UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549  

 
FORM 10-Q  

 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2014
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 
For the transition period from  ______________ to ______________
  
Commission File No. 001-33531
 
AEROGROW INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 
NEVADA
46-0510685
(State or other jurisdiction
of incorporation or organization)
(IRS Employer
Identification Number)
  
6075 Longbow Drive, Suite 200, Boulder, Colorado
80301
 (Address of principal executive offices)
 (Zip Code)
 
(303) 444-7755
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o              
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   o
Accelerated filer    o
 
Non-accelerated filer    o (Do not check if smaller reporting company)
Smaller reporting company    x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x
 
Number of shares of issuer's common stock outstanding as of February 5, 2015:  6,536,018

 
 
 
AeroGrow International, Inc.
TABLE OF CONTENTS
FORM 10-Q REPORT
December 31, 2014
 
     
     
PART I   Financial Information
 
     
Item 1.
3
 
3
 
4
 
5
 
7
     
Item 2.
16
Item 3.
28
Item 4.
28
     
PART II  Other Information
 
     
Item 1.
29
Item 1A.  
29
Item 2.
29
Item 3.
29
Item 4.
29
Item 5.
29
Item 6.
30
   
31
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
Item 1. Condensed Financial Statements
 
AEROGROW INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
 
   
December 31, 2014
   
March 31, 2014
 
(in thousands, except share and per share data)
ASSETS
 
(Unaudited)
   
(Derived from Audited Statements)
 
Current assets
           
Cash
 
$
2,261
   
$
1,707
 
Restricted cash
   
15
     
15
 
Accounts receivable, net of allowance for doubtful accounts of $54 and $5
at December 31, 2014 and March 31, 2014, respectively
   
5,401
     
573
 
Other receivables
   
152
     
187
 
Inventory
   
3,472
     
1,311
 
Prepaid expenses and other
   
219
     
306
 
            Total current assets
   
11,520
     
4,099
 
Property and equipment, net of accumulated depreciation of  $3,205 and $3,024
at December 31, 2014 and March 31, 2014, respectively
   
594
     
298
 
Other assets
               
Intangible assets
   
2
     
2
 
Deposits
   
156
     
145
 
              Total other assets
   
158
     
147
 
Total assets
 
$
12,272
   
$
4,544
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities
               
Accounts payable
 
$
2,753
   
$
553
 
Accrued expenses
   
1,002
     
306
 
Deferred rent
   
1
     
3
 
Notes payable – related party
   
4,643
     
-
 
Derivative warrant liability
   
2,369
     
2,530
 
Debt associated with sale of intellectual property
   
220
     
258
 
            Total current liabilities
   
10,988
     
3,650
 
Commitments and contingencies
               
Stockholders' equity
               
Preferred stock, $.001 par value, 20,000,000 shares authorized, 2,649,007 issued and
outstanding at December 31, 2014 and March 31, 2014
   
3
     
3
 
Common stock, $.001 par value, 750,000,000 shares authorized, 6,536,018 and
6,129,326 shares issued and outstanding at December 31, 2014 and March 31,
2014, respectively
   
7
     
6
 
Additional paid-in capital
   
81,232
     
79,563
 
Stock dividend to be distributed
   
598
     
1,456
 
Accumulated deficit
   
(80,556
)
   
(80,134
)
Total stockholders' equity
   
1,284
     
894
 
Total liabilities and stockholders' equity
 
$
12,272
   
$
4,544
 

See accompanying notes to the condensed financial statements.
 
AEROGROW INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months ended
December 31,
   
Nine Months ended
December 31,
 
(in thousands, except per share data)
 
2014
   
2013
   
2014
 
2013
 
Net revenue
 
$
10,980
   
$
4,968
   
$
14,370
   
$
6,767
 
Cost of revenue
   
7,635
     
2,867
     
9,862
     
3,977
 
Gross profit
   
3,345
     
2,101
     
4,508
     
2,790
 
                                 
Operating expenses
                               
Research and development
   
83
     
53
     
280
     
198
 
Sales and marketing
   
1,724
     
1,188
     
2,750
     
1,936
 
General and administrative
   
624
     
489
     
1,680
     
1,296
 
Total operating expenses
   
2,431
     
1,730
     
4,710
     
3,430
 
                                 
Profit (loss) from operations
   
914
     
371
     
(202
)
   
(640
)
                                 
Other (expense) income, net
                               
Fair value changes in derivative warrant liability
   
373
     
(18
 )
   
160
     
(31
)
Interest expense
   
-
     
(14
 )
   
-
     
(65
)
Interest expense – related party
   
(106
)
   
(2
 )
   
(143
)
   
(8
 )
Other (expense) income, net
   
(1
)
   
(35
 )
   
1
     
498
 
Total other (expense) income, net
   
266
     
(69
 )
   
18
     
394
 
                                 
Net income (loss)
 
$
1,180
   
$
302
   
$
(184
)
 
$
(246
)
Less: Deemed dividend on convertible preferred stock
   
-
     
-
     
-
     
(268
)
Change in fair value of preferred stock dividend
   
(153
)
   
(226
)
   
(238
)
   
(367
)
Net income (loss) attributable to common shareholders
 
$
1,027
   
$
76
   
$
(422
)
 
$
(881
)
                                 
Net income (loss) per share, basic
 
$
0.16
   
$
0.01
   
$
(0.07
)
 
$
(0.10
)
                                 
Net income (loss) per share, diluted
 
$
0.15
   
$
0.01
   
$
(0.07
)
 
$
(0.10
)
                                 
Weighted average number of common
shares outstanding, basic
   
6,536
     
5,906
     
6,358
     
5,905
 
                                 
Weighted average number of common
shares outstanding, diluted
   
6,775
     
5,992
     
6,358
     
5,905
 

See accompanying notes to the condensed financial statements.
 
 
AEROGROW INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Nine Months Ended
December 31,
(in thousands)
 
   
2014
   
2013
 
Cash flows from operating activities:
           
Net (loss)
 
$
(184
)
 
$
(246
)
Adjustments to reconcile net (loss) to cash (used) provided  by operations:
               
Issuance of common stock and options under equity compensation plans
   
224
     
176
 
Issuance of common stock warrants
   
36
     
18
 
Depreciation and amortization expense
   
181
     
113
 
Bad debt expense
   
45
     
13
 
Fair value remeasurement of derivative warrant liability
   
(160)
     
31
 
Accretion of debt associated with sale of intellectual property
   
(38
)
   
(35
)
Gain on the forgiveness of debt
   
-
     
(489
)
Amortization of debt issuance costs
   
-
     
16
 
    SMG intellectual property royalty and branding license
   
692
     
212
 
Change in operating assets and liabilities:
               
(Increase) in accounts receivable
   
(4,873
)
   
(1,313
)
Decrease in other receivable
   
35
     
38
 
(Increase) in inventory
   
(2,161
)
   
(606
)
Decrease (increase) in other current assets
   
87
     
(18
)
(Increase) in deposits
   
(11
)
   
-
 
Increase in accounts payable
   
1,797
     
165
 
Increase in accrued expenses
   
695
     
517
 
Increase in accrued interest
   
-
     
49
 
Increase  in accrued interest-related party
   
143
     
8
 
(Decrease) increase in customer deposits
   
-
     
(157
)
(Decrease) in deferred rent
   
(2
)
   
(2
)
Net cash (used)  by operating activities
 
$
(3,494
)
 
$
(1,510
)
Cash flows from investing activities:
               
Decrease in restricted cash
   
-
     
27
 
Purchases of equipment
   
(477
)
   
(184
)
Proceeds from the sale of intellectual property
   
-
     
500
 
Net cash (used) provided by investing activities
 
$
(477
)
 
$
343
 
Cash flows from financing activities:
               
Proceeds from notes payable – related party
   
4,500
     
-
 
Repayments of notes payable
   
-
     
(563
)
Repayments of notes payable – related party
   
-
     
(123
)
Repayments of long term debt borrowings
   
 -
     
(1,243
)
Proceeds from the exercise of stock options
   
25
     
2
 
Proceeds from the issuance of preferred stock
   
-
     
4,000
 
Payments for offering costs of preferred stock
   
-
     
(157
)
Net cash provided by financing activities
 
$
4,525
   
$
1,916
 
Net increase in cash
   
554
     
749
 
Cash, beginning of period
   
1,707
     
525
 
Cash, end of period
 
$
2,261
   
$
1,274
 
 
See supplemental disclosures below and the accompanying notes to the condensed financial statements.
 
 
   
Nine Months Ended
December 31,
(in thousands)
 
   
2014
   
2013
 
  Cash paid during the year for:            
Interest
 
$
-
   
$
41
 
Income taxes
 
$
-
   
$
-
 
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Deemed dividend on convertible preferred stock
 
$
-
   
$
268
 
Decrease of inventory associated with debt settlement
 
$
-
   
$
237
 
Fair value of derivative warrant liability
 
$
-
   
$
564
 
Fair value of warrant issue to placement agent
 
$
-
   
$
108
 
Debt associated with sale of intellectual property
 
$
-
   
$
297
 
Change in fair value of stock dividends accrued on convertible preferred stock
 
$
238
   
$
367
 
Decrease in liability due to issuance of SMG shares
 
$
288
   
$
-
 
 
 
AEROGROW INTERNATIONAL, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 
1.    Description of the Business
 
AeroGrow International, Inc. (the “Company," “AeroGrow,” “we,” “our” or “us”) was formed as a Nevada corporation in March 2002. The Company’s principal business is developing, marketing, and distributing advanced indoor aeroponic garden systems designed and priced to appeal to the consumer gardening, cooking and small indoor appliance markets worldwide.   The Company manufactures, distributes and markets nine different models of its AeroGarden systems in multiple colors, as well as over 40 varieties of seed pod kits and a full line of accessory products through multiple channels including retail distribution, catalogue and direct-to-consumer sales primarily in the United States and Canada, as well as selected countries in Europe, Asia and Australia.
 
2.    Liquidity and Basis of Presentation
 
Interim Financial Information

The unaudited interim financial statements of the Company included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These condensed statements do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual audited financial statements and should be read in conjunction with the Company’s audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2014, as filed with the SEC on June 30, 2014.

In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments, including normal recurring adjustments, necessary to present fairly the financial position of the Company at December 31, 2014, the results of operations for the three- and nine–month periods ended December 31, 2014 and 2013, and the cash flows for the nine–month periods ended December 31, 2014 and 2013. The results of operations for the three and nine months ended December 31, 2014 are not necessarily indicative of the expected results of operations for the full year or any future period. In this regard, the Company’s business is highly seasonal, with approximately 60.9% of revenues in the fiscal year ended March 31, 2014 (“Fiscal 2014”) occurring in the four consecutive calendar months of October through January.  Furthermore, during the nine-month period ended December 31, 2014, the Company continued to expand its distribution channel to prepare for the peak sales season.  The balance sheet as of March 31, 2014 is derived from the Company’s audited financial statements.
 
Sources of funding to meet prospective cash requirements include the Company’s existing cash balances, cash flow from operations, and borrowings under the Company’s debt arrangements and a strategic relationship entered into with The Scotts Miracle-Gro Company (collectively with its subsidiary, “SMG” or “Scotts Miracle-Gro”) on July 10, 2014.  (Refer to Note 3 for a detailed discussion on SMG’s involvement.).  We may need to seek additional capital, however, to provide a cash reserve against contingencies, address the seasonal nature of our working capital needs, and to enable us to invest further in trying to increase the scale of our business.  There can be no assurance we will be able to raise this additional capital.

Significant Accounting Policies
 
Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  It is reasonably possible that a change in the Company’s estimates could occur in the near term as information becomes available.
 
 
Net Income (Loss) per Share of Common Stock

The Company computes net income (loss) per share of common stock in accordance with Accounting Standards Codification (“ASC”) 260.  ASC 260 requires companies with complex capital structures to present basic and diluted earnings per share (“EPS”).  Basic EPS is measured as the income or loss available to common stockholders divided by the weighted average shares of common stock outstanding for the period. Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of potential common stock (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.  Employee stock options to purchase approximately 93,000 shares were outstanding and approximately 525,000 warrants to purchase common stock were outstanding but were not included in the computation of diluted net income per share because the effect of including such shares would have been antidilutive for the 3 months ended December 31, 2014 and December 31, 2013.  All potentially dilutive securities outstanding have been excluded for the nine months ended December 31, 2014 and December 31, 2013 since their effect would be antidilutive.

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation.

Concentrations of Risk

ASC 825-10-50-20   requires disclosure of significant concentrations of credit risk regardless of the degree of such risk.  Financial instruments with significant credit risk include cash deposits.  The amount on deposit with one financial institution exceeded the $250,000 federally insured limit as of December 31, 2014.  However, management believes that the financial institution is financially sound and the risk of loss is minimal.
 
Customers:
For the three months ended December 31, 2014, three customers, Amazon.com, Wal-Mart, and Costco warehouses, represented 27.2%, 25.0% and 17.4% of the Company’s net revenue, respectively. For the three months ended December 31, 2013, two customers, Amazon.com and Costco, represented 39.2% and 10.7% of the Company’s net revenue, respectively. For the nine months ended December 31, 2014, three customers, Amazon.com, Wal-Mart, and Costco, represented 24.6%, 19.1% and 13.5% of the Company’s net revenue, respectively. For the nine months ended December 31, 2013, one customer, Amazon.com that represented 33.6% of the Company’s net revenue, respectively.

Suppliers:
For the three months ended December 31, 2014, the Company purchased inventories and other inventory-related items from one supplier totaling $1.7 million, representing 22.0%, of cost of revenue. For the three months ended December 31, 2013, the Company purchased inventories and other inventory-related items from three suppliers totaling $839,000, $707,000, and $205,000, representing 29.3%, 24.7%, and 7.2% of cost of revenue, respectively. For the nine months ended December 31, 2014, the Company purchased inventories and other inventory-related items from three suppliers totaling $4.5 million, $1.7 million, and $1.2 million representing 45.7%, 17.2%, and 11.7%, of cost of revenue, respectively. For the nine months ended December 31, 2013, the Company purchased inventories and other inventory-related items from two suppliers totaling $1.4 million, and $992,000 representing 34.4%, and 24.9% of cost of revenue, respectively.

The Company’s primary contract manufacturers are located in China.  As a result, the Company may be subject to political, currency, regulatory, transportation, third-party labor and weather/natural disaster risks.  Although the Company believes alternate sources of manufacturing could be obtained, these risks could have an adverse impact on operations.

Accounts Receivable:
As of December 31, 2014, the Company had three customers, Costco warehouses, Wal-Mart, and Amazon.com, that represented 36.0%, 34.4%, and 20.7% of the Company’s outstanding accounts receivable, respectively.  As of March 31, 2014, the Company had three customers, Amazon.com, Costco.com and The Home Depot, that represented 44.1%, 24.5% and 11.1%, respectively, of outstanding accounts receivable.  The Company believes that all receivables from these customers are collectible.

Fair Value of Financial Instruments

The Company follows the guidance in ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), as it relates to the fair value of its financial assets and liabilities. ASC 820 provides for a standard definition of fair value to be used in new and existing pronouncements. This guidance requires disclosure of fair value information about certain financial instruments (insurance contracts, real estate, goodwill and taxes are excluded) for which it is practicable to estimate such values, whether or not these instruments are included in the balance sheet at fair value. The fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation.
 
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., the exit price, in an orderly transaction between market participants.  ASC 820 also provides a hierarchy for determining fair value, which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority given to Level 1, as these are the most reliable, and the lowest priority given to Level 3.
 
Level 1 – Quoted prices in active markets for identical assets.

Level 2 – Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.
 
Level 3 – Unobservable inputs that are supported by little or no market activity.

The carrying value of financial instruments including receivables, accounts payable and accrued expenses, approximates their fair value at December 31, 2014 and March 31, 2014 due to the relatively short-term nature of these instruments. 

The Company has three liabilities for which the carrying value is determined by Level 3 inputs: (1) Notes payable – related party; (2) sale of intellectual property liability; and (3) derivative warrant liability.  As discussed below in Notes 3 and 4, each of these liabilities was incurred in conjunction with the Company’s strategic alliance with Scotts Miracle-Gro.  As of December 31, 2014 and March 31, 2014, the fair value of the note payable and the sale of intellectual property liability were estimated using the discounted cash flow method, which is based on expected future cash flows, discounted to present value using a discount rate of 15%.  The Company also issued a derivative liability warrant that entitles, but does not obligate, Scotts Miracle-Gro to purchase a number of shares of common stock that, on a fully diluted basis, would constitute 80% of the Company’s outstanding capital stock.  The Company accounts for the warrant as a liability and measures the value of the warrant using the Monte Carlo simulation model as of the end of each quarterly reporting period until the warrant is exercised or expires.  As of December 31, 2014, and March 31, 2014, the fair value of the warrant was $2.4 million and $2.5 million, respectively. As of March 31, 2014, the Company did not have any financial assets or liabilities that were measured at fair value on a recurring basis subsequent to initial recognition, except for the derivative warrant liability.  The table below summarizes the fair value and carry value of each Level 3 category liability:
 
   
December 31, 2014
(in thousands)
   
March 31, 2014
(in thousands)
 
   
Fair Value
   
Carry Value
   
Fair Value
   
Carry Value
 
Liabilities
                       
Notes payable-related party
 
$
4,444
   
$
4,643
   
$
-
   
$
-
 
Derivative warrant liability
   
2,369
     
2,369
     
2,530
     
2,530
 
Sale of intellectual property liability
   
152
     
220
     
171
     
258
 
Total
 
$
6,965
   
$
7,232
   
$
2,701
   
$
2,788
 
 
Accounts Receivable and Allowance for Doubtful Accounts
 
The Company sells its products to retailers and consumers. Consumer transactions are primarily paid by credit card.  Retailer sales terms vary by customer, but generally range from net 30 days to net 60 days.  Accounts receivable are reported at net realizable value and net of the allowance for doubtful accounts. The Company uses the allowance method to account for uncollectible accounts receivable. The Company's allowance estimate is based on a review of the current status of trade accounts receivable, which resulted in an allowance of $54,000 and $5,000 at December 31, 2014 and March 31, 2014, respectively.

Other Receivables

In conjunction with the Company’s processing of credit card transactions for its direct-to-consumer sales activities and as security with respect to the Company’s performance for credit card refunds and charge backs, the Company is required to maintain a cash reserve with Litle and Company, the Company’s credit card processor. This reserve is equal to 5% of the credit card sales processed during the previous six months. As of December 31, 2014 and March 31, 2014, the balance in this reserve account was $152,000 and $187,000, respectively.
 
 
Advertising and Production Costs

The Company expenses all production costs related to advertising, including print, television, and radio advertisements when the advertisement has been broadcast or otherwise distributed.  The Company records media costs related to its direct-to-consumer advertisements, inclusive of postage and printing costs incurred in conjunction with mailings of direct-response catalogues, and related direct-response advertising costs, in accordance with ASC 340-20- Reporting on Advertising Costs .  As prescribed by ASC 340-20-25, direct-to-consumer advertising costs incurred are reported as assets and are amortized over the estimated period of the benefits, based on the proportion of current period revenue from the advertisement to probable future revenue.  

Advertising expense for the three and nine months ended December 31, 2014 and December 31, 2013, were as follows:
 
   
Three Months Ended
December 31,
(in thousands)
   
Nine Months Ended
December 31,
(in thousands)
 
   
2014
   
2013
   
2014
   
2013
 
Direct-to-consumer
 
$
415
   
$
387
   
$
582
   
$
500
 
Retail
   
565
     
384
     
578
     
386
 
Other
   
8
     
10
     
27
     
13
 
Total advertising expense
 
$
988
   
$
781
   
$
1,187
   
$
899
 

As of December 31, 2014 and March 31, 2014, the Company deferred $1,000 and $16,000, respectively, related to media and advertising costs.

Inventory

Inventories are valued at the lower of cost, determined by the first-in, first-out method, or market.  When the Company is the manufacturer, raw materials, labor and manufacturing overhead are included in inventory costs. The Company records the raw materials at delivered cost. Standard labor and manufacturing overhead costs are applied to the finished goods based on normal production capacity.  A majority of the Company’s products are manufactured overseas and are recorded at landed cost, which includes product costs for purchased and manufactured products, and freight and transportation costs for inbound freight from manufacturers.
 
   
December 31,
   
March 31,
 
   
2014
(in thousands)
   
2014
(in thousands)
 
Finished goods
 
$
2,795
   
$
784
 
Raw materials
   
677
     
527
 
   
$
3,472
   
$
1,311
 

The Company determines an inventory obsolescence reserve based on management’s historical experience and establishes reserves against inventory according to the age of the product. As of December 31, 2014 and March 31, 2014, the Company had reserved $380,000 and $332,000 for inventory obsolescence, respectively.

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.

The Company records estimated reductions to revenue for customer and distributor programs and incentive offerings, including promotions, rebates, and other volume-based incentives.  Certain incentive programs require the Company to estimate the number of customers who will actually redeem the incentive based on industry experience. As of December 31, 2014 and March 31, 2014, the Company had accrued $383,000 and $42,000, respectively, as its estimate of 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.  Based upon the foregoing, the Company has recorded a provision for potential future warranty costs of $22,000 and $11,000 as of December 31, 2014 and March 31, 2014, respectively.
 
 
The Company reserves for known and potential returns from customers and associated refunds or credits related to such returns based upon historical experience. In certain cases, retailer customers are provided a fixed allowance, usually in the 1% to 2% range, to cover returned goods and this allowance is deducted from payments made to us by such customers. As of December 31, 2014 and March 31, 2014, the Company has recorded a reserve for customer returns of $253,000 and $61,000, respectively.
 
Recently Issued Accounting Pronouncements
 
In November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815),” which updates the guidance on the determination in evaluating whether the nature of the host contract within a hybrid financial instrument issued in the form of a share is more akin to debt or to equity. The objective of this update is to eliminate the use of different methods in practice and thereby reduce existing diversity under U.S. GAAP in the accounting for hybrid financial instruments issued in the form of a share.  The guidance requires the hybrid financial instrument, weighing each term and feature on the basis of relevant facts and circumstances. That is, an entity should determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract.  The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  This new guidance will not have a material impact on our financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers.  The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services.  The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.   This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018 using one of two prescribed retrospective methods.  Early adoption is not permitted.  We have not yet selected a transition method, nor have we determined the effect of the standard on our ongoing financial reporting.
 
3.    Notes Payable, Long Term Debt and Current Portion – Long Term Debt
 
For a detailed discussion on Notes Payable, Long Term Debt and Current Portion – Long Term Debt, refer to the Company’s Annual Report on Form 10-K for the year ended March 31, 2014, as filed with the SEC on June 30, 2014.  The following are the changes to our Notes Payable, Long Term Debt and Current Portion – Long Term Debt for the periods presented.

As of December 31, 2014 and March 31, 2014, the outstanding balance of the Company’s note payable and debt, including accrued interest, is as follows:
 
   
December 31,
   
March 31,
 
   
2014
(in thousands)
   
2014
(in thousands)
 
Notes Payable –related party
 
$
4,643
   
$
-
 
Derivative warrant liability (see Note 4)
   
2,369
     
2,530
 
Sale of intellectual property liability (see Note 4)
   
220
     
258
 
Total debt
   
7,232
     
2,788
 
Less notes payable and current portion – long term debt
   
7,232
     
2,788
 
Long term debt
 
$
-
   
$
-
 
 
Scotts Miracle-Gro Term Loan

On July 10, 2014, AeroGrow entered into a Term Loan Agreement in the principal amount of up to $4.5 million with Scotts Miracle-Gro.  The proceeds were made available as needed in three advances of up to $1.0 million, $1.5 million, and $2.0 million in July, August, and after September of 2014, respectively, with a due date of February 15, 2015.  The funding provided general working capital and was used for the purpose of acquiring inventory to support anticipated growth as the Company expands its retail and its direct-to-consumer sales channels.  The Term Loan Agreement is secured by a lien on the assets of the Company.  Interest is charged at the stated rate of 10% per annum, but will paid in shares of AeroGrow common stock, valued at a price per share equal to the conversion price of the Series B Convertible Preferred Stock (which was previously issued to Scotts Miracle-Gro in April 2013).  The accrued and unpaid interest on the Term Loan is due and payable within thirty (30) days after the Interest Payment Trigger Date (as defined in the Term Loan Agreement).  The Term Loan may be prepaid from time to time, in whole or in part, in an amount greater than or equal to $25,000, without penalty or premium.  Amounts repaid or prepaid in respect of the Term Loan may not be reborrowed.  The Term Loan Agreement was filed as an exhibit to a Current Report on Form 8-K which was filed with the SEC on July 16, 2014.  As of December 31, 2014, the outstanding balance of the Term Loan, including accrued interest, was $4.6 million and we were current and in compliance with all terms and conditions.  See Note 9, Subsequent Events for a description of loan repayments in January and February of 2015.
 
 
Liability Associated with Scotts Miracle-Gro Transaction

On April 22, 2013, the Company issued Series B Convertible Preferred Stock and a warrant to a wholly-owned subsidiary of Scotts Miracle-Gro.  Pursuant to U.S. GAAP, the Company has recorded the warrant as a liability at its estimated fair value.  The derivative warrant liability will be re-measured to fair value, on a recurring basis, at the end of each reporting period until it is exercised or expires.  The techniques used to determine the fair value of the derivative warrant liability and the terms of the warrant are further explained in Note 4.  As of December 31, 2014 and March 31, 2014, the estimated fair value of the warrant was $2.4 million and $2.5 million, respectively.  

The Company and Scotts Miracle-Gro also agreed to enter an Intellectual Property Sale Agreement, a Technology License Agreement, a Brand License Agreement, and a Supply Chain Services Agreement.  The Intellectual Property Sale Agreement and the Technology License constitute an agreement of sales of future revenues. Since the Company received cash from Scotts Miracle-Gro and agreed to pay for a defined period a specified percentage of revenue, and because the Company has significant involvement in the generation of its revenue, the excess paid over net book value is classified as debt and is being amortized under the effective interest method.  As of December 31, 2014 and March 31, 2014, the Company recorded a liability of $220,000 and $258,000, respectively.
 
4.    Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions
 
Series B Convertible Preferred Stock and Related Transactions

On April 22, 2013, the Company entered into a Securities Purchase Agreement with Scotts Miracle-Gro.  Pursuant to the Securities Purchase Agreement, Scotts Miracle-Gro acquired 2,649,007 shares of the Company’s Series B Convertible Preferred Stock, par value $0.001 per share and (ii) a warrant to purchase shares of the Company’s common stock (the “Warrant,” as described in greater detail below) for an aggregate purchase price of $4.0 million.  After deducting offering expenses, including commissions and expenses paid to the Company’s advisor, net cash proceeds totaled to $3.8 million.  The Company used $950,000 of the net proceeds to repay “in full” (with concessions) a promissory note payable to one of our principal suppliers (Main Power).  

The Company also issued a warrant to purchase 125,000 shares of the Company’s common stock to the placement agent.  This warrant has an exercise price of $1.54 per share (125% of the average closing price of the Company’s common stock during the five-day period prior to the April 22, 2013 closing date). The value of this warrant was estimated at $108,000, based on the Black-Scholes model with a stock price of $1.30, calculated exercise price of $1.54, expected life of three years, annualized volatility of 117.2% and a discount rate of 0.39%. The value of the warrant was recorded as stock issuance costs.

The Series B Preferred Stock is convertible into 2,649,007 shares of the Company’s common stock ($4.0 million divided by a conversion price of $1.51 per share).  The Series B Preferred Stock bears a cumulative annual dividend of 8.0%, payable in shares of the Company’s common stock at a conversion price of $1.51 per share (subject to customary anti-dilution rights, as described in the Series B Preferred Stock Certificates of Designations).  The Series B Preferred Stock does not have a liquidation preference and shall vote on an “as-converted” basis with the common stock.  The stock dividend will accrue from day to day and will be payable in shares of our common stock within thirty days after the end of each fiscal year end.  The stock dividend issuable will be recorded at the fair market value of our common stock at the end of each quarter in the equity section of the balance sheet.  The corresponding charge will be recorded below net income to arrive at net income available to common shareholders.  The Series B Preferred Stock automatically converts into the Company’s common stock: (i) upon the affirmative election of the holders of at least a majority of the then outstanding shares of the Series B Preferred Stock voting together as a single class on an as-if-converted to common stock basis; or (ii) if, at the date of exercise in whole or in part of the Warrant, the holder (or holders) of the Series B Preferred Stock own 50.1% of the issued and the Company’s then-outstanding common stock, giving effect to the issuance of shares of common stock in connection with the conversion of the Series B Preferred Stock and such exercise of the Warrant.
 
The Warrant entitles, but does not obligate, Scotts Miracle-Gro to purchase a number of shares of common stock that, on a “fully diluted basis” (as defined in the Securities Purchase Agreement), constitute 80% of the Company’s outstanding capital stock (when added to all other shares owned by Scotts Miracle-Gro), as calculated as of the date or dates of exercise.  The Warrant can be exercised at any time and from time to time for a period of five years between April 22, 2016 and April 22, 2021 (the third and eighth anniversary of the closing date, respectively).  In addition, the Warrant can be exercised in any increment; there is no obligation to exercise the entire Warrant at one time.  The exercise price of the Warrant shall be equal to the quotient obtained by dividing:

 
(a)  
an amount equal to (i) 1.34 times the trailing twelve months “Net Sales” (which includes sales of the Company’s products by Scotts Miracle-Gro and its affiliates) minus (ii) “Debt Outstanding” net of cash (as such terms are defined in the Warrant),

by

 
(b)  
the total shares of capital stock outstanding, including outstanding in-the-money options and warrants, but not the Warrant contemplated in this Private Offering.
 
 
The Warrant expires on April 22, 2021, the eighth anniversary of the closing date.  The Warrant contains customary anti-dilution rights (for stock splits, stock dividends and sales of substantially all the Company’s assets).  Scotts Miracle-Gro also has the right to participate pro rata, based on Scotts Miracle-Gro’s percentage equity ownership in the Company (assuming the exercise of Scotts Miracle-Gro’s Warrant, but not the exercise of any options outstanding under the Company’s equity compensation plans) in future issuances of the Company’s equity securities.  Upon exercise of the Warrant and demand by Scotts Miracle-Gro, the Company must use its best efforts to file a Registration Statement on Form S-3, or, if the Company is not eligible for Form S-3, on Form S-1 (collectively, the “Registration Statement”), covering the shares of the Company’s common stock covered by the Preferred Stock and the Warrant, within 120 calendar days after receipt of Scotts Miracle-Gro’s demand for registration and shall use its best efforts to cause the Registration Statement to become effective as soon as possible thereafter.

The private offering and sale of the Series B Preferred Stock and Warrant was conducted in reliance upon exemptions from registration requirements under the Securities Act, including, without limitation, those under Regulation D promulgated under the Securities Act.  Scotts Miracle-Gro is an “accredited investor,” as defined in Rule 501 of Regulation D under the Securities Act.  Because the Series B Preferred Stock and the Warrant have not been registered under the Securities Act, they may not be reoffered or resold in the United States absent registration or an applicable exemption from registration.

The foregoing description of the Securities Purchase Agreement, the Certificates of Designations for the Series B Convertible Preferred Stock, the Warrant, and the resulting transaction is only a summary, does not purport to be complete, and is qualified in its entirety by reference to the full text of the applicable documents, each of which was included as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 23, 2013. The warrant on the Series B Convertible Preferred Stock was accounted for as a liability at its estimated fair value of $2.4 million as of December 31, 2014. The derivative warrant liability will be re-measured to fair value, on a recurring basis, at the end of each reporting period until it is exercised or expires. The Company calculated the fair value of the Warrant during the quarter ended December 31, 2014 using a Monte Carlo simulation model.

