SOURCE: AeroGrow International, Inc.

AeroGrow International, Inc.

November 10, 2010 21:38 ET

AeroGrow Reports Results for Quarter Ended September 30, 2010

Operating Loss Reduced 34% Year-Over-Year, Continuing Year-Long Trend

BOULDER, CO--(Marketwire - November 10, 2010) - AeroGrow International, Inc. (OTCBB: AERO) ("AeroGrow" or the "Company"), makers of the AeroGarden® line of indoor gardening products, announced results for the quarter ended September 30, 2010. The quarter is AeroGrow's second of the 2011 fiscal year.

For the quarter ended September 30, 2010, AeroGrow reported revenue of $1.38 million, down 58% from the quarter ended September 30, 2009. The majority of the decline was due to an anticipated $1.5 million, or 84%, decline in sales to retailers as the Company continued to aggressively exit that low margin sales channel. In addition, direct-to-consumer sales were constrained by persistent out-of-stock inventory issues caused by liquidity issues earlier in the fiscal year, long lead times on products procured from China, and by a 37.2% year-over-year decline in advertising expenditures during the quarter. Nonetheless, the Company's direct response marketing results continued to improve despite the inventory stocking issues, with sales per dollar of advertising up 24% over the same quarter the prior year.

Earlier this year, the Company announced a strategic decision to focus on building its direct-to-consumer business and to reduce the Company's exposure to retailers. This decision was based on the relatively low profit margins, high capital and operational requirements, and changing customer dynamics in the retail channel. Over the last 9 months, this strategy has resulted in a year-over-year reduction in operating losses, despite the planned reduction in sales to retailers.

AeroGrow reported an operating loss for the quarter of $1.11 million, a 34% reduction from last year's operating loss of $1.71 million in the same quarter. The decreased loss reflected continued significant decreases in operating expenses, partially offset by the impact of lower sales and gross margin during the quarter.

"I continue to be confident that we are on the right path," said Jack Walker, Chairman and CEO of AeroGrow. "Our revenue is down, but that was expected. More importantly, our change in strategy is taking hold and we delivered a year-over-year improvement on the operating loss line for the fourth consecutive quarter.

"We are making progress on a host of initiatives to position the Company for top line growth, improved margins, and continued expense control. While gross margins are still below our targets, we are seeing signs of improvement that bode well for the coming quarter. With sequential revenue growth, higher margins, more aggressive spending on holiday advertising, and a lower overhead base, I believe we will see improved results in our key December quarter."

Results of Operations:

For the three months ended September 30, 2010, sales totaled $1,379,617, a $1,906,332, or 58.0% decrease from the same period in the prior year. $1,544,408, or 81.0%, of the overall decline in revenue resulted from an 84.3% reduction in sales to retailers, a result of our strategic decision to reduce our exposure to the retail channel because of its low margins and high capital requirements. Our direct-to-consumer sales also declined, by 22.1% from the prior year, reflecting the combined impact of a 37.2% reduction in the amount of revenue-generating media spending, the impact of inventory stock outs during the period which were caused by cash constraints earlier in the fiscal year and long lead times on products procured from China, and lower average pricing on sales of our products resulting from our shift to an "everyday low pricing" sales model. Despite these issues, the effectiveness of our direct-to-consumer advertising continued to improve, and increased 24.0% year-over-year as we generated $8.68 of direct-to-consumer revenue for every dollar of revenue-generating media spent in the 2010 period, as compared to $7.00 of direct-to-consumer revenue per media dollar in 2009. The strategic shift away from sales to retailers, combined with the impact of inventory stock outs, was reflected in lower sales of AeroGardens, which declined by 78.2% from the prior year. Recurring revenue from seed kit and accessories declined slightly, by 7.8%, as these sales were not as affected as AeroGardens by the reduced retail presence or by the inventory stocking issues. Seed kit and accessory sales represented 63.0% percent of total revenue for the three months ended September 30, 2010, up from 28.7% in the prior year period.

Gross margin for the three months ended September 30, 2010 was 24.7%, as compared to 30.9% for the year earlier period. The decrease in percentage margin reflected a variety of factors during the current year period, including lower average pricing on sales of our products, operational inefficiencies caused by cash and inventory constraints, and fixed manufacturing and distribution facility costs spread over a lower revenue base. Operating expenses other than cost of revenue decreased $1,262,700, or 46.4%, from the prior year reflecting cost saving initiatives, reductions in media spending, and staffing reductions.

