UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-KSB
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(MARK
ONE)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
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For
the fiscal year ended March 31, 2007
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
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For
the transition period from ______________ to
______________
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Commission
file number: 000-50888
AEROGROW
INTERNATIONAL, INC.
(Name
of small business issuer in its charter)
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Nevada
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46-0510685
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer
Identification
No.)
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6075
Longbow Dr., Suite 200 Boulder,
Colorado
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(Address
of principal executive offices)
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(Zip
Code)
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(303)
444-7755
(Issuer’s
telephone number)
Securities
registered pursuant to Section 12(g) of
the Exchange Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $0.0001 Par Value
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Over
the Counter
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Securities
registered under Section 12(b) of the Exchange Act:
Common
Stock, $.01 par value
Check
whether the issuer is not required to file reports pursuant to Section
13 or
15(d) of the Exchange Act o
Check
whether the Registrant: (1) filed all reports required to be filed
by Sections
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter
period that the Registrant was required to file such reports), and
(2) has been
subject to such filing requirements for past 90 days. Yes x No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405
of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB
or any
amendment to this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act). Yes o No ý
Issuer’s
revenues for its most recent fiscal year $13,144,037.
The
aggregate market value of the common equity stock held by non-affiliates,
computed by reference to the average bid and asked prices of such stock
as of
May 31, 2007, was approximately $66,476,272.
The
number of shares outstanding of the issuer’s common equity as of May 31, 2007
was 11,065,609.
Documents
incorporated by reference: None
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PAGE
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PART
I.
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Item
1.
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Item
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15
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Item
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Item
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PART
II.
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Item
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15
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Item
6.
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16
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Item
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28
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Item
8.
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28
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Item
8A.
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Item
8B.
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28
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PART
III.
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Item
9.
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29
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Item
10.
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32
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Item
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Item
12.
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41
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Item
13.
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42
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Item
14.
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42
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| Signatures |
43
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| Financial
Statements |
F-1
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| Exhibit
Index |
I-1
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In
addition to historical information, this Annual Report on Form 10-KSB (“Annual
Report”) for AeroGrow International Inc. (“AeroGrow” the “Company,” “we,” “our”
or “us”) contains “forward-looking” statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), including statements that
include the words “may,” “will,” “believes,” “expects,” “anticipates,” or
similar expressions. These forward looking statements may include, among
others,
statements concerning our expectations regarding our business, growth prospects,
revenue trends, operating costs, working capital requirements, competition,
results of operations and other statements of expectations, beliefs, future
plans and strategies, anticipated events or trends, and similar expressions
concerning matters that are not historical facts. The forward-looking statements
in this Annual Report involve known and unknown risks, uncertainties and
other
factors that could cause our actual results, performance or achievements
to
differ materially from those expressed or implied by the forward-looking
statements contained herein.
Each
forward-looking statement should be read in context with, and with an
understanding of, the various disclosures concerning our business made
elsewhere
in this Annual Report, as well as other public reports filed by us with
the
United States Securities and Exchange Commission. Investors should not
place
undue reliance on any forward-looking statement as a prediction of actual
results of developments. Except as required by applicable law or regulation,
we
undertake no obligation to update or revise any forward-looking statement
contained in this Annual Report.
PART
I
Corporate
History
AeroGrow
International Inc. (“AeroGrow”) was formed as a Nevada corporation on March 25,
2002. Wentworth I, Inc., a Delaware corporation (“Wentworth”) organized
under the laws of the State of Delaware on March 6, 2001, entered into
an
Agreement and Plan of Merger with us (the “Merger Agreement”) on January 12,
2006, which was consummated on February 24, 2006. Under the Merger
Agreement, Wentworth merged with and into AeroGrow, and AeroGrow was the
surviving corporation (“Merger”). Our certificate of incorporation
and by-laws prior to the Merger are now those of the surviving company,
and the
surviving company is governed by the corporate law of the State of
Nevada.
Our
Business
Our
principal business is developing, marketing, distributing, and selling
advanced
indoor aeroponic garden systems designed and priced to appeal to the gardening,
cooking and small kitchen appliance, healthy eating, and home and office
décor
markets worldwide. Our principal activities since our formation through
March
2006 consisted of product research and development, market research, business
planning, and raising the capital necessary to fund these activities. We
have
been issued seven trademarks, one of which has been registered (AeroGarden®),
and have an additional 28 trademark applications pending (25 in the United
States and 3 internationally). We have 19 patent applications pending
in the United States. To date, we have completed the development of multiple
proprietary growing systems and 22 proprietary seed kits. These development
activities have in the past, and continue to include, an iterative process
of
experimentation, consumer testing, and adjustment in consultation with
scientists familiar with the technology. Often, these tests are combined
with
in-home use of our systems by sample consumers picked from our employees
and
investors. User feedback from these tests is frequently incorporated in
next
generation products and development.
During
2005 we completed development of our initial kitchen garden systems and
related
“bio-grow” seed pods. We contracted with a third-party manufacturer who
commenced production activities in December 2005 and a second manufacturer
who
began production in the first quarter of calendar 2007. In March 2006,
we began
sales activities. As of March 31, 2007, we had manufactured and taken delivery
of over 140,000 AeroGarden® kitchen garden units from its two manufacturers. We
commenced initial marketing and distribution of our products during March
2006
and have expanded these marketing efforts to encompass retail, home shopping,
catalogue, international, and direct to consumer sales channels.
Our
principal products are “kitchen garden” indoor growing systems and proprietary
seed kits that allow consumers, with or without gardening experience, the
ability to grow cherry tomatoes, cilantro, chives, basil, dill, oregano,
mint,
flowers, chili peppers, salad greens, vegetables and more throughout the
year.
Our kitchen garden systems are designed to be simple, consistently successful,
and affordable. We believe that our focus on the design and features of
our
kitchen garden systems made them the first of their kind on the consumer
market.
This conclusion was reached on the basis of standard market research, including
focus groups and potential customer interview techniques, review of potentially
competitive products offered at all ranges of functionality and price,
and
testing of products that may be considered competitive in function although
not
necessarily competitive in market orientation.
We
believe that our products will allow almost anyone, from consumers who
have no
gardening experience, to professional gardeners, to produce year-round
harvests
of a variety of herbs, vegetables, and flowers, which are provided in our
seed
kits, regardless of season, weather, or lack of natural light. We believe
that
our kitchen garden systems’ unique and attractive designs make them appropriate
for use in almost any location, including kitchens, bathrooms, living areas,
and
offices.
Our
kitchen garden systems currently on the market retail at approximately
$149 to
$169 with variations based on the channel of distribution in which they
are sold
and the accessory components included with the unit.
Until
March 2006, we were a development stage company
and we did not generate any revenues. Through March 1, 2006, we funded
our
operations primarily through private sales of equity securities. Since
commencing sales of our products, we have begun to increase our reliance
on
revenues generated from such sales for funding our operations. Prior to
March
2006, when we commenced sales of our aeroponic garden systems, we were
considered a Development Stage Enterprise in accordance with Statement
of
Financial Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by
Development Stage Enterprises.
Hydroponics
Industry - Background and Opportunity
Hydroponics
is the science of growing plants in water instead of soil. Used commercially
worldwide, hydroponics is considered an advanced and often preferred crop
production method. Hydroponics is typically used inside greenhouses to
give
growers the ability to better regulate and control nutrient delivery, light,
air, water, humidity, pests and temperature. Hydroponic growers benefit
by
producing crops faster and enjoying higher crop yields per acre than traditional
soil-based growers.
Aeroponic
technology is derived from hydroponics and occurs when plant roots are
suspended
in an air chamber and bathed at regular intervals with a nutrient solution.
AeroGrow believes that the aeroponic technology used in our kitchen garden
systems is a technological advance over hydroponics because plant roots
are
suspended in a near 100% humidity enclosed air chamber and bathed in a
nutrient-rich solution. We believe aeroponic methods ensure the plants
not only
have sufficient water, nutrients and oxygen, but the temperature inside
the root
chamber can be easily controlled, ensuring temperature stress of the plant
does
not limit growth. For this reason, we believe the use of a well designed
and
maintained aeroponic system can yield increases in growth rate and plant
survival when compared to hydroponics systems.
From
August 2002 through July 2005, we conducted research with approximately
500
individuals who were identified either because they (i) signed-up on our
website to pre-order the basic AeroGrow product, (ii) agreed to be beta
testers of the basic product, (iii) came to preview meetings concerning the
company, or (iv) were friends of employees and consultants of AeroGrow.
Persons found our website through referrals, web searches, or as a result
of our
fund raising and hiring activities. The research consisted of face-to-face
and
internet interviews/surveys with potential consumers and standard focus
groups.
From some of the contacts, we obtained a ten-page questionnaire, and in
other
instances we taped the responses for later review. Persons from approximately
35
states responded to the surveys and participated in focus groups. A professional
market research consultant assisted with the design, implementation and
analysis
of the focus groups, individual interviews, and surveys. From this research,
and
the initial results of our subsequent product launch, we believe that there
is a
potential, sizeable national market for our countertop soil-less kitchen
garden
systems for use indoors in homes and offices. Until the development of
our
kitchen garden systems, significant barriers have prevented hydroponic
or
aeroponic technology from being incorporated into mainstream, mass-marketed
consumer products, including:
·
Consumers
generally lack the specialized knowledge required to select, set up, operate
and
maintain the various components for a typical hydroponic or aeroponic system,
including growing trays, irrigation channels, growing media nutrient reservoirs,
and nutrient delivery systems consisting of electronic timers, pumps, motors,
tubing and nozzles;
·
Consumers
generally do not possess the specialized knowledge required to select,
set up,
operate and maintain the varied indoor lighting systems that are necessary
to
grow plants indoors in the absence of adequate natural light;
·
Consumers
are
unable to properly mix and measure complex hydroponic nutrient formulas,
which
change depending on the plant variety and the stage of plant growth. In
addition, consumers are unable to deal with the problem of nutrient spoilage;
and
·
Federally-mandated water quality reports show that the water in many large
cities is not suitable for hydroponic or aeroponic growing and requires
chemical
treatments. Consumers generally are unaware of how to adjust the water
for
healthy plant growth.
We
believe that these complexities have been accepted in existing hydroponic
market
channels because our research has indicated that hydroponic manufacturers
have
generally focused their product development and marketing efforts on satisfying
the needs of the commercial greenhouse and dedicated hobbyist markets.
These
users are motivated to gain the specialized knowledge, equipment and experience
currently required to successfully grow plants with these
products. Our research has indicated that the hydroponic growing
equipment currently available in these markets is bulky, expensive and
comprised
of many parts
We
believe that the complexities of currently available commercial hydroponic
products fail to address the needs and wants of the mass consumer market,
leaving that market unserved. We further believe that our trade secrets,
patent-pending inventions and companion technologies have simplified and
improved hydroponic and aeroponic technologies have enabled us to create
the
first indoor aeroponic gardening system appropriate for the mass consumer
market.
Our
Proprietary Technology
We
have
spent over four years innovating, simplifying, combining and integrating
numerous proprietary technologies and inventions into a family of “plug and
grow” aeroponic kitchen garden systems and related seed kits specifically
designed and priced for the mass consumer market. We have filed 19 patent
applications in the United States to protect our
inventions. Following is a description of our proprietary
technologies and inventions that are used in our kitchen garden system
and seed
kits. The inventions under the patent applications have not been granted
patents, and there can be no assurance that patents will be granted. See
“Risk
Factors - Our intellectual property and proprietary rights give us only
limited
protection and can be expensive to defend.”
Rainforest
Nutrient Delivery System. Our “rainforest” nutrient delivery system
combines our patent-pending technologies with features from several hydroponic
or aeroponic methodologies into a proprietary system designed to provide
aeroponic plant growth. These hydroponic or aeroponic methodologies
include:
·
Drip
Technologies. Drip systems create nutrient irrigation by pumping nutrient
solution from a reservoir up to the base of the plant and saturating a
soil-less
growing medium. The growing medium delivers nutrients and moisture to plant
roots, which is similar to rainwater as it drips through the soil and past
plant
roots.
·
Ein
Gedi
Aeroponic Technologies. Plant roots in aeroponic systems are suspended in
an air chamber and bathed at regular intervals with nutrient solution.
In the
Ein Gedi variation of aeroponics, plant roots are allowed to grow directly
into
nutrient solution after passing through an air space.
Our
rainforest technology suspends plant roots into a 2-to-4 inch air chamber
above
an oxygenated nutrient solution. Nutrients are pumped from the nutrient
reservoir to the base of each plant where a regulated flow of nutrients
drips
down through plant roots.
Pre-Seeded
Bio-Grow Seed Pods. Our proprietary bio-grow seed pods include
pre-implanted seeds, a bio-sponge growing medium, removable bio-dome covers
and
a grow basket to assist with the proper distribution of moisture. We designed
our seed pods for use in our kitchen garden systems. We believe consumers
may
use seeds purchased from other sources in our kitchen garden system, although
we
do not provide any assurances on germination and growth in such
cases.
We
selected the seeds to pre-implant in our initial bio-grow seed pods after
two
years of extensive research, which included:
·
analyzing
thousands of seed varieties,
·
growing
and
testing several hundred varieties of plants in our greenhouse and grow
laboratories, and
·
testing
the
taste and appearance of our grown vegetables, herbs and flowers with
consumers.
We
implant our selected seeds in a bio-sponge growing medium that, based upon
our
research, facilitates rapid germination and enhanced root growth in comparison
to other mediums tested, as well as supports plant roots from germination
through maturity and harvest. Our bio-grow domes create a “mini-greenhouse”
environment by covering the grow surface to create a near-100% humidity
air
chamber, which is optimal for most plant germination and initial growth.
Bio-grow domes help regulate moisture and temperature to levels optimal
for
plant germination.
Our
proprietary bio-grow seed pods are a vital component of our kitchen garden
system. Our bio-grow seed pods are packaged along with nutrients in our
proprietary seed kits for use in our kitchen garden systems. These seed
kits
currently include seeds for cherry tomatoes, salad greens, cilantro, chives,
basil, dill, oregano, mint, chili peppers and flowers as well as a variety
of
international herbs for Italian, Japanese, and French cooking. In addition
to
pre-seeded pods, we also allow consumers to purchase unseeded pods in our
Master
Gardner Kit, to give them the opportunity to grow their own seeds in our
kitchen
garden systems. Not all plants, however, are appropriate to grow in the
kitchen
garden system.
Microprocessor-Based
Control Panel and Nutrient Cycle Delivery System. We believe that
certain common problems face both experienced gardeners and beginning gardeners,
including:
·
improperly
watering plants,
·
improperly
feeding plants, and
·
failing
to
provide plants with sufficient light for healthy growth.
To
assist
consumers, especially inexperienced gardeners, we have developed two
patent-pending microprocessor-based technologies that address these common
problems. These technologies are designed to:
·
regulate
the
lighting system,
·
automatically
alert users when it is time to add water and nutrients,
·
help
simplify
and reduce consumers’ time and involvement in caring for plants,
·
reduce
the
variables and errors often made by consumers in plant care, and
·
enhance
plant
growth.
We
have
developed multiple kitchen garden systems, which are described below at
“Our
Kitchen Garden Systems,” with different control systems. Variations of our
microprocessor-based control panel are included as a standard feature on
our
current kitchen garden system. This control panel includes an electronic
nutrient and water reminder system and microprocessor-controlled lights
that
alert consumers to add water and nutrients when needed and help ensure
that
plants are properly fed and receive the proper lighting. In addition, with
our
microprocessor-based nutrient cycle delivery system the consumer selects
from
four plant types (lettuce, herbs, tomatoes or flowers) and the system then
automatically adjusts and optimizes the nutrient, water and lighting cycles
based on the plant variety selected.
Time-Release
Nutrient Tablets. Plants require a balanced mixture of nutrients for
optimal growth. Certain nutrient combinations, including calcium nitrate
and
magnesium sulphate, generally cannot be combined, mixed, or stored in the
same
container due to specific chemical reactions that bind them together and
renders
them useless to plants. Hydroponic growers seek to solve this problem by
packaging various nutrient concentrations in up to four separate containers,
which are individually measured and added as needed by the consumer. These
nutrient complexities require consumers using hydroponic systems
to:
·
understand
the blends of nutrient fertilizer that are best suited for the specific
variety
of plants they are growing,
·
understand
the nutrient requirements for the specific plant variety at each of three
stages
of our growth and maturity,
·
measure
and
blend nutrients from up to four different concentrated solutions and add
them to
specific measured quantities of water, and
·
monitor,
adjust and re-mix nutrient fertilizers over time.
We
believe that current plant nutrition processes required for successful
hydroponic growing have created barriers to mass consumer use and acceptance
because they are cumbersome and complex. To help overcome these barriers,
we
have developed time-release nutrient tablets designed specifically to deliver
the proper nutrients to the plants, while offering consumers a user-friendly
nutrient system. The consumer simply adds the plant-specific nutrient tablets
to
the kitchen garden systems when instructed (usually once every two weeks)
by the
microprocessor-based nutrient cycle delivery system. The nutrient tablets
eliminate the need for measuring and mixing multi-part nutrient formulas
and
storing various nutrients in separate containers. The nutrient tablets
customize
multiple nutrients and minerals such as calcium, magnesium and iron for
specific
plant varieties at different stages of their growth.
Automatic
Water Adjustment. Tap water supplied by local municipalities often is
not conducive to aeroponic or hydroponic growth. To address these problems,
most
hydroponic growers monitor and chemically adjust the water they use on
a daily
or weekly basis.
We
believe that the problems associated with the wide range of water chemistry
found throughout the United States (and possibly internationally), as well
as
the complexities involved in monitoring water chemistry, are significant
barriers to the use of hydroponic gardening by the general public. We have
developed a patent-pending formula that automatically adjusts and balances
the
water to a level capable of sustaining healthy plant growth in an aeroponic
environment. This formula is pre-mixed into our time-release nutrient tablet
described above, which eliminates the need for consumers to understand
water
chemistry.
Integrated
and Automated Lighting System. Hydroponic systems typically do not
incorporate built-in lighting systems. Lighting systems must typically
be
purchased as separate components and assembled by the consumers. Hydroponic
lighting systems generally consist of a ballast, reflector hood, lights
and an
electronic timer. The consumer must suspend the lighting system over the
hydroponic unit and then continually raise the lights as the plants grow.
Complete lighting systems often cost hundreds of dollars, which is considerably
more than the cost of our entire kitchen garden system.
Our
kitchen garden systems include built-in adjustable grow lights with ballast,
reflector hood, lights and an electronic timer. Our integrated lighting
systems
include high-output compact fluorescent light bulbs that deliver a spectrum
and
intensity of light designed to help optimize plant growth without natural
light.
In addition, our lighting system is fully automated and controlled by our
microprocessor-based control panel described above. Improvements continue
to be
made in our proprietary light bulbs to facilitate better growing characteristics
at lower manufacturing costs.
Adaptive
Growth Software. Through research and testing in our grow laboratory,
we have determined that better plant growth can be achieved if nutrients,
moisture and lighting are adapted and customized to the specific stages
of the
plants’ growth: germination, initial growth and advanced growth. We have
developed a proprietary software technology entitled “adaptive growth
technology” which automatically analyzes and adjusts the nutrient delivery
schedules based on plant maturity. We have introduced this technology into
an
upgraded kitchen garden system, which was introduced in the second calendar
quarter of 2007.
New
Technologies in Development. We continue to improve on our initial
development of a methodology to cultivate and ship “live starter plants” in the
grow pod mediums that will be able to grow in our kitchen garden systems.
We
have started market testing this process with strawberries during the first
quarter of calendar 2007. We plan to expand our efforts in this area and
are
developing a portable greenhouse that we believe enables us to scale this
methodology both geographically as well as increasing the varieties of
plants
offered as “live starter plants.” We have also begun development of a new
aeroponic based technology that utilizes a new form of proprietary seed
pod that
will facilitate transfer of water using materials that transfer moisture
to the
seeds without the need of the pump system. This new technology is anticipated
to
reduce manufacturing costs with no loss of efficacy. We plan to test market
a
smaller
version of our kitchen garden system in the fourth calendar quarter of
2007
using this new technology with a targeted retail price of $99-$129 based
on the
channel of distribution in which it is sold and the accessory components
included with the unit.
AeroGrow’s
Kitchen Garden Systems
AeroGrow’s
Kitchen Garden Systems. We have begun, and in some cases
completed, development for multiple kitchen garden systems and have commenced
marketing two of these models. Both marketed models feature the rainforest
nutrient delivery system and an integrated lighting system (including the
microprocessor-based control panel), and a microprocessor-based nutrient
cycle
delivery system. The initial/standard model of our kitchen garden system
retails
at approximately $149 with variations based on the channel of distribution
in
which it is sold and the accessory components included with the unit. In
April
2007 we launched the AeroGarden Pro100 which features a stainless steel
accented
finish as well as our adaptive growth technology (described above) and
retails
at approximately $169 with variations based on the channel of distribution
in
which it is sold and the accessory components included with the
unit.
AeroGrow’s
Seed Kits. We have developed and are producing 22 seed kits
for use in our kitchen garden systems. These seed kits include pre-seeded
bio-grow seed pods and a three-to-six-month supply of nutrients, including
our
formula for adjusting water quality. Our seed kits retail at prices ranging
from
$14.99 to $29.99. Currently developed seed kits include:
·
cherry
tomato
garden,
·
chili
pepper
garden,
·
gourmet
herb
garden,
·
salad
greens
garden,
·
grandiflora
petunia garden,
·
international
basil garden,
·
Japanese
herbs,
·
French
Herbs,
and
·
Italian
herbs.
Our
seed
kits, time-release nutrient tablets, and replacement light bulbs are also
sold
to consumers for use with our kitchen garden system. Additionally, with
our
Master Gardner Kit, seed pods are available for use by consumers who wish
to try
to grow their own seeds, but we do not give assurance that all varieties
of
plants will grow with this kit in our kitchen garden system.
Other
Accessories. To complement and expand the functionality of
our kitchen garden systems, we have developed a variety of accessory products.
We have developed an Herb Appeal Collection, consisting of an internally
produced video and guidebook on the care and uses of herbs and a set of
cutting
boards. We have also developed two wall bracket systems designed to hold
two or
more kitchen garden systems for consumers who wish to grow more than one
seed
kit at a time. We have also developed our own design of a battery operated
herb
blender and salad dressing maker called the Herb N Serve. These products
will be
sold individually and will be used as premium “gifts with purchases” to enhance
our direct to consumer and retail offerings.
Additional
Future Products. In addition to our kitchen garden systems,
we are developing and plan to market in the future companion products designed
to provide a successful gardening experience for consumers of all experience
levels while providing a potentially continuing and profitable revenue
stream
for us. Our development and production
of the following additional products will depend in large part on the revenues
generated from future product sales and the availability of additional
financings.
Children’s
Garden. Our children’s garden is designed for simplicity and ease of use.
We anticipate introducing this garden system in the toy market.
Decorator
Office Garden. We are developing a garden system designed specifically for
use in offices and work stations to introduce decorative and fragrant living
flowers into the workplace.
Professional
System. A larger-scale garden system is planned for gardening enthusiasts
who want to grow large quantities of vegetables, herbs and flowers.
Future
Seed Kits. We plan to continue development of additional seed kits on an
ongoing basis including new varieties for international markets.
Markets
Based
on
our informal market research consisting of individual consumer interviews,
focus
groups and Internet survey responses, as well as our “sales to date” experience,
we believe that our kitchen garden systems will appeal to a broad spectrum
of
consumers in the United States and internationally, including Europe and
Japan.
We believe that our products will appeal to at least four major market
segments:
·
experienced
gardeners,
·
“want-to-be”
gardeners,
·
the
kitchen
products and small appliances market, and
·
the
office
and home décor markets.
Further,
based on our discussions with potential distributors, we believe that our
kitchen garden systems present opportunities in the specialized toy,
educational, gift and hydroponic hobbyist markets.
Gardener
Market. The 2002 National Gardening Survey conducted by the National
Gardening Association states that gardening was America’s number one hobby with
more than 70 million active gardeners. Based upon this survey, there were
estimated to be: 27 million vegetable gardeners, with one out of every
four
households having a vegetable garden; over 15 million fresh herb gardeners;
and
over 20 million flower gardeners. We believe that our kitchen garden systems
and
related products can offer both expert and novice gardeners several major
benefits not readily available through traditional gardening methods,
including:
·
the
ability
to grow fresh herbs, lettuces, vegetables, tomatoes and flowers year-round,
regardless of indoor light levels or seasonal weather conditions,
·
the
ability
to easily start plants indoors during colder months and then transplant
them
outdoors at the onset of the outdoor growing season,
·
the
ability
to use stem cuttings to propagate multiple reproductions of the desired
plants
in our kitchen garden systems,
·
the
reasonable assurance that crops can grow successfully by significantly
reducing
potential obstacles such as uncertain weather and garden pests,
·
the
ease of
growing hydroponically in contrast to the toil associated with traditional
gardening, including preparing the soil, planting, thinning, weeding and
watering.
“Want-to-be”
Gardener Market. We believe that many people have an interest in
gardening but lack the knowledge, confidence, available space, equipment,
or
time to garden. We have observed the following barriers to beginning to
garden:
·
gardening
requires an ongoing time commitment,
·
apartment,
high-rise and condominium dwellers often lack the land needed for a traditional
garden,
·
gardening
requires physical work which can be a significant barrier to older people
or
people with limited mobility or health issues,
·
buying
the
necessary equipment to garden can be expensive, and
·
gardening
requires knowledge and expertise.
We
believe that our kitchen garden systems overcome many of these barriers
and
provide a simple, convenient way for many current non-gardeners to begin
to
garden.
Kitchen
Products and Small Appliances Market. We believe that many Americans
now enjoy cooking as a form of entertainment or hobby and that these people
repeatedly purchase new kitchen appliances and will be motivated to purchase
our
kitchen garden systems and related seed kits. Consumers in this potential
market
include:
·
people
interested in cooking who would appreciate the convenience and satisfaction
of
having a readily available supply of fresh-cut herbs and basils to flavor
soups,
salads and other dishes,
·
people
who
prefer the distinctive texture and taste of freshly picked, vine-ripened
tomatoes, basils, lettuces and other vegetables over days-old supermarket
produce, and
·
people
interested in healthy, pesticide-free foods for themselves and their families,
reflecting both the rapidly growing interest in naturally and organically
grown
foods and the increasing number of people who, for health or weight concerns,
include salads and fresh vegetables as part of their families’
diets.
We
believe that our kitchen garden systems will be embraced in this market
by
people who understand the value of having an ongoing supply of fresh herbs
and
vine-ripened produce throughout the year.
Office
and Home Decor Market. Flowers are frequently used to brighten homes
and offices around the world. It is difficult to readily grow flowers indoors
due to a lack of sufficient light and growing knowledge. As a result, people
often use cut flowers, which are expensive, short-lived and require ongoing
maintenance. Our kitchen garden systems enable colorful and fragrant flowers
to
be easily grown indoors year-round. Flowers grown with our kitchen garden
systems will last for months with minimal care and maintenance. Flowers
can be
grown in a wide variety of indoor locations, including kitchen and bathroom
countertops, living rooms, bedrooms, family rooms, offices, work stations,
waiting rooms and lobbies.
Specialty
Markets. We believe that several specialized markets potentially exist
for our garden systems in the future, including:
·
toy
market
for a children’s “root-viewing” garden,
·
classroom
market for student education relating to plant growth,
·
gift
market,
·
hydroponic
enthusiast market, and
·
international
markets, particularly in large cities with limited outdoor garden
space.
Marketing
and Sales Strategy
We
began
launching our kitchen garden system in the United States during the first
quarter of 2006 with a nationwide public relations campaign. Initial test
marketing shipments to retail launch partners, including Sur La Table,
Frontgate, and others commenced in March 2006. As launch partners, we agreed
to
feature Sur La Table and Frontgate in the Company’s public relations efforts. In
addition, we paid Sur La Table a $30,000 fee for full page advertisement
in Sur
La Table’s catalogue distributed to over one million consumers. We granted
exclusive rights to Frontgate as a catalogue retailer through December
1, 2006,
in exchange for Frontgate’s agreement to provide full page advertisements within
their catalogues for the AeroGarden through the end of 2006. We have developed
many of our marketing materials, including our website, product brochures,
retail packaging and other retail collateral materials, public relations
kits,
in-store point of purchase supplies, infomercial, and short-form (60 to
120
seconds) television commercials. Our planned marketing strategy is to follow
our
initial launch with sales of our products through direct marketing vehicles
and
then expanded distribution through retail channels. We plan to expand our
marketing and distribution internationally in the third calendar quarter
of
2007. Our direct marketing activities include 30-minute infomercials, 60-second
and 120-second television spots, home shopping networks, print advertising,
catalogue mailings and Internet-based advertising. Our plan is designed
to
educate prospective customers while creating widespread awareness of our
kitchen
garden systems and generating direct sales in four key target markets:
the
experienced gardener market, the “want-to-be” gardener market, the kitchen
products and small appliances markets, and the office and home décor
market.
Competition
Aeroponic
and hydroponic technologies have historically been limited to ardent hobbyists
and commercial growing facilities. We believe that we are the first company
to
develop and offer a simple soil-less indoor growing system for the mass
consumer
market.
Typical
hydroponic manufacturers offer a range of equipment and accessories through
distributors or small independent “hydro-shops” in a trade-oriented manner
similar to plumbing or electrical suppliers. Purchasers typically mix and
match
equipment from various suppliers in an “a la carte” fashion to individually
customize a large system that they then assemble on their premises. We
believe
that these products are substantially more expensive than the selling prices
of
our products.
We
believe that our simplified and complete kitchen garden systems and current
and
planned methods of distribution offer significant benefits from these
traditional hydroponic industry practices. However, we recognize that
there are companies that are better funded and have greater experience
in
producing hydroponic products in commercial markets, including, but not
limited
to, companies such as General Hydroponics and American Hydroponics. These
companies could potentially decide to focus on the consumer market with
competing products. We could also potentially face competition from gardening
wholesalers and large and profitable soil-based gardening companies, including,
but not limited to, the Burpee Seed Company and Gardener’s Supply Company,
should they decide to produce a competitive product. These companies may
have
better consumer acceptance and may be better funded than us.
Manufacturing
We
manufacture our products using contract manufacturing sources, which are
supervised by our internal engineering and manufacturing teams. Our bio-grow
seed pods are currently produced and assembled in our laboratory facilities
in
Longmont, Colorado.
We
signed
a tri-party manufacturing agreement with Source Plus, Inc. (“Source Plus”), an
Alabama corporation, and Mingkeda Industries Co., Ltd. (“Mingkeda”), a Chinese
company, for the manufacture of our kitchen garden systems and accessories.
Source Plus assisted us in identifying companies in China that had the
capability to manufacture our kitchen garden systems. Source Plus advanced
monies to Mingkeda for tooling and molds to build our products. To reimburse
Source Plus for advances to Mingkeda for tooling, we issued 62,000 shares
of our
common stock to Source Plus in October 2005 and recorded a $310,000 asset
for
tooling. Source Plus is also obligated to provide us with quality control
inspection services at Mingkeda’s factory. Mingkeda has informed us that it can
currently produce 15,000 kitchen garden systems per month and will eventually
be
able to produce approximately 25,000
kitchen garden systems per month with our existing set of tools. As of
March 31,
2007, we have received approximately 85,000 units from Mingkeda with over
20,000
additional units in process. Mingkeda estimates that it can add the additional
set of tools and presses within 60 to 90 days following our
notification.
We
have
completed two sets of tooling with a second contract manufacturer, Main
Power
Electrical Factory Ltd., which is located in China (“Main Power”). During the
first calendar quarter of 2007, AeroGrow began receiving delivery of production
units built by Main Power. Production capacity at Main Power is estimated
to be
50,000 units per month for each set of tools.
We
produce and assemble our bio-grow seed pods in our laboratory facilities
in
Longmont, Colorado. The seed pods and kitchen garden systems are shipped
to a
fulfillment center in Chino, California. A third party service provider
provides
warehousing, order fulfillment, and shipping for our products.
Product
Returns and Warranties
We
have had limited sales to date and thus, have limited experience dealing
with
returns. We currently process returns at a third party distribution center
and
at our facilities in Longmont, Colorado. We anticipate that we will send
unopened returned products back into inventory and repair defective products
to
sell as refurbished products. We are also utilizing a “Destroy in Field”
methodology for certain customers as the cost of shipping the return, if
used,
does not justify the value of the recovered unit. In these cases, the customer
is required to cut the power cord ands send it back to obtain a
credit. Our manufacturers will provide us at no charge with
replacement part assemblies for products which are deemed defective due
to
materials or manufacturing complications. We record warranty liabilities
at the
time of sale for the estimated costs that may be incurred under our basic
warranty program. The specific warranty terms and conditions vary depending
upon
the product sold but generally include technical support, repair parts,
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.
Intellectual
Property
We
have
filed 19 patent applications in the United States to protect our technologies
and products. These applications are for:
|
|
·
|
seed
germination pods that transport, support and germinate seedlings
in
aeroponic or hydroponic devices and support the growth of the
plant to
maturity, filed in November 2003, application serial number 10/714,786,
and responding to examiner’s third
action,
|
|
|
·
|
use
of infrared beams to measure plant roots which creates a basis
for the
regulation of nutrients, oxygen and plant growth, filed in December
2003,
application serial number 10/748,321, and responded to examiner’s second
action,
|
|
|
·
|
PONDS
(passive, osmotic nutrient delivery system) technology, which
is a
nutrient delivery system using no moving parts, filed in March
2005,
application serial number 11/079,054, and responding to examiner’s first
action,
|
|
|
·
|
RAIN
(rain-aerated ionized nutrient) system technology, which hyper-oxygenates
and ionizes plant roots in AeroGrow’s kitchen garden systems, filed in
March 2005, application serial number
10/528,110,
|
|
|
·
|
rainforest
growing dome for maximizing germination, filed in April 2005,
application
serial number 11/098,176, and responded to examiner’s second
action,
|
|
|
·
|
growing
basket for optimizing liquid and nutrient delivery, filed in
April 2005,
application serial number 11/111,553, and responding to an office
communication,
|
|
|
·
|
methods
for growing plants using seed germination pods, filed in
April 2005,
application serial number 11/112,269, and responding to examiner’s third
action,
|
|
|
·
|
devices
and methods for growing plants by measuring liquid or nutrient
usage rate,
the adaptive growth learning technologies, filed in December
2005,
application serial number
11/321,368,
|
|
|
·
|
time-release
oxygen generating nutrient compositions and methods for growing
plants,
filed in December 2005, application serial number
11/321,910,
|
|
|
·
|
pH
buffered plant nutrient compositions and methods for growing
plants, filed
in December 2005, application serial number
11/321,023,
|
|
|
·
|
apparatus
and methods for delivering photoradiation to plants, filed in
June 2006,
application serial number
60/814,853,
|
|
|
·
|
smart
garden devices and methods for hydroponic gardens, filed in June
2006,
application serial number
11/455,364,
|
|
|
·
|
indoor
gardening appliance, filed in August 2005, application serial
number
29/235,880, and responded to request for
information
|
|
|
·
|
master
gardener baskets and methods for growing plants, filed in August
2006,
application serial number
60/840,575,
|
|
|
·
|
devices
and methods for growing plants, filed in January 2007, application
serial
number 11/653,121,
|
|
|
·
|
indoor
gardening appliance, filed in January 2007, application serial
number
29/271,260,
|
|
|
·
|
indoor
gardening appliance, filed in January 2007, application serial
number
29/271,209
|
|
|
·
|
indoor
gardening appliance, filed in January 2007, application serial
number
29/271,259, and
|
|
|
·
|
systems
and methods for controlling liquid delivery and distribution
to plants,
filed January 2007, application serial number
11/654,164.
|
We
believe that the technology covered by these patent applications does not
infringe on issued patents owned by others. We believe that if we fail
to
receive patents for any one of these patent applications, our operations
will
not be materially, adversely affected. We believe that failure to obtain
patents, however, will make it easier for competitors to bring competitive
products to market. If such competitive products performed better and/or
were
marketed by companies with greater financial and distribution resources
than us,
such competitive products may adversely affect our operations. In addition
to
the patents being sought, we maintain some crucial information about our
products as trade secrets. The inventions under the patent applications
have not
been granted patents, and there can be no assurance that patents will be
granted.
We
have
filed 36 trademark applications in the United States (7 of which have been
allowed) and 3 trademark applications designating 33 countries, which we
intend
to prosecute to protect our products and brand equity. The applications
are
for:
|
|
·
|
Farmers
Market Fresh, filed in July 2005, application serial number 78671280,
and
allowed,
|
|
|
·
|
Kitchen
Harvest filed in December 2005, application serial number
78781094,
|
|
|
·
|
AeroGarden
filed in December 2005, application serial number 78781935, and
allowed,
|
|
|
·
|
Farmer’s
Market in Your Kitchen, filed in March 2006, application serial
number
78836826, and allowed,
|
|
|
·
|
Bio-Dome,
filed in March 2006, application serial number 78836718, and
allowed,
|
|
|
·
|
AeroPod,
filed in March 2006, application serial number 78836577, and
allowed,
|
|
|
·
|
AeroGarden,
filed in Mexico in June 2006, application serial number 790722,
and
responded to examiner’s first
action,
|
|
|
·
|
AeroGarden,
filed in 31 countries under the Madrid Protocol in June 2006,
application
serial number A0005030, and received a general statement of grant
of
protection, received notices that protected in Australia and
Norway,
received office action in Korea
|
|
|
·
|
AeroGarden,
filed in Canada in June 2006, application serial number 1,305,822,
and
allowed,
|
|
|
·
|
International
Gourmet, filed in May 2006, application serial number 78874379,
and
allowed,
|
|
|
·
|
Farmer’s
Market Fresh, filed in May 2006, application serial number 78882877,
and
responded to examiner’s first
action,
|
|
|
·
|
AeroGrow,
filed in April 2005, application serial number 78614573, responded
to
examiners first action and
suspended,
|
|
|
·
|
GrowNow,
filed in August 2006, application serial number 78955692, and
responded to
examiner’s first action,
|
|
|
·
|
Green
Thumb Guarantee, filed in September 2006, application serial
number
77007729, and responding to examiner’s first
action,
|
|
|
·
|
BioTransport,
filed in September 2006, application serial number 77009465,
and
responding to examiner’s first
action,
|
|
|
·
|
Herb
Appeal, filed November 2006, application serial number 77045636,
and
responding to examiner’s first
action,
|
|
|
·
|
Strawberry
Patch, filed November 2006, application serial number 77045993,
and
responding to examiner’s first
action,
|
|
|
·
|
Sweet
Rubies, filed December 2006, application serial number 77058522,
and
published
|
|
|
·
|
Plug
& Grow, filed December 2006, application serial number 77058534,
and
responding to examiner’s first
action,
|
|
|
·
|
Even
Better Than Organic, filed December 2006, application serial
number
77070519, and responding to examiner’s first
action,
|
|
|
·
|
AeroGarden,
filed December 2006, application serial number 77073259, and
responding to
examiner’s first action,
|
|
|
·
|
AeroGarden,
filed December 2006, application serial number 77073339, and
responding to
examiner’s first action,
|
|
|
·
|
AeroGarden,
filed December 2006, application serial number 77073345, and
responding to
examiner’s first action,
|
|
|
·
|
AeroGarden,
filed December 2006, application serial number
77073362,
|
|
|
·
|
AeroGarden,
filed December 2006, application serial number 77073424, and
received
examiner’s amendment
|
|
|
·
|
AeroGarden,
filed December 2006, application serial number 77073448, and
received
examiner’s amendment
|
|
|
·
|
Herb
‘n Serve, filed January 2007, application serial number
77095536
|
|
|
·
|
Chef
in a Box, filed March 2007, application serial number 77127173,
and
received examiner’s amendment
|
|
|
·
|
Adaptive
Growth Intelligence, filed March 2007, application serial number
77129677,
and received examiner’s amendment
|
|
|
·
|
Wall
Farm, filed March 2007, application serial number 77129806, and
examiner’s
amendment
|
|
|
·
|
Wall
Garden, filed March 2007, application serial number 77129826,
and received
examiner’s amendment
|
|
|
·
|
Pet
Net, filed March 2007, application serial number 77130024, and
received
examiner’s amendment
|
|
|
·
|
Ultimate
Kitchen Gardener, filed March 2007, application serial number
77132449,
and received examiner’s amendment
|
|
|
·
|
Ultimate
Kitchen Garden, filed March 2007, application serial number 77132485,
and
received examiner’s amendment
|
|
|
·
|
Edible
Pantry, filed March 2007, application serial number
77142761
|
|
|
·
|
Produce
Pantry, filed March 2007, application serial number
77144237
|
|
|
·
|
Get
The Garden, filed April 2007, application serial number
77154135
|
|
|
·
|
Veg-e-Garden,
filed May 2007, application serial number
77170403
|
|
|
·
|
Florist
in a Box, filed May 2007, application serial number
77185032
|
Each
of
our employees, independent contractors and consultants has executed assignment
of application agreements and nondisclosure agreements. The assignment
of
application agreements grant us the right to own inventions and related
patents
which may be granted in the United States. The nondisclosure agreements
generally provide that these people will not disclose our confidential
information to any other person without our prior written consent. We have
also
obtained, both domestically and internationally, the domain names for
AeroGrow.com, AeroGarden.com, AeroGarden.net, AeroGarden.tv, AeroGarden.biz,
and
Getthegarden.com, among others.
Governmental
Regulation and Certification
We
believe that we are complying with United States regulations concerning
the
shipping and labeling of seeds and nutrients. Currently, the components
for the
kitchen garden system are UL certified. We have filed initial applications
for
UL certification and ETL certification for the kitchen garden system as
a whole
and anticipate completion within 60 days. These certifications confirm
that the
products have been tested and conform to a recognized level of fire and
other
safety standards for consumers. Such independent third party certification
is
required for sales of products through many major retailers.
We
believe that our costs and effects of compliance with environmental laws
will
not be material.
Personnel
As
of
March 31, 2007, we employed approximately 71 persons - 59 full-time and
12
part-time. In addition, we contract for the services of part-time and project
consultants on an “as needed” basis. We believe that our employee
relations are good. We also believe that we will hire additional employees
and/or consultants in the future as our operations grow. We outsource some
activities, in whole or part, such as manufacturing, telemarketing, public
relations, infomercial production, fulfillment, and shipping.
