10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549 

FORM 10-Q

(MARK ONE)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2019
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
	For the transition period from  ______________ to ______________

Commission File No. 001-33531

AEROGROW INTERNATIONAL, INC.

(Exact Name of Registrant as specified in its charter)

NEVADA	46-0510685
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

5405 Spine Rd, Boulder, Colorado	80301
(Address of principal executive offices)	(Zip Code)

(303) 444-7755

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	AERO	OTCQB

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 file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐               

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ☐	Accelerated filer   ☐
Non-accelerated filer   ☒	Smaller reporting company ☒
Emerging growth company   ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☒

Number of shares of issuer’s common stock outstanding as of November 5, 2019:  34,328,036

AeroGrow International, Inc.

TABLE OF CONTENTS

FORM 10-Q REPORT

September 30, 2019

PART I  Financial Information
Item 1.	Financial Statements	3
	Condensed Balance Sheets as of September 30, 2019 (Unaudited) and March 31, 2019	3
	Condensed Statements of Operations for the Three and Six Months Ended September 30, 2019 and 2018 (Unaudited)	4
	Condensed Statements of Changes in Stockholders’ Equity for the Three Months Ended September 30, 2019 and 2018 (Unaudited)	5
	Condensed Statements of Changes in Stockholders’ Equity for the Six Months Ended September 30, 2019 and 2018 (Unaudited)	5
	Condensed Statements of Cash Flows for the Six Months Ended September 30, 2019 and 2018 (Unaudited)	6
	Notes to the Condensed Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II  Other Information
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		35

PART I - FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

AEROGROW INTERNATIONAL, INC.

CONDENSED BALANCE SHEETS

	September 30, 2019			March 31, 2019
(in thousands, except share and per share data)	(Unaudited)			(Derived from Audited Statements)
ASSETS
Current assets
Cash	$	997		$	1,741
Restricted cash		15			15
Accounts receivable, net of allowance for doubtful accounts of $122 and $89     at September 30, 2019 and March 31, 2019, respectively		3,725			5,102
Other receivables		693			207
Inventory, net		11,408			8,440
Prepaid expenses and other		1,451			490
Total current assets		18,289			15,995
Property and equipment and intangible assets, net of accumulated depreciation of $5,092 and $4,828 at September 30, 2019 and March 31, 2019, respectively		1,138			1,006
Operating lease right-of-use		741			-
Deposits		770			39
Total assets	$	20,938		$	17,040
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	1,697		$	1,508
Accounts payable related party		1,429			1,102
Accrued expenses		1,249			1,437
Customer deposits		124			181
Notes payable related party		3,516			-
Debt associated with sale of intellectual property-current portion		21			25
Operating lease liability-current portion		119			-
Total current liabilities		8,155			4,253
Long term liabilities
Debt associated with sale of intellectual property		14			23
Finance lease liability		46			72
Operating lease liability		1,270			-
Notes payable related party		900			-
Other liability		285			240
Total liabilities		10,670			4,588
Commitments and contingencies
Stockholders' equity
Common stock, $.001 par value, 750,000,000 shares authorized, 34,328,036 shares issued and outstanding at September 30, 2019 and March 31, 2019		34			34
Additional paid-in capital		140,817			140,817
Accumulated deficit		(130,583	)		(128,399	)
Total stockholders' equity		10,268			12,452
Total liabilities and stockholders' equity	$	20,938		$	17,040

See accompanying notes to the condensed financial statements.

3

AEROGROW INTERNATIONAL, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months ended September 30,						Six Months ended September 30,
(in thousands, except per share data)	2019			2018			2019			2018
Net revenue	$	4,423		$	8,576		$	8,898		$	12,319
Cost of revenue		2,958			5,246			5,977			7,556
Gross profit		1,465			3,330			2,921			4,763
Operating expenses
Research and development		276			130			487			289
Sales and marketing		1,369			1,630			2,772			2,873
General and administrative		893			898			1,787			1,583
Total operating expenses		2,538			2,658			5,046			4,745
Income (loss) from operations		(1,073	)		672			(2,125	)		18
Other (expense) income, net
Interest expense – related party		(52	)		(29	)		(54	)		(29	)
Other (expense) income, net		(1	)		4			(5	)		24
Total other (expense) income, net		(53	)		(25	)		(59	)		(5	)
Net income (loss)	$	(1,126	)	$	647		$	(2,184	)	$	13
Net income (loss) per share, basic and diluted	$	(0.03	)	$	0.02		$	(0.06	)	$	0.00
Weighted average number of common shares outstanding, basic and diluted		34,328			34,328			34,328			34,328

See accompanying notes to the condensed financial statements.

4

AEROGROW INTERNATIONAL, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

	Three months ended September 30, 2019
									Additional					Total
(in thousands,	Preferred Stock				Common Stock				Paid-in		Accumulated			Stockholders
except share data)	Shares		Amount		Shares		Amount		Capital		(Deficit)			Equity
Balances, June 30, 2019		-	$	-		34,328,036	$	34	$	140,817	$	(129,457	)	$	11,394
Net (loss)		-		-		-		-		-		(1,126	)		(1,126	)
Balances, September 30, 2019		-	$	-		34,328,036	$	34	$	140,817	$	(130,583	)	$	10,268

	Three months ended September 30, 2018
									Additional					Total
(in thousands,	Preferred Stock				Common Stock				Paid-in		Accumulated			Stockholders
except share data)	Shares		Amount		Shares		Amount		Capital		(Deficit)			Equity
Balances, June 30, 2018		-	$	-		34,328,036	$	34	$	140,817	$	(128,742	)	$	12,109
Net income		-		-		-		-		-		647			647
Balances, September 30, 2018		-	$	-		34,328,036	$	34	$	140,817	$	(128,095	)	$	12,756

	Six months ended September 30, 2019
									Additional					Total
(in thousands,	Preferred Stock				Common Stock				Paid-in		Accumulated			Stockholders
except share data)	Shares		Amount		Shares		Amount		Capital		(Deficit)			Equity
Balances, March 31, 2019		-	$	-		34,328,036	$	34	$	140,817	$	(128,399	)	$	12,452
Net (loss)		-		-		-		-		-		(2,184	)		(2,184	)
Balances, September 30, 2019		-	$	-		34,328,036	$	34	$	140,817	$	(130,583	)	$	10,268

	Six months ended September 30, 2018
									Additional					Total
(in thousands,	Preferred Stock				Common Stock				Paid-in		Accumulated			Stockholders
except share data)	Shares		Amount		Shares		Amount		Capital		(Deficit)			Equity
Balances, March 31, 2018		-	$	-		34,328,036	$	34	$	140,817	$	(128,108	)	$	12,743
Net income		-		-		-		-		-		13			13
Balances, September 30, 2018		-	$	-		34,328,036	$	34	$	140,817	$	(128,095	)	$	12,756

See accompanying notes to the condensed financial statements.

5

AEROGROW INTERNATIONAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended September 30,
	2019			2018
(in thousands)
Cash flows from operating activities:
Net (loss) income	$	(2,184	)	$	13
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization expense		264			193
Amortization of lease liability and right-of-use asset		63			-
Bad debt expense		33			44
Inventory allowance		(15	)		20
Accretion of debt associated with sale of intellectual property		(13	)		(17	)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable		1,344			(3,927	)
Decrease in other receivable		99			113
(Increase) in inventory		(2,953	)		(6,016	)
(Increase) in prepaid expense and other		(961	)		(1,237	)
(Increase) in deposits		(731	)		-
Increase in accounts payable and accounts payable related party		516			1,713
(Decrease) in accrued expenses and other liability		(143	)		(574	)
Increase in accrued interest-related party		16			28
(Decrease) in customer deposits		(57	)		(37	)
Net cash (used) by operating activities		(4,722	)		(9,684	)
Cash flows from investing activities:
Purchases of equipment		(396	)		(491	)
Net cash (used) by investing activities		(396	)		(491	)
Cash flows from financing activities:
Proceeds from notes payable-related party		4,400			5,000
Repayment of capital lease		(26	)		(4	)
Net cash (used) by financing activities		4,374			4,996
Net (decrease) in cash		(744	)		(5,179	)
Cash and cash equivalents and restricted cash, beginning of period		1,756			7,497
Cash and cash equivalents and restricted cash, end of period	$	1,012		$	2,318

See supplemental disclosures below and the accompanying notes to the condensed financial statements.

6

Continued from previous page

	Six months ended September 30, (in thousands)
	2019		2018
Cash paid during the year for:
Interest	$	-	$	-
Income taxes	$	-	$	-
Supplemental disclosure of non-cash investing and financing activities:
Initial recognition of right-of-use asset (Note 8)	$	758	$	-
Tenant improvement allowance (Note 8)		585		-
Initial lease liability arising from right-of-use asset (Note 8)	$	1,343	$	-

7

AEROGROW INTERNATIONAL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.     Description of the Business

AeroGrow International, Inc. (collectively, the “Company,” “AeroGrow,” “we,” “our,” or “us”) 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 consumer gardening, cooking and small indoor appliance markets worldwide.  The Company manufactures, distributes and markets ten 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 brick and online, catalogue and direct-to-consumer sales primarily in the United States and Canada, as well as selected countries in Europe.

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, 2019, (“Fiscal 2019”), as filed with the SEC on June 25, 2019.

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 September 30, 2019, the results of operations for the three and six months ended September 30, 2019 and 2018, and the cash flows for the six months ended September 30, 2019 and 2018. The results of operations for the three and six months ended September 30, 2019 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 66.2% of revenues in the fiscal year ended March 31, 2019 (“Fiscal 2019”) occurring in the four consecutive calendar months from September through January.  Furthermore, during the six-month period ended September 30, 2019, the Company has further expanded its distribution channels and invested in necessary inventory and overhead in anticipation of the Fiscal 2020 peak sales season.  The balance sheet as of March 31, 2019 is derived from the Company’s audited financial statements.

Liquidity

Sources of funding to meet prospective cash requirements during Fiscal 2020 include the Company’s existing cash balances, cash flow from operations, and borrowings under the Company’s debt arrangements as discussed in Note 3.  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.  See Note 10 for subsequent events.

Significant Accounting Policies

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.  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.

8

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 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 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 potential 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. Securities 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 and include the following: (i) employee stock options to purchase 11,000 shares of common stock for the period ended September 30, 2019; and (ii) employee stock options to purchase 93,000 shares of common stock for the three months ended September 30, 2018.

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 September 30, 2019.  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 September 30, 2019, the Company had two customers, Amazon.com, and Macy’s which represented 25.0% and 14.8% of net revenue, respectively.  For the three months ended September 30, 2018, the Company had two customers, Amazon.com, and Bed, Bath & Beyond, which represented 42.0% and 20.4% of net revenue, respectively. For the six months ended September 30, 2019, the Company had two customers, Amazon.com, and Macy’s, which represented 35.1% and 10.4% of the Company’s net revenue. For the six months ended September 30, 2018, the Company had two customers, Amazon.com, and Bed, Bath & Beyond, which represented 42.4% and 13.9% of the Company’s net revenue.

As of September 30, 2019, the Company had three customers, Macy’s, Amazon.com, and Kohl’s that represented 15.8%, 12.2% and 10.7%, respectively, of the Company’s outstanding accounts receivable.  As of March 31, 2019, the Company had two customers, Amazon.com and Target, which represented 44.3% and 12.0%, respectively, of outstanding accounts receivable.  The Company believes that all receivables from these customers are collectible.

Suppliers:

For the three months ended September 30, 2019, the Company purchased $5.0 million of inventories and other inventory-related items from one supplier, as we increase inventory levels for the holiday season. For the three months ended September 30, 2018, we purchased $9.3 million of inventories and other inventory-related items from two suppliers. For the six months ended September 30, 2019, the Company purchased $6.4 million of inventories and other inventory-related items from one supplier. For the six months ended September 30, 2018, we purchased $12.1 million of inventories and other inventory-related items from one supplier.  The purchase of inventories and other inventory-related items is tied to anticipated timing and amount of sales 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, these risks and any potential loss of supply could have an adverse impact on operations, especially in the short term.

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.

9

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, accounts payable, accrued expenses and notes payable related party, approximates their fair value at September 30, 2019 and March 31, 2019 due to the relatively short-term nature of these instruments. 

The Company’s intellectual property liability carrying value was determined by 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 September 30, 2019 and March 31, 2019, the fair value of the Company’s note payable and sale of the intellectual property liability were 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 September 30, 2019, 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 day 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 $122,000 and $89,000 at September 30, 2019 and March 31, 2019, 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 Fidelity Information Services, 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 September 30, 2019 and March 31, 2019, the balance in this reserve account was $108,000 and $207,000, respectively. The other receivables also includes $585,000 for the estimate leasehold improvement reimbursement from the landlord of the new lease discussed within the lease section.

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 340-20-25 Reporting on 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 develop 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 and six months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30, (in thousands)				Six Months Ended September 30, (in thousands)
	2019		2018		2019		2018
Direct-to-consumer	$	93	$	65	$	188	$	153
Retail		339		292		755		664
Other		-		6		1		21
Total advertising expense	$	432	$	363	$	944	$	838

10

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 September 30, 2019 and March 31, 2019 were as follows:

	September 30,		March 31,
	2019 (in thousands)		2019 (in thousands)
Finished goods	$	9,484	$	7,071
Raw materials		1,924		1,369
Total inventory	$	11,408	$	8,440

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 September 30, 2019 and March 31, 2019, the Company had reserved $111,000 and $126,000 for inventory obsolescence, respectively.  The inventory values are shown net of these reserves.

Leases

At lease inception, the Company determines whether an arrangement is or contains a lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities in the financial statements. ROU assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term. For operating leases, ROU assets and lease liabilities are recognized at the commencement date. The lease liability is measured as the present value of the lease payments over the lease term. The Company uses the rate implicit in the lease if it is determinable. When the rate implicit in the lease is not determinable, the Company uses its incremental borrowing rate at the commencement date of the lease to determine the present value of the lease payments. Operating ROU assets are calculated as the present value of the remaining lease payments, plus unamortized initial direct costs and any prepayments, less any unamortized lease incentives received. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised. The assessment of whether renewal or extension options are reasonably certain to be exercised is made at lease commencement. Factors considered in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of any leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option were not exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company has elected not to recognize an ROU asset and obligation for leases with an initial term of twelve months or less. The expense associated with short term leases is included in lease expense in the statement of operations.

For finance leases, after lease commencement the lease liability is measured on an amortized cost basis and increased to reflect interest on the liability and decreased to reflect the lease payment made during the period. Interest on the lease liability is determined each period during the lease term as the amount that results in a constant period discount rate on the remaining balance of the liability. The ROU asset is subsequently measured at cost, less any accumulated amortization and any accumulated impairment losses. Amortization on the ROU asset is recognized over the period from the commencement date to the earlier of (1) the end of the useful life of the ROU asset, or (2) the end of the lease term. The discount rate used by the Company for the finance leases is 10.0% which is the rate specified in the lease agreement or incremental borrowing rate, as appropriate, as the present value rate. To the extent a lease arrangement includes both lease and non-lease components, the components are accounted for separately.

The Company has various operating leases primarily for office space and other distribution centers, some of which include escalating lease payments and options to extend or terminate the lease. The Company determines if a contract is a lease at the inception of the arrangement. The exercise of lease renewal option is at the Company’s sole discretion and options are recognized when it is reasonably certain the Company will exercise the option. The Company’s leases have remaining terms of less than one year to seven years. The Company does not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants.

Operating lease ROU assets and liabilities are recognized at commencement date of lease agreements greater than one year based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term and variable lease costs are expensed as incurred.

11

Revenue Recognition

The Company currently has two operating and reportable segments: (i) the Direct-to-Consumer segment, which is composed of sales directly from our website, mail order or customer calls to our customer service department; and (ii) the Retail segment, which is comprised of all sales related to retailers, including where possession of our product is taken and sold by the retailer in store or online, and drop ship orders that process from the retailer and drop directly to our warehouse for us to ship on behalf of the retailer.

The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products and the risk of loss to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements.  The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of September 30, 2019 or March 31, 2019.

The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.

There were no changes to the Company’s accounting for variable consideration under ASC 606. However, the classification from a liability to a contra asset to show net realizable accounts receivable results in a change in presentation on the balance sheet. Promotional and other allowances (variable consideration) recorded as a reduction to net sales primarily include consideration given to retail customers, including, but not limited to, the following:

● discounts granted off list prices to support price promotions to end-consumers by retailers;

● the Company’s agreed share of fees paid by retailers for advertising, in-store marketing and promotional activities; and

● incentives given to the Company’s retailers for achieving or exceeding certain predetermined purchases (i.e., rebates).

