AEROGROW INTERNATIONAL, INC.
This Annual Report on Form 10-K ("Annual Report"), including the "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contains forward-looking statements regarding future events and our future
results that are based on current expectations, estimates, forecasts, and
projections about the industry in which we operate and the beliefs and
assumptions of our management. Words such as "expects," "anticipates,"
"targets," "goals," "projects," "may," "will," "would," "could," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words, and similar
expressions are intended to identify such forward-looking statements. These
forward looking statements may include, among others, statements concerning our
expectations regarding our business, growth prospects, revenue trends, operating
costs, results of operations, working capital requirements, access to funding,
competition and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. These forward-looking statements are
subject to risks, uncertainties, and assumptions that are difficult to predict.
Therefore, actual results may differ materially and adversely from expectations
expressed or implied in forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in this Report under the section entitled "Risk Factors" in Item 1A of Part I
and elsewhere, and in other reports we file with the SEC , specifically the most
recent reports on Form 10-Q. While forward-looking statements are based on
reasonable expectations of our management at the time that they are made, you
should not rely on them. We undertake no obligation to revise or update publicly
any forward-looking statements for any reason.
Executive Overview
We are in the business of developing, marketing, and distributing advanced
indoor aeroponic and hydroponic garden systems. After several years of initial
research and product development, we began sales activities in March 2006 . Since
that time we have expanded our operations and currently offer four different
indoor garden models with many sub models with each model category, more than 40
seed pod kits, and various gardening and kitchen accessories. Although our
business is focused on the United States and Canada , our products are available
in other countries and we have continued to expand our market into Europe ,
including the United Kingdom , France , Germany , Italy and Spain .
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Background of
As disclosed above under the caption "Item 1. Business," we entered into a Securities Purchase Agreement and strategic alliance inApril 2013 with a wholly owned subsidiary ofScotts Miracle-Gro . Pursuant to the Securities Purchase Agreement, we issued (i) 2,649,007 shares of Series B Convertible Preferred Stock, par value$0.001 per share (the "Series B Preferred Stock); and (ii) a warrant to purchase shares of our common stock for an aggregate purchase price of$4.0 million . InNovember 2016 ,Scotts Miracle-Gro converted all of its Series B Preferred Stock and exercised all of its warrants, thereby increasing its equity ownership to approximately 80% of the Company's outstanding common stock. In addition, as part of the strategic alliance, we entered into several other agreements withScotts Miracle-Gro , including: (i) an Intellectual Property Sale Agreement in which we agreed to sell all intellectual property associated with our hydroponic products, other than theAeroGrow and AeroGarden trademarks, free and clear of all encumbrances, toScotts Miracle-Gro for$500,000 ; (ii) a Technology Licensing Agreement; (iii) a Brand License Agreement; and (iv) a Supply Chain Management Agreement. In addition to the initial working capital infusion of approximately$4.5 million in Fiscal Year 2014 from the Securities Purchase Agreement and Intellectual Property Sale Agreement, as well as ongoing seasonal term loans to fund operations through Fiscal Year 2020, we believe that the strategic alliance affords us the use of the globally recognized and highly trusted Miracle-Gro brand name. We believe that the strategic alliance also givesScotts Miracle-Gro an entry into the burgeoning indoor gardening market, while providingAeroGrow a broad base of support in marketing, distribution, supply chain logistics, R&D, and sourcing. We have used the opportunities provided by our strategic alliance withScotts Miracle-Gro to re-establish our presence in the retail sales channels. During the first six months of Fiscal 2014, we cobranded our products with the Miracle-Gro AeroGarden trade name. We have since renewed our focus in growing the business via retail markets.
Recent Proposal by
In a Schedule 13D/A filed byScotts Miracle-Gro with theSEC onMarch 2, 2020 ,Scotts Miracle-Gro made an unsolicited proposal toAeroGrow recommending a range of operational adjustments for consideration by the AeroGrow Board of Directors that would effectively outsource most of Issuer's operations toScotts Miracle-Gro or an affiliate ofScotts Miracle-Gro . The proposal and related transactions may pose conflicts of interest and may result in: (i) cessation ofAeroGrow's status as a publicly traded company andSEC -reporting company; and (ii) may result in the liquidation of common stock held by minority shareholders at a price that may not represent the full future economic value of the common stock. See Item 1A. Risk Factors.