In conjunction with the private offering of Series B Preferred Stock and the Warrant above, the Company used $950,000 of the net proceeds to repay “in full” (with concessions) a Promissory Note with Main Power, one of the Company’s principal suppliers.  Main Power also released the Company’s pledged collateral and the parties agreed to terminate the Letter Agreement and Promissory Note effective as of April 22, 2013, as further described in Note 3 of the Form 10-K for the year ended March 31, 2014, as filed with the SEC on June 30, 2014.  The Company did not incur any early termination penalties. As of April 23, 2013, there was $237,000 in consignment inventory held by Main Power that was fully reserved for during the three-month period ended June 30, 2013.

In conjunction with the private offering described above, the Company and Scotts Miracle-Gro also agreed to enter an Intellectual Property Sale Agreement, a Technology License Agreement, a Brand License Agreement, and a Supply Chain Services Agreement.  The Intellectual Property Sale Agreement and the Technology License constitute an agreement of sales of future revenues.

For more details, regarding these agreements, please refer to Note 3 “Scotts Miracle-Gro Transactions” to the financial statements included in the Company’s Annual Report on Form 10-K, as filed with the SEC on June 30, 2014.  See also Note 3 for the Term Loan with Scotts Miracle-Gro.

5.    Equity Compensation Plans
 
For the three months ended December 31, 2014, the Company did not grant any options to purchase the Company’s common stock under the Company’s 2005 Equity Compensation Plan (the “2005 Plan”).  For the nine months ended December 31, 2014, the Company granted 93,000 options to purchase the Company’s common stock under the 2005 Plan.  For the three months ended December 31, 2013, the Company granted 180,000 options to purchase the Company’s common stock under the 2005 Plan. For the nine months ended December 31, 2013, the Company granted 331,000 options to purchase the Company’s common stock under the 2005 Plan.

During the three months ended December 31, 2014, no options to purchase shares of common stock were cancelled or expired, and no shares of common stock were issued upon exercise of outstanding stock options under the 2005 Plan.  During the three months ended December 31, 2013, options to purchase 75,000 shares of common stock were cancelled or expired, and 2,000 shares of common stock were issued upon exercise of outstanding stock options under the 2005 Plan.
 
 
During the nine months ended December 31, 2014, options to purchase 2,000 shares of common stock were cancelled or expired, and 17,000 shares of common stock were issued upon exercise of outstanding stock options under the 2005 Plan.  During the nine months ended December 31, 2013, options to purchase 109,000 shares of common stock were cancelled or expired, and 2,000 shares of common stock were issued upon exercise of outstanding stock options under the 2005 Plan.

As of December 31, 2014, the Company had granted options to purchase 131,000 shares of the Company’s common stock that are unvested and that will result in $329,000 of compensation expense in future periods if fully vested.  

Information regarding all stock options outstanding under the 2005 Plan as of December 31, 2014 is as follows:

     
OPTIONS OUTSTANDING
   
OPTIONS EXERCISABLE
 
           
Weighted-
                   
Weighted-
           
           
average
   
Weighted-
   
Aggregate
       
average
   
Weighted-
 
Aggregate
 
           
Remaining
   
average
   
Intrinsic
       
Remaining
   
average
 
Intrinsic
 
Exercise
   
Options
   
Contractual
   
Exercise
   
Value
   
Options
 
Contractual
   
Exercise
 
Value
 
price
   
(in thousands)
   
Life (years)
   
Price
   
(in thousands)
   
(in thousands)
 
Life (years)
   
Price
 
(in thousands)
 
$
1.01
     
106
     
3.11
   
$
1.01
           
99
   
3.11
   
$
1.01
       
$
1.10
     
50
     
3.25
   
$
1.10
           
50
   
3.25
   
$
1.10
       
$
1.21
     
50
     
3.25
   
$
1.21
           
50
   
3.25
   
$
1.21
       
$
2.20
     
162
     
3.69
   
$
2.20
           
108
   
3.66
   
$
1.21
       
$
2.42
     
10
     
4.77
   
$
2.42
           
10
   
3.77
   
$
1.21
       
$
5.31
     
93
     
4.60
   
$
5.31
           
23
   
4.60
   
$
5.31
       
         
471
     
3.65
   
$
2.33
   
$
 814
   
340
   
3.44
   
$
1.76
 
$
712
 

The aggregate intrinsic value in the preceding table represents the difference between the Company’s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented, which was December 31, 2014.
 
6.    Income Taxes
 
The Company follows the guidance in ASC 740, Accounting for Uncertainty in Income Taxes (“ASC 740”) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.  This interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at the end of each period, based on enacted laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income.  Any liability for actual taxes to taxing authorities is recorded as income tax liability. 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. As of December 31, 2014 and March 31, 2014, the Company recognized a valuation allowance equal to 100% of the net deferred tax asset balance and the Company has no unrecognized tax benefits related to uncertain tax positions.
 
7.    Related Party Transactions
 
See above Note 3 Notes Payable, Long Term Debt and Current Portion – Long Term Debt for disclosure of related party transactions.  See Note 3 of our Form 10-K for the year ended March 31, 2014, as filed with the SEC on June 30, 2014 for a detailed discussion of any related party transactions during the prior year period. 
 
 
8.    Stockholders’ Equity
 
  A summary of the Company’s common stock warrant activity for the period from April 1, 2014 through December 31, 2014 is presented below:

   
Warrants
Outstanding
(in thousands)
   
Weighted
Average
Exercise Price
   
Aggregate
Intrinsic Value
(in thousands)
 
Outstanding, April 1, 2014
   
575
   
$
20.24
   
$
383
 
Granted
   
-
     
-
         
Exercised
   
-
     
-
         
Expired
   
(8
)
   
799.87
         
Outstanding, December 31, 2014
   
567
   
$
9.38
   
$
83
 
 
As of December 31, 2014, the Company had the following outstanding warrants to purchase its common stock:

     
Weighted Average
 
Warrants Outstanding
(in thousands)
   
Exercise Price
   
Remaining Life (years)
 
 
50
   
$
                   2.10
     
                       3.77
 
 
                    394
   
$
                   7.00
     
                       2.28
 
 
                    123
   
$
                20.00
     
                       0.37
 
 
                    567
   
$
                 9.38
     
                       2.00
 
 
As discussed further in Note 4, the Company also issued a warrant that entitles, but does not obligate Scotts Miracle-Gro to purchase a number of shares of common stock that, on a fully diluted basis, constitute 80% of the Company’s outstanding capital stock.  The warrant on the Series B Convertible Preferred Stock was accounted for as a liability at its estimated fair value.  The warrant liability will be re-measured to fair value at the end of each reporting period until it is exercised or expires.  The tables above exclude the warrant issued to Scotts Miracle-Gro because the number of shares issuable upon exercise of the warrant is not determinable and not exercisable until 2016, as discussed above.

9.    Subsequent Events
 
In January and February 2015, the Company completed aggregate payments of $3.0 million to Scotts Miracle-Gro for payment on the July 2014 Term Loan Agreement as discussed above.  The remaining balance owed on the Term Loan Agreement is $1.6 million, including accrued interest of $143,000 of which interest will be paid in shares of common stock.  On February 13, 2015, the Company amended the Term Loan Agreement with Scotts Miracle-Gro to extend the maturity date to April 15, 2015.

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion contained herein is for the three and nine months ended December 31, 2014 and December 31, 2013.  The following discussion should be read in conjunction with the financial statements of AeroGrow International, Inc. (the “Company,” “we,” “AeroGrow,” or “our”) and the notes to the financial statements included in Item 1 above in this Quarterly Report on Form 10-Q for the period ended December 31, 2014 (this “Quarterly Report”). The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements that include words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “may,” “will,” or similar expressions that are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements include, but are not limited to, statements regarding our intent, belief, or current expectations regarding our strategies, plans, and objectives, our product release schedules, our ability to design, develop, manufacture, and market products, the ability of our products to achieve or maintain commercial acceptance, our ability to obtain financing necessary to fund our future operations, and our ability to continue as a going concern. Such statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Factors that could cause or contribute to the differences are discussed in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2014.  Except as required by applicable law or regulation, we undertake no obligation to revise or update any forward-looking statements contained in this Quarterly Report. The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. Each reader should carefully review and consider the various disclosures we made in this Quarterly Report and in our other filings with the U.S. Securities and Exchange Commission (“SEC”).

Overview

AeroGrow International, Inc. was formed as a Nevada corporation in March 2002. The Company’s principal business is developing, marketing, and distributing advanced indoor aeroponic garden systems designed and priced to appeal to the consumer gardening, cooking and small indoor appliance markets worldwide.  The Company’s principal activities from its formation through March 2006, consisted of product research and development, market research, business planning, and raising the capital necessary to fund these activities. In December 2005, the Company commenced pilot production of its AeroGarden system and, in March 2006, began shipping these systems to retail and catalogue customers. The Company manufactures, distributes and markets nine different models of its AeroGarden systems in multiple colors, as well as over 40 varieties of seed pod kits and a full line of accessory products through multiple channels including online retail distribution, in-store retail distribution, catalogue and direct-to-consumer sales primarily in the United States and Canada as well as selected countries in Europe, Asia and Australia.

In April 2013, we entered into a Securities Purchase Agreement and strategic alliance with a wholly owned subsidiary of The Scotts Miracle-Gro Company (collectively with its subsidiary, “SMG” or “Scotts Miracle-Gro”). Pursuant to the Securities Purchase Agreement, we issued (i) 2.6 million shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock); and (ii) a warrant to purchase shares of our common stock for an aggregate purchase price of $4.0 million.  In addition, as part of the strategic alliance, we entered into several other agreements with Scotts Miracle-Gro, including: (i) an Intellectual Property Sale Agreement; (ii) a Technology Licensing Agreement; (iii) a Brand License Agreement; and (iv) a Supply Chain Management Agreement.

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

On July 10, 2014, the Company entered into a Term Loan Agreement in the principal amount of up to $4.5 million with Scotts Miracle-Gro. The proceeds were made available as needed in three advances of up to $1.0 million, $1.5 million, and $2.0 million in July, August, and after September of 2014, respectively, with a due date of February 15, 2015.  The Term Loan Agreement is secured by a lien on the assets of the Company.  Interest is charged at the stated rate of 10% per annum, but will paid in shares of AeroGrow common stock, valued at a price per share equal to the conversion price of the Series B Preferred Stock, (which was previously issued to Scotts Miracle-Gro in April 2013) up to 30 days after the date the Term Loan is paid in full.  The funding provided general working capital and was used for the purpose of acquiring inventory to support anticipated growth as the Company expands its retail and its direct-to-consumer sales channels.   See Note 3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” to our condensed financial statements.
 
 
Results of Operations

Three Months Ended December 31, 2014 and December 31, 2013

Summary Overview
For the three months ended December 31, 2014, we generated $11.0 million of total revenue, an increase of 121.0%, or $6.0 million, relative to the same period in the prior year.  Due to our focus on increasing our retail distribution, retail sales increased 241.3% to $8.3 million. Our focus on increasing our retail distribution led to increased sales to newly acquired retailer accounts, such as Costco warehouse, True Value, Wal-Mart, and Sam’s Club, and increased sales to existing accounts such as Amazon.com.  Direct-to-consumer sales increased 6.0%, to $2.7 million, reflecting new product offerings, efficient advertising, joint marketing programs with Scotts Miracle-Gro, and increased visibility from and expanded retail presence while mailing fewer catalogues to drive sales in this channel.

For the three months ended December 31, 2014, sales of AeroGardens increased by 155.2% from the prior year period due to the large increase in retail sales, which were primarily garden focused.  Seed pod kit and accessory sales increased by 19.0% over prior the year period as our established base of AeroGardeners continues to grow.   This percentage increase, on a product line basis, was attributable to increased retail distribution, which tends initially to favor garden sales over seed pod kit or accessory sales, especially during the high demand holiday season.  Seed pod kit and accessory gross sales decreased as a percent of the total in the prior year period due largely to the increased size of garden sales.

During the three months ended December 31, 2014, we spent $988,000 in advertising expenditures to support our direct-to-consumer and retail channels, a 26.6% year-over-year increase compared to the same period in Fiscal 2014. As the Company moves into more of a multi-channel selling environment including direct-to-consumer, online retail sales and in store retail sales, the Company reviews its advertising expenses in a consolidated fashion across all channels. Viewed this way, overall advertising efficiency increased from $6.36 to $11.11 for the three months ended December 31, 2013 and December 31, 2014, respectively. These expenditures were divided as follows:
 
·  
Direct-to-consumer advertising increased to $415,000 from $387,000 for the three months ended December 31, 2014 and December 31, 2013, respectively.  Efficiency, as measured by dollars of direct-to-consumer sales per dollar of related advertising expense, decreased to $6.42 for the three months ended December 31, 2014, a 1.0% decrease from $6.49 for the same period in Fiscal 2014.

·  
Retail advertising increased to $565,000 from $384,000 for the three months ended December 31, 2014 and December 31, 2013, respectively, as the Company focused on driving product awareness on behalf of our retail partners and our expanded operations into the retail market.

Our gross margin for the three months ended December 31, 2014 was 30.5%, down from 42.3% in the prior year period. This decline was anticipated as we shifted our revenue mix in two ways: (i) from higher margin direct-to-consumer customers sales to lower margin wholesale sales to retailers; and (ii) from higher margin seed pod kit and accessory sales to lower margin AeroGarden sales. In the absence of a large national media spend to create awareness and drive sales, we offered aggressive pricing to several of our retail partners in exchange for in store promotions. These promotions, totaling $488,000, impacted our gross margin by 2.9%, and under U.S. GAAP accounting requirements are treated as reduction to revenue, not advertising expense. As we were not in these stores last year, there is no year-over-year comparison.

In aggregate, our total operating expenses increased 40.5%, or $700,000, year-over-year, principally because we spent more in all operating expense categories to support the 121.0% increase in the current quarter revenue growth.  Even with this increase, operating expenses as a percentage of revenue decreased by 12.7% year over year.  Spending increased in the following areas:

·  
$207,000 in advertising primarily with our larger retailers;

·  
$152,000 in sales displays for as part of our introduction into retail environments;

·  
Sales and Marketing personnel expenses increased $130,000 to support our sales, marketing, and customer service efforts as our established base of AeroGardens and awareness in the marketplace grow;

·  
$22,000 in ongoing certification and testing of our existing and new products; and

·  
$70,000 of general expenses for depreciation and bad debt allowance.
 
 
As a result of the 121.0% increase in sales, our operating profit was $914,000 for the three months ended December 31, 2014, as compared to an operating profit of $371,000 in the prior year period.

Net other income for the three months ended December 31, 2014 totaled $266,000, as compared to net other expense of $69,000 in the prior year period.  The net other expense in the current period includes $373,000 of non-cash income relating to the fair value revaluation of the warrant held by Scotts Miracle-Gro.  The net other expense in the prior year period included $18,000 of non-cash expense relating to the fair value revaluation of the warrant held by Scotts Miracle-Gro.

Net income for the three months ended December 31, 2014 was $1.2 million, as compared to the $302,000 income a year earlier.  The increase in net income reflected the growth and higher retail sales with our existing retailers and sales to new brick and mortar retailers.
 
The following table sets forth, as a percentage of sales, our financial results for the three months ended December 31, 2014 and the three months ended December 31, 2013:

   
Three Months Ended December 31,
(in thousands)
 
   
2014
   
2013
 
Net revenue
           
Direct-to-consumer
   
24.3
%
   
50.5
%
Retail
   
75.7
%
   
49.1
%
International
   
0.0
%
   
0.4
%
Total net revenue
   
100.0
%
   
100.0
%
                 
Cost of revenue
   
69.5
%
   
57.7
%
Gross profit
   
30.5
%
   
42.3
%
                 
Operating expenses
               
Research and development
   
0.7
%
   
1.1
%
Sales and marketing
   
15.7
%
   
23.9
%
General and administrative
   
5.7
%
   
9.8
%
Total operating expenses
   
22.1
%
   
34.8
%
Profit from operations
   
8.3
%
   
7.5
%

Revenue
For the three months ended December 31, 2014, revenue totaled $11.0 million, a year-over-year increase of 121.0% or $6.0 million, from the three months ended December 31, 2013.

   
Three Months Ended December 31,
(in thousands)
 
Net revenue
 
2014
   
2013
 
Direct-to-consumer
 
$
2,664
   
$
2,514
 
Retail
   
8,316
     
2,437
 
International
   
-
     
17
 
Total
 
$
10,980
   
$
4,968
 

Direct-to-consumer sales for the three months ended December 31, 2014 totaled $2.7 million, up $150,000, or 6.0%, from the prior year period.  The increase in sales to direct-to-consumer channels was caused by the increased size in our active customer database, demand for our new products (particularly AeroGardens with LED lighting systems), increased visibility from an expanded retail presence, and the increased availability of the various cobranded Miracle-Gro AeroGardens across the product line.  
  
Sales to retailer customers for the three months ended December 31, 2014 totaled $8.3 million, up $5.9 million, or 241.3%, principally reflecting sales to newly acquired retail accounts such as Wal-Mart, Sam’s Club, Costco warehouses and True Value, as well as growth in the existing Amazon.com and Costco.com accounts. We spent $565,000 in advertising dollars in the retail distribution channel, primarily in online gateway and portal advertising, as well as third party catalogues.  We also offered aggressive pricing to several of our retail partners in exchange for in store promotions.  These promotions, totaled $488,000 for the period ended December 31, 2014.
 
 
Our products consist of AeroGardens, and seed pod kits and accessories.  A summary of the sales of these two product categories for the three months ended December 31, 2014 and December 31, 2013 is as follows:

   
Three Months Ended December 31,
(in thousands)
 
   
2014
   
2013
 
Product revenue
           
AeroGardens
 
$
10,889
   
$
4,267
 
Seed pod kits and accessories
   
1,204
     
1,012
 
Discounts, allowances and other
   
(1,112
)
   
(311
)
Total
 
$
10,980
   
$
4,968
 
% of total revenue
               
AeroGardens
   
99.1
%
   
85.9
%
Seed pod kits and accessories
   
11.0
%
   
20.4
%
Discounts, allowances and other
   
(10.1)
%
   
(6.3)
%
Total
   
100.0
%
   
100.0
%

AeroGarden sales increased $6.6 million, or 155.2%, from the prior year period, reflecting growth in both the retail channel sales and the direct-to-consumer channel, as we focused more advertising in the retail market and less on the direct-to-consumer market.  The increase in seed pod kit and accessory sales of $192,000, or 19.0%, principally reflects the focus on acquiring new customers and is expected to increase as new purchasers of gardens this year purchase seed pod kits and accessories in coming months and years.  For the three months ended December 31, 2014, sales of seed pod kits and accessories represented 11.0% of total revenue, as compared to 20.4% in the prior year period.  Other revenue, which is comprised primarily of grow club revenue, shipping revenue, accruals and deductions, increased as a percent of total revenue to (10.1)% from (6.3)% in the prior year period, primarily due to increases in revenue deductions for sales allowances and discounts for retail accounts as we test the in-store retail market.
 
Cost of Revenue
Cost of revenue for the three months ended December 31, 2014 totaled $7.6 million, an increase of $4.8 million, or 166.3%, from the three months ended December 31, 2013.  Cost of revenue includes product costs for purchased and manufactured products, freight costs for inbound freight from manufacturers, costs related to warehousing and the shipping of products to customers, credit card processing fees for direct sales, and duties and customs applicable to imported products.   As a percent of total revenue, cost of revenue represented 69.5% of revenue, as compared to 57.7% for the quarter ended December 31, 2013.  The increase in costs as a percent of revenue reflected the shift in product mix from higher margin seed kits to lower margin AeroGardens, and in customer mix from higher margin direct-to-consumer customers to lower margin retailers,  including aggressive pricing to several of our retail partners in exchange for in store promotions.

Gross Margin
Our gross margin varies based upon the factors impacting net revenue and cost of revenue as discussed above, as well as the mix of our revenue that comes from the retail, direct-to-consumer, and international channels.  In a direct-to-consumer sale, we recognize as revenue the full consumer purchase price for the product.  In retail and international sales, by comparison, we recognize as revenue the wholesale price that we charge to the retailer or international distributor.  Media costs associated with direct sales are included in sales and marketing expenses.  For international sales, margins are structured based on the distributor purchasing products by letter of credit or cash in advance, terms with the distributor bearing all of the marketing and distribution costs within its territory.  As a result, international sales generally have lower gross margins than domestic retail sales.  The gross margin for the quarter ended December 31, 2014 was 30.5% as compared to 42.3% for the quarter ended December 31, 2013.  The decrease in our gross margin was primarily attributable to the increased percentage of sales to retailers, primarily Wal-Mart, Costco warehouses, True Value, Amazon.com and Costco.com, as well as customer specific allowances, our pricing strategy and product mix.
 
 
Sales and Marketing
Sales and marketing costs for the three months ended December 31, 2014 totaled $1.7 million, as compared to $1.2 million for the three months ended December 31, 2013, an increase of 45.1%, or $536,000.  Sales and marketing costs include all costs associated with the marketing, sales, operations, customer support, and sales order processing for our products, and consisted of the following:

   
Three Months Ended December 31,
(in thousands)
 
   
2014
   
2013
 
Advertising
 
$
988
   
$
781
 
Personnel
   
386
     
256
 
Sales commissions
   
8
     
18
 
Trade Shows
   
6
     
5
 
Other
   
336
     
128
 
   
$
1,724
   
$
1,188
 
 
Advertising expense is composed primarily of catalogue development, production, printing, and postage costs, web media expenses for search and affiliate web marketing programs, and the cost of developing and employing other forms of advertising.  Each is a key component of our integrated marketing strategy because it helps build consumer awareness and demand for our products in the retailer and direct-to-consumer sales channels.   Total advertising expense was $988,000 for the quarter ended December 31, 2014, a year-over-year increase of 26.6%, or $207,000, primarily because we participated in advertising programs with our on-line retail distribution channel to support various promotional programs and to increase product awareness of our cobranded product line with the Miracle-Gro AeroGarden trade name. Additionally, advertising costs related to our newly acquired retail accounts have increased from $384,000 to $565,000 in the current period.

Sales and marketing personnel costs include salaries, payroll taxes, employee benefits and other payroll costs for our sales, operations, customer service, graphics and marketing departments.  For the three months ended December 31, 2014, personnel costs for sales and marketing were $386,000, up $130,000 or 50.8% from the three months ended December 31, 2013.   The increase reflected increased headcount necessary to drive increased sales to retailers and through our Direct Response channel.  Personnel expenses include all related payroll and equity-based compensation expenses.

Other marketing expenses increased year-over-year as a result of additional public relations programs and in-store retailer displays, in comparison to the prior year, to drive product awareness.

General and Administrative
General and administrative costs for the three months ended December 31, 2014 totaled $624,000, as compared to $489,000 for the three months ended December 31, 2013, an increase of 27.6%, or $135,000. The increase is attributable to expenses associated with contractor services such as IT, depreciation expense, bad debt expense, and an increase in the employee expenses such as travel and non-cash compensation. 
 
Research and Development
Research and development costs for the quarter ended December 31, 2014 totaled $83,000, an increase of $30,000 from the quarter ended December 31, 2013.  The increase principally reflected expenses related to design and consulting service expenses for sales displays provided to new retail accounts.

Operating Income and EBITDA
Our operating income for the three months ended December 31, 2014 was $914,000, an increase of $543,000 over the $371,000 operating income for the three months ended December 31, 2013, resulting primarily from  increased sales in both the retail distribution and direct-to consumer channels.
 
 
As a non-U.S. GAAP measure of our operating performance, we track earnings before interest, taxes, depreciation and amortization (“EBITDA”) as an indicator of our ability to generate cash, which we define as operating income or loss excluding the non-cash depreciation, amortization, Scott’s Miracle-Gro IP royalty and branding, common stock warrant expense and stock based compensation expense incurred during the period (“Adjusted EBITDA”).  As calculated in the table below, our Adjusted EBITDA income for the quarter ended December 31, 2014 totaled $1.6 million, a $950,000 increase over the $685,000 of Adjusted EBITDA income recorded during the prior year quarter.

   
Three Months Ended December 31,
(in thousands)
 
   
2014
   
2013
 
Operating profit
 
$
914
   
$
371
 
Add back non-cash items:
               
Depreciation
   
76
     
42
 
Amortization
   
-
     
-
 
Stock based compensation
   
88
     
89
 
Common stock warrant expense
   
-
     
18
 
Scott’s Miracle-Gro IP royalty and branding license
   
557
     
165
 
Total non-cash items
   
721
     
314
 
Adjusted EBITDA
 
$
1,635
   
$
685
 

The U.S. GAAP measure most directly comparable to Adjusted EBITDA is income (loss) from operations. The non-U.S. GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to net earnings. Adjusted EBITDA is not a presentation made in accordance with U.S. GAAP and has important limitations as an analytical tool. Adjusted EBITDA should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Because Adjusted EBITDA excludes some, but not all, items that affect net earnings and is defined differently by different companies, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
 
Net Income and Loss
For the three months ended December 31, 2014, we recorded net income of $1.2 million, an $888,000 increase over the $302,000 net income for the three months ended December 31, 2013.  The increase in the net income reflected the increased sales into the retail channels, the positive impact of having sufficient inventory levels during the peak selling season and our growing product awareness.

Nine Months Ended December 31, 2014 and December 31, 2013

Summary Overview
For the nine months ended December 31, 2014, total revenue of $14.4 million was up 112.4%, or $7.6 million, relative to the same period in the prior year.  Sales in our direct-to-consumer channels were up, by 17.0%, or $648,000, reflecting the increased size in our active customer database, new products (particularly AeroGardens with LED lighting systems), the co-branding agreement with Scotts Miracle-Gro, more available inventory, joint marketing programs with Scotts Miracle-Gro and increased visibility from our expanded retail presence, partially offset by fewer catalogue mailing.  In addition to the direct-to-consumer increase, sales in our retail channels were up $7.1 million or 258.6%, primarily due to our focus on increasing our retail distribution which led to increased sales to newly acquired retailer accounts such as Costco warehouse, True Value, Wal-Mart, and Sam’s Club, and increased sales to existing accounts such as Amazon.com.  Sales to international distributors decreased by 87.7% to $23,000 in the nine months ended December 31, 2014 relative to the same period in the prior year. This decline is exclusively attributable to timing of reorders from existing customers and reflects the Company’s current lack of focus on the international channel as we focus on domestic growth.

For the nine months ended December 31, 2014, sales of AeroGardens increased by 162.8% from the prior year period due to the large increase in retail sales, which were primarily garden focused.  This percentage increase, on a product line basis was attributable to existing and new customers purchasing AeroGardens and introduction into our newly acquired retail accounts.  Seed pod kit and accessory sales increased by 16.9% year-over-year, as our established base of AeroGardener customers continues to grow.   This percentage increase, on a product line basis, was attributable to increased retail distribution, which tends initially to favor garden sales over seed pod kit or accessory sales, particularly during the high demand holiday season.  Seed pod kit and accessory gross sales decreased as a percent of the total in the prior year period due largely to the size of the increase in garden sales.
 
 
During the nine months ended December 31, 2014, we spent $1.2 million in advertising expenditures to support our direct-to-consumer and retail channels, a 32.0% year-over-year increase compared to the same period in Fiscal 2014.  As the Company moves into a multi-channel selling environment including direct-to-consumer, on line retail sales and in store retail sales, the Company reviews its advertising spend in a consolidated fashion across all channels. Viewed this way, overall advertising efficiency increased from $7.53 to $12.11 for the nine months ended December 31, 2013 and December 31, 2014, respectively.  These expenditures were divided as follows:

·  
Direct-to-consumer advertising increased to $582,000 from $500,000 for the nine months ended December 31,2014 and December 31, 2013, respectively.  Efficiency, as measure by dollars of direct-to-consumer sales per dollar of related advertising expense, increased to $7.68 or 0.4% for the nine months ended December 31, 2014, as compared to $7.65 for the same period in Fiscal 2014.

·  
Retail advertising increased to $578,000 from $386,000 for the nine months ended December 31, 2014 and December 31, 2013, respectively, as the Company focused on driving product awareness on behalf of our retail partners and expanded operations into the retail market.

·  
Other advertising related expenses increased $13,000 to $27,000 during the nine months ended December 31, 2014, reflecting the Company’s limited exposure to this channel of communication and the continued focus on driving sales with more direct advertising.
 
Our gross margin for the nine months ended December 31, 2014 was 31.4%, as compared to 41.2% during the prior year period. This decline was to be anticipated as we shifted our revenue mix in two ways: (i) from higher margin direct-to-consumer customers sales to lower margin wholesale sales to retailers; and (ii) from higher margin seed pod kit and accessory sales to lower margin AeroGarden sales. In the absence of a large national media spend to create awareness and drive sales, we offered aggressive pricing to several of our retail partners in exchange for in store promotions. These promotions, totaling $488,000, impacted our gross margin by 2.2%. Under U.S. GAAP accounting requirements, these expenses are netted against revenue not advertising expense. Because we were not in these stores last year, there is no year–over-year comparison.

During the nine months, we experienced lower margins associated with in-store trials with several key retailers.   We also increased our warranty reserves in support of significantly higher AeroGarden sales as well as additional costs in establishing new manufacturers into the supply chain.

In aggregate, our total operating expenses increased 37.3%, or $1.3 million, year-over-year, principally because we spent more in all operating expense categories to support the 112.4% increase in the current quarter revenue growth.  Even with the increases in spending noted above, operating expenses as a percentage of total revenue decreased 17.9% year over year. Spending increased in the following areas:

·  
$326,000 increase in sales and marketing personnel in an effort to promote the retail sales channel and support customer service;  

·  
$288,000 increase in advertising primarily with our larger retailers;

·  
$165,000 increase in sales displays for as part of our introduction into differentiated retail environments, and

·  
$84,000 increase in public relations to further drive product and investor awareness. 

·  
$112,000 increase in depreciation and bad debt allowance.

As a result of the 112.4% increase in sales, our operating loss decreased by $438,000 to $202,000 for the nine months ended December 31, 2014, from $640,000 in the prior year period.

Other income and expense for the nine months ended December 31, 2014 totaled to a net other income of $18,000, as compared to net other income of $394,000 in the prior year period.  The net other income in the current year period includes $160,000 of non-cash income relating to the fair value revaluation of the warrant held by Scotts Miracle-Gro.  The net other income in the prior year period included a non-cash gain of $489,000 attributable to the repayment and settlement of the Main Power note.

The net loss for the nine months ended December 31, 2014 was $184,000, as compared to a $246,000 loss in the prior year principally because of higher sales, partially offset by the increased operating and advertising expenses and decreased margins in the retail channel,  and revaluation of the warrant held by Scotts Miracle-Gro.  Additionally, the prior year period included a non-cash gain of $489,000 attributable to the repayment and settlement of the Main Power note.
 
 
The following table sets forth, as a percentage of sales, our financial results for the nine months ended December 31, 2014 and the nine months ended December 31, 2013:

   
Nine Months Ended December 31,
 
   
2014
   
2013
 
Net revenue
           
Direct-to-consumer
   
31.1
%
   
56.5
%
Retail
   
68.7
%
   
40.7
%
International
   
0.2
%
   
2.8
%
Total net revenue
   
100.0
%
   
100.0
%
                 
Cost of revenue
   
68.6
%
   
58.8
%
Gross profit
   
31.4
%
   
41.2
%
                 
Operating expenses
               
Research and development
   
2.0
%
   
2.9
%
Sales and marketing
   
19.1
%
   
28.6
%
General and administrative
   
11.7
%
   
19.1
%
Total operating expenses
   
32.8
%
   
50.7
%
Loss from operations
   
(1.4
)%
   
(9.5
)%

Revenue
For the nine months ended December 31, 2014, revenue totaled $14.4 million, a year-over-year increase of 112.4%, or $7.6 million, from the nine months ended December 31, 2013.