The Company’s promotional allowance programs with its retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one day to one year. The Company’s promotional and other allowances are calculated based on various programs with retail customers, and accruals are established during the year for anticipated liabilities. These accruals are based on agreed upon terms, as well as the Company’s historical experience with similar programs, and require management’s judgment with respect to estimating consumer participation and retail customer performance levels. Differences between such estimated expense and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.

The Company records estimated reductions to revenue for customer and distributor programs and incentive offerings, including promotions, rebates, and other volume-based incentives, based on historical rates.  Certain incentive programs require the Company to estimate the number of customers who will actually redeem the incentive based on our historical industry experience. As of September 30, 2019 and March 31, 2019, the Company reduced accounts receivable $459,000 and $1.2 million, respectively, as an estimate for the foregoing deductions and allowances within the “accounts receivable, net” and “accrued expenses” line of the balance sheets, respectively.

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 $196,000 and $166,000 as of September 30, 2019 and March 31, 2019, 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, retail customers are provided a fixed allowance, usually in a range of 1% to 2%, to cover returned goods and this allowance is deducted from payments made to us by such customers. As of September 30, 2019 and March 31, 2019, the Company has recorded a reserve for customer returns of $164,000 and $313,000, respectively.

Segments of an Enterprise and Related Information

U.S. GAAP utilizes a management approach based on allocating resources and assessing performance as the source of the Company’s reportable segments.  U.S. 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.

12

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period, and early adoption is permitted. The Company is in the process of evaluating the potential impact of this new guidance on the Company’s consolidated financial statements and related disclosures.

Accounting Standards Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which, among other things, requires an entity to recognize a ROU asset and a lease liability on the balance sheet for substantially all leases, including operating leases. The Company adopted ASC 842 effective April 1, 2019 utilizing the modified retrospective approach such that prior year Financial Statements were not recast under the new standard. Adoption of this standard resulted in changes to the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Cash Flows and accounting policies for leases. See Note 8 for additional information regarding the new standard and its impact on the Company’s Financial Statements.

The Company adopted the new guidance as of the effective date of April 1, 2019 with no adjustments to the comparative period presented in the financial statements. In addition, the Company elected the package of practical expedients permitted under the transition guidance to not reassess: (1) whether any expired or existing contracts are, or contain, leases; (2) the lease classification for expired or existing leases; and (3) initial direct costs for existing leases.

The adoption of the guidance resulted in the recognition of ROU assets of $758,000 which amortization of the ROU began in June 2019 and additional lease liabilities for operating leases of $1.3 million as of April 1, 2019. The guidance had an impact on the Company's consolidated condensed statements of operations. See Note 8 for disclosures related to the Company's leases.

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

The following represents the changes to our Notes Payable and Long Term Debt for the periods presented. 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, 2019, as filed with the SEC on June 25, 2019.  The following summarizes the changes to our Notes Payable, Long Term Debt and Current Portion – Long Term Debt for the periods presented.

As of September 30, 2019 and March 31, 2019, the outstanding balance of the Company’s notes payable and debt, including accrued interest, is as follows:

	September 30, 2019 (in thousands)		March 31, 2019 (in thousands)
Notes payable and debt-related party		4,416		-
Sale of intellectual property liability (see Note 4)		35		48
Total notes payable and debt		4,451		48
Less current portion – long term debt		3,537		25
Long term notes payable and debt	$	914	$	23

Scotts Miracle-Gro Term Loan Agreements

On June 20, 2019, the Company renewed a Working Capital Term Loan Agreement in the principal amount of up to $10.0 million with Scotts Miracle-Gro.  The proceeds will be made available as needed in increments of $500,000, the Company may pay down and reborrow during the Term Loan, not to exceed $10.0 million with a due date of March 31, 2020.  The Term Loan Agreement was secured by a lien on the assets of the Company.  Interest is charged at the stated rate of 10% per annum and is payable, in cash, quarterly in arrears at the end of each September, December and March. The funds provided under the Term Loan are used for general working capital and to acquire inventory to support anticipated growth as the Company expands its retail and its direct-to-consumer sales channels.  The Term Loan permits prepayments without penalty or premium, and as of September 30, 2019, the Company had borrowed $3.5 million under the Term Loan.  The Term Loan Agreement was filed as an exhibit to the Company’s Annual Report on Form 10-K filed with the SEC on June 26, 2019. Refer to Note 10 “Subsequent Events” for additional information regarding the term loan.

13

On June 20, 2019, the Company entered into a Real Estate Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro.  The funding provides capital to fund real estate related lease obligations. The proceeds will be made available as needed in increments of $100,000 not to exceed $1.5 million with a due date of March 31, 2022. Interest will be charged at the stated rate of 10% and will be paid quarterly in arrears on each of April 30, July 31, October 31 and January 31. As of September 30, 2019, the Company had borrowed $900,000 under the Real Estate Term Loan.

Liability Associated with Scotts Miracle-Gro Transaction

The Company and Scotts Miracle-Gro, the owner of approximately 80.5% of the Company’s outstanding common stock, have entered into an Intellectual Property Sale Agreement, a Technology License Agreement, a Brand License Agreement, and a Supply Chain Services Agreement, each of which has been filed with the SEC.  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 September 30, 2019 and March 31, 2019, a liability of $35,000 and $48,000, respectively, was recorded on the balance sheets for the Intellectual Property Sale Agreement.  As of September 30, 2019 and March 31, 2019, the accrued liability for the Technology Licensing Agreement, the accrual is calculated as 2% of the annual net sales and recorded as a liability and amounts to $866,000 and $680,000, respectively.  The accrued liability for the Brand License Agreement which is calculated at an amount equal to 5% of all seed pod kit and seed pod kit related sales and is recorded as a liability and amounts to $563,000 and $422,000 as of September 30, 2019 and March 31, 2019, 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 a warrant to purchase up to 80% of the Company’s common stock (the “Warrant,”) 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 were filed as exhibits to a Current Report on Form 8-K that was filed with the SEC on April 23, 2013.  On November 29, 2016 Scotts Miracle-Gro fully exercised the Warrant and, by its terms, the Series B Preferred Stock automatically converted into shares of common stock. Scotts Miracle-Gro currently owns approximately 80.5% of the Company’s outstanding common stock.  

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”), within 120 calendar days after receipt of Scotts Miracle-Gro’s demand for registration. The Company must use its best efforts to cause the Registration Statement to become effective as soon as possible thereafter.

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 25, 2019.  See also Note 3 above for the Term Loan with Scotts Miracle-Gro.

5.     Equity Compensation Plans

For the three and six months ended September 30, 2019 and September 30, 2018, the Company did not grant options to purchase shares of 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 September 30, 2019, 93,000 shares of common stock were cancelled or expired and September 30, 2018, 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.  During the six months ended September 30, 2019, 93,000 options to purchase shares of common stock were cancelled or expired and during the six months ended September 30, 2018, 50,000 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.  

14

As of September 30, 2019, 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 September 30, 2019 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)
$	1.55		11		0.88	$	1.55
			11		0.88	$	1.55	$	-

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 September 30, 2019.

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.  

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 September 30, 2019 and March 31, 2019, 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, 2019, as filed with the SEC on June 25, 2019 for a detailed discussion of related party transactions.

On June 20, 2019, AeroGrow entered into a Working Capital Term Loan Agreement in the principal amount of up to $10.0 million and a Real Estate Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro.  Interest is charged at the stated rate of 10% per annum and will be paid quarterly in arrears, in cash at the end of each September, December and March.  See Note 3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” above.

8.     Leases

The Company adopted ASU 2016-02, "Leases" (“ASC 842”) on April 1, 2019, the Company adopted using the modified retrospective approach applied to all leases with a remaining lease term greater than one year. Results for reporting periods beginning after April 1, 2019, are presented in accordance with the new guidance under ASC 842, while prior period amounts are not restated. The adoption of the new lease guidance resulted in the Company recognizing operating lease right-of-use assets and lease liabilities based on the present value of remaining minimum lease payments. For the discount rate assumption, the implicit rate was not readily determinable in the Company’s lease agreements. Therefore, the Company used an estimated incremental borrowing rate, in determining the present value of lease payments. There was no impact to opening retained earnings.

The Company elected the practical expedients available under ASC 842 and applied them consistently to all applicable leases. The Company did not apply ASC 842 to any leases with a remaining term of 12 months or less. For these leases, no asset or liability was recorded and lease expense continues to be recognized on a straight-line basis over the lease term. As allowed by the practical expedients, the Company does not reassess whether any expired or existing contracts are or contain leases, does not reassess the lease classification for any expired or existing leases and does not reassess initial direct costs for existing leases.

15

The table below sets forth supplemental Balance Sheet information for the Company’s leases.

	September 30, 2019
	(in thousands)
Assets
Operating lease right-of-use assets	$	741
Liabilities
Operating lease, current		119
Operating lease, noncurrent		1,270
Total lease liabilities	$	1,389

As of September 30, 2019, the weighted average remaining lease term for operating leases was 7 years, and the weighted average discount rate was 10%.

The table below sets forth the future cash payments under such agreements for the remaining years are as follows:

Year Ending	Operating Leases			Financing Leases
	(in thousands)			(in thousands)
March 31, 2020	$	126		$	23
March 31, 2021		257			30
March 31, 2022		266			-
March 31, 2023		275			-
March 31, 2024		285			-
Thereafter		754			-
Total lease payments	$	1,963		$	53
Less: amount of lease payments representing interest		(574	)		(3	)
Present value of future minimum lease payments		1,389			50
Less: current obligations under leases		(119	)		(42	)
Long-term lease obligations	$	1,270		$	12

Rent expense for the three month ended September 30, 2019 and 2018 was $136,000 and $76,000, respectively. Rent expense for the six months ended September 30, 2019 and 2018 was $264,000 and $165,000, respectively.

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 does not have individually identified assets regarding specific segments as all processes to manufacture products are not different based on segment.

	Three Months Ended September 30, 2019
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	1,628		$	2,795		$	-		$	4,423
Cost of revenue		920			2,038			-			2,958
Gross profit		708			757			-			1,465
Gross profit percentage		43.5	%		27.1	%		-			33.1	%
Sales and marketing (1)		110			463			147			720
Segment profit margin		598			294			(147	)		745
Segment profit margin percentage		36.7	%		10.5	%		-			16.8	%

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.

16

	Three Months Ended September 30, 2018
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	1,154		$	7,422		$	-		$	8,576
Cost of revenue		505			4,741			-			5,246
Gross profit		649			2,681			-			3,330
Gross profit percentage		56.2	%		36.1	%		-			38.8	%
Sales and marketing (1)		69			414			203			686
Segment profit margin		580			2,267			(203	)		2,644
Segment profit margin percentage		50.3	%		30.5	%		-			30.8	%

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.

	Six Months Ended September 30, 2019
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	3,530		$	5,368		$	-		$	8,898
Cost of revenue		2,309			3,668			-			5,977
Gross profit		1,221			1,700			-			2,921
Gross profit percentage		34.6	%		31.7	%		-			32.8	%
Sales and marketing (1)		142			1,065			319			1,526
Segment profit margin		1,079			635			(319	)		1,395
Segment profit margin percentage		30.6	%		11.8	%		-			15.7	%

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.

	Six Months Ended September 30, 2018
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	2,609		$	9,710		$	-		$	12,319
Cost of revenue		1,394			6,162			-			7,556
Gross profit		1,215			3,548			-			4,763
Gross profit percentage		46.6	%		36.5	%		-			38.7	%
Sales and marketing (1)		144			846			313			1,303
Segment profit margin		1,071			2,702			(313	)		3,460
Segment profit margin percentage		41.1	%		27.8	%		-			28.1	%

(1) Sales and marketing expense 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

As disclosed in Note 3 above, the proceeds under the SMG Working Capital Term Loan are made available in increments of at least $500,000 with a due date of March 31, 2020.  As of November 5, 2019, the Company had borrowed an aggregate of $4.5 million in principal under the SMG Working Capital Term Loan, a $1.0 million increase over the $3.5 million principal balance as of September 30, 2019. 

17

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, 2019 and September 30, 2018.  The following discussion should be read in conjunction with the financial statements of AeroGrow International, Inc. (the “Company,” “AeroGrow,” “we,” “our,” or “us”) and the notes to the financial statements included in Item 1 above in this Quarterly Report on Form 10-Q for the period ended September 30, 2019 (this “Quarterly Report”). The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, 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, the ability of our products to achieve or maintain commercial acceptance, our ability to obtain financing and/or generate cash flow sufficient to fund our future operations, and our ability to continue as a going concern. Such statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, our 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 this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2019.  Except as required by applicable law or regulation, we undertake no obligation to revise or update any forward-looking statements contained in this Quarterly Report. The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. Each reader should carefully review and consider the various disclosures we made in this Quarterly Report and in our other filings with the U.S. Securities and Exchange Commission (“SEC”).

Overview

AeroGrow International, Inc. 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’s principal activities from 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 initial production of its AeroGarden system and, in March 2006, began shipping these systems to retail and catalogue customers. 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 online retail distribution, in-store retail distribution, catalogue and direct-to-consumer sales primarily in the United States and Canada, as well as selected countries in Europe.

In April 2013, we entered into a Securities Purchase Agreement and strategic alliance with a wholly owned subsidiary of The Scotts Miracle-Gro Company (collectively with its subsidiary, “Scotts Miracle-Gro”). Pursuant to the Securities Purchase Agreement, we issued (i) 2.6 million shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”); and (ii) a warrant to purchase up to 80% of the Company’s common stock for an aggregate purchase price of $4.0 million.  In addition, as part of the strategic alliance, we entered into several other agreements with Scotts Miracle-Gro, including: (i) an Intellectual Property Sale Agreement; (ii) a Technology Licensing Agreement; (iii) a Brand License Agreement; and (iv) a Supply Chain Management Agreement. In November 2016, Scotts Miracle-Gro fully exercised the Warrant and, by its terms, the Series B Preferred Stock automatically converted into the Company’s common stock. Scotts Miracle-Gro currently owns approximately 80.5% of the Company’s outstanding common stock.

Pursuant to the Intellectual Property Agreement, we agreed to sell all intellectual property associated with our hydroponic products (the “Hydroponic IP”), other than the AeroGrow and AeroGarden trademarks, free and clear of all encumbrances, to Scotts Miracle-Gro for $500,000.  Scotts Miracle-Gro has the right to use the AeroGrow and AeroGarden trademarks in connection with the sale of products incorporating the Hydroponic IP.  In addition to the total working capital infusion of approximately $4.5 million from the Securities Purchase Agreement and Intellectual Property Sale Agreement, the strategic alliance affords us to use the globally recognized and highly trusted Miracle-Gro brand name.  We believe that the strategic alliance also gives Scotts Miracle-Gro an entry into the burgeoning indoor gardening market, while providing AeroGrow a broad base of support in marketing, distribution, supply chain logistics, R&D and sourcing.  We have also used our strategic alliance with Scotts Miracle-Gro to re-establish our presence in the retail and international sales channels. In Fiscal 2019, we amended the Brand License Agreement with Scotts Miracle-Gro to allow us to remove the Miracle-Gro brand from AeroGardens, thereby eliminating the cost associated with this portion of the agreement.

18

On June 20, 2019, the Company entered into a Working Capital Term Loan Agreement in the principal amount of up to $10.0 million with Scotts Miracle-Gro.  The proceeds will be made available as needed in increments of $500,000, and the Company may pay down and reborrow during the Term Loan, not to exceed $10.0 million with a due date of March 31, 2020.  The Term Loan Agreement is secured by a lien on the assets of the Company.  Interest will be charged at the stated rate of 10% per annum and will be paid, in cash, quarterly in arrears at the end of each September, December and March. 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.  See Note 3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” to our condensed financial statements.

On June 20, 2019, the Company entered into a Real Estate Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro.  The proceeds will be made available as needed in increments of $100,000, and the Company may pay down and reborrow during the Term Loan, not to exceed $1.5 million with a due date of March 31, 2022.  The Term Loan Agreement is secured by a lien on the assets of the Company.  Interest is charged at the stated rate of 10% per annum and is payable in cash, quarterly in arrears, at the end of each April 30, July 31, October 31 and January 31. See Note 3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” to our condensed financial statements.