New Developments - Fiscal Year 2020
During Fiscal 2020, we continued our strategic growth initiative by offering our products in approximately 2,100 stores and we also enhanced the depth and breadth of our direct sales distribution channels by distributing approximately 346,000 direct mail catalogues, significantly increasing our web-selling presence and developing a robust e-mail marketing program. In Fiscal 2020, approximately 66.0% of our total sales were to retail customers and approximately 34.0% of our total sales were to direct customers. Amazon.com, Inc., our largest retailer customer, comprised approximately 56.9% of our sales to retailers and 36.6% of our total sales during Fiscal 2020. The cobranding of products withScotts Miracle-Gro on seed pod kits remains in place. InJune 2019 , we also entered into a$10.0 million Term Loan Agreement withScotts Miracle-Gro in order to provide incremental working capital in advance of our peak selling season. Interest was charged at the stated rate of 10% per annum. During the fourth quarter Fiscal 2020 the impact of the ongoing COVID-19 pandemic began to affect our operations and financial results as there were changes to general economic and retail conditions. We began to see an increase in sales from the COVID-19 pandemic but also saw some risk in retail conditions as retailers temporarily closed storefronts, however, consumers shifted purchasing behavior to online purchases. As consumers shift to online purchases our product is well suited for sales as consumers can shop and research at their leisure. 17
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Our Critical Accounting Policies
Inventory
Inventories are valued at the lower of cost, as determined by standard pricing,
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. We record 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 our products are
manufactured overseas and are recorded at cost, which includes product costs for
purchased and manufactured products, and freight and transportation costs for
inbound freight from manufacturers.
March 31 , March 31 ,
2020 2019
Inventory (in thousands)
Finished goods $ 3,191 $ 7,071
Raw materials 1,597 1,369
$ 4,788 $ 8,440
The Company determines an inventory obsolescence reserve based on management's
historical experience and establishes reserves against inventory according to
the product lifecycle. As of March 31, 2020 and 2019, the Company reserved
$151,000 and $126,000 , respectively, for inventory obsolescence. The increase in
the inventory obsolescence is attributable to examining aged inventory,
including seeds, displays and replacement part and offset by disposing of the
inventory that had been reserved.
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 at a point in time as the products are homogenous and can be sold to a variety of customers and 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 ofMarch 31, 2020 orMarch 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.
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 given directly to 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 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 range
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 its 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 in which 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 historical industry experience. As of March 31, 2020 and
2019, the Company recorded a $744,000 reduction in and $1.2 million of accrued
expenses, respectively, as an estimate for the foregoing deductions and
allowances within the "accounts receivable, net" line of the balance sheets,
respectively.
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The Company reserves for known and potential returns and associated refunds or credits related to such returns based upon historical experience. In certain cases, customers are provided a fixed allowance, usually in the 1% to 2% range, to cover returned goods. This allowance is deducted from payments made to us by such retailers. As ofMarch 31, 2020 and 2019, the Company recorded a reserve for customer returns of$430,000 and$313,000 , respectively.
Warranty
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 our 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 our warranty obligation. Based upon the foregoing, the Company recorded a provision for potential future warranty costs of$226,000 and$166,000 , as ofMarch 31, 2020 and 2019, respectively. Shipping and Handling Costs Shipping and handling costs associated with inbound freight are recorded in cost of revenue and are capitalized in inventory until the inventory is sold. Shipping and handling costs associated with freight out to customers are also included in cost of revenue. Shipping and handling charges paid by customers are included in net revenue.
Stock Based Compensation
The Company accounts for share-based payments in accordance withFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 718-10-55 Shared-Based Payment. The Company uses the Black-Scholes option valuation model to estimate the fair value of stock option awards issued. For the years endedMarch 31, 2020 , and 2019, equity compensation in the form of stock options and grants of restricted stock that vested totaled$0 .
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, we record media and marketing costs related to our 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 Capitalized Advertising Costs. As prescribed by ASC 340-20-25, direct response 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 re-entered the retail distribution channel, it has expanded advertising into online gateway and portal advertising, as well as placement in third party catalogues. Advertising expenses for the years endedMarch 31, 2020 andMarch 31, 2019 , were as follows: Fiscal Year Ended March 31, (in thousands) 2020 2019 Direct-to-consumer $ 797 $ 674 Retail 3,007 3,093 General 1,190 317 Total advertising expense$ 4,994 $ 4,084 As ofMarch 31, 2020 andMarch 31, 2019 , the Company deferred$84,000 and$3,000 , respectively, related to such media and advertising costs, including capitalized pay-per-click, catalogue costs (as described above) and commercial production costs. The costs are included in the prepaid expenses and other line of the balance sheets. Research and Development Research, development, and engineering costs are expensed as incurred. Research, development, and engineering expenses primarily include payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and development support. 19
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Table of Contents New Accounting Pronouncements
Recently Issued Accounting Pronouncements
InJune 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 afterDecember 15, 2022 , 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
InFebruary 2016 , the FASB issued ASU 2016-02, Leases ("ASC 842"), which, among other things, requires an entity to recognize a right-of-use ("ROU") asset and a lease liability on the balance sheet for substantially all leases, including operating leases. The Company adopted ASC 842 effectiveApril 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 Balance Sheets, Condensed Statements of Operations and accounting policies for leases but did not have an impact on the Statements of Cash Flows. See Note 8 for additional information regarding the new standard and its impact on the Company's Financial Statements.