   
Nine Months Ended December 31,
(in thousands)
 
Net Revenue
 
2014
   
2013
 
Direct-to-consumer
 
$
4,471
   
$
3,823
 
Retail
   
9,876
     
2,754
 
International
   
23
     
190
 
Total
 
$
14,370
   
$
6,767
 

Direct-to-consumer sales for the nine months ended December 31, 2014 totaled $4.5 million, up $648,000, or 17.0%, from the prior year period.  The increase in sales to direct-to-consumer channels was caused by the increased size of our active customer database, demand for our new products (particularly AeroGardens with LED lighting systems), increased visibility from our expanded retail presence, and the increased availability of the various cobranded AeroGardens across the product line.

Sales to retailer customers for the nine months ended December 31, 2014 totaled $9.9 million, up $7.1 million, or 258.6%, from the prior-year period, principally reflecting increased sales to newly acquired retail accounts, BJ’s Wholesale Club, Wal-Mart, Costco warehouses, as well as the existing Amazon.com and Costco.com accounts.  We also tested our products in several retail stores during the period in anticipation of the continued retail expansion throughout the year. We also offered aggressive pricing to several of our retail partners in exchange for $488,000 of in store promotions during the period ended December 31, 2014.

International sales for the nine months ended December 31, 2014 totaled $23,000, down $167,000.  Sales in both periods principally reflect the timing of reorders from existing international distributors, as well as our continued focus on building the North American retail market.
 
 
Our products consist of AeroGardens, and seed pod kits and accessories.  A summary of the sales of these product categories for the nine months ended December 31, 2014 and December 31, 2013 is as follows:

   
Nine Months Ended December 31,
(in thousands)
 
   
2014
   
2013
 
Product Revenue
           
AeroGardens
 
$
13,109
   
$
4,988
 
Seed pod kits and accessories
   
2,335
     
1,998
 
Discounts, allowances and other
   
(1,074
)
   
(219)
 
Total
 
$
14,370
   
$
6,767
 
% of Total Revenue
               
AeroGardens
   
91.2
%
   
73.7
%
Seed pod kits and accessories
   
16.3
%
   
29.5
%
Discounts, allowances and other
   
(7.5
)%
   
(3.2)
%
Total
   
100.0
%
   
100.0
%

AeroGarden sales increased $8.1 million, or 162.8%, from the prior year period, principally because of our increased retail channel sales and increased sales of gardens in our Direct-to-Consumer channel.  Sales of seed pod kits and accessories increased $337,000, or 16.9%, reflecting an increase in direct-to-consumer sales.  For the nine months ended December 31, 2014, sales of seed pod kits and accessories represented 16.3% of total revenue, as compared to 29.5% in the prior year period.  Other revenue, which is comprised of items that are not specifically identifiable to a product, such as grow club revenue, shipping revenue, accruals and deductions which increased as a percent of the total to (7.5)% from (3.2)% in the prior year period due to increases in revenue deductions for sales allowances and discounts for retail accounts as we test the in store retail market.

Cost of Revenue
Cost of revenue for the nine months ended December 31, 2014 totaled $9.9 million, an increase of $5.9 million, or 147.9%, from the nine months ended December 31, 2013.  Cost of revenue includes product costs for purchased and manufactured products, freight costs for inbound freight from manufacturers, costs related to warehousing and the shipping of products to customers, credit card processing fees for direct sales, and duties and customs applicable to imported products. As a percent of total revenue, cost of revenue represented 68.6% of revenue, as compared to 58.8% during the nine months ended December 31, 2013.  The increase in costs as a percent of revenue reflected the shift of our revenue mix: (i) from higher margin direct-to-consumer customers to lower margin retailers, including aggressive pricing to several of our retail partners in exchange for in store promotions; and from higher margin seed pod kits and accessories to lower margin AeroGardens.

Gross Margin
Our gross margin varies based upon the factors affecting net revenue and cost of revenue as discussed above, as well as the mix of our revenue that comes from the retail, direct-to-consumer, and international channels.  In a direct-to-consumer sale, we recognize as revenue the full consumer purchase price for the product.  In retail and international sales, by comparison, we recognize as revenue the wholesale price that we charge to the retailer or international distributor.  Media costs associated with direct sales are included in sales and marketing expenses.  For international sales, margins are structured based on the distributor purchasing products by letter of credit or cash in advance terms, with the distributor bearing all of the marketing and distribution costs within its territory.  As a result, international sales generally have lower gross margins than domestic retail sales.  The gross margin for the nine months ended December 31, 2014 was 31.4% as compared to 41.2% for the nine months ended December 31, 2013.  The decrease in our gross margin was primarily attributable to the increased percentage of sales to retailers, the additional costs associated with establishing new manufacturers into the supply chain, lower margins associated with in-store trials with several key retailers and estimated allowances for retailers and our pricing strategy.

Sales and Marketing
Sales and marketing costs for the nine months ended December 31, 2014 totaled $2.7 million, as compared to $1.9 million for the nine months ended December 31, 2013, an increase of 42.0%, or $814,000.  Sales and marketing costs include all costs associated with the marketing, sales, operations, customer support, and sales order processing for our products, and consisted of the following:

   
Nine Months Ended December 31,
(in thousands)
 
   
2014
   
2013
 
Advertising
 
$
1,187
   
$
899
 
Personnel
   
1,027
     
701
 
Sales commissions
   
15
     
16
 
Trade shows
   
6
     
6
 
Other
   
515
     
314
 
   
$
2,750
   
$
1,936
 
 
 
Advertising expense totaled $1.2 million for the nine months ended December 31, 2014, a year-over-year increase of 32.0%, or $288,000, primarily because we continued to participate in various promotional programs to increase product awareness of our cobranded product line with the Miracle-Gro AeroGarden trade name, along with increased web-based advertising.

Sales and marketing personnel costs include salaries, payroll taxes, employee benefits and other payroll costs for our sales, operations, customer service, graphics and marketing departments.  For the nine months ended December 31, 2014, personnel costs for sales and marketing were $1.0 million, up from $701,000 for the nine months ended December 31, 2013, an increase of 46.5%.  The increase reflected increased headcount necessary to drive the growth in retail sales and through the direct-to-consumer channels.  Personnel expenses include all related payroll and equity-based compensation expenses.

Other marketing expenses increased year-over-year because of increases in a variety of spending categories, including a manufacturing realignment in China, partially offset by increased current year public relations program expenses travel costs, and sign and display advertising at specific retail locations.

General and Administrative
General and administrative costs for the nine months ended December 31, 2014 totaled $1.7 million, as compared to $1.3 million for the nine months ended December 31, 2013, an increase of 29.7%, or $384,000.  The increase is attributable to expenses associated with an investor relations program, IT contracted services, additional depreciation expense for the fixed assets at our new manufacturers and bad debt expense.
 
Research and Development
Research and development costs for the nine months ended December 31, 2014 totaled $280,000, an increase of 41.1%, or $82,000, from the nine months ended December 31, 2013.  The increase reflects the support of new product development activities, including the ongoing certification and testing of the LED products, as required by our retail partners, and design and consulting service expenses for new retail customers.
 
Operating Loss and EBITDA
Our operating loss for the nine months ended December 31, 2014 was $202,000, a decrease of $438,000 from the operating loss of $640,000 for the nine months ended December 31, 2013.  The decreased loss reflected higher sales and higher cost of revenue expenses, as discussed in greater detail above.

As a non-U.S. GAAP measure of our operating performance, we track earnings before interest, taxes, depreciation and amortization (“EBITDA”) as an indicator of our ability to generate cash, which we define as operating income or loss excluding the non-cash depreciation, amortization, Scotts Miracle-Gro Intellectual property royalty and branding, common stock warrant expense and stock based compensation expense incurred during the period (“Adjusted EBITDA”).  As calculated in the table below, our Adjusted EBITDA income for the nine months ended December 31, 2014 totaled $931,000, as compared to an Adjusted EBITDA loss of $121,000 recognized during the prior year period. 
 
   
Nine Months Ended December 31,
(in thousands)
 
   
2014
   
2013
 
Operating loss
 
$
(202
)
 
$
(640
)
Add back non-cash items:
               
   Depreciation
   
181
     
113
 
   Amortization
   
-
     
-
 
   Stock based compensation
   
224
     
176
 
   Common stock warrant expense
   
36
     
18
 
   Scotts Miracle-Gro IP royalty and branding license
   
692
     
212
 
Total non-cash items
   
1,133
     
519
 
Adjusted EBITDA
 
$
931
   
$
(121
) 

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

Net Loss
The net loss for the nine months ended December 31, 2014 was $184,000, as compared to a $246,000 net loss in the prior–year, as discussed above.
 
 
Liquidity and Capital Resources

After adjusting the net loss for non-cash items and changes in operating assets and liabilities, the net cash used by operating activities totaled $3.5 million for the nine months ended December 31, 2014, as compared to cash used of $1.5 million in the prior year period.  

Non-cash items, comprising depreciation, amortization, loss on disposal of fixed assets, bad debt allowances, change in fair value of the derivative warrant liability and the gain on the forgiveness of debt, totaled to a net gain of $980,000 for the nine months ended December 31, 2014, as compared to a net gain of $157,000 in the prior year period.  The increase principally reflected non-cash income or charges arising from the change in fair value of the derivative warrant liability and non-cash compensation expenses.

Changes in current assets used net cash of $6.9 million during the nine months ended December 31, 2014, principally from increases in inventory as we purchased cobranded inventory, and accounts receivable balances, as a result of our reintroduction into the retail channel during the peak holiday season.

As of December 31, 2014, the total inventory balance was $3.5 million, representing approximately 111 days of sales activity, and 42 days of sales activity, at the average daily rate of product cost expensed during the twelve months and three months ended December 31, 2014, respectively.  The days in inventory calculation is based on the three months of sales activity is greatly affected by the seasonality of our sales, which are at their highest level during our quarter ending December 31.

Current operating liabilities increased $2.6 million during the nine months ended December 31, 2014, because of seasonal increases in all operating liability accounts.  Accounts payable as of December 31, 2014 totaled $2.8 million, representing approximately 58 days of daily expense activity, and 25 days of daily expense activity, at the average daily rate of expenses incurred during the twelve months and three months ended December 31, 2014, respectively.

Net investment activity used $477,000 of cash in the current year period, principally because of the purchases of equipment as we change our supply manufacturers and introduce new products.

Net financing activity provided net cash of $4.5 million during the nine months ended December 31, 2014, principally due the Term Loan agreement with Scotts Miracle-Gro.
 
As of December 31, 2014, we had a cash balance of $2.3 million, of which $15,000 was restricted as collateral for various corporate obligations.  This compares to a cash balance of $1.7 million as of March 31, 2014, of which $15,000 was restricted.

As of December 31, 2014 and March 31, 2014, the outstanding balance of our note payable and debt, including accrued interest, was as follows:
 
   
December 31,
   
March 31,
 
   
2014
(in thousands)
   
2014
(in thousands)
 
Notes payable-related party
 
$
4,643
   
$
-
 
Derivative warrant liability (see Note 4)
   
2,369
     
2,530
 
Sale of intellectual property liability (see Note 4)
   
220
     
258
 
Total debt
   
7,232
     
2,788
 
Less notes payable and current portion – long term debt
   
7,232
     
2,788
 
Long term debt
 
$
-
   
$
-
 

As discussed in Note 9, “Subsequent Events” to our financial statements, we repaid $3.0 million of the Note Payable-Related Party so far during the fourth quarter of Fiscal 2015.

Cash Requirements

We generally require cash to:

·  
fund our operations and working capital requirements,
·  
develop and execute our product development and market introduction plans
·  
execute our sales and marketing plans,
·  
fund research and developm en t efforts, and
·  
pay debt obligations as they come due.

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

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

·  
our cash of $2.3 million ($15,000 of which is restricted as collateral for our various corporate obligations) as of December 31, 2014,
·  
our cash of $1.3 million, ($15,000 of which is restricted as collateral for our various corporate obligations) as of February 6, 2015,
·  
continued support of, and extensions of credit by, our suppliers and lenders, including, but not limited to, the Term Loan of up to $4.5 million from Scotts Miracle-Gro,
·  
our historical pattern of increased sales between September and March, and lower sales volume from April through August,
·  
the level of spending necessary to support our planned initiatives, and
·  
our sales to consumers, retailers, and international distributors, and the resulting cash flow from operations, which will depend in great measure on the success of  our direct-to-consumer sales initiatives, and the acceptance of the product at our various retail distribution customers
 
On July 10, 2014, the Company entered into a Term Loan Agreement in the principal amount of up to $4.5 million with Scotts Miracle-Gro.  The proceeds were made available as needed in three advances of up to $1.0 million, $1.5 million, and $2.0 million in July, August, and after September of 2014, respectively, with a due date of February 15, 2015.  The Term Loan Agreement is secured by a lien on the assets of the Company.  Interest is charged at the stated rate of 10% per annum, but will paid in shares of AeroGrow common stock, valued at a price per share equal to the conversion price of the Series B Preferred Conversion Price on the date the Term Loan.  The funding provided general working capital and was used for the purpose of acquiring inventory to support anticipated growth as the Company expands its retail and its direct-to-consumer sales channels.  The first advance on $1.0 million, as noted above was borrowed in July 2014, followed by an additional $1.5 million and $2.0 million in August and October 2014, respectively.  See Note 3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” to our condensed financial statements.

Based on these facts and assumptions, we believe our existing cash and cash equivalents, along with the cash generated by our anticipated results from operations, will be sufficient to meet our operating needs for the next twelve months.   However, we may need to seek additional capital to provide a cash reserve against contingencies, address the seasonal nature of our working capital needs, and to enable us to invest further in trying to increase the scale of our business.  There can be no assurance we will be able to raise this additional capital.

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

·  
the effectiveness of our consumer marketing efforts in generating both direct-to-consumer sales, and sales to consumers by our retailer customer,
·  
uncertainty regarding the impact of macroeconomic conditions on consumer spending,
·  
uncertainty regarding the capital markets and our access to sufficient capital to support our current and projected scale of operations,
·  
the seasonality of our business, in which we have historically experienced higher sales volume (September through March),
·  
a continued, uninterrupted supply of product from our third-party manufacturing suppliers in China, and
·  
the success of the Scotts Miracle-Gro relationship.
 
Off-Balance Sheet Arrangements

Other than our headquarter facility lease commitment incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interest in transferred assets, and have not entered into any contracts for financial derivative such as futures, swaps, and options.

 
Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Exchange Risk

We transact business primarily in U.S. currency.  Although we purchase our products in U.S. dollars, the prices charged by our suppliers in China are predicated upon their cost for components, labor and overhead. Therefore, changes in the valuation of the U.S. dollar in relation to the Chinese currency may cause our manufacturers to raise prices of our products which could reduce our profit margins.
  
In future periods, it is possible that we could be exposed to fluctuations in foreign currency exchange rates on accounts receivable from sales and net monetary assets denominated in foreign currencies and liabilities.  To date, however, virtually all of our transactions have been denominated in U.S. dollars.
 
Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act of 1934 (the “Exchange Act”), is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon and as of the date of that evaluation, the Company’s principal executive officer and financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Controls
 
There were no changes in the Company’s internal controls or in other factors that could have significantly affected those controls during the three months ended December 31, 2014.
 
 
PART II - OTHER INFORMATION

Item 1. Legal Proceedings
 
None.

Item 1A. Risk Factors
 
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, results of operations, financial condition, future results, and the trading price of our common stock. In addition to the other information set forth in this Quarterly Report, you should also carefully consider the factors described in “Part I. Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2014, which could materially affect our business, results of operations, financial condition, future results, and the trading price of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.

Item 3. Defaults Upon Senior Securities
 
None.

Item 4. Mine Safety Disclosures
 
Not applicable.

Item 5. Other Information
 
None.
 
 
Item 6. Exhibits
 
Exhibit Number
 
Description
     
3.1
 
Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.2
 
Certificate of Amendment to Articles of Incorporation, dated June 25, 2002 (incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.3
 
Certificate of Amendment to Articles of Incorporation, dated November 3, 2002 (incorporated by reference to Exhibit 3.3 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.4
 
Certificate of Change to Articles of Incorporation, dated January 31, 2005 (incorporated by reference to Exhibit 3.4 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.5
 
Certificate of Amendment to Articles of Incorporation, dated July 27, 2005 (incorporated by reference to Exhibit 3.5 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.6
 
Certificate of Amendment to Articles of Incorporation, dated February 24, 2006 (incorporated by reference to Exhibit 3.5 of our Current Report on Form 8-K/A-2, filed November 16, 2006)
3.7
 
Certificate of Amendment to Articles of Incorporation, certified May 3, 2010 (incorporated by reference to Exhibit 3.7 of our Quarterly Report on Form 10-Q, filed August 12, 2010
3.8
 
Certificate of Amendment to Articles of Incorporation, certified May 3, 2010 (incorporated by reference to Exhibit 3.8 of our Quarterly Report on Form 10-Q, filed August 10, 2012)
3.9
 
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, filed September 26, 2008)
3.10
 
Amendment to Bylaws (incorporated by reference to Exhibit 3.9 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, filed July 6, 2009)
3.11
 
Amendment No. 2 to Bylaws (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K,, filed April 23, 2013)
3.12
 
Certificate of Designations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, filed July 6, 2009)
3.13
 
Certificate of Amendment to Series A Convertible Preferred Stock Certificate of Designations, certified June 21, 2010 (incorporated by reference to Exhibit 3.11 of our Quarterly Report on Form 10-Q for the quarter year ended June 30, 2010, filed August 12, 2010)
3.14
 
Amendment Number 2 to Series A Convertible Preferred Stock Certificate of Designations, as filed with the Nevada Secretary of State on April 6, 2012 (incorporated by reference to our Current Report on Form 8-K, filed April 16, 2012)
3.15
 
Certificates of Designation of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed April 23, 2013)
10.1*
 
10.2*
 
10.3*
 
10.4*
 
10.5
 
Indemnification Agreement, by and between the Company and Chris J. Hagedorn, dated April 22, 2013 (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed April 23, 2013)
10.6
 
Term Loan and Security Agreement by and among the Company and SMG Growing Media, Inc. dated July 10, 2014 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed July 16, 2014)
10.7*
 
31.1*
 
31.2*
 
32.1*
 
32.2*
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
     
*  Filed herewith.
 
 
SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
       
 
AeroGrow International, Inc.
 
       
Date:  February 17, 2015
 
/s/ J. Michael Wolfe
 
 
By: J. Michael Wolfe
 
 
Its: President and Chief Executive Officer
 (Principal Executive Officer) and Director
 
       
       
       
Date:  February 17, 2015
 
/s/ Grey H. Gibbs
 
 
By: Grey H. Gibbs
 
 
Its: Vice President Finance and Accounting
(Principal Accounting Officer)
 
 
 
31
 
EXHIBIT 10.1
 
 
INTELLECTUAL PROPERTY PURCHASE AGREEMENT
 
by and between
 
AEROGROW INTERNATIONAL, INC.
 
and
 
OMS INVESTMENTS, INC.
 
dated as of
 
April 22, 2013
 
 
 
 
 
INTELLECTUAL PROPERTY PURCHASE AGREEMENT
 
THIS INTELLECTUAL PROPERTY PURCHASE AGREEMENT ( “Agreement” ) is made as of April 22, 2013 by and between AeroGrow International, Inc., a Nevada corporation having offices at 6075 Longbow Dr. Suite 200, Boulder, Colorado 80301 (the “ Company ”), and OMS Investments, Inc., a Delaware corporation having offices at 10250 Constellation Blvd., Suite 2800, Los Angeles, California 90067 (the “ Purchaser ”).

RECITALS:
 
A.           The Company owns certain worldwide rights in and to the IP Assets (as defined below); and
 
B.           The Purchaser wishes to purchase the Company’s entire right, title and interest in and to the IP Assets, and the Company is willing to sell its entire right, title and interest in and to the IP Assets in exchange for consideration as described below;
 
C.           Concurrently with the execution of this Agreement, Purchaser and Company will execute a Securities Purchase Agreement (the “Securities Purchase Agreement” ) pursuant to which the Purchaser will acquire convertible preferred stock and warrants from the Company; and
 
D.           The Purchaser and the Company will execute certain other Transaction Agreements as set forth in the Securities Purchase Agreement.
 
AGREEMENT:
 
NOW , THEREFORE , in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Purchaser hereby agree as follows:
 
ARTICLE 1.
 
PURCHASE AND SALE OF IP ASSETS
 
Section 1.1                       Purchase and Sale of IP Assets .  On and subject to the terms and conditions of this Agreement, at the Closing, Company shall sell, assign, transfer, convey and deliver to Purchaser, and Purchaser shall purchase and acquire from Company, free and clear of all Encumbrances, all of Company’s right, title and interest, as of the Closing, in and to the IP Assets, including without limitation the right to sue and recover damages for past, present and future infringement.
 
Section 1.2                       Excluded Liabilities .  Purchaser will not assume any liability or obligation of Company in connection with Purchaser’s purchase of the IP Assets pursuant to this Agreement.
 
Section 1.3                       Purchase Price .  In consideration for the sale by Company of the IP Assets to Purchaser, at the Closing, Purchaser shall pay to Company cash in the amount of Five Hundred Thousand U.S. Dollars (US $500,000.00) (the “Purchase Price” ), by wire transfer of immediately available funds to the account or accounts designated in writing by Company at least two business days prior to the Closing Date.
 
 
 
 
 
Section 1.4                       Closing Transactions .
 
(a)           The   purchase and sale of the IP Assets shall take place remotely via the exchange of documents and signatures, on April 24, 2013, or at such other time and place as the Company and the Purchaser mutually agree upon, orally or in writing (which time and place are designated as the “Closing” ).
 
(b)           At the Closing, Company shall deliver to Purchaser:
 
(i)           an Intellectual Property assignment in the form of Appendix A dated as of the date of Closing and duly executed by Company, assigning all of Company’s right, title and interest in and to the IP Assets to Purchaser (the “Intellectual Property Assignment” );
 
(ii)           all such other instruments of assignment and transfer as are reasonably required to effect the transfer to Purchaser of all of Company’s right, title and interest in and to the IP Assets in accordance with this Agreement, in form and substance reasonably satisfactory to Purchaser; and
 
(iii)           the compliance certificate identified in Section 4.3.
 
(c)           At the Closing, Purchaser shall deliver to Company the Purchase Price specified in Section 1.3 above.

Section 1.5                       Defined Terms Used in this Agreement .   Capitalized terms in this Agreement shall have the meanings ascribed to them in the body of this Agreement or as set forth below in this Section 1.5.  Capitalized terms not defined in this Agreement shall have the meanings set forth in the Securities Purchase Agreement.
 
(a)   “Company Intellectual Property” means all Intellectual Property owned by Company or used by Company that is associated with the Company’s products, including without limitation, the IP Assets listed in Appendix A, Schedule 1 and the Excluded Trademarks listed in Appendix B.
 
(b)   “Copyrights” means all published and unpublished works of authorship and copyrights therein, and copyright registrations and applications for registration thereof and all renewals, extensions, restorations and reversions thereof.
 
(c)   “Encumbrance” means any charge, claim, community property interest, condition, easement, covenant, warrant, demand, encumbrance, equitable interest, lien, license, mortgage, option, purchase right, pledge, security interest, right of first refusal or other right of third parties or restriction of any kind, including any restriction on use, transfer, receipt of income or exercise of any other attribute of ownership.
 
 
 
 
 
(d)   “Excluded Trademarks” means Company’s AeroGrow and AeroGarden Trademarks listed in Appendix B.
 
(e)   “Intellectual Property” means all intellectual property rights of any kind, worldwide, including rights in, to and concerning (a) Patents; (b) Trademarks; (c) Copyrights; and (d) Technical Information.
 
(f)   “IP Assets” means the Company Intellectual Property owned solely or jointly by Company, except for the Excluded Trademarks.
 
(g)   “Patents”   means all patents throughout the world (including utility patents, design patents, patents of importation, improvement patents, patents and certificates of addition, and utility models, as well as divisions, reissues, reexaminations, continuations, continuations-in-part, renewals and extensions of any of the foregoing) and applications therefore, and patents which may be issued on such applications.
 
(h)   “Trademark” means a trademark, service mark, trade dress, logo, trade name, corporate name, domain name and/or other source identifier, all goodwill associated with any of the foregoing, and registrations and applications for registration thereof, including all extensions, modifications and renewals of the foregoing .
 
(i)   “Technical Information” means know-how, trade secrets, confidential and proprietary information, ideas, inventions, discoveries, formulae, compositions, manufacturing and production processes and techniques, research and development information, reports, drawings, specifications, designs, plans, improvements, proposals, information and analytic methodology used in the development, testing, analysis, design, manufacturing and packaging of products and services, technology, software, computer programs, documentation, databases, data, mask works, financial, business and marketing plans, cost and pricing information, supplier lists and related information, sales data and plans, customer lists, customer accounts, and related information, recorded in any form.
 
ARTICLE 2.
 
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
 
The Company hereby represents and warrants to the Purchaser that, except as set forth on the Disclosure Schedule attached as Appendix C to this Agreement, which exceptions shall be deemed to be part of the representations and warranties made hereunder, the following representations are true and complete as of the date of the Closing, except as otherwise indicated.  The Disclosure Schedule shall be arranged in sections corresponding to the numbered and lettered sections and subsections contained in this Article 2, and the disclosures in any section or subsection of the Disclosure Schedule shall qualify other sections and subsections in this Article 2 only to the extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections.
 
For purposes of these representations and warranties (other than those in Section 2.2 ), the term “the Company” shall include any subsidiaries of the Company, unless otherwise noted herein.
 
 
 
 
 
Section 2.1.   Organization, Good Standing, Corporate Power and Qualification .  The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and has all requisite corporate power and authority to carry on its business as presently conducted and as proposed to be conducted.  The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.
 
Section 2.2.   Authorization .  All corporate action required to be taken by the Company’s Board of Directors and stockholders in order to authorize the Company to enter into this Agreement, and to assign and deliver the IP Assets at the Closing, has been taken or will be taken prior to the Closing.  All action on the part of the officers of the Company necessary for the execution and delivery of this Agreement, the performance of all obligations of the Company under this Agreement to be performed as of the Closing, and the assignment and delivery of the IP Assets has been taken or will be taken prior to the Closing.  This Agreement, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with its terms except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, or (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.
 
Section 2.3.   Intellectual Property .
 
(a)   The Company owns the entire right, title and interest in and to the Company Intellectual Property.  There are no outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of any kind relating to the Company Intellectual Property, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the Patents, Trademarks, Copyrights, Technical Information, licenses, information, proprietary rights and processes of any other Person.  The Company Intellectual Property does not include any Intellectual Property owned by a third party and licensed to Company.
 
(b)   To the Company’s knowledge, it will not be necessary to use any inventions of any of its employees or consultants (or Persons it currently intends to hire) made prior to their employment by the Company.  Each employee and consultant has assigned to the Company, pursuant to written agreements, all Intellectual Property rights he or she owns that are related to the Company’s business as now conducted and as presently proposed to be conducted.
 
(c)   Appendix A, Schedule 1 contain a complete list of all Company Intellectual Property other than the Excluded Trademarks.  Except as set forth in Appendix A, Schedule 1 and the Excluded Trademarks, the Company owns no Patents, Copyrights, or Trademarks that have been registered with the U.S. Patent and Trademark Office, the U.S. Copyright Office, or counterpart offices worldwide, and the Company has made no applications for any Patent, Trademark, or Copyright worldwide.
 
(d)   No claim or action by any third party contesting the validity, enforceability, or ownership of any Company Intellectual Property has been asserted against the Company nor, to the knowledge of the Company, is threatened.  To the knowledge of Company, there is no reasonable basis for any such claim.  All of the filed, registered and/or issued items of Company Intellectual Property are being actively prosecuted and have not been abandoned or allowed to lapse.
 
 
 
 
 
(e)   To the Company’s knowledge, no product or service marketed or sold (or proposed to be marketed or sold) by the Company, or any activities of the Company, infringes or misappropriates, or will infringe or misappropriate Intellectual Property rights of any third party.  The Company has not received any notices of, nor to the Company’s knowledge is there any reasonable basis for, an allegation of any infringement or misappropriation, by any third party with respect to the business, products, or services of Company, nor has Company received any claims of infringement or misappropriation of any Intellectual Property of any third party.
 
(f)   To the knowledge of the Company, no other person is infringing, misappropriating or otherwise violating, or has infringed, misappropriated or otherwise violated, any of the Company Intellectual Property, nor is there any action that is pending or threatened by Company with respect thereto.
 
(g)   Company has not granted any licenses with respect to any Company Intellectual Property to any third party.
 
(h)   No licenses to third party Intellectual Property are required for Company to use the Company Intellectual Property.
 
(i)   The Company has not embedded any open source, copyleft or community source code in any of its products generally available or in development, including but not limited to any libraries or code licensed under any General Public License, Lesser General Public License or similar license arrangement.
 
Section 2.4.   Changes .  Since December 31, 2012,   there has not been any sale, assignment or transfer of any Company Intellectual Property that could reasonably be expected to result in a Material Adverse Effect.
 
Section 2.5.   Employee Agreements .  Each current and, to the Knowledge of the Company (as defined in the Securities Purchase Agreement), former employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information, and that includes a present assignment to the Company of Intellectual Property created in the scope of employment, substantially in the form or forms delivered to the counsel for the Purchaser (the “ Confidential Information Agreements ”).  No current or, to the Knowledge of the Company, former Key Employee has excluded works or inventions from his or her assignment of inventions pursuant to such Key Employee’s Confidential Information Agreement.  Each current Key Employee has executed a non-competition and non-solicitation agreement substantially in the form or forms delivered to counsel for the Purchaser.  The Company is not aware that any of its Key Employees is in violation of any agreement covered by this Section 2.5.
 
 
 
 
 
ARTICLE 3.
 
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
 
The Purchaser hereby represents and warrants to the Company that:
 
Section 3.1.   Authorization .  The Purchaser has full power and authority to enter into this Agreement.  This Agreement, when executed and delivered by the Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors’ rights generally, and as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.
 
ARTICLE 4.
 
CONDITIONS TO THE PURCHASER’S OBLIGATIONS AT CLOSING.
 
The obligations of the Purchaser to purchase the IP Assets at the Closing are subject to the fulfillment, on or before such Closing, of each of the following conditions, unless otherwise waived:
 
Section 4.1.   Representations and Warranties .  The representations and warranties of the Company contained in Article 2 shall be true and correct in all respects as of such Closing.
 
Section 4.2.   Performance .  The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by the Company on or before such Closing.
 
Section 4.3.   Compliance Certificate .  The President of the Company shall deliver to the Purchaser at the Closing a certificate certifying that the conditions specified in Subsections Section 4.1 and Section 4.2 have been fulfilled.
 
Section 4.4.   Intellectual Property Assignment .  The Company shall have executed and delivered the Intellectual Property Assignment.
 
Section 4.5.   Material Adverse Change .  There shall not have occurred any Material Adverse Effect (or any development that, insofar as reasonably can be foreseen, is reasonably likely to result in any Material Adverse Effect).
 