On
July
27, 2006, we entered into a lease with Pawnee Properties, LLC to consolidate
our
operations, other than our seed kit manufacturing operations, into a 21,012
square foot office space at 6075 Longbow Drive, Boulder, Colorado 80301.
The
initial rent is $15,759 per month, plus our proportionate share of building
taxes, insurance and operating expenses. The initial term continues until
January 31, 2012, unless modified under specified circumstances. The agreement
contains other standard office lease provisions.
We
also
rent storage and manufacturing space in Longmont, Colorado, pursuant to
a
month-to-month rental agreement. Effective April 1, 2007, the space rented
was
increased from approximately 11,000 square feet to 22,000 square feet and
the
monthly rental was increased from $5,600 to $10,100. AeroGrow uses this
space to
manufacture our seed pods.
While
our
facilities appear adequate for the foreseeable future, we may add space
to meet
future growth as needed. Upon expiration of our current leases, we believe
that
we will be able to either renew our existing leases or arrange new leases
in
nearby locations on acceptable terms. We believe that these properties
are
adequately covered by insurance.
To
the
best of our knowledge, there are no legal proceedings pending or threatened
against us.
None.
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
From
January 8, 2007 through June 12, 2007, our common stock traded on the
Over-the-Counter Bulletin Board (“OTC BB”) using the trading symbol is AGWI.OB.
Beginning June 13, 2007, our common stock began trading on the NASDAQ Capital
Market using the trading symbol AERO. The closing price of our common stock
on
May 31, 2007 was $6.90.
Holders
of Record
As
of May
31, 2007, we had approximately 775 holders of record of our common
stock.
Dividends
We
have
not declared or paid any cash dividends on our common stock, and we currently
intend to retain future earnings, if any, to finance the expansion of our
business, and we do not expect to pay any cash dividends in the foreseeable
future. The decision whether to pay cash dividends on our common stock
will be
made by our Board of Directors, in their discretion, and will depend on
our
financial position, operating results, capital requirements and other factors
that the Board of Directors considers significant.
Equity
Compensation Plan Information
Refer
to
Item 11 below for information with respect to our equity compensation
plans.
Lock
Up Restrictions
In
conjunction with the closing of the Merger with Wentworth in February 2006,
the
former stockholders of Wentworth holding an aggregate of 396,813 shares
of
common stock, AeroGrow stockholders (including all shares of AeroGrow held
by
our current officers and directors) holding an aggregate of 4,792,428 shares
of
our common stock, and 1,831,067 shares of common stock underlying our warrants
and options entered into lock up agreements under which they are prohibited
from
selling or otherwise transferring: (i) any of their shares of common stock
for a
period of 12 months following the effective date of the registration statement
(“Initial Lock Up Period”) that registers their shares for resale, and (ii) 50%
of their shares of common stock after the expiration of Initial Lock Up
Period
until the date which is 18 months after the effective date of the registration
statement filed by us. The registration statement went effective on
December 22, 2006.
There
are
544,428 shares of common stock held by investors in our Colorado intrastate
offering (“Colorado Offering Shares”) and 553,642 shares of other outstanding
common stock that are not subject to lock up restrictions and are freely
tradable without restriction depending on how long the holders thereof
have held
these shares in accordance with the requirements of Rules 144 and
701.
The
following plan of operation provides information which our management believes
is relevant to an assessment and understanding of our business, operations,
and
financial condition. This plan of operation contains forward-looking statements
that involve risks, uncertainties, and assumptions. Our actual results
may
differ substantially from those anticipated in any forward-looking statements
included in this discussion as a result of various factors, including those
set
forth in “Risk Factors.”
Overview
We
are in
the business of developing, marketing, and distributing advanced indoor
aeroponic garden systems. Since formation and through our development stage
that
ended March 1, 2006, our principal activities consisted of product research
and
development, market research, business planning, and raising the capital
necessary to fund these activities. We have completed development of our
initial
kitchen garden systems and related “bio-grow” seed pods and have contracted with
a third-party manufacturers who have commenced production activities. We
began
sales activities as of March 2006. As of March 31, 2007, we had manufactured
and
taken delivery of over 140,000 units of our kitchen garden systems and
had
manufactured over 400,000 seed kits. We commenced initial marketing and
distribution of our products during March 2006, and have expanded these
marketing efforts to encompass retail, home shopping, catalogue, international,
and direct to consumer sales channels. Prior to March 2006 when we commenced
sales of our aeroponic garden systems, we were considered a Development
Stage
Enterprise in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 7, Accounting and Reporting by Development Stage
Enterprises.
Our
Critical Accounting Policies
Inventory
Inventories
are valued at the lower of cost, determined by the first-in, first-out
method,
or market. When we are the manufacturer, we include in inventory costs
raw
materials, labor and manufacturing overhead. 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 as prescribed under
ARB
No. 43, Chapter 4, “Inventory Pricing.” A majority of our products are
manufactured overseas and are recorded at cost.
We
will
determine an inventory obsolescence reserve based on historical experience
and
will establish reserves against inventory according to the age of the product.
As of March 31, 2007 and March 31, 2006 we had determined that no inventory
obsolescence reserve was required.
Revenue
Recognition
We
recognize revenue from product sales, net of estimated returns, when persuasive
evidence of a sale exists: that is, a product is shipped under an agreement
with
a customer; risk of loss and title has passed to the customer; the fees
are
fixed or determinable; and collection of the resulting receivable is reasonably
assured. Accordingly, we did not record $451,898 of revenue as of March
31, 2007
related to the unpaid balance due for orders shipped in conjunction with
our
direct sales to consumers because the consumer has thirty-six days to evaluate
the product paying the shipping and handling costs for such products before
making the required installment payments after the expiration of the thirty-six
day trial period. We also, as of March 31, 2007, did not record $135,459
of
product costs associated with the foregoing revenue because the customer
is
required to return the product in order to cancel further billing, and
therefore
we are able to recover these costs through resale of the goods. The liability
for sales returns are estimated based upon historical experience of return
levels.
We
record
estimated reductions to revenue for customer and distributor programs and
incentive offerings, including promotions and other volume-based incentives.
Future market conditions and product transitions may require us to take
actions
to increase customer incentive offerings, possibly resulting in an incremental
reduction of revenue at the time the incentives are offered. Additionally,
certain incentive programs require us to estimate based on industry experience
the number of customers who will actually redeem the incentive. At March
31,
2007 and March 31, 2006, we had accrued $65,385 and $0, respectively, as
our
estimate for the foregoing deductions and allowances.
Warranty
and Return Reserves
We
record
warranty liabilities at the time of sale for the estimated costs that may
be
incurred under our 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. Both
manufacturers of our products provide replacement parts for any defective
components free of charge for up to 2% of the total units
purchased. Based upon the foregoing, we have recorded a provision for
potential future warranty costs of $15,393 as of March 31, 2007. There
was no
provision required as of March 31, 2006.
We
reserve for potential returns from customers and associated refunds or
credits
related to such returns based upon historical experience. As of March 31,
2007,
we have recorded a reserve for customer returns of $238,569. There was
no
provision required as of March 31, 2006.
Shipping
and Handling Costs
Shipping
and handling costs associated with inbound freight are recorded in cost
of
revenue. Shipping and handling costs associated with freight out to customers
are also included in cost of revenue. Shipping and handling charges to
customers
are included in sales.
Stock
Based Compensation
In
December 2004, the Financial Accounting Standards Board issued SFAS No.
123R,
“Share-Based Payment.” Subsequently, the Securities and Exchange Commission
(“SEC”) provided for a phase-in implementation process for SFAS No. 123R, which
required adoption of the new accounting standard no later than January 1,
2006. SFAS No. 123R requires accounting for stock options using a
fair-value-based method as described in such statement and recognize the
resulting compensation expense in the Company’s financial statements. Prior to
January 1, 2006, the Company accounted for employee stock options using the
intrinsic value method under Accounting Principles Board (“APB”) No. 25,
“Accounting for Stock Issued to Employees” and related interpretations, which
generally results in no employee stock option expense. We adopted SFAS
No. 123R
on January 1, 2006 and do not plan to restate financial statements for
prior
periods. We plan to continue to use the Black-Scholes option valuation
model in
estimating the fair value of the stock option awards issued under SFAS
No. 123R.
The adoption of SFAS No. 123R has increased net loss by $560,859 and $3,315,840
for the year ended March 31, 2007 and the three month transitional period
ended
March 31, 2006, respectively, as compared to using our prior method under
APB
25.
Registration
Rights Penalties
The holders of securities issued in the our 2006 Offering and 2005 Offering
(see
Note 4 to our Financial Statements) had registration rights for the common
stock
and for the common stock underlying the convertible debt and the warrants
held
by them. Liquidated damages for failure to register and maintain registration
for such common stock are payable in shares of our common stock under certain
circumstances and are equal to 1% of the amount of the outstanding convertible
debt per 30-day period up to a maximum of 24% and 1% of the amount of the
investment in the 2006 Offering up to a maximum of 18%. In each case, the
amount
is payable in shares of our common stock valued
at
a rate of $2.00 per share. We elected to recognize the impact of such
registration rights penalties as incurred, which commenced after July 23,
2006.
We completed the registration of the foregoing securities on December 22,
2006
and recognized five months of penalty, resulting in the recording of 332,876
shares of common stock to be issued at a value of $5.00 for a total of
$1,664,380. On December 21, 2006, the FASB Financial Statement Publication
(“FSP”) EITF 00-19-2 that addresses the accrual and accounting for registration
rights penalties became effective immediately. This FSP addresses the proper
accounting of similarly arranged registration rights agreements entered
into
after the effective date of December 21, 2006. The Company adopted
EITF 00-19-2 as of its effective date and does not expect the adoption
to be
significantly different from our current policy.
New
Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes,” which is an interpretation of SFAS No. 109 ,
“Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with SFAS 109 and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken
or expected to be taken in a tax return. FIN 48 also provides guidance
on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We are currently evaluating the effect
that
the adoption of FIN 48 may have on our financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
157 defines fair value, establishes a framework for measuring fair value
and
expands disclosure of fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements
and
accordingly, does not require any new fair value measurements. SFAS 157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. We are currently in the process of assessing the impact
the
adoption of SFAS 157 will have on our financial statements.
In
September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.” SAB 108 requires that public companies utilize a “dual-approach” to
assessing the quantitative effects of financial misstatements. This dual
approach includes both an income statement focused assessment and a balance
sheet focused assessment. The guidance in SAB 108 must be applied to annual
financial statements for fiscal years ending after November 15, 2006. We
believe
the adoption of this pronouncement will not have a material impact on our
financial statements.
In
February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement 157.”
We will adopt SFAS 159 in the fiscal year beginning April 1, 2008. The
adoption
of this statement is not expected to have a material effect on our financial
statements.
Plan
of Operation
Having
launched our products through multiple channels including retail, home
shopping,
catalogue, international and direct to consumer sales, our objective over
the
next 12 months will be to expand our marketing efforts in each of these
channels
for our kitchen garden systems and peripheral products. Our infomercial,
a
30-minute video presentation of the product, has been airing on national
cable
and local broadcast television stations since September 2006 and we anticipate
continued airings through the balance of calendar year 2007.
We
are
also expanding our product development activities to sustain operations
beyond
our initial product offerings. Development has begun and, in some cases
has been
completed, for final design and tooling of new models of our AeroGarden
kitchen
appliances, including models that offer additional features and finishes
which
are designed for higher price points than our current system, as well models
which will have smaller growing capacities and require smaller counter
space,
designed to sell for lower price points. These lower priced products may
be
introduced into specialty channels of distribution such as toy channels
for a
children’s garden, coffee shops for a tea garden, office channels for desktop
garden, etc. We also continue to enhance our offerings of seed kits and
accessories, with available seed kits growing from the six that were available
in March 2006 to over 20 by March 2007, including the sale and distribution
of
live strawberry plants developed to grow in the AeroGarden system. We have
also
expanded our line of accessories to include the wall garden, a shelving
unit
that enables users to mount from one to three AeroGardens
systems on the wall vertically in less than 16 inches. Consumers can mount
up to
three of these wall gardens next to each other using only one electrical
outlet
(collectively know as “The Wall Farm”), allowing consumers to grow a large
abundance of fresh homegrown produce year round. We have also developed
and
launched our Herb N Serve, a battery operated mixer/blender designed to
allow
the consumer to make salad dressing using herbs from the AeroGarden and
serve it
from the same container.
We
have
completed development of many of our marketing materials, including infomercials
and short form (60 and 120 seconds) television commercials, multiple websites,
product brochures, retail packaging, point of purchase displays and other
retail
collateral materials and public relations kits. We continue to dedicate
financial and management resources to the improvement of our marketing
and sales
materials and processes.
Manufacturing
We
manufacture our products using contract manufacturing sources that are
supervised by our internal engineering and manufacturing teams. Our bio-grow
seed pods are currently manufactured and assembled in our production facilities
in Longmont, Colorado.
On
September 30, 2005, we entered into a manufacturing agreement with Source
Plus,
Inc. (“Source Plus”) an Alabama corporation, and Mingkeda Industries Co., Ltd.
(“Mingkeda”), a Chinese company located in the Guangdong Province of China that
has primarily manufactured light fixtures in the past. Under the terms
of this
agreement, Source Plus advanced monies to Mingkeda for tooling and molds
to
build our products. To reimburse Source Plus, we issued 62,000 shares of
our
common stock to Source Plus in October 2005 and recorded a $310,000 asset
for
tooling, which we will depreciate over a period of three years to reflect
the
estimated useful life of the tooling. AeroGrow and Source Plus have agreed
to
certain selling restrictions on our sale of common stock. Further, in return
for
a $0.50 per unit price concession from Mingkeda for products we purchase,
we
issued 10,000 shares of our common stock to Mingkeda in October 2005. These
shares are subject to the same selling restrictions as the stock issued
to
Source Plus. AeroGrow recorded a $50,000 expense for inventory which we
charged
to cost of sales during the initial year.
This
agreement provides for payment of the purchase price of products manufactured
by
Mingkeda as follows: 30% paid 25 days prior to shipment, 50% paid upon
shipment,
and the remaining 20% paid 20 days after shipment. The purchase price is
determined based upon a fixed percentage for profit (14% for light bulbs,
29%
for all other products); overhead and labor are applied to actual component
costs. We have also agreed to pay to Source Plus a commission of 2% of
the total
purchases of the product with such payments to be made using the same
proportions as our payments to Mingkeda. In addition, Source Plus is entitled
to
receive 2% of all our purchases of kitchen gardens, from all sources, for
a
period of 18 months from the date of the initial shipment from Mingkeda.
Mingkeda will manufacture and ship the products as and when required by
us and
will maintain an agreed level of quality. Currently, Mingkeda has the capacity
to produce 15,000 per month and has agreed to develop sufficient capacity
to
manufacture up to 25,000 kitchen garden systems per month. We will have
the
right to audit Mingkeda’s manufacturing performance periodically and maintain an
agent in the Mingkeda plant to inspect our production.
The
manufacturing agreement with Mingkeda and Source Plus provides for protection
of
our intellectual property rights. Under the agreement, Source Plus is
specifically responsible for working as the liaison between us and Mingkeda
with
responsibility for oversight of quality control in the manufacturing of
the
products, review of specifications and Mingkeda’s compliance, monitoring of
order fulfillment, and similar tasks related to quality of the finished
goods.
Source Plus receives a 2% commission for their work. Mingkeda manufactures
the
product to our specifications at a predetermined line item component and
assembly cost that will not change unless there are changes in exchange
rate or
cost of raw materials. We must approve changes in cost.
In
order
to diversify our risk from having a single manufacturer, as well as provide
for
capacity beyond that of Mingkeda, we identified and commenced production
with an
additional contract manufacturing source, Main Power Electrical Factory
Ltd
(Main Power). We have completed two sets of tooling with Main Power for
a
production capacity of 100,000 per month of our original kitchen garden
units.
We have also developed, through Main Power, tooling for a new model, the
AeroGarden Pro100, which features a stainless steel accented finish as
well as
our Adaptive Growth technology. During the first calendar quarter of 2007,
we
began receiving delivery of production units built by Main Power. Purchasing
terms with Main Power are 100% payment upon shipment through commercial
bills
of
exchange. As of March 31, 2007, we have recorded $289,335 in tooling costs
related to tooling at Main Power for two models of our AeroGarden. We have
paid
Main Power $35,736 in deposits toward tooling costs, and we owe $35,736
in
additional deposits, we have amortized $7,968 of tooling costs to date
and have
an additional $210,296 due as of March 31, 2007 to be amortized at the
rate of
$0.20 per unit.
In
addition, we have increased research and development and production capacity
for
seed kits for our kitchen garden systems at our facility in Longmont, Colorado.
We expect to continue to dedicate financial and management resources to
the
improvement of operating efficiencies and production capacity at this
facility.
Retail
Marketing and Sales
We
began
testing various direct marketing advertisements during the third and fourth
calendar quarter of 2006 including:
·
60-second
television commercials,
·
30-minute
infomercials,
·
home
shopping
networks, and
·
Internet
advertising.
We
have
been airing our infomercial we produced on national cable and broadcast
television, spending approximately $2.0 million in media through March
31, 2007.
We expect that the exposure for our products that will be generated from
the
infomercial and other direct response marketing advertising will broaden
the
AeroGarden brand and product recognition in all channels of
distribution.
In
July
2006, the AeroGarden was featured on QVC, the world’s largest television
retailer, and had multiple additional airings since that time, including
an
airing in April 2007 which featured the Pro100 model of AeroGarden throughout
QVC’s broadcast day, a promotion known as “Today’s Special Value” or
“TSV.”
We
have
expanded our presence in catalogues from our catalogue launch partner,
Frontgate, to multiple catalogues including Brookstone, Plow and Hearth,
Improvements and others, all of which we believe add to the growing consumer
recognition of their products. We also continue to expand our retail
distribution with over 1,350 retail stores to date carrying AeroGarden
products
nationwide in multiple channels including housewares, culinary, lawn and
garden
and department stores. Included in the foregoing is Linens ‘n Things with other
chain wide distribution anticipated for the remainder of calendar 2007
including
JC Penney’s, Sears and others. The AeroGarden has received recognition from
retailers such as Amazon.com whose customers voted the AeroGarden the “Most
Wished For” home and garden product of 2006, the media, including features in
nationally recognized television shows such as the “Today Show” and the “Ellen
Degeneres” show and the housewares industry, with the AeroGarden receiving "Best
in Category" from the International Housewares Association in the "Food
Preparation" category based upon the AeroGarden’s innovative technology, user
benefits and market response.
We
have
developed a nationwide network of manufacturer sales representative
organizations with experience in each of these retail categories to manage
sales
activities for these channels. These sales representatives are independent
contractors compensated by commission based on the sales they generate.
Although
our gross profit margins will be lower when selling through retail channels,
we
will not incur the relatively higher advertising costs associated with
our
direct response marketing. Our ability to continue to expand and maintain
sales
through retail channels will depend on the success of our public relations
and
direct marketing campaigns in generating awareness for our products, the
retailers’ ability and willingness to merchandise our products, and continued
consumer acceptance for our kitchen garden systems.
Distribution
Through
December 31, 2006, we had contracted with a third party service provider
in
Reno, Nevada to fulfill, store and ship our products. As of January 1,
2007, we
terminated our relationship with the company in Reno, Nevada and
relocated our warehousing and
fulfillment to a new third party facility,Motivational Fulfillment
and Logistics
Services (“Motivational”), located in Chino, California. We believe this change
has reduced inbound and outbound freight costs as well as fulfillment and
handling charges and reduced time to market as a result of our location
near the
major sea ports of Los Angeles and Long Beach, California. Motivational
provides
warehousing, order packing, and shipping for the products sold (through
both
direct response channels and retail channels) on primarily a variable cost
basis. Costs for warehousing, order packing, and shipping for the products
sold
through direct response channels are included in the shipping and handling
charge paid by the direct response purchaser. For retail distribution,
the costs
for warehousing, order packing, and shipping are lower because of the
efficiencies gained in shipping larger quantities per order. Freight costs
will
vary significantly depending upon quantity ordered and destination, but
range
from 3% to 5% of sales net of reimbursement from customers. A different
third
party service provider, Web-Ideals LLC, also provides payment processing,
database management, and customer support services for direct response
sales. We
manage the majority of our consumer and retailer customer support from
our own
call center facilities located in our headquarters in Boulder,
Colorado.
We
have
contracted with a telemarketing company, LiveOps, Inc. to provide operators
who
will take calls from consumers responding to our direct response marketing.
This
contract may be cancelled upon 30 days notice. These orders and the orders
received on our website are provided to our third party service provider
daily
to be fulfilled. Telemarketing costs per order are approximating 4% of
direct
response sales.
International
Sales
We
have
begun to build our international distributor network and have entered into
agreements with distributors in Japan, Mexico and Canada. On September
1, 2006,
we retained the services of a consultant in London to assist in developing
our
international distributor network in Europe and Asia. We anticipate finalizing
distribution agreements in key markets such as Germany and the United Kingdom
by
the end of September 2007 and have obtained electrical approvals and seed
kit
customs clearance for our kitchen garden products, enabling distribution
to
commence in Europe and Japan during the early part of the third calendar
quarter
of 2007. The terms of our international agreements generally provide for
a test
period commencing from the first shipment of product, usually around 90
to 120
days, during which the distributor will air the infomercial and otherwise
evaluate the product potential in their market. Thereafter, if electing
to go
forward, the distributor will be subject to minimum purchase requirements
on a
quarterly or semi-annual basis based upon the size of the market and the
distribution channels granted the distributor in the market.
Inflation
and Seasonality
We
do not
expect inflation to have a significant effect on our operations in the
foreseeable future. Because our kitchen garden systems are designed for
an
indoor gardening experience, it is likely that we may experience slower
sales in
the United States during June through September when our consumers may
tend to
garden outdoors. In addition, we had increased sales during the holiday
season
in the fourth calendar quarter. We have had only one year of operations,
but it
does appear that we have some seasonality. We intend to sell to our
international distributors in US Dollars thereby minimizing effects from
currency fluctuations. Our purchases from China may be affected by changes
in
valuation of the US Dollar as compared to the Chinese Yuan.
Results
of Operations
The
year
ended March 31, 2007 represented our first full year of revenues from
operations. Initial shipments of our products began in March
2006. The following table sets forth, as a percentage of sales, our
quarterly financial results for this first 12 months of operations:
| |
|
Three
months ended
|
|
| |
|
31-Mar-07
|
|
|
31-Dec-06
|
|
|
30-Sep-06
|
|
|
30-Jun-06
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales- retail
|
|
|
65.1 |
% |
|
|
67.2 |
% |
|
|
77.6 |
% |
|
|
84.4 |
% |
|
Product
sales- direct to consumer
|
|
|
34.9 |
% |
|
|
32.8 |
% |
|
|
22.4 |
% |
|
|
15.6 |
% |
|
Total
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
56.3 |
% |
|
|
67.5 |
% |
|
|
80.3 |
% |
|
|
82.2 |
% |
|
Research
and development
|
|
|
8.8 |
% |
|
|
14.4 |
% |
|
|
39.7 |
% |
|
|
52.9 |
% |
|
Sales
and marketing
|
|
|
44.0 |
% |
|
|
40.5 |
% |
|
|
132.0 |
% |
|
|
116.9 |
% |
|
General
and administrative
|
|
|
21.4 |
% |
|
|
21.5 |
% |
|
|
75.1 |
% |
|
|
104.1 |
% |
|
Total
operating expenses
|
|
|
130.5 |
% |
|
|
143.9 |
% |
|
|
327.1 |
% |
|
|
356.1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
-30.5 |
% |
|
|
-43.9 |
% |
|
|
-227.1 |
% |
|
|
-256.1 |
% |
For
the
year ended March 31, 2007, net sales totaled $13,144,037. In the
prior period, which was a transitional three-month period ended March 31,
2006,
we recorded our first sales of $35,245. Direct sales are generated as a
result
of airings of our infomercial, our websites and other direct to consumer
advertisements. Retail sales are generated through sales to “brick and mortar”
retailers, catalogues and home shopping companies who in turn sell to consumers.
In regard to our direct sales, we offer our direct customers thirty-six
days to
evaluate the product (“Trial Sales”) paying only the shipping and handling costs
for such products before making the required installment payments after
the
expiration of the thirty-six day trial period. Accordingly, we did not
record
$451,898 of revenue as of March 31, 2007 related to the unpaid balance
due for
orders shipped in conjunction with these Trial Sales. Also, as of March
31,
2007, we did not record $135,459 of product costs associated with the foregoing
Trial Sales because the customer is required to return the product and
we are
therefore able to recover these costs through resale of the goods.
During
the year ended March 31, 2007, we had two retail customers who accounted
for 15%
($1,962,968) and 10% ($1,303,899), respectively, of our net sales.
Cost
of revenues for the year ended
March 31, 2007 totaled $8,404,507 representing 64% of revenues for the
year.
Cost of revenues include product costs for purchased and manufactured products,
freight costs for inbound freight from manufacturers and outbound freight
to
customers, costs related to warehousing and the shipping of products to
customers and duties and customs applicable to products imported. Throughout
the
initial year of our product launch, we were able to improve both manufacturing
costs and transportation costs as evidenced by the above table. Included
in cost
of revenue for the year ended March 31, 2007 are costs associated with
expedited
shipping of approximately 15,000 of our AeroGarden units from our factory
in
China by air rather than by sea in order to expedite our initial deliveries
in
April 2006, and to satisfy customer demands in the November/December 2006
holiday timeframe at an incremental airfreight cost of $27 per unit, as
well as
airfreight costs associated with expediting components parts for our seed
kits
in the January 2007 timeframe for a total of additional freight cost
of approximately $490,000. We also experienced higher than anticipated
costs in
the startup of our seed kit manufacturing operations which improved throughout
the year ended March 31, 2007 as efficiencies in manufacturing seed kits
due to
improvements in both process and volume were realized.With the additional
factory capacity
that enables more efficient component purchasing, manufacturing cost reductions
related to integration of electrical components, relocation of our distribution
facilities to California improving inbound and outbound freight costs and
the
ability to maintain adequate inventory levels thereby avoiding
air freight costs, we anticipate further reductions in costs of
revenues in the next 12 months.
Gross
margins vary based upon the factors impacting cost of revenue discussed
above as
well as the ratio of direct sales versus retail sales. In a direct to consumer
sale, we recognize as revenue the full purchase price for the product as
opposed
to retail sales, where we recognize as revenue the wholesale price for
the
product charged to the retailer. Media costs associated with direct sales
are
included in sales and marketing costs. Gross margins for the year ended
March
31, 2007 were $4,739,530 representing 36% of revenues. Affecting gross
margins
for the year ended March 31, 2007, as discussed above, were airfreight
costs of
$490,000, reducing gross margins by 4%. With the addition of the new
manufacturing capability, we expect to have sufficient manufacturing capacity
to
avoid such airfreight costs in the future. There are further reductions
possible
from obtaining regulatory approval to produce selected seed kits in China
to be
shipped with the AeroGarden which would result in up to 60% cost savings
for
such seed kits as compared to current manufacturing costs in Colorado.
At
present no assurances can be given that such regulatory approval can be
obtained.
Sales
and
marketing costs for the year ended March 31, 2007 totaled $7,117,613. Sales
and
marketing costs for the year ended March 31, 2007, the three-month transitional
period ended March 31, 2006 and the year ended December 31, 2005 include
all
costs associated with the marketing sales and distribution of our products
and
consists of the following:
| |
|
Year
ended
|
|
|
Three
month transitional
period
ended
|
|
|
Year
ended
|
| |
|
March
31,
|
|
|
March
31,
|
|
|
December
31,
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
Advertising
|
|
$ |
2,125,111
|
|
|
$ |
30,000
|
|
|
$ |
-
|
|
Salaries
and related costs
|
|
|
1,672,877
|
|
|
|
94,832
|
|
|
|
109,370
|
|
Stock
based compensation
|
|
|
363,227
|
|
|
|
1,724,940
|
|
|
|
-
|
|
Infomercial
production costs
|
|
|
767,599
|
|
|
|
181,060
|
|
|
|
63,635
|
|
Sales
commissions
|
|
|
556,531
|
|
|
|
-
|
|
|
|
-
|
|
Consulting
fees
|
|
|
408,465
|
|
|
|
224,500
|
|
|
|
-
|
|
Public
relations
|
|
|
235,608
|
|
|
|
124,195
|
|
|
|
173,085
|
|
Telemarketing
|
|
|
168,572
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
819,623
|
|
|
|
169,056
|
|
|
|
237,807
|
| |
|
$ |
7,117,613
|
|
|
$ |
2,548,583
|
|
|
$ |
583,897
|
Advertising
is primarily comprised of media costs for airing of the our infomercial
which we
consider a key component of our marketing strategy in that in helps build
awareness and therefore consumer demand for all channels of distribution
as well
as generating revenues from direct to consumer sales. We anticipate continued
airing of our current infomercial through December 2007. Salaries and related
costs consist of salaries, payroll taxes, employee benefits and other payroll
costs for our sales, customer service operations, graphics and marketing
departments. Stock based compensation represents charges related to the
granting
of stock options and grants to employees and consultants that service the
foregoing departments. Infomercial production costs represent costs
related to the development, production, editing and revision of our thirty
minute infomercial and short form (0:60 and 1:20 second) television commercials.
We intend to produce and test market at least two new infomercials for
products
in development for airing in calendar year 2008. Sales commissions represent
commissions 7% of collections from net sales paid to sales representative
organizations that assisted us in opening and maintaining our retail customers.
We have recently renegotiated the agreements with our sales representative
organizations to sliding scales based upon the size of the customers and,
as a
result, anticipate the aggregate percentage rate of these commissions to
decline
in the next 12 months.
General
and administrative costs for the year ended March 31, 2007 totaled $4,050,312.
General and administrative costs for the three month transitional period
ended
March 31, 2006 and the year ended December 31, 2005 were $2,010,907 and
$2,923,792, respectively. Included in general and administrative costs
for the
year ended March 31, 2007 were $356,720 in stock based compensation related
to
employee stock option and restricted stock grants, $362,830 in legal fees
and
$322,541 of consulting fees. For the three month transitional period ended
March
31, 2006, general and administrative costs included $1,332,540 in stock
based
compensation related to employee stock option and restricted stock
grants.
Research
and Development
During
the year ended March 31, 2007 we incurred $2,113,255 in research and development
costs, inclusive of $336,482 in compensation relating to the granting of
restricted stock and stock options during the year. During the three-month
transitional period ended March 31, 2006, we incurred $978,539 in research
and
development costs, inclusive of $573,916 in compensation relating to the
granting of stock options granted March 28, 2006. During the year
ended December 31, 2005, we incurred $1,578,833 in research and development
costs. We initially focused our efforts on determining if an aeroponic
product
could be developed for consumer use in the home at attractive
prices. We then focused on developing the design, technology and
various prototype models. In addition, we set up a greenhouse and
laboratory to measure the success of growing herbs, vegetables and flowers
with
various seeds, cuttings
and nutrients under different lighting conditions. Finally, we filed
patent applications for certain of the technology used in our kitchen garden
systems.
In
the
next 12 months we intend to continue researching and developing new product
designs and product extensions including, but not limited to, nutrient
delivery
systems and additional seed varieties for our seed kits. We have also
begun development of a methodology to cultivate and ship live “starter” plants
in the grow pod mediums that will be able to grow in our kitchen garden
systems.
We started market testing this process with strawberries during the first
quarter of calendar 2007. We have also initiated development of a new aeroponic
based technology which utilizes a new form of proprietary seed pod that
will
facilitate transfer of water using materials that facilitate the transfer
of
moisture to the seeds without the need of the pump system. This new technology
is anticipated to reduce manufacturing costs of our kitchen garden systems
with
no loss of efficacy. We also plan to introduce a smaller version of our
kitchen
garden system in the fourth calendar quarter of 2007 using this new technology
with a targeted retail price of $99-$129 based on the channel of distribution
in
which it is sold and the accessory components included with the unit. Partially
offsetting future increases in these costs will be cost savings associated
with
research and development resources available to us through our new manufacturer
provided at minimal costs to us including resources for design, prototyping
and
regulatory approvals.
Liquidity
and Capital Resources
On
March
12 and March 15, 2007, we completed a private offering of 833,400 units
of our
common stock and warrants to purchase common stock and on March 29, 2007,
we
completed a private offering of 333,360 units of our common stock and warrants
to purchase common stock (“2007 Offerings”). Each unit consisted of one share of
common stock, par value $0.001, and one five-year warrant to purchase one
share
of common stock at an exercise price of $7.50 per share. The units were
sold at
a per unit price of $6.00. We raised an aggregate of $7,000,000 from the
2007
Offerings, less a placement agent fee in the amount of $700,000 and
approximately $100,000 in other expenses related to the 2007 Offerings.
The
holders of securities issued in the 2007 Offerings had registration rights
for
the common stock and for the common stock underlying the warrants held
by them.
Liquidated damages for failure to register and maintain registration for
such
common stock were payable in cash under certain circumstances and were
limited
to 1% of the amount of the investment per 30-day period made up to a maximum
of
10%. We completed the registration of $5.0 million of the 2007 Offerings
on May
11, 2007 and we intend to file a registration statement for the remaining
$2.0
million of the 2007 Offerings within the 120 day required time for filing
such
registration statement.
As
of
March 31, 2007, we had a cash balance of approximately $5,495,000. We anticipate
that existing cash resources will be sufficient for the next 12
months.
We
anticipates our principal sources of liquidity during the next fiscal year
ending March 31, 2008 will be proceeds from sales of our products. We intends\
to use our working capital principally to purchase inventory, fund media
advertising, fund product promotion and trade show costs as well as support
ongoing product development, overheads and operational costs. In the event
retail and/or direct response sales accelerate more rapidly than currently
anticipated, we would need to support this growth through additional asset-based
or other debt financing or the raising of additional equity. However, no
assurance that such financing will be available on attractive terms or
at
all.
As
of
March 31, 2007, we had generated net proceeds of $23,730,751 from the sale
of
securities.
We
have
used the funds raised to date to:
·
complete
the
research and development of our kitchen garden systems,
·
commence
manufacturing of one model of our kitchen garden and ten varieties of seed
kits.
·
develop
our
direct response marketing advertisements including one 30-minute infomercial
and
several 60-second television commercials, and
·
launch
our
public relations campaign.
·
launch our initial
products through direct response, retail, catalogue and home shopping
distribution channels.
Off-Balance
Sheet Arrangements
We
have certain current commitments under operating leases and have not entered
into any capital leases or contracts for financial derivative instruments
such
as futures, swaps and options.
RISK
FACTORS
RISKS
RELATED TO OPERATIONS
Because
we have a limited operating history, we may not be able to successfully
manage
our business or achieve profitability.
We
have a
limited operating history upon which you can base your evaluation of our
prospects and the potential value of our common stock. We recently have
begun to
produce our garden systems and seed kits. We are confronted with the risks
inherent in a start-up company, including difficulties and delays in connection
with the production and sales of our kitchen garden systems, reliance on
a small
number of products, operational difficulties and our potential under-estimation
of production and administrative costs. If we cannot successfully manage
our
business, we may not be able to generate future profits and may not be
able to
support our operations. We expect to incur substantial additional expenses
and
losses in the further implementation of our business plan. Because we are
in the
early stages of implementing our business plan, we cannot predict now if
we will
ever be profitable. We may not be able to improve operations and therefore
may
not become profitable.
We
have incurred substantial losses since inception and may never achieve
profitability.
Since
we
commenced operations in 2002 and through March 31, 2007, we have incurred
substantial operating losses. For the year ended March 31, 2007, we had
a net
loss of $10,386,451; for the transition period of the three months ended
March
31, 2006, we had a net loss of $7,543,343; for the 12 months ended December
31,
2005, we had a net loss of $7,717,577. Since inception, our losses from
operations have resulted in an accumulated deficit of $29,792,163 as of
March
31, 2007. We expect that our operating expenses will outpace revenues for
the
near future and result in continued losses. The success of our business
will
depend on its ability to expand sales and distribution of our AeroGarden™
kitchen garden systems to consumers and develop new product extensions
and
applications.
We
are
subject to many of the risks common to developing enterprises, including
undercapitalization, cash shortages, limitations with respect to financial
and
other resources, and lack of revenues to be self-sustaining. There is no
assurance that we will ever obtain profitability, which may lead to the
loss of
your entire investment.
If
our kitchen garden systems fail to perform properly, our business could
suffer
with increased costs and reduced income.
Although
we have been internally testing our products in our laboratories and with
users
for over three years, our products may fail to meet consumer expectations.
We
have only limited experience with returns and have no meaningful history
with
respect to warranty claims for our products. We may be required to replace
or
repair products or refund the purchase price to consumers. Failure of our
products to meet expectations could:
·
damage
our
reputation,
·
decrease
sales,
·
incur
costs
related to returns and repairs,
·
delay
market
acceptance of our products,
·
result
in
unpaid accounts receivable, and
·
divert
our
resources to remedy the malfunctions.
The
occurrence of any of these events would have an adverse impact on our results
of
operations.
We
will likely need additional capital to fund our growth.
We
anticipate that we have sufficient capital to satisfy our requirements
for the
next 12 months. However, we will likely require additional capital to support
our growth and cover operational expenses as we expand our marketing and
product
development. It is possible that none of our outstanding warrants will
be
exercised and we will therefore not receive any proceeds therefrom. We
may need
to issue equity, debt or securities convertible into equity. All of which
could
dilute the current stock ownership in AeroGrow. If we cannot obtain additional
financing on acceptable terms, we may not have sufficient capital to operate
our
business as planned and would have to modify our business plan or curtail
some
or all of our operations.
Our
intellectual property and proprietary rights are only filed in the United
States
and give us only limited protection and can be expensive to
defend.
Our
ability to produce and sell kitchen garden systems exclusively depends
in part
on securing patent protection for the components of our systems, maintaining
various trademarks, and protecting our operational trade secrets. To protect
our
proprietary technology, we rely on a combination of patents pending (and
if
granted, patents), trade secrets, and non-disclosure agreements, each of
which
affords only limited protection. We own the rights to 19 United States
patent
applications. However, these patent applications may not result in issued
patents and even issued patents may be challenged. We are selling our kitchen
garden systems prior to receiving issued patents relating to our patent
applications. All of our intellectual property rights may be challenged,
invalidated or circumvented. Claims for infringement may be asserted or
prosecuted against us in the future and e may not be able to protect our
patents, if any are obtained, and intellectual property rights against
others.
Our former employees or consultants may violate their non-disclosure agreements,
leading to a loss of proprietary intellectual property. We also could incur
substantial costs to assert our intellectual property or proprietary rights
against others.
Our
current or future manufacturers could fail to fulfill our orders for kitchen
garden systems, which would disrupt our business, increase our costs, and
could
potentially cause us to lose our market.
We
currently depend on two contract manufacturers in China to produce our
kitchen
garden systems. These manufacturers could fail to produce the kitchen garden
system to our specifications or in a workmanlike manner and may not deliver
the
systems on a timely basis. Our manufacturers must also obtain inventories
of the
necessary parts and tools for production. We own the tools and dies used
by our
manufacturers. Our manufacturers operate in China and may be subject to
business
risks that fall outside our control, including but not limited to, political,
currency and regulatory risks, each of which may affect the manufacturer’s
ability to fulfill our orders for kitchen garden systems. Any change in
manufacturers could disrupt our ability to fulfill orders for kitchen garden
systems. Any change in manufacturers could disrupt our business due to
delays in
finding a new manufacturer, providing specifications and testing initial
production.
If
we are unable to assimilate our new managers and recruit and retain key
personnel necessary to operate our business, our ability to successfully
manage
our business and develop and market our products may be
harmed.
Several
of our executive officers have recently joined us and therefore have limited
experience in managing our company. In addition, to expand our business
we will
also need to attract, retain and motivate highly skilled design, development,
management, accounting, sales, merchandising, marketing and customer service
personnel. We plan to hire additional personnel in all areas of our business.
Competition for many of these types of personnel is intense. As a result,
we may
be unable to successfully attract or retain qualified personnel. Additionally,
any of our officers or employees can terminate their employment with us
at any
time. The loss of any key employee or our inability to attract or retain
other
qualified employees could harm our business and results of
operations.
We
rely on third parties for a significant portion of our manufacturing, warehouse,
distribution, order processing, and fulfillment operations. If these parties
are
unwilling to continue providing services to us, or are unable to adequately
perform such services for us on a cost effective basis, our business could
be
materially harmed.
We
engage third parties to perform many critical functions. For example, we
have
outsourced our manufacturing, warehouse, distribution, order processing,
and
fulfillment operations. Any disruption in our relationship with any of
our
vendors could cause significant disruption in our business and we may not
be
able to locate another party that can provide comparable services in a
timely
manner or on acceptable commercial terms. In addition, no assurance can
be made
that these relationships will be adequate to support our business as we
follow
our business plan.
RISKS
RELATED TO THE RELEVANT MARKET FOR OUR PRODUCT
Our
future depends on the financial success of our kitchen garden systems.
Since we
are introducing entirely new products without comparable sales history,
we do
not know if our kitchen garden systems and seed kits will generate wide
acceptance by consumers.
We
have
introduced our kitchen garden systems and seed kits as new products to
consumer
markets unfamiliar with their use and benefits. In addition, we currently
have,
and only contemplate having, one product line, indoor garden systems. We
cannot
be certain that our products will generate widespread acceptance. If consumers
do not purchase our products in sufficient numbers, we will not be profitable
and you may lose all of your investment. Investors must consider our prospects
in light of the risks, expenses and challenges of attempting to introduce
new
products with unknown consumer acceptance.
Our
marketing strategies may not be successful, which would adversely affect
our
future revenues and profitability.
Our
revenues and future depend on the successful marketing of our kitchen garden
systems. We cannot give assurance that consumers will continue to be interested
in purchasing our products. We plan to use direct marketing to sell our
products
via television commercials, infomercials, magazine and newspaper advertising,
and the Internet. Our infomercials and commercials may not generate sufficient
income to continue to air them. If our marketing strategies fail to attract
customers, our product sales will not produce future revenues sufficient
to meet
our operating expenses or fund our future operations. If this occurs, our
business may fail and investors may lose their entire investment.
We
may face significant competition, and if we are unable to compete effectively,
our sales may be adversely affected.