Inflation, Seasonality and Currency Fluctuations
We do not currently expect inflation to have a significant effect on our operations. Because our garden systems are designed for indoor gardening use, we experience slower sales inthe United States andCanada during the late spring and summer months when our consumers may tend to garden outdoors. In addition, we have experienced increased sales during the four-month holiday season beginning in October and continuing through January. We sell to our international distributors inU.S. dollars thereby minimizing effects from currency fluctuations. We purchase our gardens and other accessory products from Chinese manufacturers, and these purchases are denominated inU.S. dollars. However, over time, the cost of the products we procure fromChina may be affected by changes in the value of theU.S. dollar relative to the Chinese currency and/or by labor and material cost increases faced by our Chinese manufacturers. Results of Operations
The following table sets forth, as a percentage of sales, our financial results for the last two fiscal years:
Fiscal Years Ended March 31,
2020 2019
Net revenue
Direct-to-consumer 34.0 % 23.5 %
Retail 64.3 % 72.4 %
International 1.7 % 4.1 %
Total net revenue 100.0 % 100.0 %
Cost of revenue 64.2 % 65.2 %
Gross profit 35.8 % 34.8 %
Operating expenses
Research and development 2.2 % 1.7 %
Sales and marketing 22.6 % 24.6 %
General and administrative 10.2 % 8.5 %
Total operating expenses 35.0 % 34.8 %
Income from operations 0.8 % 0.0 %
Total other income/(expense), net (0.6 %) (0.9 %)
Net income (loss) 0.2 % (0.9 %)
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Fiscal Years Ended
Summary Overview
Our net revenue in Fiscal 2020 totaled$39.2 million , an increase of 14.1% from Fiscal 2019 revenues. This increase was primarily due to our increased focus on driving sales with more targeted advertising campaigns, which led to: (i) increased Direct-to-consumer sales; (ii) continued sales through broader channels in store and web/internet channels (Amazon.com, woot!,Good Morning America , Macy's, etc.); and (iii) expanded sales through customer department stores (namely Macy's, and Kohl's). Additionally, the sales increase resulted from newly acquired retail accounts, including tests withMediocre Corporation and Wayfair. In summary, we believe increased targeted and general advertising drove sales increases in all of our channels. Our sales to retailer customers increased by 1.4% to$25.2 million during Fiscal 2020. Retailer sales encompass sales to both traditional in-store and on-line retailers. The increase in sales to retailers reflected continued sales to the existing Amazon.com, woot! and Macy's accounts, as well as newly acquired retail accounts such as Meh.com and Wayfair. While we limited the number of sales into retail stores during FY20, improved advertising generated better product awareness and increased sales to end users, which resulted in less reserves for discounts and actual returns. We spent$3.0 million in advertising in the retail distribution channel, including more targeted campaigns such as pay per click and banner ads, catalogues, and continued to promote general brand awareness. Direct-to-consumer sales during Fiscal 2020 increased to$13.3 million , or 64.6%, in the face of alternative on-line retailer outlets (primarily Amazon.com). This increase resulted primarily from our efficiency of our promotional campaigns, scheduled promotional calendar and a redesigned and effective website. We believe that our increased presence on Amazon, and other select online retailers , as well as continued momentum from our general advertising and marketing campaign and an expanded user-base, led to greater customer visibility. International sales during Fiscal 2020 decreased to$685,000 , a decrease of 51.3%, as we continue to balance profitability and the desire to test the international markets and understand the trends and acceptance of our product in international markets. The international markets consisted primarily of sales to Amazon platforms in theUnited Kingdom ,France ,Germany ,Italy andSpain . For the year endedMarch 31, 2020 , total gross dollar sales of AeroGardens and seed pod kit accessories increased by 1.8% and 34.5%, respectively. AeroGarden sales, net of allowances, represented 72.1% of total revenue, as compared to 76.4% in the prior year period. This percentage decrease, on a product line basis, was primarily attributable to growth in customers purchasing more seed pod kits and accessories and the decreased number of gardens sold into stores for the holiday season during Fiscal 2020. Seed pod kit and accessory gross sales increased as a percent of the total sales from 