Section 4.6.   Securities Purchase Agreement .  The Company and Purchaser’s Affiliate, SMG Growing Media, Inc., an Ohio corporation, shall have executed and delivered the Securities Purchase Agreement.
 
Section 4.7.   Amendment and Restatement of Commercial Security Agreement . The Company and First Western Trust Bank ("First Western") shall have executed and delivered, and provided a copy to the Purchaser of, an amendment and restatement of the May 21, 20120 Commercial Security Agreement between the Company and First Western, which amendment and restatement releases First Western's security interest in the IP Assets.
 
 
 
 
 
Section 4.8.     First Western UCC-3 . Financing Statement Amendments. First Western shall have filed a DCC-3 financing statement amendment in all jurisdiction in which it has filed a DCC-l financing statement against assets of the Company, which DCC-3 financing statement amendment indicates that First Western does not have a security interest in the IP Assets.
 
Section 4.9.     GVC Capital. LLC DCC-3 . Financing Statement Amendments. GVC Capital. LLC shall have filed a DCC-3 financing statement amendment in all jurisdiction in which it has filed a DCC-l financing statement against assets of the Company, which DCC-3 financing statement amendment indicates that GVC Capital. LLC does not have a security interest in the IP Assets.
 
Section 4.10.    Release of First Capital Security Interest . The Company and First Capital ("First Capital') shall have executed and delivered, and provided a copy to the Purchaser of, a release agreement ("Release") to the Security Agreement between the Company and First Capital, which Release releases First Capital's security interest in the IF Assets.
 
Section 4.11.    First Capital DCC-3 . First Capital shall have filed a VCC-3 amendment in all jurisdiction in which it has filed a VCC-l against assets of the Company, which VCC-3 indicates that First Capital does not have a security interest in the IP Assets.
 
Section 4.12.   Proceedings and Documents . All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchaser, and the Purchaser (or its counsel) shall have received all such counterpart original and certified or other copies of such documents as reasonably requested. Such documents may include good standing certificates.
 
ARTICLE 5.
 
CONDITIONS OF THE COMPANY’S OBLIGATIONS AT CLOSING.
 
The obligations of the Company to sell the IP Assets to the Purchaser at the Closing are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived:
 
Section 5.1.   Representations and Warranties .  The representations and warranties of the Purchaser contained in Article 3 shall be true and correct in all respects as of such Closing.
 
Section 5.2.   Performance .  The Purchaser shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by them on or before such Closing.
 
Section 5.3.   Securities Purchase Agreement .  The Company and Purchaser’s Affiliate, SMG Growing Media, Inc., an Ohio corporation, shall have executed and delivered the Securities Purchase Agreement.
 
 
 
 
 
ARTICLE 6.
 
CONDUCT OF BUSINESS PENDING THE CLOSING.
 
Section 6.1.   Conduct of Business by the Company Pending the Closing .  During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing, the Company agrees (except to the extent that the Purchaser shall otherwise consent in writing), to carry on its business in the usual, regular and ordinary course and in substantially the same manner as previously conducted, to use all reasonable efforts consistent with past practices and policies to preserve intact its Company Intellectual Property, preserve its relationships with any licensors and others having business dealings with it, to the end that its goodwill and ongoing businesses would be unimpaired, in any material respect, at the Closing.  The Company shall promptly notify Purchaser of any material event or occurrence with respect to the Company Intellectual Property or allegations of infringement or misappropriation relating to the business, products or services of the Company.  By way of amplification and not limitation, except as contemplated by this Agreement, the Company shall not, between the date of this Agreement and the Closing, do any of the following without the prior written consent of the Purchaser:
 
(a)   Grant any licenses under any Company Intellectual Property to any third party;
 
(b)   Grant any liens or security interest on, or otherwise encumber, any Company Intellectual Property;
 
(c)   Sell any Company Intellectual Property to any third party;
 
(d)   Abandon or fail to prosecute or maintain any Company Intellectual Property; or
 
(e)   Breach any license agreement relating to Company Intellectual Property.
 
Section 6.2.   Litigation .  The Company shall notify the Purchaser in writing promptly after learning of any material claim, action, suit, arbitration, mediation, proceeding or investigation by or before any court, arbitrator or arbitration panel, board or other governmental entity initiated by it or against it, or known by it to be threatened against it or any of its officers, directors, employees or stockholders in their capacity as such.
 
Section 6.3.   Notification of Certain Matters .  The Purchaser shall give reasonably prompt notice to the Company, and the Company shall give reasonably prompt notice to the Purchaser, of (i) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which would be likely to cause (x) any representation or warranty contained in this Agreement to be untrue or inaccurate, in any material respect, or (y) any covenant, condition or agreement contained in this Agreement not to be complied with or satisfied, in any material respect; and (ii) any failure or inability of the Purchaser or the Company, as the case may be, to comply, in any material respect, with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.
 
 
 
 
 
ARTICLE 7. 
 
SATISFACTION OF CLOSING CONDITIONS; TERMINATION.
 
Section 7.1.   Satisfaction of Closing Conditions .  The Company and the Purchaser shall each use its reasonable best efforts to satisfy the conditions set forth in Article 4 and Article 5, respectively.
 
Section 7.2.   Termination Events .  This Agreement may be terminated at any time prior to the Closing:
 
(a)   by the mutual written consent of the Company and the Purchaser;
 
(b)   by either the Company or the Purchaser, if the Closing shall not have been consummated by April 30, 2013 for any reason; provided , however , that the right to terminate this Agreement under this Section 7.2(b) shall not be available to any party whose action or failure to act has been a principal cause of or resulted in the failure of the Closing to occur on or before such date and such action or failure to act constitutes a material breach of this Agreement;
 
(c)   by either Company or the Purchaser, if a governmental entity shall have issued an order, decree or ruling or taken any other action after the date hereof, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Closing, which order, decree, ruling or other action shall have become final and non-appealable;
 
(d)   by the Company, upon a breach of any representation, warranty, covenant or agreement on the part of the Purchaser set forth in this Agreement, or if any representation or warranty of the Purchaser shall have become untrue, in either case such that the conditions set forth in Section 5.1 or Section 5.2 would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided, that if such inaccuracy in the Purchaser’s representations and warranties or breach by the Purchaser is curable by the Purchaser through the exercise of its commercially reasonable efforts, then the Company may not terminate this Agreement under this Section 7.2(d) for thirty (30) days after delivery of written notice from the Company to the Purchaser of such breach, provided the Purchaser continues to exercise commercially reasonable efforts to cure such breach or inaccuracy (it being understood that the Company may not terminate this Agreement pursuant to this paragraph (d) if such breach or inaccuracy by the Purchaser is cured during such thirty (30) day period);
 
(e)   by the Purchaser upon a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 4.1 or Section 4.2 would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided, that if such inaccuracy in the Company’s representations and warranties or breach by the Company is curable by the Company through the exercise of its commercially reasonable efforts, then the Purchaser may not terminate this Agreement under this Section 7.2(e) for thirty (30) days after delivery of written notice from the Purchaser to the Company of such breach, provided the Company continues to exercise commercially reasonable efforts to cure such breach or inaccuracy (it being understood that the Purchaser may not terminate this Agreement pursuant to this paragraph (e) if such breach or inaccuracy by the Company is cured during such thirty (30)-day period); or
 
 
 
 
 
(f)   by the Purchaser, if a Material Adverse Effect has occurred prior to the Closing with respect to the Company; provided, that if such Material Adverse Effect is curable by the Company through the exercise of its commercially reasonable efforts, then the Purchaser may not terminate this Agreement under this Section 7.2(f) for thirty (30) days after delivery of written notice from the Purchaser to the Company of such Material Adverse Effect, provided the Company continues to exercise commercially reasonable efforts to cure such Material Adverse Effect (it being understood that the Purchaser may not terminate this Agreement pursuant to this paragraph (f) if such Material Adverse Effect is cured during such thirty (30)-day period).
 
Section 7.3.   Effect of Termination .  In the event of the termination of this Agreement pursuant to Section 7.2, this Agreement shall forthwith become void, and there shall be no liability on the part of any party hereto or any of their respective Affiliates or the directors, officers, partners, members, managers, employees, agents or other representatives of any of them, and all rights and obligations of each party hereto shall cease, except that nothing herein shall relieve any party from liability for any willful breach of this Agreement.  Without limiting the foregoing, this Section 7.3, Section 8.2 and Article 9 shall survive the termination of this Agreement.
 
ARTICLE 8.
 
ADDITIONAL AGREEMENTS OF THE PARTIES
 
Section 8.1.   Commercially Reasonable Efforts .
 
(a)   Upon the terms and subject to the conditions hereof, each of the parties agrees to use its commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to vest in Purchaser good and marketable title to the IP Assets, including obtaining all consents, waivers, authorizations and approvals from governmental authorities and other third parties.
 
(b)   From time to time after the Closing, at the request of Purchaser and at such requesting party’s expense, and without further consideration, Company agrees on its own behalf, as well as on behalf of its subsidiaries, Affiliates, successors, assigns and legal representatives, to execute and deliver to Purchaser any further documents or instruments and perform any further acts that may reasonably be deemed necessary or desirable by Purchaser to vest, record, perfect, support and/or confirm the rights herein conveyed, or intended so to be, to Purchaser with respect to the IP Assets, including without limitation such assignments, agreements and limited powers of attorney as may be needed for recording or effectuating the transfer of the IP Assets in the United States and in foreign countries.  Nothing herein shall be deemed a waiver by Purchaser of its right to receive at the Closing an effective assignment of such rights by Company as otherwise set forth in this Agreement.  Without limiting the generality of the foregoing, Company shall execute and deliver to Purchaser or obtain for delivery to Purchaser, at the request of Purchaser and at its expense, and without further consideration, any documents required to update record title to the owned IP Assets to reflect Purchaser as the record owner in each jurisdiction in which such IP Assets exists.  At the request of Purchaser and at its expense, and without further consideration, Company shall reasonably cooperate with Purchaser in connection with the registration of the IP Assets.
 
 
 
 
 
(c)   From time to time after the Closing, at the request of Purchaser and at its expense, and without further consideration, Company shall assist Purchaser as Purchaser may reasonably require in connection with the defense or prosecution of any claim by or against any third party with respect to the ownership, validity, enforceability, infringement or other violation of or by the IP Assets.
 
Section 8.2.   Public Announcements .  Each of the parties agrees that no press release or announcement concerning this Agreement shall be issued by it or any of its Affiliates without the prior consent of the other party, except as such release or announcement may be required by applicable law or the rules or regulations of any securities exchange, in which case such party shall use its commercially reasonable efforts to allow the other party reasonable time to comment on such release or announcement in advance of such issuance.
 
ARTICLE 9.
 
INDEMNIFICATION.
 
Section 9.1.   Company’s Indemnification Obligation .  Company agrees that, from and after the Closing, it shall indemnify, defend and hold harmless Purchaser, its officers, directors, Affiliates, partners, members, managers, employees, agents and other representatives ( “Purchaser Indemnified Parties” ) from and against any damages, claims, losses, liabilities, costs and expenses (including, without limitation, reasonable attorneys’ fees) (each, a “Liability” and, collectively, “Liabilities” ) incurred by any of the foregoing Persons arising out of (a) any inaccuracy or breach of any representation or warranty of Company contained in Article 2 of this Agreement, or (b) any breach of any covenant or agreement of Company contained in this Agreement.
 
Section 9.2.   Purchaser’s Indemnification Obligation .  Purchaser agrees that, from and after the Closing, it shall indemnify, defend and hold harmless Company, its officers, directors, Affiliates, partners, members, managers, employees, agents and other representatives ( “Company Indemnified Parties” ) from and against any Liabilities incurred by any of the foregoing Persons arising out of (a) any inaccuracy or breach of any representation or warranty of Purchaser contained in Article 3 of this Agreement, or (b) any breach of any covenant or agreement of Purchaser contained in this Agreement.
 
Section 9.3.   Procedures for Indemnification for Third Party Claims .  For purposes of this Article 9, any party entitled to be indemnified under Article 9 is referred to herein as an “Indemnified Party,” and any Party obligated to provide indemnification under Article 9 is referred to herein as an “Indemnifying Party.”   The obligations and liabilities of the parties under this Article 9 with respect to, relating to or arising out of claims of third parties (individually, a “Third Party Claim” and, collectively, the “Third Party Claims” ) shall be subject to the following terms and conditions:
 
 
 
 
 
(a)   The Indemnified Party shall give the Indemnifying Party prompt written notice of any Third Party Claim, and the Indemnifying Party may undertake the defense of that claim by representatives chosen by it and reasonably satisfactory to the Indemnified Party, provided, that, in such event, the Indemnified Party will have the right to participate in such defense through counsel of its own choice and at its own expense.  Any such notice of a Third Party Claim shall identify with reasonable specificity the basis for the Third Party Claim, the facts giving rise to the Third Party Claim and the amount of the Third Party Claim (or, if such amount is not yet known, a reasonable estimate of the amount of the Third Party Claim).  The Indemnified Party shall make available to the Indemnifying Party copies of all relevant documents and records in its possession.  Failure of an Indemnified Party to give prompt notice shall not relieve the Indemnifying Party of its obligation to indemnify, except to the extent that the failure to so notify materially prejudices the Indemnifying Party’s ability to defend such claim against a third party.
 
(b)   Anything in this Section 9.3 to the contrary notwithstanding, the Indemnifying Party shall not, without the prior written consent of the Indemnified Party, settle or compromise any Third Party Claim or consent to the entry of judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of an unconditional release from all liability in respect of the Third Party Claim.  The Indemnified Party shall not, without the prior written consent (which shall not be unreasonably withheld or delayed) of the Indemnifying Party, settle, compromise or pay any Third Party Claim or consent to the entry of judgment with respect thereto.
 
Section 9.4.   Indemnification Limitations .
 
(a)   Time Limits On Indemnification .  No claim on account of a breach or inaccuracy of a representation or warranty shall be made after the expiration of the period ending twelve months after the date of Closing.  Notwithstanding the foregoing, if a written claim or written notice is given under Article 9 with respect to any representation or warranty prior to the expiration of the aforementioned survival period, the claim with respect to such representation or warranty shall continue until such claim is finally resolved.
 
(b)   Limitations on Damages .
 
(i)   In no event shall Company be liable for indemnification pursuant to Section 9.1 unless and until the aggregate of all Liabilities which are incurred or suffered by the Purchaser Indemnified Parties exceeds $50,000 (the “Basket”), in which case the Purchaser Indemnified Parties shall be entitled to indemnification for all such Liabilities including the Basket (subject to Section 9.4(b)(ii)).  In no event shall Purchaser be liable for indemnification pursuant to Section 9.2 unless and until the aggregate of all Liabilities which are incurred or suffered by the Company Indemnified Parties exceeds the Basket, in which case the Company Indemnified Parties shall be entitled to indemnification for all such Liabilities including the Basket (subject to Section 9.4(b)(ii)).
 
 
 
 
 
(ii)   Notwithstanding anything to the contrary in this Agreement, (x) the maximum aggregate liability of Company pursuant to Section 9.1 shall not exceed $1,000,000 and (y) the maximum aggregate liability of Purchaser pursuant to Section 9.2 shall not exceed $1,000,000.
 
(iii)   Notwithstanding anything to the contrary contained in this Agreement or otherwise, no Party to this Agreement shall be liable to any Indemnified Party for any special, incidental, punitive, consequential or similar damages.
 
ARTICLE 10.
 
MISCELLANEOUS.
 
Section 10.1.   Survival of Warranties .  Unless otherwise set forth in this Agreement, the representations and warranties of the Company and the Purchaser contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation or knowledge of the subject matter thereof made by or on behalf of the Purchaser or the Company.
 
Section 10.2.   Successors and Assigns .  The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties.  Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
 
Section 10.3.   Governing Law .  This Agreement shall be governed by the internal law of Ohio.
 
Section 10.4.   Counterparts .  This Agreement may be executed in two counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument.  Counterparts may be delivered via facsimile, electronic mail (including pdf) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
 
Section 10.5.   Titles and Subtitles .  The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
 
Section 10.6.   Notices .  All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or: (a) personal delivery to the party to be notified, (b) when sent, if sent by electronic mail or facsimile during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) business day after deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt.  All communications shall be sent to the respective parties at their address as set forth on the signature page, or to such e-mail address, facsimile number or address as subsequently modified by written notice given in accordance with this Section 10.6.  If notice is given to the Company, a copy shall also be sent to Hutchinson Black and Cook, LLC, 921 Walnut Street, Suite 200 Boulder, CO 80302, Attention: James L. Carpenter, Jr., Facsimile: (303) 442-6593; and if notice is given to the Purchaser, a copy shall also be given to Luis A. Rodriguez, Assistant Secretary, OMS Investments, Inc., 10250 Constellation Blvd., Suite 2800, Los Angeles, CA 90067, Facsimile: (310) 300-3051, with a copy to Hunton & Williams, LLP, 2200 Pennsylvania Avenue, N.W., Washington, D.C. 20036, Attention: J. Steven Patterson, Facsimile: (202) 778-2201.
 
 
 
 
 
Section 10.7.   Amendments and Waivers .  Any term of this Agreement may be amended, terminated or waived only with the written consent of the Company and the Purchaser.  Any amendment or waiver effected in accordance with this Section 9.7 shall be binding upon the Purchaser and each transferee of the Securities (or the Conversion Shares or the Warrant Share), each future holder of all such securities, and the Company.
 
Section 10.8.   Severability .  The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
 
Section 10.9.   Delays or Omissions .  No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring.  Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.  All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.
 
Section 10.10.   Entire Agreement .  This Agreement (including the Appendices hereto), the Securities Purchase Agreement, and the other Transaction Agreements constitute the full and entire understanding and agreement between the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties are expressly canceled.
 
Section 10.11.   Dispute Resolution .  The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of Colorado and to the jurisdiction of the United States District Court for the District of Colorado for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the state courts of Coloradoor the United States District Court for the District ofColorado, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.  The prevailing party in any such dispute shall be entitled to recover its reasonable attorneys’ fees and costs incurred, in addition to any other damages.
 
 
 
 
 
WAIVER OF JURY TRIAL:  EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS, THE SECURITIES OR THE SUBJECT MATTER HEREOF OR THEREOF.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.  THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS.  EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL
 
 [Signature pages follow.]
 
 
 
 
 
IN WITNESS WHEREOF, the parties have executed this Intellectual Property Purchase Agreement as of the date first written above.
 
COMPANY:
 
AEROGROW INTERNATIONAL, INC.


By:                                                               

Name:                                                                

Title:                                                                 

Address:

6075 Longbow Dr. Suite 200,
Boulder, Colorado 80301
Attention:
Facsimile:
 
 
 
 
 
PURCHASER:

OMS INVESTMENTS, INC.


By:                                                               

Name:                                                                   

Title:                                                               

Address:

10250 Constellation Blvd., Suite 2800
Los Angeles, California 90067
Attention:
Facsimile:
 
 
 
 
 
APPENDIX A
INTELLECTUAL PROPERTY ASSIGNMENT

WHEREAS, AeroGrow International, Inc., a Nevada corporation having offices at 6075 Longbow Dr., Suite 200, Boulder, Colorado 80301 (“ASSIGNOR”) owns all right, title and interest in and to the IP Assets (defined below); and

WHEREAS, OMS Investments, Inc., a Delaware corporation having offices at 10250 Constellation Blvd., Suite 2800, Los Angeles, California 90067 (“ASSIGNEE”) is desirous of acquiring ASSIGNOR’s entire right, title and interest in and to the IP Assets;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ASSIGNOR does hereby sell, assign, transfer and set over to ASSIGNEE, its successors and assigns, ASSIGNOR’s entire right, title and interest in and to the IP Assets.

(a)   “IP Assets” means all intellectual property rights of any kind, worldwide, owned in whole or in part by ASSIGNOR, that are associated with ASSIGNOR’S products, including rights in, to and concerning: (a) all patents and patent applications throughout the world (including utility patents, design patents, patents of importation, improvement patents, patents and certificates of addition, and utility models), as well as existing and future divisions, reissues, reexaminations, continuations, continuations-in-part, renewals and extensions of any of the foregoing, and applications therefore, and patents which may be issued on such applications, (b) all trademarks, service marks, trade dress, logos, trade names, corporate names, domain names and/or other source identifiers, all goodwill associated with any of the foregoing, and registrations and applications for registration thereof, including all extensions, modifications and renewals of the foregoing; except for ASSIGNOR’S AEROGROW and AEROGARDEN trademarks which shall continue to be owned by ASSIGNOR, (c) all published and unpublished works of authorship and copyrights therein, and copyright registrations and applications for registration thereof and all renewals, extensions, restorations and reversions thereof; and (d) all know-how, trade secrets, confidential and proprietary information, ideas, inventions, discoveries, formulae, compositions, manufacturing and production processes and techniques, research and development information, reports, drawings, specifications, designs, plans, improvements, proposals, information and analytic methodology used in the development, testing, analysis, design, manufacturing and packaging of products and services, technology, software, computer programs, documentation, databases, data, mask works, financial, business and marketing plans, cost and pricing information, supplier lists and related information, sales data and plans, customer lists, customer accounts, and related information, recorded in any form.  IP Assets includes, but is not limited to, the items listed on Schedule 1 attached hereto.
 
ASSIGNOR hereby covenants that it has the full right to convey the entire interest herein assigned, and that it has not executed, and will not execute, any agreement in conflict with this Intellectual Property Assignment.

The foregoing assignment of IP Assets includes all rights to sue for past, present, and future infringement, including the right to collect and receive any damages, royalties, or settlements for such infringements, all rights to sue for injunctive or other equitable relief, and any and all causes of action relating to any of the IP Assets.
 
 
 
 
 
ASSIGNOR hereby agrees to execute without further consideration any further documents and instruments which may be necessary, lawful and proper to secure to ASSIGNEE its interest and title in the aforementioned IP Assets.

ASSIGNOR hereby agrees to execute without further consideration any further documents and instruments which may be necessary, lawful and proper in the prosecution of the IP Assets or in the preparation or prosecution of any continuation, continuation-in-part, substitute, divisional, renewal, reexamination, or reissue applications or in any amendments, extensions, or interference proceedings, or other applications for patents of any region or country, or that may be necessary to prosecute, protect, or perfect the aforementioned IP Assets.

ASSIGNOR hereby further covenants and agrees that it will communicate to ASSIGNEE any and all facts known to it respecting said IP Assets, and testify in any legal proceeding, sign all lawful papers, execute and deliver all papers and take an actions that may be necessary or desirable to perfect the title to any of the IP Assets.

ASSIGNOR does hereby authorized and request the Director of the United States Patent and Trademark Office, the Director of the United States Copyright Office, and directors of equivalent foreign intellectual property offices, to issue any and all letters patent, trademark registrations, copyright registrations, or similar rights which may be granted upon said IP Assets, or upon any improvements thereto, or any parts thereof, when granted, to said ASSIGNEE.
 
 
 
 
 
IN TESTIMONY WHEREOF, I hereunto set my hand this ____ day of _________, 2013.

AeroGrow International, Inc. (ASSIGNOR)

By:                                                               

Name:                                                                

Title:                                                                 


County of                                                              )
)      ss:
State of                                                                  )

On this _________ day of ___________________, 20___, before me, a Notary Public in and for the County and State aforesaid, personally appeared _____________________, to me known and known to me to be the person of that name, who signed and sealed the foregoing instrument, and acknowledged the same to be of his free act and deed.
 
______________________________
Notary Public
(SEAL)
My Commission Expires _________

 
 
 
 
IN TESTIMONY WHEREOF, I hereunto set my hand this ____ day of _________, 2013.

OMS Investments, Inc. (ASSIGNEE)

By:                                                               

Name:                                                                

Title:                                                                 


County of                                                              )
)      ss:
State of                                                                  )

On this _________ day of ___________________, 20___, before me, a Notary Public in and for the County and State aforesaid, personally appeared _____________________, to me known and known to me to be the person of that name, who signed and sealed the foregoing instrument, and acknowledged the same to be of his free act and deed.
 
______________________________
Notary Public
(SEAL)
My Commission Expires _________

 
 
 
 

SCHEDULE 1
IP ASSETS  

A.
Patents

U.S. Patents and Applications

Patent No.
Application No.
Publication No.
Title
Filing Date (MM/DD/YYYY)
Status
-
10/714,786
2005/0102895
Soil-Less Support Medium and Method for Germinating a Seed
11/17/2003
Abandoned
-
11/079,054
2005/0241231
Methods and Devices for Promoting the Growth of Plant Air Roots
03/14/2005
Abandoned
-
11/098,176
2005/0246954
Devices and Methods for Growing Plants
04/04/2005
Abandoned
-
11/111,553
2005/0246955
Devices and Methods for Growing Plants
04/21/2005
Abandoned
-
11/112,269
2005/0257424
Devices and Methods for Growing Plants
04/22/2005
Abandoned
-
10/528,110
2006/0179711
Devices and Methods for Growing Plants
07/15/2005
Abandoned
D586,688
29/235,880
-
Indoor Gardening Appliance
08/08/2005
Patented
7,818,916
11/321,023
2006/0254332
PH Buffered Plant Nutrient Compositions and Methods for Growing Plants
12/28/2005
Patented
-
11/321,368
2006/0254138
Devices and Methods for Growing Plants by Measuring Liquid or Nutrient Usage Rate
12/28/2005
Abandoned
-
11/455,364
2006/0272210
Smart Garden Device and Methods for Growing Plants
06/19/2006
Abandoned
-
11/653,121
2007/0271841
Devices and Methods for Growing Plants
01/12/2007
Abandoned
8,261,486
11/654,164
2007/0271842
Systems and Methods for Controlling Liquid Delivery and Distribution to Plants
01/16/2007
Patented
-
11/895,972
2008/0078118
Master Gardener Baskets and Methods for Growing Plants
08/28/2007
Abandoned
D604,196
29/292,564
-
Indoor Gardening Appliance
10/17/2007
Patented
D604,197
29/293,343
-
Indoor Gardening Appliance
11/16/2007
Patented
-
12/002,543
2008/0276534
Devices and Methods for Growing Plants by Measuring Liquid Consumption
12/17/2007
Abandoned
-
12/073,984
2008/0282610
Devices and Methods for Growing Plants
03/12/2008
Abandoned
-
12/073,985
2008/0222949
Devices and Methods for Growing Plants
03/12/2008
Abandoned
-
12/073,987
2008/0155894
Soil-Less Seed Support Medium and Method for Germinating a Seed
03/12/2008
Abandoned
-
12/261,821
2009/0151248
Devices and Methods for Growing Plants
10/30/2008
Abandoned
8,091,275
12/911,590
2011/0036009
PH Buffered Plant Nutrient Compositions and Methods for Growing Plants
10/25/2010
Patented
 
 
 
 
 
Foreign Patents and Applications

Application/ Publication No.
Patent No.
Title
Publication Date (MM/DD/YYYY)
Status
PCT/US2004/030168
WO 2005/055700
Devices and Methods for Growing Plants
06/23/2005
Abandoned

B.
Copyrights

Reg. No.
Description
Reg. Date (MM/DD/YYYY)
Status
VA0001674819
Cascading Petunias Seed Kit
09/28/2007
Registered
TX0006833384
Cascading Petunias Tending & Harvesting Guide
09/28/2007
Registered
VA0001674791
Cherry Tomato Seed Kit
09/28/2007
Registered
TX0006833400
Cherry Tomato Tending & Harvesting Guide
09/28/2007
Registered
VA0001676754
Chili Pepper Seed Kit
09/28/2007
Registered
TX0006833387
Chili Pepper Tending & Harvesting Guide
09/28/2007
Registered
VA0001674792
French Herb Seed Kit
09/28/2007
Registered
TX0006833392
French Herb Tending & Harvesting Guide
09/28/2007
Registered
VA0001676784
Gourmet Herb Seed Kit
09/28/2007
Registered
TX0006833397
Gourmet Herb Tending & Harvesting Guide
09/28/2007
Registered
VA0001674803
Grow Bulbs (2)
09/28/2007
Registered
VA0001674808
Grow Bulb (1)
09/28/2007
Registered
TX0006833380
Herb Appeal
09/28/2007
Registered
PA0001602428
Herb Appeal
09/28/2007
Registered
VA0001674793
International Basil Seed Kit
09/28/2007
Registered
TX0006833407
International Basil Tending & Harvesting Guide
09/28/2007
Registered
VA0001674799
Italian Herb Seed Kit
09/28/2007
Registered
TX0006833410
Italian Herb Tending & Harvesting Guide
09/28/2007
Registered
VA0001674800
Japanese Herb Seed Kit
09/28/2007
Registered
TX0006833412
Japanese Herb Tending & Harvesting Guide
09/28/2007
Registered
VA0001676787
Master Gardener Deluxe
09/28/2007
Registered
TX0006833139
Master Gardener Deluxe Guide
09/28/2007
Registered
TX0006833376
Quick Start Guide
09/28/2007
Registered
TX0006833137
Salad Bar Series Tending & Harvesting Guide
09/28/2007
Registered
 
 
 
 
 
C.
Trademarks

Reg. No.
Serial No.
Name of Mark
Filing Date (MM/DD/YYYY)
Status
-
78955692
GROWNOW
08/18/2006
Abandoned
-
78955675
MINIGARDEN
08/18/2006
Abandoned
3455606
78882877
FARMER’S MARKET FRESH
05/12/2006
Active
-
78874379
INTERNATIONAL GOURMET
05/02/2006
Abandoned
-
78836826
FARMER’S MARKET IN YOUR KITCHEN
03/14/2006
Abandoned
-
78836758
OFF THE PLANT AND INTO THE POT
03/14/2006
Abandoned
-
78836736
CUT & COOK
03/14/2006
Abandoned
3525830
78836718
BIO-DOME
03/14/2006
Active
-
78836659
WE GROW GREEN THUMBS
03/14/2006
Abandoned
 
78836577
AEROPOD
03/14/2006
Abandoned
-
78781094
KITCHENHARVEST
12/27/2005
Abandoned
-
78697306
KITCHEN SMART
08/22/2005
Abandoned
-
78671280
FARMERS MARKET FRESH
07/15/2005
Abandoned
-
77720608
AEROFOOD
09/01/2009
Abandoned
-
77655735
GROW ANYTHING, ANYTIME, ANYWHERE
01/23/2009
Abandoned
3773031
77651442
VEGGIEPRO
01/16/2009
Active
-
77584019
GREENSPACE
10/02/2008
Abandoned
-
77550972
GRAPHIC
08/19/2008
Abandoned
-
77550953
GIFT THAT KEEPS ON GROWING
08/19/2008
Abandoned
-
77550941
FRESH AIR
08/19/2008
Abandoned
3633031
77550915
HERB 'N SAVE
08/19/2008
Active
-
77478932
SLEEPGARDEN
05/20/2008
Abandoned
3570754
77476610
HERB 'N ICE
05/16/2008
Active
-
77464412
PATIOPONICS
05/02/2008
Abandoned
-
77440754
PLANT PILLOW
04/04/2008
Abandoned
-
77347256
MASTER CHEF IN A BOX
12/07/2007
Abandoned
3522253
77347195
AGS ADVANCED GROWING SYSTEM
12/07/2007
Active
3573608
77304572
CHEF IN A BOX
10/15/2007
Active
3573607
77304513
FLORIST IN A BOX
10/15/2007
Active
-
77304325
ADAPTIVE INTELLIGENCE
10/15/2007
Abandoned
-
77304131
SNIP IT CHOP IT HERB IT UP!
10/15/2007
Abandoned
-
77304079
GRAPHIC
10/15/2007
Abandoned
-
77304040
ORGANIC AIR
10/15/2007
Abandoned
-
77304030
AERO-FRESH
10/15/2007
Abandoned
3528760
77304010
MOUNTAIN MEADOW
10/15/2007
Active
3592304
77303344
SPLASH OF COLOR
10/12/2007
Active
3592303
77303340
ENGLISH COTTAGE
10/12/2007
Active
-
77303337
WHITE SATIN
10/12/2007
Abandoned
3659815
77303332
RED VELVET
10/12/2007
Active
-
77301478
CORNER MARKET
10/11/2007
Abandoned
-
77238322
HERB IT & SERVE IT
07/25/2007
Abandoned
3592160
77238309
HERB IT UP
07/25/2007
Active
-
77229666
MINIGARDEN
07/13/2007
Abandoned
-
77202957
AEROFLOWER
06/11/2007
Abandoned
3568213
77185032
FLORIST IN A BOX
05/18/2007
Active
3413666
77170403
VEG-E-GARDEN
05/01/2007
Active
-
77154135
GET THE GARDEN
04/11/2007
Abandoned
-
77144237
PRODUCE PANTRY
03/29/2007
Abandoned
-
77142761
EDIBLE PANTRY
03/28/2007
Abandoned
-
77132485
ULTIMATE KITCHEN GARDEN
03/15/2007
Abandoned
3392651
77132449
ULTIMATE KITCHEN GARDENER
03/15/2007
Active
-
77130024
PET NET
03/13/2007
Abandoned
3389625
77129826
WALL GARDEN
03/13/2007
Active
3389624
77129806
WALL FARM
03/13/2007
Active
-
77129677
ADAPTIVE GROWTH INTELLIGENCE
03/13/2007
Abandoned
3373707
77127173
CHEF IN A BOX
03/09/2007
Active
3376411
77095536
HERB 'N SERVE
01/31/2007
Active
-
77070519
EVEN BETTER THAN ORGANIC
12/22/2006
Abandoned
3565083
77058534
PLUG & GROW
12/06/2006
Active
3370002
77058522
SWEET RUBIES
12/06/2006
Active
-
77045993
STRAWBERRY PATCH
11/16/2006
Abandoned
3524683
77045636
HERB APPEAL
11/16/2006
Active
-
77009465
BIOTRANSPORT
09/28/2006
Abandoned
-
77007729
GREEN THUMB GUARANTEE
09/26/2006
Abandoned
 
 
 
 
 
Domain Names:

DomainName
CreateDate
ExpirationDate
Status
365GARDENING.COM
10/27/2008
10/27/2013
Active
AEROGR.COM
5/14/2010
5/14/2013
Active
AGIMARKETING.COM
2/24/2005
7/1/2013
Active
BUYTHEGARDEN.COM
8/29/2006
8/29/2013
Active
GETTHEGARDEN.COM
8/29/2006
8/29/2013
Active
GROWFLOWERS.CA
6/22/2011
6/22/2013
Active
GROWFRESH.COM
10/30/2006
7/1/2013
Active
GROWFRESHNOW.COM
6/7/2007
6/7/2013
Active
GROWNOW.COM
6/14/2004
6/14/2013
Active
INDOORGARDENDEAL.COM
11/11/2009
11/11/2013
Active
INDOORGARDENDEALS.COM
11/17/2009
11/17/2013
Active
ULTIMATEKITCHENGARDEN.COM
6/12/2007
6/12/2013
Active
ULTIMATEKITCHENGARDENER.COM
6/12/2007
6/12/2013
Active
 
 
 
 
 
D.
Technical Information

Software rights for AeroGarden ULTRA software, and the programs and operational settings for all AeroGrow gardens, are owned by AeroGrow.  The software may control grow-light timer settings, pump/bubbler settings, nutrient timer settings, bulb-replace timer settings, garden-type settings, and alert LEDs.  The ULTRA adds customizability, time-sensitive tips, and a detailed user interface and control screen.  There is no relevant documentation.

