See supplemental disclosures below and the accompanying notes to the condensed financial statements.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Business
AeroGrow International, Inc. (collectively, the “Company," “AeroGrow,” “we,” “our” or “us”) was formed as a Nevada corporation in March 2002. The Company’s principal business is developing, marketing, and distributing advanced indoor aeroponic garden systems designed and priced to appeal to the consumer gardening, cooking and small indoor appliance markets worldwide. The Company manufactures, distributes and markets nine different models of its AeroGarden systems in multiple colors, as well as over 40 varieties of seed pod kits and a full line of accessory products through multiple channels including retail distribution via online retail outlets and brick and mortar storefronts, catalogue and direct-to-consumer sales primarily in the United States and Canada.
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies
Basis of Presentation
The unaudited interim financial statements of the Company included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These condensed statements do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual audited financial statements and should be read in conjunction with the Company’s audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2017, as filed with the SEC on June 26, 2017.
In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments, including recurring adjustments, necessary to present fairly the financial position of the Company at June 30, 2017, the results of operations for the three months ended June 30, 2017 and 2016, and the cash flows for the three months ended June 30, 2017 and 2016. The results of operations for the three months ended June 30, 2017 are not necessarily indicative of the expected results of operations for the full year or any future period. In this regard, the Company’s business is highly seasonal, with approximately 65.7% of revenues in the fiscal year ended March 31, 2017 (“Fiscal 2017”) occurring in the four consecutive calendar months from October through January. Furthermore, during the three-month period ended June 30, 2017, the Company has further expanded its distribution channels and invested in necessary overhead in anticipation of the peak sales season. The balance sheet as of March 31, 2017 is derived from the Company’s audited financial statements.
Liquidity
Sources of funding to meet prospective cash requirements include the Company’s existing cash balances, cash flow from operations, and borrowings under the Company’s debt arrangements. We may need to seek additional debt or equity capital, however, to address the seasonal nature of our working capital needs, increase the scale of our business and provide a cash reserve against contingencies. There can be no assurance we will be able to raise this additional capital.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is reasonably possible that a change in the Company’s estimates could occur in the near term as additional or new information becomes available.
Net Income (Loss) per Share of Common Stock
The Company computes net income (loss) per share of common stock in accordance with Accounting Standards Codification (“ASC”) 260. ASC 260 requires companies to present basic and diluted earnings per share (“EPS”). Basic EPS is measured as the income or loss available to common stockholders divided by the weighted average shares of common stock outstanding for the period. Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of common stock equivalents (e.g., convertible securities, options, and warrants) as if such securities had been converted into common stock at the beginning of the periods presented. 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. Securities not included in the computation of diluted EPS because to do so would have been anti-dilutive were employee stock options to purchase 175,000 shares and warrants to purchase 2,000 shares of common stock for the period ended June 30, 2017 and employee stock options to purchase 656,000 shares and warrants to purchase 3,093,000 shares for the three months ended June 30, 2016.
Concentrations of Risk
ASC 825-10-50-20
requires disclosure of significant concentrations of credit risk regardless of the degree of such risk.
Cash:
The Company maintains cash depository accounts with financial institutions. The amount on deposit with several financial institutions exceeded the $250,000 federally insured limit as of June 30, 2017. The Company has not historically incurred any losses related to these deposits. The financial institutions are highly rated, financially sound and the risk of loss is minimal.
Customers and Accounts Receivable:
For the three months ended June 30, 2017 and 2016, one customer, Amazon.com, represented 23.0% and 35.8%, respectively, of the Company’s net revenue.
As of June 30, 2017, the Company had three customers, Amazon.com, Bed, Bath & Beyond and Amazon.ca, that represented 26.5%, 16.3% and 15.8% of the Company’s outstanding accounts receivable, respectively. As of March 31, 2017, the Company had three customers, Amazon.com, Amazon.uk and Amazon.ca, which represented 33.9%, 14.3% and 11.0%, respectively, of outstanding accounts receivable. The Company believes that all receivables from these customers are collectible.