23.6% in Fiscal 2019 to 27.8% in Fiscal 2020, primarily as a result of the continued popularity of AeroGardens that have been placed in service over the past few years. For Fiscal 2020, we incurred$5.0 million in advertising expenditures, a 22.3% year-over-year increase compared to the Fiscal Year ended 2019, which included$812,000 in general television, YouTube, Facebook and other media advertising. The Company views this investment as a long term commitment to increasing awareness of the AeroGarden brand and indoor gardening category to support growth in both our direct-to-consumer and retail channels. Overall advertising efficiency (measured as total revenue per dollar of advertising expense) decreased from$8.42 to$7.85 for the years endedMarch 31, 2019 andMarch 31, 2020 , respectively, due to a strategic focus on retail advertising along with more measurable general advertising and brand awareness through digital channels. These expenditures included: ? Direct-to-consumer advertising increased 18.3% to$797,000 in Fiscal 2020 from$674,000 in Fiscal 2019, primarily as a result of increased pay-per-click, catalogues, social media expenditures and targeted
advertising. Efficiency, as measured by dollars of direct-to-consumer
sales per dollar of related advertising expense, increased to
39.2%, for Fiscal 2020, as compared to
? Retail advertising decreased
focused on driving product awareness on behalf of our retail partners and
invested in: (i) platforms made available by our retailers; (ii) fewer
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. retail catalogues, website
banner ads, email blasts, targeted search campaigns, etc.). Webelieve that the advertising in the retail channel will be more targeted
and generate greater direct-to-consumer sales through improved customer
awareness.
? Finally, in support of driving increased levels of category and brand
awareness during Fiscal 2020, we spent over $985,000 in general
television, media production and public relations. The Company views this
investment as a long-term commitment to increasing awareness of the
AeroGarden brand.
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The combination of all of the factors cited above helped drive a year-over-year
increase in total net revenues of 14.1% to
Our gross margin for Fiscal 2020 was 35.8%, up from 34.8% in the prior fiscal year. This increase was caused by: (i) an increase in sales through more profitable retailers and continued significant growth in higher margin direct-to-consumer sales; (ii) increased focus on pricing with existing retail accounts; (iii) removal of costs in the production process associated with older product lines; (iv) the introduction of new products with higher margins; and (v) the impact of the lower return reserve and discounts with retailers due to better sell-through. The increase in our margins was partially offset by frictional cost associated with reduced returns in the retail channel and decreased sales into European market, which entails additional up-front and delivery costs. Long term, we also believe that creating increased brand awareness through advertising will help us maintain higher prices and deliver better margins. Operating expenses for Fiscal 2020 totaled$13.7 million , an increase of 14.7% or$1.8 million over the prior fiscal year. As a percentage of total revenue, operating expenses increased 0.2% year-over-year. Gross spending increased in the following areas:
? A
linear TV, Online TV, Connected TV, general TV, YouTube, Facebook and
other media advertising; and
? A $761,000 increase in personnel expenses driven by the company-wide
incentive program and an increase in employee headcount;
? A
bad debt, insurance, repairs and maintenance, offices supplies, equipment;
and
? A
to e-commerce security investments.
The increases in operating expenses were partially offset by a $517,000 decrease
due to a changes in general categories such as product testing and certification
fees, public relations, trade shows, promotions and market research.
General and administrative expense totaled $4.0 million during Fiscal 2020, an
increase of 37.0% or $1.1 million as compared to the prior year, primarily due
to increases in (i) payroll-related expenses, including incentive programs,
salaries, bonuses and employee benefits; (ii) consulting and legal fees
associated with a cyber security program, a previous credit card breach, and web
hosting investments due to increased volume, electronic data processing, and
network consulting and software troubleshooting fees; (iii) office rent relating
to new accounting guidance on leases and relocation of the corporate
headquarters; and (iv) estimates for the allowance for bad debt and
depreciation.