We
believe that our simplified and complete kitchen garden systems and planned
methods of distribution offer significant benefits as compared to the
traditional hydroponic industry practices. We recognize, however, that
there are
companies that are better funded and have greater experience in producing
hydroponic products in commercial markets, including, but not limited to,
companies such as General Hydroponics and American Hydroponics. These companies
could potentially decide to focus on the consumer market with competing
products. We could also face competition from gardening wholesalers and
large
and profitable soil-based gardening companies, including, but not limited
to,
the Burpee Seed Company and Gardener’s Supply Company, should they decide to
produce a competitive product. In addition, other consumer products companies
could develop products to compete with us. These companies may use hydroponic
technologies, and may have better consumer acceptance. Such companies may
be
better funded than us. If any such competing products are successful, their
success may adversely impact us.
RISKS
RELATED TO OUR CAPITALIZATION
If
an exemption from registration on that we have relied for any of our past
offerings of common stock or warrants are later challenged legally, our
principals may have to spend time defending claims, and we would then risk
paying expenses for defense, rescission and/or regulatory
sanctions.
To
raise
working capital, we offered common stock and warrants in private transactions
that we believed to be exempt from registration under the Securities Act,
as
amended, and state securities laws. In 2004 we also conducted a state registered
offering in Colorado of common stock and warrants intended to be exempt
from
registration under the Securities Act, as amended, as an intrastate offering.
However, because we are incorporated in Nevada, the offering did not satisfy
all
of the requirements for an intrastate offering. This could result in investors
or regulators asserting that the Colorado offering and/or the private
transactions (if the private transactions were integrated with the Colorado
offering) violated the Securities Act. There can be no assurance that investors
or regulators will not be successful in asserting a claim that these
transactions should not be integrated. In the event that one or more investors
seeks rescission, with resulting return of investment funds and interest
at a
market rate, or that state or federal regulators seeks sanctions against
us or
our principals, we would spend time and financial resources to pay expenses
for
defense, rescission awards or regulatory sanctions. The use of funds would
reduce the capital available to implement our full plan of operation. No
assurance can be given regarding the outcome of any such actions.
There
may be substantial sales of our common stock by existing stockholders which
could cause the price of our stock to fall.
Future
sales of substantial amounts of our common stock in the public market,
if one
develops, or the perception that such sales might occur, could cause the
market
price of our common stock to decline and could impair the value of your
investment in our common stock and our ability to raise equity capital
in the
future. As of March 31, 2007, we had 11,065,609 shares of common stock
outstanding, of which 4,917,540 shares may be sold without restriction.
See the
following risk factor for discussion of additional shares that are subject
to
issuance pursuant to outstanding warrants, options and convertible debt.
Of the
remaining shares, (i) 580,136 shares issued to stockholders of Wentworth in
the Merger have registration rights, but of these shares, 396,813
shares are subject to lockup restrictions for periods of 12 to 18 months
from
the effective date of our registration statement declared effective on
December
22, 2006 (the "2006 Registration Statement") and the holders of such shares
have
waived their right to be included in that registration statement in exchange
for
our obligation to register all such shares as soon as commercially reasonable
after the filing of the next quarterly or annual report or after the declaration
of effectiveness of the this registration statement, (ii) 332,876 shares
were issued under registration rights agreements, (iii) 5,578,740 shares
issued
prior to December 31, 2005 that have been held more than one year and may
be
transferred and sold, subject to the restrictions under Rule 144 or Rule
701,
depending on the status of the holder and the holding period as well as
lockup
agreements, (iv) 148,931 shares granted to employees and directors since
December 31, 2005 under our 2005 Equity Compensation Plan. Of the shares
identified in the last two categories above, 4,642,326 shares are subject
to
lockup agreements for periods of 12 to 18 months from the effective date
of the
2006 Registration Statement. Also, 333,360 shares and 333,360 shares underlying
warrants were issued in March 2007 have yet to be registered. The lockup
restrictions may be released by an agreement between us and Keating Securities,
LLC (“Keating Securities”). The shares of our common stock underlying the
convertible notes and the warrants issued or to be issued to the holders
of
convertible notes are required to be registered for resale by us and are
not
subject to lockup restrictions. The sales of our common stock by these
stockholders having registration rights or even the appearance that such
holders
may make such sales once a registration statement becomes effective may
limit
the market for the common stock or depress any trading market volume and
price
before other investors are able to sell the common stock. Moreover, a number
of
shareholders have held their investment for a substantial period of time
and may
desire to sell their shares, which could drive down the price of our common
stock.
Our
outstanding warrants, options and convertible notes, and additional future
obligations to issue our securities to various parties, may dilute the
value of
your investment and may adversely affect our ability to raise additional
capital.
As
of March 31, 2007, we are committed to issue up to 7,066,454 additional
shares
of common stock under the terms of outstanding convertible notes, warrants,
options and other arrangements. There are warrants and options outstanding
issued prior to June 30, 2005 that can be exercised for 818,858 shares
of its
common stock at exercise prices ranging from $0.005 to $15.00 per share.
There
are 2,143,000 shares of common stock issuable upon exercise of the outstanding
warrants issued to investors in our February 2006 private placement offering
(the "2006 Offering") exercisable at $6.25 per share. There are 1,166,760
shares
of common stock issuable upon exercise of the outstanding warrants issued
to
investors in our March 2007 private placement offering (the "2007 Offering")
exercisable at $7.50 per share. There are 600,000 shares of common
stock issuable upon exercise of outstanding warrants held by the initial
holders
of the convertible notes with an exercise price of $5.00 per share. There
are
594,000 shares of common stock
issuable upon exercise of warrants, at an exercise price of $6.00 per share,
that were issued to holders that elected to convert notes in the principal
amount of $2,970,000. There are 60,000 shares of common stock issuable
upon
exercise of outstanding warrants issued in 2005 to Keating Securities or
its
designees in connection with the convertible notes offering with exercise
price
of $6.00 per share and 214,800 shares of common stock issuable upon exercise
of
outstanding warrants issued to designees of Keating Securities in the 2006
Offering with an exercise price of $6.25 and 116,676 shares of common stock
issuable upon exercise of outstanding warrants issued to designees of Keating
Securities in the 2007 Offering with an exercise price of $8.25. As of
March 31,
2007, we had granted 1,337,360 options to purchase its common stock pursuant
to
our 2005 Equity Compensation Plan.
We
have
historically issued shares of its common stock or granted stock options
to
employees, consultants and vendors as a means to conserve cash, and we
may
continue to grant additional shares of stock and issue stock options in
the
future. As of March 31, 2007, 33,386 shares of common stock remain available
for
issuance under our 2005 Equity Compensation Plan.
For
the
length of time these notes, warrants, and options are outstanding, the
holders
will have an opportunity to profit from a rise in the market price of our
common
stock without assuming the risks of ownership. This may adversely affect
the
terms upon which we can obtain additional capital. The holders of such
derivative securities would likely exercise or convert them at a time when
we
would be able to obtain equity capital on terms more favorable than the
exercise
or conversion prices provided by the notes, warrants or options.
The
market price of the shares may fluctuate greatly. Investors in AeroGrow
bear the
risk that they will not recover their investment.
Our
common stock began trading on the NASDAQ on June 13, 2007. From January
8, 2007
through June 12, 2007, our common stock traded on the Over-the-Counter
Bulletin
Board (“OTC BB”) using the trading symbol AGWI.OB. Our trading symbol is AERO.
No assurance can be made that an active market will develop on the
NASDAQ. Currently, trading in our common stock on NASDAQ is limited,
and the per share price is likely to be influenced by the price at which
and the
amount of shares the selling stockholders are attempting to sell at any
time
with the possible effect of limiting the trading price or lowering the
price to
their offering price. Shares such as ours are also subject to the activities
of
persons engaged in short selling securities, which generally has the effect
of
driving the price down. Also, the common stock of emerging growth companies
is
typically subject to high price and volume volatility. Therefore, the price
of
our common stock may fluctuate widely. A full and stable trading market
for our
common stock may never develop in which event any holder of such shares
may not
be able to sell at the time he elects or at all.
Our
financial statements appear in a separate section at the end of this
Annual
Report. Such information is incorporated herein by reference.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On
February 24, 2006, we dismissed Hein & Associates LLP (“Hein”) as our
independent certified public accountants, the former accountants for Wentworth,
the company which merged with and into AeroGrow. The decision was approved
by
our Board of Directors. We are the “successor issuer” to Wentworth I, Inc.
within the meaning of Rule 12(g)-3 under the Securities Exchange Act of
1934, as
amended (“Exchange Act”) and became a Section 12(g) reporting company under the
Exchange Act.
The
reports of Hein on Wentworth’s financial statements for the fiscal years ended
December 31, 2005 did not contain an adverse opinion or disclaimer of opinion
and were not modified as to uncertainty, audit scope, or accounting principles,
except the report did contain an explanatory paragraph related to Wentworth’s
ability to continue as a going concern. During Wentworth’s fiscal
year ended December 31, 2005, there were no disagreements with Hein on
any
matter of accounting principles or practices, financial statement disclosure,
or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Hein would have caused Hein to make reference to
the
subject matter of the disagreements in connection with its report on the
financial statements for such years. Wentworth requested that Hein furnish
it
with a letter addressed to the Securities and Exchange Commission ("SEC")
stating whether or not it agrees with Wentworth’s statements in this Item
4.01(a). A copy of the letter furnished by Hein in response to that request,
dated February 27, 2006 which was filed as Exhibit 16.1 to the Form 8-K
reporting the change.
Gordon,
Hughes & Banks, LLP (“GHB”) have audited our financial statements annually
since inception through March 31, 2007. At a shareholder’s meeting held on
February 21, 2006, our shareholder’s ratified the appointment of GHB as auditors
for fiscal year ending March 31, 2007. During the years ended December
31, 2005
and 2004, and the period from January 1, 2006 through March 31, 2007 there
were
no disagreements with GHB on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of GHB, would have caused
GHB
to make reference to the subject matter of the disagreements in connection
with
its reports on the our financial statements. In addition, none of the events
described in Item 304(a)(1)(iv) of Regulation S-K occurred during such
periods.
(a)
Evaluation of Disclosure Controls and Procedures
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted
an
evaluation of the effectiveness of the design and operations of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the
Securities Exchange Act of 1934, as of March 31, 2007. Based on this evaluation,
our principal executive officer and principal financial officer concluded
that
our disclosure controls and procedures were effective such that the material
information required to be included in our SEC reports is recorded, processed,
summarized and reported within the time periods specified in SEC rules
and forms
relating to AeroGrow International Inc., and was made known to them by
others
within those entities, particularly during the period when this report
was being
prepared.
(b)
Changes in Internal Controls
We
have
not made any significant changes to our internal controls subsequent to
the
evaluation date. We have not identified any significant deficiencies or
material
weaknesses or other factors that could significantly affect these controls,
and
therefore, no corrective action was taken.
Not
applicable.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL
PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE
ACT
Directors
and Officers
The
following table shows the names and ages of our directors and executive
officers
and the positions they hold with us. Our bylaws provide that directors
are
generally elected at our annual shareholders meeting and hold office until
the
next annual shareholders meeting and until their successors are elected
and
qualified. Our bylaws provide that the board of directors shall consist
of such
number of members as the board may determine from time to time, but not
less
than one and not more than fifteen. Our board of directors currently consists
of
five individuals. Executive officers are selected by the board of directors
and
serve at its discretion.
|
Name
|
Age
|
Position
with AeroGrow
|
Serving
as a Director Since
|
|
W.
Michael Bissonnette
|
58
|
Chief
Executive Officer, President and Director
|
2002
|
|
Richard
A. Kranitz
|
63
|
Director
|
2002
|
|
Dennis Channer
|
57
|
Director
|
2007
|
|
Jack
J. Walker
|
72
|
Director
|
2006
|
|
Kenneth
Leung
|
62
|
Director
|
2006
|
|
Mitchell
B. Rubin
|
52
|
Chief
Financial Officer
|
n/a
|
|
Randall
Lee Seffren
|
49
|
Chief
Marketing Officer
|
n/a
|
W. Michael
Bissonnette is our founding shareholder and has served as chief
executive officer, president and a director of AeroGrow since July 2002.
Concurrently, he has served as chief executive officer, president, and
a
director of our former parent company, Mentor Capital Consultants, Inc.
since
March 2000. Mentor Capital currently has no active operating business.
From 1994
through 2000, Mr. Bissonnette was a private investor. From 1989 to 1994, he
was the founder, chief executive officer, president, and a director of
Voice
Powered Technology International, Inc., an international consumer electronics
company. From 1977 to 1989, Mr. Bissonnette was the founder, chief
executive officer and president of Knight Protective Industries, Inc.,
an
international consumer security products company. Prior to 1977, he was
founder,
chief executive officer and president of Shagrila Carpets, Inc., a multi-store
retailer of commercial and home carpeting. Both Voice Powered Technology
International, Inc. and Knight Protective Industries, Inc. specialized
in the
funding, development, and marketing of technology-based consumer
products.
Richard A.
Kranitz has been a director of AeroGrow since July 2002. He has also
served as a director of Mentor Capital since March 2000. Mr. Kranitz has
been an attorney in private practice since 1970, emphasizing securities,
banking
and business law. From 1990 to the present he has been an attorney in
Kranitz & Philipp in Grafton, Wisconsin. Previously, following the
death of a partner in 1976, he formed the Law Offices of Richard A.
Kranitz. From 1982 to 1983 he also was a member of Fretty & Kranitz and
from 1977 to 1978 he was also a member of Habush, Gillick, Habush, Davis,
Murphy, Kraemer & Kranitz. He was a member of McKay, Martin &
Kranitz from 1973 to 1976, and was employed by Reinhart, Boerner, Van Deuren,
Norris & Reiselbach, s.c. from 1970 to 1973. Mr. Kranitz served as
Law Clerk to the Honorable Myron L. Gordon in the U.S. District Court (E.D.
Wisconsin) from 1969 to 1970. Mr. Kranitz has served as a director of the
Grafton State Bank from 1990 to present. He served as a venture capital
consultant to, and director of, various companies, and he has served at
various
times as a director of various professional, civic, or charitable
organizations.
Dennis
Channer, CPA, CFP, has been a director of AeroGrow since April 16,
2007. Since 2001 to the present, Mr. Channer has been a member of Channer
Darmour Yanari, LLC, an investment advisory firm in Boulder, Colorado.
From 1999
to 2000 he served as a Senior Consultant and Vice President of Portfolio
Management Consultants, Inc., a provider of wealth management services,
with
over $30 billion in assets under management. From 1996 to 1999 Mr. Channer
was a
co-founder, Managing Director, and Chairman of the Board of Directors of
Investors Independent Trust Company in Boulder, Colorado. From 1992 to
1996 he
was the Managing Principal of Channer & Company, an independent investment
advisory and financial planning firm. From 1986 to 1992 he worked as the
Director of Financial Planning for Acacia Group in Denver, Colorado. From
1981
to 1986 Mr. Channer was a Partner in Thal Channer & Company, CPAs. Before
that, he served as an Accounting Manager (Western Interstate Commission
For
Higher Education, 1979 to 1980); a Controller (Boulder County Department
of
Human Resources, 1975 to 1978); and an Assistant Controller (Denver Manpower
Administration, 1974 to 1975). Mr. Channer was awarded his B.S. in accounting
by
Metropolitan State College of Denver in 1973.
Jack J.
Walker has been a director since the February 23, 2006, annual
meeting of shareholders. He has served as president of English &
Continental Properties, Inc., a real estate investment and development
company,
from 1980 to present. From 1976 to 1985, Mr. Walker was president of March
Trade & Finance, Inc., a private investment company. From 1974 to 1976,
Mr. Walker acquired control of Charles Spreckly Industries, Town &
Commercial Properties and Associated Development Holdings. In 1961 he started
English & Continental Property Company, and became joint Managing
Director of this commercial development company until 1976. Mr. Walker
began his career in 1957 as a lawyer in London, England specializing in
real
estate, financing, international tax, and corporate affairs. Mr. Walker has
served as a director of Megafoods Stores Inc. from 1984 to 1993. In addition,
since 1975 through the present, he has served as a venture capital consultant
to
companies on financial and pre-IPO strategies. In addition, he created
the Walker Foundation for Charitable Activities and he has served at various
times as a director of various professional, civic, and charitable
organizations.
Kenneth
Leung has been a director since the February 23, 2006, annual
meeting of shareholders. From 1995 to the present he has been Managing
Director
of Investment Banking-Environmental and the Chief Investment Officer of
the
Environmental Opportunities Fund at Sanders Morris Harris. Previously
Mr. Leung served as Managing Director Research-Environmental at Smith
Barney from 1978 to 1994. He was Vice President Research-Environmental
with
F. Eberstadt & Co. from 1974 to 1978. From 1968-1974 he was an
Assistant Treasurer with Chemical Bank. Mr. Leung served on the boards of
American Ecology since February 2005, Caprius, Inc. since December, 2006,
and
SystemOne Technologies since June 2000, all of which are public companies.
He
has served at various times as a director of various civic and charitable
organizations.
Description
of Other Executive Officers of the Corporation
All
of
the officers of the corporation are appointed by the board of directors
to serve
until their termination or resignation or appointment of a successor. The
current officers, in addition to Mr. Bissonette, are:
Mitchell
Rubin was elected chief financial officer and treasurer of AeroGrow
on
February 23, 2006. Prior to joining AeroGrow, from January 2003 through
February
2006, Mr. Rubin was an independent financial consultant. From July 1999
to
December 2002, Mr. Rubin was the Chief Financial Officer of Web-Ideals
LLC, a
privately owned application service provider that offered a web-based
application for managing direct to consumer commerce. From January 1994
to June
1999, Mr. Rubin held various positions including Chief Financial Officer,
Chief
Executive Officer, and director with Voice Powered Technology International
Inc., a publicly held developer and manufacturer of consumer electronic
products. From July 1991 to December 1993, Mr. Rubin served as Executive
Vice
President and Chief Operating Officer of Regal Group, Inc., a television
direct-response company. Mr. Rubin began his career as a certified public
accountant.
Randall
Seffren has been chief marketing officer of AeroGrow since April 2004
on a consulting basis through Prometheus Communications Group, a company
of
which he is the principal owner, and through which he has billed AeroGrow,
and
as an employee since July 2006. From 1999 to 2004, Mr. Seffren headed the
marketing efforts for healthcare communications companies, including Orbis
Broadcast Group and MedEd Architects. From 1993 to 1999, he was executive
vice
president with Reebok Home Fitness/DP Fitness/Body By Jake Fitness/Kent
&
Spiegel Direct. From 1989 to 1993, Mr. Seffren led the marketing, communications
and product development efforts as director of marketing communications
with
Life Fitness, a fitness equipment company.
Board
Committees and Meetings
We
have
established two standing committees so that some matters can be addressed
in
more depth than may be possible in a full board meeting: an audit committee
and
a governance, compensation and nominating committee. These two committees
each
operate under a written charter. The board has affirmatively determined
that
Mr. Channer, who was elected by the board and appointed Chairman of these
two committees on April 16, 2007, is independent as defined by applicable
securities law and NASDAQ corporate governance guidelines. Following is
a
description of both of these committees.
Audit
Committee. The current members of our audit committee are Mr. Channer
(chairman), Mr. Jack Walker and Mr. Kenneth Leung. Mr. Channer is considered
a
financial expert and Messrs Walker and Leung are considered financially
literate
under the rules of the SEC for audit committee members. The board has
affirmatively determined that each of these persons is an independent director
as defined by applicable securities law and NASDAQ corporate governance
guidelines. As we add additional independent members to our board of directors
as required by applicable securities laws or exchange listing guidelines,
such
independent directors may be appointed to our audit committee or the membership
of the committee may be changed. This committee’s charter provides that the
committee shall:
|
|
·
|
oversee
the accounting and financial reporting processes and audits
of the
financial statements,
|
|
|
·
|
assist
the board with oversight of the integrity of our financial statements,
the
Company’s compliance with legal and regulatory requirements, its
independent auditors’ qualifications and independence and the performance
of the independent auditors, and
|
|
|
·
|
provide
the board with the results of its
monitoring.
|
Governance,
Compensation and Nominating Committee. The current members of the
governance, compensation and nominating committee are Mr. Channer
(chairman) and Mr. Jack Walker and Mr. Kenneth Leung. Each of these persons
is
an independent director. This committee’s charter provides that the committee
shall:
|
|
·
|
recommend
to the board the corporate governance guidelines to be
followed,
|
|
|
·
|
review
and recommend the nomination of board
members,
|
|
|
·
|
set
the compensation for the chief executive officer and other officers,
and
|
|
|
·
|
administer
the equity performance plans of
AeroGrow.
|
Meetings.
During fiscal year ended March 31, 2007 the board of directors met eight
times.
Each director attended all of the meetings held by the board during the
period
that he served as a director of AeroGrow.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive
officers and directors, and persons who own more than 10% of our the
Company’s
common stock, to file reports of ownership on Form 3 and changes in ownership
on
Form 4 or 5 with the SEC. Such executive officers, directors and 10%
stockholders are also required by SEC rules to furnish the Company with
copies
of all Section 16(a) forms they file.
To
our
knowledge, based solely on our review of the copies of such forms received
by
us, or written representations from the reporting persons, Section 16(a)
forms for our officers and directors were not timely filed for the fiscal
year
ended March 31, 2007 as follows:
|
Name
|
Number
of
Late
Reports
|
Number
of Transactions
Not
Reported on
a Timely Basis
|
Failure
to File
Requested
Form
|
Reason
|
|
Jeffrey
Brainard
|
1
|
1
|
0
|
|
|
|
1
|
2
|
0
|
Time
to obtain SIC code and compile initial filing
|
|
|
2
|
3
|
0
|
Administrative
error
|
|
Richard
A. Kranitz
|
1
|
2
|
0
|
Administrative
error
|
|
|
2
|
3
|
0
|
Administrative
error
|
|
|
1
|
1
|
0
|
Administrative
error
|
|
|
2
|
2
|
11
|
Administrative
error
|
|
(1)
|
Mr.
Walker filed an amended Form 3 on June 28, 2007 originally
filed on March
6, 2006 due to an error in the number of common stock shares reported
on the initial filing. Further, Mr. Walker filed a Form 4 on June
28, 2007 to report additional common stock and warrants purchased
by Mr.
Walker in conjuction with the Company's 2006
Offering.
|
Code
of Ethics. We have adopted a Code of Ethics that applies to each of our
employees, executive officers and directors. A copy is available free
of charge
in the “Investor” section of our website at www.aerogrow.com. Any amendment to
or waiver of the Code of Ethics will be disclosed promptly following
the date of
such amendment or waiver in a Current Report on Form 8-K filing with
the
SEC.
Executive
Compensation
Executives
and Employment Arrangements
The
following discussion and table relates to compensation arrangements on
behalf
of, and compensation paid by us to Mr. Bissonnette, our chief executive
officer, Mr. Rubin, our Chief Financial Officer, Mr. Brainard, our Vice
President of Sales, Mr. Seffren, our Chief Marketing Officer, Mr. Wolfe,
our Vice President of Operations and Mr. Robertson, our Vice President
of
Engineering and Manufacturing for the fiscal year ended March 31,
2007.
Employment
Contracts
We
have
entered into employment agreements with W. Michael Bissonnette, Mitchell B.
Rubin, Randall (Randy) L. Seffren, Jeffrey Brainard, W. Terry Robertson
Jr. and
J. Michael Wolfe.
W. Michael
Bissonnette
The
employment agreement of Mr. Bissonnette, dated as of March 1, 2006,
provides that he will be employed as the chief executive officer of AeroGrow
for
an initial term of 24 months, renewable automatically for successive one
year
terms. He will be paid a base salary of $225,000. Mr. Bissonnette will also
be able to participate in equity compensation plans as determined by the
compensation committee. Mr. Bissonnette will be reimbursed car and home
office expenses at the rate of $2,500 per month and participate in regular
employee benefit plans as provided by us. If Mr. Bissonnette is terminated
without cause by us or Mr. Bissonnette terminates under certain
circumstances constituting a breach of the agreement by us, he will be
paid his
base salary, medical benefits, and pro rata portion of the bonus for one
year.
If he terminates his employment without cause, he will be paid his salary
to the
end of the month of such notice. Mr. Bissonnette has agreed to regular
confidentiality provisions and agreed not to compete with us in the area
of
aeroponics products and business for two years after the termination of
employment. Any inventions, including modifications, are assigned to us
by the
terms of the agreement.
Mitchell
B. Rubin
The
employment agreement of Mr. Rubin, dated as of March 1, 2006, provides that
he will be employed as the chief financial officer of the Company. He will
devote his entire business time to the affairs of the Company, provided
that for
the first four months of his employment he was permitted to devote a limited
amount of time to non-competitive business activities during the work day
in
transition from his prior consulting business. The initial term is two
years and
renewable for successive one year terms. Mr. Rubin shall receive base
compensation of $200,000 per year and a bonus per fiscal year of not less
than
1.5% of EBITDA. If Mr. Rubin is terminated without cause by us or
Mr. Rubin terminates under certain circumstances constituting a breach of
the agreement by us, Mr. Rubin shall be entitled to receive severance
compensation equivalent to six-months base salary and the pro rata bonus.
In
addition, if Mr. Rubin is terminated in the event of a change in control
of
AeroGrow, including a change in chief executive officer, Mr. Rubin shall be
entitled to receive severance equal to his base salary for one year. The
agreement also provides for medical, vacation and other benefits commensurate
with the policies and programs as adopted by us for our senior executives.
Further, the agreement provides for Mr. Rubin to receive a grant of options
to purchase 125,000 shares of our common stock under our 2005 Plan at an
exercise price of not greater than $5.00, which was granted on March 28,
2006.
These options: (i) were fully vested on the grant date; (ii) shall not
expire in less than five years from the date of grant; (iii) are subject to
other standard terms and conditions under the 2005 Plan; and (iv) have
other terms and conditions no less favorable than those granted to other
senior
executives of the Company. Mr. Rubin has agreed to regular confidentiality
and inventions assignment provisions and agreed not to compete with AeroGrow
for
two years after the termination of employment.
Randall
(Randy) L. Seffren
The
employment agreement of Mr. Seffren provides that he will be employed as
Chief
Marketing Officer of the Company. He will devote all of his business time
to the
affairs of the Company working half time from an office in Chicago, Illinois
and
the balance of his time traveling on Company business. The initial term
is two
years ending July 31, 2008, and renewable for successive one-year terms.
Mr. Seffren will receive base compensation of $200,000 per year and a bonus
per fiscal year in an amount not less than 1.5% of the EBITDA of the Company,
as
determined by the our annual financial statements and pro rated for any
portion
of such annual period covered under this agreement. The bonus is subject
to
adjustment so that it is no less favorable than that granted to other senior
executives. The agreement also provides for medical, vacation, and other
benefits commensurate with the policies and programs as adopted by us for
our
senior executives. Further, the agreement confirms the option grant awarded
to
Mr. Seffren as of March 28, 2006,
consisting of an option to purchase 125,000 shares of our common stock
under our
2005 Equity Compensation Plan at an exercise price of $5.00 per share,
which
were fully vested as of that grant date and are subject to other standard
terms
and conditions under the 2005 Equity Compensation Plan. Mr. Seffren has
agreed
to regular confidentiality and inventions assignment provisions and agreed
not
to compete with us during employment and for 24 months thereafter. If his
employment is terminated, he will be entitled to receive severance pay
equal to
six months of his base salary as in effect immediately before his termination,
and the payment by the Company of medical benefits until the 12th month
following termination, and the pro rata portion of his bonus as of the
nearest
quarter end financial statements of the Company.
Jeffrey
Brainard
The
employment agreement of Mr. Brainard, dated as of March 31, 2006,
provides that he will be employed as the vice president, sales of the Company.
He will devote his entire business time to the affairs of the Company,
working
from his home office in Lexington, Massachusetts. The initial term is two
years
and renewable for successive one year terms. Mr. Brainard shall receive
base
compensation of $150,000 per year and a bonus per fiscal year in an amount
not
less than the greater of: (i) $50,000; (ii) 0.5 per cent of retail net
sales, net of all customer deductions including but not limited to returns,
allowances, bad debts and other deductions; or (iii) 1.5% of the EBITDA of
the Company as determined by the our annual financial statements and pro
rated
for any portion of such annual period covered under this agreement. Such
bonus
shall be payable for the initial year in two installments, $25,000 to be
paid
six months following the initial date of the agreement, an additional $25,000
12
months following the date of the agreement, and the balance not later than
120
days after the end of the each of the Company’s fiscal years covered under the
agreement. The agreement also provides for medical, vacation, and other
benefits
commensurate with the policies and programs adopted by us for our senior
executives. Further, the agreement provides for Mr. Brainard to receive a
grant of 125,000 options to purchase our common stock under our 2005 Plan
at an
exercise price of not greater than $5.00. The options shall: (i) vest
pursuant to a schedule that provides for vesting of at least of 33% of
the
amount of the grant at the date granted and 33% per each 12-month period
from
the date of grant; (ii) not expire in less than five years from the date of
grant; and (iii) be subject to other standard terms and conditions under
the 2005 Plan. The agreement also required that Mr. Brainard be granted
shares
of our common stock equal in value to $25,000 semi-annually until such
time as
the salary is at a rate of $200,000 annually. The first 5,000 shares (valued
at
a price of $5.00 per share) were granted immediately upon Mr. Brainard’s joining
AeroGrow, with 5,000 additional shares six months thereafter. Effective
March
31, 2007, his salary was increased to $200,000 annually. Mr. Brainard has
agreed to regular confidentiality and inventions assignment provisions
and
agreed not to compete with AeroGrow for a period equal to the term employed
after the termination of employment. If Mr. Brainard is terminated without
cause by us or Mr. Brainard terminates under certain circumstances
constituting a breach of the agreement by us, Mr. Brainard shall be
entitled to receive severance compensation equivalent to six months base
salary
and the pro rata bonus. In addition, if Mr. Brainard is terminated in the
event
of a change in control of AeroGrow, including a change in chief executive
officer, Mr. Brainard shall be entitled to receive severance equal to his
base salary for one year.
W.
Terry Robertson, Jr.
The
employment agreement of Mr. Robertson, dated as of April 15, 2006, provides
that he will be employed as the Vice President of Engineering, Manufacturing
and
Quality of the Company. He will devote his entire business time to the
affairs
of the Company. The initial term is two years and renewable for successive
one
year terms. Mr. Robertson shall receive base compensation of $150,000 per
year, a bonus of 5,000 shares of the our common stock upon Employee’s relocation
to the Boulder, Colorado area, and a bonus per fiscal year of not less
than 1.5%
of EBITDA. If Mr. Robertson is terminated without cause by us or
Mr. Robertson terminates under certain circumstances constituting a breach
of the agreement by us, Mr. Robertson shall be entitled to receive
severance compensation equivalent to six months base salary and the pro
rata
bonus. The agreement also provides for medical, vacation and other benefits
commensurate with the policies and programs adopted by us for our senior
executives. Further, the agreement provides for Mr. Robertson to receive a
grant of 125,000 options to purchase our common stock under our 2005 Plan
at an
exercise price of not greater than $5.00. The options, which were granted
on
March 28, 2006, shall: (i) vest 50% 12 months from the anniversary date
hereof and an additional 12.5% per each three-month period thereafter until
fully vested; (ii) not expire in less than five years from the date of
grant; and (iii) be subject to other standard terms and conditions under
the 2005 Plan. Mr. Robertson has agreed to regular confidentiality and
inventions assignment provisions and agreed not to compete with AeroGrow
for a
period equal to the term employed after the termination of employment.
In
addition, if Mr. Robertson is terminated in the event of a change in control
of
AeroGrow,
including a change in chief executive officer, Mr. Robertson shall be
entitled to receive severance equal to his base salary for one year. On
November
15, 2006, Mr. Robertson’s annual salary was increased to $165,000 per year and
he received a retroactive salary adjustment of $10,000.
J.
Michael Wolfe
The
employment agreement of Mr. Wolfe, dated as of March 15, 2006, provides
that he will be employed as the Vice President of Operations of the Company.
He
will devote his entire business time to the affairs of the Company. The
initial
term is two years and renewable for successive one year terms. Mr. Wolfe
initially received base compensation of $135,000 per year and a bonus per
fiscal
year of not less than 0.5% of EBITDA. If Mr. Wolfe is terminated without
cause by the us or Mr. Wolfe terminates under certain circumstances
constituting a breach of the agreement by the us, Mr. Wolfe shall be
entitled to receive severance compensation equivalent to six months base
salary
and the pro rata bonus. The agreement also provides for medical, vacation
and
other benefits commensurate with the policies and programs adopted by us
for our
senior executives. Further, the agreement provides for Mr. Wolfe to receive
a grant of options to purchase 125,000 shares of our common stock under
our 2005
Plan at an exercise price of not greater than $5.00, which was granted
on March
28, 2006. These options: (i) were fully vested on the grant date;
(ii) shall not expire in less than five years from the date of grant; and
(iii) are subject to other standard terms and conditions under the 2005
Plan. Mr. Wolfe has agreed to regular confidentiality and inventions
assignment provisions and agreed not to compete with AeroGrow for a period
equal
to the term employed after the termination of employment. In addition,
if Mr.
Wolfe is terminated in the event of a change in control of AeroGrow, including
a
change in chief executive officer, Mr. Wolfe shall be entitled to receive
severance equal to his base salary for one year. Effective April 7, 2007,
Mr.
Wolfe’s annual salary was increased to $175,000 per year and the bonus to 1.5%
of EBITDA.
Except
as
set forth above, our other employees are employed on an “at will” basis subject
to varying lengths of severance agreements and, to the extent specific
agreements exist; such agreements are not deemed material.
Summary
Compensation Table
The
following table sets forth information regarding all forms of compensation
received by the named executive officers during the fiscal year ended March
31,
2007:
|
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
All
Other Compensation
|
|
|
Total
|
|
W.
Michael Bissonnette,
CEO,
President and Director(1)
|
|
2007
|
|
$ |
225,000
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
23,063 |
(1) |
|
$ |
248,063
|
|
Mitchell
B. Rubin,
Chief
Financial Officer
|
|
2007
|
|
$ |
200,000
|
|
|
$ |
5,000
|
|
|
$ |
25,000 |
(2) |
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
230,000
|
|
Randy
Seffren,
Chief
Marketing Officer
|
|
2007
|
|
$ |
150,000
|
|
|
$ |
--
|
|
|
$ |
$
--
|
|
|
$ |
--
|
|
|
$ |
53,828 |
(3) |
|
$ |
203,828
|
|
Jeffrey
Brainard,
Vice
President Sales
|
|
2007
|
|
$ |
150,000
|
|
|
$ |
63,462
|
|
|
$ |
25,000 |
(4) |
|
$ |
9,604 |
(4) |
|
$ |
--
|
|
|
$ |
248,066
|
|
W.
Terry Robertson Jr.
Vice
President of Engineering, Manufacturing and Quality
|
|
2007
|
|
$ |
159,375
|
|
|
$ |
--
|
|
|
$ |
25,000 |
(5) |
|
$ |
515,000 |
(5) |
|
$ |
--
|
|
|
$ |
699,375
|
|
J.
Michael Wolfe
Vice
President, Operations
|
|
2007
|
|
$ |
157,500
|
|
|
$ |
--
|
|
|
$ |
$
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
157,500
|
|
(1)
|
In
accordance with the employment agreement entered into as of March
1, 2006,
Mr. Bissonette has a non-accountable expense allowance of $2,500
per month
as reimbursement for his auto expenses, home office expenses
and other
expenses.
|
|
(2)
|
Represents
5,000 shares of our common stock granted to Mr. Rubin in December
2006
valued by us at $5.00 per share.
|
|
(3)
|
Represents
consulting fees paid to Prometheus Communications Group, LLC
(“PCG”) of
which Mr. Seffren is the 100% owner and managing member prior
to the
effective date of Mr. Seffren’s employment
agreement.
|
|
(4)
|
In
accordance with Mr. Brainard’s employment agreement, we issued 5,000
shares of our common stock on January 3, 2007 valued by the us
at $5.00
per share. In addition, in December 2006, Mr. Brainard was granted
five
year options to purchase our common stock at an exercise price
of $5.00
per share, which will vest monthly pro-rata over a two year period.
We valued the foregoing options using the Black Scholes option
pricing
model using the following assumptions: no dividend yield; expected
volatility rate of 129.67%; risk free interest rate of 5% and
an average
life of 4 years, resulting in a value of $4.12 per option
granted.
|
|
(5)
|
We
issued 5,000 shares of our common stock to Mr. Robertson on January
3,
2007 valued by us at $5.00 per share. In accordance with Mr.
Robertson’s
employment agreement, we granted in June 2006 125,000 options
to purchase
our common stock at an exercise price of $5.00 per share, which
will vest
50% during the initial 12 months from the date of the grant and
12.5% for
each of the next four three month periods thereafter. We valued
these
options using the Black Scholes option pricing model using the
following
assumptions: no dividend yield; expected volatility rate of 129.67%;
risk
free interest rate of 5% and an average life of 4 years, resulting
in a
value of $4.12 per option granted.
|
The
following table provides information with respect to the named executive
officers concerning unexercised stock options held by them at March 31,
2007.
All options granted to date are unexercised and, based upon the closing
price of
the stock as of April 30, 2007 of $6.35 per share, are considered to be
“in the
money.”
Outstanding
Equity Awards at Fiscal Year End
|
Name
|
|
Number
of Securities Underlying
Unexercised
Options
(Exercisable)
(1)
|
|
|
Number
of Securities Underlying
Unexercised
Options
(Unexercisable)
|
|
|
Exercise
Price per Share
|
|
Expiration
Date
|
|
Randy
Seffren
|
|
|
125,000
|
|
|
|
-
|
|
|
$ |
5.00
|
|
27-Mar-2011
|
|
Mitchell
Rubin
|
|
|
3,768
|
|
|
|
-
|
|
|
$ |
0.50
|
|
31-Dec-2010
|
|
Mitchell
Rubin
|
|
|
125,000
|
|
|
|
-
|
|
|
$ |
5.00
|
|
27-Mar-2011
|
|
W.Terry
Robertson
|
|
|
46,875
|
|
|
|
78,125 |
(2) |
|
$ |
5.00
|
|
27-Jun-2011
|
|
Jeffrey
Brainard
|
|
|
83,329
|
|
|
|
41,671 |
(3) |
|
$ |
5.00
|
|
27-Mar-2011
|
|
Jeffrey
Brainard
|
|
|
1,166
|
|
|
|
1,166 |
(4) |
|
$ |
5.00
|
|
14-Dec-2011
|
|
(1)
|
Though
vested and exercisable, and shares common stock received from
such
exercise are subject to lock-up agreements prohibiting the sale
of such
shares through December 22, 2007, and 50% of aggregate share
holdings
through June 22, 2008.
|
|
(2)
|
Will
vest 50% during the initial 12 months from the date of the grant,
June 28,
2006, and 12.5% for each of the next four three month periods
thereafter.
|
|
(3)
|
Will
vest monthly pro-rata over a two year period from the date of
grant, March
28, 2006.
|
|
(4)
|
Will
vest monthly pro-rata over a two year period from the date of
grant,
December 14, 2006.
|
Director
Compensation
Current
and Historical Compensation Program
In
2004
and 2005 each director received 2,000 shares of common stock for his service
as
director. Mr. Bissonnette has agreed to forgo any future stock-based
compensation for serving as a director of AeroGrow. We compensate outside
directors $500 for attending meetings and reimburses them for their
out-of-pocket expenses for attending meetings. On March 28, 2006, we
granted to each of our four outside directors 2,500 shares of the our common
stock at a value of $5.00 per share for a total of $12,500 for each director,
or
an aggregate total of $50,000, and 10,000 fully vested five-year options
to
purchase our common stock at an exercise price of $5.00 per share for services
for the fiscal year ending March 31, 2007. In addition, Messrs. Walker,
Harding
and Leung received grants of 1,250
shares for service on the Audit Committee and 750 shares for service on
the
Governance Committee. On March 22, 2007, we granted to three of our four
outside directors, Messrs. Leung, Walker and Kranitz, 2,500 shares of the
our
common stock at a market value of $5.90 per share for a total of $14,750
for
each director, or an aggregate total of $59,000, and 10,000 fully vested
five-year options to purchase our common stock at an exercise price of
$5.90 per
share, the price per share equal to the fair market value of the common
stock on
the date of the option grant, for services on the board for the calendar
year
ending December 31, 2007. In addition, on March 22, 2007, Messrs. Walker
and
Leung received grants of 1,250 shares for service on the Audit Committee
and 750
shares for service on the Governance Committee. Also, Mr. Harding, the
previous
Chairman of the audit and governance committees, received a grant on March
22,
2007 for services rendered of 3,500 shares of our common stock at a market
value
of $5.90 per share for a total of $20,650 and 5,000 fully vested five-year
options to purchase our common stock at an exercise price of $5.90 per
share,
the price per share equal to the fair market value of the common stock
on the
date of the option grant. Mr. Harding resigned from the board effective
April
16, 2007.
Director
Compensation Table
The
following table sets forth information regarding all forms of compensation
received by directors of the Company during the fiscal year ended March
31,
2007:
|
Name
|
|
Directors
Fees
Earned
or
Paid
in Cash
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
All
Other Compensation
|
|
|
Total
|
|
|
Michael
Bissonnette (Chairman)
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
|
|
|
$ |
-
|
|
|
Wayne
E. Harding, III, Director
|
|
$ |
2,000
|
|
|
$ |
30,650
|
|
|
$ |
25,850 |
(1) |
|
$ |
69,650 |
(2) |
|
$ |
128,150
|
|
|
Richard
A. Kranitz, Director
|
|
$ |
2,000
|
|
|
$ |
14,750
|
|
|
$ |
51,700 |
(1) |
|
$ |
24,000 |
(3) |
|
$ |
92,450
|
|
|
Kenneth
Leung, Director
|
|
$ |
2,000
|
|
|
$ |
36,550
|
|
|
$ |
51,700 |
(1) |
|
$ |
-
|
|
|
$ |
90,250
|
|
|
Jack
J. Walker, Director
|
|
$ |
2,000
|
|
|
$ |
36,550
|
|
|
$ |
51,700 |
(1) |
|
$ |
-
|
|
|
$ |
90,250
|
|
|
(1)
|
Valued
using the Black Scholes option pricing model using the following
assumptions: no dividend yield; expected volatility rate of 132%;
risk
free interest rate of 5% and an average life of 5 years resulting
in a
value of $5.17 per option granted.
|
|
(2)
|
Represents
consulting fees paid to Wayne Harding & Co. for various projects
including oversight of a pilot kiosk sales program, investigation
of
international sales prospects and other new business
opportunities.
|
|
(3)
|
Represents
fees for legal services paid to Kranitz and Philip, a law firm
of which
Mr. Kranitz is a partner.
|
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth certain information regarding our common stock
beneficially owned on March 31, 2007 by:
·
each
shareholder we
know to be the beneficial owner of 5% or more of our outstanding common
stock,
·
each
of our
executive officers for whom disclosure is provided in Item 10, “Executive
Compensation,” and each of our directors, and
·
all
executive
officers and directors as a group.