Results of Operations

Three Months Ended September 30, 2019 and September 30, 2018

Summary Overview

Sales results during the first six months of our fiscal year (April-September), are historically variable as the impact of load-in timing before the holiday season fluctuates year to year. For the three months ended September 30, 2019, total revenue was $4.4 million, a decrease of 48.4%, or $4.2 million, relative to the same period in the prior year.  The decrease was primarily due to the timing of early load-in of stock in advance of the peak holiday season by certain retail accounts, primarily related to Amazon.com and Bed Bath and Beyond, as these customers did not take the load-in orders as early as they had in the prior year. This timing of sales, which has historically fluctuated between the three-month period ended September 30 and the three-month period ended December 31, is normal for our business and supports our strategy to build through online retailers during non-holiday seasons. As we approach holiday seasons, which are more subject to timing and are larger programs, we focus on in-store sales.  Additionally, sales in our direct-to-consumer channel increased 41.0%, or $474,000, primarily due to continued momentum from our general advertising and marketing campaign, and an increase in our established user base.  We believe that we benefit from more visibility from our increased presence on Amazon platforms and other select online retail distribution channels.  

For the three months ended September 30, 2019, total dollar sales of AeroGarden units decreased by 65.6% from the prior year period due to timing of load-in programs with existing customers for AeroGarden orders to retailers in the current period, in advance of the peak holiday season.  Seed pod kit and accessory sales increased by 13.4% over prior year period as our established base of AeroGardeners continues to grow.  AeroGarden sales, net of allowances, represented 62.8% of total revenue, as compared to 83.1% in the prior year period.  This percentage decrease, on a product line basis, was attributable to timing of sales to retail accounts, as discussed above.  Seed pod kit and accessory sales increased $194,000 or 13.4%. As a percent of total sales, seed pod kit and accessory sales increased to 37.2% from 16.9%, primarily due to continued customer engagement for our product after the initial purchase of an AeroGarden. 

The Company continues to spend advertising dollars in order to strategically build market awareness and enhance initiatives implemented in the prior year. For Fiscal 2020, we intend to expand consumer awareness of the AeroGrow brand and product line.  During the three months ended September 30, 2019, we incurred $432,000 in advertising expenditures, a $69,000 or 19.1% year-over-year increase compared to the prior year period. This was primarily due to an increase in our direct-to-consumer pay-per-click and retail marketing campaigns and expanded email programs.  The advertising expenditures were divided as follows:

● Direct-to-consumer advertising increased $28,000 from $65,000 to $93,000 during the three months ended September 30, 2019, primarily reflecting an increase in spending from pay-per-click and digital display advertising campaigns.  Efficiency, as measured by dollars of direct-to-consumer sales generated per dollar of related advertising expense continued to be strong, but decreased slightly to $17.50 for the three months ended September 30, 2019, as compared to $17.89 for the same period in Fiscal 2019.

● Retail advertising increased $47,000 from $292,000 to $339,000 for the three months ended September 30, 2019 and September 30, 2018, respectively, as the Company continued to invest in driving product awareness through: (i) platforms made available by our retailers; (ii) various promotional programs to increase product awareness with our housewares channel of retail accounts, including catalogues and email campaigns; and (iii) web-based advertising programs (e.g. including online retail catalogues, website banner ads, email blasts, targeted search campaigns, etc.). 

19

Our gross profit for the three months ended September 30, 2019 was 33.1%, down from 38.8% in the prior year period due to timing of load-in of sales to our retail channels, (which also impact our mix), several one-time fees related to the setup of a new warehouse, and significantly higher retail sales during specific lower margin advertising campaigns.  

In aggregate, our total operating expenses decreased 4.5% or $120,000 year-over-year, principally as a result of fewer sales in the current year.  Gross spending fluctuated in the following areas:

● A $177,000 decrease in personnel expenses, primarily due to the calculation on our incentive compensation program which is down to the decrease in sales being offset by small increases in headcount, which includes changes to compensation due to investments in a new sales support role and research and development roles;

● A $27,000 decrease in general categories such as property insurance and bad debt allowance;

These decreases were partially offset by:

● A $49,000 increase in a variety of general operating accounts, including changes in rent expense due to the new lease accounting guidance, repairs and maintenance, telephone, general courier fees, office supplies and equipment; and expenses related to a corporate headquarter office move; and

● A $46,000 increase in travel as we conducted face-to-face meetings with potential domestic and European customers, warehouse distribution locations and manufacturers in China.

Due to the timing of load-in orders in comparison to the prior year, we incurred an operating loss of $1.1 million for the three months ended September 30, 2019, as compared to operating income of $672,000 in the prior year period.

Other income and expense for the three months ended September 30, 2019 totaled to a net other expense of $53,000, as compared to net other expense of $25,000 in the prior year period.  The net other expense is primarily attributable to interest expense related to the Term Loan. 

The net loss for the three months ended September 30, 2019 increased to $1.1 million, as compared to a $647,000 net income in the prior year.  The decrease in net loss is due to lower overall sales, particularly in retail accounts and fewer pre-holiday load-in sales to retailers and decreased gross margins, partially offset by an increase in direct-to-consumer sales. 

The following table sets forth, as a total percentage of sales, our financial results for the three months ended September 30, 2019 and the three months ended September 30, 2018:

	Three Months Ended September 30,
	2019			2018
Net revenue
Direct-to-consumer		36.8	%		13.5	%
Retail		61.6	%		86.0	%
International		1.6	%		0.5	%
Total net revenue		100.0	%		100.0	%
Cost of revenue		66.9	%		61.2	%
Gross profit		33.1	%		38.8	%
Operating expenses
Research and development		6.3	%		1.5	%
Sales and marketing		30.9	%		19.0	%
General and administrative		20.2	%		10.5	%
Total operating expenses		57.4	%		31.0	%
(Loss) income from operations		(24.3	)%		7.8	%

20

Revenue

For the three months ended September 30, 2019, revenue totaled $4.4 million, a year-over-year decrease of 48.4% or $4.2 million, from the three months ended September 30, 2018.

	Three Months Ended September 30, (in thousands)
Net Revenue	2019		2018
Direct-to-consumer	$	1,628	$	1,154
Retail		2,725		7,376
International		70		46
Total	$	4,423	$	8,576

Direct-to-consumer sales for the three months ended September 30, 2019 totaled $1.6 million, up $474,000 or 41.0% from the prior year period.  The increase in sales to direct-to-consumer channels was caused by a change in our marketing campaign company, better promotional scheduling and better returns on the programs already in place for our general advertising.

Sales to retailer customers for the three months ended September 30, 2019 totaled $2.7 million, down $4.7 million from the prior year period, principally reflecting decreases due to the delay, from the second fiscal quarter to the third fiscal quarter, of our load-in sales to Amazon accounts and our brick-and-mortar stores in advance of the peak holiday season.  International sales totaled $70,000, up from $46,000 in the prior year period, as a result of sales testing in Europe during the prior year period. We plan to continue testing in the international market in future years in an effort to understand international market trends.  

Our products consist of AeroGardens, and seed pod kits and accessories.  A summary of the sales of these two product categories for the three months ended September 30, 2019 and September 30, 2018 is as follows:

	Three Months Ended September 30, (in thousands)
	2019			2018
Product revenue
AeroGardens	$	3,403		$	9,885
Seed pod kits and accessories		1,644			1,449
Discounts, allowances and other		(624	)		(2,758	)
Total	$	4,423		$	8,576
% of total revenue
AeroGardens		76.9	%		115.2	%
Seed pod kits and accessories		37.2	%		16.9	%
Discounts, allowances and other		(14.1	)%		(32.1	)%
Total		100.0	%		100.0	%

AeroGarden sales decreased $6.5 million, or 65.6%, from the prior year period, reflecting: decreased retail channel sales due to delay of load-in sales to online outlets and brick-and-mortar stores in advance of the peak holiday season, partially offset by increased sales of AeroGardens in our Direct-to-Consumer channel as our advertising campaigns and pay-per-click programs continued to be strong.  The increase in seed pod kit and accessory sales, from $1.4 million to $1.6 million, principally reflects the overall increase in our established base of AeroGardens and sales to retail customers at brick-and-mortar stores.  For the three months ended September 30, 2019, sales of seed pod kits and accessories represented 37.2% of total revenue, as compared to 16.9% in the prior year period, which is a result of the delay in AeroGarden retail sales in the current year.  Other revenue, which is comprised primarily of grow club revenue, shipping revenue, accruals and deductions, decreased as a percent of the total to (14.1)% from (32.1)% in the prior year period due to lower retail sales and the estimated returns, deductions for sales allowances and future discounts for in-store retail accounts.

21

Cost of Revenue

Cost of revenue for the three months ended September 30, 2019 totaled $3.0 million, a decrease of $2.3 million from the three months ended September 30, 2018, due to decreased sales volume.  Cost of revenue includes product costs for purchased and manufactured products, freight costs for inbound freight from manufacturers, costs related to warehousing and the shipping of products to customers, credit card processing fees for direct sales, and duties and customs applicable to imported products. As a percent of total revenue, cost of revenue represented 66.9% of revenue as compared to 61.2% for the quarter ended September 30, 2018.  The increase in costs as a percent of revenue reflected decreased sales, including a disproportionate (compared to prior year) amount of sales related to specific deals such as Prime Day, which typically have compressed margins, one-time fees related to establishing a new warehouse location, additional warehouse fees for product preparation, and a larger proportion of sales related to seed pod kit sales that are subject to the 5% Branding fee with Scotts Miracle-Gro.  

Gross Profit

Our gross profit varies based upon the factors affecting net revenue and cost of revenue (as discussed above), as well as the mix of our revenue that comes from the retail, direct-to-consumer, and international channels.  In a direct-to-consumer sale, we recognize as revenue the full consumer purchase price for the product.  In retail and international sales, by comparison, we recognize as revenue the wholesale price for the product which we charge to the retailer or international distributor.  Media costs associated with direct sales are included in sales and marketing expenses.  As a result, retail and international sales generally have lower gross margins than direct-to-consumer sales.  The gross profit for the quarter ended September 30, 2019 was 33.1% as compared to 38.8% for the quarter ended September 30, 2018.  The decrease in our gross profit is due primarily to changes in customer and product mix, particularly the decline due to the delayed load-in of AeroGarden products into brick-and-mortar stores and online outlets.  Additionally, we experienced higher costs during the current year quarter as we incurred one-time fees in establishing a new warehouse location.

Research and Development

Research and development costs for the quarter ended September 30, 2019 totaled $276,000, an increase of $147,000 from the quarter ended September 30, 2018.  The increase reflects an $85,000 in personnel expenses for new employees and a company-wide incentive program, $45,000 of collaboration expenses that were offset by Scotts Miracle-Gro in the prior year quarter, and a $35,000 increase in new product development, partially offset by decreases in new product testing and certifications.

Sales and Marketing

Sales and marketing costs for the three months ended September 30, 2019 totaled $1.4 million, as compared to $1.6 million for the three months ended September 30, 2018, an increase of 16.1%, or $261,000.  Sales and marketing costs include all costs associated with the marketing, sales, operations, customer support, and sales order processing for our products, and consisted of the following:

	Three Months Ended September 30, (in thousands)
	2019		2018
Advertising	$	432	$	363
Personnel		494		760
Sales commissions		14		50
Trade shows		1		2
Market research		94		127
Travel		90		61
Media production and promotional products		22		7
Quality control and processing fees		50		73
Other		172		187
	$	1,369	$	1,630

Advertising expense is principally comprised of the costs of development, production, printing, and postage for our catalogue mailing and web media costs for search and affiliate web marketing programs, and developing and employing other forms of advertising.  Each of these are key components of our integrated marketing strategy because they help build awareness of, and consumer demand for, our products, in addition to generating direct-to-consumer sales.  Advertising expense totaled $432,000 for the quarter ended September 30, 2019, a year-over-year increase of 19.1%, or $69,000, due to an increase in various retail promotional programs, including keyword search campaigns, general marketing and advertising campaigns and web-based advertising programs.

22

Sales and marketing personnel costs include salaries, payroll taxes, employee benefits and other payroll costs for our sales, operations, customer service, graphics and marketing departments.  For the three months ended September 30, 2019, personnel costs for sales and marketing were $494,000, down $265,000 or 34.9% from the three months ended September 30, 2018.  The decrease reflected the incentive program estimate, which is partially based on a comparison of current year and prior year sales, partially offset by the creation of new retail support roles and a related increase in employee benefits for those employees. Personnel expenses include all related payroll expenses, including incentive programs, salaries, bonuses and employee benefits.

Other marketing expenses decreased year-over-year principally because of the delay in retail sales in the current year quarter and the related commission expense, fewer market research programs, fewer retailer marketing programs, prior year upgrade expenses for third party sales tax software and social media campaigns, partially offset by additional travel, media production discussions for television campaigns.

General and Administrative

General and administrative costs for the three months ended September 30, 2019 totaled $893,000, as compared to $898,000 for the three months ended September 30, 2018, a decrease of 0.6%, or $5,000.  The decrease is attributable to decreases in contracting fees for upgrading our website and ERP system in the prior year and the allowance for bad debt, partially offset by increases in office rent (under the new accounting guidance) maintenance/moving expenses for the new corporate headquarters. 

Operating Income and Loss

Our operating loss for the three months ended September 30, 2019 was $1.1 million, a decline of $1.7 million from the operating income of $672,000 for the three months ended September 30, 2018.  The increased loss reflected lower sales in our retail channel partially offset by an increase in direct-to-consumer channels, as discussed in greater detail above.

Net Income and Loss

For the three months ended September 30, 2019, we recorded a net loss of $1.1 million as compared to a net income of $647,000 for the three months ended September 30, 2018.

Segment Results

We report our segment information in the same way that management assesses the business and makes decision regarding the allocations of resources. Factors considered in determining our reportable segments include the nature of the business activities, the reports provided to the Company’s chief operating decision maker (CODM) for operating and administrative activities, available information and information that is presented to our Board of Directors.

The Company’s CODM has been identified as the Chief Executive Officer because he has final authority over the performance assessment and resource allocation decisions. The CODM regularly receives discrete financial information about each reportable segment. The CODM uses all such information for performance assessment and resource allocation decisions. The CODM evaluates the performance of and allocates resources based upon the contribution margins of each segment.

As a result, we divide our business into two reportable segments: Direct-to-Consumer and Retail. This division of reportable segments is consistent with how the segments report to and are managed by the chief operating decision maker of the Company.  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.

	Three Months Ended September 30, 2019
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	1,628		$	2,795		$	-		$	4,423
Cost of revenue		920			2,038			-			2,958
Gross profit		708			757			-			1,465
Gross profit percentage		43.5	%		27.1	%		-			33.1	%
Sales and marketing (1)		110			463			147			720
Segment profit		598			294			(147	)		745
Segment profit percentage		36.7	%		10.5	%		-			16.8	%

(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.

23

	Three Months Ended September 30, 2018
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	1,154		$	7,422		$	-		$	8,576
Cost of revenue		505			4,741			-			5,246
Gross profit		649			2,681			-			3,330
Gross profit percentage		56.2	%		36.1	%		-			38.8	%
Sales and marketing (1)		69			414			203			686
Segment profit		580			2,267			(203	)		2,644
Segment profit percentage		50.3	%		30.5	%		-			30.8	%

(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.

Six Months Ended September 30, 2019 and September 30, 2018

Summary Overview

Sales results during the first six months of our fiscal year (April-September), are historically variable as the impact of load-in timing before the holiday season fluctuates year to year.  For the six months ended September 30, 2019, total revenue was $8.9 million, down 27.8%, or $3.4 million, relative to the same period in the prior year.  The decrease was primarily due to a delay in the timing of load-in of holiday stock sales at many retail accounts, primarily from Amazon.com and Bed, Bath and Beyond, as these customers did not take load-in orders as early as they had in the prior year. Retail sales results in advance of the holiday peak season have historically fluctuated between the first six months of our fiscal year (April-September) and the first nine months of the year (April-December).  The decrease in retail sales was partially offset by sales in our direct-to-consumer channels increased by 35.3%, or $922,000, primarily due to more visibility and continued momentum from our general advertising and marketing campaign, increased user base and our increased visibility on Amazon and other select online retail distribution channels.   

For the six months ended September 30, 2019, total sales of AeroGarden units decreased by 46.3% from the prior year period and seed pod kit and accessory sales increased by 27.3% over prior year period.  AeroGarden sales, net of allowances, represented 62.6% of total revenue, as compared to 78.8% in the prior year period.  This percentage decrease, on a product line basis, was attributable to a delay in the timing of load-in programs in advance of the peak holiday season, as discussed above. Total dollar sales of seed pod kits and accessories increased by $713,000 or 27.3%. As a percentage of total sales, seed pod kit and accessory sales increased from 21.2% in the prior year period to 37.4%, primarily as a result of continued customer engagement for our product after the initial purchase of an AeroGarden.  

