions.
7. Related
Party Transactions
During
the six months ended September 30, 2007 and September 30, 2006, the Company
paid
fees totaling $2,000 per month, a total of $12,000, to one director as a
retainer for general legal services.
Also
during the six months ended September 30, 2007 and September 30, 2006, the
Company incurred fees totaling $582,808 and $584,903, respectively to MedEd
Architects LLC, a video production company owned 33% by Randy Seffren, the
Company’s Chief Marketing Officer.
8. Stockholders’
Equity
In
September 2007, the Company completed a private offering in which it sold an
aggregate of 800,000 shares of common stock and warrants to purchase 800,000
shares of common stock at an exercise price of $8.00 per share in the form
of
units consisting of one share of common stock and one warrant per unit. The
units were sold at a per unit price of $6.25. Upon closing of offering, the
Company received gross proceeds of $5,000,000, less a placement agent fee in
the
amount of $400,000 and approximately $170,000 in other expenses related to
the
offering. In addition, the Company issued warrants to purchase 80,000 shares
of
common stock at an exercise price of $8.25 per share to the placement agent
of
this offering.
During
the six months ended September 2007, the Company received proceeds, net of
$5,000 in expenses, of $890,937 from the exercise of warrants to purchase
148,100 shares of the Company’s common stock at prices ranging from $2.50 to
$6.25 per share.
On
August
1, 2007, the Company entered into an agreement with an investor relations firm
that included a grant of a five year warrant to purchase 50,000 shares of the
Company’s common stock at an exercise price of $6.96, the closing market price
as of the date of the agreement. The warrants will vest monthly over a one
year
period unless the agreement is terminated. The Company used the following
weighted average assumptions for valuation of the warrants issued: no dividend
yield; expected volatility rate of 50.3%; risk free interest rate of 6%; and
average lives of three years, resulting in a total value of $138,023 to be
recognized monthly over the twelve month period.
A
summary
of the Company’s warrant activity for the period from April 1, 2007 through
September 30, 2007 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
Warrants
|
|
|
Average
|
|
Aggregate
|
|
|
Outstanding
|
|
|
Exercise
Price
|
|
Intrinsic
Value
|
Outstanding,
March 31, 2007
|
|
|
5,724,094
|
|
|
$ |
7.21
|
|
|
Granted
|
|
|
930,000
|
|
|
$ |
6.96
|
|
|
Exercised
|
|
|
(148,100 |
) |
|
$ |
6.05
|
|
|
Expired
|
|
|
-
|
|
|
$ |
-
|
|
|
Outstanding,
September 30, 2007
|
|
|
6,505,994
|
|
|
$ |
7.34
|
|
$ 9,584,926
|
As
of
September 30, 2007, the Company had the following outstanding warrants to
purchase its common stock:
|
|
|
Weighted
|
|
|
Weighted
|
Warrants
|
|
|
Average
|
|
|
Average
|
Outstanding
|
|
|
Exercise
Price
|
|
|
Remaining
Life
|
|
31,498
|
|
|
$ |
2.50
|
|
|
|
0.40
|
|
15,000
|
|
|
$ |
5.00
|
|
|
|
0.40
|
|
580,000
|
|
|
$ |
5.01
|
|
|
|
2.95
|
|
644,000
|
|
|
$ |
6.00
|
|
|
|
3.62
|
|
2,240,300
|
|
|
$ |
6.25
|
|
|
|
3.40
|
|
50,000
|
|
|
$ |
6.96
|
|
|
|
4.83
|
|
1,283,436
|
|
|
$ |
7.57
|
|
|
|
4.49
|
|
800,000
|
|
|
$ |
8.00
|
|
|
|
6.92
|
|
80,000
|
|
|
$ |
8.25
|
|
|
|
6.92
|
|
390,880
|
|
|
$ |
10.00
|
|
|
|
0.25
|
|
390,880
|
|
|
$ |
15.00
|
|
|
|
0.25
|
|
6,505,994
|
|
|
$ |
7.34
|
|
|
|
3.68
|
Item
2.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
discussion contained herein is for the three and six months ended September
30,
2007 and September 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
September 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 S-3/A filed with the SEC September 28, 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 September 30, 2007. The information
contained in this Quarterly Report on Form 10-Q for the quarterly period ended
September 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
September 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 and related products. 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 two third-party manufacturers who have commenced
production activities. We began sales activities as of March 2006. As of
September 30, 2007, we had manufactured and taken delivery of over 245,000
units
of our kitchen garden systems and had manufactured over 800,000 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. We have also
completed development of multiple new models of our AeroGarden systems, seed
kits and other accessory products for the AeroGarden.. Prior to March 2006
when
we commenced sales of our first aeroponic garden system, 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 September 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 fee is fixed
or determinable; and collection of the resulting receivable is reasonably
assured. Beginning with the quarter ended December 31, 2006, we 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
six months ended September 30, 2007, we offered a thirty-six day trial period
and accordingly, we did not record $280,493 as of September 30, 2007 related
to
the unpaid balance due for orders shipped in conjunction with this evaluation
program. We also deferred, as of September 30, 2007, recognition of
$84,507 of product costs associated the foregoing revenue 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.
