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

6 Months Ended

Sep. 30, 2016

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

For a 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, 2016, as filed with the SEC on June 15, 2016. The following are the changes to our Notes Payable, Long Term Debt and Current Portion – Long Term Debt for the periods presented.

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

	September 30, 2016 (in thousands)		March 31, 2016 (in thousands)
Notes payable-related party	$	2,759	$	1,293
Derivative warrant liability (see Note 4)		1,547		644
Sale of intellectual property liability (see Note 4)		138		160
Total debt		4,444		2,097
Less notes payable and current portion – long term debt		4,444		2,097
Long term debt	$	-	$	-

Scotts Miracle-Gro Term Loan

On July 15, 2016, AeroGrow entered into a Term Loan Agreement in the principal amount of up to $6.0 million with Scotts Miracle-Gro (“SMG Term Loan”). The proceeds will be made available as needed in increments of $500,000 not to exceed $6.0 million with a due date of April 15, 2017. The funding provides general working capital and is being used for the purpose of acquiring inventory to support anticipated growth as the Company expands its retail and its direct-to-consumer sales channels. The Term Loan Agreement is secured by a lien on the assets of the Company and interest is charged at the stated rate of 10% per annum, but will be paid quarterly in arrears in cash on the 15^th day of each June, September, December and March. The Term Loan may be prepaid from time to time, in whole or in part, in an amount greater than or equal to $250,000, without penalty or premium. Amounts repaid or prepaid in respect of the Term Loan may not be reborrowed. The Term Loan Agreement has been filed as an exhibit to a Current Report on Form 8-K filed with the SEC on July 21, 2016. As of September 30, 2016, the outstanding balance of the Term Loan, including accrued interest, was $2.8 million and we were current and in compliance with all terms and conditions.

Liabilities 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 September 30, 2016 and March 31, 2016, the estimated fair value of the warrant was $1.5 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. Because the Company received cash from Scotts Miracle-Gro and agreed to pay for a defined period a specified percentage of revenue, and 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 September 30, 2016 and March 31, 2016, a liability of $138,000 and $160,000, respectively, was recorded on the balance sheets for the Intellectual Property Sale Agreement. As of September 30, 2016 and March 31, 2016, a liability of $263,000 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 $454,000 and $905,000 of the stock dividend to be distributed as of September 30, 2016 and March 31, 2016, respectively.