3. Notes Payable, Long Term Debt and Current Portion -Long Term Debt

3 Months Ended

Jun. 30, 2016

3. 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, 2016, as filed with the SEC on June 15, 2016 for a detailed discussion on our previously outstanding 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.

As of June 30, 2016 and March 31, 2016, the outstanding balance of the Company’s note payable and debt, including accrued interest, is as follows:

	June 30, 2016		March 31, 2016
	(in thousands)		(in thousands)
Notes Payable –related party	$	-	$	1,293
Derivative warrant liability (see Note 4)		1,089		644
Sale of intellectual property liability (see Note 4)		149		160
Total debt		1,238		2,097
Less notes payable and current portion – long term debt		1,238		2,097
Long term debt	$	-	$	-

Scotts Miracle-Gro Term Loan Agreement

On July 6, 2015, the Company entered into a Term Loan Agreement in the principal amount of up to $6.0 million with SMG Growing Media, Inc. The proceeds were made available as needed in three advances of up to $2.0 million, $2.5 million, and $1.5 million in July, August, and after September of 2015, respectively, with a due date of April 15, 2016. The funding provided general working capital and was used for the purpose of acquiring inventory to support the Company’s expansion into retail and direct-to-consumer sales channels in advance of the peak selling season. The Term Loan Agreement was secured by a lien on the assets of the Company. Interest was charged at the stated rate of 10% per annum, but was payable in shares of AeroGrow common stock, valued at a price per share equal to the conversion price of the Series B Convertible Preferred Stock (which was previously issued to Scotts Miracle-Gro in April 2013). The Term Loan Agreement was filed as an exhibit to a Current Report on Form 8-K which was filed with the SEC on July 10, 2015. On April 12, 2016, the principal balance of the Term Loan was repaid in full. On May 9, 2016, the outstanding balance of the interest on the Term Loan, was paid in full in the form of 196,044 shares of the Company’s common stock.

Liability Associated with Scotts Miracle-Gro Transaction

On April 22, 2013, the Company issued Series B Convertible Preferred Stock and a warrant to a wholly-owned subsidiary of Scotts Miracle-Gro. Pursuant to U.S. GAAP, the Company has classified the warrant as a liability at its estimated fair value. The derivative warrant liability will be re-measured to fair value, on a recurring basis, at the end of each reporting period until it is exercised or expires. The valuation techniques used to determine the fair value of the derivative warrant liability and the terms of the warrant are further explained in Note 4. As of June 30, 2016 and March 31, 2016, the estimated fair value of the warrant was $1.1 million and $644,000, respectively.

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, 2016 and March 31, 2016, a liability of $149,000 and $160,000, respectively, was recorded on the balance sheets for the Intellectual Property Sale Agreement. As of June 30, 2016 and March 31, 2016, a liability of $727,000 and $579,000, respectively, was recorded on the balance sheets for the Technology Licensing Agreement. 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 $1.1 million and $905,000 of the stock dividend to be distributed as of June 30, 2016 and March 31, 2016, respectively.