Suppliers:
For the three months ended June 30, 2017, the Company purchased inventories and other inventory-related items from one supplier totaling $1.7 million. For the three months ended June 30, 2016, the Company purchased inventories and other inventory-related items from one supplier totaling $300,000. The purchase of inventories and other inventory-related items is dependent on timing of purchases for our highly seasonal business and payment terms with our suppliers.
The Company’s primary contract manufacturers are located in China. As a result, the Company may be subject to political, currency, regulatory, transportation/shipping and weather/natural disaster risks. Although the Company believes alternate sources of manufacturing could be obtained, the risk of an interruption in product sourcing could have an adverse impact on operations.
Fair Value of Financial Instruments
The Company follows the guidance in ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”), as it relates to the fair value of its financial assets and liabilities. ASC 820 provides for a standard definition of fair value to be used in new and existing pronouncements. This guidance requires disclosure of fair value information about certain financial instruments (insurance contracts, real estate, goodwill and taxes are excluded) for which it is practicable to estimate such values, whether or not these instruments are included in the balance sheet at fair value. The fair values presented for certain financial instruments are estimates, which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants. ASC 820 also provides a hierarchy for determining fair value, which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority given to Level 1 as these are the most reliable, and the lowest priority given to Level 3.
Level 1 – Quoted prices in active markets for identical assets.
Level 2 – Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.
Level 3 – Unobservable inputs that are supported by little or no market activity.
The carrying value of financial instruments including cash, receivables and accounts payable and accrued expenses, approximates their fair value at June 30, 2017 and March 31, 2017 due to the relatively short-term nature of these instruments.
The Company’s intellectual property liability carrying value was determined utilizing Level 3 inputs. As discussed below in Notes 3 and 4, this liability was incurred in conjunction with the Company’s strategic alliance with Scotts Miracle-Gro. As of June 30, 2017 and March 31, 2017, the fair value of the Company's sale of the intellectual property liability was estimated using the discounted cash flow method, which is based on expected future cash flows, discounted to present value using a discount rate of 15%. As of June 30, 2017, the Company did not have any financial assets or liabilities that were measured at fair value on a recurring basis, subsequent to initial recognition.
Accounts Receivable and Allowance for Doubtful Accounts
The Company sells its products to retailers and directly to consumers. Retailer sales terms vary by customer, but generally range from net 30 days to net 60 days, while direct-to-consumer transactions are primarily paid by credit card. Accounts receivable are reported at net realizable value and net of the allowance for doubtful accounts. The Company uses the allowance method to account for uncollectible accounts receivable. The Company's allowance estimate is based on a review of the current status of trade accounts receivable, which resulted in an allowance of $10,000 and $20,000 at June 30, 2017 and March 31, 2017, respectively.
Other Receivables
In conjunction with the Company’s processing of credit card transactions for its direct-to-consumer sales activities and as security with respect to the Company’s performance for credit card refunds and charge backs, the Company is required to maintain a cash reserve with Litle and Company, the Company’s credit card processor. This reserve is equal to 5% of the credit card sales processed during the previous six months. As of June 30, 2017 and March 31, 2017, the balance in this reserve account was $176,000 and $258,000, respectively.
Advertising and Production Costs
The Company expenses all production costs related to advertising, including print, television, and radio advertisements when the advertisement has been broadcast or otherwise distributed. In contrast, the Company records media and marketing costs related to its direct-to-consumer advertisements, inclusive of postage and printing costs incurred in conjunction with mailings of direct-response catalogues, and related direct-response advertising costs, in accordance with ASC 340-20
Capitalized Advertising Costs
. As prescribed by ASC 340-20-25, direct-to-consumer advertising costs incurred are reported as assets and should be amortized over the estimated period of the benefits, based on the proportion of current period revenue from the advertisement to probable future revenue.
As the Company has continued to expand its retail distribution channel, the Company has expanded its advertising to include online gateway and portal advertising, as well as placement in third party catalogues.