Additionally,
we did not record $883,632 of revenue as of September 30, 2007 related to the
wholesale sales value of inventory held by one of our retail shopping channel
customers that was paid in full by the customer. Accordingly, we have
also recorded a customer deposit for $883,632 related to this
transaction. We also deferred, as of September 30, 2007, recognition
of $510,462 of product and freight costs associated with this sale, which have
been included in inventory.
We
record
estimated reductions to revenues for customer and distributor sales programs
and
incentive offerings, including, promotions, general advertising, merchandising
and other volume-based incentives. Future market conditions and product
transitions may require that we 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
us to
estimate based on industry experience the number of customers who will actually
redeem the incentive. At September 30, 2007 and March 31, 2007, we had accrued
$372,788 and $65,385, respectively, as our estimate for the foregoing deductions
and allowances.
Warranty
and Return Reserves
We
record
warranty liabilities at the time of sale for the estimated costs that may be
incurred under our basic warranty program. The specific warranty terms and
conditions vary depending upon the product sold but generally include technical
support, repair parts and labor for periods up to one year. Factors that affect
our warranty liability include the number of installed units currently under
warranty, historical and anticipated rates of warranty claims on those units,
and cost per claim to satisfy our warranty obligation. Both
manufacturers of our products provide replacement parts for any defective
components free of charge up to 2% of the total units
purchased. Based upon the foregoing, we have recorded a provision for
potential future warranty costs of $49,424 and $15,593 at September 30, 2007
and
March 31, 2007, respectively. The liability for sales returns
is estimated based upon historical experience of return levels and, as of
September 30, 2007, we had recorded a liability of $139,019 representing the
estimated sales value of future returns.
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 our
financial statements. Prior to January 1, 2006, we 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 $246,414 and $182,404 for the six months ended September 30, 2007 and the
six
months ended September 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 and six months ended September 30, 2007 and the three
and
six months ended September 30, 2006:
|
|
Three
Months ended
September
30,
|
|
|
Six
Months ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales- retail
|
|
|
77.2 |
% |
|
|
77.6 |
% |
|
|
71.5 |
% |
|
|
80.6 |
% |
Product
sales- direct to consumer
|
|
|
22.8 |
% |
|
|
22.4 |
% |
|
|
28.5 |
% |
|
|
19.4 |
% |
Total
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
60.0 |
% |
|
|
80.3 |
% |
|
|
58.5 |
% |
|
|
81.1 |
% |
Research
and development
|
|
|
10.0 |
% |
|
|
39.7 |
% |
|
|
9.2 |
% |
|
|
45.6 |
% |
Sales
and marketing
|
|
|
50.2 |
% |
|
|
132.0 |
% |
|
|
48.5 |
% |
|
|
125.3 |
% |
General
and administrative
|
|
|
15.6 |
% |
|
|
75.1 |
% |
|
|
17.6 |
% |
|
|
88.0 |
% |
Total
operating expenses
|
|
|
135.8 |
% |
|
|
327.1 |
% |
|
|
133.8 |
% |
|
|
340.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
-35.8 |
% |
|
|
-227.1 |
% |
|
|
-33.8 |
% |
|
|
-240.0 |
% |
For
the
three months ended September 30, 2007 and September 30, 2006, product sales
totaled $6,283,645 and $1,030,316, respectively, an increase of $5,253,329
or
510%. For the six months ended September 30, 2007 and September 30, 2006,
product sales totaled $ 12,562,079 and $1,852,254, respectively, an increase
of
$10,709,825 or 578%. Our AeroGarden products are primarily sold through two
sales methods. Direct sales are generated as a result of airings of our
infomercial, our websites, our own catalogues 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.