Our loss from operations totaled $1,117,549 for the three months ended September 30, 2010, as compared to a loss of $1,705,661 in the prior year period. The decreased loss reflected the significant decrease in operating expenses other than cost of revenue, partially offset by the impact of lower sales and gross margin.

Other income and expense for the three months ended September 30, 2010 totaled to a net other expense of $1,012,004, as compared to net other expense of $59,593 in the prior year period. The net other expense in the current year period included $760,900 in non-cash expense related to the combined effect of the amortization of deferred financing costs (principally the value of warrants granted to a placement agent) and a debt discount, on convertible notes we issued during the current fiscal year. These notes were considered to have been issued at a discount because they had a conversion price lower than the market price of our stock at the time of issuance, and because the notes were issued with warrants to purchase our common stock. The resulting discount is being amortized to expense over the three-year life of the notes, as are the related financing costs. The prior year net other expense amount included $180,286 in gains related to accounts payable balance reduction agreements negotiated with certain vendors.

The year-over-year increase in other expense more than offset the reduction in the operating loss, and, as a result, the net loss for the three months ended September 30, 2010 increased to $2,129,553 from a net loss of $1,765,254 in the same period a year earlier.

The following table sets forth, as a percentage of sales, our financial results for the three months ended September 30, 2010 and the three months ended September 30, 2009:

                                                     Three Months Ended
                                                        September 30,
                                                  ------------------------
                                                      2010         2009
                                                  -----------  -----------
Revenue
  Product sales - retail, net                            20.8%        55.8%
  Product sales - direct to consumer, net                77.7%        41.8%
  Product sales - international                           1.5%         2.4%
                                                  -----------  -----------
    Total sales                                         100.0%       100.0%

Operating expenses
  Cost of revenue                                        75.3%        69.1%
  Research and development                                3.8%         5.3%
  Sales and marketing                                    43.0%        38.0%
  General and administrative                             58.9%        41.2%
                                                  -----------  -----------
    Total operating expenses                            181.0%       151.9%
                                                  -----------  -----------
Profit/(loss) from operations                           -81.0%       -51.9%
                                                  ===========  ===========



                          AEROGROW INTERNATIONAL, INC.
                      CONDENSED STATEMENTS OF OPERATIONS
                                  (Unaudited)


                           Three Months ended         Six Months ended
                              September 30,             September 30,
                        ------------------------  ------------------------
                            2010         2009         2010         2009
                        -----------  -----------  -----------  -----------
Revenue
  Product sales         $ 1,379,617  $ 3,285,949  $ 3,197,636  $ 6,265,642

Operating expenses
  Cost of revenue         1,038,812    2,270,556    2,360,515    4,140,361
  Research and
   development               52,745      173,354       89,760      292,552
  Sales and marketing       593,309    1,248,102    1,410,287    2,407,898
  General and
   administrative           812,300    1,299,598    1,708,483    2,753,806
                        -----------  -----------  -----------  -----------
  Total operating
   expenses             $ 2,497,166  $ 4,991,610  $ 5,569,045  $ 9,594,617
                        -----------  -----------  -----------  -----------

Profit (loss) from
 operations              (1,117,549)  (1,705,661)  (2,371,409)  (3,328,975)

Other (income) expense,
 net
  Interest (income)          (1,900)         (61)      (8,530)        (141)
  Interest expense          933,400      239,940    1,451,500      485,990
  Interest expense -
   related party             94,490            -      155,749            -
  Other (income)            (13,986)    (180,286)    (111,525)    (987,838)
  Total other (income)
   expense, net           1,012,004       59,593    1,487,194     (501,989)
                        -----------  -----------  -----------  -----------

Net income (loss)       $(2,129,553) $(1,765,254) $(3,858,603) $(2,826,986)
                        ===========  ===========  ===========  ===========

Net income (loss) per
 share, basic           $     (0.17) $     (0.14) $     (0.31) $     (0.22)
                        ===========  ===========  ===========  ===========

Net income (loss) per
 share, diluted         $     (0.17) $     (0.14) $     (0.31) $     (0.22)
                        ===========  ===========  ===========  ===========

Weighted average number
 of common shares
 outstanding used to
 calculate basic net
 income (loss) per
 share                   12,566,486   12,422,249   12,566,486   12,729,125
                        ===========  ===========  ===========  ===========

Effect of dilutive
 securities:
  Equity based
   compensation                   -            -            -            -
Weighted average number
 of common shares
 outstanding used to
 calculate diluted
 net income per share    12,566,486   12,422,249   12,566,486   12,729,125
                        ===========  ===========  ===========  ===========