During the six months ended September 30, 2019, we spent $944,000 in advertising expenditures, a year-over-year increase of $106,000, or 12.6%, compared to the same period ended September 30, 2018. This increase was to support our retail sales channels.  These expenditures were divided as follows:

● Direct-to-consumer advertising increased $35,000 to $188,000 during the six months ended September 30, 2019, primarily reflecting increases in specific pay-per-click advertising geared toward the direct-to-consumer customer base and direct advertising campaigns.  Efficiency, as measured by dollars of direct-to-consumer sales per dollar of related advertising expense increased to $18.80 for the six months ended September 30, 2019, as compared to $17.01 for the same period in Fiscal 2019.

● Retail advertising increased to $756,000 from $664,000 for the six months ended September 30, 2019 and September 30, 2018, respectively, as we invested in: (i) platforms made available by our retailers; (ii) various promotional programs to increase product awareness with our retail housewares channel, including catalogues and email campaigns; and (iii) web-based advertising programs (e.g. inclusion in online retail catalogues, website banner ads, email blasts, targeted search campaigns, etc.).

Our gross profit for the six months ended September 30, 2019, was 32.8%, down from 38.7% in the prior year period.  The decrease in the gross profit percentage is due to timing of load-in sales to our retail channels (as discussed above), related changes in customer and product mix, and several one-time fees related to set up of a new warehouse to serve select retail customers.

24

In aggregate, our total operating expenses increased 6.3%, or $301,000, year-over-year, principally to support new product introductions and anticipated growth, including the following:

 ● a $115,000 increase in one-time expenses for outside contractors relating to e-commerce security;

● a $64,000 increase in new product development, prototype and design; 

● a $55,000 increase in travel to manufacturers in China, warehouses and potential domestic and European customers; and

● a $50,000 increase in general office categories such as depreciation, insurance, repairs and maintenance, office supplies, and equipment.

Our operating loss increased $2.1 million to $2.1 million for the six months ended September 30, 2019, from operating income of $18,000 in the prior year period, primarily as a result of a delay in product load-in sales to established retail accounts, lower margins, and general operating expenses for new products and market expansion.  Historically, the first six months of the year are our slowest seasonal sales period.

Other expense for the six months ended September 30, 2019 totaled to a net other expense of $59,000, as compared to net other expense of $5,000 in the prior year period.  The current year other expense is attributable to interest expense related to the SMG Working Capital Term Loan, partially offset by other income from consulting related revenue, and foreign exchange gains.  In the prior year period, net other expense was primarily attributable to smaller amounts of interest expense due to timing of borrowing on SMG Working Capital Term Loan and larger offsets from interest income, other income from consulting related revenue, and foreign exchange gains.  

The net loss for the six months ended September 30, 2019 was $2.2 million, as compared to the $13,000 income in the prior year.  The increased net loss is due to lower overall sales, which includes timing of load-in sales to retail accounts in advance of the peak holiday season and decreased margins due to several one-time expenses.

The following table sets forth, as a total percentage of sales, our financial results for the six months ended September 30, 2019, and the six months ended September 30, 2018:

	Six Months Ended September 30,
	2019			2018
Net revenue
Direct-to-consumer		39.7	%		21.2	%
Retail		58.1	%		78.1	%
International		2.2	%		0.7	%
Total net revenue		100.0	%		100.0	%
Cost of revenue		67.2	%		61.3	%
Gross profit		32.8	%		38.7	%
Operating expenses
Research and development		5.5	%		2.3	%
Sales and marketing		31.1	%		23.3	%
General and administrative		20.1	%		12.9	%
Total operating expenses		56.7	%		38.5	%
(Loss) income from operations		(23.9	)%		0.2	%

25

Revenue

For the six months ended September 30, 2019, revenue totaled $8.9 million, a year-over-year decrease of 27.8% or $3.4 million, from the six months ended September 30, 2018.

	Six Months Ended September 30, (in thousands)
Net Revenue	2019		2018
Direct-to-consumer	$	3,530	$	2,609
Retail		5,168		9,629
International		200		81
Total	$	8,898	$	12,319

Direct-to-consumer sales for the six months ended September 30, 2019, totaled $3.5 million, up $922,000 or 35.3%, from the prior year period. The increase in sales to direct-to-consumer channels was caused by our efforts to drive direct-to-consumer awareness during our non-peak season through focused marketing, better promotional scheduling, follow-on direct sales to customers that have previously purchased AeroGardens, and better returns on our general advertising programs already in place.

Sales to retailer customers for the six months ended September 30, 2019, totaled $5.2 million, down $4.5 million, or 46.3%, from the prior year period, principally reflecting delays in load-in sales to our online and brick-and-mortar stores in advance of the peak holiday season

International sales for the six months ended September 30, 2019, totaled $200,000, an increase of $119,000 from the prior year period, as a result of sales testing in Europe during the prior year period. We plan to continue testing in the international market in future years in an effort to understand the trends that impact the international market.

Our products consist of AeroGardens, and seed pod kits and accessories.  A summary of the sales of these two product categories for the six months ended September 30, 2019 and September 30, 2018 is as follows:

	Six Months Ended September 30,
	2019			2018
Product revenue	(in thousands)			(in thousands)
AeroGardens	$	6,809		$	12,690
Seed pod kits and accessories		3,325			2,612
Discounts, allowances and other		(1,236	)		(2,983	)
Total	$	8,898		$	12,319
% of total revenue
AeroGardens		76.5	%		103.0	%
Seed pod kits and accessories		37.4	%		21.2	%
Discounts, allowances and other		(13.9	)%		(24.2	)%
Total		100.0	%		100.0	%

AeroGarden sales decreased $5.9 million, or 46.3%, from the prior year period, reflecting a delay in the load-in of retail channel sales, partially offset by increased sales of AeroGardens in our direct-to-consumer channel.  The increase in seed pod kit and accessory sales, which increased by $713,000, or 27.3%, principally reflects the continued focus on acquiring new AeroGarden customers, who have historically purchased seed pod kits and accessories after purchasing and using new AeroGardens.  For the six months ended September 30, 2019, sales of seed pod kits and accessories represented 37.4% of total revenue, as compared to 21.2% in the prior year period.  The percentage increase is due to an increase in the established base of AeroGardens.  Other revenue, which is comprised primarily of grow club revenue, shipping revenue, accruals and deductions, decreased as a percent of the total to (13.9)% from (24.2)% in the prior year period due to lower retail sales and the estimated returns, deductions for sales allowances and future discounts for in-store retail accounts.

Cost of Revenue

Cost of revenue for the six months ended September 30, 2019 totaled $6.0 million, a decrease of $1.6 million, from the six months ended September 30, 2018, due to decreased sales volume.  Cost of revenue includes product costs for purchased and manufactured products, freight costs for inbound freight from manufacturers, costs related to warehousing and the shipping of products to customers, credit card processing fees for direct sales, and duties and customs applicable to imported products. As a percent of total revenue, cost of revenue represented 67.2% of revenue as compared to 61.3% for the prior year period.

26

Gross Profit

Our gross profit varies based upon the factors affecting net revenue and cost of revenue as discussed above, as well as the mix of our revenue that comes from the retail, direct-to-consumer, and international channels.  In a direct-to-consumer sale, we recognize as revenue the full consumer purchase price for the product.  In retail and international sales, by comparison, we recognize as revenue the wholesale price for the product which we charge to the retailer or international distributor.  Media costs associated with direct sales are included in sales and marketing expenses.  As a result, retail and international sales generally have lower gross profits than direct-to-consumer sales.  The gross profit for the six months ended September 30, 2019, was 32.8% as compared to 38.7% for the six months ended September 30, 2018.  The decrease in our gross profit percentage was primarily due to a current year delay in load-in of AeroGardens into online and brick-and-mortar stores, and resulting changes in customer and product mix.  Additionally, we experienced higher costs during the current year period as we incurred one-time fees in establishing a new warehouse location.

Research and Development

Research and development costs for the six months ended September 30, 2019, totaled $487,000, an increase of 68.2%, or $197,000, from the six months ended September 30, 2018.  The increase reflects increases in personnel expenses for new employees and a company-wide incentive program, $45,000 of collaboration expenses that were subject to offset by Miracle-Grow in the prior year period, and a $63,000 increase in new product prototype development, partially offset by decreases in new product testing and certifications.

Sales and Marketing

Sales and marketing costs for the six months ended September 30, 2019, totaled $2.8 million, as compared to $2.9 million for the six months ended September 30, 2018, a decrease of 3.5%, or $101,000.  Sales and marketing costs include all costs associated with the marketing, sales, operations, customer support, and sales order processing for our products, and consisted of the following:

	Six Months Ended September 30, (in thousands)
	2019		2018
Advertising	$	944	$	838
Personnel		985		1,263
Sales commissions		23		56
Trade shows		1		2
Market research		145		165
Travel		156		131
Media production and promotional products		29		12
Quality control and processing fees		82		120
Other		407		286
	$	2,772	$	2,873

Advertising expense totaled $944,000 for the six months ended September 30, 2019, a year-over-year increase of 12.6%, or $106,000, primarily because we increased spending on general brand awareness advertising and marketing, promotional programs within our retail channel, email campaigns, and pay-per click advertising.

Sales and marketing personnel costs include salaries, payroll taxes, employee benefits and other payroll costs for our sales, operations, customer service, graphics and marketing departments.  For the six months ended September 30, 2019, personnel costs for sales and marketing were $985,000, down from $1.3 million for the six months ended September 30, 2018, a decrease of 22.0%.  The decrease primarily reflected the incentive program estimate which is partially based on a comparison of current year and prior year sales, partially offset by the creation of new retail support roles and a related increase in employee benefits for those employees.  Personnel expenses include all related payroll expenses, including incentive programs, bonuses and employee benefits.

Other marketing expenses increased year-over-year due to additional travel, social media, market research programs, retailer marketing programs, third party sales tax software and new products that were initiated during the current year period.

General and Administrative

General and administrative costs for the six months ended September 30, 2019, totaled $1.8 million, as compared to $1.6 million for the six months ended September 30, 2018, an increase of 12.9%, or $204,000.  The increase is attributable to increases in: (i) consulting and legal fees associated with a credit card breach; (ii) payroll-related expenses, including incentive programs, salaries, bonuses and employee benefits; (iii) office rent (under new accounting guidance) and maintenance/moving expenses for the corporate headquarters; and (iv) depreciation expense. These increases were partially offset by decreases in the allowance for bad debt, and reduced consulting services in conjunction with the upgrade of our website and ERP system.

27

Operating Income and Loss

Operating loss for the six months ended September 30, 2019 was $2.1 million, a decrease of $2.1 million from the operating income of $18,000 for the six months ended September 30, 2018.  The increase in operating loss was attributable to delayed sales in the retail sales channel, partially offset by increased sales in direct-to consumer channels.

Net Income and Loss

The net loss for the six months ended September 30, 2019 was $2.2 million, as compared to $13,000 net income in the prior-year period as discussed above.

Segment Results

We report our segment information in the same way that management assesses the business and makes decision regarding the allocations of resources

	Six Months Ended September 30, 2019
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	3,530		$	5,368		$	-		$	8,898
Cost of revenue		2,309			3,668			-			5,977
Gross profit		1,221			1,700			-			2,921
Gross profit percentage		34.6	%		31.7	%		-			32.8	%
Sales and marketing (1)		142			1,065			319			1,526
Segment profit		1,079			635			(319	)		1,395
Segment profit percentage		30.6	%		11.8	%		-			15.7	%

(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.

	Six Months Ended September 30, 2018
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	2,609		$	9,710		$	-		$	12,319
Cost of revenue		1,394			6,162			-			7,556
Gross profit		1,215			3,548			-			4,763
Gross profit percentage		46.6	%		36.5	%		-			38.7	%
Sales and marketing (1)		144			846			313			1,303
Segment profit		1,071			2,702			(313	)		3,460
Segment profit percentage		41.1	%		27.8	%		-			28.1	%

(1) Sales and marketing includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section.

Liquidity and Capital Resources

After adjusting the net loss for non-cash items and changes in operating assets and liabilities, the net cash used by operating activities totaled $4.7 million for the six months ended September 30, 2019, as compared to cash used of $9.7 million in the prior year period.

Non-cash items, comprising depreciation, amortization, bad debt expense allowances, inventory allowances, and accretion, totaled to a net gain of $331,000 for the six months ended September 30, 2019, as compared to a net gain of $240,000 in the prior year period.  The increase principally reflected non-cash charges arising from depreciation and amortization of lease liability and right-of-use asset.

Changes in current assets used net cash of $3.2 million during the six months ended September 30, 2019, principally from increases in inventory, prepaid and deposit balances as we ramp up for our peak sales season, which historically begins in the third fiscal quarter.

As of September 30, 2019, the total inventory balance was $11.4 million, representing approximately 200 days of sales activity, and 355 days of sales activity, at the average daily rate of product cost expensed during the twelve months and three months ended September 30, 2019, respectively.  The days in inventory calculation based on the three months of sales activity can vary greatly due to the seasonality of our sales, which are at their highest level during the quarter ended December 31.  The twelve months’ days in inventory calculation is based on the twelve months of sales activity and is less impacted by the seasonality of our sales.

28

Current operating liabilities increased $334,000 during the six months ended September 30, 2019, principally because of an increase in accounts payable.  Accounts payable as of September 30, 2019, totaled $3.1 million, representing approximately 35 days of daily expense activity, and 52 days of daily expense activity, at the average daily rate of expenses incurred during the twelve months and three months ended September 30, 2019, respectively.

Net investment activity used $396,000 of cash in the current year period, principally because of the purchases of equipment as we change our supply manufacturers and introduce new products.

Net financing activity provided net cash of $4.4 million during the six months ended September 30, 2019, principally due to the Term Loan and payments on the capital lease.

Cash

As of September 30, 2019, we had a cash balance of $1.0 million, of which $15,000 was restricted as collateral for various corporate obligations.  This compares to a cash balance of $1.8 million as of March 31, 2019, of which $15,000 was restricted.  The decrease in cash is primarily attributable to the purchase of inventory in the current quarter to meet peak season sales demand, in particular to satisfy the current period load-in sales with new and expanded brick-and-mortar retail customers.

Borrowing Agreements

As of September 30, 2019 and March 31, 2019, we have $4.4 million and zero, respectively, of outstanding long-term debt. We have entered into a Working Capital Term Loan Agreement in the principal amount of up to $10.0 million and Real Estate Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro. As of September 30, 2019 and March 31, 2019, the outstanding balance of our note payable and debt, including accrued interest, was as follows:

	September 30, 2019		March 31, 2019
	(in thousands)		(in thousands)
Notes payable-related party	$	4,416	$	-
Total debt		4,416		-
Less notes payable and current portion – long term debt		3,516		-
Long term debt	$	900	$	-

After September 30, 2019, we borrowed an additional $1.0 million under the Working Capital Term Loan, bringing the total principal amount of both loans due to $5.4 million.

Cash Requirements

We generally require cash to:

● fund our operations and working capital requirements;

● develop and execute our product development and market introduction plans;

● execute our sales and marketing plans;

● fund research and development efforts; and

● pay debt obligations as they come due.

At this time, we do not expect to enter into additional capital leases to finance major purchases.  In addition, we do not currently have any binding commitments with third parties to obtain any material amount of equity or debt financing other than the financing arrangements described in this report.

29

Assessment of Future Liquidity and Results of Operations

Liquidity

To assess our ability to fund ongoing operating requirements, we developed assumptions regarding operating cash flow.  Critical sources of funding, and key assumptions and areas of uncertainty include:

● our cash of $1.0 million ($15,000 of which is restricted as collateral for our various corporate obligations) as of September 30, 2019;

● our cash of $494,000 ($15,000 of which is restricted as collateral for our various corporate obligations) as of November 5, 2019;

● the continued support of, and extensions of credit by, our suppliers and lenders, including, but not limited to, the Working Capital Term Loan of up to $10.0 million from Scotts Miracle-Gro and Real Estate Term loan of up to $1.5 million, of which we had borrowed $4.4 million and $5.4 million of the combined $11.5 million in principal amount as of September 30, 2019 and November 5, 2019, respectively;

● our historical pattern of increased sales between September and March, and lower sales volume from April through August;

● the level of spending necessary to support our planned initiatives; and

● our sales to consumers, retailers, and international distributors, and the resulting cash flow from operations, which will depend in great measure on the success of our direct-to-consumer sales initiatives, and the acceptance of the product at our various retail distribution customers.

On June 20, 2019, the Company entered into a Working Capital Term Loan Agreement in the principal amount of up to $10.0 million with Scotts Miracle-Gro.  The proceeds will be made available as needed in increments of $500,000, the Company may pay down and reborrow during the Term Loan, not to exceed $10.0 million with a due date of March 31, 2020.  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 to be paid quarterly in arrears in cash, at the end of each September, December and March.  The funds provide 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.  We have borrowed $4.5 million as of November 5, 2019 and can reborrow amounts repaid against the $10.0 million loan in order to purchase inventory during our peak selling season.  See Note 3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” to our condensed financial statements.