The increase in sales is directly attributable to higher direct sales as a
result of our increased media spending for our infomercials as compared to
the
prior year as well as our increased retail distribution which grew to
approximately 3,500 storefronts as of September 30, 2007 compared to 600
storefronts as of September 30, 2006. During the quarter, we
commenced initial shipment and recognized revenues of $36,000 for sales to
international distributors in Japan and Europe and we anticipate this will
become a significant component of our aggregate sales volume in future periods.
A summary of our sales categories for the three and six months ended September
30, 2007 and 2006 is as follows:
|
|
Three
Months ended September 30,
|
|
|
Six
Months ended September 30,
|
|
Product
Revenues
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Product
sales- retail
|
|
$ |
4,850,298
|
|
|
$ |
799,335
|
|
|
$ |
8,979,900
|
|
|
$ |
1,492,945
|
|
Product
sales- direct to consumer
|
|
|
1,433,347
|
|
|
|
230,981
|
|
|
|
3,582,179
|
|
|
|
359,309
|
|
Total
|
|
$ |
6,283,645
|
|
|
$ |
1,030,316
|
|
|
$ |
12,562,079
|
|
|
$ |
1,852,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales- retail
|
|
|
77.19 |
% |
|
|
77.58 |
% |
|
|
71.48 |
% |
|
|
80.60 |
% |
Product
sales- direct to consumer
|
|
|
22.81 |
% |
|
|
22.42 |
% |
|
|
28.52 |
% |
|
|
19.40 |
% |
Total
sales
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
Our
products consist of our AeroGardens
as well as seed kits and accessories which represent recurring revenue
opportunity for each AeroGarden sold. A summary of the sales of these two
product categories is as follows:
|
|
Three
Months ended September 30,
|
|
|
Six
Months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Product
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
AeroGardens
|
|
$ |
4,816,504
|
|
|
$ |
889,979
|
|
|
$ |
10,460,138
|
|
|
$ |
1,616,870
|
|
Seed
kits and accessories
|
|
|
1,467,141
|
|
|
|
140,337
|
|
|
|
2,101,941
|
|
|
|
235,384
|
|
Total
|
|
$ |
6,283,645
|
|
|
$ |
1,030,316
|
|
|
$ |
12,562,079
|
|
|
$ |
1,852,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AeroGardens
|
|
|
76.65 |
% |
|
|
86.38 |
% |
|
|
83.27 |
% |
|
|
87.29 |
% |
Seed
kits and accessories
|
|
|
23.35 |
% |
|
|
13.62 |
% |
|
|
16.73 |
% |
|
|
12.71 |
% |
Total
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
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 $280,493 of revenue
from these Trial Sales as of September 30, 2007. We also deferred, as of
September 30, 2007, recognition of $84,507 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 $883,632 of revenue as of September 30, 2007 related to the
wholesale sales value of inventory held by one of our retail shopping channel
customers that was paid in full by the customer. Accordingly, we also
recorded a customer deposit for $883,632 related to this
transaction. We have also deferred, as of September 30, 2007,
recognition of $510,462 of product and freight costs associated with this sale,
which have been included in inventory.
For
the
three months ended September 30, 2007, we had two customers who represented
24.0% and 17.8%, respectively of net product sales. For the three months ended
September 30, 2006, we had one customer who represented 24.0% of net product
sales. For the six months ended September 30, 2007, we had one customer who
represented 12.0% of net product sales. For the six months ended September
30,
2006, we had one customer who represented 45.0% of net product
sales.
Retail
sales for three months ended September 30, 2007 increased as a
percentage of our total sales over the previous quarter ended June 30, 2007
as a
result primarily of our obtaining distribution in four key accounts in September
2007 on a nationwide basis including Sears, JC Penney’s, Macy’s and Bed, Bath
and Beyond. The increase in retail sales was, in part, offset by a decrease
in
direct to consumer sales during the three months ended September 30, 2007 due
to
reduced media expenditures for direct response offerings and offset by
reductions in our sales to home shopping channels reflecting the reduced
seasonal demand for our indoor gardening products during the summer months
as
well as reduced television viewership during these months as well.