Advertising expense for the three months ended June 30, 2017 and June 30, 2016, were as follows:
|
|
Three Months Ended
June 30,
(in thousands)
|
|
|
|
2017
|
|
|
2016
|
|
Direct-to-consumer
|
|
$
|
72
|
|
|
$
|
79
|
|
Retail
|
|
|
185
|
|
|
|
195
|
|
Other
|
|
$
|
10
|
|
|
$
|
8
|
|
Total advertising expense
|
|
$
|
267
|
|
|
$
|
282
|
|
As of June 30, 2017 and March 31, 2017, the Company deferred $4,000 and $24,000, respectively, related to such media and advertising costs which include the catalogue cost described above. The costs are included within the “prepaid expenses and other” line of the balance sheet.
Inventory
Inventories are valued at the lower of cost, determined on the basis of standard costing, which approximates the first-in, first-out method, or net realizable value. When the Company is the manufacturer, raw materials, labor and manufacturing overhead are included in inventory costs. The Company records the raw materials at delivered cost. Standard labor and manufacturing overhead costs are applied to the finished goods based on normal production capacity. A majority of the Company’s products are manufactured overseas and are recorded at standard cost, which includes product costs for purchased and manufactured products, and freight and transportation costs for inbound freight from manufacturers. Inventory values at June 30, 2017 and March 31, 2017 were as follows:
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2017
(in thousands)
|
|
|
2017
(in thousands)
|
|
Finished goods
|
|
$
|
2,403
|
|
|
$
|
2,274
|
|
Raw materials
|
|
|
561
|
|
|
|
647
|
|
|
|
$
|
2,964
|
|
|
$
|
2,921
|
|
The Company determines an inventory obsolescence reserve based on management’s historical experience and establishes reserves against inventory according to the age of the product. As of June 30, 2017 and March 31, 2017, the Company had reserved $346,000 and $362,000 for inventory obsolescence, respectively. The inventory values are shown net of these reserves.
Revenue Recognition
The Company recognizes revenue from product sales, net of estimated returns, when persuasive evidence of a sale exists, including the following; (i) a product is shipped under an agreement with a customer; (ii) the risk of loss and title has passed to the customer; (iii) the fee is fixed or determinable; and (iv) collection of the resulting receivable is reasonably assured.
The Company records estimated reductions to revenue for customer and distributor programs and incentive offerings, including promotions, rebates, and other volume-based incentives. Certain incentive programs require the Company to estimate the number of customers who will actually redeem the incentive based on historical industry experience. As of June 30, 2017 and March 31, 2017, the Company accrued $202,000 and $304,000, respectively, as an estimate for the foregoing deductions and allowances within the “accrued expenses” line of the balance sheets.
Warranty and Return Reserves
The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its basic warranty program. The specific warranty terms and conditions vary depending upon the product sold, but generally include technical support, repair parts, and labor for periods up to one year. Factors that affect the Company’s warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy the Company’s warranty obligation. Based upon the foregoing, the Company has recorded a provision for potential future warranty costs of $117,000 and $125,000 as of June 30, 2017 and March 31, 2017, respectively.
The Company reserves for known and potential returns from customers and associated refunds or credits related to such returns based upon historical experience. In certain cases, retailer customers are provided a fixed allowance, usually in the 1% to 2% range, to cover returned goods and this allowance is deducted from payments made to us by such customers. As of June 30, 2017 and March 31, 2017, the Company has recorded a reserve for customer returns of $73,000 and $175,000, respectively.
Segments of an Enterprise and Related Information
GAAP utilizes a management approach based on allocating resources and assessing performance as the source of the Company's reportable segments. GAAP also requires disclosures about products and services, geographic areas and major customers. At present, the Company operates in two segments, Direct-to-Consumer and Retail Sales.