On June 20, 2019, the Company entered into a Real Estate Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro.  The funding provides capital to fund real estate related lease obligations. The proceeds will be made available as needed in increments of $100,000 not to exceed $1.5 million with a due date of March 31, 2022. Interest will be charged at the stated rate of 10% and will be paid quarterly in arrears on each of April 30, July 31, October 31 and January 31. As of September 30, 2019, the Company had borrowed $900,000 under the Real Estate Term Loan. See Note 3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” to our condensed financial statements.

Based on these facts and assumptions, we believe our existing cash and cash equivalents, along with the Term Loan Agreement and the cash generated by our anticipated results from operations, will be sufficient to meet our needs for the next twelve months.  

Results of Operations

There are several factors that could affect our future results of operations.  These factors include, but are not limited to, the following:

● the effectiveness of our consumer marketing efforts in generating both direct-to-consumer sales, and sales to consumers by our retailer customers;

● uncertainty regarding the impact of macroeconomic conditions on consumer spending;

● uncertainty regarding the capital markets and our access to sufficient capital to support our current and projected scale of operations;

● the seasonality of our business, in which we have historically experienced higher sales volume during the fall and winter months (September through March);

● a continued, uninterrupted supply of product from our third-party manufacturing suppliers in China; and

● the success of the Scotts Miracle-Gro relationship.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interest in transferred assets, and have not entered into any contracts for financial derivative such as futures, swaps, and options. 

30

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our interest income is most sensitive to fluctuations in the general level of U.S. interest rates. As such, changes in U.S. interest rates affect the interest earned on our cash, cash equivalents, and short-term investments, and the value of those investments. Due to the short-term nature of our cash equivalents and investments, we have concluded that a change in interest rates does not pose a material market risk to us with respect to our interest income. Our debt carries fixed interest rates and therefore changes in the general level of market interest rates will not impact our interest expense during the terms of our existing debt arrangements.

Foreign Currency Exchange Risk

We transact business primarily in U.S. currency.  Although we purchase our products in U.S. dollars, the prices charged by our suppliers in Asia are predicated upon their cost for components, labor and overhead. Therefore, changes in the valuation of the U.S. dollar in relation to the Chinese currencies may cause our manufacturers to raise prices of our products which could reduce our profit margins.

In future periods, it is possible that we could be exposed to fluctuations in foreign currency exchange rates on accounts receivable from sales and net monetary assets denominated in foreign currencies and liabilities.  To date, however, virtually all of our transactions have been denominated in U.S. dollars.

Item 4. Controls and Procedures

(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 Securities Exchange Act of 1934 (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 officer 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 three months ended September 30, 2019.

31

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, results of operations, financial condition, future results, and the trading price of our common stock. In addition to the other information set forth in this Quarterly Report, you should also carefully consider the factors described in “Part I. Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2019, which could materially affect our business, results of operations, financial condition, future results, and the trading price of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None. 

32

Item 6. Exhibits

Exhibit Number	Description
3.1	Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.2	Certificate of Amendment to Articles of Incorporation, dated June 25, 2002 (incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.3	Certificate of Amendment to Articles of Incorporation, dated November 3, 2002 (incorporated by reference to Exhibit 3.3 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.4	Certificate of Change to Articles of Incorporation, dated January 31, 2005 (incorporated by reference to Exhibit 3.4 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.5	Certificate of Amendment to Articles of Incorporation, dated July 27, 2005 (incorporated by reference to Exhibit 3.5 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.6	Certificate of Amendment to Articles of Incorporation, dated February 24, 2006 (incorporated by reference to Exhibit 3.6 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.7	Certificate of Amendment to Articles of Incorporation, certified May 3, 2010 (incorporated by reference to Exhibit 3.7 of our Quarterly Report on Form 10-Q, filed August 12, 2010)
3.8	Certificate of Amendment to Articles of Incorporation, dated May 1, 2012 (incorporated by reference to Exhibit 3.8 of our Quarterly Report on Form 10-Q, filed August 10, 2012)
3.9	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, filed September 26, 2008)
3.10	Amendment to Bylaws (incorporated by reference to Exhibit 3.9 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, filed July 6, 2009)
3.11	Amendment No. 2 to Bylaws (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, filed April 23, 2013)
3.12	Certificate of Designations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, filed July 6, 2009)
3.13	Certificate of Amendment to Series A Convertible Preferred Stock Certificate of Designations, certified June 21, 2010 (incorporated by reference to Exhibit 3.11 of our Quarterly Report on Form 10-Q for the quarter year ended June 30, 2010, filed August 12, 2010)
3.14	Amendment Number 2 to Series A Convertible Preferred Stock Certificate of Designations, as filed with the Nevada Secretary of State on April 6, 2012 (incorporated by reference to Exhibit 3.12 to our Current Report on Form 8-K, filed April 16, 2012)
3.15	Certificates of Designation of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed April 23, 2013)
4.1	Form of Certificate of Common Stock of Registrant (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed September 5, 2007)
4.2	Form of Warrant Agreement, dated April 22, 2013 (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed April 23, 2013)
4.3	First Amendment to Warrant Agreement (incorporated by reference to Exhibit 10.6 of our Quarterly Report on Form 10-Q filed November 9, 2015)
4.4	Second Amendment to Warrant Agreement dated July 15, 2016 (incorporated by reference to Exhibit 10.6 of our Current Report on Form 8-K, filed July 21, 2016)
4.5	Investor Rights Agreement by and between the Company and SMG Growing Media, Inc., dated April 22, 2013 (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed April 23, 2013)
4.6	Voting Agreement, dated April 22, 2013 (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed April 23, 2013)
4.7	Waiver Agreement dated July 15, 2016 (incorporated by reference to Exhibit 10.7 of our Current Report on Form 8-K, filed July 21, 2016)
10.1	Term Loan and Security Agreement by and among AeroGrow and The Scotts Company, LLC, dated July 6, 2018 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed July 11, 2018)
10.2	Fourth Amendment to the Technology License Agreement (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed July 11, 2018)

33

31.1*	Certifications of the Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act.
31.2*	Certifications of the Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act.
32.1*	Certifications of the Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act.
32.2*	Certifications of the Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
*  Filed herewith.

34

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AeroGrow International, Inc.
Date:  November 12, 2019	/s/ J. Michael Wolfe
	By: J. Michael Wolfe
	Its: President and Chief Executive Officer (Principal Executive Officer) and Director
Date:  November 12, 2019	/s/Grey H. Gibbs
	By: Grey H. Gibbs
	Its: Senior Vice President Finance and Accounting (Principal Accounting Officer)

35

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER

UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, J. Michael Wolfe certify that:

1.             I have reviewed this report on Form 10-Q for the period ended September 30, 2019 of AeroGrow International, Inc.;

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 12, 2019	By:	/s/ J. Michael Wolfe
		J. Michael Wolfe
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS OF THE CHIEF FINANCIAL OFFICER

UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, Grey H. Gibbs, certify that:

1.            I have reviewed this report on Form 10-Q for the period ended September 30, 2019 of AeroGrow International, Inc.;

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 12, 2019	By:	/s/Grey H. Gibbs
		Grey H. Gibbs
		Senior Vice President Finance and Accounting (Principal Accounting Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER

UNDER SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Quarterly Report of AeroGrow International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2019 (the “Report”), as filed with the Securities and Exchange Commission, I, J. Michael Wolfe, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by this Report.

Date:  November 12, 2019	By:	/s/ J. Michael Wolfe
		J. Michael Wolfe
		President and Chief Executive Officer (Principal Executive Officer)

EX-32.2

EXHIBIT 32.2

CERTIFICATIONS OF THE CHIEF FINANCIAL OFFICER

UNDER SECTION 906 OF THE SARBANES-OXLEY ACT

            In connection with the Quarterly Report of AeroGrow International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2019 (the “Report”), as filed with the Securities and Exchange Commission, I, Grey H. Gibbs, Senior Vice President Finance and Accounting of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by this Report.

Date:  November 12, 2019	By:	/s/Grey H. Gibbs
		Grey H. Gibbs
		Senior Vice President Finance and Accounting (Principal Accounting Officer)

XML

9. Segment Information (Tables)

6 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Schedule of Segment Reporting Information, by Segment [Table Text Block]

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 does not have individually identified assets regarding specific segments as all processes to manufacture products are not different based on segment.

	Three Months Ended September 30, 2019
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	1,628		$	2,795		$	-		$	4,423
Cost of revenue		920			2,038			-			2,958
Gross profit		708			757			-			1,465
Gross profit percentage		43.5	%		27.1	%		-			33.1	%
Sales and marketing (1)		110			463			147			720
Segment profit margin		598			294			(147	)		745
Segment profit margin percentage		36.7	%		10.5	%		-			16.8	%

	Three Months Ended September 30, 2018
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	1,154		$	7,422		$	-		$	8,576
Cost of revenue		505			4,741			-			5,246
Gross profit		649			2,681			-			3,330
Gross profit percentage		56.2	%		36.1	%		-			38.8	%
Sales and marketing (1)		69			414			203			686
Segment profit margin		580			2,267			(203	)		2,644
Segment profit margin percentage		50.3	%		30.5	%		-			30.8	%

	Six Months Ended September 30, 2019
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	3,530		$	5,368		$	-		$	8,898
Cost of revenue		2,309			3,668			-			5,977
Gross profit		1,221			1,700			-			2,921
Gross profit percentage		34.6	%		31.7	%		-			32.8	%
Sales and marketing (1)		142			1,065			319			1,526
Segment profit margin		1,079			635			(319	)		1,395
Segment profit margin percentage		30.6	%		11.8	%		-			15.7	%

	Six Months Ended September 30, 2018
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	2,609		$	9,710		$	-		$	12,319
Cost of revenue		1,394			6,162			-			7,556
Gross profit		1,215			3,548			-			4,763
Gross profit percentage		46.6	%		36.5	%		-			38.7	%
Sales and marketing (1)		144			846			313			1,303
Segment profit margin		1,071			2,702			(313	)		3,460
Segment profit margin percentage		41.1	%		27.8	%		-			28.1	%

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.

XML

3. Notes Payable and Long Term Debt (Details) - USD ($)		6 Months Ended
	Jun. 20, 2019	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2019	Apr. 22, 2013
3. Notes Payable and Long Term Debt (Details) [Line Items]
Proceeds from Related Party Debt		$ 4,400,000	$ 5,000,000
Accrued Liabilities, Current		1,249,000		$ 1,437,000
Scotts Miracle-Gro Company [Member]
3. Notes Payable and Long Term Debt (Details) [Line Items]
Debt, Current		35,000,000		48,000,000
Working Capital Term Loan Agreement [Member] | Scotts Miracle-Gro Company [Member]
3. Notes Payable and Long Term Debt (Details) [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity	$ 10,000,000
Debt Instrument, Description	The proceeds will be made available as needed in increments of $500,000, the Company may pay down and reborrow during the Term Loan, not to exceed $10.0 million
Debt Instrument, Maturity Date	Mar. 31, 2020
Debt Instrument, Interest Rate, Stated Percentage	10.00%
Line of Credit, Current		3,500
Real Estate Term Loan Agreement [Member] | Scotts Miracle-Gro Company [Member]
3. Notes Payable and Long Term Debt (Details) [Line Items]
Debt Instrument, Description	proceeds will be made available as needed in increments of $100,000 not to exceed $1.5 million
Debt Instrument, Maturity Date	Mar. 31, 2022
Debt Instrument, Interest Rate, Stated Percentage	10.00%
Debt Instrument, Face Amount	$ 1,500,000
Proceeds from Related Party Debt		$ 900,000,000
Technology License Agreement [Member] | Scotts Miracle-Gro Company [Member]
3. Notes Payable and Long Term Debt (Details) [Line Items]
Royalty, Percentage		2.00%
Accrued Liabilities, Current		$ 866,000		680,000
Brand License Agreement [Member] | Scotts Miracle-Gro Company [Member]
3. Notes Payable and Long Term Debt (Details) [Line Items]
Royalty, Percentage		5.00%
Accrued Liabilities, Current		$ 563,000		$ 422,000
Scotts Miracle-Gro Company [Member]
3. Notes Payable and Long Term Debt (Details) [Line Items]
Equity Method Investment, Ownership Percentage		80.50%			80.50%

XML

CONDENSED BALANCE SHEETS (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2019	Mar. 31, 2019
Allowance for doubtful accounts (in Dollars)	$ 122	$ 89
Accumulated depreciation (in Dollars)	$ 5,092	$ 4,828
Common stock, par value (in Dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	750,000,000	750,000,000
Common stock, shares issued	34,328,036	34,328,036
Common stock, shares outstanding	34,328,036	34,328,036

XML

1. Description of the Business

6 Months Ended

Sep. 30, 2019

Disclosure Text Block [Abstract]

Business Description and Basis of Presentation [Text Block]

1.     Description of the Business

AeroGrow International, Inc. (collectively, the “Company,” “AeroGrow,” “we,” “our,” or “us”) 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 consumer gardening, cooking and small indoor appliance markets worldwide.  The Company manufactures, distributes and markets ten 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 brick and online, catalogue and direct-to-consumer sales primarily in the United States and Canada, as well as selected countries in Europe.

XML

9. Segment Information (Details) - Schedule of Segment Reporting Information, by Segment - USD ($) $ in Thousands		3 Months Ended		6 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Segment Reporting Information [Line Items]
Net sales		$ 4,423	$ 8,576	$ 8,898	$ 12,319
Cost of revenue		2,958	5,246	5,977	7,556
Gross profit		1,465	3,330	2,921	4,763
Sales and marketing		1,369	1,630	2,772	2,873
Consolidated Entity [Member]
Segment Reporting Information [Line Items]
Net sales		4,423	8,576	8,898	12,319
Cost of revenue		2,958	5,246	5,977	7,556
Gross profit		$ 1,465	$ 3,330	$ 2,921	$ 4,763
Gross profit percentage		33.10%	38.80%	32.80%	38.70%
Sales and marketing	[1]	$ 720	$ 686	$ 1,526	$ 1,303
Segment profit margin		$ 745	$ 2,644	$ 1,395	$ 3,460
Segment profit margin percentage		16.80%	30.80%	15.70%	28.10%
Direct-to-consumer [Member]
Segment Reporting Information [Line Items]
Net sales		$ 1,628	$ 1,154	$ 3,530	$ 2,609
Cost of revenue		920	505	2,309	1,394
Gross profit		$ 708	$ 649	$ 1,221	$ 1,215
Gross profit percentage		43.50%	56.20%	34.60%	46.60%
Sales and marketing	[1]	$ 110	$ 69	$ 142	$ 144
Segment profit margin		$ 598	$ 580	$ 1,079	$ 1,071
Segment profit margin percentage		36.70%	50.30%	30.60%	41.10%
Retail [Member]
Segment Reporting Information [Line Items]
Net sales		$ 2,795	$ 7,422	$ 5,368	$ 9,710
Cost of revenue		2,038	4,741	3,668	6,162
Gross profit		$ 757	$ 2,681	$ 1,700	$ 3,548
Gross profit percentage		27.10%	36.10%	31.70%	36.50%
Sales and marketing	[1]	$ 463	$ 414	$ 1,065	$ 846
Segment profit margin		$ 294	$ 2,267	$ 635	$ 2,702
Segment profit margin percentage		10.50%	30.50%	11.80%	27.80%
Corporate and Other [Member]
Segment Reporting Information [Line Items]
Net sales		$ 0	$ 0
Cost of revenue		0	0
Gross profit		$ 0	$ 0
Gross profit percentage		0.00%	0.00%
Sales and marketing	[1]	$ 147	$ 203	$ 319	$ 313
Segment profit margin		$ (147)	$ (203)	$ (319)	$ (313)
Segment profit margin percentage		0.00%	0.00%

[1] Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.