Cost
of
revenues for the three months ended September 30, 2007 and September 30, 2006
totaled $3,765,376 and $827,165, respectively, representing 60.0% and 80.3%
of
revenues for the respective periods, an increase of $2,938,211 or 355.2%. 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.
Cost
of
revenues for the six months ended September 30, 2007 and September 30, 2006
totaled $7,347,794 and $1,502,860, respectively, representing 58.5% and 81.1%
of
revenues for the respective periods, an increase of $5,844,934 or 388.9%. The
increase in cost of revenues is a direct result of the increase in revenues
discussed above. Included in cost of revenue for the six months ended
September 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
September 30, 2006. Since our product launch, we continue to strive to improve
both manufacturing costs and transportation costs. Impacting cost of revenues
during the three and six months ended September 30, 2007 were increases in
freight costs associated with outbound freight to retail customers as well
as
inbound freight for finished goods from China and seed kits components as a
result of imposed fuel surcharges by freight providers as well as higher freight
and fulfillment costs, as a percentage of sales, associated with retail
sales.
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 less allowances granted for merchandising and
promotion. Media costs associated with direct sales are included in sales and
marketing costs. Gross margins for the three and six months ended September
30,
2007 were $2,518,269 and $5,214,285, representing 40.1% and 41.5% of revenues,
respectively, as compared to $203,151 and $349,394 for the three and six months
ended September 30, 2006, representing 19.7% and 18.9% of revenues,
respectively.
Sales
and
marketing costs for the three months ended September 30, 2007 totaled
$3,156,414, as compared to $1,359,797 for the three months ended September
30,
2006, an increase of $1,796,617 or 132.1%. For the six months ended September
30, 2007 and September 30, 2006, sales and marketing costs were $6,091,537
and
$2,320,271, respectively, representing an increase of $3,771,266 or
162.5%.
Sales
and
marketing costs include all costs associated with the marketing, and sales,
sales and customer support and sales order processing for our products and
consist of the following:
|
|
Three
Months ended September 30,
|
|
|
Six
Months ended September 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Advertising
|
|
$ |
643,382
|
|
|
$ |
84,786
|
|
|
$ |
1,910,376
|
|
|
$ |
81,788
|
Salaries
and related expenses
|
|
|
786,802
|
|
|
|
372,389
|
|
|
|
1,450,930
|
|
|
|
642,313
|
Infomercial
production costs
|
|
|
729,131
|
|
|
|
458,856
|
|
|
|
829,348
|
|
|
|
590,890
|
Sales
commissions
|
|
|
183,765
|
|
|
|
66,664
|
|
|
|
420,458
|
|
|
|
133,729
|
Retail
point of sale displays
|
|
|
113,046
|
|
|
|
-
|
|
|
|
150,768
|
|
|
|
-
|
Supplies
and printing
|
|
|
108,655
|
|
|
|
31,499
|
|
|
|
236,518
|
|
|
|
59,437
|
Consulting
fees
|
|
|
113,766
|
|
|
|
71,725
|
|
|
|
260,047
|
|
|
|
234,904
|
Public
relations
|
|
|
29,433
|
|
|
|
26,158
|
|
|
|
98,735
|
|
|
|
124,249
|
Trade
Shows
|
|
|
88,095
|
|
|
|
8,515
|
|
|
|
198,596
|
|
|
|
53,521
|
Telemarketing
|
|
|
98,664
|
|
|
|
5,211
|
|
|
|
203,250
|
|
|
|
5,211
|
Other
|
|
|
261,675
|
|
|
|
233,994
|
|
|
|
332,511
|
|
|
|
394,229
|
|
|
$ |
3,156,414
|
|
|
$ |
1,359,797
|
|
|
$ |
6,091,537
|
|
|
$ |
2,320,271
|
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.
During
the three months ended September 30, 2007, we substantially completed at a
cost
to date of approximately $700,000 two new infomercials focused on our next
generation of product, a three pod AeroGarden utilizing a new aeroponic
technology. All infomercial production costs are expensed as
incurred. During the three months ended September 30, 2006, we had
incurred similar costs for the production of our current infomercial featuring
our original AeroGarden product which has been airing since September 2006
with
$3.5 million in media expenditures to date. The new technology for our three
pod
unit 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 September 30, 2007 totaled
$982,181 as compared to $773,362 for the three months ended September 30, 2006,
an increase of $208,819 or 27.0%. General and administrative costs have
increased in most areas as we have positioned our organization to manage our
sales growth and diversification of products and distribution channels.