In
general, a person is deemed to be a “beneficial owner” of a security if that
person has or shares the power to vote or direct the voting of such security,
or
the power to dispose or to direct the disposition of such security. A person
is
also deemed to be a beneficial owner of any securities of which the person
has
the right to acquire beneficial ownership
within 60 days. To the best of our knowledge, subject to community and
marital
property laws, all persons named have sole voting and investment power
with
respect to such shares except as otherwise noted. The table assumes a total
of
11,065,609 shares of common stock outstanding.
|
Name
of Beneficial Owner (1)
|
Amount
of
Beneficial
Ownership
|
Percent
Beneficial
Ownership
|
|
W.
Michael Bissonnette
c/o 6075 Longbow Dr. Suite 200
Boulder,
CO 80301
|
956,297
|
8.60%
|
|
Mitchell
Rubin
c/o 6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (2)
|
143,331
|
1.30%
|
|
Jeffrey
Brainard
c/o
6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (3)
|
160,173
|
1.40%
|
|
Richard
A. Kranitz
1238 Twelfth Avenue
Grafton,
WI 53024 (4)
|
80,079
|
0.70%
|
|
Randy
Seffren
c/o 6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (3)
|
209,320
|
1.90%
|
|
Wayne
Harding
5206 South Hanover Way
Englewood,
CO 80111 (5)
|
133,768
|
1.20%
|
|
Jack
J. Walker
c/o
6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (6)
|
244,408
|
2.20%
|
|
Kenneth
Leung
c/o
6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (7)
|
29,000
|
0.30%
|
|
W.
Terry Robertson
c/o 6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (8)
|
130,000
|
1.20%
|
|
J.
.Michael Wolfe
c/o
6075 Longbow Dr. Suite 200
Boulder,
CO 80301 (9)
|
125,000
|
1.10%
|
|
All
AeroGrow Executive Officers and Directors as a Group (10 Persons)
(10)
|
2,211,376
|
19.90%
|
|
1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC,
which
include holding voting and investment power with respect to the
securities. Shares of common stock subject to options or warrants
currently exercisable, or exercisable within 60 days, are deemed
outstanding for computing the percentage of the total number
of shares
beneficially owned by the designated person, but are not deemed
outstanding for computing the percentage for any other
person.
|
|
(2)
|
Includes
options to purchase 3,768 shares of our common stock at an exercise
price
of $0.50 per share and options granted on March 28, 2006 to purchase
125,000 shares of our common stock at an exercise price of $5.00
per
share.
|
|
(3)
|
Includes
options granted on March 28, 2006 to purchase 125,000 shares
of our common
stock at an exercise price of $5.00 per share and options granted
on
December 14, 2006 to purchase 2,331 shares of our common stock
at an
exercise price of $5.00 per share.
|
|
(4)
|
Includes
46,546 shares owned by Cedar Creek Ventures, LLC, of which Mr.
Kranitz is
a 50% owner and managing member. Also includes 10,000 fully vested
five-year options to purchase our common stock at an exercise
price of
$5.00 per share and 2,500 shares of common stock valued at $5.00
per share
granted as of March 28, 2006 and 10,000 fully vested five-year
options to
purchase our common stock at an exercise price of $5.90 per share
and
2,500 shares of common stock valued at $5.90 per share granted
as of March
22, 2007.
|
|
(5)
|
Includes
options to purchase 3,910 shares of our common stock at an exercise
price
of $2.50 per share, and warrants to purchase 5,000 shares of
our common
stock at an exercise price of $2.50 per share. Also includes
10,000 fully
vested five-year options to purchase our common stock at an exercise
price
of $5.00 per share and 2,500 shares of common stock valued at
$5.00 per
share granted as of March 28, 2006, for services as a director
and 2,000
shares of common stock valued at $5.00 per share granted for
services on
the audit and compensation committees. Also includes 5,000 fully
vested
five-year options to purchase our common stock at an exercise
price of
$5.90 per share and 3,500 shares of common stock valued at $5.90
per share
granted as of March 22, 2007.
|
|
(6)
|
Includes
96,122 shares held of record by March Trade & Finance, Inc. of which
Mr. Walker is a controlling person and 34,286 shares issuable
under a
convertible note in principal amount of $120,000 that was converted
by
March 31, 2007 and 24,000 shares underlying immediately exercisable
warrants at $5.00 per share and 24,000 shares underlying warrants
issuable
and exercisable upon conversion of the note at $6.00 per share.
March
Trade & Finance, Inc. holds 42,000 of these shares on behalf of an
unrelated third party. Also includes 12,000 shares underlying
immediately
exercisable warrants at $6.25 per share, 10,000 fully vested
five-year
options to purchase our common stock at an exercise price of
$5.00 per
share and 2,500 shares of common stock valued at $5.00 per share
granted
as of March 28, 2006 and 2,000 shares of common stock valued
at $5.00 per
share granted for services on the audit and compensation committees.
Also
includes 10,000 fully vested five-year options to purchase our
common
stock at an exercise price of $5.90 per share and 4,500 shares
of common
stock valued at $5.90 per share granted as of March 22,
2007.
|
|
(7)
|
Includes
10,000 fully vested five-year options to purchase our common
stock at an
exercise price of $5.00 per share and 2,500 shares of common
stock valued
at $5.00 per share granted as of March 28, 2006, and 2,000 shares
of
common stock valued at $5.00 per share granted for services on
the audit
and compensation committees. Also includes 10,000 fully vested
five-year
options to purchase our common stock at an exercise price of
$5.90 per
share and 4,500 shares of common stock valued at $5.90 per share
granted
as of March 22, 2007.
|
|
(8)
|
Includes
options granted in June, 2006 to purchase 125,000 shares of our
common
stock at an exercise price of $5.00 per share that will vest
50% 12 months
from the anniversary date hereof and an additional 12.5% per
each
three-month period thereafter until fully
vested.
|
|
(9)
|
Includes
options granted on March 28, 2006 to purchase 125,000 shares
of our common
stock at an exercise price of $5.00 per share.
|
|
(10)
|
Includes
options and warrants to acquire 780,059 shares of common
stock.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
Amended
2003 Stock Option Plan. On January 3, 2003, our board of directors
adopted a stock option plan for key employees (including key employees
who are
directors), non-employee directors, consultants and investors which provided
that an aggregate of 400,000 shares of our common stock may be granted
under the
plan (the “2003 Plan”). As of December 31, 2005, there were
options for 204,869 shares outstanding at exercise prices ranging from
$0.01 to
$5.00. The remaining 195,131 options were merged into the 2005 Equity
Compensation Plan and the 2003 Plan no longer separately exists. Vesting
schedules are determined individually for each grant and were all fully
vested
as of December 2005.
Administration.
The plan is administered by our Governance, Compensation and Nominating
Committee, and in the past was administered by the board. The plan provides
that
it may be administered by either the committee or board, and in its
administration it may:
|
|
·
determine the date of grant, exercise price and other terms of
options,
|
|
|
·
establish rules and regulations to administer the
plan,
|
|
|
·
amend,
suspend, or discontinue the plan subject to applicable shareholder
approval,
|
|
|
·
interpret the rules relating to the plan,
and
|
|
|
·
otherwise administer the plan.
|
Stock
Options. The plan provides that the committee may grant both incentive
stock options, which can result in potentially favorable tax treatment
to the
participant, and non-qualified stock options. The committee determines
the terms
and vesting provisions, including the exercise price. The maximum term
of each
option and the times at which each option will be exercisable generally
are
fixed by the committee, except that no option may have a term exceeding
ten
years. Shares subject to options that expire or otherwise terminate remain
available for awards under the plan. Shares issued under the plan may be
either
newly issued shares or shares which we have reacquired.
2005
Equity Compensation Plan. In August 2005 we adopted the 2005 Equity
Compensation Plan (“2005 Plan”) to promote our interests and the interests of
our shareholders by attracting, retaining, and motivating our key officers,
employees, directors, and consultants. The Plan was approved by our stockholders
at the annual meeting of stockholders held February 23, 2006. Our 2003
stock
option plan was merged into this plan in August 2005, which modification
was
approved by the stockholders in February 23, 2006; the 2003 Plan no longer
separately exists. The options for the 204,869 shares issued under the
2003 Plan
continue to be governed by their grant agreements but are administered
under the
2005 Plan. A total of 1,505,000 shares of our common stock were originally
available for grant under the 2005 Plan pursuant to stock options or awards
of
shares of restricted stock. As of March 31, 2007, we have issued 1,343,554
options to purchase common stock at exercise prices ranging from $5.00
to $5.90
and 339,123 shares of common stock at valued at prices ranging from $5.00
to
$5.90 and there remain 33,386 unallocated shares that may be the subject
of
awards in the future.
Shares
Available for Awards. Shares subject to an award that is cancelled, expired
unexercised, forfeited, settled in cash or otherwise terminated remain
available
for awards under the plan. Shares issued under the 2005 Plan may be either
newly
issued shares or shares which we have reacquired. The plan imposes individual
limitations on the amount of certain awards in order to comply with
Section 162(m) of the Internal Revenue Code of 1986. Under these
limitations no single participant may generally receive awards in any calendar
year that relate to more than $1 million. Awards may generally be adjusted
to
prevent dilution or enlargement of benefits when certain events occur such
as a
stock dividend, reorganization, recapitalization, stock split, combination,
merger, or consolidation.
Eligibility.
Our employees, directors and consultants may be granted awards under the
plan. As of March 31, 2007, approximately 65 individuals were
eligible to participate.
Administration.
The plan is administered by the Governance, Compensation and Nominating
Committee. Awards to directors serving on the committee are determined
and
administered by the full board of directors. The committee may:
|
|
·
|
determine
the type and number of awards to be
granted,
|
|
|
·
|
determine
the exercise or purchase price, vesting periods and any performance
goals,
|
|
|
·
|
determine
and later amend the terms and conditions of any
award,
|
|
|
·
|
interpret
the rules relating to the plan,
and
|
|
|
·
|
otherwise
administer the plan.
|
Stock
Options. The committee may grant both incentive stock options, which can
result in potentially favorable tax treatment to the participant, and
non-qualified stock options. The committee determines the terms and individual
vesting schedules for each grant including the exercise price, which may
not be
less than the fair market value of a share of common stock on the date
of the
grant.
Restricted
Shares. The committee may grant restricted shares of common stock.
Restricted shares are shares of common stock with transfer restrictions.
These
restrictions lapse on the basis of performance and/or continued employment
as
determined in advance by the committee. They may be forfeited by participants
as
specified by the committee in the award agreement. A participant who has
received a grant of restricted shares will be eligible to receive dividends
and
have the right to vote those shares. Restricted shares may not be transferred,
encumbered or disposed of during the restricted period or until after the
restrictive conditions are met.
Other
Terms. All outstanding awards vest, become immediately exercisable or
payable, and have all restrictions lifted immediately when we experience
a
change in control. The Board may amend or terminate the plan subject to
applicable stockholder approval. The committee may not amend the terms
of
previously granted options to reduce the exercise price or cancel options
and
grant substitute options with a lower exercise price than the cancelled
options.
The committee also may not adversely affect the rights of any award holder
without the award holder’s consent.
In
addition to option grants, during the year ended March 31, 2007, we granted
under the 2005 Plan a total of 98,194 shares of common stock at a value
of $5.00
to $5.90 per share consisting of 5,000 shares issued to our Chief Financial
Officer, 5,000 shares issued to our Vice President of Engineering and
Manufacturing, 18,044 shares issued to other employees, 49,150 shares granted
to
consultants for services, 21,000 shares granted to directors for service
on the
Board of Directors, Audit Committee and on the Governance Committee. All
of the
foregoing are included in operating expenses for the year ended March 31,
2007
resulting in a total charge of $516,170.
Information
regarding our equity compensation plans at March 31, 2007 is as
follows:
|
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
|
|
Number
of securities remaining available for future
issuance
|
|
Equity
compensation plans approved by security holders
|
|
|
1,337,360
|
|
|
$ |
4.58
|
|
|
|
33,386
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
$ |
-
|
|
|
|
-
|
|
Total
|
|
|
1,337,360
|
|
|
$ |
4.58
|
|
|
|
33,386
|
At
March
31, 2007 we had granted options for 131,462 shares of the our common stock
that
are unvested that will result in $643,881 of compensation expense in future
periods if fully vested.
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
following transactions were entered into with our executive officers, directors
and 5% or greater shareholders. These transactions may or will continue
in
effect and may result in conflicts of interest between us and these individuals.
Although our executive officers and directors have fiduciary duties to
us and
our shareholders, we cannot assure that these conflicts of interest will
always
be resolved in our favor or in the favor of our shareholders.
Richard
Kranitz, one of our directors, is a member of the law firm of Kranitz and
Philipp, which provides legal services to us. During the years ended December
31, 2005, we paid legal fees to Kranitz and Philipp in the amount of $37,438
and
issued shares of common stock for services provided valued at $10,000.
During
the year ended March 31, 2007 and the three-month transition period ended
March
31, 2006, we paid $24,000 and $44,472, respectively, to this same firm
for legal
services.
During
the year ended March 31, 2007, we incurred fees totaling $640,186 for various
video and web projects, including production of our infomercial to promote
our
products, to MedEd Architects LLC a video production company owned 33%
by Mr.
Seffren. We may incur additional costs in subsequent calendar quarters
to MedEd
Architects LLC, for editing and production of additional infomercials featuring
our products and related video-based products. During the three month transition
period ended March 31, 2006, we incurred $131,894 in expenses to MedEd
Architects, LLC for video production, printing, duplication, and web
design.
During
the three-month transition period ended March 31, 2006, we paid to Mr.
Walker, a
director, $12,500 in consulting fees in connection with a corporate presentation
used for our private placement in February 2006.
During
the year ended March 31, 2007, we paid consulting fees totaling $81,238
to Mr.
Harding, a director, for services related to the development of an international
channel of distribution for our products and other consulting services. Mr.
Harding resigned as a director on April 16, 2007.
Director
Independence
Our
Board of Directors comprises W.
Michael Bissonnette, Richard A. Kranitz, Dennis Channer, Jack J. Walker,
and
Kenneth Leung. Our Board of Directors has determined that
Mr. Channer, Mr. Walker, and Mr. Leung are “independent” as that term is
defined by NASDAQ. Under the NASDAQ definition, an independent
director is a person who is not an executive officer or employee of the
Company
and who does not have a relationship with the Company that, in the opinion
of
our Board of Directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
The
information required by this Item is set forth in the section of this Annual
Report entitled “EXHIBIT INDEX” and is incorporated herein by
reference.
Aggregate
fees billed by Gordon, Hughes & Banks, LLP (“GHB”), our current independent
registered public accounting firm, for the year ended March 31, 2007, the
three
months ended March 31, 2006 and for the year ended December 31, 2005, are
as
follows:
| |
|
Year
Ended March 31,
|
|
|
Three
Months Ended March 31,
|
|
|
Year
Ended December 31,
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
Audit
Fees
|
|
$ |
26,000
|
|
|
$ |
18,000
|
|
|
$ |
10,500
|
|
All
Other Fees
|
|
$ |
15,564
|
|
|
$ |
11,300
|
|
|
$ |
2,150
|
Other
fees paid to GHB were for review of SEC filings including 8-Ks and Form
SB-2s filed during the periods.
Tax
Fees
Tax
fees
consist of fees for tax compliance, including the preparation of tax returns,
tax advice, and tax planning services. Tax advice and tax planning services
relate to advice regarding mergers and acquisitions and assistance with
tax
audits and appeals. We use a firm other than GHB for these services. We
paid
$3,375 for tax related services for the three months ended March 31, 2006
and
$9,244 for the year ended December 31, 2005, respectively.
Policy
on Accounting Matters; Pre-Approval of Audit and Non-Audit Services of
Independent Registered Public Accounting Firm
The
primary purpose of the Audit Committee is to assist the Board in monitoring
(i)
the integrity of our financial statements and disclosures, including oversight
of the accounting and financial reporting processes and the audits of our
financial statements, (ii) the compliance by us with our legal, ethical
and
regulatory requirements and (iii) the independence and performance of our
independent registered public accounting firm.
The
Audit
Committee’s policy is to pre-approve all audit and non-audit services, other
than de minimis non-audit services, provided by the independent registered
public accounting firm. These services may include, among others, audit
services, audit-related services, tax services and other services. Pre-approval
is generally provided for up to one year and any pre-approval is detailed
as to
particular service or category of services and is generally subject to
a
specific budget. The independent registered public accounting firm and
management are required to periodically report to the full Board regarding
the
extent of services provided by the independent registered public accounting
firm
in accordance with this pre-approval, and the fees for the services performed
to
date.
The
Audit
Committee has considered the provision of non-audit services provided by
our
independent registered public accounting firm to be compatible with maintaining
their independence. The Audit Committee will continue to approve all audit
and
permissible non-audit services provided by our independent registered public
accounting firm. These services may include audit services and related
services,
tax services, and other services.
Pursuant
to the requirements of Section 13 or 15(d) 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.,
A
NEVADA CORPORATION
|
|
| |
|
|
|
|
|
By:
|
/s/ W.
Michael
Bissonnette
|
|
| |
|
W.
Michael Bissonnette |
|
| |
|
President
and Chairman of the
Board |
|
| |
|
|
|
Pursuant
to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
on
the 29th day of June 2007.
|
Signature
|
Title
|
Date
|
| |
|
|
|
/s/
W. MICHAEL BISSONNETTE
|
President
and Chairman
|
June
29, 2007
|
|
W.
Michael Bissonnette
|
of
the Board (Principal Executive Officer)
|
|
| |
|
|
|
/s/
MITCHELL RUBIN
|
Treasurer
(Principal
|
June
29, 2007
|
|
Mitchell
Rubin
|
Financial
Officer and
|
|
|
|
Principal
Accounting Officer |
|
| |
|
|
|
/s/
RICHARD A. KRANITZ
|
Director
|
June
29, 2007
|
|
Richard
A. Kranitz
|
|
|
| |
|
|
|
/s/
DENNIS CHANNER
|
Director
|
June
29, 2007
|
|
Dennis
Channer
|
|
|
| |
|
|
|
/s/
JACK J. WALKER
|
Director
|
June
29, 2007
|
|
Jack
J. Walker
|
|
|
| |
|
|
|
/s/
KENNETH LEUNG
|
Director
|
June
29, 2007
|
|
Kenneth
Leung
|
|
|
INDEX
TO FINANCIAL STATEMENTS
| |
Page
|
|
|
F-1
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-7
|
The
Board
of Directors
AeroGrow
International, Inc.
Boulder,
CO
We
have
audited the accompanying balance sheets of AeroGrow International,
Inc. (the
“Company”) as of March 31, 2007 and 2006, and the related statements of
operations, changes in stockholders’ equity (deficit) and cash flows for the
year ended March 31, 2007, the three months ended March 31, 2006 and
the year
ended December 31, 2005. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance
about whether
the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. Our audits included consideration
of internal control over financial reporting as
a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly,
we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial
statements referred to above present fairly, in all material respects,
the
financial position of AeroGrow International,
Inc. as of March
31, 2007 and 2006, and
the results of its
operations and its cash flows for the year ended March 31, 2007, the
three
months ended March 31, 2006 and the year ended December 31, 2005, in
conformity
with accounting principles generally accepted in the United States
of
America.
Gordon,
Hughes & Banks, LLP
Greenwood
Village, Colorado
June
8,
2007
| |
|
March
31,
|
|
|
March
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
5,495,501
|
|
|
$ |
8,852,548
|
|
|
Restricted
cash
|
|
|
84,363
|
|
|
|
-
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$80,695 and $0 at March 31, 2007 and March 31, 2006,
respectively
|
|
|
1,884,743
|
|
|
|
43,156
|
|
|
Other
receivable
|
|
|
182,221
|
|
|
|
-
|
|
|
Inventory
|
|
|
3,940,614
|
|
|
|
192,946
|
|
|
Prepaid
expenses and other
|
|
|
480,990
|
|
|
|
199,590
|
|
|
Total
current assets
|
|
|
12,068,432
|
|
|
|
9,288,240
|
|
| |
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $322,405 and
$102,431 at
March 31, 2007 and March 31, 2006, respectively
|
|
|
909,496
|
|
|
|
480,771
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs, net of accumulated amortization $419,471 and
$373,853 at
March 31, 2007 and March 31, 2006, respectively
|
|
|
-
|
|
|
|
45,618
|
|
|
Intangible
assets, net of accumulated amortization $6,659 and $1,071 of
at March 31,
2007 and March 31, 2006, respectively
|
|
|
28,723
|
|
|
|
21,696
|
|
|
Deposits
|
|
|
35,155
|
|
|
|
4,684
|
|
| |
|
|
63,878
|
|
|
|
71,998
|
|
|
Total
Assets
|
|
$ |
13,041,806
|
|
|
$ |
9,841,009
|
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Due
to factor
|
|
$ |
645,151
|
|
|
$ |
-
|
|
|
Accounts
payable
|
|
|
3,192,734
|
|
|
|
487,474
|
|
|
Accrued
expenses
|
|
|
1,166,485
|
|
|
|
334,524
|
|
|
Deferred
rent
|
|
|
53,531
|
|
|
|
-
|
|
|
Convertible
debentures, net of discounts of $0 and $196,781 at March 31,
2007 and
March 31, 2006, respectively
|
|
|
-
|
|
|
|
792,539
|
|
|
Mandatorily
redeemable common stock
|
|
|
-
|
|
|
|
310,000
|
|
|
Total
current liabilities
|
|
|
5,057,901
|
|
|
|
1,924,537
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 20,000,000 shares authorized, none issued
or
outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock, $.001 par value, 75,000,000 shares authorized, 11,065,609
and
9,102,622 shares issued and outstanding at March 31, 2007 and
March 31,
2006, respectively
|
|
|
11,065
|
|
|
|
9,103
|
|
|
Additional
paid-in capital
|
|
|
37,765,003
|
|
|
|
27,313,081
|
|
|
Accumulated
(deficit)
|
|
|
(29,792,163 |
) |
|
|
(19,405,712 |
) |
|
Total
Stockholders' Equity
|
|
|
7,983,905
|
|
|
|
7,916,472
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
13,041,806
|
|
|
$ |
9,841,009
|
|
See
accompanying notes to the financial statements.
STATEMENTS
OF OPERATIONS
| |
|
Year
ended
|
|
|
Three
month transitional period ended
|
|
|
Year
ended
|
|
| |
|
March
31,
|
|
|
March
31,
|
|
|
December
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Product
sales, net
|
|
$ |
13,144,037
|
|
|
$ |
35,245
|
|
|
$ |
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
8,404,507
|
|
|
|
134,622
|
|
|
|
-
|
|
|
Research
and development
|
|
|
2,113,255
|
|
|
|
978,539
|
|
|
|
1,578,833
|
|
|
Sales
and marketing
|
|
|
7,117,613
|
|
|
|
2,548,583
|
|
|
|
583,897
|
|
|
General
and administrative
|
|
|
4,050,312
|
|
|
|
2,010,907
|
|
|
|
2,923,792
|
|
|
Total
operating expenses
|
|
|
21,685,687
|
|
|
|
5,672,651
|
|
|
|
5,086,522
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(8,541,650 |
) |
|
|
(5,637,406 |
) |
|
|
(5,086,522 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(income)
|
|
|
(176,173 |
) |
|
|
(39,919 |
) |
|
|
(41,106 |
) |
|
Interest
expense
|
|
|
356,594
|
|
|
|
1,813,278
|
|
|
|
1,225,961
|
|
|
Warrant
modification expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1,446,200
|
|
|
Loss
on modification of debt
|
|
|
-
|
|
|
|
132,578
|
|
|
|
-
|
|
|
Registration
rights penalty
|
|
|
1,664,380
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
other (income) expense, net
|
|
|
1,844,801
|
|
|
|
1,905,937
|
|
|
|
2,631,055
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(10,386,451 |
) |
|
$ |
(7,543,343 |
) |
|
$ |
(7,717,577 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
$ |
(1.09 |
) |
|
$ |
(0.84 |
) |
|
$ |
(1.55 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding, basic and diluted
|
|
|
9,505,926
|
|
|
|
8,956,353
|
|
|
|
4,971,857
|
|
See
accompanying notes to the financial statements
STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY
| |
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
| |
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
Balances,
January 1, 2005
|
|
|
4,882,908
|
|
|
$ |
4,883
|
|
|
$ |
6,051,832
|
|
|
$ |
(4,144,792 |
) |
|
$ |
1,911,923
|
|
|
Exercise
of common stock warrants
|
|
|
435,000
|
|
|
|
435
|
|
|
|
1,047,065
|
|
|
|
-
|
|
|
|
1,047,500
|
|
|
Issuance
of common stock for cash in August at $5.00 per share
|
|
|
1,600
|
|
|
|
2
|
|
|
|
7,998
|
|
|
|
-
|
|
|
|
8,000
|
|
|
Issuance
of common stock for services provided, rent and equipment
purchases
|
|
|
261,232
|
|
|
|
261
|
|
|
|
1,305,875
|
|
|
|
-
|
|
|
|
1,306,136
|
|
|
Issuance
of stock options to non-employees for services
|
|
|
-
|
|
|
|
-
|
|
|
|
72,936
|
|
|
|
-
|
|
|
|
72,936
|
|
|
Issuance
of warrants to debt holders of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
1,059,480
|
|
|
|
-
|
|
|
|
1,059,480
|
|
|
Intrinsic
value of convertible debentures, beneficial conversion
feature
|
|
|
-
|
|
|
|
-
|
|
|
|
750,000
|
|
|
|
-
|
|
|
|
750,000
|
|
|
Effects
of variable accounting on the modification of terms
|
|
|
-
|
|
|
|
-
|
|
|
|
1,446,200
|
|
|
|
-
|
|
|
|
1,446,200
|
|
|
Net
(loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,717,577 |
) |
|
|
(7,717,577 |
) |
|
Balances,
December 31, 2005
|
|
|
5,580,740
|
|
|
|
5,581
|
|
|
|
11,741,386
|
|
|
|
(11,862,369 |
) |
|
|
(115,402 |
) |
|
Common
stock issued in private placement
|
|
|
2,148,000
|
|
|
|
2,148
|
|
|
|
8,807,787
|
|
|
|
-
|
|
|
|
8,809,935
|
|
|
Common
stock issued for conversion of convertible debentures
|
|
|
710,009
|
|
|
|
710
|
|
|
|
2,129,290
|
|
|
|
-
|
|
|
|
2,130,000
|
|
|
Common
stock issued in exchange for stock of Wentorth 1
|
|
|
580,136
|
|
|
|
580
|
|
|
|
(580 |
) |
|
|
-
|
|
|
|
-
|
|
|
Common
stock issued under equity compensation plans
|
|
|
83,737
|
|
|
|
84
|
|
|
|
418,600
|
|
|
|
-
|
|
|
|
418,684
|
|
|
Stock
options issued under equity compensation plans
|
|
|
-
|
|
|
|
-
|
|
|
|
3,315,840
|
|
|
|
-
|
|
|
|
3,315,840
|
|
|
Beneficial
conversion value due to modification of the convertible
debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
900,758
|
|
|
|
-
|
|
|
|
900,758
|
|
|
Net
(loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,543,343 |
) |
|
|
(7,543,343 |
) |
|
Balances,
March 31, 2006
|
|
|
9,102,622
|
|
|
|
9,103
|
|
|
|
27,313,081
|
|
|
|
(19,405,712 |
) |
|
|
7,916,472
|
|
|
Common
stock issued in private placements
|
|
|
1,166,760
|
|
|
|
1,167
|
|
|
|
6,199,147
|
|
|
|
-
|
|
|
|
6,200,314
|
|
|
Exercise
of common stock warrants at $2.50
|
|
|
34,000
|
|
|
|
34
|
|
|
|
84,966
|
|
|
|
-
|
|
|
|
85,000
|
|
|
Exercise
of common stock warrants at $6.25
|
|
|
5,000
|
|
|
|
5
|
|
|
|
31,245
|
|
|
|
-
|
|
|
|
31,250
|
|
|
Common
stock issued upon conversion of convertible debt
|
|
|
240,006
|
|
|
|
240
|
|
|
|
839,760
|
|
|
|
-
|
|
|
|
840,000
|
|
|
Common
stock issued under equity compensation plans
|
|
|
98,194
|
|
|
|
98
|
|
|
|
516,072
|
|
|
|
-
|
|
|
|
516,170
|
|
|
Common
stock issued to landlord as rent
|
|
|
8,872
|
|
|
|
9
|
|
|
|
44,351
|
|
|
|
-
|
|
|
|
44,360
|
|
|
Common
stock issued to public relations firm for services
|
|
|
11,354
|
|
|
|
11
|
|
|
|
56,759
|
|
|
|
-
|
|
|
|
56,770
|
|
|
Common
stock issued in settlement of claim
|
|
|
6,858
|
|
|
|
7
|
|
|
|
40,455
|
|
|
|
-
|
|
|
|
40,462
|
|
|
Repurchase
of common stock
|
|
|
(3,000 |
) |
|
|
(3 |
) |
|
|
(14,997 |
) |
|
|
-
|
|
|
|
(15,000 |
) |
|
Adjustment
for error in warrant exercise
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock
options issued under equity compensation plans
|
|
|
-
|
|
|
|
-
|
|
|
|
560,859
|
|
|
|
-
|
|
|
|
560,859
|
|
|
Accretion
of loss on modification of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
119,319
|
|
|
|
-
|
|
|
|
119,319
|
|
|
Common
stock issued for registration rights penalty
|
|
|
332,876
|
|
|
|
332
|
|
|
|
1,664,048
|
|
|
|
-
|
|
|
|
1,664,380
|
|
|
Mandatory
redeemable common stock converted
|
|
|
62,000
|
|
|
|
62
|
|
|
|
309,938
|
|
|
|
-
|
|
|
|
310,000
|
|
|
Net
(loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,386,451 |
) |
|
|
(10,386,451 |
) |
|
Balances,
March 31, 2007
|
|
|
11,065,609
|
|
|
$ |
11,065
|
|
|
$ |
37,765,003
|
|
|
$ |
(29,792,163 |
) |
|
$ |
7,983,905
|
|
See
accompanying notes to the financial statements.
STATEMENTS
OF CASH FLOWS
| |
|
Year
ended
|
|
|
Three
month transitional period ended
|
|
|
Year
ended
|
|
| |
|
March
31,
|
|
|
March
31,
|
|
|
December
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$ |
(10,386,451 |
) |
|
$ |
(7,543,343 |
) |
|
$ |
(7,717,577 |
) |
|
Adjustments
to reconcile net (loss) to cash provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(used)
by operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock issued for registration rights penalty
|
|
|
1,664,380
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance
of common stock and options under equity compensation
plans
|
|
|
1,077,029
|
|
|
|
3,734,525
|
|
|
|
1,349,072
|
|
|
Issuance
of common stock not under equity compensation plan
|
|
|
141,592
|
|
|
|
-
|
|
|
|
-
|
|
|
Depreciation
and amortization expense
|
|
|
225,949
|
|
|
|
41,514
|
|
|
|
53,759
|
|
|
Bad
debt expense
|
|
|
80,695
|
|
|
|
-
|
|
|
|
-
|
|
|
Amortization
of debt issuance costs
|
|
|
242,399
|
|
|
|
164,119
|
|
|
|
209,737
|
|
|
Amortization
of convertible debentures, beneficial conversion feature
|
|
|
-
|
|
|
|
1,180,937
|
|
|
|
375,000
|
|
|
Interest
expense from warrants issued with convertible debentures
|
|
|
-
|
|
|
|
414,522
|
|
|
|
529,740
|
|
|
Effects
of variable accounting for modification of warrant terms
|
|
|
-
|
|
|
|
132,578
|
|
|
|
1,446,200
|
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in subscriptions receivable
|
|
|
-
|
|
|
|
840,000
|
|
|
|
-
|
|
|
(Increase)
in accounts receivable
|
|
|
(1,922,282 |
) |
|
|
(43,156 |
) |
|
|
-
|
|
|
(Increase)
in other receivable
|
|
|
(182,221 |
) |
|
|
-
|
|
|
|
-
|
|
|
(Increase)
in inventory
|
|
|
(3,747,668 |
) |
|
|
(173,466 |
) |
|
|
(19,480 |
) |
|
Increase
in other current assets
|
|
|
(281,400 |
) |
|
|
(119,870 |
) |
|
|
(873,297 |
) |
|
(Increase)
decrease in deposits
|
|
|
(30,471 |
) |
|
|
-
|
|
|
|
(200 |
) |
|
(Decrease)
increase in accounts payable
|
|
|
2,705,260
|
|
|
|
290,634
|
|
|
|
149,871
|
|
|
Increase
in accrued expenses
|
|
|
831,961
|
|
|
|
277,624
|
|
|
|
327,322
|
|
|
Increase
in deferred rent
|
|
|
53,531
|
|
|
|
-
|
|
|
|
-
|
|
|
Net
cash (used) by operating activities
|
|
|
(9,527,697 |
) |
|
|
(803,382 |
) |
|
|
(4,169,853 |
) |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
(84,363 |
) |
|
|
-
|
|
|
|
-
|
|
|
Purchases
of equipment
|
|
|
(649,087 |
) |
|
|
(100,771 |
) |
|
|
(413,482 |
) |
|
Patent
expenses
|
|
|
(12,615 |
) |
|
|
(2,360 |
) |
|
|
(20,407 |
) |
|
Net
cash (used) by investing activities
|
|
|
(746,065 |
) |
|
|
(103,131 |
) |
|
|
(433,889 |
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in amounts due to factor
|
|
|
645,151
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock
repurchase
|
|
|
(15,000 |
) |
|
|
-
|
|
|
|
-
|
|
|
Proceeds
from issuance of common stock, net
|
|
|
6,200,314
|
|
|
|
8,809,935
|
|
|
|
1,055,500
|
|
|
Proceeds
from exercise of warrants
|
|
|
116,250
|
|
|
|
-
|
|
|
|
-
|
|
|
Repayments
of convertible debentures
|
|
|
(30,000 |
) |
|
|
-
|
|
|
|
-
|
|
|
Proceeds
from issuance of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000,000
|
|
|
Issuance
costs associated with debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
(419,474 |
) |
|
Net
cash provided (used) by financing activities
|
|
|
6,916,715
|
|
|
|
8,809,935
|
|
|
|
3,636,026
|
|
|
Net
increase (decrease) in cash
|
|
|
(3,357,047 |
) |
|
|
7,903,422
|
|
|
|
(967,716 |
) |
|
Cash,
beginning of period
|
|
|
8,852,548
|
|
|
|
949,126
|
|
|
|
1,916,842
|
|
|
Cash,
end of period
|
|
$ |
5,495,501
|
|
|
$ |
8,852,548
|
|
|
$ |
949,126
|
|
See
supplemental disclosures on the following page and the accompanying notes
to the
financial statements.
|
Supplemental
disclosure of non cash investing and
financing activities:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
83,158
|
|
|
$ |
32,700
|
|
|
$ |
111,487-
|
|
|
Income
taxes paid
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
Accretion
of debt modification
|
|
$ |
119,319
|
|
|
$ |
13,249
|
|
|
$ |
-
|
|
|
Issuance
of common stock for equipment purchases
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
30,000
|
|
|
Convertible
debentures converted to common stock
|
|
$ |
840,000
|
|
|
$ |
2,130,000
|
|
|
$ |
-
|
|
|
Conversion
of manditorily redeemable common stock
|
|
$ |
310,000
|
|
|
$ |
-
|
|
|
$ |
-
|
|
See
accompanying notes to the financial statements.
Description
of the Business
AeroGrow
International, Inc. ("the Company") was incorporated in the State of Nevada
on
March 25, 2002. The Company’s principal business is developing and
marketing advanced indoor aeroponic garden systems designed and priced
to appeal
to the gardening, cooking and small kitchen appliance markets worldwide.
The
Company’s principal activities since our formation through March 2006 had
consisted of the development of the Company’s products business planning and
raising the capital necessary to fund these activities. In December 2005,
the
Company commenced pilot production of our AeroGarden™ system and, in March 2006,
began shipping these systems to retail and catalogue customers. Prior to
March
2006 when the Company commenced sales of our aeroponic garden systems,
the
Company was considered a Development Stage Enterprise in accordance FAS
No. 7,
Accounting and Reporting by Development Stage Enterprises. Effective March
2006,
the Company ceased being considered a development stage enterprise. The
Company
is headquartered in Boulder, Colorado.
On
January 12, 2006, the Company and Wentworth I, Inc., a Delaware corporation
(“Wentworth”), entered into an Agreement and Plan of Merger (the “Merger
Agreement”) which was consummated on February 24, 2006. Under the
Merger Agreement, Wentworth merged with and into the Company, and the Company
was the surviving corporation (“Merger”). The Merger, for accounting and
financial reporting purposes, has been accounted as an acquisition of Wentworth
by the Company. As such, the Company was the accounting acquirer in
the Merger, and the historical financial statements of the Company will
be the
financial statements for the Company following the Merger.
Significant
Accounting Policies
Use
of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Net
Income (Loss) per Share of Common Stock
The
Company computes net income (loss) per share of common stock in accordance
with
SFAS No. 128, “Earnings per Share,” and Securities and Exchange Commission Staff
Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires
companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as the income or loss available to common
stock shareholders 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 (e.g.,
convertible securities, options and warrants) as if they had been converted
at
the beginning of the periods presented. Potential shares of common stock
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.
Reclassifications
Certain
prior year amounts have been reclassified to conform to current year
presentation.
Cash
and cash equivalents
The
Company considers all highly liquid investments with an original maturity
of
three months or less when purchased to be cash equivalents.
Restricted
Cash
The
Company has secured activity related to its corporate credit card purchase
account with a restricted money market account. The balance in this account
as
of March 31, 2007 was $84,363.
Concentration
of Credit Risk and Financial Instruments
Statement
of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of Information
About Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," requires disclosure
of
significant concentrations of credit risk regardless of the degree of
such
risk. Financial instruments with
significant credit risk include cash. The amount on deposit with a
financial institution exceeded the $100,000 federally insured limit as
of March
31, 2007, March 31, 2006 and December 31, 2005. However, management
believes that the financial institution is financially sound and the
risk of
loss is minimal.
Financial
instruments consist of cash and cash equivalents, accounts receivable and
accounts payable. The carrying values of all financial instruments approximate
their fair value.
Customers:
For
the
year ended March 31, 2007, the Company had two customers who represented
15% and
10% of the Company’s net product sales, respectively. At March 31,
2007, the foregoing customers accounted for 13% and 2% of the total outstanding
accounts receivable, respectively. In addition, at March 31, 2007,
the Company had three additional customers accounting for 15%, 11% and
11%,
respectively, of total accounts receivable outstanding.
For
the
three months ended March 31, 2006, one customer represented 93% of the
Company’s
net product sales. At March 31, 2006, this customer represented 76%
of the total accounts outstanding receivable.
Suppliers:
As
of
March 31, 2007, the Company had two suppliers each of which accounted for
in
excess of 10% of total accounts payable consisting of $942,758 and $383,976,
or
29.4% and 12.0% respectively, of total outstanding accounts payable. At
March
31, 2006, one supplier represented $66,151 or 13.57% of total accounts
payable. In addition, one service provider represented $53,739 or
11.02% of total accounts payable. For the year ended March 31, 2007,
the Company purchased inventories and other inventory related items from
these
suppliers totaling $2,307,826 and $4,686,403, respectively. During
the three months ended March 31, 2006, the Company purchased inventory
and other
inventory related items from one supplier totaling $160,523.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation for financial
accounting purposes is computed using the straight-line method over the
estimated lives of the respective assets. Office equipment and
computer hardware are depreciated over five years. Tooling is
depreciated over three years. Leasehold improvements are being amortized
over
the life of the lease which is five years.
|
Property
and equipment consist of the following as of:
|
|
|
|
|
| |
|
March
31
|
|
|
March
31
|
|
| |
|
2007
|
|
|
2006
|
|
|
Manufacturing
equipment and tooling
|
|
$ |
823,675
|
|
|
$ |
425,482
|
|
|
Computer
hardware
|
|
|
131,625
|
|
|
|
88,681
|
|
|
Leasehold
Improvements
|
|
|
104,994
|
|
|
|
-
|
|
|
Office
equipment
|
|
|
171,607
|
|
|
|
68,651
|
|
| |
|
|
1,231,901
|
|
|
|
582,814
|
|
|
Less: accumulated
depreciation
|
|
|
(322,405 |
) |
|
|
(102,043 |
) |
|
Property
and equipment, net
|
|
$ |
909,496
|
|
|
$ |
480,771
|
|
Depreciation
expense for the year ended March 31, 2007, for the three months ended March
31,
2006, and for the year ended December 31, 2005 was $220,362, $40,444 and
$53,760, respectively.
Intangible
assets and goodwill
Intangible
assets, to date, have consisted of the direct costs incurred for application
fees and legal expenses associated with patents and trademarks on the Company's
products. The Company periodically reviews the recoverability from future
operations using undiscounted cash flows. To the extent carrying values
exceed fair values, an impairment loss will be evaluated for possible
recording. The Company amortizes its patent and trademarks costs on a
straight line basis over their estimated useful life of 5 years.
Intangible
assets consist of the following:
| |
|
March
31
|
|
|
March
31
|
|
| |
|
2007
|
|
|
2006
|
|
|
Patents
|
|
$ |
22,858
|
|
|
$ |
15,913
|
|
|
Trademarks
|
|
|
12,524
|
|
|
|
6,854
|
|
| |
|
|
35,382
|
|
|
|
22,767
|
|
|
Less: accumulated
amortization
|
|
|
(6,659 |
) |
|
|
(1,071 |
) |
|
Intangible
assets, net
|
|
$ |
28,723
|
|
|
$ |
21,696
|
|
Amortization
expense for the year ended March 31, 2007, for the three months ended March
31,
2006, and for the year ended December 31, 2005 was $5,588, $1,071 and $0,
respectively.