List of software:  AG ULTRA, AG Extra, AG 7, Pro 100, AG 6, Space Saver 6, AG3, Ultimate Kitchen Garden, and Veggie Pro (including source code)

 
 
 
 
APPENDIX B
EXCLUDED TRADEMARKS & DOMAIN NAMES
 
1.           Marks

Reg. No.
Serial No.
Name of Mark
Filing Date (MM/DD/YYYY)
Status
3252527
78781935
AEROGARDEN
12/28/2005
Active
-
78697314
AEROGROWN
08/22/2005
Active
-
78697293
AEROGROW SMART
08/22/2005
Active
-
78697264
AEROGROW SMART GARDEN
08/22/2005
Active
-
78654377
AEROGROW KITCHEN GARDEN
06/20/2005
Abandoned
3412797
78614573
AEROGROW
04/22/2005
Active
3710117
77573358
AEROGARDEN ANTICS
09/18/2008
Active
-
77304395
AEROGARDEN MINI
10/15/2007
Abandoned
3632111
77229682
AEROGARDEN
07/13/2007
Active
3322684
77073448
AEROGARDEN
12/29/2006
Active
3311062
77073424
AEROGARDEN
12/29/2006
Active
3311054
77073362
AEROGARDEN
12/29/2006
Active
3568085
77073345
AEROGARDEN
12/29/2006
Active
-
77073339
AEROGARDEN
12/29/2006
Active
-
77073259
AEROGARDEN
12/29/2006
Active
 
 
 
 
 
2.
Domain Names

DomainName
CreateDate
ExpirationDate
Status
AERO-GARDEN.COM
1/2/2006
7/1/2013
Active
AEROGARDEN.CA
9/12/2007
9/12/2013
Active
AEROGARDEN.COM
1/12/2005
7/1/2013
Active
AEROGARDEN.NET
2/11/2005
7/1/2013
Active
AEROGARDEN.ORG
12/28/2005
12/28/2013
Active
AEROGARDEN.TV
4/6/2006
4/6/2013
Active
AEROGARDEN.US
12/28/2005
12/27/2013
Active
AEROGARDEN3.COM
7/8/2009
7/8/2013
Active
AEROGARDEN365.COM
5/14/2008
5/14/2013
Active
AEROGARDENBLOG.COM
5/29/2009
5/29/2013
Active
AEROGARDENBULBS.COM
7/20/2007
7/20/2013
Active
AEROGARDENCANADA.CA
6/8/2009
6/8/2013
Active
AEROGARDENCANADA.COM
2/23/2007
2/23/2014
Active
AEROGARDENCATALOG.COM
7/29/2008
7/29/2013
Active
AEROGARDENCLUB.COM
3/6/2008
3/6/2014
Active
AEROGARDENCOMMUNITY.COM
1/7/2010
1/7/2014
Active
AEROGARDENCOUPONS.COM
2/13/2009
2/13/2014
Active
AEROGARDENDIRECT.CA
5/16/2008
5/16/2013
Active
AEROGARDENDIRECT.COM
8/29/2006
8/29/2013
Active
AEROGARDENER.COM
12/28/2005
7/1/2013
Active
AEROGARDENER.NET
12/28/2005
7/1/2013
Active
AEROGARDENGIFTS.COM
3/31/2008
3/31/2014
Active
AEROGARDENGROWBULBS.COM
7/20/2007
7/20/2013
Active
AEROGARDENGROWLIGHTS.COM
1/18/2011
1/18/2014
Active
AEROGARDENIDEAS.COM
11/10/2008
11/10/2013
Active
AEROGARDENIMAGES.COM
11/3/2010
11/3/2013
Active
AEROGARDENING.COM
12/28/2005
7/1/2013
Active
AEROGARDENMINI.COM
8/30/2007
8/30/2013
Active
AEROGARDENNUTRIENTS.COM
1/18/2011
1/18/2014
Active
AEROGARDENOFFERS.COM
2/18/2008
2/18/2014
Active
AEROGARDENONLINE.COM
9/27/2006
9/27/2013
Active
AEROGARDENONLINESTORE.COM
9/27/2006
9/27/2013
Active
AEROGARDENOUTLET.COM
1/20/2009
1/20/2014
Active
AEROGARDENREVIEWS.COM
12/9/2008
12/9/2013
Active
AEROGARDENS.COM
8/28/2006
8/28/2013
Active
AEROGARDENS.EU
10/15/2008
10/31/2014
Active
AEROGARDENSTORE.COM
4/28/2006
7/1/2013
Active
AEROGARDENSUPPORT.COM
4/28/2006
7/1/2013
Active
AEROGARDENTHREE.COM
7/8/2009
7/8/2013
Active
AEROGARDENTV.COM
8/27/2008
8/27/2013
Active
AEROGARDENUTRIENTS.COM
1/18/2011
1/18/2014
Active
AEROGARDENVIDEO.COM
2/22/2010
2/22/2014
Active
AEROGARDENVIP.COM
11/13/2007
11/13/2013
Active
AEROGARDENYOUTUBE.COM
11/28/2007
11/28/2013
Active
AEROGRO.COM
6/24/2002
7/1/2013
Active
AEROGROW.CO.UK
7/20/2012
7/20/2013
Active
AEROGROW.COM
6/24/2002
7/1/2014
Active
AEROGROW.NET
10/18/2005
7/1/2013
Active
AEROGROWDIRECT.COM
8/29/2006
8/29/2013
Active
AEROGROWOUTLET.COM
1/20/2009
1/20/2014
Active
AIROGARDEN.COM
1/2/2006
7/1/2013
Active
AMAZINGAEROGARDEN.COM
11/28/2007
11/28/2013
Active
AROGARDEN.COM
1/2/2006
7/1/2013
Active
AROWGARDEN.COM
1/2/2006
7/1/2013
Active
ARROGARDEN.COM
1/2/2006
7/1/2013
Active
ARROWGARDEN.COM
1/2/2006
7/1/2013
Active
ARROWGROW.COM
6/24/2002
7/1/2013
Active
EROGARDEN.COM
1/2/2006
7/1/2013
Active
GETTHEAEROGARDEN.COM
9/27/2006
9/27/2013
Active
ILOVEMYAEROGARDEN.COM
6/19/2008
6/19/2013
Active
MYAEROGARDEN.COM
10/3/2012
10/3/2013
Active
THEAEROGARDEN.CA
9/16/2008
9/16/2013
Active
THEAEROGARDEN.COM
5/26/2006
5/26/2013
Active
THEAEROGARDENSTORE.COM
9/27/2006
9/27/2013
Active
aerogarden.fi
6/3/2010
6/3/2013
Active
aerogarden.com.br
8/4/2009
8/4/2013
Active
aerogarden.mx
7/1/2009
6/30/2013
Active
aerogarden.nl
3/23/2011
8/10/2013
Active
aerogarden.no
11/17/2008
9/10/2013
Active
aerogardens.ch
8/3/2010
9/29/2013
Active
aerogardens.fr
10/15/2008
10/15/2013
Active
aerogarden.es
10/15/2008
10/15/2013
Active
aerogarden.it
10/21/2008
10/21/2013
Active
aerogarden.dk
10/15/2008
10/15/2013
Active
aerogarden.asia
3/26/2008
3/26/2014
Active
aerogarden.hk
2/23/2008
3/2/2014
Active
aerogarden.kr
10/26/2007
10/26/2013
Active
theaerogarden.fr
10/9/2007
10/9/2013
Active
theaerogarden.nl
10/8/2007
10/8/2013
Active
aerogarden.ie
10/4/2007
10/16/2013
Active
aerogrow.hk
9/27/2007
8/15/2013
Active
aerogarden.com.mx
7/26/2006
7/26/2013
Active
theaerogarden.eu
7/20/2006
7/31/2013
Active
aerogarden.jp
7/20/2006
7/20/2013
Active
theaerogarden.com.au
10/11/2007
10/10/2013
Active
aerogarden.se
7/20/2006
7/20/2013
Active
aerogrow.jp
5/13/2011
5/11/2013
Active
aerogarden.co.uk
5/29/2007
10-Apr-16
Active
 
 
 
 
 
APPENDIX C

(Exceptions to reps and warranties)

2.3(a)  First Western Trust Bank has a security interest in the Company Intellectual Property, which must be released or satisfied prior to or contemporaneous with the Closing. GVC Capital,
LLC has a security interest in the Company Intellectual Property, which must be released or satisfied prior to or contemporaneous with the Closing. First Capital has a security interest in the Company Intellectual Property, which must be released or satisfied prior to or contemporaneous with the Closing.

2.3(d) Schedule I to Appendix A identifies those IP Assets that have been abandoned, including without limitation, patents, patent applications, trademarks, and trademark applications.

2.3(g)   The Company does permit use of the Company’s Trademarks by distributors in connection with marketing activities for international distribution of its products.

2.5  The Company’s has enforceable non-compete agreements only with Mike Wolfe, John Thompson, and former Key Employee Greg Clarke.

 

 
 
 

 
APPENDIX A
INTELLECTUAL PROPERTY ASSIGNMENT

WHEREAS, AeroGrow International, Inc., a Nevada corporation having offices at 6075 Longbow Dr., Suite 200, Boulder, Colorado 80301 (“ASSIGNOR”) owns all right, title and interest in and to the IP Assets (defined below); and

WHEREAS, OMS Investments, Inc., a Delaware corporation having offices at 10250 Constellation Blvd., Suite 2800, Los Angeles, California 90067 (“ASSIGNEE”) is desirous of acquiring ASSIGNOR’s entire right, title and interest in and to the IP Assets;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ASSIGNOR does hereby sell, assign, transfer and set over to ASSIGNEE, its successors and assigns, ASSIGNOR’s entire right, title and interest in and to the IP Assets.

(a)   “IP Assets” means all intellectual property rights of any kind, worldwide, owned in whole or in part by ASSIGNOR, including rights in, to and concerning: (a) all patents and patent applications throughout the world (including utility patents, design patents, patents of importation, improvement patents, patents and certificates of addition, and utility models), as well as existing and future divisions, reissues, reexaminations, continuations, continuations-in-part, renewals and extensions of any of the foregoing, and applications therefore, and patents which may be issued on such applications, (b) all trademarks, service marks, trade dress, logos, trade names, corporate names, domain names and/or other source identifiers, all goodwill associated with any of the foregoing, and registrations and applications for registration thereof, including all extensions, modifications and renewals of the foregoing; except for ASSIGNOR’S AEROGROW and AEROGARDEN trademarks which shall continue to be owned by ASSIGNOR, (c) all published and unpublished works of authorship and copyrights therein, and copyright registrations and applications for registration thereof and all renewals, extensions, restorations and reversions thereof; and (d) all know-how, trade secrets, confidential and proprietary information, ideas, inventions, discoveries, formulae, compositions, manufacturing and production processes and techniques, research and development information, reports, drawings, specifications, designs, plans, improvements, proposals, information and analytic methodology used in the development, testing, analysis, design, manufacturing and packaging of products and services, technology, software, computer programs, documentation, databases, data, mask works, financial, business and marketing plans, cost and pricing information, supplier lists and related information, sales data and plans, customer lists, customer accounts, and related information, recorded in any form.  IP Assets includes, but is not limited to, the items listed on Schedule 1 attached hereto.
 
ASSIGNOR hereby covenants that it has the full right to convey the entire interest herein assigned, and that it has not executed, and will not execute, any agreement in conflict with this Intellectual Property Assignment.

The foregoing assignment of IP Assets includes all rights to sue for past, present, and future infringement, including the right to collect and receive any damages, royalties, or settlements for such infringements, all rights to sue for injunctive or other equitable relief, and any and all causes of action relating to any of the IP Assets.
 
 
 
 
 
ASSIGNOR hereby agrees to execute without further consideration any further documents and instruments which may be necessary, lawful and proper to secure to ASSIGNEE its interest and title in the aforementioned IP Assets.

ASSIGNOR hereby agrees to execute without further consideration any further documents and instruments which may be necessary, lawful and proper in the prosecution of the IP Assets or in the preparation or prosecution of any continuation, continuation-in-part, substitute, divisional, renewal, reexamination, or reissue applications or in any amendments, extensions, or interference proceedings, or other applications for patents of any region or country, or that may be necessary to prosecute, protect, or perfect the aforementioned IP Assets.

ASSIGNOR hereby further covenants and agrees that it will communicate to ASSIGNEE any and all facts known to it respecting said IP Assets, and testify in any legal proceeding, sign all lawful papers, execute and deliver all papers and take an actions that may be necessary or desirable to perfect the title to any of the IP Assets.

ASSIGNOR does hereby authorized and request the Director of the United States Patent and Trademark Office, the Director of the United States Copyright Office, and directors of equivalent foreign intellectual property offices, to issue any and all letters patent, trademark registrations, copyright registrations, or similar rights which may be granted upon said IP Assets, or upon any improvements thereto, or any parts thereof, when granted, to said ASSIGNEE.
 
 
 
 
 
IN TESTIMONY WHEREOF, I hereunto set my hand this ____ day of _________, 2013.

AeroGrow International, Inc. (ASSIGNOR)

By:                                                               

Name:                                                                

Title:                                                                 


County of                                                              )
)      ss:
State of                                                                  )

On this _________ day of ___________________, 20___, before me, a Notary Public in and for the County and State aforesaid, personally appeared _____________________, to me known and known to me to be the person of that name, who signed and sealed the foregoing instrument, and acknowledged the same to be of his free act and deed.
 
______________________________
Notary Public
(SEAL)
My Commission Expires _________

 
 
 
 
 
IN TESTIMONY WHEREOF, I hereunto set my hand this ____ day of _________, 2013.

OMS Investments, Inc. (ASSIGNEE)

By:                                                               

Name:                                                                

Title:                                                                 


County of                                                              )
)      ss:
State of                                                                  )

On this _________ day of ___________________, 20___, before me, a Notary Public in and for the County and State aforesaid, personally appeared _____________________, to me known and known to me to be the person of that name, who signed and sealed the foregoing instrument, and acknowledged the same to be of his free act and deed.
 
______________________________
Notary Public
(SEAL)
My Commission Expires _________

 
 
 
 

SCHEDULE 1
IP ASSETS  

A.
Patents

U.S. Patents and Applications

Patent No.
Application No.
Publication No.
Title
Filing Date (MM/DD/YYYY)
Status
-
10/714,786
2005/0102895
Soil-Less Support Medium and Method for Germinating a Seed
11/17/2003
Abandoned
-
11/079,054
2005/0241231
Methods and Devices for Promoting the Growth of Plant Air Roots
03/14/2005
Abandoned
-
11/098,176
2005/0246954
Devices and Methods for Growing Plants
04/04/2005
Abandoned
-
11/111,553
2005/0246955
Devices and Methods for Growing Plants
04/21/2005
Abandoned
-
11/112,269
2005/0257424
Devices and Methods for Growing Plants
04/22/2005
Abandoned
-
10/528,110
2006/0179711
Devices and Methods for Growing Plants
07/15/2005
Abandoned
D586,688
29/235,880
-
Indoor Gardening Appliance
08/08/2005
Patented
7,818,916
11/321,023
2006/0254332
PH Buffered Plant Nutrient Compositions and Methods for Growing Plants
12/28/2005
Patented
-
11/321,368
2006/0254138
Devices and Methods for Growing Plants by Measuring Liquid or Nutrient Usage Rate
12/28/2005
Abandoned
-
11/455,364
2006/0272210
Smart Garden Device and Methods for Growing Plants
06/19/2006
Abandoned
-
11/653,121
2007/0271841
Devices and Methods for Growing Plants
01/12/2007
Abandoned
8,261,486
11/654,164
2007/0271842
Systems and Methods for Controlling Liquid Delivery and Distribution to Plants
01/16/2007
Patented
-
11/895,972
2008/0078118
Master Gardener Baskets and Methods for Growing Plants
08/28/2007
Abandoned
D604,196
29/292,564
-
Indoor Gardening Appliance
10/17/2007
Patented
D604,197
29/293,343
-
Indoor Gardening Appliance
11/16/2007
Patented
-
12/002,543
2008/0276534
Devices and Methods for Growing Plants by Measuring Liquid Consumption
12/17/2007
Abandoned
-
12/073,984
2008/0282610
Devices and Methods for Growing Plants
03/12/2008
Abandoned
-
12/073,985
2008/0222949
Devices and Methods for Growing Plants
03/12/2008
Abandoned
-
12/073,987
2008/0155894
Soil-Less Seed Support Medium and Method for Germinating a Seed
03/12/2008
Abandoned
-
12/261,821
2009/0151248
Devices and Methods for Growing Plants
10/30/2008
Abandoned
8,091,275
12/911,590
2011/0036009
PH Buffered Plant Nutrient Compositions and Methods for Growing Plants
10/25/2010
Patented
 
 
 
 
 
Foreign Patents and Applications

Application/ Publication No.
Patent No.
Title
Publication Date (MM/DD/YYYY)
Status
PCT/US2004/030168
WO 2005/055700
Devices and Methods for Growing Plants
06/23/2005
Abandoned

B.
Copyrights

Reg. No.
Description
Reg. Date (MM/DD/YYYY)
Status
VA0001674819
Cascading Petunias Seed Kit
09/28/2007
Registered
TX0006833384
Cascading Petunias Tending & Harvesting Guide
09/28/2007
Registered
VA0001674791
Cherry Tomato Seed Kit
09/28/2007
Registered
TX0006833400
Cherry Tomato Tending & Harvesting Guide
09/28/2007
Registered
VA0001676754
Chili Pepper Seed Kit
09/28/2007
Registered
TX0006833387
Chili Pepper Tending & Harvesting Guide
09/28/2007
Registered
VA0001674792
French Herb Seed Kit
09/28/2007
Registered
TX0006833392
French Herb Tending & Harvesting Guide
09/28/2007
Registered
VA0001676784
Gourmet Herb Seed Kit
09/28/2007
Registered
TX0006833397
Gourmet Herb Tending & Harvesting Guide
09/28/2007
Registered
VA0001674803
Grow Bulbs (2)
09/28/2007
Registered
VA0001674808
Grow Bulb (1)
09/28/2007
Registered
TX0006833380
Herb Appeal
09/28/2007
Registered
PA0001602428
Herb Appeal
09/28/2007
Registered
VA0001674793
International Basil Seed Kit
09/28/2007
Registered
TX0006833407
International Basil Tending & Harvesting Guide
09/28/2007
Registered
VA0001674799
Italian Herb Seed Kit
09/28/2007
Registered
TX0006833410
Italian Herb Tending & Harvesting Guide
09/28/2007
Registered
VA0001674800
Japanese Herb Seed Kit
09/28/2007
Registered
TX0006833412
Japanese Herb Tending & Harvesting Guide
09/28/2007
Registered
VA0001676787
Master Gardener Deluxe
09/28/2007
Registered
TX0006833139
Master Gardener Deluxe Guide
09/28/2007
Registered
TX0006833376
Quick Start Guide
09/28/2007
Registered
TX0006833137
Salad Bar Series Tending & Harvesting Guide
09/28/2007
Registered
 
 
 
 
 
C.
Trademarks

Reg. No.
Serial No.
Name of Mark
Filing Date (MM/DD/YYYY)
Status
-
78955692
GROWNOW
08/18/2006
Abandoned
-
78955675
MINIGARDEN
08/18/2006
Abandoned
3455606
78882877
FARMER’S MARKET FRESH
05/12/2006
Active
-
78874379
INTERNATIONAL GOURMET
05/02/2006
Abandoned
-
78836826
FARMER’S MARKET IN YOUR KITCHEN
03/14/2006
Abandoned
-
78836758
OFF THE PLANT AND INTO THE POT
03/14/2006
Abandoned
-
78836736
CUT & COOK
03/14/2006
Abandoned
3525830
78836718
BIO-DOME
03/14/2006
Active
-
78836659
WE GROW GREEN THUMBS
03/14/2006
Abandoned
 
78836577
AEROPOD
03/14/2006
Abandoned
-
78781094
KITCHENHARVEST
12/27/2005
Abandoned
-
78697306
KITCHEN SMART
08/22/2005
Abandoned
-
78671280
FARMERS MARKET FRESH
07/15/2005
Abandoned
-
77720608
AEROFOOD
09/01/2009
Abandoned
-
77655735
GROW ANYTHING, ANYTIME, ANYWHERE
01/23/2009
Abandoned
3773031
77651442
VEGGIEPRO
01/16/2009
Active
-
77584019
GREENSPACE
10/02/2008
Abandoned
-
77550972
[Missing Graphic Reference]
08/19/2008
Abandoned
-
77550953
GIFT THAT KEEPS ON GROWING
08/19/2008
Abandoned
-
77550941
FRESH AIR
08/19/2008
Abandoned
3633031
77550915
HERB 'N SAVE
08/19/2008
Active
-
77478932
SLEEPGARDEN
05/20/2008
Abandoned
3570754
77476610
HERB 'N ICE
05/16/2008
Active
-
77464412
PATIOPONICS
05/02/2008
Abandoned
-
77440754
PLANT PILLOW
04/04/2008
Abandoned
-
77347256
MASTER CHEF IN A BOX
12/07/2007
Abandoned
3522253
77347195
AGS ADVANCED GROWING SYSTEM
12/07/2007
Active
3573608
77304572
CHEF IN A BOX
10/15/2007
Active
3573607
77304513
FLORIST IN A BOX
10/15/2007
Active
-
77304325
ADAPTIVE INTELLIGENCE
10/15/2007
Abandoned
-
77304131
SNIP IT CHOP IT HERB IT UP!
10/15/2007
Abandoned
-
77304079
[Missing Graphic Reference]
10/15/2007
Abandoned
-
77304040
ORGANIC AIR
10/15/2007
Abandoned
-
77304030
AERO-FRESH
10/15/2007
Abandoned
3528760
77304010
MOUNTAIN MEADOW
10/15/2007
Active
3592304
77303344
SPLASH OF COLOR
10/12/2007
Active
3592303
77303340
ENGLISH COTTAGE
10/12/2007
Active
-
77303337
WHITE SATIN
10/12/2007
Abandoned
3659815
77303332
RED VELVET
10/12/2007
Active
-
77301478
CORNER MARKET
10/11/2007
Abandoned
-
77238322
HERB IT & SERVE IT
07/25/2007
Abandoned
3592160
77238309
HERB IT UP
07/25/2007
Active
-
77229666
MINIGARDEN
07/13/2007
Abandoned
-
77202957
AEROFLOWER
06/11/2007
Abandoned
3568213
77185032
FLORIST IN A BOX
05/18/2007
Active
3413666
77170403
VEG-E-GARDEN
05/01/2007
Active
-
77154135
GET THE GARDEN
04/11/2007
Abandoned
-
77144237
PRODUCE PANTRY
03/29/2007
Abandoned
-
77142761
EDIBLE PANTRY
03/28/2007
Abandoned
-
77132485
ULTIMATE KITCHEN GARDEN
03/15/2007
Abandoned
3392651
77132449
ULTIMATE KITCHEN GARDENER
03/15/2007
Active
-
77130024
PET NET
03/13/2007
Abandoned
3389625
77129826
WALL GARDEN
03/13/2007
Active
3389624
77129806
WALL FARM
03/13/2007
Active
-
77129677
ADAPTIVE GROWTH INTELLIGENCE
03/13/2007
Abandoned
3373707
77127173
CHEF IN A BOX
03/09/2007
Active
3376411
77095536
HERB 'N SERVE
01/31/2007
Active
-
77070519
EVEN BETTER THAN ORGANIC
12/22/2006
Abandoned
3565083
77058534
PLUG & GROW
12/06/2006
Active
3370002
77058522
SWEET RUBIES
12/06/2006
Active
-
77045993
STRAWBERRY PATCH
11/16/2006
Abandoned
3524683
77045636
HERB APPEAL
11/16/2006
Active
-
77009465
BIOTRANSPORT
09/28/2006
Abandoned
-
77007729
GREEN THUMB GUARANTEE
09/26/2006
Abandoned
 
 
 
 
 
Domain Names:

DomainName
CreateDate
ExpirationDate
Status
365GARDENING.COM
10/27/2008
10/27/2013
Active
AEROGR.COM
5/14/2010
5/14/2013
Active
AGIMARKETING.COM
2/24/2005
7/1/2013
Active
BUYTHEGARDEN.COM
8/29/2006
8/29/2013
Active
GETTHEGARDEN.COM
8/29/2006
8/29/2013
Active
GROWFLOWERS.CA
6/22/2011
6/22/2013
Active
GROWFRESH.COM
10/30/2006
7/1/2013
Active
GROWFRESHNOW.COM
6/7/2007
6/7/2013
Active
GROWNOW.COM
6/14/2004
6/14/2013
Active
INDOORGARDENDEAL.COM
11/11/2009
11/11/2013
Active
INDOORGARDENDEALS.COM
11/17/2009
11/17/2013
Active
ULTIMATEKITCHENGARDEN.COM
6/12/2007
6/12/2013
Active
ULTIMATEKITCHENGARDENER.COM
6/12/2007
6/12/2013
Active

D.
Technical Information

Software rights for AeroGarden ULTRA software, and the programs and operational settings for all AeroGrow gardens, are owned by AeroGrow.  The software may control grow-light timer settings, pump/bubbler settings, nutrient timer settings, bulb-replace timer settings, garden-type settings, and alert LEDs.  The ULTRA adds customizability, time-sensitive tips, and a detailed user interface and control screen.  There is no relevant documentation.

List of software:  AG ULTRA, AG Extra, AG 7, Pro 100, AG 6, Space Saver 6, AG3, Ultimate Kitchen Garden, and Veggie Pro (including source code)

EXHIBIT 10.2

 
 

 
TECHNOLOGY LICENSE AGREEMENT
 
by and between
 
OMS INVESTMENTS, INC.
 
and
 
AEROGROW INTERNATIONAL, INC.
 
dated as of
 
April 22, 2013
 
 
 
 
 
TECHNOLOGY LICENSE AGREEMENT
 
THIS TECHNOLOGY LICENSE AGREEMENT ( “Agreement” ) is made as of April 1, 2013 (“ Effective Date ”) by and between OMS Investments, Inc., a Delaware corporation having offices at 10250 Constellation Blvd., Suite 2800, Los Angeles, California 90067 (“ OMS ”), and AeroGrow International, Inc., a Nevada corporation having offices at 6075 Longbow Dr., Suite 200, Boulder, Colorado 80301 (“ AeroGrow ”).  OMS and AeroGrow are sometimes referred to herein collectively as the “ Parties ” and individually as a “ Party .”

RECITALS
 
A.           OMS owns certain Hydroponic IP (as defined below) relating to hydroponic and aeroponic growing systems.
 
B.           AeroGrow desires to obtain from OMS a license to use the Hydroponic IP in connection with the manufacture, marketing and sale of Licensed Products in the Territory.
 
C.           OMS is willing to grant such license to AeroGrow, according to the terms and conditions set forth herein.
 
AGREEMENT
 
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Parties hereby agree as follows:
 
1.  DEFINITIONS
 
Capitalized terms in this Agreement shall have the meanings ascribed to them as set forth below in this Article 1, or in the body of this Agreement.  Capitalized terms not defined in this Agreement shall have the meanings set forth in the Securities Purchase Agreement.

“ Affiliate ” means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with, such other Person.  For purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”) when used with respect to any Person, means the possession, directly or indirectly, of the power to cause the direction of management or policies of such person, whether through the ownership of voting securities, by contract or otherwise.

“Brand License Agreement” means that certain Brand License Agreement executed by the Parties concurrently with this Agreement.

“Contract Year ” means the one-year period from April 1 of a calendar year to March 31 of the following calendar year.
 