Increases in general and administrative costs for the three months ended
September 30, 2007 over the three months ended September 30, 2006 include
$42,000 in salary related costs, $50,000 in depreciation expense, $76,000 in
facility rent, $55,000 in corporate governance costs.
For
the
six months ended September 30, 2007, general and administrative costs totaled
$2,208,033 as compared to $1,629,402 for the six months ended September 30,
2006, an increase of $578,631 or 35.5%. Increases in general and administrative
costs for the six months ended September 30, 2007 over the six months ended
September 30, 2006 include $160,000 in salary related costs, $98,000 in
depreciation expense, $106,000 in facility rent, $112,000 in corporate
governance costs and $170,000 in bad debt expense allowances offset by a
reduction in outside consulting fees on $116,000.
During
the three months ended September 30, 2007, we incurred $628,542 in research
and
development costs, as compared to $409,453 for the three months ended September
30, 2006, an increase of $219,089 or 53.5%. The period over period increase
was
due to an approximate $70,000 increase in personnel costs for our plant labs
and
engineering personnel as well as costs associated with development of our new
three pod and six pod products including prototyping, travel and costs
associated with research in furthering our development of live plants for our
AeroGardens such as strawberries and baby roses.
For
the
six months ended September 30, 2007, research and development costs totaled
$1,157,987 as compared to $844,384 for the six months ended September 30, 2006,
an increase of $313,603 or 37.1% as a result of the reasons discussed
above.
We
have
substantially completed development of multiple new models of our AeroGarden
systems including our Pro series which feature stainless steel trim and more
sophisticated electronics for managing light and nutrient delivery during the
plant’s life cycle; our deluxe series, which feature a higher adjustable light
hood and a new light bulb technology that delivers more light
enabling higher height for the light hood and therefore ability to
grow full size tomatoes, peppers etc.; as well as our new six pod and three
pod
systems which will feature lower retail price points combined with a new, more
efficient seed pod technology and nutrient delivery system. 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.
Our
loss
from operations for the three months ended September 30, 2007 was $2,248,868
as
compared to $2,339,461 for the three months ended September 30, 2006, a decrease
of $90,593 or 3.9%. For the six months ended September 30, 2007, the loss from
operations is $4,243,272 as compared to $4,444,663 for the three months ended
September 30, 2006, a decrease in net loss of $201,391 or 4.5%. With the
additional retail distribution obtained during the quarter ended September
30,
2007, the non-recurrence of the $720,000 in infomercial production costs
incurred during this same quarter, the commencement of our international
expansion in Japan, Europe and elsewhere and the diversification of our product
line, we anticipate losses from operations will be decreased significantly
in
future periods.
Other
income and expense for the three months ended September 30, 2007 totaled $90,394
as compared to $1,069,305 for the three months ended September 30, 2006, a
decrease of $978,911. In the three months ended September 30, 2006 we incurred
$1,028,250 in penalties payable in our common stock related to delays we
encountered in registering common stock issued in various private offerings.
Current interest expense is the result of our factoring arrangement for our
accounts receivable as discussed below. For the six months ended September
30,
2007, other income and expense totaled $118,720 as compared to $1,086,992 for
the six months ended September 30, 2006, a decrease of $968,272.
Liquidity
and Capital Resources
In
September 2007, we completed a private offering in which we sold an aggregate
of
800,000 shares of common stock and warrants to purchase 800,000 shares of common
stock at an exercise price of $8.00 per share in the form of units consisting
of
one share of common stock and one warrant per unit. The units were sold at
a per
unit price of $6.25. Upon closing of offering, we received gross proceeds of
$5,000,000, less a placement agent fee in the amount of $400,000 and
approximately $200,000 in other expenses related to the offering. In addition,
we issued warrants to purchase 80,000 shares of common stock at an exercise
price of $8.25 per share to the placement agent of this offering.
During
the six months ended September 2007, we received proceeds, net of $5,000 in
expenses, of $890,875 from the exercise of warrants to purchase 148,100 shares
of our common stock at prices ranging from $2.50 to $6.25 per
share.