XML

8. Leases (Details) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Disclosure Text Block [Abstract]
Operating Lease, Weighted Average Remaining Lease Term	7 years		7 years
Operating Lease, Weighted Average Discount Rate, Percent	10.00%		10.00%
Operating Leases, Rent Expense	$ 136,000	$ 76,000	$ 264,000	$ 165,000

XML

2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Tables)

6 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Schedule of Advertising Expenses [Table Text Block]

Advertising expense for the three and six months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30, (in thousands)				Six Months Ended September 30, (in thousands)
	2019		2018		2019		2018
Direct-to-consumer	$	93	$	65	$	188	$	153
Retail		339		292		755		664
Other		-		6		1		21
Total advertising expense	$	432	$	363	$	944	$	838

Schedule of Inventory, Current [Table Text Block]

Inventory values at September 30, 2019 and March 31, 2019 were as follows:

	September 30,		March 31,
	2019 (in thousands)		2019 (in thousands)
Finished goods	$	9,484	$	7,071
Raw materials		1,924		1,369
Total inventory	$	11,408	$	8,440

XML

4. Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions

6 Months Ended

Sep. 30, 2019

Convertible Preferred Stock, Warrants and Other Transactions [Abstract]

Convertible Preferred Stock, Warrants and Other Transactions [Text Block]

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 a warrant to purchase up to 80% of the Company’s common stock (the “Warrant,”) 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 were filed as exhibits to a Current Report on Form 8-K that was filed with the SEC on April 23, 2013.  On November 29, 2016 Scotts Miracle-Gro fully exercised the Warrant and, by its terms, the Series B Preferred Stock automatically converted into shares of common stock. Scotts Miracle-Gro currently owns approximately 80.5% of the Company’s outstanding common stock.  

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”), within 120 calendar days after receipt of Scotts Miracle-Gro’s demand for registration. The Company must use its best efforts to cause the Registration Statement to become effective as soon as possible thereafter.

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 25, 2019.  See also Note 3 above for the Term Loan with Scotts Miracle-Gro.

XML

8. Leases

6 Months Ended

Sep. 30, 2019

Disclosure Text Block [Abstract]

Lessee, Operating Leases [Text Block]

8.     Leases

The Company adopted ASU 2016-02, "Leases" (“ASC 842”) on April 1, 2019, the Company adopted using the modified retrospective approach applied to all leases with a remaining lease term greater than one year. Results for reporting periods beginning after April 1, 2019, are presented in accordance with the new guidance under ASC 842, while prior period amounts are not restated. The adoption of the new lease guidance resulted in the Company recognizing operating lease right-of-use assets and lease liabilities based on the present value of remaining minimum lease payments. For the discount rate assumption, the implicit rate was not readily determinable in the Company’s lease agreements. Therefore, the Company used an estimated incremental borrowing rate, in determining the present value of lease payments. There was no impact to opening retained earnings.

The Company elected the practical expedients available under ASC 842 and applied them consistently to all applicable leases. The Company did not apply ASC 842 to any leases with a remaining term of 12 months or less. For these leases, no asset or liability was recorded and lease expense continues to be recognized on a straight-line basis over the lease term. As allowed by the practical expedients, the Company does not reassess whether any expired or existing contracts are or contain leases, does not reassess the lease classification for any expired or existing leases and does not reassess initial direct costs for existing leases.

The table below sets forth supplemental Balance Sheet information for the Company’s leases.

	September 30, 2019
	(in thousands)
Assets
Operating lease right-of-use assets	$	741
Liabilities
Operating lease, current		119
Operating lease, noncurrent		1,270
Total lease liabilities	$	1,389

As of September 30, 2019, the weighted average remaining lease term for operating leases was 7 years, and the weighted average discount rate was 10%.

The table below sets forth the future cash payments under such agreements for the remaining years are as follows:

Year Ending	Operating Leases			Financing Leases
	(in thousands)			(in thousands)
March 31, 2020	$	126		$	23
March 31, 2021		257			30
March 31, 2022		266			-
March 31, 2023		275			-
March 31, 2024		285			-
Thereafter		754			-
Total lease payments	$	1,963		$	53
Less: amount of lease payments representing interest		(574	)		(3	)
Present value of future minimum lease payments		1,389			50
Less: current obligations under leases		(119	)		(42	)
Long-term lease obligations	$	1,270		$	12

Rent expense for the three month ended September 30, 2019 and 2018 was $136,000 and $76,000, respectively. Rent expense for the six months ended September 30, 2019 and 2018 was $264,000 and $165,000, respectively.

XML

9. Segment Information (Details)	6 Months Ended
	Sep. 30, 2019
Segment Reporting [Abstract]
Number of Reportable Segments	2

XML

7. Related Party Transactions (Details) - Scotts Miracle-Gro Company [Member] $ in Millions	Jun. 20, 2019 USD ($)
Working Capital Term Loan Agreement [Member]
7. Related Party Transactions (Details) [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity	$ 10.0
Debt Instrument, Interest Rate, Stated Percentage	10.00%
Real Estate Term Loan Agreement [Member]
7. Related Party Transactions (Details) [Line Items]
Debt Instrument, Face Amount	$ 1.5
Debt Instrument, Interest Rate, Stated Percentage	10.00%
Notes Payable, Other Payables [Member] | Real Estate Term Loan Agreement [Member]
7. Related Party Transactions (Details) [Line Items]
Debt Instrument, Interest Rate, Stated Percentage	10.00%

XML

5. Equity Compensation Plans and Employee Benefit Plans

6 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement, Disclosure [Abstract]

Disclosure of Share-based Compensation Arrangements by Share-based Payment Award [Table Text Block]

5.     Equity Compensation Plans

For the three and six months ended September 30, 2019 and September 30, 2018, the Company did not grant options to purchase shares of 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 September 30, 2019, 93,000 shares of common stock were cancelled or expired and September 30, 2018, 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.  During the six months ended September 30, 2019, 93,000 options to purchase shares of common stock were cancelled or expired and during the six months ended September 30, 2018, 50,000 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 September 30, 2019, 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 September 30, 2019 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)
$	1.55		11		0.88	$	1.55
			11		0.88	$	1.55	$	-

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 September 30, 2019.

XML

9. Segment Information

6 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Segment Reporting Disclosure [Text Block]

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 does not have individually identified assets regarding specific segments as all processes to manufacture products are not different based on segment.

	Three Months Ended September 30, 2019
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	1,628		$	2,795		$	-		$	4,423
Cost of revenue		920			2,038			-			2,958
Gross profit		708			757			-			1,465
Gross profit percentage		43.5	%		27.1	%		-			33.1	%
Sales and marketing (1)		110			463			147			720
Segment profit margin		598			294			(147	)		745
Segment profit margin percentage		36.7	%		10.5	%		-			16.8	%

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.

	Three Months Ended September 30, 2018
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	1,154		$	7,422		$	-		$	8,576
Cost of revenue		505			4,741			-			5,246
Gross profit		649			2,681			-			3,330
Gross profit percentage		56.2	%		36.1	%		-			38.8	%
Sales and marketing (1)		69			414			203			686
Segment profit margin		580			2,267			(203	)		2,644
Segment profit margin percentage		50.3	%		30.5	%		-			30.8	%

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.

	Six Months Ended September 30, 2019
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	3,530		$	5,368		$	-		$	8,898
Cost of revenue		2,309			3,668			-			5,977
Gross profit		1,221			1,700			-			2,921
Gross profit percentage		34.6	%		31.7	%		-			32.8	%
Sales and marketing (1)		142			1,065			319			1,526
Segment profit margin		1,079			635			(319	)		1,395
Segment profit margin percentage		30.6	%		11.8	%		-			15.7	%

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.

	Six Months Ended September 30, 2018
(in thousands)	Direct-to-consumer			Retail			Corporate/Other			Consolidated
Net sales	$	2,609		$	9,710		$	-		$	12,319
Cost of revenue		1,394			6,162			-			7,556
Gross profit		1,215			3,548			-			4,763
Gross profit percentage		46.6	%		36.5	%		-			38.7	%
Sales and marketing (1)		144			846			313			1,303
Segment profit margin		1,071			2,702			(313	)		3,460
Segment profit margin percentage		41.1	%		27.8	%		-			28.1	%

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.

XML

3. Notes Payable and Long Term Debt (Tables)

6 Months Ended

Sep. 30, 2019

Debt Disclosure [Abstract]

Schedule of Debt [Table Text Block]

As of September 30, 2019 and March 31, 2019, the outstanding balance of the Company’s notes payable and debt, including accrued interest, is as follows:

	September 30, 2019 (in thousands)		March 31, 2019 (in thousands)
Notes payable and debt-related party		4,416		-
Sale of intellectual property liability (see Note 4)		35		48
Total notes payable and debt		4,451		48
Less current portion – long term debt		3,537		25
Long term notes payable and debt	$	914	$	23

XML

2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) - USD ($)	3 Months Ended		6 Months Ended		9 Months Ended	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018	Mar. 31, 2019	Mar. 31, 2018	Apr. 01, 2019
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Cash, FDIC Insured Amount	$ 250,000		$ 250,000
Accounts Receivable, Allowance for Credit Loss	122,000		$ 122,000			$ 89,000
Other receivable, reserve percentage of credit card sales			5.00%
Other Receivables	108,000		$ 108,000			207,000
Operating Lease, Payments, Use			585,000
Inventory Adjustments	$ 111,000		$ 111,000			126,000
Lessee, Finance Lease, Discount Rate	10.00%		10.00%
Increase (Decrease) in Accounts and Other Receivables			$ (459,000)			(1,200,000)
Provision for Future Warranty Costs	$ 196,000		$ 196,000			$ 166,000
Number of Operating Segments			2
Operating Lease, Liability	$ 1,389,000		$ 1,389,000					$ 1,300,000
Minimum [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Lessee, Operating Lease, Term of Contract	1 year		1 year
Returns Reserves Allowance, Percentage	1.00%		1.00%
Maximum [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Lessee, Operating Lease, Term of Contract	7 years		7 years
Returns Reserves Allowance, Percentage	2.00%		2.00%
Seasonal Revenue [Member] | Revenue Benchmark [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Concentration Risk, Percentage						66.20%
Share-based Payment Arrangement, Option [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount			11,000	93,000
Measurement Input, Discount Rate [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Fair Value, Option, Relation to Measurement Inputs			15%
Sales Returns and Allowances [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Customer Refund Liability, Current	$ 164,000		$ 164,000			$ 313,000
Amazon.com [Member] | Customer Concentration Risk [Member] | Revenue Benchmark [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Concentration Risk, Percentage	25.00%	42.00%	35.10%	42.40%
Amazon.com [Member] | Credit Concentration Risk [Member] | Accounts Receivable [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Concentration Risk, Percentage					12.20%		44.30%
Macy's [Member] | Customer Concentration Risk [Member] | Revenue Benchmark [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Concentration Risk, Percentage	14.80%		10.40%
Macy's [Member] | Credit Concentration Risk [Member] | Accounts Receivable [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Concentration Risk, Percentage					15.80%
Bed Bath & Beyond [Member] | Customer Concentration Risk [Member] | Revenue Benchmark [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Concentration Risk, Percentage		20.40%		13.90%
Kohl's [Member] | Credit Concentration Risk [Member] | Accounts Receivable [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Concentration Risk, Percentage					10.70%
Target [Member] | Credit Concentration Risk [Member] | Accounts Receivable [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Concentration Risk, Percentage							12.00%
Major Supplier 1 [Member] | Supplier Concentration Risk [Member] | Cost of Goods and Service Benchmark [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) [Line Items]
Payments to Suppliers	$ 5,000,000	$ 9,300,000	$ 6,400,000	$ 12,100,000

XML

3. Notes Payable and Long Term Debt (Details) - Schedule of Debt - USD ($) $ in Thousands	Sep. 30, 2019	Mar. 31, 2019
Schedule of Debt [Abstract]
Notes payable and debt-related party	$ 4,416	$ 0
Sale of intellectual property liability (see Note 4)	35	48
Total notes payable and debt	4,451	48
Less current portion – long term debt	3,537	25
Long term notes payable and debt	$ 914	$ 23

XML

CONDENSED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2019	Mar. 31, 2019
Current assets
Cash	$ 997	$ 1,741
Restricted cash	15	15
Accounts receivable, net of allowance for doubtful accounts of $122 and $89 at September 30, 2019 and March 31, 2019, respectively	3,725	5,102
Other receivables	693	207
Inventory, net	11,408	8,440
Prepaid expenses and other	1,451	490
Total current assets	18,289	15,995
Property and equipment and intangible assets, net of accumulated depreciation of $5,092 and $4,828 at September 30, 2019 and March 31, 2019, respectively	1,138	1,006
Operating lease right-of-use	741	0
Deposits	770	39
Total assets	20,938	17,040
Current liabilities
Accounts payable	1,697	1,508
Accounts payable related party	1,429	1,102
Accrued expenses	1,249	1,437
Customer deposits	124	181
Notes payable related party	3,516	0
Debt associated with sale of intellectual property-current portion	21	25
Operating lease liability-current portion	119	0
Total current liabilities	8,155	4,253
Long term liabilities
Debt associated with sale of intellectual property	14	23
Finance lease liability	46	72
Operating lease liability	1,270	0
Notes payable related party	900	0
Other liability	285	240
Total liabilities	10,670	4,588
Commitments and contingencies
Stockholders' equity
Common stock, $.001 par value, 750,000,000 shares authorized, 34,328,036 shares issued and outstanding at September 30, 2019 and March 31, 2019	34	34
Additional paid-in capital	140,817	140,817
Accumulated deficit	(130,583)	(128,399)
Total stockholders' equity	10,268	12,452
Total liabilities and stockholders' equity	$ 20,938	$ 17,040

XML

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash flows from operating activities:
Net (loss) income	$ (2,184)	$ 13
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization expense	264	193
Amortization of lease liability and right-of-use asset	63	0
Bad debt expense	33	44
Inventory allowance	(15)	20
Accretion of debt associated with sale of intellectual property	(13)	(17)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable	1,344	(3,927)
Decrease in other receivable	99	113
(Increase) in inventory	(2,953)	(6,016)
(Increase) in prepaid expense and other	(961)	(1,237)
(Increase) in deposits	(731)	0
Increase in accounts payable and accounts payable related party	516	1,713
(Decrease) in accrued expenses and other liability	(143)	(574)
Increase in accrued interest-related party	16	28
(Decrease) in customer deposits	(57)	(37)
Net cash (used) by operating activities	(4,722)	(9,684)
Cash flows from investing activities:
Purchases of equipment	(396)	(491)
Net cash (used) by investing activities	(396)	(491)
Cash flows from financing activities:
Proceeds from notes payable-related party	4,400	5,000
Repayment of capital lease	(26)	(4)
Net cash (used) by financing activities	4,374	4,996
Net (decrease) in cash	(744)	(5,179)
Cash and cash equivalents and restricted cash, beginning of period	1,756	7,497
Cash and cash equivalents and restricted cash, end of period	1,012	2,318
Cash paid during the year for:
Interest	0	0
Income taxes	0	0
Supplemental disclosure of non-cash investing and financing activities:
Initial recognition of right-of-use asset (Note 8)	758	0
Tenant improvement allowance (Note 8)	585	0
Initial lease liability arising from right-of-use asset (Note 8)	$ 1,343	$ 0

XML

7. Related Party Transactions

6 Months Ended

Sep. 30, 2019

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

7.     Related Party Transactions

See Note 6 “Related Party Transactions” of Form 10-K for the year ended March 31, 2019, as filed with the SEC on June 25, 2019 for a detailed discussion of related party transactions.

On June 20, 2019, AeroGrow entered into a Working Capital Term Loan Agreement in the principal amount of up to $10.0 million and a Real Estate Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro.  Interest is charged at the stated rate of 10% per annum and will be paid quarterly in arrears, in cash at the end of each September, December and March.  See Note 3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” above.

XML

Accounting Policies, by Policy (Policies)

6 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

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, 2019, (“Fiscal 2019”), as filed with the SEC on June 25, 2019.

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 September 30, 2019, the results of operations for the three and six months ended September 30, 2019 and 2018, and the cash flows for the six months ended September 30, 2019 and 2018. The results of operations for the three and six months ended September 30, 2019 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 66.2% of revenues in the fiscal year ended March 31, 2019 (“Fiscal 2019”) occurring in the four consecutive calendar months from September through January.  Furthermore, during the six-month period ended September 30, 2019, the Company has further expanded its distribution channels and invested in necessary inventory and overhead in anticipation of the Fiscal 2020 peak sales season.  The balance sheet as of March 31, 2019 is derived from the Company’s audited financial statements.

Use of Estimates, Policy [Policy Text Block]

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.  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.

Earnings Per Share, Policy [Policy Text Block]

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 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 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 potential 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. Securities 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 and include the following: (i) employee stock options to purchase 11,000 shares of common stock for the period ended September 30, 2019; and (ii) employee stock options to purchase 93,000 shares of common stock for the three months ended September 30, 2018.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

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 September 30, 2019.  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 September 30, 2019, the Company had two customers, Amazon.com, and Macy’s which represented 25.0% and 14.8% of net revenue, respectively.  For the three months ended September 30, 2018, the Company had two customers, Amazon.com, and Bed, Bath & Beyond, which represented 42.0% and 20.4% of net revenue, respectively. For the six months ended September 30, 2019, the Company had two customers, Amazon.com, and Macy’s, which represented 35.1% and 10.4% of the Company’s net revenue. For the six months ended September 30, 2018, the Company had two customers, Amazon.com, and Bed, Bath & Beyond, which represented 42.4% and 13.9% of the Company’s net revenue.