Inventory
Inventories
are valued at the lower of cost, determined by the first-in, first-out
method,
or market. Included in inventory costs where the Company is the manufacturer
are
raw materials, labor and manufacturing overhead. 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 as prescribed
under ARB No. 43, Chapter 4, “Inventory Pricing.” A majority of the
Company’s products are manufactured overseas and are recorded at
cost.
| |
|
March
31
|
|
|
March
31
|
| |
|
2007
|
|
|
2006
|
|
Finished
goods
|
|
$ |
3,626,671
|
|
|
$ |
132,806
|
|
Raw
materials
|
|
|
313,943
|
|
|
|
60,140
|
| |
|
$ |
3,940,614
|
|
|
$ |
192,946
|
The
Company will determine inventory obsolescence reserve based on management’s
historical experience and establishes reserves against inventory according
to
the age of the product. As of March 31, 2007 and March 31, 2006, the Company
had
determined that no inventory obsolescence reserve was required.
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company sells its products to retailers and consumers. Consumer transactions
are
paid primarily by credit card. Retailer sales terms vary by customer, however,
and generally are net 30 days. Accounts receivable are reported at net
realizable value and net of allowance for doubtful accounts. The Company
uses
the allowance method to account for uncollectible accounts receivable.
The
Company's estimate is based on a review of the current status of trade
accounts
receivable which totaled $80,695 and $14,627 at March 31, 2007 and March
31,
2006, respectively.
Other
receivable
In
conjunction with the Company’s processing of credit card transactions and for
its direct to consumer sales activities and as security with respect to
the
Company’s performance for required credit card refunds and chargebacks, the
Company is required to maintain a cash reserve with Litle and Company,
the
Company’s credit card processor. This reserve is equal to 5% of the credit card
sales processed over the previous six months of activity. As of March 31,
2007,
the balance in this reserve account was $182,221.
Advertising
and Production Costs
The
Company expenses all production costs related to advertising as incurred.
These
costs include actual advertising such as print, television, and radio
advertisements which are expensed when the advertisement has been broadcast
or
otherwise distributed. Advertising expense for the year ended March
31, 2007, for the three months ended March 31, 2006, and for the year ended
December 31, 2005 was $2,125,112, $30,000, and $0, respectively.
Research
and Development
Research,
development, and engineering costs are expensed as incurred, in accordance
with
SFAS No. 2, “Accounting for Research and Development
Costs.” 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.
Stock
Based Compensation
In
December 2004, the Financial Accounting Standards Board issued SFAS No.
123R,
“Share-Based Payment.” Subsequently, the Securities and Exchange Commission
(“SEC”) provided for a phase-in implementation process for SFAS No. 123R, which
required adoption of the new accounting standard no later than January
1, 2006.
SFAS No. 123R requires accounting for stock options using a fair-value-based
method as described in such statement and recognize the resulting compensation
expense in the Company’s financial statements. Prior to January 1, 2006, the
Company accounted for employee stock options using the intrinsic value
method
under APB No. 25, “Accounting for Stock Issued to Employees” and related
Interpretations, which generally results in no employee stock option expense.
The Company adopted SFAS No. 123R on January 1, 2006 and does not plan
to
restate financial statements for prior periods. The Company plans to continue
to
use the Black-Scholes option valuation model in estimating the fair value
of the
stock option awards issued under SFAS No. 123R. The adoption of SFAS No.
123R
will have a material impact on our results of operations. For the year
ended
March 31, 2007 and the three month transition period ended March 31, 2006,
equity compensation in the form of stock options and grants of restricted
stock
totaled $1,077,029 and $3,734,525, respectively, and is included in the
accompanying Statements of Operations in the following categories:
| |
|
Year
ended
March
31, 2007
|
|
|
Three
month transition period ended March 31, 2006
|
|
General
and administrative
|
|
$ |
356,720
|
|
|
$ |
1,332,540
|
|
Research
and development
|
|
|
336,482
|
|
|
|
651,417
|
|
Sales
and marketing
|
|
|
383,827
|
|
|
|
1,724,940
|
|
Cost
of Sales
|
|
|
-
|
|
|
|
25,628
|
|
|
|
$ |
1,077,029
|
|
|
$ |
3,734,525
|
Income
taxes
The
Company accounts for deferred income taxes in accordance with the liability
method as required by Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109"). Deferred income taxes are
recognized for the tax consequences in future years for 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. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income
in the
period that includes the enactment date. A valuation allowance is established
against such assets where management is unable to conclude more likely
than not
that such asset will be realized. For the year ended March 31, 2007 and
the
three month transition period ended March 31, 2006, and for the year ended
December 31, 2005 the Company recognized a valuation allowance equal to
100% of
the net deferred tax asset balance.
Revenue
Recognition
The
Company recognizes revenue from product sales, net of estimated returns,
when
persuasive evidence of a sale exists: that is, a product is shipped under
an
agreement with a customer; risk of loss and title has passed to the customer;
the fee is fixed or determinable; and collection of the resulting receivable
is
reasonably assured. Accordingly, the Company did not record $451,898 of
revenue
as of March 31, 2007 related to the unpaid balance due for orders shipped
in
conjunction with the Company’s direct sales to consumers because the consumer
has thirty-six days to evaluate the product, paying only the shipping and
handling costs for such products before making the required installment
payments
after the expiration of the thirty-six day trial period. The Company also,
as of
March 31, 2007, did not record $135,459 of product costs associated with
the
foregoing revenue in as much as the customer is required to return the
product
and the Company is therefore able to recover these costs through resale
of the
goods. The liability for sales returns is estimated based upon historical
experience of return levels.
The
Company records estimated reductions to revenue for customer and distributor
programs and incentive offerings, including promotions and other volume-based
incentives. Future market conditions and product transitions may require
the
Company to take actions to increase customer incentive offerings, possibly
resulting in an incremental reduction of revenue at the time the incentive
is
offered. Additionally, certain incentive programs require the Company to
estimate based on industry experience the number of customers who will
actually
redeem the incentive. At March 31, 2007 and March 31, 2006, the Company
had
accrued $65,385 and $0, respectively, as its estimate for the foregoing
deductions and allowances.
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. Both manufacturers of the Company’s products
provide replacement parts for any defective components free of charge up
to 2%
of the total units purchased. Based upon the foregoing, the Company
has recorded as of March 31, 2007 a provision for potential future warranty
costs of $15,393. There was no provision required as of March 31,
2006.
The
Company reserves for potential returns from customers and associated refunds
or
credits related to such returns based upon historical experience. As of
March
31, 2007, the Company has recorded a reserve for customer returns of $238,569.
There was no provision required as of March 31, 2006.
Shipping
and Handling Costs
Shipping
and handling costs associated with inbound freight are recorded in cost
of
revenue. Shipping and handling costs associated with freight out to customers
are also included in cost of revenue. Shipping and handling charges to
customers
are included in sales.
Deferred
Rent
In
July
2006, the Company entered into a facility lease with a term through January
2012, for its corporate offices in Boulder, Colorado. At March 31,
2007, the Company had recorded deferred rent related to this agreement
in the
amount of $53,531, based on the difference between rent expense recorded
and the
rent payment obligation.
Registration
Rights Penalties
The
holders of securities issued in the Company’s 2006 Offering and 2005 Offering
(see Note 4) had registration rights for the common stock and for the common
stock underlying the convertible debt and the warrants held by them. Liquidated
damages for failure to register and maintain registration for such common
stock
were payable in common stock of the Company under certain circumstances
and were
limited to 1% of the amount of the outstanding convertible debt per 30-day
period up to a maximum of 24% and 1% of the amount of the investment in
the 2006
Offering up to a maximum of 18%. In each case, the amount was payable in
shares
of the Company’s common stock valued at a rate of $2.00 per
share. The Company elected to recognize the impact of such
registration rights penalties as incurred, which commenced after July 23,
2006
(see Note 4 and Note 6). The Company completed the registration of the
foregoing
securities on December 22, 2006 and recognized five months of penalty,
resulting
in the recording of 332,876 shares of common stock to be issued at a value
of
$5.00 for a total of $1,664,380. On December 21, 2006, the FASB
Financial Statement Publication (“FSP”) EITF 00-19-2 that addresses the accrual
and accounting for registration rights penalties and became effective for
all
fiscal years beginning after December 15, 2006 and immediately for all
new
arrangements entered into after this date. The Company adopted this
FSP immediately for fiscal 2007. The Company does not expect the
adoption to have a significant impact on its current policy.
On
March
12 and March 15, 2007, the Company completed a private offering of 833,400
units
of its common stock and warrants to purchase common stock and on March
29, 2007,
the Company completed a private offering of 333,360 units of its common
stock
and warrants to purchase common stock (“2007 Offerings”). Each unit consisted of
one share of common stock, par value $0.001, and one five-year warrant
to
purchase one share of common stock at an exercise price of $7.50 per share.
The
units were sold at a per unit price of $6.00. The Company raised an aggregate
of
$7,000,000 from the 2007 Offerings, less a placement agent fee in the amount
of
$700,000 and approximately $100,000 in other expenses related to the 2007
Offerings. The holders of securities issued in the Company’s 2007 Offerings had
registration rights for the common stock and for the common stock underlying
the
warrants held by them. Liquidated damages for failure to register and maintain
registration for such common stock were payable in cash under certain
circumstances and were limited to 1% of the amount of the investment per
30-day
period made up to a maximum of 10%. The Company completed the registration
of
$5.0 million of the 2007 Offerings on May 11, 2007 and intends to file
a
registration statement for the remaining $2.0 million of the 2007 Offerings
within the required time for filing such registration
statement.
Segments
of an Enterprise and Related Information
Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an
Enterprise and Related Information" ("SFAS 131") replaces the industry
segment
approach under previously issued pronouncements with the management
approach. The management approach designates the internal
organization that is used by management for allocating resources and assessing
performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas and
major customers. At present, the Company only operates in one
segment.
Debt
Issuance Costs
Debt
issuance costs consist of consideration paid to third parties with respect
to a
$3.0 million debt financing in July 2005, including cash payments for legal
fees
and placement agent fees. Such costs are being deferred and were to be
amortized
over the term of the related debt, which was one year. On February
24, 2006, $2,130,000 of the debt associated with these costs converted
to
710,009 shares of the common stock (See Note 4, Convertible
Debentures). The pro rata costs associated with the $2,130,000 which
converted to common stock was expensed as interest as of the date converted.
The
amortization of the remaining debt issuance costs will be amortized over
the
remaining life of the debt.
Beneficial
Conversion Feature of Debentures
In
accordance with Emerging Issues Task Force No. 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and Emerging Issues Task Force No. 00-27, “Application of
Issue No. 98-5 to Certain Convertible Instruments,” the Company recognized the
advantageous value of conversion rights attached to convertible debt. Such
rights gives the debt holder the ability to convert debt into shares of
common
stock at a price per share that is less than the fair market value of the
common
stock on the day the loan is made to the Company. The beneficial value
was
calculated as the intrinsic value (the fair market value of the stock at
the
commitment date in excess of the conversion rate) of the beneficial conversion
feature of the debentures and the related accrued interest and was recorded
as a
discount to the related debt and an addition to additional paid in capital.
The
discount was subsequently amortized to interest expense over the remaining
outstanding period of the related debt using the interest method.
New
Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes,” which is an interpretation of SFAS No. 109 (“SFAS
109”), “Accounting for Income Taxes.” FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with SFAS 109 and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We are currently evaluating
the effect that the adoption of FIN 48 may have on our financial position
or
results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” SFAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosure of fair value measurements.
SFAS
157 applies under other accounting pronouncements that require or permit
fair
value measurements and accordingly, does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for
fiscal
years beginning after November 15, 2007. The Company is currently in the
process
of assessing the impact the adoption of SFAS 157 will have on its financial
statements.
In
September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.” SAB 108 requires that public companies utilize a
“dual-approach” to assessing the quantitative effects of financial
misstatements. This dual approach includes both an income statement focused
assessment and a balance sheet focused assessment. The guidance in SAB
108 must
be applied to annual financial statements for fiscal years ending after
November
15, 2006. Management believes the adoption of this pronouncement will not
have a
material impact on the Company’s financial statements.
In
February 2007, the FASB issued SFAS No.159,” The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement 157.”
We will adopt SFAS 159 in the fiscal year beginning April 1, 2008. The
adoption
of this Statement is not expected to have a material effect on our consolidated
financial statements.
Note
2 – Merger and 2006 Private Placement
The
Company entered into a Letter of Intent on January 4, 2006, and a Merger
Agreement on January 12, 2006, with Wentworth I, Inc., a Delaware corporation.
Wentworth was a non-operating entity without significant assets. On January
12,
2006, Wentworth’s Board of Directors and its shareholders approved the Merger
Agreement and the Company’s Board of Directors approved the Merger Agreement.
Under the Merger Agreement, Wentworth merged with and into the Company,
and the
Company was the surviving corporation (“Merger”). The Merger, for accounting and
financial reporting purposes, has been accounted as an acquisition of Wentworth
by the Company.
As
a
condition of the closing of the Merger Agreement, the Company was required
to
complete a private placement offering of its common stock shares and common
stock warrants with gross proceeds of not less that $5 million (the “Offering”).
Under the terms of the Merger Agreement, the Company paid a financial advisory
fee of $350,000 to Keating Securities, Wentworth’s financial advisor in the
transaction.
The
closing of the Merger Agreement occurred on February 24, 2006 and closings
of
the Offering occurred on February 24, 2006 and March 1, 2006. The Company
received gross proceeds of $10,740,000 in the Offering. Pursuant to Subscription
Agreements entered into with these Investors, the Company sold 2,148,000
units
(“Unit(s)”) in the Offering; each Unit consisted of one share of common stock
and a five-year warrant to purchase one share of common stock at an exercise
price of $6.25 per share. The price per Unit in the Offering was $5.00.
After
commissions, expenses and the reverse merger fee payable to Keating Securities,
the Company received net proceeds of $8,964,952 in the Offering. This offering
required registration of the common stock issued and the shares of common
stock
underlying the warrants. Liquidated damages are payable to investors under
the
following circumstances: (a) if a registration statement is not filed by
the
Company on or prior to 45 days after the closing date (such an event, a
“Filing
Default”); (b) if the registration statement is not declared effective by the
SEC on or prior to the 150th day after the Closing Date (such an event,
an
“Effectiveness Default”); and/or (c) if the Registration Statement (after its
effectiveness date) ceases to be effective and available to investors for
any
continuous period that exceeds 30 days or for one or more periods that
exceeds
in the aggregate 60 days in any 12-month period (such an event, a “Suspension
Default” and together with a Filing Default and an Effectiveness Default, a
“Registration Default”). In the event of a Registration Default, the Company
shall pay as Liquidated Damages, for each 30-day period of a Registration
Default, an amount equal to 1% of the aggregate purchase price paid by
the
investors up to a maximum of 18% of the aggregate purchase price
paid, provided that liquidation damages in respect of a Suspension Default
shall
not be payable in relation to any securities not owned by the investors
at the
time of the Suspension Default and, provided further, that no liquidated
damages
are due in respect of the warrants. In the event of a Filing Default or
an
Effectiveness Default, the Liquidated Damages shall be paid by the issuance
of
additional common stock at the rate of the amount of the liquidated damages
due
divided by $2.00. In the event of a Suspension Default, the liquidated
damages
shall be paid in cash. The Company filed the required Registration Statement
within the 45 days pursuant to (a) above and completed the registration
of the
foregoing securities on December 22, 2006. Accordingly, the Company recognized
five months of penalty, resulting in the recording of 332,876 shares of
common
stock to be issued at a value of $5.00 for a total of $1,664,380, inclusive
of
74,250 penalty shares issued to investors in the Company’s Convertible Debt
Offering (See Note 4).
In
the
Merger each of the Wentworth’s 3,750,000 shares of outstanding common stock was
converted into the right to receive 0.154703 shares of the Company common
stock
resulting in the issuance of 580,136 shares of the Company’s common stock to the
Wentworth stockholders representing 6.4% of the issued and outstanding
common
stock of the Company immediately after the Merger, the Offering and the
Note
Conversion. Immediately after the closing of the Offering, the investors
owned
2,148,000 shares of the Company’s common stock representing 23.7% of the issued
and outstanding common stock immediately after the Merger, the Offering
and the
Note Conversion.
Note
3 – Due to Factor
On
February 9, 2007, the Company entered into an agreement with Benefactor
Group
Inc. (“Benefactor”) whereby Benefactor agreed to factor the company’s retail
accounts receivable invoices. The term of the agreement is for one year
but can
be terminated by the Company with 60 days written notice. In accordance
with the
terms of the agreement, Benefactor will purchase the invoices that it approves
for an initial payment of 85% of the amount of the invoice with the remaining
15% paid upon collection less any deductions from the customer. Benefactor
charges a commission of 1 ¼% of the gross amount of the invoice and a
maintenance fee equal to an annual rate of prime plus 3%,
prime
being determined by Benefactor based upon either the prime rate published
by
Benefactor’s bank or the Wall Street Journal, (11.25% at March 31, 2007) charged
on a daily basis for the unpaid invoice amounts outstanding. The Company
has
agreed, beginning May 2007, to factor with Benefactor a minimum of $800,000
of
invoices monthly. The Company is responsible for any invoices which are
unpaid
after 91 days or are subject to other defaults by the customer and this
obligation is secured by the Company with a security interest granted to
Benefactor on all assets. As of March 31, 2007, Benefactor had advanced
the
Company $645,151 against invoices totaling $764,338. Fees paid to Benefactor
for
interest, discounts and other services for the year ended March 31, 2007
totaled
$39,556. The receivables are considered recourse and are shown gross
in the balance sheet.
Note
4 – Convertible Debentures
On
May
27, 2005, the Company entered into an exclusive Placement Agreement with
Keating
Securities, LLC to raise up to $3,000,000, through a private placement
offering
consisting of up to 300 units at an offering price of $10,000 per unit
(the
“2005 Offering”). Each unit was comprised of a convertible debenture evidenced
by a 10% unsecured convertible promissory note in the principal amount
of
$10,000 (a total of $3,000,000), and 2,000 five-year warrants (a total
of
600,000 warrants), each warrant providing for the purchase of one share
of the
Company's common stock at the exercise price of $5.01 per share. The Unsecured
Convertible Promissory Notes bear interest at the rate of 10% per annum
which
was payable quarterly beginning September 30, 2005. The principal was originally
due on September 30, 2006. The Company received proceeds of $3,000,000
from this
private placement less $419,471 in directly incurred debt issuance costs.
In
addition to the foregoing, for each share of common stock issuable upon
conversion, each note holder received an additional five year warrant to
purchase one share of common stock at an exercise price of $6.00 per share.
The
Company had agreed to registration rights related to both the shares underlying
the convertible debt and the related warrants. In the event the
Company failed to fulfill its registration obligations the Company agreed
to pay
liquidated damages under the following circumstances: (a) if the registration
statement was not filed by the Company on or prior to 60 days after the
final
closing of the 2005 Offering (such an event, a “Filing Default”); (b) if the
registration statement was not declared effective by the SEC on or prior
to 150
days after the final Closing of the offering (such an event, an “Effectiveness
Default”); or (c) if the Company did not file its required periodic reports
under the Exchange Act when due (such an event, a “Reporting Default” and
together with a Filing Default and an Effectiveness Default, a “SEC Default”).
In the event of an SEC Default, the Company shall as liquidated damages
pay, for
each 30-day period of an SEC Default, an amount equal to 1% of the principal
amount of the notes up to a maximum aggregate of 24 months of SEC Defaults.
The
Company was obligated to pay the Liquidated Damages in shares of common
stock,
priced at $2.00 per share as follows: (i) in connection with a Filing Default,
on the 61st day after the initial closing, and each 30th day thereafter
until
the registration statement is filed with the SEC; (ii) in connection with
an
Effectiveness Default, on the 151st day after the initial closing, and
each 30th
day thereafter until the Registration Statement is declared effective by
the
SEC; or (iii) in connection with a Reporting Default, on the 31st consecutive
day of after a Reporting Default has occurred, provided that if the Reporting
Default has been cured, then such days during which a Reporting Default
were
accruing will be added to any future Reporting Default period for the purposes
of calculating the payment of the liquidated damages provided for in this
provision. The Company has recorded penalties for an Effectiveness Default
with
regard to the 2005 Offering through December 22, 2006, the effective date
of the
registration of the underlying shares, of 74,250 shares of common stock
valued
at $371,250.
In
conjunction with the 2005 Offering, the Company recognized at the time
of
issuance $750,000 of beneficial conversion costs, representing the value
of the
beneficial conversion rights of the convertible debentures, determined
by
calculating the difference of the fair market value of the stock at the
commitment date, or $5.00 per share, less the conversion exercise price
of $4.00
times the number of shares to be issued upon conversion or 750,000 shares.
This
value is recorded as a discount to the convertible debentures and an addition
to
additional paid- in capital. This discount was completely amortized as
interest
expense over the term of the convertible debentures which were originally
due,
if not converted, by June 30, 2006.
Also
in
conjunction with the 2005 Offering, the Company recognized at the time
of
issuance $1,059,480 representing the fair value of the five year warrants
issued
with the convertible debentures. The value of these warrants was determined
in
accordance with the Black-Scholes pricing model utilizing a historic volatility
factor of 129.67%, a risk free interest rate of 5.0% and an expected life
for
the warrants of five years, resulting in a value of $2.73 per warrant.
This
value was recorded as an additional discount to the convertible debentures
and
an addition to additional
paid-in capital. This discount was completely amortized to interest expense
over
the term of the convertible debentures which were originally due if not
converted by June 30, 2006.
Prior
to
the closings of the Merger and the 2006 Offering but contingent upon their
successful completion, in February 2006, the Company entered into agreements
with the convertible debt holders of the 2005 Offering whereby certain
debt
holders converted $2,130,000 of their outstanding debt obligations into
common
stock of the Company at a conversion price of $3.00 per share and certain
other
debt holders agreed to extend the maturity dates of $840,000 of debt obligations
from June 30, 2006 to December 31, 2006. The $2,130,000 of debt that converted
immediately resulted in additional beneficial conversion expense of $887,500
to
account for the additional fair value attributed to the additional shares
of
common stock were issued as a result of the change in the conversion price
to $3
per share from the original conversion price of $4 per share. The fair
value of
the foregoing additional shares was based upon a price of $5.00 per share.
The
converting note holders also were issued, pursuant to the terms of the
original
note offering, five-year warrants to purchase 426,000 shares of the Company’s
common stock at an exercise price of $6.00 per share. With respect to the
$840,000 of convertible debentures that were modified by extension of the
due
date from June 30, 2006 to December 31, 2006 and modification of the embedded
conversion feature from a conversion price of $4.00 per share to a conversion
price of $3.50 per share, based on the significant change in the terms
of these
$840,000 in debentures, the original debt was deemed extinguished and a
debt
extinguishment loss was recognized. This loss was based on the fair value
of the
new debt instrument in accordance with EITF 96-19, “Debtor’s Accounting for a
Modification or Exchange of Debt Instruments and EITF 05-07, Accounting
for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues.” The Company recognized a loss on extinguishment of debt of
$132,578. This loss was determined by calculating the change in net present
value of the cash flows from the convertible debt, inclusive of the change
in
the embedded conversion feature determined by comparing the fair value
of the
conversion option immediately following such modification with its fair
value
immediately prior to the modification. This loss was recorded as of February
2006 with a corresponding increase in fair value of the modified convertible
debenture balance and is being amortized over the remaining term of these
debentures to additional paid in capital. As of December 31, 2006, the
Company
has accreted $132,578 of the recognized loss on extinguishment of debt
to
additional paid in capital. Of the original amount of $3,000,000 in
convertible debentures disclosed as outstanding as of December 31, 2005,
$2,130,000 converted to common stock in February 2006, $30,000 was repaid
in
June 2006 and $840,000 converted to common stock in March 2007.
The
holders of securities issued in the private placement offering and the
convertible debt offering have registration rights under the common stock
and
for the common stock underlying the warrants held by them. Liquidated damages
for failure to register and maintain registration for the common stock
and for
the common stock underlying the warrants held by investors are payable
under the
following circumstances: (a) if a registration statement is not filed by
the
Company on or prior to 45 days after the closing date (such an event, a
“Filing
Default”); (b) if the registration statement is not declared effective by the
SEC on or prior to the 150th day after the Closing Date (such an event,
an
“Effectiveness Default”); and/or (c) if the Registration Statement (after its
effectiveness date) ceases to be effective and available to Investor for
any
continuous period that exceeds 30 days or for one or more period that exceeds
in
the aggregate 60 days in any 12-month period (such an event, a “Suspension
Default” and together with a Filing Default and an Effectiveness Default, a
“Registration Default”). In the event of a Registration Default, the Company
shall pay to Investor as Liquidated Damages, for each 30-day period of
a
Registration Default, an amount equal to 1% of the aggregate purchase price
paid
by Investor pursuant to this Agreement up to a maximum of 18% of the aggregate
purchase price paid by the investor, provided that liquidation damages
in
respect of a Suspension Default shall not be payable in relation to any
securities not owned by the investor at the time of the Suspension Default
and,
provided further, that no liquidated damages are due in respect of the
warrants.
In the event of a Filing Default or an Effectiveness Default, the Liquidated
Damages shall be paid by the issuance of additional common stock at the
rate of
the amount of the liquidated damages due divided by $2.00. In the event
of a
Suspension Default, the liquidated damages shall be paid in cash. In summary,
the liquidated damages are either settled with common stock in the case
of a
delay in filing having declared effective a registration statement, or
in cash
but only related to actual stock issued (excluding common stock underlying
warrants) for failure to maintain effectiveness of a registration. The
Company
filed the required Registration Statement within the 45 days pursuant to
(a)
above and completed the registration on December 22, 2006. Accordingly,
the
Company recognized five months of penalty and issued 74,250 penalty shares
of
common stock in January 2007 to investors in the Company’s Convertible Debt
Offering aggregating a total charge to expense of $371,250.
The
balance presented for the Convertible Debentures, net of discounts, as
of March
31, 2007 and March 31, 2006 is as follows:
| |
|
March
31, 2007
|
|
|
March
31, 2006
|
|
|
Convertible
debentures outstanding
|
|
$ |
-
|
|
|
$ |
870,000
|
|
| |
|
|
|
|
|
|
|
|
|
Loss
on modification of debt, net of $13,258 accretion to additional
paid in
capital as of March 31, 2006
|
|
|
-
|
|
|
|
119,320
|
|
|
Discount
as a result of beneficial conversion feature, net of amortization
of $668,437 as of March 31, 2006
|
|
|
-
|
|
|
|
(81,563 |
) |
|
Discount
as a result of fair value of warrants issued, net of amortization
of
$944,262 as of March 31, 2006
|
|
|
-
|
|
|
|
(115,218 |
) |
|
Net
balance
|
|
$ |
-
|
|
|
$ |
792,539
|
|
Note
5 – Equity Compensation Plans
In
2003,
the Company's Board of Directors approved a Stock Option Plan (the 2003
Plan)
pursuant to which nonqualified stock options are reserved for issuance
to
eligible employees, consultants and directors of the Company. The
2003 Plan was administered by the Board of Directors, which had the authority
to
select the individuals to whom awards were to be granted, the number of
shares
of common stock to be covered by each award, the vesting schedule of stock
options, and all other terms and conditions of each award. The
Company has granted nonqualified stock options to purchase shares of common
stock to certain employees at exercise prices ranging from $0.01 to $5.90
per
share. In August 2005, the 2003 Plan was merged into the 2005 Equity
Compensation Plan and it no longer separately exists. However, options
issued
and outstanding under the 2003 Plan continue to be governed by their grant
agreements but are administered under the 2005 Equity Compensation
Plan.
In
August
2005, the Company’s Board of Directors approved the 2005 Equity Compensation
Plan (the 2005 Plan) pursuant to which both qualified and nonqualified
stock
options as well as restricted shares of common stock are reserved for issuance
to eligible employees, consultants and directors of the Company. A
total of 1,505,000 shares of our common stock may be granted under the
2005
Plan.
The
2005
Plan is administered by the Company’s compensation committee which has the
authority to select the individuals to whom awards are to be granted, the
number
of shares of common stock to be covered by each award, the vesting schedule
of
stock options, and all other terms and conditions of each award. The
Company has granted qualified stock options to purchase shares of common
stock
to certain employees at exercise prices ranging from $0.01 to $5.90 per
share.
Prior
to
January 1, 2006, the Company accounted for employee stock-based compensation
under the recognition and measurement principles of Accounting Principles
Board
Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related
Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based
Compensation.” Under the recognition principles of APB No. 25,
compensation expense related to restricted stock and performance units
was
recognized in the financial statements. However, APB No. 25 generally did
not
require the recognition of compensation expense for stock options because
the
exercise price of these instruments was generally equal to the fair value
of the
underlying common stock on the date of grant, and the related number of
shares
granted were fixed at that point in time.
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
SFAS No. 123(R), “Share-Based Payment.” In addition to recognizing
compensation expense related to restricted stock and performance units,
SFAS No.
123(R) also requires recognition of compensation expense related to the
estimated fair value of stock options. The Company adopted SFAS No. 123(R)
using
the modified-prospective-transition method. Under that transition method,
compensation expense recognized subsequent to adoption includes: (a)
compensation cost for all share-based payments granted prior to, but not
yet
vested as of January 1, 2006, based on the values estimated in accordance
with
the original provisions of SFAS No. 123, and (b) compensation cost for
all
share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair values estimated in accordance with the provisions of SFAS
No.
123(R). Consistent with the modified-prospective-transition method, the
Company’s results of operations for prior periods have not been adjusted to
reflect the adoption of FAS 123(R).
For
the
year and three months ended March 31, 2007 and March 31, 2006, respectively,
the
Company granted 222,131 and 888,153 options to purchase the Company’s common
stock at an exercise prices ranging from $5.00 to $5.90 per share under
the 2005
Plan as follows:
| |
|
Year
ended
March
31, 2007
|
|
|
Three
month transition period ended March 31, 2006
|
|
Employees
|
|
|
170,131
|
|
|
|
810,700
|
|
Consultants
|
|
|
17,000
|
|
|
|
40,000
|
|
Directors
|
|
|
35,000
|
|
|
|
37,453
|
| |
|
|
222,131
|
|
|
|
888,153
|
For
the
option grants issued during the three month transition period ended March
31,
2006 and through December 31, 2006, the Company used the following weighted
average assumptions: no dividend yield; expected volatility rate of 129.67%;
risk free interest rate of 5%; and average lives of 4 years resulting in
a value
of $4.12 per option granted. In March 2007, in as much as the Company’s stock
had begun trading in the public market but trading history was limited
the
Company reviewed the assumptions utilized for the volatility rate, researching
companies within the consumer products category with comparable market
capitalizations, comparable per share prices and with a minimum of five
years of
trading history, the length of time the options are exercisable. Accordingly,
for the options granted for the three months ended March 31, 2007, the
Company
used the following weighted average assumptions: no dividend yield; expected
volatility rate of 50.3%; risk free interest rate of 5%; and average lives
of 3
years resulting in a value of $2.28 per option granted based upon a market
value
of $5.90 per share on the date of grant. As a result of recognizing compensation
expense for stock options pursuant to the provisions of SFAS No. 123(R),
the net
loss for the year ended March 31, 2007 and the three month transition period
ended March 31, 2006, was $560,859 and $3,315,840 greater, respectively,
than if
the Company had continued to account for stock options under APB No. 25.
In
addition, both basic and diluted loss per share for the year ended March
31,
2007 and for the three month transition period ended March 31, 2006 was
$0.06
and $0.37 greater, respectively, than if the Company had continued to account
for stock options under APB No. 25.
The
following table illustrates the effect on net income and EPS for the year
ended
December 31, 2005 if the Company had applied the fair value recognition
provisions of SFAS No. 123R:
| |
|
Year
ended
|
|
| |
|
December
31, 2005,
|
|
| |
|
|
|
|
Net
loss, as reported
|
|
$ |
(7,717,577 |
) |
| Net
income (loss) per share, basic and diluted, as reported |
|
$ |
(1.55 |
) |
|
Deduct: Stock-based
compensation expense, as determined under fair-value based method
for all
employee awards
|
|
|
(225,127 |
) |
|
Pro
forma net loss
|
|
$ |
(7,942,704 |
) |
|
Pro
forma net income (loss) per share, basic and diluted
|
|
$ |
(1.60 |
) |
For
purposes of calculating fair value under SFAS 123, the fair value of
each option
grant for the year ended December 31, 2005 was estimated on the date
of grant
using the Black-Scholes option-pricing model with the followingweighted
average assumptions: no dividend yield, expected volatility rate of 129.67%;
risk free interest rate of 5%; and average lives of 5 years.
A
summary
of option activity in the 2005 Plan is as follows:
| |
|
|
|
|
Exercise price
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted-
|
| |
|
Options
|
|
|
Low
|
|
|
High
|
|
|
average
|
|
Balance
unexercised at January 1, 2005
|
|
|
184,429
|
|
|
$ |
0.01
|
|
|
$ |
5.00
|
|
|
$ |
1.47
|
|
Granted
|
|
|
67,070
|
|
|
$ |
0.50
|
|
|
$ |
5.00
|
|
|
$ |
4.22
|
|
Exercised
|
|
|
-
|
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
Forfeited
|
|
|
(18,229 |
) |
|
$ |
0.05
|
|
|
$ |
1.25
|
|
|
$ |
0.62
|
|
Balance
unexercised at December 31, 2005
|
|
|
233,270
|
|
|
$ |
0.01
|
|
|
$ |
5.00
|
|
|
$ |
2.34
|
|
Granted
|
|
|
888,153
|
|
|
$ |
5.00
|
|
|
$ |
5.00
|
|
|
$ |
5.00
|
|
Exercised
|
|
|
-
|
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
Forfeited
|
|
|
(4,154 |
) |
|
$ |
5.00
|
|
|
$ |
5.00
|
|
|
$ |
5.00
|
|
Balance
unexercised at March 31, 2006
|
|
|
1,117,269
|
|
|
$ |
0.01
|
|
|
$ |
5.00
|
|
|
$ |
4.44
|
|
Granted
|
|
|
222,131
|
|
|
$ |
5.00
|
|
|
$ |
5.90
|
|
|
$ |
5.24
|
|
Exercised
|
|
|
-
|
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
Forfeited
|
|
|
(2,040 |
) |
|
$ |
5.00
|
|
|
$ |
5.00
|
|
|
$ |
5.00
|
|
Balance
unexercised at March 31, 2007
|
|
|
1,337,360
|
|
|
$ |
0.01
|
|
|
$ |
5.90
|
|
|
$ |
4.58
|
Information
regarding all stock options outstanding under the 2005 Plan as of March
31, 2007
is as follows:
| |
|
|
Options
Outstanding
|
|
Options
Exercisable
|
| |
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
| |
|
|
|
|
|
average
|
|
|
Weighted-
|
|
|
|
|
|
|
average
|
|
|
Weighted-
|
|
|
| |
|
|
|
|
|
Remaining
|
|
|
average
|
|
Aggregate
|
|
|
|
|
Remaining
|
|
|
average
|
|
Aggregate
|
|
Exercise
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
Intrinsic
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
Intrinsic
|
|
price range
|
|
|
Options
|
|
|
Life (years)
|
|
|
Price
|
|
Value
|
|
Options
|
|
|
Life (years)
|
|
|
Price
|
|
Value
|
|
Over
$0.00 to
$0.50
|
|
|
|
24,141
|
|
|
|
1.56
|
|
|
$ |
0.06
|
|
|
|
|
24,141
|
|
|
|
3.33
|
|
|
$ |
0.06
|
|
|
|
Over
$0.50 to$2.50
|
|
|
|
136,259
|
|
|
|
1.73
|
|
|
$ |
1.57
|
|
|
|
|
136,259
|
|
|
|
3.33
|
|
|
$ |
1.57
|
|
|
| |
$5.00
|
|
|
|
1,116,660
|
|
|
|
3.99
|
|
|
$ |
5.00
|
|
|
|
|
985,198
|
|
|
|
3.97
|
|
|
$ |
5.00
|
|
|
| |
$5.90
|
|
|
|
60,300
|
|
|
|
4.97
|
|
|
$ |
5.90
|
|
|
|
|
40,521
|
|
|
|
5.00
|
|
|
$ |
5.90
|
|
|
| |
|
|
|
|
1,337,360
|
|
|
|
3.76
|
|
|
$ |
4.34
|
|
$1,870,297
|
|
|
1,186,119
|
|
|
|
3.63
|
|
|
$ |
4.34
|
|
$1,736,857
|
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 (March 30, 2007) of the period
presented.
In
addition to option grants, during the year ended March 31, 2007, the three
month
transition period ended March 31, 2006 and the year ended December 31,
2005 the
Company granted and issued under the 2005 Equity Compensation Plan a total
of
98,194, 83,737 and 157,192 shares, respectively, of common stock at $5.00
to
$5.90 per share to employees, consultants and directors for services
provided. Other than grants in March 2007, which were valued at
market on the date of grant, the fair value of these shares was determined
based
upon sales of other stock transactions in the private market just prior
to the
services being provided as follows:
| |
|
Year
ended
March
31, 2007
|
|
|
Three
Months ended
March
31, 2006
|
|
|
Year
ended
December
31, 2005
|
| |
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Employees
|
|
|
28,044
|
|
|
$ |
140,220
|
|
|
|
34,000
|
|
|
$ |
170,000
|
|
|
|
30,431
|
|
|
$ |
152,155
|
|
Consultants
|
|
|
49,150
|
|
|
|
257,450
|
|
|
|
39,737
|
|
|
|
198,685
|
|
|
|
126,761
|
|
|
|
633,805
|
|
Directors
|
|
|
21,000
|
|
|
|
118,500
|
|
|
|
10,000
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
| |
|
|
98,194
|
|
|
$ |
516,170
|
|
|
|
83,737
|
|
|
$ |
418,685
|
|
|
|
157,192
|
|
|
$ |
785,960
|
Accordingly,
a total of 33,386 shares are available for future grants under the 2005
Plan. At March 31, 2007 the Company has granted options for 151,241
shares of the Company’s common stock that are unvested that will result in
$586,719 of compensation expense in future periods if fully vested.
Note
6 – Income Taxes
The
Company did not record any provision for federal and state income taxes
for the
year ended March 31, 2007, the three months ended March 31, 2006 and
for the
year ended December 31, 2005. Variations from the federal statutory
rate are as follows:
| |
|
Year
Ended
|
|
|
Three
Months Ended
|
|
|
Year
Ended
|
|
| |
|
March
31,
|
|
|
March
31,
|
|
|
December
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected
income tax benefit at the statutory rate of 34%
|
|
$ |
4,083,171
|
|
|
$ |
2,179,733
|
|
|
$ |
1,559,071
|
|
|
Less
valuation allowance
|
|
|
(4,083,171 |
) |
|
|
(2,179,733 |
) |
|
|
(1,559,071 |
) |
|
Net
tax expense
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Deferred
income tax assets result from cumulative federal and state operating
loss
carryforwards in the amounts of $10,402,418 and $7,751,561 at March 31,
2006 and
December 31, 2005, respectively. For the year ended March 31, 2007, the
Company
incurred additional federal and state operating loss carryforwards of
$8,895,243. The loss carry forwards will begin to expire in 2022. At
March 31, 2007, March 31, 2006, and December 31, 2005, the Company has
research
and development tax credit carryforwards of $362,672, $118,285 and $118,285,
respectively, which begin to expire in 2022.
Net
deferred tax assets consist of the following as of:
| |
|
March
31,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
| |
|
|
|
|
|
|
|
|
|
Tax
effect of net operating loss carryforwards
|
|
$ |
7,454,687
|
|
|
$ |
4,021,104
|
|
|
$ |
2,997,078
|
|
|
Tax
effect of employee equity compensation
|
|
|
1,374,298
|
|
|
|
1,157,638
|
|
|
|
-
|
|
|
Tax
effect of other temporary differences
|
|
|
166,194
|
|
|
|
(22,348 |
) |
|
|
(20,417 |
) |
|
Research
and development tax credit
|
|
|
362,672
|
|
|
|
118,285
|
|
|
|
118,285
|
|
|
Less
valuation allowance
|
|
|
(9,357,850 |
) |
|
|
(5,274,679 |
) |
|
|
(3,094,946 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
In
assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some or the entire deferred tax
asset
will not be realized. The Company believes that sufficient
uncertainty exists regarding the realizability of the deferred tax assets
such
that valuation allowances equal to the entire balance of the deferred
tax assets
are necessary. In accordance with Sections 382 and 383 of the
Internal Revenue Code, a change in ownership of greater than 50% of a
corporation within a three-year period will place an annual limitation
on our
ability to utilize our existing tax loss and tax credit carry
forwards. The Company did incur such a change in ownership effective
in the fourth quarter of 2004. The result of the section 382
limitation was that the NOL carryover from 2004 and previous years was
limited
to $1,042,501 per year. At this time the Company does not anticipate
a section 383 limitation as a result of this ownership change.
Note
7 – Related Party Transactions
During
the year ended December 31, 2005, the Company retained one member of
their board
as a consultant who was granted shares of common stock and fees for services
provided totaling $286,167. During the year ended December 31, 2005,
the Company paid legal fees to a director in the amount of $37,438 and
issued
shares of common stock for services provided valued at
$10,000. During the year ended March 31, 2007 and the three month
transition period ended March 31, 2006, the Company paid $44,472 and
$24,000,
respectively, to this same director for legal services. The Company also
issued
shares of common stock to its Board of Directors for services provided
valued at
$30,000 for the year ended December 31, 2005. On March 28, 2006, the
Company granted to each of its four outside directors 2,500 shares of
the
Company’s common stock at a value of $5.00 per share for a total of $12,500 for
each director, or an aggregate total of $50,000, and 10,000 fully vested
five-year options to purchase the Company’s common stock at an exercise price of
$5.00 per share for services for the fiscal year ending March 31, 2007.
In
addition, three outside directors received grants of 1,250 shares for
service on
the Audit Committee and 750 shares for service on the Governance Committee.