Research and development costs also increased 48.6% year-over-year, or $287,000
in Fiscal 2020. Research and development spending increased in Fiscal 2020,
particularly due to: (i) the addition of full-time employees to expedite our new
product development process; (ii) the company-wide incentive program; (iii)
market research; and (iv) investments in new product and prototype development,
including our largest most advanced product system, that we anticipate
introducing to the market in the next fiscal year, along with related testing
certifications; and (v) termination of a collaboration expense offset program
with Scotts Miracle-Gro . In prior years, Scotts Miracle-Gro offset a portion of
the Company's product development expenses.
Our income from operations totaled
Other loss for Fiscal 2020 totaled
Our net income for Fiscal 2020 totaled$57,000 , a$348,000 improvement over the net loss of$291,000 in Fiscal 2019, primarily due to increased sales volumes and operating margins as we continued to refine our selling strategy, partially offset by increased operating expenses. 22
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Table of Contents Revenue
The table set forth below shows quarterly revenues by sales channel for the
fiscal years ended
Fiscal 2020 Quarters ended Year ended (in thousands) 30-Jun-19 30-Sep-19 31-Dec-19 31-Mar-20 31-Mar-2020 Sales - direct-to-consumer$ 1,902 $ 1,628 $ 4,665 $ 5,127 $ 13,322 Sales - retail 2,443 2,725 13,579 6,459 25,206 Sales - international 130 70 282 204 686$ 4,475 $ 4,423 $ 18,526 $ 11,790 $ 39,214 Fiscal 2019 Quarters ended Year ended (in thousands) 30-Jun-18 30-Sep-18 31-Dec-18 31-Mar-19 31-Mar-19 Sales - direct-to-consumer$ 1,454 $ 1,154 $ 3,010 $ 2,473 $ 8,091 Sales - retail 2,254 7,376 9,136 6,101 24,867 Sales - international 35 46 795 532 1,408$ 3,743 $ 8,576 $ 12,941 $ 9,106 $ 34,366 In Fiscal 2020, revenue totaled$39.2 million , an increase of$4.8 million , or 14.1%, from Fiscal 2019. Sales to retailer customers for Fiscal 2020 totaled$25.2 million , up$339,000 , or 1.4%, from the same period a year earlier, principally reflecting AeroGarden sales to the existing retailer web/internet channels of Amazon.com, and woot! and in store accounts of Macy's, as well as newly acquired retail accounts such as Meh.com and Wayfair. Direct-to-consumer revenue totaled$13.3 million in Fiscal 2020, as compared to$8.1 million in Fiscal 2019, principally reflecting our redesigned and better functioning website and our focus on advertising that drives sales brand awareness. International sales totaled$686,000 , a decrease of$722,000 , as we test international markets in theUnited Kingdom ,France ,Germany ,Italy andSpain primarily through the Amazon platforms. The following table presents our quarterly sales by product category, inU.S. dollars and as a percent of total net revenue, for Fiscal 2020 and Fiscal 2019. Fiscal 2020 Quarters ended Year ended (in thousands) 30-Jun-19 30-Sep-19 31-Dec-19 31-Mar-20 31-Mar-20 Product Revenue AeroGardens$ 3,406 $ 3,403 $ 18,845 $ 9,070 $ 34,724 Seed pod kits and accessories 1,681 1,644 3,498 4,085 10,908 Discounts, allowances and other (612 ) (624 ) (3,817 ) (1,365 ) (6,418 ) Total$ 4,475 $ 4,423 $ 18,526 $ 11,790 $ 39,214 % of Revenue AeroGardens 76.1 % 76.9 % 101.7 % 76.9 % 88.6 % Seed pod kits and accessories 37.6 % 37.2 % 18.9 % 34.7 % 27.8 % Discounts, allowances and other (13.7 )% (14.1 )% (20.6 )% (11.6 )% (16.4 )% Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Fiscal 2019 Quarters ended Year ended (in thousands) 30-Jun-18 30-Sep-18 31-Dec-18 31-Mar-19 31-Mar-19 Product Revenue AeroGardens$ 2,806 $ 9,885 $ 13,925 $ 7,490 $ 34,106 Seed pod kits and accessories 1,162 1,449 2,715 2,784 8,110 Discounts, allowances and other (225 ) (2,758 ) (3,699 ) (1,168 ) (7,850 ) Total$ 3,743 $ 8,576 $ 12,941 $ 9,106 $ 34,366 % of Revenue AeroGardens 75.0 % 115.2 % 107.6 % 82.2 % 99.2 % Seed pod kits and accessories 31.0 % 16.9 % 21.0 % 30.6 % 23.6 % Discounts, allowances and other (6.0 )% (32.1 )% (28.6 )% (12.8 )% (22.8 )% Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 23
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AeroGarden unit revenue totaled$34.7 million in Fiscal 2020, up$618,000 from$34.1 million , or 1.8%, from a year ago, principally due to: (i) the increase in direct-to-consumer channel sales; (ii) the increased focus on advertising to drive sales and general brand awareness; and (iii) the increase in the retail channel sales. Sales of seed pod kits and accessories increased by$2.8 million , or 34.5%, resulting from an overall increase in brand awareness and growth of the existing customer base. In Fiscal 2020, sales of seed pod kits and accessories represented 27.8% of our total net revenue, an increase from 23.6% in the prior fiscal year, reflecting the expansion of AeroGarden sales in retail markets. Discounts, allowances and other revenue (expense), which is comprised of items that are not specifically identifiable to a product, such as grow club revenue, shipping revenue, accruals and deductions, decreased as a percentage of total revenue from (22.8)% in Fiscal 2019 to (16.4)% in Fiscal 2020 due to decreases in revenue deductions for potential returns, sales allowances and discounts. Cost of Revenue Cost of revenue for Fiscal 2020 totaled$25.2 million , a 12.5% increase from the prior fiscal year. Cost of revenue includes product costs for purchased and manufactured products, freight costs for inbound freight from manufacturers and outbound freight to customers, costs related to warehousing, credit card processing fees for direct sales, and duties and customs applicable to imported products. The dollar amount of cost of revenue increased in conjunction with the 14.1% increase in total sales, along with increased supply chain costs. As a percent of total revenue, cost of revenue was 64.2% in Fiscal 2020, as compared to 65.2% in the year earlier period. The decrease in costs as a percent of revenue resulted from:
? Revenue mix shift to some higher margin customers from some lower margin
retail customers, along with reductions in certain product costs; and
? Reductions in operating costs for orders as we focused on optimization of
quantity and capacity of moving goods.
The decrease in cost of revenues, as a percent of revenue, was partially offset by increases in:
? Certain supply chain costs such as domestic and international shipping;
? The cost of product storage in several domestic and international
locations and changes to the warehouses to position us for long-term
growth.
Gross Margin
Our gross margin varies based upon the factors affecting net revenue and cost of
revenue as discussed above, as well as the mix of our revenue from high- and
low-margin customers. 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, with fluctuations
attributable to the mix of on-line and brick and mortar customers. Gross margins
also vary based on specific products, as well as the maturity and size of the
customer relationship. Media costs associated with direct sales are included in
sales and marketing costs. Overall, the gross margin for Fiscal 2020 was 35.8%
as compared to 34.8% in the prior year. The increase in our gross margin was
primarily attributable to decreases in product costs, and increases in the
revenue mix attributable to better margin customers, partially offset by
increased supply chain expenses, one-time fees related to establishing new
retail customers and inventory storage and order processing costs.
Research and Development
Research and development costs totaled$877,000 for Fiscal 2020, an increase of$287,000 , or 48.6% from the prior fiscal year. Research and development costs are comprised of payroll, travel and other costs associated with (i) development of new AeroGarden models and technologies; (ii) our plant laboratories that research new plant varieties and growing technologies; (iii) new technologies, such as improved lighting and nutrient formulation; and (iv) costs to enhance the performance of our products. Our research and development spending increased in Fiscal 2020, particularly related to the addition of full-time employees to expedite our new product development process, the company-wide incentive program, market research, new product and prototype development, (which we anticipate introducing in the next fiscal year), testing certifications, and the termination of a collaboration expense offset program withScotts Miracle-Gro . 24
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Table of Contents Sales and Marketing Sales and marketing costs for Fiscal 2020 totaled$8.9 million , an increase of$390,000 , or 4.6%, from the prior fiscal year. Sales and marketing costs include all costs associated with the marketing, sales, operations, customer support, and sales order processing for our products. The following table breaks down the components of our sales and marketing costs for Fiscal 2020 and Fiscal 2019: Fiscal Years Ended March 31, 2020 2019 (in thousands) Advertising$ 4,994 $ 4,084 Salaries and related expenses 2,172 2,200 Sales commissions 81 83 Trade shows 14 52 Travel 235 238 Media production and promotional products 75
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Quality control and processing fees 206 240 General brand marketing 364 788 Other 711 697 Total$ 8,852 $ 8,462 Advertising is principally composed of the costs of developing and airing our commercials, the costs of development, production, printing, and postage for our catalogues, and mailing and web media costs for search and affiliate web marketing programs and retail support placement. Each of these are key components of our integrated marketing strategy because they help build awareness of, and consumer demand for, our products in all our channels of distribution (retail and direct-to-consumer). Advertising expense totaled$5.0 million for Fiscal 2020, a year-over-year increase of 22.3%, or$910,000 , primarily because of our increased use of more measurable pay-per-click advertising, including general television, YouTube, Facebook and other general media 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. Personnel costs for sales and marketing in Fiscal 2020 were$2.2 million , relatively flat from Fiscal 2019 levels. Sales commissions, which generally include 1-7% of cash collections from some of our retailer customers, are paid to third-party sales representatives that assist us in developing and maintaining relationships with certain retailers. Sales commission expense totaled$81,000 for the fiscal year endedMarch 31, 2020 , a decrease of 1.6% from the prior fiscal year as a result of lower overall sales to customers represented by third-party sales representatives. Other marketing expenses decreased$410,000 , or 27.7%, year-over-year primarily as a result of decreases in a variety of other marketing initiatives, including direct marketing consulting with several retailers, general marketing programs to develop brand recognition and understand target market customers, changes in overall promotional programs, market research and retailer marketing programs, and use of contractors to help drive sales.
