AeroGrow Reports Results for the Quarter Ended September 30, 2013

November 12, 2013

BOULDER, CO--(Marketwired - Nov 12, 2013) - AeroGrow International, Inc. ( OTCQB : AERO ) ("AeroGrow" or the "Company"), which sells the AeroGarden® line of high-output, soil-free indoor gardens, seed pod kits, and accessory items, announced results for the quarter ended September 30, 2013, the second quarter of AeroGrow's 2014 fiscal year.

For the three months ended September 30, 2013, total revenue of $676,035 was down 41% relative to the same period in the prior year. The decline was caused by the strategic decision to reduce inventory as the Company transitioned to a new line of 'Miracle-Gro AeroGarden' products co-branded with the nationally recognized Miracle-Gro brand. Due to the inventory shortage, the Company's website was out of stock on most garden items throughout much of the quarter, and spending on advertising was reduced 64.6% from the prior year, further impacting revenue. Partially offsetting the decline in our direct-to-consumer channel was the large sales increase in our retail channel, from $6,419 in the prior period to $148,466 for three months ended September 30, 2013.

"Our April 2013 partnership with the Scott's Miracle-Gro Company presents multiple opportunities for sustained, long term growth," said Mike Wolfe, AeroGrow's President and Chief Executive Officer. "One of those is the co-branding of our product lines under the 'Miracle-Gro AeroGarden' brand, however sales this past quarter were negatively impacted in the short term as we drew down inventories of old merchandise in advance of the co-branded launch. That launch was completed during October and early November; we are once again in stock with new and co-branded products, and are well prepared with adequate inventory for selling this holiday season.

"In addition to co-branding, our efforts at entering the retail marketplace -- in some cases with the help of the team at Scotts -- has also proved successful. We are launching, testing or expanding in no fewer than 8 new major national accounts during the current quarter. These efforts are leaving us well poised for further expansion in coming quarters and years. Having restructured our company and generated significant efficiencies in the operating of our business over the past several years, I believe that as sales through these new channels increase we will begin to see this expansion drive significant improvement to our financial results.

"I'm also excited about several new products that we have added to our line. Our new LED AeroGarden, which is being featured in the current FrontGate catalog, is truly revolutionary. And our new growing technology that allows AeroGardeners to grow everything from strawberries to bonsai trees is sure to be a hit. We've added ten new products to our product line, all of which are featured in our new 40 page catalog (our biggest ever) and which can be viewed at AeroGarden.com."

On April 23, 2013 the Company announced that Scotts Miracle-Gro made a $4.5 million equity investment and IP acquisition with the Company, resulting in a 30% beneficial ownership interest in AeroGrow. In the process, AeroGrow took steps to entirely eliminate its long term debt, restructured the balance sheet to facilitate potential future transactions, and gained a valuable partnership for growth. The agreement affords AeroGrow the use of the globally recognized and highly trusted Miracle-Gro brand name while also providing AeroGrow a broad base of support in marketing, distribution, supply chain logistics, R&D, and sourcing.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2013 and September 30, 2012

Summary Overview

For the three months ended September 30, 2013, total revenue of $676,035 was down 40.9%, or $468,225 relative to the same period in the prior year. The decline was caused by a $592,087, or 53.2%, decline in sales to direct-to-consumer channels caused by lack of advertising due to low inventory levels as we rebrand our product line with the Miracle-Gro trade name. This decline was partially offset by the sales in our retail channels which were up 2,219.9%, or $142,047, primarily due to sales to newly acquired retail accounts, particularly Amazon.com. Sales to international distributors decreased by 73.4% to $6,600 in the three months ended September 30, 2013 relative to the same period in the prior year. This decrease is also attributable to lack of promotional activity due to our low inventory levels as we rebranded our product.

We saw a 32.4% year-over-year increase in the efficiency of our marketing efforts during the three months ended September 30, 2013, as measured by dollars of direct-to-consumer sales per dollar of advertising expense. Sales per dollar of advertising expense totaled $12.25 for the three months ended September 30, 2013, as compared to $9.26 per dollar of advertising expense in for the same period the previous year. Marketing efficiency improved as we reduced our marketing spending due to the lack of inventory. We spent only $42,512 during the three months that ended September 30, 2013 compared to $120,260 for the same period in the previous year.

On a product line basis, we experienced a year-over-year decrease in the mix of AeroGardens as a percent of total revenue as existing customers continued to purchase seed kits and accessories while we had low inventory levels of AeroGardens. For the three months ended September 30, 2013, AeroGarden sales represented 21.3% of total revenue, as compared to 35.9% in the prior year period. Seed kit and accessory sales increased as a percent of the total to 78.7% from 64.1% in the prior year period. 

Our gross margin for the three months ended September 30, 2013 was 42.5%, down from 52.3% in the prior year period as we shift our revenue mix from higher margin direct response customers and seed kit sales to lower margin retailers, international distributors and AeroGarden sales. Our gross margin is also affected by brand and intellectual property royalty fees associated with our strategic alliance with Scotts Miracle-Gro, which we believe will result in expanded sales outlets and decreased gross margins.