On
March 22, 2007, the Company granted to three of its four outside directors,
2,500 shares of the Company’s common stock at a market value of $5.90 per share
for a total of $14,750 for each director, or an aggregate total of $44,250,
and
10,000 fully vested five-year options to purchase the Company’s common stock at
an exercise price of $5.90 per share, the price per share equal to the
fair
market value of the common stock on the date of the option grant, for
services
on the board for the calendar year ending December 31, 2007. In
addition, on March 22, 2007, two outside directors received grants of 1,250
shares for service on the Audit Committee and 750 shares for service
on the
Governance Committee at an exercise price of $5.90 per share for an aggregate
total of $23,600. Also, the previous Chairman of the audit and governance
committees, received a grant on March 22, 2007 for services rendered
of 3,500
shares of the Company’s common stock at a market value of $5.90 per share for a
total of $20,650 and 5,000 fully vested five-year options to purchase
the
Company’s common stock at an exercise price of $5.90 per share, the price per
share equal to the fair market value of the common stock on the date
of the
option grant.
The
Company leased its office space during the year ended December 31, 2005
from a
landlord who is a minority shareholder. The Company paid rent to the
shareholder in the amount of $30,408 and issued shares of common stock
for rent
valued at $76,036. Through July 2005, the Company leased certain
laboratory space from an employee. Rent expense paid to the employee
totaled $7,574 for the year ended December 31, 2005.
The
Company was renting office furniture, office equipment, and computers from
its
former parent, Mentor Capital Consultants, Inc., at the rate of $2,500
per
month. For the first five months of 2005, the Company continued to rent
equipment from Mentor Capital for a total of $12,500. On May 31,
2005, the Company acquired these fixed assets for their net book value
of
$33,901.
During
the three-month transition period ended March 31, 2006, the Company paid
to a
director, $12,500 in consulting fees in connection with a corporate presentation
given in conjunction with our private placement in February 2006.
During
the year ended March 31, 2007, the Company paid consulting fees totaling
$81,238
to one of its directors who resigned on April 16, 2007, for services related
to
the development of an international channel of distribution for the Company’s
products and other consulting services.
Also,
during the year ended March 31, 2007, the Company incurred fees totaling
$640,186 for various video and web projects, including production of the
Company’s infomercial to promote its products, to MedEd Architects LLC a video
production company owned 33% by the Company’s Chief Marketing Officer. The
Company may incur additional costs in subsequent calendar quarters to MedEd
Architects LLC, for editing and production of additional infomercials featuring
the Company’s products and related video-based products. During the three
month
transition period ended March 31, 2006, we incurred $131,894 in expenses
to
MedEd Architects, LLC for video production, printing, duplication, and
web
design.
Note
8 – Commitments and Contingencies
On
July
27, 2006 the Company entered into a lease with Pawnee Properties, LLC to
consolidate its operations, other than its seed kit manufacturing operations,
into a 21,012 square foot office space at 6075 Longbow Drive, Boulder,
Colorado
80301, commencing December 1, 2006. The initial rent is $15,759 per
month, plus the Company’s proportionate share of building taxes, insurance and
operating expenses. The initial term continues until January 31, 2012,
unless
modified under specified circumstances. The agreement contains other standard
office lease provisions.
Future
cash payments under such operating lease for the upcoming five years are
as
follows:
|
Year
Ended
|
|
Rent
|
|
March
31, 2008
|
|
$ |
296,546
|
|
March
31, 2009
|
|
|
328,400
|
|
March
31, 2010
|
|
|
341,970
|
|
March
31, 2011
|
|
|
344,684
|
|
March
31, 2012
|
|
|
268,691
|
|
|
|
$ |
1,580,291
|
Rent
expense for the year ended March 31, 2007, for the three months ended March
31,
2006, and for the year ended December 31, 2005 was $348,454, $33,458 and
$106,444, respectively.
Note
9 – Stockholders’ Equity
On
January 31, 2005, the State of Nevada approved the Board of Director's
amendment
to the articles of incorporation were amended to increase the
authorized shares of the Company's common stock from 40,000,000 shares
to
75,000,000 shares. On May 31, 2005, the Company's Board of Directors
approved a one-for-five reverse stock split of all outstanding
shares. The historical share and per share amounts included in the
accompanying financial statements have been retroactively adjusted to reflect
the split.
On
September 2, 2005, the Board approved the modification of 504,098 warrants
whereby the expiration dates of the aforementioned warrants was extended
from
various dates throughout 2005, through and including December 31,
2005. The Company recorded the effects of the modification of these
terms of the warrants in accordance with variable accounting. This
modification resulted in additional expense of $1,446,200 being recorded
in the
year ending December 31, 2005. The Company accounted for this modification
in
warrant terms in accordance with variable accounting in that the extension
of
the expiration dates of the outstanding warrants results in a new measurement
of
compensation cost as if the award were newly granted. Therefore, in
applying variable accounting, the Company revalued the warrants as if they
were
granted on September 2, 2005 and recognized as compensation expense the
difference between the fair value determined on September 2, 2005 and the
fair
value of the warrants determined when originally issued in 2002 and
2003. The warrants, when originally issued, were determined to have a
fair value of $198,844. The warrants, when re-valued on September 2,
2005, were determined to have a fair value of $1,645,044, or a difference
of
$1,446,200. This modification resulted in additional expense of
$1,446,200 being recorded in the year ending December 31, 2005. The
Black-Scholes valuation model was utilized to value the warrants in accordance
with fair value as of both the original warrant issuance date and September
2,
2005.
During
the year ended December 31, 2005, 1,600 shares of common stock were sold
at
$5.00 per share to an employee per an employment agreement. In
addition, 38,000 warrants were exercised at $1.25 per share and 64,000
warrants
were exercised at $2.50 per share. As of December 31, 2005, the
Company recorded subscriptions receivable of $840,000 representing the
exercises
of 326,000 warrants at $2.50 per share and 5,000 warrants at $5.00 per
share. This amount was collected in cash in January
2006.
Also
during 2005, the Company issued a total of 104,040 shares of common stock
at a
$5.00 per share value to vendors (17,100 shares), landlords (15,208 shares),
consultants (62,705 shares) and employees (9,027 shares) for various services
provided. The fair value of these shares was determined based upon
sales of other stock transactions in the private market just prior to the
services being provided.
During
the three-month transition period ended March 31, 2006, the Company issued
2,148,000 shares of common stock valued at $5.00 per unit (each unit included
one share and one warrant to purchase a share of common stock at an exercise
price of $7.50 per share ) in a private placement (Note 2 – Merger and Private
Placement).
During
the three month transition period ended March 31, 2006, the Company issued
710,009 shares of common stock valued at $5.00 per share and five year
warrants
issuable upon conversion with an exercise price of $6.00 per share in exchange
for conversion of convertible debentures (Note 4 – Convertible
Debentures).
During
the three month transition period ended March 31, 2006, the Company issued
580,136 shares of common stock in conjunction with a merger with Wentworth
I
(Note 2 – Merger and 2006 Private Placement).
In
June
2006, a warrant holder with warrants expiring June 30, 2006 exercised warrants
to purchase 10,000 shares of the company’s common stock at $2.50 per
share.
In
July
2006, a warrant holder with warrants from the Company’s 2006 Offering exercised
warrants to purchase 5,000 shares of the Company’s common stock at $6.25 per
share.
The
Company purchased 3,000 shares of its own common stock at a price of $5.00
per
share in July 2006 that had been previously issued as compensation to a
consultant based upon an agreement to allow such consultant to convert
such
stock to cash if the consultant so elected prior to June 30, 2006.
In
December 2006 a warrant holder with warrants expiring December 31, 2006
exercised warrants to purchase 24,000 shares of the company’s common stock at
$2.50 per share.
During
the year ended March 31, 2007, the Company issued 98,194 shares of common
stock
under its 2005 Plan including 5,000 shares to the Company’s Chief Financial
Officer as additional compensation, 21,000 shares to its directors, 23,044
shares to other employees, and 49,150 shares to consultants.
During
the year ended March 31, 2007, the Company issued 8,872 shares of stock
to a
landlord and recorded $44,360 as additional rent expense. During the nine
months
ended December 31, 2005, the Company issued 11,403 shares of stock to a
landlord
and recorded $57,015 as additional rent expense.
During
the year ended March 31, 2007, the Company issued 11,354 shares of stock
to its
public relations firm and recorded $56,770 as additional marketing
expense.
During
the year ended March 31, 2007, the Company issued 6,858 shares of stock
to an
unrelated third party in settlement of a claim from its previous parent
company
and recorded $40,462 as additional general and administrative
expense.
On
March
16, 2007, the Company completed a private offering in which the Company
sold an
aggregate of 833,400 shares of common stock and warrants to purchase 833,400
shares of common stock (the "2007 Investor Warrants") in the form of units
consisting of one share of common stock and one warrant per unit (the "2007
Offering"). The units were sold at a price of $6.00 per unit. In addition,
warrants to purchase 83,340 shares of common stock were issued to the placement
agent of the 2007 Offering (the "2007 Agent Warrants," and together with
the
2007 Investor Warrants, the "2007 Warrants").
Each
2007
Investor Warrant is exercisable for one share of common stock at an exercise
price of $7.50 per share, and each 2007 Agent Warrant is exercisable for
one
share of common stock at an exercise price of $8.25 per share. Each 2007
Warrant
will be exercisable for five years from the closing of the 2007 Offering.
The
exercise price and number of shares of common stock underlying the 2007
Warrants
is subject to adjustment on certain events, including reverse stock splits,
stock dividends and recapitalizations, combinations, and mergers where
the
Company is not the surviving company. The Company will at all times reserve
and
keep available, solely for issuance and delivery upon the exercise of the
2007
Warrants, such shares of common stock underlying the 2007 Warrants, as
from time
to time shall be issuable upon the exercise of the 2007 Warrants.
The
Company has the right to require the holders of 2007 Investor Warrants
to
exercise the 2007 Investor Warrant if our common stock is quoted on the
NASDAQ
Capital Market and, for a period of 20 consecutive trading days, the closing
bid
price of the common stock has been above $10.00 per share and the daily
trading
volume has been at least 50,000 shares, in each case on each of the 20
consecutive trading days.
On
March
28, 2007, the Company completed an additional private offering in which
the
Company sold an aggregate of 333,360 shares of common stock and warrants
to
purchase 333,360 shares of common stock in the form of units consisting
of one share of common stock and one warrant per unit. The units were
sold at a
price of $6.00 per unit. In addition, warrants to purchase 33,336 shares
of
common stock were issued to the placement agent of this private offering.
The
warrants issued to the investors and the placement agent has the same
terms as
the 2007 Investor Warrants and the 2007 Agent Warrants,
respectively.
The
Company's Articles of Incorporation authorize the issuance of 20,000,000
shares
of preferred stock with $.001 par value. As of March 31,
2007, March 31, 2006 and December 31, 2005, no shares of preferred stock
have
been issued.
A
summary
of the Company’s warrant activity for the period from January 1, 2005 through
March 31, 2007 is presented below:
| |
|
|
|
|
Weighted
|
|
Aggregate
|
| |
|
Warrants
|
|
|
Average
|
|
Intrinsic
|
| |
|
Outstanding
|
|
|
Exercise
Price
|
|
Value
|
|
Outstanding,
January 1, 2005
|
|
|
1,350,858
|
|
|
$ |
8.31
|
|
|
|
Granted
|
|
|
660,000
|
|
|
$ |
5.10
|
|
|
|
Exercised
|
|
|
(433,000 |
) |
|
$ |
1.25
|
|
|
|
Expired
|
|
|
(25,000 |
) |
|
$ |
5.00
|
|
|
|
Outstanding,
December 31, 2005
|
|
|
1,552,858
|
|
|
$ |
8.64
|
|
|
|
Granted
|
|
|
2,962,800
|
|
|
$ |
6.20
|
|
|
|
Exercised
|
|
|
-
|
|
|
$ |
-
|
|
|
|
Expired
|
|
|
-
|
|
|
$ |
-
|
|
|
|
Outstanding,
March 31, 2006
|
|
|
4,515,658
|
|
|
$ |
7.04
|
|
|
|
Granted
|
|
|
1,283,436
|
|
|
$ |
7.57
|
|
|
|
Exercised
|
|
|
(39,000 |
) |
|
$ |
2.98
|
|
|
|
Expired
|
|
|
(36,000 |
) |
|
$ |
3.08
|
|
|
|
Outstanding,
March 31, 2007
|
|
|
5,724,094
|
|
|
$ |
7.21
|
|
$ 721,343
|
As
of
March 31, 2007, the Company had the following outstanding warrants to purchase
its common stock:
| |
|
|
Weighted
|
|
|
Weighted
|
|
Warrants
|
|
|
Average
|
|
|
Average
|
|
Outstanding
|
|
|
Exercise
Price
|
|
|
Remaining
Life
|
| |
32,098
|
|
|
$ |
2.50
|
|
|
|
0.90
|
| |
15,000
|
|
|
$ |
5.00
|
|
|
|
0.90
|
| |
600,000
|
|
|
$ |
5.00
|
|
|
|
3.45
|
| |
654,000
|
|
|
$ |
6.00
|
|
|
|
4.12
|
| |
2,357,800
|
|
|
$ |
6.25
|
|
|
|
3.90
|
| |
1,283,436
|
|
|
$ |
7.57
|
|
|
|
4.99
|
| |
391,280
|
|
|
$ |
10.00
|
|
|
|
2.63
|
| |
391,280
|
|
|
$ |
15.00
|
|
|
|
2.63
|
| |
5,724,094
|
|
|
$ |
7.21
|
|
|
|
3.93
|
Note
10 – Mandatorily Redeemable Common Stock
On
September 30, 2005, the Company entered into a manufacturing agreement
with
Source Plus, Inc. (“Source Plus”) and Mingkeda Industries Co. Ltd.
(“Mingkeda”). Source Plus advanced monies to Mingkeda for tooling and
molds to build the Company’s products. To reimburse Source Plus for
its advances to Mingkeda, the Company issued
62,000 shares of common stock to Source Plus in October 2005 with an estimated
market value of $5.00 per share. The Company recorded a $310,000
asset for tooling which is being depreciated over a period of three years
to
reflect the estimated useful life of the tooling. If an offering or
other transaction to enable Source Plus the ability to register their issued
shares was not completed on or before June 1, 2006, Source Plus could have
required the Company to repay $310,000 in exchange for its return of the
shares
of common stock. In accordance with SFAS No. 150, the Company had
recorded the shares issued as a liability until such time as the registration
contingency could be removed. The Company completed registration of the
shares
issued in its 2006 Private Placement on December 22, 2006 and the forgoing
shares were reclassified as equity.
Note
11 – Subsequent Events
On
June
14, 2007, the Company received gross proceeds of $312,500 from the exercise
of
50,000 stock purchase warrants having an exercise price of $6.25 per
share.
|
3.1
|
Articles
of Incorporation of the Registrant (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 November 3,
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 January 31,
2005
(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 July 27, 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 February 24,
2006
(incorporated by reference to Exhibit 3.5 of our Current Report
on Form
8-K/A-2, filed November 16, 2006)
|
|
3.6
|
Amended
Bylaws of the Registrant (incorporated by reference to Exhibit
3.6 of our
Current Report on Form 8-K/A-2, filed November 16,
2006)
|
|
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 March 7,
2006)
|
|
4.2
|
Form
of 2005 Warrant (incorporated by reference to Exhibit 4.2 of
our Current
Report on Form 8-K, filed March 7,
2006)
|
|
4.3
|
Form
of 2006 Warrant (incorporated by reference to Exhibit 4.3 of
our Current
Report on Form 8-K, filed March 7,
2006)
|
|
4.4
|
Form
of 10% Convertible Note (incorporated by reference to Exhibit
4.4 of our
Current Report on Form 8-K, filed March 7,
2006)
|
|
4.5
|
Form
of $10.00 Redeemable Warrant (incorporated by reference to Exhibit
4.5 of
our Current Report on Form 8-K, filed March 7,
2006)
|
|
4.6
|
Form
of $15.00 Redeemable Warrant (incorporated by reference to Exhibit
4.6 of
our Current Report on Form 8-K, filed March 7,
2006)
|
|
4.7
|
Form
of Conversion Warrant (incorporated by reference to Exhibit 4.7
of our
Current Report on Form 8-K, filed March 7,
2006)
|
|
4.8
|
Form
of 2005 Placement Agent Warrant (incorporated by reference to
Exhibit 4.8
of our Current Report on Form 8-K, filed March 7,
2006)
|
|
4.9
|
Form
of 2006 Placement Agent Warrant (incorporated by reference to
Exhibit 4.9
of our Current Report on Form 8-K, filed March 7,
2006)
|
|
4.10
|
Form
of $2.50 Warrant (incorporated by reference to Exhibit 4.10 of
our Current
Report on Form 8-K, filed March 7,
2006)
|
|
4.11
|
Form
of $5.00 Warrant (incorporated by reference to Exhibit 4.11 of
our Current
Report on Form 8-K, filed March 7,
2006)
|
|
4.12
|
Form
of Convertible Note Modification Agreement (incorporated by reference
to
Exhibit 10.27 of our Current Report on Form 8-K/A-2, filed November
16,
200)
|
|
4.13
|
Form
of 2007 Investor Warrant (incorporated by reference to Exhibit
4.1 of our
Current Report on Form 8-K, filed March 16,
2007)
|
|
4.14
|
Form
of 2007 Agent Warrant (incorporated by reference to Exhibit 4.2
of our
Current Report on Form 8-K, filed March 16,
2007)
|
|
4.15
|
Form
of 2007 Second Tranche Investor
Warrant*
|
|
4.16
|
Form
of 2007 Second Tranche Agent
Warrant*
|
|
10.1
|
Lease
Agreement between AeroGrow and United Professional Management,
Inc. dated
October 1, 2003, as amended by a Lease Amendment dated October 7,
2003, and a Lease Amendment dated April 71 2005 (incorporated
by reference
to Exhibit 10.1 of our Current Report on Form 8-K, filed March
7,
2006)
|
|
10.2
|
Amended
2003 Stock Option Plan (incorporated by reference to Exhibit
10.2 of our
Current Report on Form 8-K, filed March 7,
2006)
|
|
10.3
|
Form
of Stock Option Agreement relating to the 2003 Stock Option Plan
(incorporated by reference to Exhibit 10.3 of our Current Report
on Form
8-K, filed March 7, 2006)
|
|
10.4
|
2005
Equity Compensation Plan (incorporated by reference to Exhibit
10.4 of our
Current Report on Form 8-K, filed March 7,
2006)
|
|
10.5
|
Form
of Stock Option Agreement relating to the 2005 Equity Compensation
Plan
(incorporated by reference to Exhibit 10.5 of our Current Report
on Form
8-K, filed March 7, 2006)
|
|
10.6
|
Form
of Restricted Stock Grant Agreement relating to the 2005 Equity
Compensation Plan (incorporated by reference to Exhibit 10.6
of our
Current Report on Form 8-K, filed March 7,
2006)
|
|
10.7
|
Form
of Lock-up Agreement for certain investors (incorporated by reference
to
Exhibit 10.7 of our Current Report on Form 8-K, filed March 7,
2006)
|
|
10.8
|
Placement
Agent Agreement between Keating Securities, LLC and AeroGrow
dated May 27,
2005 with respect to the Convertible Note offering (incorporated
by
reference to Exhibit 10.8 of our Current Report on Form 8-K,
filed March
7, 2006)
|
|
10.9
|
Placement
Agent Agreement between Keating Securities, LLC and AeroGrow
dated
February 6, 2006 with respect to the 2006 Offering (incorporated
by
reference to Exhibit 10.9 of our Current Report on Form 8-K,
filed March
7, 2006)
|
|
10.10
|
Business
Lease dated December 8, 2004, between AeroGrow and Investors
Independent
Trust Company (incorporated by reference to Exhibit 10.10 of
our Current
Report on Form 8-K, filed March 7,
2006)
|
|
10.11
|
Consulting
Arrangement between Randy Seffren and AeroGrow dated October
13, 2004
(incorporated by reference to Exhibit 10.11 of our Current Report
on Form
8-K, filed March 7, 2006)
|
|
10.12
|
Contract
between AeroGrow and Innotrac Corporation dated October 7, 2005
(incorporated by reference to Exhibit 10.12 of our Current Report
on Form
8-K, filed March 7, 2006)
|
|
10.13
|
Letter
of Agreement dated September 30, 2005, between AeroGrow and Kenneth
Dubach
(incorporated by reference to Exhibit 10.13 of our Current Report
on Form
8-K, filed March 7, 2006)
|
|
10.14
|
Consulting
Agreement between AeroGrow and Jerry Gutterman dated May 16,
2005
(incorporated by reference to Exhibit 10.14 of our Current Report
on Form
8-K, filed March 7, 2006)
|
|
10.15
|
Manufacturing
Agreement among Mingkeda Industries Co., LTD., Source Plus, Inc.
and
AeroGrow dated September 30, 2005 (incorporated by reference
to Exhibit
10.15 of our Current Report on Form 8-K, filed March 7,
2006)
|
|
10.16
|
Form
of Subscription Agreement relating to the issuance of our convertible
notes and redeemable 2005 warrants (incorporated by reference
to Exhibit
10.16 of our Current Report on Form 8-K, filed March 7,
2006)
|
|
10.17
|
Form
of Assignment of Application Agreement between AeroGrow and our
executives, employees and consultants (incorporated by reference
to
Exhibit 10.17 of our Current Report on Form 8-K, filed March
7,
2006)
|
|
10.18
|
Form
of Non-disclosure Agreement between AeroGrow and our executives,
employees
and consultants (incorporated by reference to Exhibit 10.18 of
our Current
Report on Form 8-K, filed March 7,
2006)
|
|
10.19
|
Form
of Statement of Confidentiality, Non-Disclosure and Non-Compete
Agreement
between AeroGrow and our employees, consultants and other third-party
contractors (incorporated by reference to Exhibit 10.19 of our
Current
Report on Form 8-K, filed March 7,
2006)
|
|
10.20
|
Letter
agreement dated July 15, 2005 between AeroGrow and Patrice Tanaka
&
Company (incorporated by reference to Exhibit 10.20 of our Current
Report
on Form 8-K, filed March 7, 2006)
|
|
10.21
|
Production
Agreement dated October 3, 2005, between AeroGrow and Respond2,
Inc.
(incorporated by reference to Exhibit 10.21 of our Current Report
on Form
8-K, filed March 7, 2006)
|
|
10.22
|
Form
of Subscription Agreement relating to offering consummated February
24,
2006 for the sale of common stock and warrants* (incorporated
by reference
to Exhibit 10.22 of our Current Report on Form 8-K, filed March
7,
2006)
|
|
10.23
|
Employment
Agreement between AeroGrow and W. Michael Bissonnette (incorporated
by
reference to Exhibit 10.23 of our Current Report on Form 8-K,
filed March
7, 2006)
|
|
10.24
|
Employment
Agreement between AeroGrow and Mitchell Rubin (incorporated by
reference
to Exhibit 10.24 of our Current Report on Form 8-K, filed March
7,
2006)
|
|
10.25
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Employment
Agreement between AeroGrow and Jeff Brainard (incorporated by
reference to
Exhibit 10.25 of our Current Report on Form 8-K/A, filed May
16,
2006)
|
|
10.26
|
Employment
Agreement between AeroGrow and Randal Seffren, dated July 24,
2006
(incorporated by reference to Exhibit 10.26 of our Current Report
on Form
8-K, filed July 27,
2006).
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|
10.27
|
Waiver
and Amendment No. 1 to Agreement and Plan of Merger (incorporated
by
reference to Exhibit 10.26 our Current Report on Form 8-K/A-2,
filed
November 16, 2006)
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10.28
|
Lease
Agreement with Pawnee Properties, LLC (incorporated by reference
to
Exhibit 10.27 of our Current Report on Form 8-K, filed August
2,
2006)
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|
10.29
|
Registration
Rights Agreement dated as of March 12, 2007, by and between AeroGrow
International, Inc. and the other parties thereto (incorporated
by
reference to Exhibit 10.1 of our Current Report on Form 8-K,
filed March
16, 2007)
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|
10.30
|
Product
Supply Agreement between AeroGrow and Global Information Services,
Inc.,
dated May 30, 2007 (incorporated by reference to Exhibit 10.1
of our
Current Report on Form 8-K, filed June 4,
2007)
|
|
10.31
|
Registration
Rights Agreement dated as of March 30, 2007, by and between AeroGrow
International, Inc. and the other parties
thereto*
|
|
23.1
|
Consent
of Independent Registered Public Accounting
Firm*
|
|
31.1
|
Chief
Executive Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|
31.2
|
Chief
Financial Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|
32.1
|
Chief
Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
|
32.2
|
Chief
Financial Officer Certification pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
Exhibit
4.15
NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT
FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B)
AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A
UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.
THIS
WARRANT MAY NOT, IN ANY EVENT, BE TRANSFERRED TO ANY PERSON OR ENTITY
THAT IS
NOT AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(c) OF REGULATION
D OF
THE SECURITIES ACT OF 1933, AS AMENDED.
Void
after 5:00 p.m., Mountain time, on March ___, 2012
COMMON
STOCK PURCHASE WARRANT
OF
AEROGROW
INTERNATIONAL, INC.
AEROGROW
INTERNATIONAL, INC., a Nevada corporation (the “Company”), hereby certifies
that, for value received, ______________ (the “Warrant Holder” and collectively
with all other holders of Warrants issued pursuant to the Securities
Purchase
Agreement defined below, the “Warrant Holders”) is the owner of this Warrant to
purchase, at any time during the period commencing on the Commencement
Date (as
defined in Section 2.1) and ending on the Expiration Date (as
defined Section 2.4), up to __________ fully paid and non-assessable
shares of common stock, par value $0.001 per share, of the Company
(“Common
Stock”) at a per share purchase price equal to the Exercise Price (as defined
in
Section 1.2) in lawful money of the United States of
America. This Warrant is part of the duly authorized issuance of up
to ____________ Units, each Unit consisting of one share of Common
Stock and a
warrant to purchase one share of Common Stock, issued or to be issued
by the
Company as part of a certain private offering (“Offering”) pursuant a Securities
Purchase Agreement dated March 12, 2007 between the Buyers (as defined
therein)
and the Company (the “Securities Purchase Agreement”). The warrants
issued pursuant to the Securities Purchase Agreement are referred to
herein as
the “Warrants."
1. WARRANT;
EXERCISE
PRICE.
1.1 Each
share of Common Stock to which the
Warrant Holder is entitled to purchase pursuant to this Warrant is
referred to
herein individually as a “Warrant Share” and severally, the “Warrant
Shares.”
1.2 The
purchase price payable upon
exercise (“Exercise Price”) shall be $7.50 per share, subject to adjustment as
provided in Section
8.
2. EXERCISE
OF WARRANT; EXPIRATION
DATE.
2.1 Exercise. This
Warrant is
exercisable during the period commencing on March ___, 2007 (“Commencement
Date”) and ending on the Expiration Date as provided in Section
2.4 below,
in whole, or from time to time,
in part, at the option of the Warrant Holder, upon surrender of this
Warrant to
the Company, or such other person as the Company may designate, together
with a
duly completed and executed form of exercise attached hereto (indicating
exercise by payment of the Exercise Price) and payment of an amount
equal to the
then applicable Exercise Price multiplied by the number of Warrant
Shares then
being purchased upon such exercise. The payment of the Exercise Price
shall be in cash or by certified check or official bank check, payable
to the
order of the Company. This warrant is exercisable in whole share
increments only.
2.2 Effectiveness. Each
exercise of a Warrant
shall be deemed to have been effected immediately prior to the close
of business
on the day on which such Warrant shall have been surrendered to the
Company as
provided in Section
2.1. At
such time, the person or persons in whose name or names any certificates
for
Warrant Shares shall be issuable upon such exercise as provided in
Section
2.3 below shall
be deemed to have become
the holder or holders of record of the Warrant Shares represented by
such
certificates.
2.3 Issuance. As
soon as practicable
after the exercise of this Warrant, in full or in part, the Company,
at its
expense, will use its best efforts to cause to be issued in the name
of, and
delivered to, the Warrant Holder, or, subject to the terms and conditions
hereof, to such other individual or entity as such Warrant Holder may
direct:
(a) a
certificate or certificates for the
number of full Warrant Shares to which such Warrant Holder shall be
entitled
upon such exercise; and
(b) in
case such exercise is in part only,
a new Warrant (dated the date hereof) of like tenor, stating on the
face or
faces thereof the number of shares currently stated on the face of
this Warrant
minus the number of such shares purchased by the Warrant Holder upon
such
exercise as provided in Section
2.1 (prior
to any adjustments made thereto
pursuant to the provisions of this Warrant).
The
Company shall not be required upon the exercise of this Warrant to
issue any
fractional shares, as this Warrant shall be exercisable in whole share
increments only.
2.4 Expiration
Date. The term “Expiration Date” shall mean 5:00 p.m., Mountain
time, on March ___, 2012, or if such date shall in the State of Colorado
be a
holiday or a day on which banks are authorized to close, then 5:00
p.m.,
Mountain time the next following day which in the State of Colorado
is not a
holiday or a day on which banks are authorized to close.
2.5 Mandatory
Exercise of Warrant. The Company shall have the right to require
the Warrant Holder to exercise this Warrant in accordance with the
following
terms:
(a) In
the event: (i)
the Common Stock is quoted on the NASDAQ Capital Market and (ii) for
a period of
20 consecutive trading days, the closing bid price of the Common Stock
has been
above $10.00 per share and the daily trading volume of the Common Stock
as
reported by NASDAQ has been at least 50,000 shares, in each case on
each of the
20 consecutive trading days, the Company may, in its sole discretion,
require
the Warrant Holder to exercise the Warrant upon written notice delivered
to the
Warrant Holder (such requirement, a “Mandatory Exercise”).
(b) If
the Company
requires a Mandatory Exercise, the Company shall provide notice to
the Warrant
Holder as provided in Section 18 of this Warrant (a “Mandatory Exercise
Notice”). Upon receipt of the Mandatory Exercise Notice (the “Date of
Receipt”), the holder shall, within five business days of the Date of Receipt,
exercise this warrant for such number of shares (up to the total number
of
shares for which this Warrant is exercisable) as the Warrant Holder
shall desire
upon surrender of this Warrant to the Company, or such other person
as the
Company may designate, together with a duly completed and executed
form of
exercise attached hereto (indicating exercise by payment of the Exercise
Price)
and payment of an amount equal to the then applicable Exercise Price
multiplied
by the number of Warrant Shares then being purchased upon such
exercise. The payment of the Exercise Price shall be in cash or by
certified check or official bank check, payable to the order of the
Company.
(c) If
a Warrant Holder
shall fail to exercise this Warrant within thirty calendar days of
the Date of
Receipt, then all rights under this Warrant shall be automatically
extinguished
and of no further force or effect.
3. REGISTRATION
AND TRANSFER ON COMPANY
BOOKS.
3.1 The
Company (or an agent of the
Company) will maintain a register containing the names and addresses
of the
Warrant Holders. Any Warrant Holder may change its, his or her
address as shown on the warrant register by written notice to the Company
requesting such change.
3.2 The
Company shall register upon its
books any transfer of a Warrant upon surrender of same as provided
in
Section
5.
4. RESERVATION
OF
SHARES. The Company
will at all times reserve and keep available, solely for issuance and
delivery
upon the exercise of this Warrant, such Warrant Shares and other stock,
securities and property, as from time to time shall be issuable upon
the
exercise of this Warrant. The Company covenants that all shares of
Warrant Shares so issuable when issued will be duly and validly issued
and fully
paid and non-assessable.
5. EXCHANGE,
LOSS OR MUTILATION OF
WARRANT. This Warrant
is exchangeable, without expense, at the option of the Warrant Holder,
upon
presentation and surrender hereof to the Company for other warrants
of different
denominations entitling the holder thereof to purchase in the aggregate
the same
number of shares of Common Stock purchasable hereunder on the same
terms and
conditions as provided herein. Subject to the provisions of
Section
6, if applicable,
this
Warrant may be divided or combined with other warrants which carry
the same
rights upon presentation of such warrants at the Company’s office together with
a written notice specifying the names and denominations in which new
warrants
are to be issued and signed by the Warrant Holder hereof. The term
“Warrant” as used herein includes any warrants into which this Warrant may be
divided or exchanged. Upon receipt by the Company of reasonable
evidence of the ownership and the loss, theft, destruction or mutilation
of this
Warrant and, in the case of loss, theft or destruction, receipt of
indemnity
reasonably satisfactory to the Company, or, in the case of mutilation,
upon
surrender and cancellation of the mutilated Warrant, the Company shall
execute
and deliver in lieu thereof a new Warrant of like tenor and date representing
an
equal number of shares of Common Stock.
6. LIMITATION
ON EXERCISE AND
SALES.
6.1 Each
Warrant Holder acknowledges that
the Warrants and the Warrant Shares have not been registered under
the
Securities Act of 1933, as amended (“the Securities Act”) and the rules and
regulations thereunder, or any successor legislation, and agrees not
to sell,
pledge, distribute, offer for sale, transfer or otherwise dispose of
any
Warrant, or any Warrant Shares issued upon its exercise, in except
in compliance
with the requirements of Section
6.2.
6.2 This
Warrant and the rights granted to
the Warrant Holder are transferable only to Accredited Investors (as
defined in
Section 502 of the Securities Act) in whole or in part, upon surrender
of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or to the agent of the Company; provided,
however,
that if
at the time
of the surrender of this Warrant in connection with any exercise, transfer
or
exchange of this Warrant, this Warrant (or, in the case of any exercise,
the
Warrant Shares issuable hereunder), shall not be registered for resale
under the
Securities Act or under applicable state securities or blue sky laws,
then the
Company may require, as a condition of allowing such exercise, transfer
or
exchange, (i) a written opinion of counsel, which opinion and counsel
are
acceptable to the Company, to the effect that such exercise, transfer
or
exchange may be made without registration under the Securities Act
or under
applicable state securities or blue sky laws, (ii) that any transferee
of the
Warrant execute and deliver to the Company a document containing investment
representations and warranties substantially similar to those set forth
in the
Securities Purchase Agreement pursuant to which the initial Warrant
Holder
acquired this Warrant, and (iii) prior to exercise of the Warrant,
the Warrant
Holder shall have executed the form of exercise annexed
hereto.
6.3 Certificates
delivered to the Warrant
Holder upon exercise hereof shall be imprinted with a legend in substantially
the following form if such Warrant Shares are not registered at the
time of
exercise:
|
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE
FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT
OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
|
| |
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THIS WARRANT
MAY NOT, IN ANY EVENT, BE TRANSFERRED TO ANY PERSON OR
ENTITY THAT IS NOT
AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(c) OF
REGULATION D OF THE SECURITIES ACT OF 1933, AS
AMENDED.
|
7. REGISTRATION
RIGHTS OF WARRANT
HOLDER. The initial
Warrant Holder (and certain permitted assignees thereof) is entitled
to the
benefit of registration rights in respect of Warrant Shares in accordance
with
and subject to the terms and conditions of the Registration Rights
Agreement
executed and delivered by the initial Warrant Holder and the
Company.
8. ADJUSTMENT
OF PURCHASE PRICE AND
NUMBER OF SHARES DELIVERABLE. The Exercise
Price and the number of
Warrant Shares purchasable pursuant to each Warrant shall be subject
to
adjustment from time to time as hereinafter set forth in this Section
8:
(a) If
the Company shall (i) issue any
shares of its Common Stock as a stock dividend or (ii) subdivide the
number of
outstanding shares of its Common Stock into a greater number of shares,
the
Exercise Price shall be proportionately reduced and the number of Warrant
Shares
at that time purchasable pursuant to this Warrant shall be proportionately
increased. If the Company shall reduce the number of outstanding
shares of Common Stock by combining such shares into a smaller number
of shares,
the Exercise Price per Warrant Share shall be proportionately increased
and the
number of Warrant Shares at that time purchasable pursuant to this
Warrant shall
be proportionately decreased. If the Company shall, at any time
during the life of this Warrant, declare a dividend payable in cash
on its
Common Stock and shall at substantially the same time offer to its
stockholders
a right to purchase new Common Stock from the proceeds of such dividend
or for
an amount substantially equal to the dividend, for purposes of this
Warrant, all
Common Stock so issued shall be deemed to have been issued as a stock
dividend. Any dividend paid or distributed upon the Common Stock in
stock of any other class of securities convertible into shares of Common
Stock
shall be treated as a dividend paid in Common Stock to the extent that
shares of
Common Stock are issuable upon conversion thereof.
(b) If
the Company shall be recapitalized
by reclassifying its outstanding Common Stock, (other than a change
in par value
or a subdivision or combination as provided in Section
8(a)), or the
Company or a successor
corporation shall consolidate or merge with or convey all or substantially
all
of its or of any successor corporation’s property and assets to any other
corporation or corporations (any such other corporations being included
within
the meaning of the term “successor corporation” hereinbefore used), then, as a
condition of such recapitalization, consolidation, merger or conveyance,
lawful
and adequate provision shall be made whereby the Warrant Holder shall
thereafter
have the right to receive upon the exercise hereof the kind and amount
of shares
of stock or other securities or property which such Warrant Holder
would have
been entitled to receive if, immediately prior to any such reorganization
or
reclassification, such Warrant Holder had held the number of shares
of Common
Stock which were then purchasable upon the exercise of this
Warrant. In any such case, appropriate adjustment shall be made in
the application of the provisions set forth herein with respect to
the rights
and interest thereafter of the Warrant Holder such that the provisions
set forth
in this Section
8 (including
provisions with respect to adjustment of the Exercise Price and number
of shares
purchasable upon the exercise of this Warrant) shall thereafter be
applicable,
as nearly as may be in relation to any shares of stock or other securities
or
property thereafter deliverable upon the exercise of this
Warrant.
(c) If
the Company shall sell all or
substantially all of its property or dissolve, liquidate, or wind up
its
affairs, lawful provision shall be made as part of the terms of any
such sale,
dissolution, liquidation or winding up, so that the holder of this
Warrant may
thereafter receive upon exercise hereof in lieu of each Warrant Share
that it
would have been entitled to receive, the same kind and amount of any
securities
or assets as may be issuable, distributable or payable upon any such
sale,
dissolution, liquidation or winding up with respect to each share of
Common
Stock of the Company, provided,
however, that
in any case of any such sale or
of dissolution, liquidation or winding up, the right to exercise this
Warrant
shall terminate on a date fixed by the Company; such date so fixed
to be not
earlier than 5:00 p.m., Mountain time, on the 45th day next succeeding
the date
on which notice of such termination of the right to exercise this Warrant
has
been given by mail to the registered holder of this Warrant at its
address as it
appears on the books of the Company.
(d) No
adjustment in the per share Exercise
Price shall be required unless such adjustment would require an increase
or
decrease in the Exercise Price by at least $0.01; provided,
however, that
any adjustments that by reason
of this subsection are not required to be made shall be carried forward
and
taken into account in any subsequent adjustment. All calculations under
this
Section
8 shall be
made to the
nearest cent or to the nearest 1/100th
of a share, as the case may
be.
(e) The
Company will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer
of
assets, consolidation, merger, dissolution, issue or sale of securities
or any
other voluntary action, avoid or seek to avoid the observance or performance
of
any of the terms to be observed or performed hereunder by the Company
but will
at all times in good faith assist in the carrying out of all the provisions
of
this Section
8 and in
the taking of
all such actions as may be necessary or appropriate in order to protect
against
impairment of the rights of the Warrant Holder to adjustments in the
Exercise
Price.
(f) Upon
the happening of any event
requiring an adjustment of the Exercise Price hereunder, the Company
shall give
written notice thereof to the Warrant Holder stating the adjusted Exercise
Price
and the adjusted number of Warrant Shares resulting from such event
and setting
forth in reasonable detail the method of calculation and the facts
upon which
such calculation is based.
9. VOLUNTARY
ADJUSTMENT BY THE
COMPANY. The Company
may, at its option, at any time during the term of this Warrant, reduce
the then
current Exercise Price to any amount deemed appropriate by the Board
of
Directors of the Company and/or extend the date of the expiration of
this
Warrant.
10. RIGHTS
OF THE HOLDER. The Warrant
Holder shall
not, by virtue hereof, be entitled to any rights of a stockholder in
the
Company, either at law or equity, and the rights of the Warrant Holder
are
limited to those expressed in this Warrant and are not enforceable
against the
Company except to the extent set forth herein.
11. NOTICES
OF RECORD
DATE. In
case: (a) the Company shall take a record of the holders of its Common
Stock (or
other stock or securities at the time deliverable upon the exercise
of this
Warrant) for the purpose of entitling or enabling them to receive any
dividend
or other distribution, or to receive any right to subscribe for or
purchase any
shares of any class or any other securities, or to receive any other
right, or
(b) of any capital reorganization of the Company, any reclassification
of the
capital stock of the Company, any consolidation or merger of the Company
with or
into another corporation (other than a consolidation or merger in which
the
Company is the surviving entity), or any transfer of all or substantially
all of
the assets of the Company, or (c) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Company, then, and in each such case,
the
Company will mail or cause to be mailed to the Warrant Holder a notice
specifying, as the case may be: (i) the date on which a record is to
be taken
for the purpose of such dividend, distribution or right, and stating
the amount
and character of such dividend, distribution or right, or (ii) the
effective
date on which such reorganization, reclassification, consolidation,
merger,
transfer, dissolution, liquidation or winding-up is to take place,
and the time,
if any is to be fixed, as of which the holders of record of Common
Stock (or
such other stock or securities at the time deliverable upon the exercise
of this
Warrant) shall be entitled to exchange their shares of Common Stock
(or such
other stock or securities) for securities or other property deliverable
upon
such reorganization, reclassification, consolidation, merger, transfer,
dissolution, liquidation or winding-up. Such notice shall be mailed
at least 20 days prior to the record date or effective date for the
event
specified in such notice, provided that the failure to mail such notice
shall
not affect the legality or validity of any such action.
12. SUCCESSORS. The
rights and obligations
of the parties to this Warrant will inure to the benefit of and be
binding upon
the parties hereto and their respective permitted heirs, successors,
assigns,
pledgees, transferees and purchasers.
13. CHANGE
OR WAIVER. Any term
of this Warrant
may be changed or waived only by an instrument in writing signed by
the party
against whom enforcement of the change or waiver is sought.
14. HEADINGS. The
headings in this
Warrant are for purposes of reference only and shall not limit or otherwise
affect the meaning of any provision of this Warrant.
15. GOVERNING
LAW. This
Warrant shall be governed by and
construed in accordance with the laws of the State of Colorado as such
laws are
applied to contracts made and to be fully performed entirely within
that state
between residents of that state except to the
extent the laws of the
State of Nevada mandatorily apply because the Company is incorporated
in the
State of Nevada.