As of September 30, 2019, the Company had three customers, Macy’s, Amazon.com, and Kohl’s that represented 15.8%, 12.2% and 10.7%, respectively, of the Company’s outstanding accounts receivable.  As of March 31, 2019, the Company had two customers, Amazon.com and Target, which represented 44.3% and 12.0%, respectively, of outstanding accounts receivable.  The Company believes that all receivables from these customers are collectible.

Suppliers:

For the three months ended September 30, 2019, the Company purchased $5.0 million of inventories and other inventory-related items from one supplier, as we increase inventory levels for the holiday season. For the three months ended September 30, 2018, we purchased $9.3 million of inventories and other inventory-related items from two suppliers. For the six months ended September 30, 2019, the Company purchased $6.4 million of inventories and other inventory-related items from one supplier. For the six months ended September 30, 2018, we purchased $12.1 million of inventories and other inventory-related items from one supplier.  The purchase of inventories and other inventory-related items is tied to anticipated timing and amount of sales 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, these risks and any potential loss of supply could have an adverse impact on operations, especially in the short term.

Fair Value of Financial Instruments, Policy [Policy Text Block]

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, accounts payable, accrued expenses and notes payable related party, approximates their fair value at September 30, 2019 and March 31, 2019 due to the relatively short-term nature of these instruments. 

The Company’s intellectual property liability carrying value was determined by 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 September 30, 2019 and March 31, 2019, the fair value of the Company’s note payable and sale of the intellectual property liability were 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 September 30, 2019, the Company did not have any financial assets or liabilities that were measured at fair value on a recurring basis subsequent to initial recognition. 

Receivables, Trade and Other Accounts Receivable, Allowance for Doubtful Accounts, Policy [Policy Text Block]

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 day 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 $122,000 and $89,000 at September 30, 2019 and March 31, 2019, respectively.

Receivable [Policy Text Block]

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 Fidelity Information Services, 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 September 30, 2019 and March 31, 2019, the balance in this reserve account was $108,000 and $207,000, respectively. The other receivables also includes $585,000 for the estimate leasehold improvement reimbursement from the landlord of the new lease discussed within the lease section.

Advertising Cost [Policy Text Block]

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 340-20-25 Reporting on 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 develop 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 and six months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30, (in thousands)				Six Months Ended September 30, (in thousands)
	2019		2018		2019		2018
Direct-to-consumer	$	93	$	65	$	188	$	153
Retail		339		292		755		664
Other		-		6		1		21
Total advertising expense	$	432	$	363	$	944	$	838

Inventory, Policy [Policy Text Block]

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 September 30, 2019 and March 31, 2019 were as follows:

	September 30,		March 31,
	2019 (in thousands)		2019 (in thousands)
Finished goods	$	9,484	$	7,071
Raw materials		1,924		1,369
Total inventory	$	11,408	$	8,440

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 September 30, 2019 and March 31, 2019, the Company had reserved $111,000 and $126,000 for inventory obsolescence, respectively.  The inventory values are shown net of these reserves.

Lessee, Leases [Policy Text Block]

Leases

At lease inception, the Company determines whether an arrangement is or contains a lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities in the financial statements. ROU assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term. For operating leases, ROU assets and lease liabilities are recognized at the commencement date. The lease liability is measured as the present value of the lease payments over the lease term. The Company uses the rate implicit in the lease if it is determinable. When the rate implicit in the lease is not determinable, the Company uses its incremental borrowing rate at the commencement date of the lease to determine the present value of the lease payments. Operating ROU assets are calculated as the present value of the remaining lease payments, plus unamortized initial direct costs and any prepayments, less any unamortized lease incentives received. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised. The assessment of whether renewal or extension options are reasonably certain to be exercised is made at lease commencement. Factors considered in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of any leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option were not exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company has elected not to recognize an ROU asset and obligation for leases with an initial term of twelve months or less. The expense associated with short term leases is included in lease expense in the statement of operations.

For finance leases, after lease commencement the lease liability is measured on an amortized cost basis and increased to reflect interest on the liability and decreased to reflect the lease payment made during the period. Interest on the lease liability is determined each period during the lease term as the amount that results in a constant period discount rate on the remaining balance of the liability. The ROU asset is subsequently measured at cost, less any accumulated amortization and any accumulated impairment losses. Amortization on the ROU asset is recognized over the period from the commencement date to the earlier of (1) the end of the useful life of the ROU asset, or (2) the end of the lease term. The discount rate used by the Company for the finance leases is 10.0% which is the rate specified in the lease agreement or incremental borrowing rate, as appropriate, as the present value rate. To the extent a lease arrangement includes both lease and non-lease components, the components are accounted for separately.

The Company has various operating leases primarily for office space and other distribution centers, some of which include escalating lease payments and options to extend or terminate the lease. The Company determines if a contract is a lease at the inception of the arrangement. The exercise of lease renewal option is at the Company’s sole discretion and options are recognized when it is reasonably certain the Company will exercise the option. The Company’s leases have remaining terms of less than one year to seven years. The Company does not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants.

Operating lease ROU assets and liabilities are recognized at commencement date of lease agreements greater than one year based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term and variable lease costs are expensed as incurred.

The Company currently has two operating and reportable segments: (i) the Direct-to-Consumer segment, which is composed of sales directly from our website, mail order or customer calls to our customer service department; and (ii) the Retail segment, which is comprised of all sales related to retailers, including where possession of our product is taken and sold by the retailer in store or online, and drop ship orders that process from the retailer and drop directly to our warehouse for us to ship on behalf of the retailer.

The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products and the risk of loss to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements.  The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of September 30, 2019 or March 31, 2019.

The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.

There were no changes to the Company’s accounting for variable consideration under ASC 606. However, the classification from a liability to a contra asset to show net realizable accounts receivable results in a change in presentation on the balance sheet. Promotional and other allowances (variable consideration) recorded as a reduction to net sales primarily include consideration given to retail customers, including, but not limited to, the following:

● discounts granted off list prices to support price promotions to end-consumers by retailers;

● the Company’s agreed share of fees paid by retailers for advertising, in-store marketing and promotional activities; and

● incentives given to the Company’s retailers for achieving or exceeding certain predetermined purchases (i.e., rebates).

The Company’s promotional allowance programs with its retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one day to one year. The Company’s promotional and other allowances are calculated based on various programs with retail customers, and accruals are established during the year for anticipated liabilities. These accruals are based on agreed upon terms, as well as the Company’s historical experience with similar programs, and require management’s judgment with respect to estimating consumer participation and retail customer performance levels. Differences between such estimated expense and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.

The Company records estimated reductions to revenue for customer and distributor programs and incentive offerings, including promotions, rebates, and other volume-based incentives, based on historical rates.  Certain incentive programs require the Company to estimate the number of customers who will actually redeem the incentive based on our historical industry experience. As of September 30, 2019 and March 31, 2019, the Company reduced accounts receivable $459,000 and $1.2 million, respectively, as an estimate for the foregoing deductions and allowances within the “accounts receivable, net” and “accrued expenses” line of the balance sheets, respectively.

Standard Product Warranty, Policy [Policy Text Block]

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 $196,000 and $166,000 as of September 30, 2019 and March 31, 2019, 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, retail customers are provided a fixed allowance, usually in a range of 1% to 2%, to cover returned goods and this allowance is deducted from payments made to us by such customers. As of September 30, 2019 and March 31, 2019, the Company has recorded a reserve for customer returns of $164,000 and $313,000, respectively.

Segment Reporting, Policy [Policy Text Block]

Segments of an Enterprise and Related Information

U.S. GAAP utilizes a management approach based on allocating resources and assessing performance as the source of the Company’s reportable segments.  U.S. 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.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period, and early adoption is permitted. The Company is in the process of evaluating the potential impact of this new guidance on the Company’s consolidated financial statements and related disclosures.

Accounting Standards Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which, among other things, requires an entity to recognize a ROU asset and a lease liability on the balance sheet for substantially all leases, including operating leases. The Company adopted ASC 842 effective April 1, 2019 utilizing the modified retrospective approach such that prior year Financial Statements were not recast under the new standard. Adoption of this standard resulted in changes to the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Cash Flows and accounting policies for leases. See Note 8 for additional information regarding the new standard and its impact on the Company’s Financial Statements.

The Company adopted the new guidance as of the effective date of April 1, 2019 with no adjustments to the comparative period presented in the financial statements. In addition, the Company elected the package of practical expedients permitted under the transition guidance to not reassess: (1) whether any expired or existing contracts are, or contain, leases; (2) the lease classification for expired or existing leases; and (3) initial direct costs for existing leases.

The adoption of the guidance resulted in the recognition of ROU assets of $758,000 which amortization of the ROU began in June 2019 and additional lease liabilities for operating leases of $1.3 million as of April 1, 2019. The guidance had an impact on the Company's consolidated condensed statements of operations. See Note 8 for disclosures related to the Company's leases.

XML

8. Leases (Details) - Lessee, Operating Lease, Disclosure - USD ($) $ in Thousands	Sep. 30, 2019	Apr. 01, 2019	Mar. 31, 2019
Assets
Operating lease right-of-use assets	$ 741		$ 0
Liabilities
Operating lease, current	119		0
Operating lease, noncurrent	1,270		$ 0
Total lease liabilities	$ 1,389	$ 1,300

XML

5. Equity Compensation Plans and Employee Benefit Plans (Details) - Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable $ / shares in Units, shares in Thousands, $ in Thousands	6 Months Ended
	Sep. 30, 2019 USD ($) $ / shares shares
5. Equity Compensation Plans and Employee Benefit Plans (Details) - Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable [Line Items]
Options Outstanding (in Shares) | shares	11
Options Outstanding, Weighted-average Remaining Contractual Life	321 days
Options Outstanding, Weighted-average Exercise Price	$ 1.55
Options Outstanding, Aggregate Intrinsic Value (in Dollars) | $	$ 0
Options Exercise Price $5.31 [Member]
5. Equity Compensation Plans and Employee Benefit Plans (Details) - Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable [Line Items]
Exercise Price	$ 1.55
Options Outstanding (in Shares) | shares	11
Options Outstanding, Weighted-average Remaining Contractual Life	321 days
Options Outstanding, Weighted-average Exercise Price	$ 1.55

XML

10. Subsequent Events (Details) - Working Capital Term Loan Agreement [Member] - Scotts Miracle-Gro Company [Member] - USD ($) $ in Millions		1 Months Ended
	Jun. 20, 2019	Nov. 04, 2019	Sep. 30, 2019
10. Subsequent Events (Details) [Line Items]
Debt Instrument, Description	The proceeds will be made available as needed in increments of $500,000, the Company may pay down and reborrow during the Term Loan, not to exceed $10.0 million
Debt Instrument, Maturity Date	Mar. 31, 2020
Long-term Line of Credit			$ 3.5
Subsequent Event [Member]
10. Subsequent Events (Details) [Line Items]
Debt Instrument, Description		available in increments of at least $500,000
Debt Instrument, Maturity Date		Mar. 31, 2020
Notes Payable, Related Parties		$ 4.5
Proceeds from Related Party Debt		$ 1.0

XML

CONDENSED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Net revenue	$ 4,423	$ 8,576	$ 8,898	$ 12,319
Cost of revenue	2,958	5,246	5,977	7,556
Gross profit	1,465	3,330	2,921	4,763
Operating expenses
Research and development	276	130	487	289
Sales and marketing	1,369	1,630	2,772	2,873
General and administrative	893	898	1,787	1,583
Total operating expenses	2,538	2,658	5,046	4,745
Income (loss) from operations	(1,073)	672	(2,125)	18
Other (expense) income, net
Interest expense – related party	(52)	(29)	(54)	(29)
Other (expense) income, net	(1)	4	(5)	24
Total other (expense) income, net	(53)	(25)	(59)	(5)
Net income (loss)	$ (1,126)	$ 647	$ (2,184)	$ 13
Net income (loss) per share, basic and diluted (in Dollars per share)	$ (0.03)	$ 0.02	$ (0.06)	$ 0.00
Weighted average number of common shares outstanding, basic and diluted (in Shares)	34,328	34,328	34,328	34,328

XML

2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies

6 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

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, 2019, (“Fiscal 2019”), as filed with the SEC on June 25, 2019.

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 September 30, 2019, the results of operations for the three and six months ended September 30, 2019 and 2018, and the cash flows for the six months ended September 30, 2019 and 2018. The results of operations for the three and six months ended September 30, 2019 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 66.2% of revenues in the fiscal year ended March 31, 2019 (“Fiscal 2019”) occurring in the four consecutive calendar months from September through January.  Furthermore, during the six-month period ended September 30, 2019, the Company has further expanded its distribution channels and invested in necessary inventory and overhead in anticipation of the Fiscal 2020 peak sales season.  The balance sheet as of March 31, 2019 is derived from the Company’s audited financial statements.

Liquidity

Sources of funding to meet prospective cash requirements during Fiscal 2020 include the Company’s existing cash balances, cash flow from operations, and borrowings under the Company’s debt arrangements as discussed in Note 3.  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.  See Note 10 for subsequent events.

Significant Accounting Policies

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.  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 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 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 potential 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. Securities 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 and include the following: (i) employee stock options to purchase 11,000 shares of common stock for the period ended September 30, 2019; and (ii) employee stock options to purchase 93,000 shares of common stock for the three months ended September 30, 2018.

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 September 30, 2019.  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 September 30, 2019, the Company had two customers, Amazon.com, and Macy’s which represented 25.0% and 14.8% of net revenue, respectively.  For the three months ended September 30, 2018, the Company had two customers, Amazon.com, and Bed, Bath & Beyond, which represented 42.0% and 20.4% of net revenue, respectively. For the six months ended September 30, 2019, the Company had two customers, Amazon.com, and Macy’s, which represented 35.1% and 10.4% of the Company’s net revenue. For the six months ended September 30, 2018, the Company had two customers, Amazon.com, and Bed, Bath & Beyond, which represented 42.4% and 13.9% of the Company’s net revenue.

As of September 30, 2019, the Company had three customers, Macy’s, Amazon.com, and Kohl’s that represented 15.8%, 12.2% and 10.7%, respectively, of the Company’s outstanding accounts receivable.  As of March 31, 2019, the Company had two customers, Amazon.com and Target, which represented 44.3% and 12.0%, respectively, of outstanding accounts receivable.  The Company believes that all receivables from these customers are collectible.

Suppliers:

For the three months ended September 30, 2019, the Company purchased $5.0 million of inventories and other inventory-related items from one supplier, as we increase inventory levels for the holiday season. For the three months ended September 30, 2018, we purchased $9.3 million of inventories and other inventory-related items from two suppliers. For the six months ended September 30, 2019, the Company purchased $6.4 million of inventories and other inventory-related items from one supplier. For the six months ended September 30, 2018, we purchased $12.1 million of inventories and other inventory-related items from one supplier.  The purchase of inventories and other inventory-related items is tied to anticipated timing and amount of sales 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, these risks and any potential loss of supply could have an adverse impact on operations, especially in the short term.

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, accounts payable, accrued expenses and notes payable related party, approximates their fair value at September 30, 2019 and March 31, 2019 due to the relatively short-term nature of these instruments. 

The Company’s intellectual property liability carrying value was determined by 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 September 30, 2019 and March 31, 2019, the fair value of the Company’s note payable and sale of the intellectual property liability were 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 September 30, 2019, 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 day 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 $122,000 and $89,000 at September 30, 2019 and March 31, 2019, 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 Fidelity Information Services, 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 September 30, 2019 and March 31, 2019, the balance in this reserve account was $108,000 and $207,000, respectively. The other receivables also includes $585,000 for the estimate leasehold improvement reimbursement from the landlord of the new lease discussed within the lease section.

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 340-20-25 Reporting on 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 develop 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 and six months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30, (in thousands)				Six Months Ended September 30, (in thousands)
	2019		2018		2019		2018
Direct-to-consumer	$	93	$	65	$	188	$	153
Retail		339		292		755		664
Other		-		6		1		21
Total advertising expense	$	432	$	363	$	944	$	838

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 September 30, 2019 and March 31, 2019 were as follows:

	September 30,		March 31,
	2019 (in thousands)		2019 (in thousands)
Finished goods	$	9,484	$	7,071
Raw materials		1,924		1,369
Total inventory	$	11,408	$	8,440

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 September 30, 2019 and March 31, 2019, the Company had reserved $111,000 and $126,000 for inventory obsolescence, respectively.  The inventory values are shown net of these reserves.