In aggregate, our total operating expenses decreased 18.0% or $177,760 year-over-year, principally because we did not replace our CFO who resigned in April 2013, spent $77,747 less in advertising expense and conducted less research and development costs after we introduced the AeroGrow Ultra in the third quarter of Fiscal 2013.

As a result of lower sales, our operating loss increased to $521,459 for the three months ended September 30, 2013, from $388,457 in the prior year period.

Other income and expense for the three months ended September 30, 2013 totaled to a net other expense of $100,368, as compared to net other expense of $10,917 in the prior year period. The net other expense in the current year period includes $12,321 expense relating to the fair value revaluation of the warrants held by Scotts Miracle-Gro. For the three months ended September 30, 2012, net other expense included the impact of $80,389 in non-recurring gains relating to adjustments in estimates of certain accounts payable accounts.

The net loss for the three months ended September 30, 2013 was $621,827, more than the $398,654 loss in the prior year due to the lower overall sales as a result of low inventory levels as we rebrand our product line with the Miracle-Gro trade name.

   
   
AEROGROW INTERNATIONAL, INC.  
CONDENSED STATEMENTS OF OPERATIONS  
(Unaudited)  
   
    Three Months ended September 30,     Six Months ended September 30,  
    2013     2012     2013   2012  
Product sales   $ 676,035     $ 1,144,260     $ 1,799,204   $ 2,560,793  
  Cost of revenue     388,405       545,868       1,109,849     1,238,200  
  Gross profit     287,630       598,392       689,355     1,321,593  
                               
Operating expenses                              
  Research and development     33,569       115,114       55,238     208,138  
  Sales and marketing     394,199       432,061       864,220     883,238  
  General and administrative     381,321       439,674       780,552     1,017,290  
                                 
  Total operating expenses   $ 809,089     $ 986,849     $ 1,700,010   $ 2,108,666  
                               
Loss from operations     (521,459 )     (388,457 )     (1,010,655)     (787,073 )
                               
Other (income) expense, net                              
  Fair value changes in derivative warrant liability     12,321       --       12,321     --  
  Interest (income)     (2 )     (2 )     (4)     (4 )
  Interest expense     101,546       103,814       192,713     212,789  
  Interest expense - related party     2,860       4,444       6,453     16,094  
  Debt conversion cost     -       -       -     6,648,267  
  Other (income)     (16,357 )     (98,059 )     (533,014)     (97,757 )
  Total other (income) expense, net     100,368       10,197       (321,531)     6,779,389  
                               
Net loss   $ (621,827 )   $ (398,654 )   $ (689,124)   $ (7,566,462 )
                               
Deemed dividend on convertible preferred stock     --       --       (268,157)     --  
Net loss attributable to common shareholders     (621,827 )     (398,654 )     (957,281)     (7,566,462 )
                               
Net loss per share, basic and diluted   $ (0.11 )   $ (0.07 )   $ (0.12)   $ (1.31 )
                               
Weighted average number of common shares outstanding, basic and diluted     5,904,877       5,809,545       5,904,877     5,786,606  
                               
                               
                               
AEROGROW INTERNATIONAL, INC.  
CONDENSED BALANCE SHEETS  
   
          March 31, 2013  
ASSETS   September 30, 2013 (Unaudited)     (Derived from Audited Statements)  
Current assets                
  Cash   $ 2,090,377     $ 524,491  
  Restricted cash     24,991       42,294  
  Accounts receivable, net of allowance for doubtful accounts of $3,505 and $1,100 at September 30, 2013 and March 31, 2013, respectively     77,424       173,096  
  Other receivables     57,943       168,511  
  Inventory     1,104,188       1,229,397  
  Prepaid expenses and other     500,562       204,927  
    Total current assets     3,855,485       2,342,716  
Property and equipment, net of accumulated depreciation of $2,939,893 and $2,868,610 at September 30, 2013 and March 31, 2013, respectively     332,009       265,508  
                 