16. JURISDICTION
AND
VENUE. The
Company and the Warrant Holder (i) agree that any legal suit, action
or
proceeding arising out of or relating to this Warrant shall be instituted
exclusively in the federal courts located in Denver, Colorado, U.S.A.,
(ii)
waive any objection to the venue of any such suit, action or proceeding
and the
right to assert that such forum is not a convenient forum, and (iii)
irrevocably
consent to the jurisdiction of the federal courts located in Denver,
Colorado,
U.S.A. in any such suit, action or proceeding, and the Company further
agrees to
accept and acknowledge service or any and all process that may be served
in any
such suit, action or proceeding in the federal courts located in Denver,
Colorado, U.S.A. in person or by certified mail addressed as provided
in
Section 18.
17. AMENDMENT
AND WAIVER. Any amendment
or waiver of
any of the terms or conditions of the Warrants by the Company must
be in writing
and must be duly executed by the Company or on its behalf. Any of the
terms or conditions of the Warrants may be amended or waived by the
Warrant
Holders only upon the written consent of Warrant Holders representing
51% of the
Warrants then outstanding. Any such amendment or waiver shall be
binding on all Warrant Holders whether they consented or not or whether
their
consent was solicited or not. The failure of a party to exercise any
of its rights hereunder or to insist upon strict adherence to any term
or
condition hereof on any one occasion shall not be construed as a waiver
or
deprive that party of the right thereafter to insist upon strict adherence
to
the terms and conditions of this Warrant at a later date. Further, no
waiver of any of the terms and conditions of this Warrant shall be
deemed to or
shall constitute a waiver of any other term of condition hereof (whether
or not
similar).
18. MAILING
OF NOTICES,
ETC. All notices
and
other communications under this Warrant (except payment) shall be in
writing and
shall be sufficiently given if delivered to the addressees in person,
by Federal
Express or similar overnight courier service, or if mailed, postage
prepaid, by
certified mail, return receipt requested, as follows:
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Registered
Holder
|
:
|
To
his or her last known address as indicated on the Company’s books and
records.
|
| |
The
Company
|
:
|
To
the Company’s Chief Executive Officer at the address of the Company’s
principal office as set forth in the last filing by the Company
with the
Securities and Exchange Commission
|
or
to
such other address as any of them, by notice to the others, may designate
from
time to time. Notice shall be deemed given (a) when personally
delivered, (b) on the scheduled delivery date if sent by Federal Express
or
other overnight courier service or (c) the fifth day after sent by
certified
mail.
IN
WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly
authorized officer as of the ____ day of March, 2007.
AEROGROW
INTERNATIONAL, INC.
By: _______________________________________
Michael Bissonnette, Chief Executive Officer
Notice
of Exercise
To
be
Executed by the Warrant Holder
in
Order
to Exercise Warrant
The
undersigned Warrant Holder hereby irrevocably elects to exercise the
attached
Warrant for ______ shares of Common Stock represented by this Warrant
by payment
of the Exercise Price in cash pursuant to Section 2.1(a) of the Warrant
for the
shares of Common Stock issuable upon the exercise of such Warrant,
and requests
that certificates for such shares of Common Stock shall be issued in
the name
of:
PLEASE
INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
(Please
print or type name and address)
and
be
delivered to
(Please
print or type name and address)
and
if
such number of shares of Common stock shall not be all the shares of
Common
Stock into which this Warrant may be exercised, that a new Warrant
for the
balance of such shares of Common Stock be registered in the name of,
and
delivered to, the registered Warrant Holder at the address stated
above.
The
undersigned hereby represents and warrants to the Company that it is
an
“Accredited Investor” within the meaning of Rule 501(c) of Regulation D of the
Securities Act of 1933, as amended (the “Securities Act”), and is acquiring
these securities for its own account and not with a view to, or for
sale in
connection with, any distribution thereof, nor with any present intention
of
distributing or selling the same provided, however, the undersigned
may sell
such securities in accordance with federal and state securities
laws. The undersigned further represents that it does not have any
contract, agreement, understanding or arrangement with any person to
sell,
transfer or grant the shares of Common Stock issuable under this Warrant.
The
undersigned understands that the shares it will be receiving are “restricted
securities” under federal securities laws inasmuch as they are being acquired
from AEROGROW INTERNATIONAL, INC., in transactions not including any
public
offering and that under such laws, such shares may only be sold pursuant
to an
effective and current registration statement under the Securities Act
or an
exemption from the registration requirements of the Securities Act
and any other
applicable restrictions including the requirements of state securities
and “blue
sky” laws, in which event a legend or legends will be placed upon the
certificate(s) representing the Common Stock issuable under this Warrant
denoting such restrictions. The undersigned understands and acknowledges
that
the Company will rely on the accuracy of these representations and
warranties in
issuing the securities underlying the Warrant.
|
Dated:
_______________
|
__________________________________________
(Signature
of Registered Holder)
|
ASSIGNMENT
FORM
To
be
executed by the Warrant Holder
in
order
to Assign Warrants
FOR
VALUE
RECEIVED,____________________________________ hereby sell, assigns
and transfer
unto
PLEASE
INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
(Please
print or type name and address)
______________________
of the shares of Common Stock into which this Warrant is exercisable,
and hereby
irrevocably constitutes and appoints ________________________ Attorney
to
transfer this Warrant on the books of the Company, with full power
of
substitution in the premises.
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Dated:
_______________
|
__________________________________________
(Signature
of Registered Holder)
|
CERTIFICATION
OF STATUS OF TRANSFEREE
TO
BE EXECUTED BY THE TRANSFEREE OF THIS WARRANT
The
undersigned transferee hereby certifies to the registered holder of
this Warrant
and to AEROGROW INTERNATIONAL, INC. that the transferee is an “Accredited
Investor” within the meaning of Rule 501 of Regulation D of the Securities Act
of 1933, as amended.
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Dated:
_______________
|
__________________________________________
(Signature
of Transferee)
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Exhibit
4.16
NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT
FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN
OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A
UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.
THIS
WARRANT MAY NOT, IN ANY EVENT, BE TRANSFERRED TO ANY PERSON OR ENTITY
THAT IS
NOT AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(c) OF REGULATION
D OF
THE SECURITIES ACT OF 1933, AS AMENDED.
Void
after 5:00 p.m., Mountain time on March __, 2012
COMMON
STOCK PURCHASE WARRANT
OF
AEROGROW
INTERNATIONAL, INC.
AEROGROW
INTERNATIONAL, INC., a Nevada corporation (the “Company”), hereby certifies
that, for value received, _________ (the “Warrant Holder” and collectively with
all other holders of Warrants issued pursuant to the Securities Purchase
Agreement defined below, the “Warrant Holders”) is the owner of this Warrant to
purchase, at any time during the period commencing on the Commencement
Date (as
defined in Section 2.1) and ending on the Expiration Date (as
defined Section 2.5), up to ________ fully paid and non-assessable
shares of common stock, par value $0.001 per share, of the Company (“Common
Stock”) at a per share purchase price equal to the Exercise Price (as defined
in
Section 1.2) in lawful money of the United States of
America. This Warrant is part of the duly authorized issuance of up
to 833,400 Units, each Unit consisting of one share of Common Stock and
a
warrant to purchase one share of Common Stock, issued or to be issued
by the
Company as part of a certain private offering (“Offering”) pursuant a Securities
Purchase Agreement dated March 12, 2007 between the Buyers (as defined
therein)
and the Company (the “Securities Purchase Agreement”). The warrants
issued pursuant to the Securities Purchase Agreement are referred to
herein as
the “Warrants”.
1. WARRANT;
EXERCISE
PRICE.
1.1 Each
share of Common Stock to which the
Warrant Holder is entitled to purchase pursuant to this Warrant is referred
to
herein individually as a “Warrant Share” and severally, the “Warrant
Shares.”
1.2 The
purchase price payable upon
exercise (“Exercise Price”) shall be $8.25 per share, subject to adjustment as
provided in Section
8.
2. EXERCISE
OF WARRANT; EXPIRATION
DATE.
2.1 Exercise
of Warrant.
(a) Exercise
for Cash. This Warrant
is
exercisable during the period commencing on March 27, 2007 (“Commencement Date”)
and ending on the Expiration Date, in whole, or from time to time, in
part, at
the option of the Warrant Holder, upon surrender of this Warrant to the
Company,
or such other person as the Company may designate, together with a duly
completed and executed form of exercise attached hereto (indicating exercise
by
payment of the Exercise Price) and payment of an amount equal to the
then
applicable Exercise Price multiplied by the number of Warrant Shares
then being
purchased upon such exercise. The payment of the Exercise Price shall
be in cash or by certified check or official bank check, payable to the
order of
the Company.
(b) Cashless
Exercise. In lieu of
exercising the
Warrant pursuant to Section 2.1(a), this Warrant may be exercised during
any
period commencing on the first anniversary of the closing of the Offering
and
ending on the Expiration Date during which a valid Company prospectus
covering
the public re-sale of the Warrant Shares is not available to the Warrant
Holder,
in whole, or from time to time, in part, at the option of the Warrant
Holder,
upon surrender of the Warrant to the Company, or such other person as
the
Company may designate, together with a duly completed and executed form
of
exercise attached hereto (indicating exercise by cashless exercise),
specifying
the number of shares to be purchased upon exercise. The number of
Warrant Shares to be issued to the Warrant Holder upon such cashless
exercise
shall be computed using the following formula:
|
X
=
(P)(Y)(A-B)/A
|
|
Where
|
X
=
|
the
number of shares of Warrant Shares to be issued to the Warrant
Holder for
the Warrant being converted.
|
|
|
|
P
=
|
the
number of shares of Common Stock being purchased on exercise
expressed as
a decimal fraction.
|
|
|
|
Y
=
|
the
total number of Warrant Shares issuable upon exercise of the
Warrant in
full.
|
|
|
|
A
=
|
the
fair market value of one Warrant Share which shall mean the
"last sale
price" as determined in accordance with Section 2.4.
|
|
|
|
B
=
|
the
Exercise Price on the date of
conversion.
|
2.2 Effectiveness. Each
exercise of a Warrant
shall be deemed to have been effected immediately prior to the close
of business
on the day on which such Warrant shall have been surrendered to the Company
as
provided in Section
2.1. At
such time, the person or persons in whose name or names any certificates
for
Warrant Shares shall be issuable upon such exercise as provided in Section 2.3
below shall be deemed to have become
the holder or holders of record of the Warrant Shares represented by
such
certificates.
2.3 Issuance. As
soon as practicable
after the exercise of this Warrant, in full or in part, the Company,
at its
expense, will use its best efforts to cause to be issued in the name
of, and
delivered to, the Warrant Holder, or, subject to the terms and conditions
hereof, to such other individual or entity as such Warrant Holder may
direct:
(a) a
certificate or certificates for the
number of full Warrant Shares to which such Warrant Holder shall be entitled
upon such exercise plus, in lieu of any fractional share to which such
Warrant
Holder would otherwise be entitled, cash in an amount determined pursuant
to
Section
2.4
hereof,
(b) in
case such exercise is in part only,
a new Warrant (dated the date hereof) of like tenor, stating on the face
or
faces thereof the number of shares currently stated on the face of this
Warrant
minus the number of such shares purchased by the Warrant Holder upon
such
exercise as provided in Section 2.1
(prior to any adjustments made thereto
pursuant to the provisions of this Warrant), and
The
Company shall not be required upon the exercise of this Warrant to issue
any
fractional shares, but shall round down to the next whole share.
2.4 Price. “Last
sale price” means
(i) if the Common Stock is listed on a national securities exchange or
quoted on
the Nasdaq National Market, Nasdaq Capital Markets or NASD OTC Bulletin
Board
(or successor such as the Bulletin Board Exchange), the closing bid price
of the
Common Stock in the principal trading market for the Common Stock as
reported by
the exchange, Nasdaq or the NASD, as the case may be, (ii) if the Common
Stock
is not listed on a national securities exchange or quoted on the Nasdaq
National
Market, Nasdaq SmallCap Market or the NASD OTC Bulletin Board (or successor
such
as the Bulletin Board Exchange), but is traded in the residual over-the-counter
market, the closing bid price for the Common Stock on the last trading
day
preceding the date in question for which such quotations are reported
by the
Pink Sheets, LLC or similar publisher of such quotations, and (iii) if
the fair
market value of the Common Stock cannot be determined pursuant to clause
(i) or
(ii) above, such price as the Board of Directors of the Company shall
determine,
in good faith.
2.5 Expiration
Date. The term “Expiration Date” shall mean 5:00 p.m., Mountain
time on March ___, 2012, or if such date shall in the State of Colorado
be a
holiday or a day on which banks are authorized to close, then 5:00 p.m.,
Mountain time the next following day which in the State of Colorado is
not a
holiday or a day on which banks are authorized to close.
3. REGISTRATION
AND TRANSFER ON COMPANY
BOOKS.
3.1 The
Company (or an agent of the
Company) will maintain a register containing the names and addresses
of the
Warrant Holders. Any Warrant Holder may change its, his or her
address as shown on the warrant register by written notice to the Company
requesting such change.
3.2 The
Company shall register upon its
books any transfer of a Warrant upon surrender of same as provided in
Section
5.
4. RESERVATION
OF
SHARES. The Company
will at all times reserve and keep available, solely for issuance and
delivery
upon the exercise of this Warrant, such Warrant Shares and other stock,
securities and property, as from time to time shall be issuable upon
the
exercise of this Warrant. The Company covenants that all shares of
Warrant Shares so issuable when issued will be duly and validly issued
and fully
paid and non-assessable.
5. EXCHANGE,
LOSS OR MUTILATION OF
WARRANT. This Warrant
is exchangeable, without expense, at the option of the Warrant Holder,
upon
presentation and surrender hereof to the Company for other warrants of
different
denominations entitling the holder thereof to purchase in the aggregate
the same
number of shares of Common Stock purchasable hereunder on the same terms
and
conditions as provided herein. Subject to the provisions of
Section
6, if applicable,
this
Warrant may be divided or combined with other warrants which carry the
same
rights upon presentation of such warrants at the Company’s office together with
a written notice specifying the names and denominations in which new
warrants
are to be issued and signed by the Warrant Holder hereof. The term
“Warrant” as used herein includes any warrants into which this Warrant may be
divided or exchanged. Upon receipt by the Company of reasonable
evidence of the ownership and the loss, theft, destruction or mutilation
of this
Warrant and, in the case of loss, theft or destruction, receipt of indemnity
reasonably satisfactory to the Company, or, in the case of mutilation,
upon
surrender and cancellation of the mutilated Warrant, the Company shall
execute
and deliver in lieu thereof a new Warrant of like tenor and date representing
an
equal number of shares of Common Stock.
6. LIMITATION
ON EXERCISE AND
SALES.
6.1 Each
Warrant Holder acknowledges that
the Warrants and the Warrant Shares have not been registered under the
Securities Act of 1933, as amended (“the Securities Act”) and the rules and
regulations thereunder, or any successor legislation, and agrees not
to sell,
pledge, distribute, offer for sale, transfer or otherwise dispose of
any
Warrant, or any Warrant Shares issued upon its exercise, in except in
compliance
with the requirements of Section 6.2.
6.2 This
Warrant and the rights granted to
the Warrant Holder are transferable only to Accredited Investors (as
defined in
Section 502 of the Securities Act) in whole or in part, upon surrender
of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or to the agent of the Company; provided,
however,
that if at
the time
of the surrender of this Warrant in connection with any exercise, transfer
or
exchange of this Warrant, this Warrant (or, in the case of any exercise,
the
Warrant Shares issuable hereunder), shall not be registered for resale
under the
Securities Act or under applicable state securities or blue sky laws,
then the
Company may require, as a condition of allowing such exercise, transfer
or
exchange, (i) a written opinion of counsel, which opinion and counsel
are
acceptable to the Company, to the effect that such exercise, transfer
or
exchange may be made without registration under the Securities Act or
under
applicable state securities or blue sky laws, (ii) that any transferee
of the
Warrant execute and deliver to the Company a document containing investment
representations and warranties substantially similar to those set forth
in the
Securities Purchase Agreement pursuant to which the initial Warrant Holder
acquired this Warrant, and (iii) prior to exercise of the Warrant, the
Warrant
Holder shall have executed the form of exercise annexed
hereto.
6.3 Certificates
delivered to the Warrant
Holder upon exercise hereof shall be imprinted with a legend in substantially
the following form if such Warrant Shares are not registered at the time
of
exercise:
|
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE
FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
|
| |
|
THIS
WARRANT MAY NOT, IN ANY EVENT, BE TRANSFERRED TO ANY PERSON
OR ENTITY THAT
IS NOT AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE
501(c) OF
REGULATION D OF THE SECURITIES ACT OF 1933, AS
AMENDED.
|
7. REGISTRATION
RIGHTS OF WARRANT
HOLDER. The initial
Warrant Holder (and certain permitted assignees thereof) is entitled
to the
benefit of registration rights in respect of Warrant Shares in accordance
with
and subject to the terms and conditions of the Registration Rights Agreement
executed and delivered by the initial Warrant Holder and the
Company.
8. ADJUSTMENT
OF PURCHASE PRICE AND
NUMBER OF SHARES DELIVERABLE. The Exercise
Price and the number of
Warrant Shares purchasable pursuant to each Warrant shall be subject
to
adjustment from time to time as hereinafter set forth in this Section 8:
(a) If
the Company shall (i) issue any
shares of its Common Stock as a stock dividend or (ii) subdivide the
number of
outstanding shares of its Common Stock into a greater number of shares,
the
Exercise Price shall be proportionately reduced and the number of Warrant
Shares
at that time purchasable pursuant to this Warrant shall be proportionately
increased. If the Company shall reduce the number of outstanding
shares of Common Stock by combining such shares into a smaller number
of shares,
the Exercise Price per Warrant Share shall be proportionately increased
and the
number of Warrant Shares at that time purchasable pursuant to this Warrant
shall
be proportionately decreased. If the Company shall, at any time
during the life of this Warrant, declare a dividend payable in cash on
its
Common Stock and shall at substantially the same time offer to its stockholders
a right to purchase new Common Stock from the proceeds of such dividend
or for
an amount substantially equal to the dividend, for purposes of this Warrant,
all
Common Stock so issued shall be deemed to have been issued as a stock
dividend. Any dividend paid or distributed upon the Common Stock in
stock of any other class of securities convertible into shares of Common
Stock
shall be treated as a dividend paid in Common Stock to the extent that
shares of
Common Stock are issuable upon conversion thereof.
(b) If
the Company shall be recapitalized
by reclassifying its outstanding Common Stock, (other than a change in
par value
or a subdivision or combination as provided in Section 8(a)),
or the Company or a successor
corporation shall consolidate or merge with or convey all or substantially
all
of its or of any successor corporation’s property and assets to any other
corporation or corporations (any such other corporations being included
within
the meaning of the term “successor corporation” hereinbefore used), then, as a
condition of such recapitalization, consolidation, merger or conveyance,
lawful
and adequate provision shall be made whereby the Warrant Holder shall
thereafter
have the right to receive upon the exercise hereof the kind and amount
of shares
of stock or other securities or property which such Warrant Holder would
have
been entitled to receive if, immediately prior to any such reorganization
or
reclassification, such Warrant Holder had held the number of shares of
Common
Stock which were then purchasable upon the exercise of this
Warrant. In any such case, appropriate adjustment shall be made in
the application of the provisions set forth herein with respect to the
rights
and interest thereafter of the Warrant Holder such that the provisions
set forth
in this Section
8 (including
provisions with respect to adjustment of the Exercise Price and number
of shares
purchasable upon the exercise of this Warrant) shall thereafter be applicable,
as nearly as may be in relation to any shares of stock or other securities
or
property thereafter deliverable upon the exercise of this
Warrant.
(c) If
the Company shall sell all or
substantially all of its property or dissolve, liquidate, or wind up
its
affairs, lawful provision shall be made as part of the terms of any such
sale,
dissolution, liquidation or winding up, so that the holder of this Warrant
may
thereafter receive upon exercise hereof in lieu of each Warrant Share
that it
would have been entitled to receive, the same kind and amount of any
securities
or assets as may be issuable, distributable or payable upon any such
sale,
dissolution, liquidation or winding up with respect to each share of
Common
Stock of the Company, provided,
however, that in
any case of any such sale or
of dissolution, liquidation or winding up, the right to exercise this
Warrant
shall terminate on a date fixed by the Company; such date so fixed to
be not
earlier than 5:00 p.m., Mountain time, on the 45th day next succeeding
the date
on which notice of such termination of the right to exercise this Warrant
has
been given by mail to the registered holder of this Warrant at its address
as it
appears on the books of the Company.
(d) No
adjustment in the per share Exercise
Price shall be required unless such adjustment would require an increase
or
decrease in the Exercise Price by at least $0.01; provided,
however, that any
adjustments that by reason
of this subsection are not required to be made shall be carried forward
and
taken into account in any subsequent adjustment. All calculations under
this
Section
8 shall be
made to the
nearest cent or to the nearest 1/100th
of a share, as the case may
be.
(e) The
Company will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer
of
assets, consolidation, merger, dissolution, issue or sale of securities
or any
other voluntary action, avoid or seek to avoid the observance or performance
of
any of the terms to be observed or performed hereunder by the Company
but will
at all times in good faith assist in the carrying out of all the provisions
of
this Section
8 and in the
taking of
all such actions as may be necessary or appropriate in order to protect
against
impairment of the rights of the Warrant Holder to adjustments in the
Exercise
Price.
(f) Upon
the happening of any event
requiring an adjustment of the Exercise Price hereunder, the Company
shall give
written notice thereof to the Warrant Holder stating the adjusted Exercise
Price
and the adjusted number of Warrant Shares resulting from such event and
setting
forth in reasonable detail the method of calculation and the facts upon
which
such calculation is based.
9. VOLUNTARY
ADJUSTMENT BY THE
COMPANY. The Company
may, at its option, at any time during the term of this Warrant, reduce
the then
current Exercise Price to any amount deemed appropriate by the Board
of
Directors of the Company and/or extend the date of the expiration of
this
Warrant.
10. RIGHTS
OF THE HOLDER. The Warrant
Holder shall
not, by virtue hereof, be entitled to any rights of a stockholder in
the
Company, either at law or equity, and the rights of the Warrant Holder
are
limited to those expressed in this Warrant and are not enforceable against
the
Company except to the extent set forth herein.
11. NOTICES
OF RECORD
DATE. In
case: (a) the Company shall take a record of the holders of its Common
Stock (or
other stock or securities at the time deliverable upon the exercise of
this
Warrant) for the purpose of entitling or enabling them to receive any
dividend
or other distribution, or to receive any right to subscribe for or purchase
any
shares of any class or any other securities, or to receive any other
right, or
(b) of any capital reorganization of the Company, any reclassification
of the
capital stock of the Company, any consolidation or merger of the Company
with or
into another corporation (other than a consolidation or merger in which
the
Company is the surviving entity), or any transfer of all or substantially
all of
the assets of the Company, or (c) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Company, then, and in each such case,
the
Company will mail or cause to be mailed to the Warrant Holder a notice
specifying, as the case may be: (i) the date on which a record is to
be taken
for the purpose of such dividend, distribution or right, and stating
the amount
and character of such dividend, distribution or right, or (ii) the effective
date on which such reorganization, reclassification, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place, and
the time,
if any is to be fixed, as of which the holders of record of Common Stock
(or
such other stock or securities at the time deliverable upon the exercise
of this
Warrant) shall be entitled to exchange their shares of Common Stock (or
such
other stock or securities) for securities or other property deliverable
upon
such reorganization, reclassification, consolidation, merger, transfer,
dissolution, liquidation or winding-up. Such notice shall be mailed
at least 20 days prior to the record date or effective date for the event
specified in such notice, provided that the failure to mail such notice
shall
not affect the legality or validity of any such action.
12. SUCCESSORS. The
rights and obligations
of the parties to this Warrant will inure to the benefit of and be binding
upon
the parties hereto and their respective permitted heirs, successors,
assigns,
pledgees, transferees and purchasers.
13. CHANGE
OR WAIVER. Any term of
this Warrant
may be changed or waived only by an instrument in writing signed by the
party
against whom enforcement of the change or waiver is sought.
14. HEADINGS. The
headings in this
Warrant are for purposes of reference only and shall not limit or otherwise
affect the meaning of any provision of this Warrant.
15. GOVERNING
LAW. This
Warrant shall be governed by and
construed in accordance with the laws of the State of Colorado as such
laws are
applied to contracts made and to be fully performed entirely within that
state
between residents of that state.
16. JURISDICTION
AND
VENUE. The
Company and the Warrant Holder (i) agree that any legal suit, action
or
proceeding arising out of or relating to this Warrant shall be instituted
exclusively in the federal courts located in Denver, Colorado, U.S.A.,
(ii)
waive any objection to the venue of any such suit, action or proceeding
and the
right to assert that such forum is not a convenient forum, and (iii)
irrevocably
consent to the jurisdiction of the federal courts located in Denver,
Colorado,
U.S.A. in any such suit, action or proceeding, and the Company further
agrees to
accept and acknowledge service or any and all process that may be served
in any
such suit, action or proceeding in the federal courts located in Denver,
Colorado, U.S.A. in person or by certified mail addressed as provided
in
Section 18.
17. AMENDMENT
AND WAIVER. Any amendment
or waiver of
any of the terms or conditions of the Warrants by the Company must be
in writing
and must be duly executed by the Company or on its behalf. Any of the
terms or conditions of the Warrants may be amended or waived by the Warrant
Holders only upon the written consent of Warrant Holders representing
51% of the
Warrants then outstanding. Any such amendment or waiver shall be
binding on all Warrant Holders whether they consented or not or whether
their
consent was solicited or not. The failure of a party to exercise any
of its rights hereunder or to insist upon strict adherence to any term
or
condition hereof on any one occasion shall not be construed as a waiver
or
deprive that party of the right thereafter to insist upon strict adherence
to
the terms and conditions of this Warrant at a later date. Further, no
waiver of any of the terms and conditions of this Warrant shall be deemed
to or
shall constitute a waiver of any other term of condition hereof (whether
or not
similar).
18. MAILING
OF NOTICES,
ETC. All notices
and
other communications under this Warrant (except payment) shall be in
writing and
shall be sufficiently given if delivered to the addressees in person,
by Federal
Express or similar overnight courier service, or if mailed, postage prepaid,
by
certified mail, return receipt requested, as follows:
| |
Registered
Holder
|
:
|
To
his or her last known address as indicated on the Company’s books and
records.
|
| |
The
Company
|
:
|
To
the Company’s Chief Executive Officer at the address of the Company’s
principal office as set forth in the last filing by the Company
with the
Securities and Exchange Commission
|
or
to
such other address as any of them, by notice to the others, may designate
from
time to time. Notice shall be deemed given (a) when personally
delivered, (b) on the scheduled delivery date if sent by Federal Express
or
other overnight courier service or (c) the fifth day after sent by certified
mail.
IN
WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly
authorized officer as of the ___ day of March, 2007.
AEROGROW
INTERNATIONAL, INC.
By: _____________________________
Michael Bissonnette, CEO
Notice
of Exercise
To
be
Executed by the Warrant Holder
in
Order
to Exercise Warrant
The
undersigned Warrant Holder hereby irrevocably elects to exercise the
attached
Warrant for ______ shares of Common Stock represented by this Warrant
by:
(check
one)
¨
payment of the Exercise
Price in cash pursuant to Section 2.1(a) of the Warrant
¨
the cashless exercise
option pursuant to Section 2.1(b) of the Warrant
for
the
shares of Common Stock issuable upon the exercise of such Warrant, and
requests
that certificates for such shares of Common Stock shall be issued in
the name
of
PLEASE
INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
(Please
print or type name and address)
and
be
delivered to
(Please
print or type name and address)
and
if
such number of shares of Common stock shall not be all the shares of
Common
Stock into which this Warrant may be exercised, that a new Warrant for
the
balance of such shares of Common Stock be registered in the name of,
and
delivered to, the registered Warrant Holder at the address stated
above.
The
undersigned hereby represents and warrants to the Company that it is
an
“Accredited Investor” within the meaning of Rule 501(c) of Regulation D of the
Securities Act of 1933, as amended (the “Securities Act”), and is acquiring
these securities for its own account and not with a view to, or for sale
in
connection with, any distribution thereof, nor with any present intention
of
distributing or selling the same provided, however, the undersigned may
sell
such securities in accordance with federal and state securities
laws. The undersigned further represents that it does not have any
contract, agreement, understanding or arrangement with any person to
sell,
transfer or grant the shares of Common Stock issuable under this Warrant.
The
undersigned understands that the shares it will be receiving are “restricted
securities” under federal securities laws inasmuch as they are being acquired
from AEROGROW INTERNATIONAL, INC., in transactions not including any
public
offering and that under such laws, such shares may only be sold pursuant
to an
effective and current registration statement under the Securities Act
or an
exemption from the registration requirements of the Securities Act and
any other
applicable restrictions including the requirements of state securities
and “blue
sky” laws, in which event a legend or legends will be placed upon the
certificate(s) representing the Common Stock issuable under this Warrant
denoting such restrictions. The undersigned understands and acknowledges
that
the Company will rely on the accuracy of these representations and warranties
in
issuing the securities underlying the Warrant.
|
Dated:
_______________
|
__________________________________________
(Signature
of Registered Holder)
|
ASSIGNMENT
FORM
To
be
executed by the Warrant Holder
in
order
to Assign Warrants
FOR
VALUE
RECEIVED,____________________________________ hereby sell, assigns and
transfer
unto
PLEASE
INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
(Please
print or type name and address)
______________________
of the shares of Common Stock into which this Warrant is exercisable,
and hereby
irrevocably constitutes and appoints ________________________ Attorney
to
transfer this Warrant on the books of the Company, with full power of
substitution in the premises.
|
Dated:
_______________
|
__________________________________________
(Signature
of Registered Holder)
|
CERTIFICATION
OF STATUS OF TRANSFEREE
TO
BE EXECUTED BY THE TRANSFEREE OF THIS WARRANT
The
undersigned transferee hereby certifies to the registered holder of this
Warrant
and to AEROGROW INTERNATIONAL, INC. that the transferee is an “Accredited
Investor” within the meaning of Rule 501 of Regulation D of the Securities Act
of 1933, as amended.
|
Dated:
_______________
|
__________________________________________
(Signature
of Transferee)
|
Exhibit
10.31
REGISTRATION
RIGHTS AGREEMENT
REGISTRATION
RIGHTS AGREEMENT (this "Agreement"), dated as of
March 30, 2007, by and among AeroGrow International, Inc., a Nevada
corporation with headquarters located at 6075 Longbow Drive, Suite
200, Boulder,
Colorado 80301 (the "Company"), and
the undersigned buyers (each, an "Investor", and collectively,
the "Investors" as listed on
Exhibit A).
WHEREAS:
A. In
connection with the Securities Purchase Agreement by and among the
parties
hereto dated as of March 30, 2007 (the "Securities Purchase
Agreement"), the Company has agreed, upon the terms and subject to
the
conditions set forth in the Securities Purchase Agreement, to issue
and sell to
each Investor (i) shares of the Company's common stock, par value $0.001
per
share (the "Common Stock"), and (ii) warrants (the
"Warrants") which will be exercisable to purchase shares of
Common Stock (as exercised, collectively the "Warrant Shares")
in accordance with the terms of the Warrants.
B. To
induce the Investors to execute and deliver the Securities Purchase
Agreement,
the Company has agreed to provide certain registration rights under
the
Securities Act of 1933, as amended, and the rules and regulations thereunder,
or
any similar successor statute (collectively, the "1933 Act"),
and applicable state securities laws.
NOW,
THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt
and
sufficiency of which are hereby acknowledged, the Company and each
of the
Investors hereby agree as follows:
1. Definitions.
Capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings set forth in the Securities Purchase Agreement. As used in
this Agreement, the following terms shall have the following
meanings:
a. "Business
Day" means any day other than Saturday, Sunday or any other day
on
which commercial banks in the City of New York are authorized or required
by law
to remain closed.
b. "Closing
Date" shall have the meaning set forth in the Securities Purchase
Agreement.
c. "Effective
Date" means the date the Registration Statement is declared effective
by the SEC.
d. "Effectiveness
Deadline" means the date that is 120 days after the Filing
Date.
e. "Filing
Date" means the date on which the Registration Statement (as defined
below) is filed with the SEC.
f. "Filing
Deadline" means the date that is 120 days after the Closing
Date.
g. "Investor"
means an Investor or any transferee or assignee thereof to whom an
Investor
assigns its rights under this Agreement and who agrees to become bound
by the
provisions of this Agreement in accordance with Section 9 and any transferee
or
assignee thereof to whom a transferee or assignee assigns its rights
under this
Agreement and who agrees to become bound by the provisions of this
Agreement in
accordance with Section 9.
h. "Person"
means an individual, a limited liability company, a partnership, a
joint
venture, a corporation, a trust, an unincorporated organization and
a government
or any department or agency thereof.
i. "Public
Sale" means any sale of Registrable Securities to the public pursuant
to a public offering registered under the 1933 Act or to the public
through a
broker or market-maker pursuant to the provisions of Rule 144 (or any
successor
rule) adopted under the 1933 Act.
j. "register,"
"registered," and "registration" refer to a
registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the 1933 Act and pursuant
to
Rule 415 and the declaration or ordering of effectiveness of such Registration
Statement(s) by the SEC.
j. "Registrable
Securities" means (i) the Common Stock, (ii) the Warrant Shares issued
or issuable upon exercise of the Warrants, and (iii) any capital stock
of the
Company issued or issuable with respect to the Common Stock, the Warrant
Shares,
or the Warrants as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise, without regard
to any
limitations on exercise of the Warrants, provided that Registrable
Securities shall not include shares of Common Stock or other securities
that
have been sold in a Public Sale or held by an Investor whose entire
holdings of
Registrable Securities are then eligible for resale without registration
and
without regard to volume or time limitations under Rule 144 under the
1933 Act,
as such rule may be amended from time to time, or any similar rule
or regulation
hereafter adopted by the SEC.
k. "Registration
Statement" means a registration statement or registration statements
of
the Company filed under the 1933 Act covering the Registrable
Securities. "Registration Statement" means a
registration statement or registration statements of the Company filed
under the
1933 Act covering the Registrable Securities.
l. "Required
Holders" means the holders of at least a majority of the Registrable
Securities.
m. "Required
Registration Amount" means the sum of (i) the number of Common Stock
issued and, (ii) 100% of the maximum number of Warrant Shares issued
and
issuable pursuant to the Warrants as of the trading day immediately
preceding
the applicable date of determination, all subject to adjustment as
provided in
Section 2(d).
n. "Rule
415" means Rule 415 under the 1933 Act or any successor rule
providing
for offering securities on a continuous or delayed basis.
o. "SEC"
means the United States Securities and Exchange Commission.
2. Registration.
a. Mandatory
Registration. The Company shall prepare, and, as soon as
practicable, but in no event later than the Filing Deadline, file with
the SEC
the Registration Statement on Form SB-2 covering the resale of all
of the
Registrable Securities. In the event that Form SB-2 is unavailable
for such a registration, the Company shall use such other form as is
available
for such a registration on another appropriate form reasonably acceptable
to the
Required Holders, subject to the provisions of Section 2(c). The
Registration Statement prepared pursuant hereto shall register for
resale at
least the number of shares of Common Stock equal to the Required Registration
Amount determined as of date the Registration Statement is initially
filed with
the SEC. The Registration Statement shall contain (except if
otherwise directed by the Required Holders) the "Selling Stockholders"
and "Plan of Distribution" sections in substantially the form attached
hereto as Exhibit B. The Company shall use its best efforts to
have the Registration Statement declared effective by the SEC as soon
as
practicable, but in no event later than the Effectiveness Deadline.
b. Allocation
of Registrable Securities. The initial number of Registrable
Securities included in any Registration Statement and any increase
in the number
of Registrable Securities included therein shall be allocated pro rata
among the
Investors based on the number of Registrable Securities held by each
Investor at
the time the Registration Statement covering such initial number of
Registrable
Securities or increase thereof is declared effective by the SEC. In
the event that an Investor sells or otherwise transfers any of such
Investor's
Registrable Securities in any manner that leaves the Common Stock so
transferred
ineligible for resale without registration, each transferee shall be
allocated a
pro rata portion of the then remaining number of Registrable Securities
included
in such Registration Statement for such transferor.
c. Ineligibility
for Form SB-2 or S-3. In the event that neither Form SB-2 nor
Form S-3 is available for the registration of the resale of Registrable
Securities hereunder, the Company shall (i) register the resale of
the
Registrable Securities on another appropriate form reasonably acceptable
to the
Required Holders and (ii) undertake to register the Registrable Securities
on
Form SB-2 or S-3 as soon as either such form is available, provided
that the
Company shall maintain the effectiveness of the Registration Statement
then in
effect until such time as a Registration Statement on Form SB-2 or
Form S-3
covering the Registrable Securities has been declared effective by
the
SEC.
d. Sufficient
Number of Shares Registered. In the event the number of shares
available under a Registration Statement filed pursuant to Section
2(a) is
insufficient to cover all of the Registrable Securities required to
be covered
by such Registration Statement or an Investor's allocated portion of
the
Registrable Securities pursuant to Section 2(b), the Company shall
amend the
applicable Registration Statement, or file a new Registration Statement
(on the
short form available therefor, if applicable), or both, so as to cover
at least
the Required Registration Amount as of the trading day immediately
preceding the
date of the filing of such amendment or new Registration Statement,
in each
case, as soon as practicable, but in any event not later than fifteen
days after
the necessity therefor arises. The Company shall use its best efforts
to cause such amendment and/or new Registration Statement to become
effective as
soon as practicable following the filing thereof. For purposes of the
foregoing provision, the number of shares available under a Registration
Statement shall be deemed "insufficient to cover all of the Registrable
Securities" if at any time the number of shares of Common Stock available
for
resale under the Registration Statement is less than the product determined
by
multiplying (i) the Required Registration Amount as of such time less
that
number of shares of Common Stock that have already been sold pursuant
to
transactions covered by the Registration Statement by (ii) 0.90. The
calculation set forth in the foregoing sentence shall be made without
regard to
any limitations on the exercise of the Warrants and such calculation
shall
assume that the Warrants are then exercisable for shares of Common
Stock at the
then prevailing Exercise Price (as defined in the Warrants).
e. Effect
of Failure to File and Obtain and Maintain Effectiveness of Registration
Statement. If, during the period from the Closing Date until the
second anniversary of the Closing Date (i) the Registration Statement
covering
all of the Registrable Securities required to be covered thereby and
required to
be filed by the Company pursuant to this Agreement is (A) not filed
with the SEC
on or before the Filing Deadline (a "Filing Failure") or (B)
not declared effective by the SEC on or before the Effectiveness Deadline
(an
"Effectiveness Failure") or (ii) after the Effective Date sales
of all of the Registrable Securities required to be included on such
Registration Statement cannot be made (other than during an Allowable
Grace
Period (as defined in Section 3(p)) pursuant to such Registration Statement
or
otherwise (including, without limitation, because of a failure to keep
such
Registration Statement effective, to disclose such information as is
necessary
for sales to be made pursuant to such Registration Statement, to register
a
sufficient number of shares of Common Stock or to maintain the listing
of the
shares of Common Stock) (a "Maintenance Failure") then, as
partial relief for the damages to any holder by reason of any such
delay in or
reduction of its ability to sell the underlying shares of Common Stock
(which
remedy shall not be exclusive of any other remedies available at law
or in
equity), the Company shall pay to each holder of Registrable Securities
relating
to such Registration Statement an amount in cash equal to one percent
of the
aggregate Purchase Price (as such term is defined in the Securities
Purchase
Agreement) of such Investor's Registrable Securities included in such
Registration Statement on each of the following dates: (i) the day
of a Filing
Failure and on every thirtieth day (pro rated for periods totaling
less than
thirty days) thereafter until such Filing Failure is cured, and (ii)
the day of
an Effectiveness Failure and on every thirtieth day (pro rated for
periods
totaling less than thirty days) thereafter until such Effectiveness
Failure is
cured, and (iii) the initial day of a Maintenance Failure and on every
thirtieth
day (pro rated for periods totaling less than thirty days) thereafter
until such
Maintenance Failure is cured. The payments to which a holder shall be
entitled pursuant to this Section 2(e) are referred to herein as
"Registration Delay Payments." Registration Delay
Payments shall be paid on the day of the Filing Failure, Effectiveness
Failure
or the initial day of Maintenance Failure, as applicable, and thereafter
on the
earlier of (I) the thirtieth day after the event or failure giving
rise to a
Registration Delay Payments occurs, or (II) the third Business Day
after the
event or failure giving rise to the Registration Delay Payments is
cured. In the event the Company fails to make Registration Delay
Payments in a timely manner, such Registration Delay Payments shall
bear
interest at the rate of one and one-half percent per month (prorated
for partial
months) until paid in full. Notwithstanding anything herein or in the
Securities Purchase Agreement to the contrary in no event shall the
aggregate
amount of Registration Delay Payments (other than Registration Delay
Payments
payable pursuant to events that are within the control of the Company)
exceed,
in the aggregate, ten percent of the aggregate Purchase Price.
3. Related
Obligations.