                          AEROGROW INTERNATIONAL, INC.
                            CONDENSED BALANCE SHEETS


                                                  September     March 31,
                                                  30, 2010        2010
                                                ------------  ------------
                                                                (Derived
                                                              from Audited
ASSETS                                          (Unaudited)    Statements)
Current assets
  Cash                                          $    629,178  $    249,582
  Restricted cash                                     87,904       443,862
  Accounts receivable, net of allowance for
   doubtful accounts of $85,416 and $87,207
   at September 30, 2010 and March 31, 2010,
   respectively                                      360,411       478,113
  Other receivables                                  104,108       259,831
  Inventory                                        4,245,458     3,493,732
  Prepaid expenses and other                         552,994       338,095
                                                ------------  ------------
            Total current assets                $  5,980,053  $  5,263,215

Property and equipment, net of accumulated
 depreciation of $2,875,420 and $2,486,377
 at September 30, 2010 and March 31, 2010,
 respectively                                        672,731     1,002,530
Other assets
  Intangible assets, net of $16,468 and $6,854
   of accumulated amortization at September 30,
   2010 and March 31, 2010, respectively             270,053       275,599
  Deposits                                           217,840       240,145
  Deferred debt issuance costs, net of
   accumulated amortization of $244,316
   and $486,791 at September 30, 2010 and March
   31, 2010, respectively                          1,867,280        62,291
                                                ------------  ------------
            Total other assets                  $  2,355,173  $    578,035
                                                ------------  ------------
Total Assets                                    $  9,007,957  $  6,843,780
                                                ============  ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
  Current portion - long term debt - related
   party                                        $    143,743  $    911,275
  Current portion - long term debt                 1,914,636     3,053,984
  Accounts payable                                 1,974,605     3,354,703
  Accrued expenses                                 2,006,646     1,449,977
  Customer deposits                                   13,223       339,041
  Deferred rent                                       32,519        40,773
                                                ------------  ------------
            Total current liabilities           $  6,085,372  $  9,149,753
Long term debt                                     1,407,070     1,020,957
Long term debt - related party                       136,926             -
Stockholders' equity
  Preferred stock, $.001 par value, 20,000,000
   shares authorized and 7,586 shares issued
   and outstanding at September 30, 2010
   and March 31, 2010                                      8             8
  Common stock, $.001 par value, 500,000,000
   shares authorized, 12,650,605 and
   12,398,249 shares issued and outstanding at
   September 30, 2010 and March 31, 2010,
   respectively                                       12,650        12,398
  Additional paid-in capital                      61,497,338    52,933,467
  Accumulated (deficit)                          (60,131,407)  (56,272,803)
                                                ------------  ------------
Total Stockholders' Equity (Deficit)            $  1,378,589  $ (3,326,930)
                                                ------------  ------------
Total Liabilities and Stockholders' Equity
 (Deficit)                                      $  9,007,957  $  6,843,780
                                                ============  ============



SALES BY CHANNEL


                                           Three Months Ended September 30,
                                           --------------------------------
Product Revenue                                 2010             2009
                                           ---------------  ---------------
  Retail, net                              $       287,373  $     1,831,781
  Direct to consumer, net                        1,071,606        1,375,141
  International                                     20,638           79,027
                                           ---------------  ---------------
     Total                                 $     1,379,617  $     3,285,949
                                           ===============  ===============



SALES BY PRODUCT TYPE

                                           Three Months Ended September 30,
                                           -------------------------------
                                                2010             2009
                                           --------------   --------------
Product Revenue
  AeroGardens                              $      510,458   $    2,343,439
  Seed kits and accessories                       869,159          942,510
                                           --------------   --------------
     Total                                 $    1,379,617   $    3,285,949
                                           ==============   ==============
% of Total Revenue
  AeroGardens                                        37.0%            71.3%
  Seed kits and accessories                          63.0%            28.7%
                                           --------------   --------------
     Total                                          100.0%           100.0%
                                           ==============   ==============

About AeroGrow International, Inc.:

Founded in 2002 in Boulder, Colorado, AeroGrow International, Inc. is dedicated to the research, development and marketing of the AeroGarden line of foolproof, dirt-free indoor gardens. 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. See www.aerogrow.com.

FORWARD-LOOKING STATEMENTS

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements by Jack Walker and/or the Company, statements regarding growth of the AeroGarden product line, optimism related to the business, direct-to-consumer strategy, expanding sales, improved margins, operating efficiencies 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 under "risk factors" and elsewhere. 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.

Contact Information

  • John Thompson
    AeroGrow International, Inc.
    303-444-7755