 
 
 
 
“Copyrights” means all published and unpublished works of authorship and copyrights therein, and copyright registrations and applications for registration thereof and all renewals, extensions, restorations and reversions thereof.

“First Contract Year” means April 1, 2013 through March 31, 2014.

“ Initial Term ” means the term beginning on the Effective Date and ending five (5) years after the Effective Date.

“Hydroponic IP” means the OMS Intellectual Property set forth in Schedule 1 to this Agreement.

“ Intellectual Property” means all intellectual property rights of any kind, worldwide, including rights in, to and concerning (a) Patents; (b) Trademarks; (c) Copyrights; and (d) Technical Information.

“Licensed Products” means the AeroGarden 3, the AeroGarden 7, the AeroGarden Extra, the AeroGarden Ultra, any additional aeroponic or hydroponic products developed by AeroGrow in the future, and associated seed kits.

“ Net Sales ” means the net sales of Licensed Products under U.S. GAAP.

“Patents”   means all patents throughout the world (including utility patents, design patents, patents of importation, improvement patents, patents and certificates of addition, and utility models), as well as divisions, reissues, reexaminations, continuations, continuations-in-part, renewals and extensions of any of the foregoing, and applications therefore, and patents which may be issued on such applications.

“ Person ” means any individual, corporation, partnership, trust, limited liability company, association or other entity.

“ Protected Information ” of a Party means trade secrets and information concerning the Party’s business, technology, and affairs, including without limitation current and historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, Technical Information, the names and backgrounds of key personnel, personnel training techniques and materials and current and historical financial information regarding individual products, services, departments or categories.

“ Renewal Term ” means a five-year period following the Initial Term.

“Research Purposes” means use of the Hydroponic IP for the purposes of (a) conducting research and development, (b) pursuing regulatory approvals, and (c) pursuing Intellectual Property protection on modifications and improvements to the Hydroponic IP.

“Securities Purchase Agreement” means that certain Securities Purchase Agreement executed between AeroGrow and OMS’s Affiliate, SMG Growing Media, Inc., effective as of _____.
 
 
 
 
 
“ Series B Preferred ” means the series of preferred stock of AeroGrow designated Series B Convertible Preferred Stock with a par value of $0.001 per share under the Certificate of Designations.

“ Series B Preferred Conversion Price ” has the meaning ascribed to such term in the Certificate of Designations of Series B Convertible Preferred Stock of AeroGrow (the “ Certificate of Designations ”).

“Technical Information” means know-how, trade secrets, confidential and proprietary information, ideas, inventions, discoveries, formulae, compositions, manufacturing and production processes and techniques, research and development information, reports, drawings, specifications, designs, plans, improvements, proposals, information and analytic methodology used in the development, testing, analysis, design, manufacturing and packaging of products and services, technology, software, computer programs, documentation, databases, data, mask works, financial, business and marketing plans, cost and pricing information, supplier lists and related information, sales data and plans, customer lists, customer accounts, and related information, recorded in any form.

“Term” means the Initial Term and any properly obtained Renewal Terms.

“Territory” means (a) North America and (b) on a country-by-country basis, all European countries including the United Kingdom, but excluding France and Germany, under the following conditions: (i) AeroGrow has an established European distributor for such country under a contract approved in writing by OMS, (ii) AeroGrow and OMS mutually agree in writing on annual sales volume requirements for such country, (iii) OMS has the right to terminate AeroGrow’s rights in such country if such annual sales volume requirements are not met, or for any other reason, and (iv) OMS has not already commenced sales of Licensed Products in such country.

“Trademark” means a trademark, service mark, trade dress, logo, trade name, corporate name, domain name and/or other source identifier, all goodwill associated with any of the foregoing, and registrations and applications for registration thereof, including all extensions, modifications and renewals of the foregoing .

“ U.S. GAAP ” means United States generally accepted accounting principles and practices applied consistently throughout the periods involved.

2.  LICENSE GRANT TO AEROGROW
 
2.1             License Grant.   Subject to the terms and conditions of this Agreement, OMS hereby grants to AeroGrow an exclusive license under the Hydroponic IP to make, use, sell, distribute, offer to sell, and import Licensed Products in the Territory during the Term of this Agreement.  Notwithstanding the foregoing exclusive license, OMS reserves the right for OMS and its Affiliates and contractors to use the Hydroponic IP to make and use products in the Territory, but only for Research Purposes.
 
 
 
 
 
2.2             No Right to Sublicense.   The license grant in Section 2.1 does not include the right for AeroGrow to grant sublicenses to others to use the Hydroponic IP in any manner or in connection with any goods or services, but Licensee may permit the distribution by third party distributors of Licensed Products in accordance with this Agreement.
 
2.3             Reservation of Rights.   OMS reserves all rights with respect to the Hydroponic IP not expressly licensed to AeroGrow hereunder.
 
2.4             Restriction on Assignment.  This Agreement shall be binding upon and inure to the benefit of the Parties and their successors or assigns; provided that AeroGrow may assign this Agreement only if OMS provides prior and specific written consent, which consent may be withheld in OMS’s sole and absolute discretion.  Any assignment or transfer not expressly permitted by this Section 2.4 is prohibited and will be deemed to be null and void.
 
2.5           Use of Contract Manufacturers.
 
 
(a)
Subject to the exception in Section 2.5(b), AeroGrow shall not use the services of contract manufacturers in the manufacture of the Licensed Products unless OMS approves such contract manufacturers, specifically and in writing, before AeroGrow engages such contract manufacturers.  AeroGrow shall require any approved contract manufacturers to execute an agreement to manufacture the Licensed Products, and the agreement must be in a form approved by OMS before the agreement is presented to the contract manufacturer.
 
 
(b)
AeroGrow shall be permitted to continue to use the services of its current contract manufacturers as of the Securities Purchase Agreement effective date; provided that (i) AeroGrow shall require such contract manufacturers to promptly execute the agreement identified in Section 2.5(a) to the extent such agreement is not already in place or is unacceptable to OMS, and (ii) OMS shall have the right to terminate any such existing contract manufacturer to the extent that such existing contract manufacturer is the cause of a material deficiency in manufacturing of Licensed Products.
 
3.  PAYMENTS AND REPORTS
 
3.1             Royalty Payment.   AeroGrow shall pay OMS a royalty of two percent (2%) times Net Sales of Licensed Products ( “Royalty” ) sold by AeroGrow during the Term of this Agreement.

3.2             Timing of Payments.   Royalties shall be payable annually for each Contract Year.  No later than April 15 th of each Contract Year after the First Contract Year, and April 15 th after expiration or termination of the Agreement for any reason, AeroGrow shall provide OMS with a Royalty report including the Net Sales figures for the prior Contract Year and the current Contract Year, itemized according to each product and country, and shall provide in such report all other information and calculations (including the calculation of Net Sales) necessary to allow OMS to verify the accuracy of the Royalty calculation.  Concurrently with providing each such report, AeroGrow shall pay OMS the Royalties for the prior Contract Year.
 
 
 
 
 
3.3             Form of Payment.   For Royalties and other fees due under this Agreement and accrued in Contract Years 1-4 shall be payable by AeroGrow to OMS, or to an OMS Affiliate designated in writing by OMS, in shares of AeroGrow’s common stock, par value $0.001 per share “ Common Stock ”), at the then-current Series B Preferred Conversion Price, and such fees must be paid in accordance with U.S. tax laws and any other relevant tax laws.  For purposes of clarity, the Series B Preferred Conversion Price shall be calculated as provided under the Certificate of Designations, regardless of whether any shares of Series B Convertible Stock are then outstanding and regardless of whether the Certificate of Designations is then an effective part of the Articles of Incorporation of AeroGrow.  Until this Agreement is terminated or expires, AeroGrow shall deliver to OMS the certificate of adjustment referred to in Section 4(k) of the Certificate of Designations, regardless of whether the Series B Preferred is then convertible pursuant to Section 4 of the Certificate of Designations.  Royalties and other fees due under this Agreement and accrued in Contract Year 5 or subsequent Contract Years shall be payable by AeroGrow to OMS, or to an OMS Affiliate designated in writing by OMS, in cash (US dollars), and such fees must continue to be paid in accordance with U.S. tax laws and any other relevant tax laws.

3.4             Interest on Late Payments.   If AeroGrow fails to make any payment to OMS hereunder on the due date for payment, without prejudice to any other right or remedy available to OMS, AeroGrow shall pay OMS interest on all such overdue amounts from the due date of such amounts until paid at a twelve percent (12%) rate per annum.

3.5             Records and Audit.   AeroGrow shall keep, maintain and preserve, at its place of business identified above, during the Initial Term, during any Renewal Terms, and for at least three (3) years following termination or expiration of this Agreement for any reason, complete and accurate books, accounts, records and other materials covering all transactions related to this Agreement, including but not limited to the information contained in or related to the accounting for and payment of Royalties, which may include customer records, invoices, correspondence and banking, financial and other records in AeroGrow’s possession or under its control (the “ Records ”).  During the Initial Term, during any Renewal Terms, and for three (3) years following termination or expiration of this Agreement for any reason, OMS and/or an independent third party representative of OMS, upon three (3) days’ notice and during regular business hours, shall have the right once per year to conduct an audit of the Records.  Following the audit, AeroGrow shall take immediate steps to timely resolve any issues raised therein, including payment of any monies owing and due.  OMS shall bear the costs of the audit, provided, however, that if an audit reveals an underpayment of more than five (5%) percent of the total amount payable for any Contract Year, then AeroGrow shall bear the expense of the audit.

3.6             Currency Conversion.   For purposes of computing the Royalty payment on Net Sales of Licensed Products in any country outside the United States, the Net Sales of such Licensed Products for each calendar quarter shall be converted to U.S. Dollars using the rate of exchange as reported in the Wall Street Journal on the last business day of the applicable calendar quarter.
 
 
 
 
 
4.  DEVELOPMENT OF LICENSED PRODUCTS
 
4.1             Development by AeroGrow.   AeroGrow accepts full responsibility for and agrees to pay all costs it incurs associated with the development, manufacture and promotion of the Licensed Products in the Territory.  AeroGrow will secure all plant, equipment and technical skills necessary for the development and manufacture of the Licensed Products, and OMS shall have no liability or responsibility with respect thereto.
 
4.2             Compliance with Laws.   AeroGrow shall develop, manufacture, package, label, advertise, and sell all Licensed Products in strict compliance with all applicable laws, rules and regulations.  Without limiting the foregoing, the Licensed Products will be manufactured in substantial compliance with all applicable federal, state and local laws and regulations applicable within the Territory, and will not be adulterated or misbranded within the meaning of any federal, state or local laws, rules or regulations applicable within the Territory.  AeroGrow shall obtain any required license or certification under the laws or regulation of the United States and other countries within the Territory.  Unless OMS agrees otherwise in writing, AeroGrow will destroy all inventories of Licensed Products that are not in conformity with any applicable laws, rules or regulations within the Territory.  AeroGrow agrees to notify OMS promptly of any regulatory action of which AeroGrow has knowledge that is taken in relation to it by any federal, state, foreign, county or municipal authority which relates to or affects the development, manufacture, storage, packaging, labeling, advertising, distribution, or sale of the Licensed Products.
 
5.  INTELLECTUAL PROPERTY
 
5.1           Developed IP.

 
(a)
During the Term of this Agreement, AeroGrow shall disclose to OMS all technical developments, inventions and improvements made by AeroGrow relating to the Licensed Products.  AeroGrow shall be responsible, at its expense, for filing, prosecution, registration, maintenance and other protection and/or perfection of Intellectual Property rights relating such developments, inventions and improvements ( “Developed IP” ).  AeroGrow shall provide to OMS quarterly during the term of this Agreement a report of all Developed IP created during the previous quarter and a proposed plan and strategy for securing Intellectual Property protection on such Developed IP.

 
(b)
AeroGrow shall provide OMS with copies of all relevant file histories, correspondence, and other papers related to the Developed IP during the Term of this Agreement.  AeroGrow shall promptly provide to OMS all information received concerning the institution or possible institution of any opposition, re-examination, reissue, review, revocation, interference, nullification or any other official proceeding involving any of the Developed IP anywhere in the Territory.  AeroGrow agrees to provide OMS with copies of substantive communications, search reports and third party observations submitted to or received from intellectual property offices during the Term of this Agreement.  AeroGrow shall also provide OMS an opportunity to review and comment on all substantive responses to the intellectual property offices with respect to Developed IP and AeroGrow shall consider in good faith all such comments received from OMS.
 
 
 
 
 
 
 (c)
If AeroGrow wishes to discontinue the prosecution of any patent application or maintenance of any patent included within the Developed IP, or otherwise declines to pursue Intellectual Property protection (e.g., by deciding not to file a patent application) AeroGrow shall promptly notify OMS and supply OMS with all relevant information, including copies of all written communications with the government patent office or offices involved.  OMS shall then have the right, but not the obligation, to file, maintain or continue prosecution of such application or maintain such patent application or patent , and AeroGrow shall assign all of its right, title and interest in such application to OMS at no additional cost to OMS .  AeroGrow shall fully cooperate with OMS in such filing, maintenance, and/or prosecution, including the execution and provision of all documents OMS deems necessary for such filing, prosecution and/or maintenance.

 
(d)
OMS shall have a right of first refusal (“ROFR”) to purchase or otherwise acquire any Developed IP owned by AeroGrow.  In the event that AeroGrow intends to begin negotiations for sale of all or a portion of the Developed IP with any third party, AeroGrow shall promptly provide to OMS written notice and any copies of such third party offer (suitably redacted to remove the name) offered by such third party and shall provide OMS with an opportunity to discuss such transaction and make a proposal to AeroGrow.  If the Parties are unable to agree on a non-binding term sheet within 20 business days following OMS’s receipt of such notice, AeroGrow shall have the right to conclude such transaction with the third party within a period of 90 days.  If such transaction does not close within such period, OMS shall have another ROFR.  The ROFR shall become effective as of the Effective Date of this Agreement and shall remain in force during the Term of this Agreement.

5.2             IP Enforcement.   If, during the term of this Agreement, either Party becomes aware of any actual or threatened infringement or misappropriation of any Hydroponic IP or Developed IP by any third party that impacts the Licensed Products or their use, the following provisions shall apply:

 
(a)
The Party having such knowledge shall promptly give notice to the other Party, with all available details.

 
(b)
To the extent that the infringement concerns the Hydroponic IP, OMS, as the owner of the Hydroponic IP, shall have the right to enforce the Hydroponic IP, and AeroGrow, as the exclusive licensee, shall join any such enforcement action if requested by OMS.  AeroGrow agrees to cooperate with OMS by taking such actions as may be reasonably necessary, including but not limited to, producing relevant documents and signing all necessary papers and ensuring that its employees and agents also take such action.  In the event any monetary recovery in connection with such infringement action is obtained, such recovery shall be applied in the following priority: (i) to reimburse OMS to the extent of its out-of-pocket expenses (including reasonable attorneys’ fees) in prosecuting such infringement or misappropriation, (ii) ninety percent (90%) of the balance shall be paid to the OMS; and (iii) ten percent (10%) of the balance shall be paid to AeroGrow as exclusive licensee.
 
 
 
 
 
 
(c)
If OMS determines, in its discretion, not to enforce the Hydroponic IP against any such infringement in the Territory, AeroGrow, as the exclusive licensee of the Hydroponic IP in the Territory, shall have the right to enforce such Hydroponic IP that OMS has determined not to enforce in the Territory.  OMS shall make such determination within six (6) months of written notice from AeroGrow describing such infringement and the relevant Hydroponic IP.  If OMS declines, then OMS, as the owner, shall join any such enforcement action by AeroGrow (at the expense of AeroGrow) if requested by AeroGrow.  OMS agrees to cooperate with AeroGrow (at the expense of AeroGrow) by taking such actions as may be reasonably necessary, including but not limited to, producing relevant documents and signing all necessary papers and ensuring that its employees and agents also take such action.  In the event any monetary recovery in connection with such infringement action is obtained, such recovery shall be applied in the following priority: (i) to reimburse AeroGrow to the extent of its out-of-pocket expenses (including reasonable attorney’s fees) in prosecuting such infringement or misappropriation, (ii) fifty percent (50%) of the balance shall be paid to the AeroGrow; and (iii) fifty percent (50%) of the balance shall be paid to OMS.  If AeroGrow has not filed suit to enforce the Hydroponic IP within six (6) months after OMS has declined, then the right to enforce the Hydroponic IP in the Territory shall revert to OMS.

 
(d)
To the extent that the infringement concerns the Developed IP, the Parties shall meet to discuss and agree upon an appropriate course of action, and each Party shall provide reasonable assistance to the other Party with respect to enforcement of the Developed IP.

 
(e)
The Parties shall keep one another informed of the status of their respective activities regarding any litigation or settlement thereof concerning enforcement of the Hydroponic IP and the Developed IP; provided, that no settlement or consent judgment or other voluntary final disposition of any suit defended or action brought by a Party pursuant to this Article 5 may be entered into without the consent of the other Party if such settlement would require the other Party to be subject to an injunction or to make a monetary payment or an admission of wrongdoing or would otherwise adversely affect the other Party’s rights under this Agreement.

6.  INSURANCE

AeroGrow agrees to obtain and maintain, at its own cost and expense, Commercial General Liability Insurance (including Excess/Umbrella Insurance) in the amount not less than Five Million Dollars ($5,000,000) covering bodily injury, property damage, products -  completed operations and personal injury, including death resulting there from and Automobile Liability in an amount not less than one million dollars ($1,000,000) covering bodily injury and property damage.  This required insurance shall be written by companies licensed to do business in the state in which the service will be provided and shall have a Best’s Key rating of no less than A-VII.  Such policy shall name OMS as Additional Insured including providing defense costs and be primary with respect to any insurance or self-insurance programs maintained by OMS.  The policy must be endorsed to reflect that the Additional Insured will be provided no less than thirty (30) days advance written notice of cancellation or material change in the policy required to be carried as part of this Agreement.  AeroGrow shall deliver to OMS a certificate of insurance that specifies the required coverage immediately following execution of this Agreement.  AeroGrow shall also obtain and maintain at its own cost and expense, any and all statutorily required insurance, including, but not limited to Workers’ compensation insurance with statutory limits, and Employer’s Liability insurance.  The Commercial General Liability, Automobile Liability and Workers Compensation/Employer’s Liability policy will include a Waiver of Subrogation in favor of OMS.  The limits required to be evidenced do not limit the liability of AeroGrow in any claim or suit.
 
 
 
 
 
7.  CONFIDENTIALITY
 
7.1             Acknowledgment of Confidentiality.   Each Party understands that any Protected Information disclosed to it by the other Party under this Agreement is secret, proprietary and of great value to the disclosing Party, which value may be impaired if the secrecy of the Protected Information is not maintained.  The Party disclosing Protected Information is hereinafter sometimes referred to as the “ Disclosing Party ” and the Party receiving Protected Information is sometimes hereinafter referred to as the “ Receiving Party .”

7.2             Reasonable Security Measures.   Each Party has taken and will continue to take reasonable security measures to preserve and protect the secrecy of the Protected Information, and each Receiving Party agrees to take all measures reasonably necessary to protect the secrecy of a Disclosing Party’s Protected Information in order to prevent it from falling into the public domain or into the possession of persons not bound to maintain the secrecy of such information.

7.3             Non-Disclosure Obligation.   Each Receiving Party agrees not to disclose the Protected Information of the Disclosing Party obtained pursuant to this Agreement, to any person or entity (other than its key officers, and employees and/or their Affiliate to whom disclosure is necessary and which person or entity is bound to confidentiality obligations at least as restrictive as those set forth in this Article 7), while this Agreement is in effect or at any time following the expiration or termination of this Agreement for any reason.

7.4             Burden of Proof.   Each Receiving Party acknowledges and agrees that if it shall disclose, divulge, reveal, report, publish, transfer or use, for any purpose whatsoever, except as authorized herein, any Protected Information of a Disclosing Party, and such Receiving Party shall assert as a defense that such information (a) was already known to it or developed prior to the execution of this Agreement, (b) was independently developed by it, (c) was disclosed to third parties without violation of this Agreement, (d) was in the public domain prior to the Effective Date of this Agreement, or (e) entered the public domain without violation of this Agreement, then such Receiving Party shall bear the burden of proof with respect to the same.
 
 
 
 
 
7.5             Permitted Use.   Neither AeroGrow nor OMS shall use the Protected Information of the other Party for any purpose except as permitted in this Agreement.

7.6             Permitted Disclosures .  The confidentiality obligations contained in this Article 7 shall not apply to the extent that any Receiving Party is required (a) to disclose the information by law, order or regulation of governmental agency or a court of competent jurisdiction, or (b) to disclose information to any governmental agency for purposes of obtaining approvals to test or market the Product; provided , that, in each such case, the Receiving Party shall give written notice thereof to the Disclosing Party and sufficient opportunity to prevent or limit any such disclosure or to request confidential treatment thereof; and provided , further , that the Receiving Party shall give reasonable assistance to the Disclosing Party to preserve the information as confidential.

7.7             Terms of this Agreement .  The terms and existence of this Agreement shall be treated by the Parties as Protected Information.  Neither Party shall issue a press release or otherwise publicize the negotiation or conclusion of this Agreement without the express written consent of the other Party.

8.  TERM AND TERMINATION

8.1             Initial Term.   The Initial Term of this Agreement, and the license granted herein, shall be five (5) years from the April 1, 2013, unless sooner terminated in accordance with the provisions hereof.

8.2             Renewal Terms.   AeroGrow may renew this Agreement, and the license granted herein, for consecutive additional five-year Renewal Terms by providing written notice of renewal to OMS at least six (6) months in advance of the expiration of the Initial Term (or the then-effective Renewal Term), provided that, at the time of the notice and at the time of the renewal, AeroGrow is not in default with respect to any of its obligations under the Agreement.

8.3             Termination.   This Agreement may be terminated as follows:

 
(a)
If AeroGrow defaults in the payment of any Royalties, interest, or other fees, and such default is not cured within thirty (30) business days following AeroGrow’s receipt of written notice of such default, then this Agreement and the license granted hereunder may be terminated upon written notice by OMS sent to AeroGrow after expiration of the thirty (30) day period and effective upon receipt of such notice, without prejudice to any and all other rights and remedies OMS may have hereunder or by law provided.  Notwithstanding the foregoing provision allowing AeroGrow thirty (30) business days to cure a default in payment, AeroGrow must use its best efforts to cure such default as promptly as possible within said thirty (30) business day period.
 
 
 
 
 
 
(b)
If AeroGrow fails to sell and commercially distribute an amount of Licensed Products equivalent to $5,000,000 in gross sales of Licensed Products for which Royalties are due under Section 3.1 for any Contract Year, and such default is not cured within thirty (30) business days following AeroGrow’s receipt of written notice of such default, then this Agreement and the license granted hereunder may be terminated upon written notice by OMS sent to AeroGrow after expiration of the thirty (30) day period and effective upon receipt of such notice, without prejudice to any and all other rights and remedies OMS may have hereunder or by law provided.

 
(c)
If AeroGrow fails to perform in accordance with any material term or condition of this Agreement (other than as described in Sections 8.3(a) or 8.3(b) above) and such default continues unremedied for thirty (30) days after the date on which AeroGrow receives written notice of default, then this Agreement may be terminated upon notice by OMS, effective upon receipt of such notice, without prejudice to any and all other rights and remedies OMS may have hereunder or by law provided.

 
(d)
If any corporate action, legal proceedings or other procedure or step is taken in relation to: (i) the suspension of payments, a moratorium of any indebtedness, winding-up, dissolution, administration or reorganization of AeroGrow; (ii) a composition, compromise, assignment or arrangement with any creditor of AeroGrow; (iii) the appointment of a liquidator, trustee in bankruptcy, special administrator or other similar officer in respect of AeroGrow or any of its assets; (iv) the commencement of a case or proceeding, whether voluntary or involuntary, under any applicable bankruptcy or insolvency law; (v) enforcement of any liens over any assets of AeroGrow having an aggregate value in excess of $50,000 (or its equivalent in any other currency or currencies), or (vi) any analogous procedure or step is taken in any jurisdiction, then this Agreement and the license granted hereunder may be terminated immediately upon notice by OMS, effective upon sending such notice, without prejudice to any and all other rights and remedies OMS may have hereunder or by law provided, and the license herein granted shall not constitute an asset in reorganization, bankruptcy, or insolvency which may be assigned or which may accrue to any court or creditor appointed referee, receiver, or committee.

 
(e)
OMS shall have the right, but not the obligation, to terminate this Agreement by providing written notice to AeroGrow, in the event that the Brand License Agreement expires or terminates for any reason.

 
(f)
If AeroGrow fails to comply with its obligations under Section 4.2, as reasonably determined by OMS, and such default continues unremedied for thirty (30) days after the date on which AeroGrow receives written notice of default, then this Agreement may be terminated upon notice by OMS, effective upon receipt of such notice, without prejudice to any and all other rights and remedies OMS may have hereunder or by law provided.
 
 
 
 
 
8.4             Rights Upon Cancellation, Termination, or Expiration.   Upon any cancellation, termination, or expiration of this Agreement for any reason:

 
(a)
The license granted to AeroGrow in Section 2.1 shall terminate; and, except as provided in Section 8.6 below, AeroGrow shall forthwith discontinue all use of the Hydroponic IP.

 
(b)
AeroGrow shall promptly pay to OMS all amounts due and owing hereunder, including all unpaid, accrued Royalties under Article 3 and under Section 8.6.

 
(c)
Each Receiving Party shall return to the Disclosing Party (or at the Disclosing Party’s direction, destroy) all Protected Information of the Disclosing Party provided or otherwise made available by the Disclosing Party that is in the possession, custody or control of the Receiving Party; provided, however, that such obligation shall not apply to the extent that the return or destruction of such Protected Information to the Disclosing Party would materially interfere with the surviving rights of the Receiving Party under this Agreement.

8.5             Surviving Terms.   The following terms shall survive termination of this Agreement: Article 1, Sections 2.2, 2.3, 2.4, 3.2, 3.3, 3.4, 3.5, 3.6, and 3.7, Article 7, Sections 8.4, 8.5, 8.6, and 9.3, and Articles 10, 11 and 12 .

8.6             Disposal of Inventory After Cancellation, Termination, or Expiration.   For a period of three (3) months after cancellation, termination, or expiration of this Agreement, AeroGrow may sell Licensed Products in AeroGrow’s inventory as provided in the Brand License Agreement (“ Sell-Off Period ”), except that AeroGrow shall have no right to a Sell-Off Period if OMS terminates this Agreement pursuant to any of the provisions in Sections 8.3(c) or 8.3(d).  Any sales of Licensed Products during the Sell-Off Period shall require payment of all Royalties, interest, and other fees in accordance with Article 3 and Section 8.4(b).

9.  REPRESENTATIONS AND WARRANTIES

9.1             Mutual Representations and Warranties.   AeroGrow and OMS each represents and warrants as follows:

 
(a)
It is a corporation duly organized, validly existing and in good standing under the laws of Nevada and  Delaware, respectively, is qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the performance of its obligations hereunder requires such qualification and has all requisite power and authority, corporate or otherwise, to conduct its business as now being conducted and to execute, deliver and perform this Agreement.

 
(b)
The execution, delivery and performance by it of this Agreement have been duly authorized by all necessary corporate actions, and do not and will not:
 
 
 
 
 
 
(i)
require any consent or approval of its stockholders or any government authority, or

 
(ii)
violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to it or any provision of its charter documents.

 
(c)
This Agreement is legal, valid and binding and any obligation under it is enforceable in accordance with its terms and conditions.

 
(d)
It is not under any  contractual obligation that is materially conflicting or materially inconsistent in any respect with the terms of this Agreement or that would materially impede the diligent and complete fulfillment of its obligations.

9.2             DISCLAIMER OF WARRANTIES.   EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A WARRANTY OR REPRESENTATION BY OMS THAT THE USE OF THE HYDROPONIC IP LICENSED TO AEROGROW HEREUNDER WILL RESULT IN ANY PRODUCTS, OR AS A WARRANTY OR REPRESENTATION BY OMS THAT THE EXPLOITATION OF ANY OF THE FOREGOING WILL BE FREE FROM INFRINGEMENT OF INTELLECTUAL PROPERTY OF THIRD PARTIES.

10.  INDEMNIFICATION

10.1             OMS Indemnification.   OMS hereby indemnifies AeroGrow and forever holds AeroGrow harmless from and against all claims, suits, actions, proceedings, damages, losses, liabilities, costs, or expenses (including reasonable attorneys' fees and expenses) arising out of, based upon, or in connection with any breach of any of OMS’s representations and warranties set forth in this Agreement.

10.2             AeroGrow Indemnification.   AeroGrow hereby indemnifies OMS and forever holds OMS harmless from and against all claims, suits, actions, proceedings, damages, losses or liabilities, costs or expenses (including reasonable attorneys' fees and expenses) arising out of, based upon, or in connection with (a) any breach of any of AeroGrow’s representations and warranties as set forth in this Agreement; (b) any use of any Patent, process, method, or device, including Developed IP, by AeroGrow in connection with the Licensed Products; (c) any alleged defects or dangers inherent in the Licensed Products or the manufacture, distribution, sale, or use thereof; (d) any injuries or damages to purchasers, users, or consumers of Licensed Products or arising from or related to the use or consumption of the Licensed Products; or (e) any alleged infringement of any third party's Copyright, Patent, Trademark, or other Intellectual Property unless and to the extent such alleged infringement is directly caused by conformance by AeroGrow to product specifications for the Licensed Products provided by OMS to AeroGrow.

10.3             Conditions of Indemnification.   As a condition of indemnification under this Article 10, the Party seeking indemnification shall give the other Party (for purposes of this Article 10, the “ Indemnifying Party ”) immediate notice of and copies of all pleadings and correspondence related to the assertion of any such claim, proceeding, action, or suit and agrees not to settle, compromise, or otherwise dispose of any such claim, proceeding, action or suit without the prior written consent of the Indemnifying Party.  The Indemnifying Party shall have the right (but not the obligation) to assume the defense or settlement of any such claim, proceeding, action, or suit at its expense, by counsel of its choice.  If the Indemnifying Party assumes such defense, the Party seeking indemnity shall cooperate fully with the Indemnifying Party in defense of the action and the Indemnifying Party shall not be liable to pay or reimburse the other Party for attorneys' fees or expenses, except such out-of-pocket costs or expenses incurred by the indemnified Party in cooperating with the Indemnifying Party.
 
 
 
 
 
10.4             Limits.   Neither Party shall be liable to the other Party, whether pursuant to indemnification or otherwise under this Agreement, for any punitive, indirect or consequential losses, or for loss of business or goodwill, except that these limitations of liability shall not apply to (a) claims for death or physical injury, or loss or damage to tangible personal or real property; (b) damages caused by either Party’s gross negligence or willful misconduct or omission of either Party or its respective employees or representatives; or (c) damages payable pursuant to a breach of Article 7 (Confidentiality) or this Article 10 (Indemnification).