At
such
time as the Company is obligated to file a Registration Statement with
the SEC
pursuant to Section 2(a) or 2(d), the Company will use its best efforts
to
effect the registration of the Registrable Securities in accordance
with the
intended method of disposition thereof and, pursuant thereto, the Company
shall
have the following obligations:
a. The
Company shall submit to the SEC, within two Business Days after the
Company
learns that no review of a particular Registration Statement will be
made by the
staff of the SEC or that the staff has no further comments on a particular
Registration Statement, as the case may be, a request for acceleration
of
effectiveness of such Registration Statement to a time and date not
later than
three business days after the submission of such request. The Company
shall keep each Registration Statement effective pursuant to Rule 415
at all
times until the earlier of (i) the date as of which the Investors may
sell all
of the Registrable Securities covered by such Registration Statement
without
restriction pursuant to Rule 144(k) (or any successor thereto) promulgated
under
the 1933 Act and is not otherwise prohibited by the SEC or any statute,
rule,
regulation or other applicable law from selling any such Registrable
Securities
pursuant to such Rule or (ii) the date on which the Investors shall
have sold
all of the Registrable Securities covered by such Registration Statement
(the
"Registration Period"). The Company shall ensure
that each Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required
to be
stated therein, or necessary to make the statements therein (in the
case of
prospectuses, in the light of the circumstances in which they were
made) not
misleading.
b. The
Company shall prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement
and the
prospectus used in connection with such Registration Statement, which
prospectus
is to be filed pursuant to Rule 424 promulgated under the 1933 Act,
as may be
necessary to keep such Registration Statement effective at all times
during the
Registration Period, and, during such period, comply with the provisions
of the
1933 Act with respect to the disposition of all Registrable Securities
of the
Company covered by such Registration Statement until such time as all
of such
Registrable Securities shall have been disposed of in accordance with
the
intended methods of disposition by the seller or sellers thereof as
set forth in
such Registration Statement. In the case of amendments and
supplements to a Registration Statement which are required to be filed
pursuant
to this Agreement (including pursuant to this Section 3(b)) by reason
of the
Company filing a report on Form 10-QSB, Form 10-KSB or any analogous
report
under the Securities Exchange Act of 1934, as amended (the "1934
Act"), the Company shall have incorporated such report by reference
into such Registration Statement, if applicable, or shall file such
amendments
or supplements with the SEC on the same day on which the 1934 Act report
is
filed which created the requirement for the Company to amend or supplement
such
Registration Statement.
c. Upon
request, the Company shall furnish to each Investor whose Registrable
Securities
are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, one copy
of such
Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference,
if
requested by an Investor, all exhibits and each preliminary prospectus,
(ii)
upon the effectiveness of any Registration Statement, up to ten copies
of the
prospectus included in such Registration Statement and all amendments
and
supplements thereto (or such other number of copies as such Investor
may
reasonably request), and (iii) such other documents, including copies
of any
preliminary or final prospectus, as such Investor may reasonably request
from
time to time in order to facilitate the disposition of the Registrable
Securities owned by such Investor.
d. The
Company shall use its best efforts to (i) register and qualify, unless
an
exemption from registration and qualification applies, the resale by
Investors
of the Registrable Securities covered by a Registration Statement under
such
other securities or "blue sky" laws of all jurisdictions in the United
States as
may be requested in writing by an Investor, (ii) prepare and file in
those
jurisdictions, such amendments (including post-effective amendments)
and
supplements to such registrations and qualifications as may be necessary
to
maintain the effectiveness thereof during the Registration Period,
(iii) take
such other actions as may be necessary to maintain such registrations
and
qualifications in effect at all times during the Registration Period,
and (iv)
take all other actions reasonably necessary or advisable to qualify
the
Registrable Securities for sale in such jurisdictions; provided, however,
that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it
would not
otherwise be required to qualify but for this Section 3(d), (y) subject
itself
to general taxation in any such jurisdiction, or (z) file a general
consent to
service of process in any such jurisdiction. The Company shall
promptly notify each Investor who holds Registrable Securities of the
receipt by
the Company of any notification with respect to the suspension of the
registration or qualification of any of the Registrable Securities
for sale
under the securities or "blue sky" laws of any jurisdiction in the
United States
or its receipt of actual notice of the initiation or threatening of
any
proceeding for such purpose.
e. The
Company shall notify each Investor in writing of the happening of any
event, as
promptly as practicable after becoming aware of such event, as a result
of which
the prospectus included in a Registration Statement, as then in effect,
includes
an untrue statement of a material fact or omission to state a material
fact
required to be stated therein or necessary to make the statements therein,
in
the light of the circumstances under which they were made, not misleading
(provided that in no event shall such notice contain any material,
nonpublic
information), and, subject to Section 3(p), promptly prepare a supplement
or
amendment to such Registration Statement to correct such untrue statement
or
omission, and upon request deliver ten copies of such supplement or
amendment to
each Investor (or such other number of copies as such Investor may
reasonably
request). The Company shall also promptly notify each Investor in
writing and by overnight mail, (i) of any request by the SEC for amendments
or
supplements to a Registration Statement or related prospectus or related
information, and (ii) of the Company's reasonable determination that
a
post-effective amendment to a Registration Statement would be
appropriate.
f. The
Company shall use its best efforts to prevent the issuance of any stop
order or
other suspension of effectiveness of a Registration Statement, or the
suspension
of the qualification of any of the Registrable Securities for sale
in any
jurisdiction and, if such an order or suspension is issued, to obtain
the
withdrawal of such order or suspension at the earliest possible moment
and to
notify each Investor who holds Registrable Securities being sold of
the issuance
of such order and the resolution thereof or its receipt of actual notice
of the
initiation or threat of any proceeding for such purpose.
g. If
any
Investor is required under applicable securities laws to be described
in the
Registration Statement as an underwriter, at the reasonable request
of such
Investor, the Company shall furnish to such Investor, on the date of
the
effectiveness of the Registration Statement and thereafter from time
to time on
such dates as an Investor may reasonably request (i) a letter, dated
such date,
from the Company's independent certified public accountants in form
and
substance as is customarily given by independent certified public accountants
to
underwriters in an underwritten public offering, addressed to the Investors,
and
(ii) an opinion, dated as of such date, of counsel representing the
Company for
purposes of such Registration Statement, in form, scope and substance
as is
customarily given in an underwritten public offering, addressed to
the
Investors.
h. If
any
Investor is required under applicable securities laws to be described
in the
Registration Statement as an underwriter, then at the request of such
Investor
in connection with such Investor's due diligence requirements, the
Company shall
make available for inspection by (i) such Investor, (ii) legal counsel
for such
investor and (iii) one firm of accountants or other agents retained
by such
Investors (collectively, the "Inspectors"), all pertinent
financial and other records, and pertinent corporate documents and
properties of
the Company (collectively, the "Records"), as shall be
reasonably deemed necessary by each Inspector, and cause the Company's officers,
directors and employees to supply all information which any Inspector
may
reasonably request; provided, however, that each Inspector shall agree
to hold
in strict confidence and shall not make any disclosure (except to an
Investor)
or use of any Record or other information which the Company determines
in good
faith to be confidential, and of which determination the Inspectors
are so
notified, unless (a) the disclosure of such Records is necessary to
avoid or
correct a misstatement or omission in any Registration Statement or
is otherwise
required under the 1933 Act, (b) the release of such Records is ordered
pursuant
to a final, non-appealable subpoena or order from a court or government
body of
competent jurisdiction, or (c) the information in such Records has
been made
generally available to the public other than by disclosure in violation
of this
or any other agreement of which the Inspector has knowledge. Each
Investor agrees that it shall, upon learning that disclosure of such
Records is
sought in or by a court or governmental body of competent jurisdiction
or
through other means, give prompt notice to the Company and allow the
Company, at
its expense, to undertake appropriate action to prevent disclosure
of, or to
obtain a protective order for, the Records deemed
confidential. Nothing herein (or in any other confidentiality
agreement between the Company and any Investor) shall be deemed to
limit the
Investors' ability to sell Registrable Securities in a manner which
is otherwise
consistent with applicable laws and regulations.
i. The
Company shall hold in confidence and not make any disclosure of information
concerning an Investor provided to the Company unless (i) disclosure
of such
information is necessary to comply with federal or state securities
laws, (ii)
the disclosure of such information is necessary to avoid or correct
a
misstatement or omission in any Registration Statement, (iii) the release
of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available
to the
public other than by disclosure in violation of this Agreement or any
other
agreement. The Company agrees that it shall, upon learning that
disclosure of such information concerning an Investor is sought in
or by a court
or governmental body of competent jurisdiction or through other means,
give
prompt written notice to such Investor and allow such Investor, at
the
Investor's expense, to undertake appropriate action to prevent disclosure
of, or
to obtain a protective order for, such information.
j. The
Company shall use its best efforts either to (i) cause all of the Registrable
Securities covered by a Registration Statement to be listed on each
securities
exchange on which securities of the same class or series issued by
the Company
are then listed, if any, if the listing of such Registrable Securities
is then
permitted under the rules of such exchange, or (ii) secure designation
and
quotation of all of the Registrable Securities covered by a Registration
Statement on The NASDAQ Capital Market, or (iii) if, despite the Company's
best
efforts to satisfy, the preceding clauses (i) and (ii) the Company
is
unsuccessful in satisfying the preceding clauses (i) and (ii), to secure
the
inclusion for quotation on The NASDAQ Capital Market or the American
Stock
Exchange for such Registrable Securities and, without limiting the
generality of
the foregoing, to use its best efforts to arrange for at least two
market makers
to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection
with satisfying its obligation under this Section 3(j).
k. The
Company shall cooperate with the Investors who hold Registrable Securities
being
sold pursuant to the Registration Statement and, to the extent applicable,
facilitate the timely preparation and delivery of certificates (not
bearing any
restrictive legend) representing the shares that were Registrable Securities
prior to their sale under the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may
be, as the
Investors may reasonably request and registered in such names as the
Investors
may request.
l. If
requested by an Investor, the Company shall (i) as soon as practicable
incorporate in a prospectus supplement or post-effective amendment
such
information as an Investor reasonably requests to be included therein
relating
to the sale and distribution of Registrable Securities, including,
without
limitation, information with respect to the number of Registrable Securities
being offered or sold, the purchase price being paid therefor and any
other
terms of the offering of the Registrable Securities to be sold in such
offering;
(ii) as soon as practicable make all required filings of such prospectus
supplement or post-effective amendment after being notified of the
matters to be
incorporated in such prospectus supplement or post-effective amendment;
and
(iii) as soon as practicable, supplement or make amendments to any
Registration
Statement if reasonably requested by an Investor holding any Registrable
Securities.
m. The
Company shall use its best efforts to cause the Registrable Securities
covered
by a Registration Statement to be registered with or approved by such
other
governmental agencies or authorities as may be necessary to consummate
the
disposition of such Registrable Securities.
n. The
Company shall make generally available to its security holders as soon
as
practical, but not later than ninety days after the close of the period
covered
thereby, an earnings statement (in form complying with, and in the
manner
provided by, the provisions of Rule 158 under the 1933 Act) covering
a
twelve-month period.
o. The
Company shall otherwise use its best efforts to comply with all applicable
rules
and regulations of the SEC in connection with any registration
hereunder.
p. Notwithstanding
anything to the contrary herein, at any time after the Effective Date,
the
Company may delay the disclosure of material, non-public information
concerning
the Company the disclosure of which at the time is not, in the good
faith
opinion of the Board of Directors of the Company and its counsel, in
the best
interest of the Company and, in the opinion of counsel to the Company,
otherwise
required (a "Grace Period"); provided, that the Company shall
promptly (i) notify the Investors in writing of the existence of material,
non-public information giving rise to a Grace Period (provided that
in each
notice the Company will not disclose the content of such material,
non-public
information to the Investors) and the date on which the Grace Period
will begin,
and (ii) notify the Investors in writing of the date on which the Grace
Period
ends; and, provided further, that no Grace Period shall exceed five
consecutive
days and during any three-hundred-sixty-five day period such Grace
Periods shall
not exceed an aggregate of twenty days and the first day of any Grace
Period
must be at least five trading days after the last day of any prior
Grace Period
(each, an "Allowable Grace Period"). For purposes of
determining the length of a Grace Period above, the Grace Period shall
begin on
and include the date the Investors receive the notice referred to in
clause (i)
and shall end on and include the later of the date the Investors receive
the
notice referred to in clause (ii) and the date referred to in such
notice. The provisions of Section 3(e) hereof shall not be applicable
during the period of any Allowable Grace Period. Upon expiration of
the Grace Period, the Company shall again be bound by the first sentence
of
Section 3(e) with respect to the information giving rise thereto unless
such
material, non-public information is no longer
applicable. Notwithstanding anything to the contrary, the Company
shall cause its transfer agent to deliver unlegended shares of Common
Stock to a
transferee of an Investor in accordance with the terms of the Securities
Purchase Agreement in connection with any sale of Registrable Securities
with
respect to which an Investor has entered into a contract for sale,
and delivered
a copy of the prospectus included as part of the applicable Registration
Statement (unless an exemption from such prospectus delivery requirements
exists), prior to the Investor's receipt of the notice of a Grace Period
and for
which the Investor has not yet settled.
4. Obligations
of the Investors.
a. At
least
five Business Days prior to the first anticipated filing date of a
Registration
Statement, the Company shall notify each Investor in writing of the
information
the Company requires from each such Investor if such Investor elects
to have any
of such Investor's Registrable Securities included in such Registration
Statement. It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement
with respect
to the Registrable Securities of a particular Investor that such Investor
shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the
Registrable
Securities held by it as shall be reasonably required to effect the
effectiveness of the registration of such Registrable Securities and
shall
execute such documents in connection with such registration as the
Company may
reasonably request.
b. Each
Investor, by such Investor's acceptance of the Registrable Securities,
agrees to
cooperate with the Company as reasonably requested by the Company in
connection
with the preparation and filing of any Registration Statement hereunder,
unless
such Investor has notified the Company in writing of such Investor's
election to
exclude all of such Investor's Registrable Securities from such Registration
Statement.
c. Each
Investor agrees that, upon receipt of any notice from the Company of
the
happening of any event of the kind described in Section 3(f) or the
first
sentence of 3(e), such Investor will immediately discontinue disposition
of
Registrable Securities pursuant to any Registration Statement(s) covering
such
Registrable Securities until such Investor's receipt of the copies
of the
supplemented or amended prospectus contemplated by Section 3(e) or
Section 3(f)
or receipt of notice that no supplement or amendment is
required. Notwithstanding anything to the contrary, the Company shall
cause its transfer agent to deliver unlegended shares of Common Stock
to a
transferee of an Investor in connection with any sale of Registrable
Securities
covered by the Registration Statement and with respect to which an
Investor has
entered into a contract for sale prior to the Investor's receipt of
a notice
from the Company of the happening of any event of the kind described
in Section
3(e) or Section 3(f) and for which the Investor has not yet
settled.
d. Each
Investor covenants and agrees that it will comply with the prospectus
delivery
requirements of the 1933 Act as applicable to it or an exemption therefrom
in
connection with sales of Registrable Securities pursuant to the Registration
Statement.
5. Expenses
of Registration.
All
reasonable expenses, other than underwriting discounts and commissions,
incurred
in connection with registrations, filings or qualifications pursuant
to Sections
2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements
of
counsel for the Company shall be paid by the Company.
6. Indemnification.
In
the
event any Registrable Securities are included in a Registration Statement
under
this Agreement:
a. To
the
fullest extent permitted by law, the Company will, and hereby does,
indemnify,
hold harmless and defend each Investor, the directors, officers, members,
partners, employees, agents, representatives of, and each Person, if
any, who
controls any Investor within the meaning of the 1933 Act or the 1934
Act (each,
an "Indemnified Person"), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, reasonable
attorneys'
fees, amounts paid in settlement or expenses, joint or several, (collectively,
"Claims") incurred in investigating, preparing or defending
any
action, claim, suit, inquiry, proceeding, investigation or appeal taken
from the
foregoing by or before any court or governmental, administrative or
other
regulatory agency, body or the SEC, whether pending or threatened,
whether or
not an indemnified party is or may be a party thereto ("Indemnified
Damages"), to which any of them may become subject insofar as such
Claims (or actions or proceedings, whether commenced or threatened,
in respect
thereof) arise out of or are based upon: (i) any untrue statement or
alleged untrue statement of a material fact in a Registration Statement
or any
post-effective amendment thereto or in any filing made in connection
with the
qualification of the offering under the securities or other "blue sky"
laws of
any jurisdiction in which Registrable Securities are offered ("Blue Sky
Filing"), or the omission or alleged omission to state a material
fact
required to be stated therein or necessary to make the statements therein
not
misleading, (ii) any untrue statement or alleged untrue statement of
a material
fact contained in any preliminary prospectus if used prior to the effective
date
of such Registration Statement, or contained in the final prospectus
(as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state
therein any
material fact necessary to make the statements made therein, in the
light of the
circumstances under which the statements therein were made, not misleading,
or
(iii) any violation or alleged violation by the Company of the 1933 Act,
the 1934 Act, any other law, including, without limitation, any state
securities
law, or any rule or regulation thereunder relating to the offer or
sale of the
Registrable Securities pursuant to a Registration Statement or (the
matters in
the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to Section 6(c), the Company
shall reimburse the Indemnified Persons, promptly as such expenses
are incurred
and are due and payable, for any legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any
such
Claim. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a): (A) shall
not apply to a Claim by an Indemnified Person arising out of or based
upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by such Indemnified Person for
such
Indemnified Person expressly for use in connection with the preparation
of the
Registration Statement or any such amendment thereof or supplement
thereto, if
such prospectus was timely made available by the Company pursuant to
Section
3(d) and (B) shall not be available to the extent such Claim is based
on a
failure of the Investor to deliver or to cause to be delivered the
prospectus
made available by the Company, including a corrected prospectus, if
such
prospectus or corrected prospectus was timely made available by the
Company
pursuant to Section 3(d); and (C) shall not apply to amounts paid in
settlement
of any Claim if such settlement is effected without the prior written
consent of
the Company, which consent shall not be unreasonably withheld or
delayed. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified
Person
and shall survive the transfer of the Registrable Securities by the
Investors
pursuant to Section 9.
b. In
connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to severally and not jointly
indemnify,
hold harmless and defend, to the same extent and in the same manner
as is set
forth in Section 6(a), the Company, each of its directors, each of
its officers
who signs the Registration Statement and each Person, if any, who controls
the
Company within the meaning of the 1933 Act or the 1934 Act (each, an
"Indemnified Party"), against any Claim or Indemnified Damages
to which any of them may become subject, under the 1933 Act, the 1934
Act or
otherwise, insofar as such Claim or Indemnified Damages arise out of
or are
based upon any Violation, in each case to the extent, and only to the
extent,
that such Violation occurs in reliance upon and in conformity with
written
information furnished to the Company by such Investor expressly for
use in
connection with such Registration Statement; and, subject to Section
6(c), such
Investor will reimburse any legal or other expenses reasonably incurred
by an
Indemnified Party in connection with investigating or defending any
such Claim;
provided, however, that the indemnity agreement contained in this Section
6(b)
and the agreement with respect to contribution contained in Section
7 shall not
apply to amounts paid in settlement of any Claim if such settlement
is effected
without the prior written consent of such Investor, which consent shall
not be
unreasonably withheld or delayed; provided, further, however, that
the Investor
shall be liable under this Section 6(b) for only that amount of a Claim
or
Indemnified Damages as does not exceed the net proceeds to such Investor
as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified
Party
and shall survive the transfer of the Registrable Securities by the
Investors
pursuant to Section 9.
c. Promptly
after receipt by an Indemnified Person or Indemnified Party under this
Section 6
of notice of the commencement of any action or proceeding (including
any
governmental action or proceeding) involving a Claim, such Indemnified
Person or
Indemnified Party shall, if a Claim in respect thereof is to be made
against any
indemnifying party under this Section 6, deliver to the indemnifying
party a
written notice of the commencement thereof, and the indemnifying party
shall
have the right to participate in, and, to the extent the indemnifying
party so
desires, jointly with any other indemnifying party similarly noticed,
to assume
control of the defense thereof with counsel mutually satisfactory to
the
indemnifying party and the Indemnified Person or the Indemnified Party,
as the
case may be; provided, however, that an Indemnified Person or Indemnified
Party
shall have the right to retain its own counsel with the fees and expenses
of not
more than one counsel for such Indemnified Person or Indemnified Party
to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel
of the
Indemnified Person or Indemnified Party and the indemnifying party
would be
inappropriate due to actual or potential differing interests between
such
Indemnified Person or Indemnified Party and any other party represented
by such
counsel in such proceeding. In the case of an Indemnified Person,
legal counsel referred to in the immediately preceding sentence shall
be
selected by the Investors holding at least a majority in
interest of the Registrable Securities included in the Registration
Statement to
which the Claim relates. The Indemnified Party or Indemnified Person
shall cooperate fully with the indemnifying party in connection with
any
negotiation or defense of any such action or Claim by the indemnifying
party and
shall furnish to the indemnifying party all information reasonably
available to
the Indemnified Party or Indemnified Person which relates to such action
or
Claim. The indemnifying party shall keep the Indemnified Party or
Indemnified Person reasonably apprised at all times as to the status
of the
defense or any settlement negotiations with respect thereto. No
indemnifying party shall be liable for any settlement of any action,
claim or
proceeding effected without its prior written consent, provided, however,
that
the indemnifying party shall not unreasonably withhold, delay or condition
its
consent. No indemnifying party shall, without the prior written
consent of the Indemnified Party or Indemnified Person, consent to
entry of any
judgment or enter into any settlement or other compromise which does
not include
as an unconditional term thereof the giving by the claimant or plaintiff
to such
Indemnified Party or Indemnified Person of a release from all liability
in
respect to such Claim or litigation, and such settlement shall not
include any
admission as to fault on the part of the Indemnified Party. Following
indemnification as provided for hereunder, the indemnifying party shall
be
subrogated to all rights of the Indemnified Party or Indemnified Person
with
respect to all third parties, firms or corporations relating to the
matter for
which indemnification has been made. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement
of
any such action shall not relieve such indemnifying party of any liability
to
the Indemnified Person or Indemnified Party under this Section 6, except
to the
extent that the indemnifying party is prejudiced in its ability to
defend such
action.
d. The
indemnification required by this Section 6 shall be made by periodic
payments of
the amount thereof during the course of the investigation or defense,
as and
when bills are received or Indemnified Damages are incurred.
e. The
indemnity agreements contained herein shall be in addition to (i) any
cause of
action or similar right of the Indemnified Party or Indemnified Person
against
the indemnifying party or others, and (ii) any liabilities the indemnifying
party may be subject to pursuant to the law.
7. Contribution.
To
the
extent any indemnification by an indemnifying party is prohibited or
limited by
law, the indemnifying party agrees to make the maximum contribution
with respect
to any amounts for which it would otherwise be liable under Section
6 to the
fullest extent permitted by law; provided, however, that: (i) no
Person involved in the sale of Registrable Securities which Person
is guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933
Act) in connection with such sale shall be entitled to contribution
from any
Person involved in such sale of Registrable Securities who was not
guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of
Registrable
Securities shall be limited in amount to the net amount of proceeds
received by
such seller from the sale of such Registrable Securities pursuant to
such
Registration Statement.
8. Reports
Under the 1934 Act.
With
a
view to making available to the Investors the benefits of Rule 144
promulgated
under the 1933 Act or any other similar rule or regulation of the SEC
that may
at any time permit the Investors to sell securities of the Company
to the public
without registration ("Rule 144"), the Company agrees
to:
a. make
and
keep public information available, as those terms are understood and
defined in
Rule 144;
b. file
with
the SEC in a timely manner all reports and other documents required
of the
Company under the 1933 Act and the 1934 Act so long as the Company
remains
subject to such requirements and the filing of such reports and other
documents
is required for the applicable provisions of Rule 144; and
c. furnish
to each Investor so long as such Investor owns Registrable Securities,
promptly
upon request, (i) a written statement by the Company, if true, that
it has
complied with the reporting requirements of Rule 144, the 1933 Act
and the 1934
Act, (ii) a copy of the most recent annual or quarterly report of the
Company
and such other reports and documents so filed by the Company, and (iii)
such
other information as may be reasonably requested to permit the Investors
to sell
such securities pursuant to Rule 144 without registration.
9. Assignment
of Registration Rights.
The
rights under this Agreement shall be automatically assignable by the
Investors
to any transferee of all or any portion of such Investor's Registrable
Securities if: (i) the Investor agrees in writing with the transferee
or assignee to assign such rights, and a copy of such agreement is
furnished to
the Company within a reasonable time after such assignment; (ii) the
Company is,
within a reasonable time after such transfer or assignment, furnished
with
written notice of (a) the name and address of such transferee or assignee,
and
(b) the securities with respect to which such registration rights are
being
transferred or assigned; (iii) immediately following such transfer
or assignment
the further disposition of such securities by the transferee or assignee
is
restricted under the 1933 Act and applicable state securities laws;
(iv) at or
before the time the Company receives the written notice contemplated
by clause
(ii) of this sentence the transferee or assignee agrees in writing
with the
Company to be bound by all of the provisions contained herein; and
(v) such
transfer shall have been made in accordance with the applicable requirements
of
the Securities Purchase Agreement.
10. Amendment
of Registration Rights.
Provisions
of this Agreement may be amended and the observance thereof may be
waived
(either generally or in a particular instance and either retroactively
or
prospectively), only with the written consent of the Company and the
Required
Holders. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Investor and the Company. No
such amendment shall be effective to the extent that it applies to
less than all
of the holders of the Registrable Securities. No consideration shall
be offered or paid to any Person to amend or consent to a waiver or
modification
of any provision of any of this Agreement unless the same consideration
also is
offered to all of the parties to this Agreement.
11. Miscellaneous.
a. A
Person
is deemed to be a holder of Registrable Securities whenever such Person
owns or
is deemed to own of record such Registrable Securities. If the
Company receives conflicting instructions, notices or elections from
two or more
Persons with respect to the same Registrable Securities, the Company
shall act
upon the basis of instructions, notice or election received from such
record
owner of such Registrable Securities.
b. Any
notices, consents, waivers or other communications required or permitted
to be
given under the terms of this Agreement must be in writing and will
be deemed to
have been delivered: (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of
transmission
is mechanically or electronically generated and kept on file by the
sending
party); or (iii) one Business Day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the
party to
receive the same. The addresses and facsimile numbers for such
communications shall be:
If
to
Company (prior to consummation of the transactions contemplated by
the Exchange
Agreement):
AeroGrow
International,
Inc.
6075
Longbow Drive, Suite
200
Boulder,
CO 80307
Telephone:
(303)
444-7755
Facsimile:
(303)
444-0406
Attention:
Michael
Bissonette, President
and
with
a
copy to:
Gibson,
Dunn &
Crutcher
1801
California, Suite
4200
Denver,
CO 80203
Telephone: 303-298-5700
Facsimile: 303-296-5310
Attention: Steven
K. Talley
If
to an
Investor, to its address and facsimile number set forth on the Schedule
of
Investors attached hereto, with copies to such Investor's representatives
as set
forth on the Schedule of Investors, or to such other address and/or
facsimile
number and/or to the attention of such other Person as the recipient
party has
specified by written notice given to each other party five days prior
to the
effectiveness of such change. Written confirmation of receipt (A)
given by the recipient of such notice, consent, waiver or other communication,
(B) mechanically or electronically generated by the sender's facsimile
machine
containing the time, date, recipient facsimile number and an image
of the first
page of such transmission or (C) provided by a courier or overnight
courier
service shall be rebuttable evidence of personal service, receipt by
facsimile
or receipt from a nationally recognized overnight delivery service
in accordance
with clause (i), (ii) or (iii) above, respectively.
c. Failure
of any party to exercise any right or remedy under this Agreement or
otherwise,
or delay by a party in exercising such right or remedy, shall not operate
as a
waiver thereof.
d. This
Agreement shall be governed by and construed in accordance with the
laws of the
State of Colorado as such laws are applied to contracts made and to
be fully
performed entirely within that state between residents of that
state. The parties hereto (i) agree that any legal suit, action or
proceeding arising out of or relating to the transactions contemplated
by this
Agreement shall be instituted exclusively in the federal courts located
in
Denver, Colorado, U.S.A., (ii) waive any objection to the venue of
any such
suit, action or proceeding and the right to assert that such forum
is not a
convenient forum, and (iii) irrevocably consent to the jurisdiction
of the
federal courts located in Denver, Colorado, U.S.A. in any such suit,
action or
proceeding, and each party further agrees to accept and acknowledge
service or
any and all process that may be served in any such suit, action or
proceeding in
the federal courts located in Denver, Colorado, U.S.A. in person or
by certified
mail addressed as provided in Section 11(b).
e. This
Agreement, the other Transaction Documents (as defined in the Securities
Purchase Agreement) and the instruments referenced herein and therein
constitute
the entire agreement among the parties hereto with respect to the subject
matter
hereof and thereof. There are no restrictions, promises, warranties
or undertakings, other than those set forth or referred to herein and
therein. This Agreement, the other Transaction Documents and the
instruments referenced herein and therein supersede all prior agreements
and
understandings among the parties hereto with respect to the subject
matter
hereof and thereof.
f. Subject
to the requirements of Section 9, this Agreement shall inure to the
benefit of
and be binding upon the permitted successors and assigns of each of
the parties
hereto.
g. The
headings in this Agreement are for convenience of reference only and
shall not
limit or otherwise affect the meaning hereof.
h. This
Agreement may be executed in identical counterparts, each of which
shall be
deemed an original but all of which shall constitute one and the same
agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this
Agreement
bearing the signature of the party so delivering this Agreement.
i. Each
party shall do and perform, or cause to be done and performed, all
such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as any other party may reasonably
request in order to carry out the intent and accomplish the purposes
of this
Agreement and the consummation of the transactions contemplated
hereby.
j. All
consents and other determinations required to be made by the Investors
pursuant
to this Agreement shall be made, unless otherwise specified in this
Agreement,
by the Required Holders.
k. The
language used in this Agreement will be deemed to be the language chosen
by the
parties to express their mutual intent and no rules of strict construction
will
be applied against any party.
l. This
Agreement is intended for the benefit of the parties hereto and their
respective
permitted successors and assigns, and is not for the benefit of, nor
may any
provision hereof be enforced by, any other Person.
m. The
obligations of each Investor hereunder are several and not joint with
the
obligations of any other Investor, and no provision of this Agreement
is
intended to confer any obligations on any Investor vis-à-vis any other
Investor. Nothing contained herein, and no action taken by any
Investor pursuant hereto, shall be deemed to constitute the Investors
as a
partnership, an association, a joint venture or any other kind of entity,
or
create a presumption that the Investors are in any way acting in concert
or as a
group with respect to such obligations or the transactions contemplated
herein.
n. Currency. As
used herein, "Dollar", "US Dollar" and "$" each mean the lawful money
of the
United States.
*
* * * *
*
IN
WITNESS WHEREOF, each Investor and the Company have caused their
respective signature page to this Registration Rights Agreement to
be duly
executed as of the date first written above.
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COMPANY:
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AEROGROW
INTERNATIONAL, NC.
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By:__________________________________
Name:
Title:
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IN
WITNESS WHEREOF, each Investor and the Company have caused their
respective signature page to this Registration Rights Agreement to
be duly
executed as of the date first written above.
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BUYERS:
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[LEAD
BUYER]
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By:__________________________________
Name:
Title:
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IN
WITNESS WHEREOF, each Investor and the Company have caused their
respective signature page to this Registration Rights Agreement to
be duly
executed as of the date first written above.
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[OTHER
BUYERS]
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By:__________________________________
Name:
Title:
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EXHIBIT
A
SCHEDULE
OF BUYERS
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Investor
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Investor's
Address
and
Facsimile Number
|
Investor's
Representative's Address
and
Facsimile Number
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EXHIBIT
B
SELLING
STOCKHOLDERS
The
shares of common stock being offered by the selling stockholders are
those
previously issued to the Selling Stockholders and those issuable to
the Selling
Stockholders upon exercise of the warrants. For additional
information regarding the issuances of common stock and the warrants,
see
"Private Placement of Common Stock and Warrants" above. We are
registering the shares of common stock in order to permit the selling
stockholders to offer the shares for resale from time to time. Except
for the ownership of the shares of common stock and the warrants, the
selling
stockholders have not had any material relationship with us within
the past
three years.
The
table
below lists the selling stockholders and other information regarding
the
beneficial ownership of the shares of common stock by each of the selling
stockholders. The second column lists the number of shares of common
stock beneficially owned by each selling shareholder, based on its
ownership of
the shares of common stock and the warrants, as of ________, 2007,
assuming
exercise of the warrants held by the selling stockholders on that date,
without
regard to any limitations on exercise.
The
third
column lists the shares of common stock being offered by this prospectus
by the
selling stockholders.
In
accordance with the terms of registration rights agreements with the
holders of
the shares of common stock and the warrants, this prospectus generally
covers
the resale of at least the sum of (i) the number of shares of common
stock
issued and (ii) 150% of the number of shares of common stock issued
and issuable
upon exercise of the related warrants, determined as if the outstanding
warrants
were exercised, as applicable, in full, as of the trading day immediately
preceding the date this registration statement was initially filed
with the
SEC. The fourth column assumes the sale of all of the shares offered
by the selling stockholders pursuant to this prospectus.
Under
the
terms of the warrants, a selling stockholder may not exercise the warrants,
to
the extent such exercise would cause such selling stockholder, together
with its
affiliates, to beneficially own a number of shares of common stock
which would
exceed 4.99% of our then outstanding shares of common stock following
such
exercise, excluding for purposes of such determination shares of common
stock
issuable upon exercise of the warrants which have not been
exercised. The number of shares in the second column does not reflect
this limitation. The selling stockholders may sell all, some or none
of their shares in this offering. See "Plan of
Distribution."
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Name
of Selling Stockholder
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Number
of Shares of Common Stock
Owned
Prior to Offering
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Maximum
Number of Shares of Common Stock to be Sold Pursuant to this
Prospectus
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Number
of Shares of Common Stock Owned After Offering
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0
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PLAN
OF DISTRIBUTION
We
are
registering the shares of common stock previously issued and the shares
of
common stock issuable upon exercise of the warrants to permit the resale
of
these shares of common stock by the holders of the common stock and
warrants
from time to time after the date of this prospectus. We will not
receive any of the proceeds from the sale by the selling stockholders
of the
shares of common stock. We will bear all fees and expenses incident
to our obligation to register the shares of common stock.
The
selling stockholders may sell all or a portion of the shares of common
stock
beneficially owned by them and offered hereby from time to time directly
or
through one or more underwriters, broker-dealers or agents. If the
shares of common stock are sold through underwriters or broker-dealers,
the
selling stockholders will be responsible for underwriting discounts
or
commissions or agent's commissions. The shares of common stock may be
sold in one or more transactions at fixed prices, at prevailing market
prices at
the time of the sale, at varying prices determined at the time of sale,
or at
negotiated prices. These sales may be effected in transactions, which
may involve crosses or block transactions,
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·
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on
any national securities exchange or quotation service on
which the
securities may be listed or quoted at the time of
sale;
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in
the over-the-counter market;
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in
transactions otherwise than on these exchanges or systems
or in the
over-the-counter market;
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through
the writing of options, whether such options are listed on
an options
exchange or otherwise;
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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·
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block
trades in which the broker-dealer will attempt to sell the
shares as agent
but may position and resell a portion of the block as principal
to
facilitate the transaction;
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·
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purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account;
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·
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an
exchange distribution in accordance with the rules of the
applicable
exchange;
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privately
negotiated transactions;
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·
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sales
pursuant to Rule 144;
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broker-dealers
may agree with the selling securityholders to sell a specified
number of
such shares at a stipulated price per
share;
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·
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a
combination of any such methods of sale;
and
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·
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any
other method permitted pursuant to applicable
law.
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If
the
selling stockholders effect such transactions by selling shares of
common stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or commissions
from
purchasers of the shares of common stock for whom they may act as agent
or to
whom they may sell as principal (which discounts, concessions or commissions
as
to particular underwriters, broker-dealers or agents may be in excess
of those
customary in the types of transactions involved). In connection with
sales of the shares of common stock or otherwise, the selling stockholders
may
enter into hedging transactions with broker-dealers, which may in turn
engage in
short sales of the shares of common stock in the course of hedging
in positions
they assume. The selling stockholders may also sell shares of common
stock short and deliver shares of common stock covered by this prospectus
to
close out short positions and to return borrowed shares in connection
with such
short sales. The selling stockholders may also loan or pledge shares
of common stock to broker-dealers that in turn may sell such
shares.
The
selling stockholders may pledge or grant a security interest in some
or all of
the warrants or shares of common stock owned by them and, if they default
in the
performance of their secured obligations, the pledgees or secured parties
may
offer and sell the shares of common stock from time to time pursuant
to this
prospectus or any amendment to this prospectus under Rule 424(b)(3)
or other
applicable provision of the Securities Act, amending, if necessary,
the list of
selling stockholders to include the pledgee, transferee or other successors
in
interest as selling stockholders under this prospectus. The selling
stockholders also may transfer and donate the shares of common stock
in other
circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes
of
this prospectus.
The
selling stockholders and any broker-dealer participating in the distribution
of
the shares of common stock may be deemed to be "underwriters" within
the meaning
of the Securities Act, and any commission paid, or any discounts or
concessions
allowed to, any such broker-dealer may be deemed to be underwriting
commissions
or discounts under the Securities Act. At the time a particular
offering of the shares of common stock is made, a prospectus supplement,
if
required, will be distributed which will set forth the aggregate amount
of
shares of common stock being offered and the terms of the offering,
including
the name or names of any broker-dealers or agents, any discounts, commissions
and other terms constituting compensation from the selling stockholders
and any
discounts, commissions or concessions allowed or reallowed or paid
to
broker-dealers.
Under
the
securities laws of some states, the shares of common stock may be sold
in such
states only through registered or licensed brokers or dealers. In
addition, in some states the shares of common stock may not be sold
unless such
shares have been registered or qualified for sale in such state or
an exemption
from registration or qualification is available and is complied
with.
There
can
be no assurance that any selling stockholder will sell any or all of
the shares
of common stock registered pursuant to the registration statement,
of which this
prospectus forms a part.
The
selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange
Act of 1934,
as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing
of
purchases and sales of any of the shares of common stock by the selling
stockholders and any other participating person. Regulation M may
also restrict the ability of any person engaged in the distribution
of the
shares of common stock to engage in market-making activities with respect
to the
shares of common stock. All of the foregoing may affect the
marketability of the shares of common stock and the ability of any
person or
entity to engage in market-making activities with respect to the shares
of
common stock.
We
will
pay all expenses of the registration of the shares of common stock
pursuant to
the registration rights agreement, estimated to be
$[ ] in total, including, without limitation,
Securities and Exchange Commission filing fees and expenses of compliance
with
state securities or "blue sky" laws; provided, however, that a selling
stockholder will pay all underwriting discounts and selling commissions,
if
any. We will indemnify the selling stockholders against liabilities,
including some liabilities under the Securities Act, in accordance
with the
registration rights agreements, or the selling stockholders will be
entitled to
contribution. We may be indemnified by the selling stockholders
against civil liabilities, including liabilities under the Securities
Act, that
may arise from any written information furnished to us by the selling
stockholder specifically for use in this prospectus, in accordance
with the
related registration rights agreements, or we may be entitled to
contribution.
Once
sold
under the registration statement, of which this prospectus forms a
part, the
shares of common stock will be freely tradable in the hands of persons
other
than our affiliates.
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
AeroGrow
International Inc.
We
consent to the incorporation by reference in the registration statements
on
Forms SB-2 (Nos. 333-141689 and 333-133180 of AeroGrow International
Inc. of our
report dated June 8, 2007, with respect to the balance sheets of
AeroGrow
International Inc. as of March 31, 2007 and 2006, and the related
statements of
operations, shareholders’ equity and cash flows for the year ended March 31,
2007, the three month period ended March 31, 2006 and the year
ended December
31, 2005, which report appears in the March 31, 2007, annual report
on Form
10-KSB of AeroGrow International Inc.
/s/
Gordon, Hughes & Banks, LLP
Greenwood
Village, CO
June
29,
2007
Exhibit
31.1
CERTIFICATIONS
I,
W.
Michael Bissonnette, certify that:
1.
I have reviewed this annual report on Form 10-KSB for the fiscal
year ended
March 31, 2007 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 small business
issuer as
of, and for, the periods presented in this report;
4.
The small business issuer’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)) for the small business
issuer and we
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 small business issuer, 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;
and
(b)
Omitted; and
(c)
Evaluated the effectiveness of the small business issuer’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 small business issuer’s internal
control over financial reporting that occurred during the small
business
issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is
reasonably likely to materially affect, the small business issuer’s internal
control over financial reporting.
5.
The small business issuer’s other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to
the small business issuer’s auditors and the audit committee of the small
business issuer’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 small business issuer’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 small business issuer’s internal control over
financial reporting.
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Date: June
29, 2007
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By:
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/s/
W. Michael Bissonnette
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W.
Michael Bissonnette
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Chief
Executive Officer
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(Principal
Executive Officer)
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Exhibit
31.2
CERTIFICATIONS
I,
Mitchell B. Rubin, certify that:
1.
I have reviewed this annual report on Form 10-KSB for the fiscal year
ended
March 31, 2007 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 small business
issuer as
of, and for, the periods presented in this report;
4.
The small business issuer’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)) for the small business issuer
and we
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 small business issuer, 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;
and
(b)
Omitted; and
(c)
Evaluated the effectiveness of the small business issuer’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 small business issuer’s internal
control over financial reporting that occurred during the small business
issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is
reasonably likely to materially affect, the small business issuer’s internal
control over financial reporting.
5.
The small business issuer’s other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to
the small business issuer’s auditors and the audit committee of the small
business issuer’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 small business issuer’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 small business issuer’s internal control over
financial reporting.
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Date: June
29, 2007
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By:
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/s/
Mitchell
B.
Rubin
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Mitchell
B. Rubin
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Chief
Financial Officer
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(Principal
Financial Officer)
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Exhibit
32.1
CERTIFICATIONS
OF THE CHIEF FINANCIAL OFFICER
UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the filing by AeroGrow International, Inc. (the “Registrant”) of
its Annual Report on Form 10-KSB for the fiscal year ended March 31,
2007 (the
“Annual Report”) with the Securities and Exchange Commission, I, W. Michael
Bissonnette, Chief Executive Officer of the Registrant, 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 Annual 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 Annual Report fairly presents, in
all material
respects, the financial condition and results of operations of the
Registrant.
A
signed
original of this written statement required by Section 906 has been
provided to
the Registrant and will be retained by the Registrant and furnished
to the
Securities and Exchange Commission or its staff upon request.
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Date: June
29, 2007
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By:
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/s/
W. Michael Bissonnette
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W.
Michael Bissonnette
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Chief
Executive Officer
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(Principal
Executive Officer)
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CERTIFICATIONS
OF THE CHIEF FINANCIAL OFFICER
UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the filing by AeroGrow International, Inc. (the “Registrant”) of
its Annual Report on Form 10-KSB for the fiscal year ended March 31,
2007 (the
“Annual Report”) with the Securities and Exchange Commission, I, Mitchell B.
Rubin, Chief Financial Officer of the Registrant, 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 Annual 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 Annual Report fairly presents, in
all material
respects, the financial condition and results of operations of the
Registrant.
A
signed
original of this written statement required by Section 906 has been
provided to
the Registrant and will be retained by the Registrant and furnished
to the
Securities and Exchange Commission or its staff upon request.
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Date:
June 29, 2007
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By:
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/s/
Mitchell
B.
Rubin
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Mitchell
B. Rubin
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Chief
Financial Officer
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(Principal
Financial Officer)
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