Other assets                
  Intangible assets, net of $364 and $134,837 of accumulated amortization at September 30, 2013 and March 31, 2013, respectively     1,811       195,403  
  Deposits     145,014       145,201  
  Deferred debt issuance costs, net of accumulated amortization of $267,030 and $254,636 at September 30, 2013 and March 31, 2013, respectively     10,658       23,052  
    Total other assets     157,483       363,656  
Total assets   $ 4,344,977     $ 2,971,880  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                
Current liabilities                
  Notes payable   $ 309,250     $ 518,347  
  Notes payable - related party     67,369       122,026  
  Current portion - long term debt     1,051,997       899,399  
  Accounts payable     532,262       379,242  
  Accrued expenses     185,804       292,066  
  Customer deposits     86,488       156,929  
  Deferred rent     5,766       6,209  
      Total current liabilities     2,238,936       2,374,218  
Long term debt     --       1,168,711  
    Total liabilities     2,238,936       3,542,929  
Commitments and contingencies                
Stockholders' equity (deficit)                
  Preferred stock, $.001 par value, 20,000,000 shares authorized, 2,649,007 and 0 shares issued and outstanding at September 30, 2013 and March 31, 2013, respectively     2,649       --  
  Common stock, $.001 par value, 750,000,000 shares authorized, 5,904,877 and 5,904,877 shares issued and outstanding at September 30, 2013 and March 31, 2013, respectively     5,905       5,905  
  Additional paid-in capital     79,058,939       75,427,217  
  Accumulated deficit     (76,961,452 )     (76,004,171 )
Total stockholders' equity (deficit)     2,106,041       (571,049 )
Total liabilities and stockholders' equity (deficit)   $ 4,344,977     $ 2,971,880  
                 
                 
                 
AEROGROW INTERNATIONAL, INC.  
   
SUPPLEMENTAL INFORMATION  
   
SALES BY CHANNEL  
   
    Three Months Ended
September 30,
 
    2013     2012  
  Net revenue            
    Direct-to-consumer   77.2 %   97.3 %
    Retail   21.9 %   0.5 %
    International   0.9 %   2.2 %
      Total net revenue   100.0 %   100.0 %
             
             
SALES BY PRODUCT  
   
    Three Months Ended
September 30,
 
    2013     2012  
  % of Total Revenue            
    AeroGardens   21.3 %   35.9 %
    Seed kits and accessories   78.7 %   64.1 %
      Total   100.0 %   100.0 %
                   
                   
EBITDA CALCULATION
 
    Three Months Ended
September 30,
    2013     2012
  Loss from operations   $ (521,459 )   $ (388,457)
  Add back non-cash items:              
    Depreciation     34,243       31,236
    Amortization     (1,425 )     3,662
    Stock based compensation     43,531       61,407
    Warrant liability change     12,321       --
    Scott's Miracle-Gro IP royalty and branding     18,779       --
      Total non-cash items     107,449       96,305
  EBITDA   $ (414,010 )   $ (292,152)
                 

EBITDA is a non-GAAP measure. The GAAP measure most directly comparable to EBITDA is net earnings. The non-GAAP financial measure of EBITDA should not be considered as an alternative to net earnings. EBITDA is not a presentation made in accordance with GAAP and has important limitations as an analytical tool. EBITDA should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because EBITDA excludes some, but not all, items that affect net earnings and is defined differently by different companies, our definition of EBITDA may not be comparable to similarly titled measures of other companies.

About AeroGrow International, Inc.

Headquartered in Boulder, Colorado, AeroGrow International, Inc. is the leader in the rapidly growing indoor gardening market place. With a commitment to "Grow Anything... Anytime... Guaranteed," AeroGardens allow anyone to grow farmer's market fresh herbs, salad greens, tomatoes, chili peppers, flowers and more, indoors, year-round, so simply and easily that no green thumb is required. For more information, visit http://www.aerogrow.com.

About ScottsMiracle-Gro

With more than $2.8 billion in worldwide sales, The Scotts Miracle-Gro Company ( NYSE : SMG ), through its wholly-owned subsidiary, The Scotts Company LLC, is the world's largest marketer of branded consumer products for lawn and garden care. The Company's brands are the most recognized in the industry. In the U.S., the Company's Scotts®, Miracle-Gro® and Ortho® brands are market-leading in their categories, as is the consumer Roundup® brand, which is marketed in North America and most of Europe exclusively by Scotts and owned by Monsanto. In the U.S., Scotts operates Scotts LawnService®, the second largest residential lawn care service business. In Europe, the Company's brands include Weedol®, Pathclear®, Evergreen®, Levington®, Miracle-Gro®, KB®, Fertiligène® and Substral®. For additional information, visit http://www.scotts.com.

Forward-Looking Statements

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements by Mike Wolfe, and/or the Company, statements regarding growth of the AeroGarden product line, ability to raise capital, optimism related to the business, expanding sales, and other statements in this press release are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Such statements are based on current expectations, estimates and projections about the Company's business. Words such as expects, anticipates, intends, plans, believes, sees, estimates and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. Actual results could vary materially from the description contained herein due to many factors including continued market acceptance of the Company's products or the need to raise additional capital. In addition, actual results could vary materially based on changes or slower growth in the indoor garden market; the potential inability to realize expected benefits and synergies; domestic and international business and economic conditions; changes in customer demand or ordering patterns; changes in the competitive environment including pricing pressures or technological changes; technological advances; shortages of manufacturing capacity; future production variables impacting excess inventory and other risk factors listed from time to time in the Company's Securities and Exchange Commission (SEC) filings, including in "Item 1A Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2013. The forward-looking statements contained in this press release speak only as of the date on which they are made, and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this press release.