Leases

At lease inception, the Company determines whether an arrangement is or contains a lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities in the financial statements. ROU assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term. For operating leases, ROU assets and lease liabilities are recognized at the commencement date. The lease liability is measured as the present value of the lease payments over the lease term. The Company uses the rate implicit in the lease if it is determinable. When the rate implicit in the lease is not determinable, the Company uses its incremental borrowing rate at the commencement date of the lease to determine the present value of the lease payments. Operating ROU assets are calculated as the present value of the remaining lease payments, plus unamortized initial direct costs and any prepayments, less any unamortized lease incentives received. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised. The assessment of whether renewal or extension options are reasonably certain to be exercised is made at lease commencement. Factors considered in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of any leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option were not exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company has elected not to recognize an ROU asset and obligation for leases with an initial term of twelve months or less. The expense associated with short term leases is included in lease expense in the statement of operations.

For finance leases, after lease commencement the lease liability is measured on an amortized cost basis and increased to reflect interest on the liability and decreased to reflect the lease payment made during the period. Interest on the lease liability is determined each period during the lease term as the amount that results in a constant period discount rate on the remaining balance of the liability. The ROU asset is subsequently measured at cost, less any accumulated amortization and any accumulated impairment losses. Amortization on the ROU asset is recognized over the period from the commencement date to the earlier of (1) the end of the useful life of the ROU asset, or (2) the end of the lease term. The discount rate used by the Company for the finance leases is 10.0% which is the rate specified in the lease agreement or incremental borrowing rate, as appropriate, as the present value rate. To the extent a lease arrangement includes both lease and non-lease components, the components are accounted for separately.

The Company has various operating leases primarily for office space and other distribution centers, some of which include escalating lease payments and options to extend or terminate the lease. The Company determines if a contract is a lease at the inception of the arrangement. The exercise of lease renewal option is at the Company’s sole discretion and options are recognized when it is reasonably certain the Company will exercise the option. The Company’s leases have remaining terms of less than one year to seven years. The Company does not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants.

Operating lease ROU assets and liabilities are recognized at commencement date of lease agreements greater than one year based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term and variable lease costs are expensed as incurred.

The Company currently has two operating and reportable segments: (i) the Direct-to-Consumer segment, which is composed of sales directly from our website, mail order or customer calls to our customer service department; and (ii) the Retail segment, which is comprised of all sales related to retailers, including where possession of our product is taken and sold by the retailer in store or online, and drop ship orders that process from the retailer and drop directly to our warehouse for us to ship on behalf of the retailer.

The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products and the risk of loss to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements.  The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of September 30, 2019 or March 31, 2019.

The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.

There were no changes to the Company’s accounting for variable consideration under ASC 606. However, the classification from a liability to a contra asset to show net realizable accounts receivable results in a change in presentation on the balance sheet. Promotional and other allowances (variable consideration) recorded as a reduction to net sales primarily include consideration given to retail customers, including, but not limited to, the following:

● discounts granted off list prices to support price promotions to end-consumers by retailers;

● the Company’s agreed share of fees paid by retailers for advertising, in-store marketing and promotional activities; and

● incentives given to the Company’s retailers for achieving or exceeding certain predetermined purchases (i.e., rebates).

The Company’s promotional allowance programs with its retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one day to one year. The Company’s promotional and other allowances are calculated based on various programs with retail customers, and accruals are established during the year for anticipated liabilities. These accruals are based on agreed upon terms, as well as the Company’s historical experience with similar programs, and require management’s judgment with respect to estimating consumer participation and retail customer performance levels. Differences between such estimated expense and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.

The Company records estimated reductions to revenue for customer and distributor programs and incentive offerings, including promotions, rebates, and other volume-based incentives, based on historical rates.  Certain incentive programs require the Company to estimate the number of customers who will actually redeem the incentive based on our historical industry experience. As of September 30, 2019 and March 31, 2019, the Company reduced accounts receivable $459,000 and $1.2 million, respectively, as an estimate for the foregoing deductions and allowances within the “accounts receivable, net” and “accrued expenses” line of the balance sheets, respectively.

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 $196,000 and $166,000 as of September 30, 2019 and March 31, 2019, 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, retail customers are provided a fixed allowance, usually in a range of 1% to 2%, to cover returned goods and this allowance is deducted from payments made to us by such customers. As of September 30, 2019 and March 31, 2019, the Company has recorded a reserve for customer returns of $164,000 and $313,000, respectively.

Segments of an Enterprise and Related Information

U.S. GAAP utilizes a management approach based on allocating resources and assessing performance as the source of the Company’s reportable segments.  U.S. 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 June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period, and early adoption is permitted. The Company is in the process of evaluating the potential impact of this new guidance on the Company’s consolidated financial statements and related disclosures.

Accounting Standards Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which, among other things, requires an entity to recognize a ROU asset and a lease liability on the balance sheet for substantially all leases, including operating leases. The Company adopted ASC 842 effective April 1, 2019 utilizing the modified retrospective approach such that prior year Financial Statements were not recast under the new standard. Adoption of this standard resulted in changes to the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Cash Flows and accounting policies for leases. See Note 8 for additional information regarding the new standard and its impact on the Company’s Financial Statements.

The Company adopted the new guidance as of the effective date of April 1, 2019 with no adjustments to the comparative period presented in the financial statements. In addition, the Company elected the package of practical expedients permitted under the transition guidance to not reassess: (1) whether any expired or existing contracts are, or contain, leases; (2) the lease classification for expired or existing leases; and (3) initial direct costs for existing leases.

The adoption of the guidance resulted in the recognition of ROU assets of $758,000 which amortization of the ROU began in June 2019 and additional lease liabilities for operating leases of $1.3 million as of April 1, 2019. The guidance had an impact on the Company's consolidated condensed statements of operations. See Note 8 for disclosures related to the Company's leases.

XML

5. Equity Compensation Plans and Employee Benefit Plans (Details) - shares	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Equity Compensation Plan (2005 Plan) [Member]
5. Equity Compensation Plans and Employee Benefit Plans (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures and Expirations in Period	93,000	0	93,000	50,000

XML

8. Leases (Tables)

6 Months Ended

Sep. 30, 2019

Disclosure Text Block [Abstract]

Lessee, Operating Lease, Disclosure [Table Text Block]

The table below sets forth supplemental Balance Sheet information for the Company’s leases.

	September 30, 2019
	(in thousands)
Assets
Operating lease right-of-use assets	$	741
Liabilities
Operating lease, current		119
Operating lease, noncurrent		1,270
Total lease liabilities	$	1,389

Lessee, Operating Lease, Liability, Maturity [Table Text Block]

The table below sets forth the future cash payments under such agreements for the remaining years are as follows:

Year Ending	Operating Leases			Financing Leases
	(in thousands)			(in thousands)
March 31, 2020	$	126		$	23
March 31, 2021		257			30
March 31, 2022		266			-
March 31, 2023		275			-
March 31, 2024		285			-
Thereafter		754			-
Total lease payments	$	1,963		$	53
Less: amount of lease payments representing interest		(574	)		(3	)
Present value of future minimum lease payments		1,389			50
Less: current obligations under leases		(119	)		(42	)
Long-term lease obligations	$	1,270		$	12

XML

2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) - Schedule of Inventory - USD ($) $ in Thousands	Sep. 30, 2019	Mar. 31, 2019
Schedule of Inventory [Abstract]
Finished goods	$ 9,484	$ 7,071
Raw materials	1,924	1,369
Total inventory	$ 11,408	$ 8,440

XML

3. Notes Payable and Long Term Debt

6 Months Ended

Sep. 30, 2019

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

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

The following represents the changes to our Notes Payable and Long Term Debt for the periods presented. 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, 2019, as filed with the SEC on June 25, 2019.  The following summarizes the changes to our Notes Payable, Long Term Debt and Current Portion – Long Term Debt for the periods presented.

As of September 30, 2019 and March 31, 2019, the outstanding balance of the Company’s notes payable and debt, including accrued interest, is as follows:

	September 30, 2019 (in thousands)		March 31, 2019 (in thousands)
Notes payable and debt-related party		4,416		-
Sale of intellectual property liability (see Note 4)		35		48
Total notes payable and debt		4,451		48
Less current portion – long term debt		3,537		25
Long term notes payable and debt	$	914	$	23

Scotts Miracle-Gro Term Loan Agreements

On June 20, 2019, the Company renewed a Working Capital Term Loan Agreement in the principal amount of up to $10.0 million with Scotts Miracle-Gro.  The proceeds will be made available as needed in increments of $500,000, the Company may pay down and reborrow during the Term Loan, not to exceed $10.0 million with a due date of March 31, 2020.  The Term Loan Agreement was secured by a lien on the assets of the Company.  Interest is charged at the stated rate of 10% per annum and is payable, in cash, quarterly in arrears at the end of each September, December and March. The funds provided under the Term Loan are used for general working capital and to acquire inventory to support anticipated growth as the Company expands its retail and its direct-to-consumer sales channels.  The Term Loan permits prepayments without penalty or premium, and as of September 30, 2019, the Company had borrowed $3.5 million under the Term Loan.  The Term Loan Agreement was filed as an exhibit to the Company’s Annual Report on Form 10-K filed with the SEC on June 26, 2019. Refer to Note 10 “Subsequent Events” for additional information regarding the term loan.

On June 20, 2019, the Company entered into a Real Estate Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro.  The funding provides capital to fund real estate related lease obligations. The proceeds will be made available as needed in increments of $100,000 not to exceed $1.5 million with a due date of March 31, 2022. Interest will be charged at the stated rate of 10% and will be paid quarterly in arrears on each of April 30, July 31, October 31 and January 31. As of September 30, 2019, the Company had borrowed $900,000 under the Real Estate Term Loan.

Liability Associated with Scotts Miracle-Gro Transaction

The Company and Scotts Miracle-Gro, the owner of approximately 80.5% of the Company’s outstanding common stock, have entered into an Intellectual Property Sale Agreement, a Technology License Agreement, a Brand License Agreement, and a Supply Chain Services Agreement, each of which has been filed with the SEC.  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 September 30, 2019 and March 31, 2019, a liability of $35,000 and $48,000, respectively, was recorded on the balance sheets for the Intellectual Property Sale Agreement.  As of September 30, 2019 and March 31, 2019, the accrued liability for the Technology Licensing Agreement, the accrual is calculated as 2% of the annual net sales and recorded as a liability and amounts to $866,000 and $680,000, respectively.  The accrued liability for the Brand License Agreement which is calculated at an amount equal to 5% of all seed pod kit and seed pod kit related sales and is recorded as a liability and amounts to $563,000 and $422,000 as of September 30, 2019 and March 31, 2019, respectively.

XML

Document And Entity Information - shares	6 Months Ended
	Sep. 30, 2019	Nov. 05, 2019
Document Information Line Items
Entity Registrant Name	AeroGrow International, Inc.
Document Type	10-Q
Current Fiscal Year End Date	--03-31
Entity Common Stock, Shares Outstanding		34,328,036
Amendment Flag	false
Entity Central Index Key	0001316644
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q2
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Ex Transition Period	false
Entity Interactive Data Current	Yes

XML

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY - USD ($) $ in Thousands	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balances at Mar. 31, 2018	$ 0	$ 34	$ 140,817	$ (128,108)	$ 12,743
Balances (in Shares) at Mar. 31, 2018	0	34,328,036
Net income (loss)				13	13
Balances at Sep. 30, 2018	$ 0	$ 34	140,817	(128,095)	12,756
Balances (in Shares) at Sep. 30, 2018	0	34,328,036
Balances at Jun. 30, 2018	$ 0	$ 34	140,817	(128,742)	12,109
Balances (in Shares) at Jun. 30, 2018	0	34,328,036
Net income (loss)				647	647
Balances at Sep. 30, 2018	$ 0	$ 34	140,817	(128,095)	12,756
Balances (in Shares) at Sep. 30, 2018	0	34,328,036
Balances at Mar. 31, 2019	$ 0	$ 34	140,817	(128,399)	12,452
Balances (in Shares) at Mar. 31, 2019	0	34,328,036
Net income (loss)				(2,184)	(2,184)
Balances at Sep. 30, 2019	$ 0	$ 34	140,817	(130,583)	10,268
Balances (in Shares) at Sep. 30, 2019	0	34,328,036
Balances at Jun. 30, 2019	$ 0	$ 34	140,817	(129,457)	11,394
Balances (in Shares) at Jun. 30, 2019	0	34,328,036
Net income (loss)				(1,126)	(1,126)
Balances at Sep. 30, 2019	$ 0	$ 34	$ 140,817	$ (130,583)	$ 10,268
Balances (in Shares) at Sep. 30, 2019	0	34,328,036

XML

5. Equity Compensation Plans and Employee Benefit Plans (Tables)

6 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement, Disclosure [Abstract]

Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable [Table Text Block]

Information regarding all stock options outstanding under the 2005 Plan as of September 30, 2019 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)
$	1.55		11		0.88	$	1.55
			11		0.88	$	1.55	$	-

XML

2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) - Schedule of Advertising Expenses - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) - Schedule of Advertising Expenses [Line Items]
Advertising expense	$ 432	$ 363	$ 944	$ 838
Direct-to-consumer [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) - Schedule of Advertising Expenses [Line Items]
Advertising expense	93	65	188	153
Retail [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) - Schedule of Advertising Expenses [Line Items]
Advertising expense	339	292	755	664
Other Advertising [Member]
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies (Details) - Schedule of Advertising Expenses [Line Items]
Advertising expense	$ 0	$ 6	$ 1	$ 21

XML

4. Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions (Details) - USD ($) $ / shares in Units, $ in Millions	Apr. 22, 2013	Sep. 30, 2019
Series B Preferred Stock [Member] | Scotts Miracle-Gro Company [Member]
4. Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions (Details) [Line Items]
Stock Issued During Period, Shares, New Issues	2,649,007
Shares Issued, Price Per Share	$ 0.001
Stock Issued During Period, Value, New Issues	$ 4.0
Convertible Preferred Stock, Terms of Conversion	On November 29, 2016 Scotts Miracle-Gro fully exercised the Warrant and, by its terms, the Series B Preferred Stock automatically converted into shares of common stock.
Scotts Miracle-Gro Company [Member]
4. Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions (Details) [Line Items]
Equity Method Investment, Ownership Percentage	80.50%	80.50%

XML

6. Income Taxes

6 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

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.  

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 September 30, 2019 and March 31, 2019, 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.

XML

10. Subsequent Events

6 Months Ended

Sep. 30, 2019

Subsequent Events [Abstract]

Subsequent Events [Text Block]

10.     Subsequent Events

As disclosed in Note 3 above, the proceeds under the SMG Working Capital Term Loan are made available in increments of at least $500,000 with a due date of March 31, 2020.  As of November 5, 2019, the Company had borrowed an aggregate of $4.5 million in principal under the SMG Working Capital Term Loan, a $1.0 million increase over the $3.5 million principal balance as of September 30, 2019. 

XML

8. Leases (Details) - Lessee, Operating Lease, Liability, Maturity - USD ($) $ in Thousands	Sep. 30, 2019	Apr. 01, 2019	Mar. 31, 2019
Lessee, Operating Lease, Liability, Maturity [Abstract]
Operating Leases due March 31, 2020	$ 126
Finance Leases due March 31, 2020	23
Operating Leases due March 31, 2021	257
Finance Leases due March 31, 2021	30
Operating Leases due March 31, 2022	266
Finance Leases due March 31, 2022	0
Operating Leases due March 31, 2023	275
Finance Leases due March 31, 2023	0
Operating Leases due March 31, 2024	285
Finance Leases due March 31, 2024	0
Operating Leases due Thereafter	754
Finance Leases due Thereafter	0
Operating Leases, Total lease payments	1,963
Finance Leases, Total lease payments	53
Operating Leases, amount of lease payments representing interest	(574)
Finance Leases, amount of lease payments representing interest	(3)
Operating Leases, Present value of future minimum lease payments	1,389	$ 1,300
Finance Leases, Present value of future minimum lease payments	46		$ 72
Operating Leases, current obligations under leases	(119)		0
Finance Leases, current obligations under leases	(42)
Operating Leases, Long-term lease obligations	1,270		$ 0
Finance Leases, Long-term lease obligations	$ 12

XML

6. Income Taxes (Details) - USD ($)	6 Months Ended	12 Months Ended
	Sep. 30, 2019	Mar. 31, 2019
Income Tax Disclosure [Abstract]
Deferred Tax Asset, Net, Valuation Allowance, Percent	100.00%	100.00%
Unrecognized Tax Benefits	$ 0	$ 0