11.  NOTICES

All notices provided for in this Agreement shall be in writing and shall be given by facsimile or registered mail, postage prepaid, or by overnight courier deposited with a reputable company, addressed to the other Party at the applicable address set forth below, or to such other addresses as may be given for such purpose by such that Party by notice duly given hereunder.  Notice shall be deemed properly given on the date of a confirmed facsimile transmission, three (3) days after the date mailed if given by first class mail, or one (1) day after confirmed delivery by overnight courier:

TO OMS:
 
OMS Investments, Inc.
Attn.: Luis A. Rodriguez, Assistant Secretary
10250 Constellation Blvd., Suite 2800
Los Angeles, CA 90067
Facsimile: (310) 300-3051
 
WITH COPIES TO:
 
Hunton & Williams, LLP
2200 Pennsylvania Avenue, N.W.
Washington, D.C. 20036
Attention: J. Steven Patterson
Facsimile: (202) 778-2201
 
TO AEROGROW:
 
AeroGrow International, Inc.
Attn.: President and CEO
102 6075 Longbow Dr., Suite 200
Boulder, CO 80301
Facsimile: (303) 444-0406
 
WITH COPIES TO:
 
Hutchinson Black and Cook, LLC
921 Walnut Street, Suite 200
Boulder, CO 80302
Attention: James L. Carpenter, Jr.
Facsimile: (303) 442-6593

 
 
 

12.  GENERAL PROVISIONS

12.1             No Fiduciary or Other Relationship .  The Parties understand and agree that this Agreement does not create a fiduciary relationship between them, that they are and shall be independent contractors, and that nothing in this Agreement is intended to make either Party a general or special agent, joint venture, partner, or employee of the other Party for any purpose whatsoever.  Except as expressly authorized in writing, neither OMS nor AeroGrow shall make any express or implied agreements, warranties, guarantees or representations or incur any debt in the name or on behalf of the other, represent that their relationship is other than licensor and licensee, or be obligated by or have any liability under any agreements or representations made by the other that are not expressly authorized in writing.

12.2             Patent Marking .  AeroGrow agrees to mark all Licensed Products sold or otherwise disposed of by it under the license granted herein with the word “Patent” or “Patents” and the number or numbers of the issued Patents within the Hydroponic IP applicable thereto.

12.3             Severability .  In the event that any provision of this Agreement is deemed invalid, unenforceable or void by a final, non-appealable judgment of a court of competent jurisdiction, the remainder of the Agreement shall be interpreted to the extent possible to effect the overall intention of the Parties as of the date of this Agreement.

12.4             Waiver .  A Party may by written instrument unilaterally waive or reduce any obligation of or restriction upon the other Party under this Agreement, effective upon delivery of written notice thereof to the other or such other effective date stated in the notice of waiver.  Any waiver so granted by the waiving Party shall be without prejudice to any other rights the waiving Party may have, will be subject to continuing review by the waiving Party and may be revoked, in the waiving Party's sole discretion, at any time and for any reason, effective upon delivery to the other Party of ten (10) days' prior written notice.

12.5             Waiver by Custom or Practice .  A Party shall not be deemed to have waived or impaired any right, power or option reserved by this Agreement (including, without limitation, the right to demand exact compliance with every term, condition and covenant herein or to declare any breach thereof to be a default and to terminate this Agreement) by virtue of any custom or practice of the Parties at variance with the terms hereof.  Any failure, refusal or neglect of a Party to exercise any right under this Agreement or to insist upon exact compliance by the other with its obligations hereunder, any waiver, forbearance, delay, failure or omission by a Party to exercise any right, power or option, whether of the same, similar or different nature, or OMS’s acceptance of any payments due from AeroGrow after any breach of this Agreement, shall not be deemed a waiver or impairment of any right, power or other option provided under this Agreement.

12.6             Force Majeure .  Neither Party shall be liable for loss or damage or deemed to be in breach of this Agreement if their failure to perform obligations results from:

 
(a)
compliance with any law, regulation, requirement or instruction of any federal, state, municipal or foreign government or any department or agency thereof;
 
 
 
 
 
 
(b)
acts of God; 
 
 
(c)
fires, strikes, embargoes, war or riot; or
 
 
(d)
any other similar event or cause.
 
Any delay resulting from any of said causes shall extend performance accordingly or excuse performance, in whole or in part, as may be reasonable, except that said causes shall not excuse payments of amounts owed at the time of such occurrence or payment of any Royalties, interest, or other fees.

12.7             Temporary Restraining Orders and Preliminary Injunctions .  Notwithstanding anything to the contrary in this Agreement, each Party shall have the right in a proper case to obtain temporary restraining orders and temporary or preliminary injunctive relief from a court of competent jurisdiction.

12.8             Rights Cumulative .  The rights of each Party hereunder are cumulative and no exercise or enforcement by a Party of any right or remedy hereunder shall preclude the exercise or enforcement by that Party of any other right or remedy hereunder which that Party is entitled by law to enforce.

12.9             Costs and Attorneys’ Fees .  If a claim for amounts owed by AeroGrow to OMS or its Affiliates is asserted in any judicial proceeding or appeal thereof, or if a Party enforces this Agreement in any judicial proceeding or appeal thereof, the Party prevailing in such proceeding shall be entitled to reimbursement of its reasonable costs and expenses, including reasonable accounting and legal fees, whether incurred prior to, in preparation for, or in contemplation of the filing of any written demand, claim, action, hearing or proceeding to enforce the obligations of this Agreement.  If OMS incurs expenses in connection with AeroGrow’s failure to pay when due amounts owing to OMS, to submit when due any reports, information or supporting records or otherwise to comply with this Agreement, including, but not limited to legal and accounting fees, OMS shall be reimbursed by AeroGrow for any reasonable costs and expenses that OMS incurs.

12.10             Governing Law .  This Agreement, and the relationship between the Parties, shall be governed by the laws of the State of Ohio, without regard to principles of conflicts of laws.

12.11             Jurisdiction .  The Parties hereby irrevocably consent and agree that any legal action, suit or proceeding arising out of or in any way in connection with this Agreement may be instituted or brought in the United States District Court for the Southern District of Ohio.  The Parties hereby irrevocably consent and submit to, for themselves and in respect of their property, generally and unconditionally, the jurisdiction of such Court, and to all proceedings in such Court.  Further, the Parties irrevocably consent to actual receipt of any summons and/or legal process at their respective addresses as set forth in this Agreement as constituting in every respect sufficient and effective service of process in any such legal action or proceeding.  The Parties further agree that final judgment in any such legal action, suit or proceeding shall be conclusive and may be enforced in any other jurisdiction, whether within or outside the United States of America, by suit under judgment, a certified or exemplified copy of which will be conclusive evidence of the fact and the amount of the liability.
 
 
 
 
 
12.12             Waiver of Punitive Damages .  The Parties waive to the fullest extent permitted by law any right to or claim for any punitive or exemplary damages against the other and agree that, in the event of a dispute between them, the Party making a claim shall be limited to recovery of any actual damages it sustains; except that, the limitations of liability arising out of, under or in connection with (a) claims for death or physical injury, or loss or damage to tangible personal or real property; (b) damages caused by either Party’s gross negligence or willful misconduct or omission of either Party or their respective employees or representatives; or (c) damages payable pursuant to a breach of Article 7 (Confidentiality) and Article 10 (Indemnification).

12.13             Headings .  The headings of the several Articles and Sections hereof are for convenience only and do not define, limit or construe the contents of such Articles or Sections.

12.14             Interpretation.   Except where the context otherwise permits or requires, the use of the term “including” and inflections thereof, mean “including without limitation,” “include without limitation” or “includes without limitation.”

12.15             Entire Agreement .  This Agreement represents the entire agreement between the Parties with respect to the subject matter hereof and supersedes any prior agreements and negotiations between the Parties, including all oral, written or otherwise communicated statements in whatever form or from whatever source.

12.16             Counterparts .  This Agreement may be executed simultaneously in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement, binding upon all Parties hereto, notwithstanding that all Parties are not signatories to the original or the same counterpart.

12.17             Expenses .  Each Party shall bear its own expenses (including attorneys' fees and expenses) in connection with the preparation, negotiation, execution, and delivery of this Agreement.

[Signature pages follow.]
 

 
 
 
 
IN WITNESS WHEREOF, the Parties have executed this Technology License Agreement, effective as of the Effective Date first written above.
 

 
OMS INVESTMENTS, INC.

By:                                                                 

Name:                                                                 

Title:                                                                 



AEROGROW INTERNATIONAL, INC.

By:                                                                 

Name:                                                                 

Title:                                                                 

 
 
 
 
                                                                
SCHEDULE 1
HYDROPONIC IP


1.
Patents

U.S. Patents and Applications

Patent No.
Application No.
Publication No.
Title
Filing Date (MM/DD/YYYY)
D586,688
29/235,880
-
Indoor Gardening Appliance
08/08/2005
7,818,916
11/321,023
2006/0254332
PH Buffered Plant Nutrient Compositions and Methods for Growing Plants
12/28/2005
8,261,486
11/654,164
2007/0271842
Systems and Methods for Controlling Liquid Delivery and Distribution to Plants
01/16/2007
D604,196
29/292,564
-
Indoor Gardening Appliance
10/17/2007
D604,197
29/293,343
-
Indoor Gardening Appliance
11/16/2007
8,091,275
12/911,590
2011/0036009
PH Buffered Plant Nutrient Compositions and Methods for Growing Plants
10/25/2010

Foreign Patents and Applications

Application No.
Publication No.
Title
Filing Date (MM/DD/YYYY)
PCT/US2004/030168
WO 2005/055700
Devices and Methods for Growing Plants
09/15/2004

 
 
 

2.
Copyrights

No.
Description
Reg. Date (MM/DD/YYYY)
VA0001674819
Cascading Petunias Seed Kit
09/28/2007
TX0006833384
Cascading Petunias Tending & Harvesting Guide
09/28/2007
VA0001674791
Cherry Tomato Seed Kit
09/28/2007
TX0006833400
Cherry Tomato Tending & Harvesting Guide
09/28/2007
VA0001676754
Chili Pepper Seed Kit
09/28/2007
TX0006833387
Chili Pepper Tending & Harvesting Guide
09/28/2007
VA0001674792
French Herb Seed Kit
09/28/2007
TX0006833392
French Herb Tending & Harvesting Guide
09/28/2007
VA0001676784
Gourmet Herb Seed Kit
09/28/2007
TX0006833397
Gourmet Herb Tending & Harvesting Guide
09/28/2007
VA0001674803
Grow Bulbs (2)
09/28/2007
VA0001674808
Grow Bulb (1)
09/28/2007
TX0006833380
Herb Appeal
09/28/2007
PA0001602428
Herb Appeal
09/28/2007
VA0001674793
International Basil Seed Kit
09/28/2007
TX0006833407
International Basil Tending & Harvesting Guide
09/28/2007
VA0001674799
Italian Herb Seed Kit
09/28/2007
TX0006833410
Italian Herb Tending & Harvesting Guide
09/28/2007
VA0001674800
Japanese Herb Seed Kit
09/28/2007
TX0006833412
Japanese Herb Tending & Harvesting Guide
09/28/2007
VA0001676787
Master Gardener Deluxe
09/28/2007
TX0006833139
Master Gardener Deluxe Guide
09/28/2007
TX0006833376
Quick Start Guide
09/28/2007
TX0006833137
Salad Bar Series Tending & Harvesting Guide
09/28/2007


3.
Technical Information

Software rights for AeroGarden ULTRA software, and the programs and operational setting for all AeroGrow gardens, are owned by AeroGrow.  The software may control grow-light timer settings, pump/bubbler settings, nutrient timer settings, bulb-replace timer settings, garden-type settings, and alert LEDs.  The ULTRA adds customizability, time-sensitive tips, and a detailed user interface and control screen.  There is no relevant documentation.

List of software: AG ULTRA, AG Extra, AG 7, Pro 100, AG 6, Space Saver 6, AG3, Ultimate Kitchen Garden, and Veggie Pro.

EXHIBIT 10.3
 
 
 
BRAND LICENSE AGREEMENT
 
by and between
 
OMS INVESTMENTS, INC.
 
and
 
AEROGROW INTERNATIONAL, INC.
 
dated as of
 
April 22, 2013
 
 
 
 
 
BRAND LICENSE AGREEMENT
 
THIS BRAND LICENSE AGREEMENT ( “Agreement” ) is made as of April 22, 2013 (the “ Effective Date ”), by and between OMS Investments, Inc., a Delaware company having offices at 10250 Constellation Blvd., Suite 2800, Los Angeles, California 90067 (the “ Licensor ”), and AeroGrow International, Inc., a Nevada corporation having offices at 6075 Longbow Dr., Suite 200, Boulder, Colorado 80301 (the “ Licensee ”).  The Licensor and the Licensee are sometimes referred to herein collectively as the “ Parties ” and individually as a “ Party .”

RECITALS
 
A.           The Licensor is the sole owner of certain “ Licensed Trademarks ” (as defined in Section 1.7), which have become associated with high quality lawn and garden products.
 
B.           The Licensee desires to obtain from the Licensor a license to use the Licensed Trademarks in connection with the manufacture, marketing and sale of certain products and the Licensor is willing to grant such license, on the terms and conditions set forth herein.
 
C.           The Licensee recognizes the vital importance of protecting the Licensor’s exclusive and valuable rights in and to the Licensed Trademarks, and the goodwill symbolized thereby.
 
D.           Concurrently with the execution of this Agreement, the Licensor’s Affiliate, SMG Growing Media, Inc., an Ohio corporation having offices at 14111 Scottslawn Road, Marysville, Ohio 43041 (“ Scotts ”) and the Licensee are executing a Securities Purchase Agreement (the “Securities Purchase Agreement” ) pursuant to which Scotts will acquire convertible preferred stock and warrants from the Licensee; and Scotts, the Licensor, and the Licensee are executing certain other Transaction Agreements as set forth in the Securities Purchase Agreement.
 
AGREEMENT
 
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Parties hereby agree as follows:
 
1.  DEFINED TERMS
 
Capitalized terms in this Agreement shall have the meanings ascribed to them in this Agreement, including this Section 1.  Capitalized terms not defined in this Agreement shall have the meanings set forth in the Securities Purchase Agreement.
 
1.1            “ AeroGarden Products ” means and includes the following:  the AeroGarden 3, AeroGarden 7, AeroGarden Extra, and AeroGarden Ultra indoor garden units, depictions and descriptions of which are attached at Exhibit A ; the seed kits made and sold for use with any of the foregoing AeroGarden indoor garden units, depictions and descriptions of which are attached at Exhibit B .
 
 
 
 
 
1.2            “ Approval Guidelines ” means the guidelines for review and approval of Licensed Products and related items and materials set forth in Section 9.
 
1.3            “ Contract Year ” means the one-year period from April 1 of a calendar year to March 31 of the following calendar year.
 
1.4            “ First Contract Year ” means the Effective Date through March 31, 2014.
 
1.5            “ Initial Term ” shall have the meaning set forth in Section 14.1.
 
1.6             " Licensed MG Trademarks " means and includes those trademarks identified on Exhibit C .
 
1.7            “ Licensed Products ” means the AeroGarden Products and Other Approved Products.
 
1.8            “ Licensed Trademarks ” means the Licensed MG Trademarks and the Other Licensed Trademarks.
 
1.9            “ Licensee Markets ” means hydroponic and aeroponic products.
 
1.10            “ Net Sales ” means the net sales of the Licensee under U.S. GAAP.
 
1.11            “ Other Approved Products ” means Licensee products other than the AeroGarden Products that Licensee submits to Licensor for approval and that Licensor approves.
 
1.12             “ Other Licensed Trademarks " means and includes those trademarks identified on Exhibit D .
 
1.13            “ Protected Information ” of a Party means trade secrets and information concerning the Party’s business and affairs, including without limitation current and historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training techniques and materials and current and historical financial information regarding individual products, departments or categories.
 
1.14            “ Renewal Terms ” means a five-year period following the Initial Term.
 
1.15             “ Series B Preferred ” means the series of preferred stock of the Licensee designated Series B Convertible Preferred Stock with a par value of $0.001 per share under the Certificate of Designations.
 
1.16             “ Series B Preferred Conversion Price ” has the meaning ascribed to such term in the Certificate of Designations of Series B Convertible Preferred Stock of Licensee (the “ Certificate of Designations ”).
 
1.17            “ Territory ” means (a) North America and (b) on a country-by-country basis, all European countries including the United Kingdom, but excluding France and Germany, under the following conditions: (i) AeroGrow has an established European distributor for such country under a contract approved in writing by OMS, (ii) AeroGrow and OMS mutually agree in writing on annual sales volume requirements for such country, (iii) OMS has the right to terminate AeroGrow's rights in such country if such annual sales volume requirements are not met, or for any other reason, and (iv) OMS has not already commenced sales of Licensed Products in such
country.
 
 
 
 
 
1.18             “ U.S. GAAP ” means United States generally accepted accounting principles and practices applied consistently throughout the periods involved.
 
2.  GRANT OF LICENSE
 
Subject to the terms and conditions of this Agreement, the Licensor hereby grants to the Licensee, and the Licensee hereby accepts the grant by the Licensor of, the non-exclusive right and license to use the Licensed Trademarks on and in connection with the Licensed Products, that is, to rebrand the AeroGarden Products, and, with the prior written consent and approval of the Licensor, to apply to Other Approved Products, in the Licensee Markets in the Territory, during the Initial Term and during any properly obtained Renewal Terms.
 
3.  RESERVATION OF RIGHTS
 
The Licensor reserves all rights with respect to the Licensed Trademarks not expressly licensed to the Licensee hereunder, and the Licensee may not use or grant licenses to others to use the Licensed Trademarks in any other manner or in connection with any goods or services. The Licensor shall have the option to obtain from the Licensee a royalty-free trademark license to use the AEROGARDEN and AEROGROW trademarks outside the Territory in connection with the sale of products incorporating the Company Intellectual Property (as defined in the Intellectual Property Purchase Agreement dated April 22, 2013 between the Parties).
 
4.  LICENSE TRANSFER
 
This Agreement shall be binding upon and inure to the benefit of the Parties and their successors or assigns; provided, that the Licensee may assign this Agreement only if the Licensor provides prior and specific written consent, which consent may be withheld in Licensor's sole and absolute discretion. The Licensee shall not have the right to grant sublicenses under this Agreement, but may permit the distribution by third party distributors of AeroGarden Products that are branded with the Licensed Trademarks in accordance with this Agreement. Any assignment, franchise, sublicense, or transfer not expressly permitted by this Section 4 is prohibited and will be deemed to be null and void.
 
5.  USE OF CONTRACT MANUFACTURERS
 
5.1             Licensor Approval Required for Contract Manufacturers.   Subject to the exception in Section 5.2, the Licensee shall not use the services of contract manufacturers in the manufacture of the Licensed Products unless the Licensor approves such contract manufacturers, specifically and in writing, before the Licensee engages such contract manufacturers.  The Licensee shall require any approved contract manufacturers to execute an agreement to manufacture the Licensed Products, and the agreement must be in a form approved by the Licensor before the agreement is presented to the contract manufacturer.
 
 
 
 
 
5.2             Current Contract Manufacturers.   The Licensee shall be permitted to continue to use the services of its current contract manufacturers for the AeroGarden Products as of the Securities Purchase Agreement effective date; provided that (a) Licensee shall require such contract manufacturers to promptly execute the agreement identified in Section 5.1 to the extent such agreement is not already in place or is unacceptable to the Licensor, and (ii) the Licensor shall have the right to terminate any such existing contract manufacturer to the extent that such existing contract manufacturer is the cause of a material deficiency in manufacturing any Licensed Products.
 
6.  COMPENSATION
 
6.1             Calculation of License Fees . For the First Contract Year, the Parties shall use annual the Net Sales for the equivalent period during fiscal year 2013 ending March 31, 2013 ("Equivalent 2013 Period Net Sales"), and the Licensee shall pay the Licensor an amount equal to 5% of the increase in Net Sales from the Equivalent 2013 Period Net Sales to the Net Sales for the First Contract Year. For each subsequent Contract Year of the Agreement, the Licensee shall pay the Licensor an amount equal to 5% of the increase in Net Sales from the fiscal year 2013 (Le., April 1,2012 to March 31, 2013) Net Sales, which were $7,330,408, (the "Baseline Net Sales Amount") to the current Contract Year.
 
6.2             Accounting for and Payment of License Fees.   No later than April 30 th of each Contract Year after the First Contract Year, and April 30 th of the year after expiration or termination of the Agreement for any reason, the Licensee shall provide the Licensor with the Net Sales figures for the current Contract Year and concurrently shall pay the Licensor the License Fee set forth in Section 6.1 above (the “ Annual License Fee ”).  For the first four (4) Contract Years, fees due under this Agreement, including, but not limited to, the Annual License Fee, shall be payable by the Licensee to the Licensor, or an affiliate designated in writing by the Licensor, in shares of the Licensee’s common stock, par value $0.001 per share (“ Common Stock ”), at the then-current Series B Preferred Conversion Price, and fees must be paid in accordance with U.S. tax laws and any other relevant tax laws.  For purposes of clarity, the Series B Preferred Conversion Price shall be calculated as provided under the Certificate of Designations, regardless of whether any shares of Series B Convertible Stock are then outstanding and regardless of whether the Certificate of Designations is then an effective part of the Articles of Incorporation of the Licensee.  Until this Agreement is terminated or expires, the Licensee shall deliver to the Licensor the certificate of adjustment referred to in Section 4(k) of the Certificate of Designations, regardless of whether the Series B Preferred is then convertible pursuant to Section 4 of the Certificate of Designations.  For the fifth Contract Year and any subsequent Contract Years (i.e., from 4/1/17 forward), fees due under this Agreement, including, but not limited to, the Annual License Fee, shall be payable by the Licensee to the Licensor in cash (U.S. dollars), and such fees must continue to be paid in accordance with U.S. tax laws and any other relevant tax laws.
 
6.3             Interest on Late Payments.   If the Licensee does not pay any fees when due, then, without limiting any other remedies or recourse available to the Licensor, the Licensee shall pay the Licensor interest on all such overdue amounts from the due date of such amounts until paid at twelve percent (12%) rate per annum.
 
 
 
 
 
6.4             Guaranteed Minimum License Fees.   If the license fees due to the Licensor for the fourth Contract Year (i.e., 4/1/16 - 3/31/17) for Net Sales of Licensed Products under the Licensed MG Trademarks are less than $500,000, then the Licensee shall pay the Licensor in stock the difference between $500,000 and the license fees due, and this guaranteed minimum fee shall be paid at the same time that the license fee is paid. If the license fees due to the Licensor for the fifth Contract Year (i.e., 4/1/17 - 3/31/18) or any subsequent Contract Year for Net Sales of Licensed Products under the Licensed MG Trademarks are less than $1,000,000, then the Licensee shall pay the Licensor in cash the difference between $1,000,000 and the license fees due, and this guaranteed minimum license fee shall be paid at the same time that the
license fee is paid.
 
6.5             Audit.   The Licensee shall keep, maintain and preserve, at its place of business identified above, during the Initial Term, during any Renewal Terms, and for at least three (3) years following termination or expiration of this Agreement for any reason, complete and accurate books, accounts, records and other materials covering all transactions related to this Agreement, including but not limited to the information contained in or related to the accounting for and payment of license fees, which may include customer records, invoices, correspondence and banking, financial and other records in the Licensee’s possession or under its control (the “ Records ”). During the Initial Term, during any Renewal Terms, and for three (3) years following termination or expiration of this Agreement for any reason, the Licensor and/or an independent third party representative of the Licensor, upon three (3) days’ notice and during regular business hours, shall have the right once per year to conduct an audit of the Records. Following the audit, the Licensee shall take immediate steps to timely resolve any issues raised therein, including payment of any monies owing and due.  The Licensor shall bear the costs of the audit, provided, however, that if an audit reveals an underpayment of more than five (5%) percent of the total amount payable for any Contract Year, then the Licensee shall bear the expense of the audit.
 
7.  LICENSED PRODUCTS
 
7.1             Product Development.   The Licensed Products must be and must remain at least as high in quality as the current AeroGarden Products, and must be developed, manufactured, marketed, and sold as premium products consistent with the Licensor’s then existing image.  The Licensee accepts full responsibility for and agrees to pay all costs it incurs associated with the development of the Licensed Products and all advertising and promotion, packaging design, graphics, and packaging materials for the Licensed Products.
 
7.2             Licensor Approval.   Other than the existing AeroGarden Products, the Licensee shall not sell any Licensed Products until the Licensor, in its reasonable judgment, finds that such products in mass production quantities are satisfactory to the Licensor.  The license to the Licensee granted by this Agreement to distribute the Licensed Products under the Licensed Trademarks is expressly contingent upon such final written approval by the Licensor.  Other than the existing AeroGarden Products for the initial Contract Year, by no later than sixty (60) days prior to distribution and sale of each Licensed Product, the Licensee shall provide the Licensor for its prior written approval (a) a list of each of the Licensed Products, including SKU numbers, proposed MSRP (manufacturer suggested retail price) and product specifications, as well as product samples for each; and (b) the distribution and marketing plans for the Licensed Products, including proposed distribution channels, marketing and advertising spend, marketing and advertising channels and media plan, and related information.
 
 
 
 
 
7.3             Adherence to the Approval Guidelines.   The Licensee will manufacture, package, label, sell, and distribute the Licensed Products in strict adherence with the Approval Guidelines.
 
7.4             Capital Costs.   The Licensee will secure all plant, equipment and technical skills necessary for the manufacture of the Licensed Products and any packaging therefor, and the Licensor shall have no liability or responsibility with respect thereto.
 
7.5             Compliance with Laws.   The Licensee shall manufacture, package, label, advertise, and sell all Licensed Products in strict compliance with all applicable laws, rules and regulations.  Accordingly, (a) the Licensed Products manufactured by the Licensee in the Territory will be manufactured in compliance with, and will not be adulterated or misbranded within the meaning of, any federal, state or local laws, rules or regulations applicable within the Territory, will not constitute an article which may not be introduced into interstate commerce, and will be manufactured in substantial compliance with all applicable federal, state and local laws and regulations applicable within the Territory, and (b) any Licensed Products manufactured by the Licensee in foreign countries will be manufactured in compliance with all applicable laws, rules and regulations in those countries.  The Licensee shall provide any required license or certification under the laws or regulation of the United States, the Territory, or the countries of manufacture.  Unless the Licensor agrees otherwise in writing, the Licensee will destroy all inventories of Licensed Products that are not in conformity with any applicable laws, rules or regulations within the Territory.  The Licensee agrees to notify the Licensor promptly of any regulatory action of which the Licensee has knowledge that is taken in relation to it by any federal, state, foreign, county or municipal authority which relates to or affects the manufacture, storage, packaging, labeling, advertising, distribution, or sale of the Licensed Products.
 
7.6             Consumer Comments and Complaints.   Once per quarter, the Licensee shall provide the Licensor a summary of all written (including electronic) consumer comments and complaints received regarding the quality of the Licensed Products and shall maintain all written (including electronic) consumer comments and complaints and a telephone log for all consumer comments and complaints received by telephone.  The Licensee will also keep such information available for inspection by the Licensor during normal working hours upon reasonable notice.  The Licensee will respond to any consumer complaint about the Licensed Products in a prompt and businesslike manner, and in a manner that reflects well upon itself, the Licensed Products, and the Licensed Trademarks, and the Licensee will provide the Licensor with copies of all responses that it makes to consumer comments or complaints.  The Licensor will send the Licensee information on any consumer comments or complaints that the Licensor receives about the Licensed Products.  Licensee agrees to conform to Licensor’s product return policy consistent with Licensor’s business practices, namely, Licensee shall allow purchasers to return the Licensed Products for a full refund for up to a thirty (30) days following purchase if the customer provides a cash register receipt and/or UPC bar code for the Licensed Products.
 
 
 
 
 
8.  ADVERTISING AND PROMOTION REQUIREMENTS
 
The Licensee shall market the Licensed Products as premium products and as is otherwise consistent with the Licensor’s then existing image, so that such marketing shall not reflect adversely upon the Licensed Products, the good name of the Licensor, or the Licensed Trademarks.  The Licensor shall have a prior-to-use right of approval for all promotional, marketing, and advertising materials and concepts, including but not limited to television commercials, radio spots, print advertisements, direct mail, brochures, signs, billboards, displays, shelf talkers, packaging, labeling, point of sale materials, trade show displays, sales materials, website materials, online advertisements, social media advertisements, advertisements on handheld devices, sponsorships, and promotional contests, sweepstakes, and events.  The Licensor shall have a right of approval for all such advertisements, and all such advertisements shall conform in all material respects to the approvals given by the Licensor.  The Licensor shall have fourteen (14) business days following the receipt of the proposed promotional, marketing or advertising materials to send the Licensee written notice of its disapproval, which shall include an explanation of the basis for disapproval.  Licensor shall use its best efforts to provide, such written notice within the fourteen (14) business day period; provided, however, that if such written disapproval is not received by the Licensee within this fourteen (14) business day period, the marketing, promotional or advertising material submitted to the Licensor shall be deemed disapproved.  Any material modifications to any such advertisements previously approved by the Licensor shall be subject to approval pursuant to this Section 8.  To the extent that the Licensee makes non-material modifications to any advertisements previously approved by the Licensor, however, the Licensee shall not have to submit such advertisements to the Licensor for its prior approval.
 
9.  APPROVALS AND QUALITY CONTROL
 
9.1             Licensed Products Approval Guidelines.   BEFORE FULL EXECUTION OF THIS AGREEMENT, ANY PRODUCT DEVELOPMENT DONE BY THE LICENSEE IS AT THE SOLE RISK OF THE LICENSEE.  UNDER NO CIRCUMSTANCES MAY THE LICENSEE SELL OR SHIP LICENSED PRODUCTS BEARING THE LICENSED TRADEMARKS BEFORE FULL EXECUTION OF THIS AGREEMENT, EXCEPT WITH THE LICENSOR’S EXPRESS PRIOR WRITTEN CONSENT.  Before any sale or distribution, the Licensee, at its expense, shall submit to the Licensor all prospective Licensed Products for the Licensor’s advance written approval, in the Licensor’s sole and absolute discretion, at all stages listed below.  Notwithstanding the foregoing, the Licensee is not required to submit the current AeroGarden Products for the Licensor’s advance written approval, except that to the extent the current AeroGarden Products, or any associated materials, will display the Licensed Trademarks, the Licensee must submit all such materials for the Licensor’s advance written approval.
 
CONCEPT:
Rough sketches or layout concepts.
 
PROTOTYPE:
Prototypes or finished artwork.
 
FINAL:
Pre-production sample.
 
 
 
 
 
The following rules shall apply to all stages   of the Approval Guidelines:

 
(a)
The Licensee shall not make any use of, sell or distribute such items as listed in this Section 9.1 before the Licensor’s granting final written approval.

 
(b)
The Licensor shall have fourteen (14) business days from the Licensor’s actual receipt to review and respond in writing to each of the Licensee’s submissions.  If the Licensor does not respond to such submission within such fourteen (14) business day period, such submission shall be deemed disapproved .

 
(c)
The Licensor, in its sole discretion, reserves the right to reject an item approved at a prior stage if in its physical form it does not meet the Licensor’s marketing standards or if it departs from the approved sample.

 
(d)
In the event of any modification or change in quality of the items, whether during the approval process or after final approval has been granted, such items shall be re-submitted to the Licensor for approval.

 
(e)
All submissions shall become the property of the Licensor.

 
(f)
Upon the Licensee’s written request, the Licensor shall return prototypes and final artwork at the Licensee’s expense, provided that the Licensee supplies digital photographs of same.

 
(g)
The Licensee shall not have any rights against the Licensor for damages or other remedies by reason of the Licensor’s failure or refusal to grant any approval referred to in this Section 9.

 
(h)
At the commencement of each Contract Year, the Licensee shall supply the Licensor with three (3) production samples of each of the Licensed Products, free of charge.