Recently Issued Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, “Statement of Cash Flows.” The new guidance will require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents is required to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. The Company plans to adopt this new guidance in the first quarter of fiscal year 2018 and does not expect the adoption to have a material impact on our financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Compensation Accounting,” which requires that excess tax benefits are recorded on the income statement as opposed to additional paid-in-capital, and treated as an operating activity on the statement of cash flows. ASU 2016-09 also allows companies to make an accounting policy election to either estimate the number of awards that are expected to vest (current U.S. GAAP) or account for forfeitures when they occur. ASU 2016-09 further requires cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. Due to the Company’s valuation allowance on its deferred tax assets, no income tax benefit is recognized as a result of the adoption of ASU 2016-09. There is no change to retained earnings with respect to excess tax benefits, as this is not applicable to the Company. The treatment of forfeitures has not changed as we are electing to continue our current process of estimating the number of forfeitures. We have elected to present the cash flow statement on a prospective transition method and no prior periods have been adjusted.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected to result in all operating leases being capitalized and a current and long-term liability recorded in the Company’s financial statements.
In August 2015, the FASB issued ASU 2015-14 to defer the effective date by one year of previously issued ASU 2014-09, “Revenue from Contracts with Customers,” which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019 using one of two prescribed retrospective methods. Early adoption is permitted but not before annual periods beginning after December 15, 2016. We have not yet selected a transition method and are currently in the early stages of evaluating the impact of adoption of this ASU on our consolidated financial statements and disclosures.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management early adopted ASU 2015-11 and noted no material impact on the Company’s financial position or results of operations.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern: Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. This ASU is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The adoption of this ASU did not have a material impact on the Company’s financial statements.
3. Notes Payable, Long Term Debt and Current Portion – Long Term Debt
The following are the changes to our Notes Payable, Long Term Debt and Current Portion – Long Term Debt for the periods presented. For a more detailed discussion on our previously outstanding Notes Payable, Long Term Debt and Current Portion – Long Term Debt, refer to the Company’s Annual Report on Form 10-K for the year ended March 31, 2017, as filed with the SEC on June 26, 2017.
As of June 30, 2017 and March 31, 2017, the outstanding balance of the Company’s note payable and debt, including accrued interest, is as follows:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Sale of intellectual property liability (see Note 4)
|
|
|
107
|
|
|
|
117
|
|
Total debt
|
|
|
107
|
|
|
|
117
|
|
Less notes payable and current portion – long term debt
|
|
|
107
|
|
|
|
117
|
|
Long term debt
|
|
$
|
-
|
|
|
$
|
-
|
|
Liability Associated with Scotts Miracle-Gro Transaction
The Company and Scotts Miracle-Gro also agreed to enter an Intellectual Property Sale Agreement, a Technology License Agreement, a Brand License Agreement, and a Supply Chain Services Agreement. The Intellectual Property Sale Agreement and the Technology License constitute an agreement of sales of future revenues. Since the Company received cash from Scotts Miracle-Gro and agreed to pay for a defined period a specified percentage of revenue, and because the Company has significant involvement in the generation of its revenue, the excess paid over net book value is classified as debt and is being amortized under the effective interest method. As of June 30, 2017 and March 31, 2017, a liability of $107,000 and $117,000, respectively, was recorded on the balance sheets for the Intellectual Property Sale Agreement. As of June 30, 2017 and March 31, 2017, the accrued liability for the Technology Licensing Agreement at $1.51 per share is fair valued at period end and recorded as stock dividend to be distributed and amounts to $725,000 and $935,000, respectively. The accrued liability for the Brand License Agreement at $1.51 per share is fair valued at period end and recorded as stock dividend to be distributed and amounts to $1.3 million and $1.6 million of the stock dividend to be distributed as of June 30, 2017 and March 31, 2017, respectively.
4. Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions
Series B Convertible Preferred Stock and Related Transactions
On April 22, 2013, the Company entered into a Securities Purchase Agreement with SMG Growing Media, Inc., a wholly owned subsidiary of Scotts Miracle-Gro (NYSE: “SMG”), a worldwide marketer of branded consumer lawn and garden products. Pursuant to the Securities Purchase Agreement, Scotts Miracle-Gro acquired 2,649,007 shares of the Company’s Series B Convertible Preferred Stock, par value $0.001 per share (the
“
Series B Preferred Stock”), and (ii) a warrant to purchase shares of the Company’s common stock (the “Warrant,” as described in greater detail below) for an aggregate purchase price of $4.0 million. The Securities Purchase Agreement, Certificates of Designations for the Series B Preferred Stock, Form of Warrant, Indemnification Agreement, Investor’s Rights Agreement and Voting Agreement have been filed as exhibits to a Current Report on Form 8-K that was filed with the SEC on April 23, 2013. After deducting offering expenses, including commissions and expenses paid to the Company’s advisor, net cash proceeds to the Company totaled to $3.8 million. The Company used $950,000 of the net proceeds to repay “in full” (with concessions) the Promissory Note due to Main Power, a former supplier. The Company used the remaining net proceeds for working capital and general corporate purposes. On November 29, 2016 Scotts Miracle-Gro fully exercised the Warrant and upon exercise of the Warrant the Series B Preferred Stock converted into shares of common stock.
The Series B Preferred Stock was convertible into 2,649,007 shares of common stock ($4.0 million divided by a conversion price of $1.51 per share). The Series B Preferred Stock bore a cumulative annual dividend of 8.0%, payable in shares of the Company’s common stock at a conversion price of $1.51 per share (subject to customary anti-dilution rights, as described in the Series B Preferred Stock Certificates of Designations). The Series B Preferred Stock did not have a liquidation preference and was entitled to vote on an “as-converted” basis with the common stock. The stock dividend accrued from day to day and was payable in shares of our common stock within thirty days after the end of each fiscal year end. The stock dividend was recorded at the fair market value of our common stock at the end of each quarter in the equity section of the balance sheet. The corresponding charge was recorded below net income to arrive at net income available to common shareholders. The Series B Preferred Stock automatically converted into the Company’s common stock: (i) upon the affirmative election of the holders of at least a majority of the then outstanding shares of the Series B Preferred Stock voting together as a single class on an as-if-converted to common stock basis; or (ii) if, at the date of exercise in whole or in part of the Warrant, the holder (or holders) of the Series B Preferred Stock own 50.1% of the issued and then-outstanding common stock of the Company, giving effect to the issuance of shares of common stock in connection with the conversion of the Series B Preferred Stock and such exercise of the Warrant. By its terms, the Series B Preferred Stock automatically converted into the Company’s common stock on November 29, 2016, when Scotts Miracle-Gro exercised the Warrant.
Upon demand by Scotts Miracle-Gro, the Company must use its best efforts to file a Registration Statement on Form S-3, or, if the Company is not eligible for Form S-3, on Form S-1 (collectively, the “Registration Statement”), covering the shares of the Company’s common stock covered by the Preferred Stock and the Warrant, within 120 calendar days after receipt of Scotts Miracle-Gro’s demand for registration and shall use its best efforts to cause the Registration Statement to become effective as soon as possible thereafter.
The foregoing description of the Securities Purchase Agreement, the Certificates of Designations for the Series B Convertible Preferred Stock, the Warrant, and the resulting transaction is only a summary, does not purport to be complete, and is qualified in its entirety by reference to the full text of the applicable documents, each of which was included as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 23, 2013. The warrant on the Series B Convertible Preferred Stock was accounted for as a liability at its estimated fair value. The derivative warrant liability was re-measured to fair value, on a recurring basis, at the end of each reporting period until it was exercised. The Company accounted for the warrant as a liability and measured the value of the warrant using the Monte Carlo simulation model as of the end of each quarterly reporting period until the warrant was exercised. As of June 30, 2017 and March 31, 2017, the warrant had been exercised, and the fair value of the warrant was $0. On November 29, 2016, Scotts Miracle-Gro fully exercised its warrant to purchase 80% of the Company’s outstanding stock, when the derivative warrant liability was extinguished and the Convertible Preferred Stock was converted to common stock.