On
February 9, 2007, we entered into an agreement with Benefactor Group Inc.
(“Benefactor”) whereby Benefactor agreed to factor our retail accounts
receivable invoices. The term of the agreement is for one year but can be
terminated by us 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, (10.75% at September 30, 2007 and 11.25% at March 31, 2007), charged
on
a daily basis for the unpaid invoice amounts outstanding. We have agreed,
beginning May 2007, to factor with Benefactor a minimum of $800,000 of invoices
monthly. We are 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
a security interest granted to Benefactor on all assets. As of September 30,
2007, Benefactor had advanced us $3,577,447 against invoices totaling
$4,188,573. Fees paid to Benefactor for interest, discounts and other
services for the three and six months ended September 30, 2007 totaled $97,732
and $164,881, respectively. The receivables are considered recourse
and are shown at their gross value on the balance sheet.
As
of
September 30, 2007, we had a cash balance of approximately $6,193,987. 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 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
has improved 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, there is no assurance that such financing will
be
available on attractive terms or at all.
For
the
six months ended September 30, 2007, cash used in operations was $7,273,945
as
compared to cash used in operations for the six months ended September 30,
2006
of $5,383,469, an increase of $1,890,476. The principal use of cash in
operations was the net loss, which, after add back of non cash items, equaled
$3,906,000, increases in accounts receivable of $2,990,000 related to
our expansion of our retail distribution and increases in inventory of
$2,540,000 acquired to support our expanded distribution for the upcoming
holiday season. Offsetting the foregoing are increases in customer deposits
for
goods under guaranteed sale arrangements of $901,000 and increase in accrued
expenses and accounts payable of $1,221,000 related to increased purchases
in
transit.
Cash
used
by investing activities totaled $289,204 for the six months ended September
30,
2007, as compared to $105,619 used in investing activities for the six months
ended September 30, 2006. The principal use of cash in investing activities
was
the purchase of $275,000 in computer equipment and software related to our
installation of a new computer network and ERP accounting and purchasing system,
inclusive of $136,523 through a capitalized lease program that did not require
the outlay of cash, as well computers purchased due to our increased staffing
requirements and $48,000 in manufacturing equipment, $30,000 in new tooling
and $15,000 in office equipment.
Cash
provided by financing activities was $8,261,635 for the six months ended
September 30, 2007, as compared to cash provided by financing activities of
$11,250 for the three months ended September 30, 2006. Cash provided by
financing activities included $4,433,372 from the issuance of common stock
in
our September 2007 offering discussed above, $890,937 of proceeds from exercise
of warrants and $2,932,296 from our accounts receivable factoring
facility.
Off-Balance
Sheet Arrangements
We
have certain current commitments under operating leases and capital leases
and
have not entered into any contracts for financial derivative instruments such
as
futures, swaps and options.
Item
3. Quantitative and Qualitative Disclosures About
Market
Risk
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 September 30, 2007, we had $3,577,447 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 $35,774 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
September 30, 2007.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
During
the three months ended September 30, 2007, there has not been any material
changes in risk factors previously disclosed.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
As
part
of the private offering that we completed in September 2007, we sold an
aggregate of 40,000 shares of common stock and warrants to purchase 40,000
shares of common stock at an exercise price of $8.00 per share in the form
of
units consisting of one share of common stock and one warrant per
unit. The units were sold at a per unit price of $6.25. In
addition, as part of the private offering that we completed in September 2007
we
issued warrants to purchase 4,000 shares of common stock at an exercise price
of
$8.25 per share to the placement agent of this offering.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
During
the three months ended September 30, 2007 there were no matters brought to
a
vote of the security holders.
Item
5. Other Information
None
Item
6. Exhibits
31.1
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Certifications
of the Chief Executive Officer Under Section 302 of the Sarbanes-Oxley
Act*
|
31.2
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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.
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AeroGrow
International Inc.
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Date: November
14, 2007
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/s/Michael
Bissonnette
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By:
Michael Bissonnette
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Its:
Chief Executive Officer (Principal Executive Officer) and
Director
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Date: : November
14, 2007
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/s/Mitchell
B.
Rubin
|
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By:
Mitchell B. Rubin
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Its:
Chief Financial Officer (Principal Financial Officer and Principal
Accounting Officer)
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