General and Administrative
General and administrative expense for the fiscal year endedMarch 31, 2020 totaled$4.0 million , an increase of 37.0% or$1.1 million , as compared to the prior year. This increase was principally due to increases in payroll-related expenses, including incentive programs, salaries, bonuses and employee benefits, consulting and legal fees associated with investments in credit card security, web hosting, electronic data processing, network consulting and software troubleshooting fees, office rent relating to new accounting guidance on leases and relocation of the corporate headquarters, and estimates for the allowance for bad debt and depreciation.
Operating Income and Loss
The income from operations totaled
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Table of Contents Other Income and Expense
Other expense for Fiscal 2020 totaled
Net Loss
Our net income for Fiscal 2020 was
Segment Results
We report our segment information in the same way that management assesses the
business and makes decisions regarding the allocations of resources in
accordance with the Segment Reporting Topic of the Financial Accounting
Standards Board Accounting Standards Codification (ASC). We have two reportable
segments. Retail and Direct-to-Consumer. 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.
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.
Fiscal Year Ended March 31, 2020
(in thousands) Direct-to-consumer Retail Corporate/Other Consolidated
Net sales $ 13,322 $ 25,892 $ - $ 39,214
Cost of revenue 8,537 16,648 - 25,185
Gross profit 4,785 9,244 - 14,029
Gross profit percentage 35.9 % 35.7 % - 35.8 %
Sales and marketing (1) 1,376 3,302 1,480 6,158
Segment profit 3,409 5,942 (1,480 ) 7,871
Segment profit percentage 25.6 % 22.9 % - 20.1 %
(1) Sales and marketing includes advertising, trade shows, media production and promotional products, general brand marketing and other as discussed in the sales and marketing section.
Fiscal Year Ended March 31, 2019
(in thousands) Direct-to-consumer Retail Corporate/Other Consolidated
Net sales $ 8,091 $ 26,275 $ - $ 34,366
Cost of revenue 5,737 16,658 - 22,395
Gross profit 2,354 9,617 - 11,971
Gross profit percentage 29.1 % 36.6 % - 34.8 %
Sales and marketing (1) 802 3,575 1,324 5,701
Segment profit 1,552 6,042 (1,324 ) 6,270
Segment profit percentage 19.2 % 23.0 % - 18.2 %
(1) Sales and marketing includes advertising, trade shows, media production and promotional products, general brand marketing and other as discussed in the sales and marketing section.