In conjunction with the private offering described above, the Company and Scotts Miracle-Gro also agreed to enter an Intellectual Property Sale Agreement, a Technology License Agreement, a Brand License Agreement, and a Supply Chain Services Agreement. The Intellectual Property Sale Agreement and the Technology License constitute an agreement of sales of future revenues. For more details regarding these agreements, please refer to Note 3 “Scotts Miracle-Gro Transactions” to the financial statements included in the Company’s Annual Report on Form 10-K, as filed with the SEC on June 26, 2017.
5. Equity Compensation Plans and Employee Benefit Plans
For the three months ended June 30, 2017 and June 30, 2016, the Company did not grant any options to purchase the Company’s common stock under the Company’s 2005 Equity Compensation Plan (the “2005 Plan”) and no new options will be granted under this plan until a new plan is adopted.
During the three months ended June 30, 2017 and June 30, 2016, no options to purchase shares of common stock were cancelled or expired, and no shares of common stock were issued upon exercise of outstanding stock options under the 2005 Plan.
As of June 30, 2017, the Company had no unvested outstanding options to purchase shares of the Company’s common stock and that will result in no additional compensation expense
Information regarding all stock options outstanding under the 2005 Plan as of June 30, 2017 is as follows:
|
|
|
OPTIONS OUTSTANDING AND EXERCISABLE
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Remaining
|
|
|
average
|
|
|
Intrinsic
|
|
Exercise
|
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Value
|
|
price
|
|
|
(in thousands)
|
|
|
Life (years)
|
|
|
Price
|
|
|
(in thousands)
|
|
$
|
1.10
|
|
|
|
50
|
|
|
|
0.75
|
|
|
$
|
1.10
|
|
|
|
|
|
$
|
1.55
|
|
|
|
11
|
|
|
|
3.13
|
|
|
$
|
1.55
|
|
|
|
|
|
$
|
2.20
|
|
|
|
21
|
|
|
|
1.29
|
|
|
$
|
2.20
|
|
|
|
|
|
$
|
5.31
|
|
|
|
93
|
|
|
|
2.10
|
|
|
$
|
5.31
|
|
|
|
|
|
|
|
|
|
|
175
|
|
|
|
1.69
|
|
|
$
|
3.50
|
|
|
$
|
72
|
|
The aggregate intrinsic value in the preceding table represents the difference between the Company’s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented, which was June 30, 2017.
6. Income Taxes
The Company follows the guidance in ASC 740,
Accounting for Uncertainty in Income Taxes
(“ASC 740”) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at the end of each period, based on enacted laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Any liability for actual taxes to taxing authorities is recorded as income tax liability. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against such assets where management is unable to conclude more likely than not that such asset will be realized. As of June 30, 2017 and March 31, 2017, the Company recognized a valuation allowance equal to 100% of the net deferred tax asset balance and the Company has no unrecognized tax benefits related to uncertain tax positions.
7. Related Party Transactions
See Note 6 “Related Party Transactions” of Form 10-K for the year ended March 31, 2017, as filed with the SEC on June 26, 2017 for a detailed discussion of related party transactions.