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Table of Contents
Liquidity and Capital Resources
After adjusting the net income for non-cash items and changes in operating assets and liabilities, net cash provided by operating activities totaled$7.1 million in Fiscal 2020, as compared to net cash used by operating activities of$4.8 million in the prior fiscal year. Non-cash items, consisting of depreciation, amortization, bad debt allowances, accretion of debt association with sale of intellectual property, and changes in inventory allowances totaled a net loss of$1.1 million in Fiscal 2020, as compared to a net loss of$520,000 in the prior fiscal year. Changes in current assets provided cash of$3.2 million during Fiscal 2020, primarily due to decreases in accounts receivable and inventory, partially offset by an increase in other current assets. In Fiscal 2019, changes in these assets used$4.2 million , reflecting increases in accounts receivable and inventory, partially offset by a decrease in other current assets. As ofMarch 31, 2020 , the inventory balance was$4.8 million , representing approximately 70 days of sales activity during Fiscal 2020. Net accounts receivable totaled$3.4 million as ofMarch 31, 2020 , representing approximately 46 days of net retail sales activity at the average daily rate of sales recognized during Fiscal 2020. The days of sales in receivables and inventory calculations can fluctuate, and are greatly impacted by our seasonality and the timing of sales and inventory receipts during the period. Current operating liabilities increased$2.9 million during Fiscal 2020, because of a$3.0 million increase in accounts payable and accrued liabilities. In the prior year period, current operating liabilities decreased$864,000 primarily due to increases in accounts payable and accrued liabilities, including accrued interest and customer deposits. Accounts payable as ofMarch 31, 2020 totaled$4.7 million , representing approximately 44 days of daily expense activity at the average daily rate of expenses incurred during Fiscal 2020. Net investment activity used$862,000 of cash, primarily due to purchases of equipment to manufacture our new products, as compared to cash used of$854,000 in the prior year. Net financing activity, including the borrowing and repayment of debt, provided cash of$857,000 during Fiscal 2020, as compared to cash used of$21,000 in the prior fiscal year.
As of
As ofMarch 31, 2020 andMarch 31, 2019 , the outstanding balance of our debt is as follows: For the Fiscal Years Ended March 31, 2020 2019 (in thousands) Notes payable and debt-related party $ 915 $ - Sale of intellectual property liability (see Note 3) 24 48 Total debt 939 48 Less current portion 39 25 Long term debt $ 900 $ 23
As of
We use, or have used, a variety of debt funding sources to meet our liquidity requirements, including the following:
Borrowing Agreements
During Fiscal 2020, we entered into a Working Capital Term Loan Agreement in the principal amount of up to$10.0 million withScotts Miracle-Gro and Real Estate Term Loan of up to$1.5 million . As ofMarch 31, 2020 , the outstanding balance of our note payable and debt, including accrued interest, was$900,000 as discussed in more detail in Note 2. 27
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Table of Contents 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.
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
our various corporate obligations) as of
? our cash of
for our various corporate obligations) as of June 15, 2020 ;
? continued support of, and extensions of credit by, our suppliers and
previous lenders, including Scotts Miracle-Gro ;
? 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
acceptance of our products by retail distribution customers and the
success of planned direct-to-consumer sales initiatives.
During Fiscal 2020 we took a number of actions to address our liquidity
needs. Most importantly, we concentrated on increasing our margin by eliminating
some production costs despite a shipping related problem in our domestic and
international channels. Specifically, we utilized more targeted pay-per-click
advertising along with general brand awareness marketing and strategically
expanded sales to major retailers that have proven to be the best and most
profitable business partners.
In first quarter of Fiscal 2020, the Company entered into a Term Loan Agreement
in the principal amount of up to $10.0 million with Scotts Miracle-Gro with a
maturity date of March 31, 2020 . The Term Loan Agreement was secured by a lien
on the assets of the Company. Interest was charged at the stated rate of 10%
per annum. The funding provided general working capital and was used for the
purpose of acquiring inventory to support our expansion into retail and its
direct-to-consumer sales channels in advance of our peak selling season. The
principal and accrued interest on the Term Loan were repaid in full during the
fourth quarter of Fiscal 2020.
Based on these facts and assumptions, we believe our existing cash and cash
equivalents, along with the cash generated by our anticipated results from
operations, will be sufficient to meet our needs for the next twelve months from
the filing date of this report based on current cash on hand and financing from
Scotts Miracle-Gro similar to the last few years. However, we may need to seek
additional debt or equity capital to provide a cash reserve against
contingencies, address the seasonal nature of our working capital needs, and to
purchase inventory and incur other expenses in an attempt to increase the scale
of our business. There can be no assurance we will be able to raise this
additional capital.
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Table of Contents 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 current commitments under capital leases and have not entered into any contracts for financial derivative such as futures, swaps, and options other than those disclosed in this Annual Report. Obligations and Commitments As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts, such as leases and the timing and effect that such commitments are expected to have on our liquidity and cash flow in future periods. The following is a summary of these obligations as ofMarch 31, 2020 . Less than 1 year 1 -3 years More than 3 years Total (in thousands) Capital leases $ 30 $ - $ -$ 30 Operating leases $ 185$ 825 $ 755$ 1,765 Totals: $ 215$ 825 $ 755$ 1,795
See Note 2, Note 3 and Note 7 to our financial statements for additional information related to our notes payable and long term debt and operating leases, respectively.
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