8. Stockholders’ Equity
A summary of the Company’s common stock warrant activity for the period from April 1, 2017 through June 30, 2017 is presented below:
|
|
Warrants
Outstanding
(in thousands)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, April 1, 2017
|
|
|
396
|
|
|
$
|
6.97
|
|
|
$
|
2
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
(394
|
)
|
|
|
7.00
|
|
|
|
|
|
Outstanding, June 30, 2017
|
|
|
2
|
|
|
$
|
2.10
|
|
|
$
|
2
|
|
As of June 30, 2017, the Company had the following outstanding warrants to purchase its common stock:
|
|
Weighted Average
|
|
Warrants Outstanding
(in thousands)
|
|
Exercise Price
|
|
Remaining Life (years)
|
|
|
2
|
|
|
$
|
2.10
|
|
|
|
1.27
|
|
|
2
|
|
|
$
|
2.10
|
|
|
|
1.27
|
|
Preferred Stock and Preferred Stock Warrants
As discussed in Note 4 above, the Series B Preferred Stock was converted into 2,649,007 shares of common stock ($4.0 million divided by a conversion price of $1.51 per share) on November 29, 2016, concurrently with Scotts Miracle-Gro’s exercise of its Warrant. The Series B Convertible Preferred Stock bore a cumulative annual dividend of 8.0%, payable in shares of the Company’s common stock at a conversion price of $1.51 per share (subject to customary anti-dilution rights, as described in the Series B Convertible Preferred Stock Certificates of Designations). As of June 30, 2017, based on the number of shares issuable to Scotts Miracle-Gro the Company has accrued $38,000 for the stock dividend. For additional details regarding the initial issuance of the Series B Convertible Preferred Stock and Warrant in March 2013 and the November 2016 conversation/exercise of the Series B Preferred Stock and Warrant, see “Note 4 – Scotts Miracle-Gro Transaction” above.
9. Segment Information
The Company has determined that its reportable segments are those that are based on its method of internal reporting and the perspective of the chief operating decision maker. The company has two reportable segments, Retail Sales and Direct-to-Consumers. The Company evaluates performance based on the primary financial measure of contribution margin (“segment profit”). Segment profit reflects the income or loss from operations before corporate expenses, non-operating income, net interest expense, and income taxes. The Company doesn’t have an individually identified assets regarding specific segments as all processes to manufacture products are not different based on segment.
|
|
Fiscal Year Ended June 30, 2017
|
|
(in thousands)
|
|
Direct-to-consumer
|
|
|
Retail
|
|
|
Corporate/Other
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
1,425
|
|
|
$
|
1,037
|
|
|
$
|
-
|
|
|
$
|
2,462
|
|
Cost of revenue
|
|
|
936
|
|
|
|
704
|
|
|
|
-
|
|
|
|
1,640
|
|
Gross profit
|
|
|
489
|
|
|
|
333
|
|
|
|
-
|
|
|
|
822
|
|
Gross profit percentage
|
|
|
34.3
|
%
|
|
|
32.1
|
%
|
|
|
-
|
|
|
|
33.4
|
%
|
Sales and marketing (1)
|
|
|
20
|
|
|
|
251
|
|
|
|
69
|
|
|
|
340
|
|
Segment profit
|
|
|
469
|
|
|
|
82
|
|
|
|
(69
|
)
|
|
|
482
|
|
Segment profit percentage
|
|
|
32.9
|
%
|
|
|
7.9
|
%
|
|
|
-
|
|
|
|
19.6
|
%
|
(1) Sales and marketing includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.
|
|
Fiscal Year Ended June 30, 2016
|
|
(in thousands)
|
|
Direct-to-consumer
|
|
|
Retail
|
|
|
Corporate/Other
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
1,142
|
|
|
$
|
1,014
|
|
|
$
|
-
|
|
|
$
|
2,156
|
|
Cost of revenue
|
|
|
698
|
|
|
|
614
|
|
|
|
-
|
|
|
|
1,312
|
|
Gross profit
|
|
|
444
|
|
|
|
400
|
|
|
|
-
|
|
|
|
844
|
|
Gross profit percentage
|
|
|
38.9
|
%
|
|
|
39.4
|
%
|
|
|
-
|
|
|
|
39.1
|
%
|
Sales and marketing (1)
|
|
|
19
|
|
|
|
230
|
|
|
|
55
|
|
|
|
344
|
|
Segment profit
|
|
|
425
|
|
|
|
170
|
|
|
|
(55
|
)
|
|
|
504
|
|
Segment profit percentage
|
|
|
37.2
|
%
|
|
|
16.8
|
%
|
|
|
-
|
|
|
|
23.4
|
%
|
(1) Sales and marketing includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.
10. Subsequent Events
None.