9.2             Examination by the Licensor.   Periodically, the Licensor shall have the right, upon reasonable notice to the Licensee and at suitable times, to inspect the premises of the Licensee and of the Licensee’s contract manufacturers, with respect to any of their operations related to any of the Licensed Products.  Periodically, the Licensor shall also have the right to request and upon such request the Licensee shall provide to the Licensor, free of charge, representative samples of any Licensed Products then being sold, together with any packaging, packaging inserts, labels, wrapping, advertising, marketing, web pages, and promotional material then in use.  The Licensor shall examine any such samples, artwork, packaging, promotional or marketing materials, and advertisements within thirty (30) days after receipt.  If as a result of such examination the Licensor believes that any Licensed Products do not strictly adhere to the Approval Guidelines or product quality approved by the Licensor, or that any packaging, advertising, marketing or promotional materials are not in substantial conformity with any previous approvals given by the Licensor, or any Licensed Trademarks are not being used in conformity with the requirements of this Agreement (“ Non-Conforming Materials ”), the Licensor will promptly notify the Licensee in writing, specifying the alleged non-conformity and the steps required to correct it (the “ Non-Conformity Notice ”).  After receipt of any Non-Conformity Notice, the Licensee shall have thirty (30) business days to correct the Non-Conforming Materials identified therein.  For the sake of clarity, it is understood and agreed that the Licensee shall have the right to continue to sell Licensed Products, and to use its packaging therefor, so long as they are not Non-Conforming Materials and are in substantial conformity with any previous approvals given by the Licensor.  The Licensee recognizes that representatives of the Licensor may also inspect Licensed Products after they have been delivered or distributed to the Licensee’s customers, and the Licensee shall cooperate with the Licensor in obtaining the Licensee’s customers’ cooperation in such inspections.
 
 
 
 
 
9.3             Right To Suspend Approval Process.   In addition to its other remedies, the Licensor has the right to suspend the approval process if the Licensor has given the Licensee notice of breach of this Agreement, until the Licensee cured the breach.
 
9.4             Trademark Notices.   Whenever the Licensee uses the Licensed Trademarks, the Licensee shall affix the appropriate trademark notice and shall use the registration symbol “ Ò ” for Licensed Trademarks that are federally registered, or “TM” for Licensed Trademarks that are not federally registered, and in each instance of use of the Licensed MG Trademarks where appropriate, accompanied by the words “Reg. TM of OMS Investments, Inc.” or “TM of OMS Investments, Inc.” and “Used under license.” or a reasonable facsimile thereof or such other reference as may be designated by the Licensor from time to time.  Where a Licensed Trademark is used more than once on packaging, in copy or advertising, or on the Licensed Products, the “ Ò ” or “TM” designation need only be used once either on the most prominent use of the Licensed Trademark, or if all uses are of equal prominence, then on the first use of the Licensed Trademark in or on each package, copy, advertisement, or product.  The Licensee shall use the Licensed Trademarks only as trademarks, service marks, or trade names and shall affix the notices as specified.  The Licensee shall not have the right, unless previously agreed in writing by the Licensor, to use other trademarks, service marks, or trade names in marketing and promoting the Licensed Products, including other trademarks, service marks, or trade names owned by the Licensor.  The Licensee shall cooperate with the Licensor and assist the Licensor in registering the Licensed Trademarks for the Licensed Products, including by providing packaging, labeling, and documentation as may be required to obtain and maintain registrations for Licensed Trademarks for the Licensed Products.
 
10.  USE OF LICENSED TRADEMARKS
 
10.1             Restrictions on Use.   Unless the Licensor gives prior consent specifically and in writing, the Licensee shall use the Licensed Trademarks:

(a)           only for the purposes of and pursuant to this Agreement;

 
(b)
only in a manner consistent with the scope of the relevant registration of the Licensed Trademark or application therefore in the Territory;
 
 
 
 
 
(c)           only in the manner permitted and prescribed by the Licensor as set forth herein; and

(d)           only for the Licensed Products.

10.2             Recognition of Goodwill.   The Licensee recognizes the value of the goodwill associated with the Licensed Trademarks and acknowledges that the Licensed Trademarks and all rights therein and goodwill pertaining thereto belong exclusively to the Licensor.  Except as provided in this Agreement, the Licensee shall not, anywhere in the world, use or seek to register any trademarks, service marks, trade dress, names, trade names, or domain names that are the Licensed Trademarks, that are colorably or confusingly similar to the Licensed Trademarks, or that incorporate the Licensed Trademarks or any element colorably or confusingly similar to the Licensed Trademarks.

10.3             Validity of Licensed Trademarks.   The Licensee will not, at any time while this Agreement is in effect or thereafter, dispute, challenge, destroy, impair, or impede the effect, validity, or enforceability of the Licensed Trademarks, or dispute or challenge the Licensor’s rights or title in and to the Licensed Trademarks.

10.4             Validity of Agreement.   The Licensee will not, at any time while this Agreement is in effect or thereafter, dispute or challenge the title or any rights of the Licensor in and to the Licensed Trademarks, the validity or enforceability of this Agreement, or the validity or enforceability of any other license agreement or similar or comparable agreement involving the Licensed Trademarks to which the Licensor is a party.

11.  INFRINGEMENT

If requested by the Licensor, the Licensee will assist the Licensor (at Licensor’s expense) procuring protection for, and in protecting, any of the Licensor’s rights in the Licensed Trademarks.  The Licensor, if it so desires, may commence or prosecute any claim, suit, or action in its own name or, with the Licensee’s consent, in the name of the Licensee, and may join the Licensee as a party to any claim, suit, or action.  The Licensee shall promptly notify the Licensor in writing of any infringements or imitations by others of the Licensed Trademarks which the Licensee becomes aware of, and the Licensor shall have the sole right to determine whether or not any action shall be taken on account of any such infringements or imitations.  The Licensor shall notify the Licensee of any potential infringement regarding any Licensed Products.  The Licensee shall not institute any suit or take any action on account of any such infringements or imitations without first obtaining the written consent of the Licensor, which may be given or withheld in the Licensor’s sole discretion.

12.  INSURANCE

Licensee agrees to obtain and maintain, at its own cost and expense, Commercial General Liability Insurance (including Excess/Umbrella Insurance) in an amount not less than five million dollars ($5,000,000) covering bodily injury, property damage, products - completed operations and personal injury, including death resulting there from and Automobile Liability in an amount not less than one million dollars ($1,000,000) covering bodily injury and property state in which the service will be provided and shall have a Best's Key rating of no less than A-VII. Such policy shall name Licensor as Additional Insured including providing defense costs and be primary with respect to any insurance or self-insurance programs maintained by Licensor. The policy must be endorsed to reflect that the Additional Insured will be provided no less than thirty (30) days advance written notice of cancellation or material change in the policy required to be carried as part ofthis Agreement. Licensee shall deliver to Licensor a certificate of insurance that specifies the required coverage immediately following execution of this Agreement. Licensee shall also obtain and maintain at its own cost and expense, any and all statutorily required insurance, including, but not limited to Workers' compensation insurance with statutory limits, and Employer's Liability insurance. The Commercial General Liability, Automobile Liability and Workers Compensation/Employer's Liability policy will include a Waiver of Subrogation in favor of Licensor. The limits required to be evidenced do not limit the liability of Licensee in any claim or suit.
 
 
 
 
 
13.  CONFIDENTIALITY
 
13.1             Acknowledgment of Confidentiality.   Each Party understands that any Protected Information disclosed to it by the other Party under this Agreement is secret, proprietary and of great value to the disclosing Party, which value may be impaired if the secrecy of the Protected Information is not maintained.  The Party disclosing Protected Information is hereinafter sometimes referred to as the “ Disclosing Party ” and the Party receiving Protected Information is sometimes hereinafter referred to as the “ Receiving Party .”

13.2             Reasonable Security Measures.   Each Party has taken and will continue to take reasonable security measures to preserve and protect the secrecy of the Protected Information, and each Receiving Party agrees to take all measures reasonably necessary to protect the secrecy of a Disclosing Party’s Protected Information in order to prevent it from falling into the public domain or into the possession of persons not bound to maintain the secrecy of such information.

13.3             Non-Disclosure Obligation.   Each Receiving Party agrees not to disclose the Protected Information of the Disclosing Party obtained pursuant to this Agreement, to any person or entity (other than its key officers, and employees and/or their parent and subsidiaries to whom disclosure is necessary), while this Agreement is in effect or at any time following the expiration or termination of this Agreement for any reason.

13.4             Burden of Proof.   Each Receiving Party acknowledges and agrees that if it shall disclose, divulge, reveal, report, publish, transfer or use, for any purpose whatsoever, except as authorized herein, any Protected Information of a Disclosing Party, and such Receiving Party shall assert as a defense that such information (a) was already known to it or developed prior to the execution of this Agreement, (b) was independently developed by it, (c) was disclosed to third parties without violation of this Agreement, (d) was in the public domain prior to the Effective Date of this Agreement, or (e) entered the public domain without violation of this Agreement, then such Receiving Party shall bear the burden of proof with respect to the same.

 
 
 
 
14.  TERM AND TERMINATION

14.1             Initial Term.   The Initial Term of this Agreement, and the license granted herein, shall be the period from the Effective Date to March 31, 2018, unless sooner terminated in accordance with the provisions hereof.

14.2             Renewal Terms.   The Licensee may renew this Agreement, and the license granted herein, for consecutive additional five (5) year Renewal Terms by providing written notice of renewal to the Licensor at least six (6) months in advance of the expiration of the Initial Term (or the then-effective Renewal Term), provided that, at the time of the notice and at the time of the renewal, the Licensee is not in default with respect to any of its obligations under the Agreement.

14.3             Termination.   This Agreement may be terminated as follows:

 
(a)
If the Licensee defaults in the payment of any license fees, interest, or other fees, and such default is not cured within thirty (30) business days following the Licensee’s receipt of written notice of such default, then this Agreement and the license granted hereunder may be terminated upon written notice by the Licensor sent to the Licensee after expiration of the thirty (30) day period and effective upon receipt of such notice, without prejudice to any and all other rights and remedies the Licensor may have hereunder or by law provided.  Notwithstanding the foregoing provision allowing the Licensee thirty (30) business days to cure a default in payment, the Licensee must use its best efforts to cure such default as promptly as possible within said thirty (30) business day period.

 
(b)
If Licensee fails to sell and commercially distribute an amount of Licensed Products under the Licensed MG Trademarks equivalent to $5,000,000 in gross sales of Licensed Products for any Contract Year, and such default is not cured within thirty (30) business days following Licensee’s receipt of written notice of such default, then this Agreement and the license granted hereunder may be terminated upon written notice by Licensor sent to Licensee after expiration of the thirty (30) day period and effective upon receipt of such notice, without prejudice to any and all other rights and remedies Licensor may have hereunder or by law provided.

 
(c)
If the Licensee fails to perform in accordance with any material term or condition of this Agreement (other than as described in Sections 14.3(a) or 14.3(b) above) and such default continues unremedied for thirty (30) days after the date on which the Licensee receives written notice of default, unless such remedy cannot be accomplished in such time period and the Licensee has commenced diligent efforts within such time period and continues such efforts until the remedy is complete, then this Agreement may be terminated upon notice by the Licensor, effective upon receipt of such notice, without prejudice to any and all other rights and remedies the Licensor may have hereunder or by law provided.
 
 
 
 
 
 
(d)
If any corporate action, legal proceedings or other procedure or step is taken in relation to: (i) the suspension of payments, a moratorium of any indebtedness, winding-up, dissolution, administration or reorganization of the Licensee; (ii) a composition, compromise, assignment or arrangement with any creditor of the Licensee; (iii) the appointment of a liquidator, trustee in bankruptcy, special administrator or other similar officer in respect of the Licensee or any of its assets; (iv) the commencement of a case or proceeding, whether voluntary or involuntary, under any applicable bankruptcy or insolvency law; (v) enforcement of any liens over any assets of the Licensee having an aggregate value in excess of $50,000 (or its equivalent in any other currency or currencies), or (vi) any analogous procedure or step is taken in any jurisdiction, then this Agreement and the license granted hereunder may be terminated immediately upon notice by the Licensor, effective upon sending such notice, without prejudice to any and all other rights and remedies the Licensor may have hereunder or by law provided, and the license herein granted shall not constitute an asset in reorganization, bankruptcy, or insolvency which may be assigned or which may accrue to any court or creditor appointed referee, receiver, or committee.

 
(e)
Licensor shall have the right, but not the obligation, to terminate this Agreement by providing written notice to Licensee, in the event that the Technology License Agreement expires or terminates for any reason.

 
(f)
If Licensee fails to comply with its obligations under Section 7.5, as reasonably determined by Licensor, and such default continues unremedied for thirty (30) days after the date on which Licensee receives written notice of default, then this Agreement may be terminated upon notice by Licensor, effective upon receipt of such notice, without prejudice to any and all other rights and remedies Licensor may have hereunder or by law provided.

14.4             Rights Upon Cancellation, Termination, or Expiration.   Upon any cancellation, termination, or expiration of this Agreement for any reason:

 
(a)
The Licensee shall immediately pay to the Licensor all amounts due and owing hereunder; shall return to the Licensor all of its Protected Information, confidential documents and other material that the Licensor supplied to the Licensee; and shall never use, disclose to others, or assist others in using such Licensor Protected Information, confidential documents, and other material.

 
(b)
The Licensee will be deemed to have automatically and irrevocably assigned, transferred, and conveyed to the Licensor any rights, equities, goodwill, titles, or other rights in and to the Licensed Trademarks which may have been obtained by the Licensee or which may have vested in the Licensee pursuance of any endeavors covered hereby, and the Licensee will execute any instruments requested by the Licensor to accomplish or confirm the foregoing.  Any such assignment, transfer or conveyance shall be without consideration other than the mutual covenants and considerations of this Agreement.
 
 
 
 
 
 
(c)
Except as provided in Section 14.6, the Licensee shall forthwith discontinue the use of all Licensed Trademarks, including use of the Licensed Trademarks on packaging, on other paper goods, and on other objects bearing any Licensed Trademarks; in any advertising and marketing; on websites and social media; and in all other places where the Trademarks are used.

14.5             Licensing and Use of Licensed Trademarks Upon Cancellation, Termination, or Expiration.   Upon any cancellation, termination, or expiration of this Agreement for any reason, the Licensee may not continue to sell products using the Licensed Trademarks.

14.6             Disposal of Inventory After Cancellation, Termination, or Expiration.   For a period of three (3) months after cancellation, termination, or expiration of this Agreement, the Licensee may sell Licensed Products in Licensee’s inventory which were already packaged in packages bearing the Licensed Trademarks (“ Sell-Off Period ”), except that the Licensee shall have no right to a Sell-Off Period if the Licensor terminates this Agreement pursuant to any of the provisions in Sections 14.3(c) or 14.3(d).  Unless agreed to in writing by the Licensor, the Licensee shall not dispose any Licensed Products during the Sell-Off Period in quantities more than 10% greater than inventory of Licensed Products sold in six month period during the Agreement.  In addition, the Licensee shall not dispose of existing inventory of Licensed Products during the Sell-Off Period if Licensee knows or should know that the inventory will be sold as close-outs or with deep discounts.  After expiration of the Sell-Off Period, or upon termination or expiration of this Agreement if the Sell-Off Period does not apply, then the Licensor shall have the right to require the Licensee to destroy any unused packaging materials bearing the Licensed Trademarks.  Any sales of Licensed Products during the Sell-Off Period shall be, at all times, in accordance with the policies, prices, and standards established for marketing and distribution of the Licensed Products pursuant to this Agreement, and shall require payment of all license fees, interest, and other fees in accordance with Section 6.

14.7             Final Statement of Upon Cancellation, Termination, or Expiration.   As soon as practicable after cancellation, termination, or expiration of this Agreement for any reason, but in no event more than thirty (30) days thereafter, the Licensee shall deliver to the Licensor a statement indicating the number and description of Licensed Products packaged in packaging using the Licensed Trademarks then in the Licensee’s inventory and the number and description of unused packaging using the Licensed Trademarks then in the Licensee’s inventory.  The Licensor may conduct a physical inventory (at Licensor’s expense) to ascertain or verify such statement.

15.  REPRESENTATIONS AND WARRANTIES

15.1             Licensed Trademarks.

 
(a)
The Licensee acknowledges that the Licensor owns all right, title, and interest in and to the Licensed Trademarks.  The Licensee further acknowledges the goodwill associated with the Licensed Trademarks and that the Licensed Trademarks have acquired secondary meaning in the mind of the public as a result of Licensor’s use (in the case of Licensed MG Trademarks) and Licensee’s use (in the case of the Other Licensed Trademarks) of the Licensed Trademarks in the Territory for certain goods and services and ownership of the Registrations (defined below).  The Licensee shall not, during or after this Agreement, dispute or contest, directly or indirectly, or do or cause to be done, any action that in any way contests, impairs, or tends to impair the Licensor’s rights in and title to the Licensed Trademarks or the validity of any registrations thereof, and shall not assist others in so doing.  The Licensee shall not in any manner represent that it owns any rights in the Licensed Trademarks (and/or registrations therefor), but the Licensee may, only during the Agreement, and only if the Licensee complies with all laws and regulations of the relevant jurisdiction for so doing, represent that it is a “licensee” of the Licensor.  The Licensee shall not register or attempt to register in its own name, or that of any third party, any Licensed Trademark.  Subject to the terms and conditions of this Agreement, the Licensee agrees that any and all of its use of the Licensed Trademarks under this Agreement shall be on behalf of and accrue and inure to the benefit of the Licensor.
 
 
 
 
 
 
(b)
Licensor represents and warrants that it owns certain rights in and to the Licensed MG Trademarks based upon Licensor’s use of and/or ownership of the Licensed MG Trademarks and/or related trademark and service mark registrations it owns, itself or through its subsidiaries, in the Territory (the “Registrations” ).  Licensor represents and warrants that it is applying or has applied to register the Licensed MG Trademarks in the Territory for the Licensed Products and that Licensor’s representations and warranties in this Section 15.1 as they relate to the Licensed MG Trademarks for the Licensed Products are subject to Licensor’s successful registration of the Licensed Trademarks for the Licensed Products.

15.2             Right To Enter Into This Agreement.   Each Party represents and warrants for itself that it has the right to enter into this Agreement; that its entering into this Agreement will not, to its knowledge, violate any other agreement to which it is a party or conflict with or violate any law, rule, or regulation by which it is bound; and that it will not knowingly take any action contrary to this Agreement.

16.  INDEMNIFICATION

16.1             Licensor Indemnification.   The Licensor hereby indemnifies the Licensee and forever holds the Licensee harmless from and against all claims, suits, actions, proceedings, damages, losses, liabilities, costs, or expenses (including reasonable attorneys' fees and expenses) arising out of, based upon, or in connection with (a) any breach of any of the Licensor’s representations and warranties set forth in this Agreement or (b) any claim that the use by the Licensee of the Licensed MG Trademarks in accordance with this Agreement infringes any third party trademark.

16.2             Licensee Indemnification.   The Licensee hereby indemnifies the Licensor and forever holds the Licensor harmless from and against all claims, suits, actions, proceedings, damages, losses or liabilities, costs or expenses (including reasonable attorneys' fees and expenses) arising out of, based upon, or in connection with (a) any breach of any of the Licensee’s representations, warranties, or obligations as set forth in this Agreement; (b) any use of any patent, process, method, or device by the Licensee in connection with the Licensed Products; (c) any alleged defects or dangers inherent in the Licensed Products or the manufacture, distribution, sale, or use thereof; (d) any injuries or damages to purchasers, users, or consumers of Licensed Products or arising from or related to the use or consumption of the Licensed Products; (e) any injuries or damages arising from the Licensee’s or any of the Licensee’s customers’ advertising, marketing, or promotion of the Licensed Trademarks or the Licensed Products; or (f) any alleged infringement of any third party's copyright, patent, trademark, or other intellectual property unless and to the extent such alleged infringement is based upon the Licensee’s use of the Licensed MG Trademarks in accordance with this Agreement.
 
 
 
 
 
16.3             Conditions of Indemnification.   As a condition of indemnification under this Section 16, the Party seeking indemnification shall give the other Party (for purposes of this Section 16, the “ Indemnifying Party ”) immediate notice of and copies of all pleadings and correspondence related to the assertion of any such claim, proceeding, action, or suit and agrees not to settle, compromise, or otherwise dispose of any such claim, proceeding, action or suit without the prior written consent of the Indemnifying Party.  The Indemnifying Party shall have the right (but not the obligation) to assume the defense or settlement of any such claim, proceeding, action, or suit at its expense, by counsel of its choice.  If the Indemnifying Party assumes such defense, the Party seeking indemnity shall cooperate fully with the Indemnifying Party in defense of the action and the Indemnifying Party shall not be liable to pay or reimburse the other Party for attorneys' fees or expenses, except such out-of-pocket costs or expenses incurred by the indemnified Party in cooperating with the Indemnifying Party.

16.4             Limits.   Neither Party shall be liable to the other Party, whether pursuant to indemnification or otherwise under this Agreement, for any punitive, indirect or consequential losses, or for loss of business or goodwill, except that these limitations of liability shall not apply to (a) claims for death or physical injury, or loss or damage to tangible personal or real property; (b) damages caused by either Party’s gross negligence or willful misconduct or omission of either Party or its respective employees or representatives; (c) damages payable pursuant to a breach of Section 14 (Confidentiality) or this Section 16 (Indemnification); or (d) damages to the Licensor’s reputation, to the Licensed Trademarks, or the Licensor’s brands or trademark goodwill.

17.  NOTICES

All notices provided for in this Agreement shall be in writing and shall be given by facsimile or registered mail, postage prepaid, or by overnight courier deposited with a reputable company, addressed to the other Party at the applicable address set forth below, or to such other addresses as may be given for such purpose by such that Party by notice duly given hereunder.  Notice shall be deemed properly given on the date of a confirmed facsimile transmission, three (3) days after the date mailed if given by first class mail, or one (1) day after confirmed delivery by overnight courier:
 
 
 
 
 
TO THE LICENSOR:

OMS Investments, Inc.
Attn.: Luis A. Rodriguez, Assistant Secretary
10250 Constellation Blvd., Ste. 2800
Los Angeles, CA 90067
Facsimile: (310) 300-3051

WITH COPIES TO:

Hunton & Williams, LLP
2200 Pennsylvania Avenue, N.W.
Washington, D.C. 20036
Attention: J. Steven Patterson
Facsimile: (202) 778-2201

TO THE LICENSEE:

AeroGrow International, Inc.
Attn.: President and CEO
102 6075 Longbow Dr., Suite 200
Boulder, CO 80301
Facsimile: (303) 444-0406

WITH COPIES TO:

Hutchinson Black and Cook, LLC
921 Walnut Street, Suite 200
Boulder, CO 80302
Attention: James L. Carpenter, Jr.
Facsimile: (303) 442-6593
 
18.  GENERAL PROVISIONS

18.1             No Fiduciary or Other Relationship .  The Parties understand and agree that this Agreement does not create a fiduciary relationship between them, that they are and shall be independent contractors, and that nothing in this Agreement is intended to make either Party a general or special agent, joint venturer, partner, or employee of the other Party for any purpose whatsoever.

18.2             Use of Licensed Trademarks in Contracts .  The Licensee shall not employ any of the Licensed Trademarks in signing any contract or applying for any license or permit or in a manner that may result in the Licensor’s liability for any of the Licensee’s indebtedness or obligations.  The Licensee may not use the Licensed Trademarks in any way not expressly authorized by the Licensor.  Except as expressly authorized in writing, neither the Licensor nor the Licensee shall make any express or implied agreements, warranties, guarantees or representations or incur any debt in the name or on behalf of the other, represent that their relationship is other than licensor and licensee, or be obligated by or have any liability under any agreements or representations made by the other that are not expressly authorized in writing.
 
 
 
 
 
18.3             Severability .  Except as expressly provided to the contrary herein, each Section, term and provision of this Agreement, and any portion thereof, shall be considered severable and if, for any reason, any such provision of this Agreement is held to be invalid, contrary to or in conflict with any applicable present or future law or regulation in a final, unappealable ruling issued by any court, agency or tribunal with competent jurisdiction in a proceeding to which the Licensor is a party, that ruling shall not impair the operation of, or have any other effect upon, such other portions of this Agreement as may remain otherwise intelligible, which shall continue to be given full force and effect and bind the Parties, although any portion held to be invalid shall be deemed not to be a part of this Agreement from the date the time for appeal expires, if the Licensee is a party thereto, otherwise upon the Licensee’s receipt of a notice of non-enforcement thereof from the Licensor.  If any covenant herein which restricts competitive activity is deemed unenforceable by virtue of its scope in terms of area, business activity prohibited and/or length of time, but would be enforceable by reducing any part or all thereof, the Parties agree that the same shall be enforced to the fullest extent permissible under the laws and public policies applied in the jurisdiction in which enforcement is sought.

18.4             Substitution of Provisions .  If any applicable and binding law or rule of any jurisdiction requires a greater prior notice of the termination of this Agreement than is required hereunder, or the taking of some other action not required hereunder, or if, under any applicable and binding law or rule of any jurisdiction, any provision of this Agreement is invalid or unenforceable, the prior notice and/or other action required by such law or rule shall be substituted for the comparable provisions hereof.  The Parties agree to be bound by any promise or covenant imposing the maximum duty permitted by law which is subsumed within the terms of any provision hereof, as though it were separately articulated in and made a part of this Agreement, that may result from striking from any of the provisions hereof, any portion or portions which a court may hold to be unenforceable in a final decision to which the Licensor is a party, or from reducing the scope of any promise or covenant to the extent required to comply with such a court order.  Such modifications to this Agreement shall be effective only in such jurisdiction, unless the Licensor elects to give them greater applicability, and shall be enforced as originally made and entered into in all other jurisdictions.

18.5             Waiver .  A Party may by written instrument unilaterally waive or reduce any obligation of or restriction upon the other Party under this Agreement, effective upon delivery of written notice thereof to the other or such other effective date stated in the notice of waiver.  Any waiver so granted by the waiving Party shall be without prejudice to any other rights the waiving Party may have, will be subject to continuing review by the waiving Party and may be revoked, in the waiving Party's sole discretion, at any time and for any reason, effective upon delivery to the other Party of ten (10) days' prior written notice.

18.6             Waiver by Custom or Practice .  A Party shall not be deemed to have waived or impaired any right, power or option reserved by this Agreement (including, without limitation, the right to demand exact compliance with every term, condition and covenant herein or to declare any breach thereof to be a default and to terminate this Agreement) by virtue of any custom or practice of the Parties at variance with the terms hereof.  Any failure, refusal or neglect of a Party to exercise any right under this Agreement or to insist upon exact compliance by the other with its obligations hereunder, any waiver, forbearance, delay, failure or omission by a Party to exercise any right, power or option, whether of the same, similar or different nature, or the Licensor’s acceptance of any payments due from the Licensee after any breach of this Agreement, shall not be deemed a waiver or impairment of any right, power or other option provided under this Agreement.
 
 
 
 

 
18.7             Force Majeure .  Neither Party shall be liable for loss or damage or deemed to be in breach of this Agreement if their failure to perform obligations results from:

 
(a)
compliance with any law, regulation, requirement or instruction of any federal, state, municipal or foreign government or any department or agency thereof;
 
 
(b)
acts of God; 
 
 
(c)
fires, strikes, embargoes, war or riot; or
 
 
(d)
any other similar event or cause.
 
Any delay resulting from any of said causes shall extend performance accordingly or excuse performance, in whole or in part, as may be reasonable, except that said causes shall not excuse payments of amounts owed at the time of such occurrence or payment of any license fees, interest, or administration fees.

18.8             Temporary Restraining Orders and Preliminary Injunctions .  Notwithstanding anything to the contrary in this Agreement, each Party shall have the right in a proper case to obtain temporary restraining orders and temporary or preliminary injunctive relief from a court of competent jurisdiction.

18.9             Rights Cumulative .  The rights of each Party hereunder are cumulative and no exercise or enforcement by a Party of any right or remedy hereunder shall preclude the exercise or enforcement by that Party of any other right or remedy hereunder which that Party is entitled by law to enforce.

18.10             Costs and Attorneys’ Fees .  If a claim for amounts owed by the Licensee to the Licensor or its affiliates is asserted in any judicial proceeding or appeal thereof, or if a Party enforces this Agreement in any judicial proceeding or appeal thereof, the Party prevailing in such proceeding shall be entitled to reimbursement of its reasonable costs and expenses, including reasonable accounting and legal fees, whether incurred prior to, in preparation for, or in contemplation of the filing of any written demand, claim, action, hearing or proceeding to enforce the obligations of this Agreement.  If the Licensor incurs expenses in connection with the Licensee’s failure to pay when due amounts owing to the Licensor, to submit when due any reports, information or supporting records or otherwise to comply with this Agreement, including, but not limited to legal and accounting fees, the Licensor shall be reimbursed by the Licensee for any reasonable costs and expenses that the Licensor incurs.
 
 
 
 
 
18.11             Governing Law .  Except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. §§ 1051 et seq. ) or other federal law, this Agreement, and the relationship between the Parties, shall be governed by the laws of the State of Ohio.

18.12             Jurisdiction .  The Parties hereby irrevocably consent and agree that any legal action, suit or proceeding arising out of or in any way in connection with this Agreement may be instituted or brought in the United States District Court for the Southern District of Ohio.  The Parties hereby irrevocably consent and submit to, for themselves and in respect of their property, generally and unconditionally, the jurisdiction of such Court, and to all proceedings in such Court.  Further, the Parties irrevocably consent to actual receipt of any summons and/or legal process at their respective addresses as set forth in this Agreement as constituting in every respect sufficient and effective service of process in any such legal action or proceeding.  The Parties further agree that final judgment in any such legal action, suit or proceeding shall be conclusive and may be enforced in any other jurisdiction, whether within or outside the United States of America, by suit under judgment, a certified or exemplified copy of which will be conclusive evidence of the fact and the amount of the liability.

18.13             Waiver of Punitive Damages .  The Parties waive to the fullest extent permitted by law any right to or claim for any punitive or exemplary damages against the other and agree that, in the event of a dispute between them, the Party making a claim shall be limited to recovery of any actual damages it sustains; except that, the limitations of liability arising out of, under or in connection with (a) claims for death or physical injury, or loss or damage to tangible personal or real property; (b) damages caused by either Party’s gross negligence or willful misconduct or omission of either Party or their respective employees or representatives; or (c) damages payable pursuant to a breach of Section 14 (Confidentiality) and Section 16 (Indemnification).

18.14             Headings .  The headings of the several Sections hereof are for convenience only and do not define, limit or construe the contents of such Sections.

18.15             Entire Agreement .  This Agreement represents the entire agreement between the Parties with respect to the subject matter hereof and supersede any prior agreements and negotiations between the Parties, including all oral, written or otherwise communicated statements in whatever form or from whatever source.

18.16             Counterparts .  This Agreement may be executed simultaneously in counterparts, including with PDFs or photocopies of signatures, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement, binding upon all Parties hereto, notwithstanding that all Parties are not signatories to the original or the same counterpart.

18.17             Expenses .  Each Party shall bear its own expenses (including attorneys' fees and expenses) in connection with the preparation, negotiation, execution, and delivery of this Agreement.

[Signature pages follow.]
 
 
 
 
 
IN WITNESS WHEREOF, the Parties have executed this Brand License Agreement, effective as of the Effective Date first written above.
 
LICENSOR:
 
OMS INVESTMENTS, INC.


By:                                                                 

Name:                                                                                                                             

Title:                                                                                                                              


LICENSEE:

AEROGROW INTERNATIONAL, INC.


By:                                                                 

Name:                                                                                                                             

Title:                                                                                                                              

                                                      
 
 
 


EXHIBIT A
SELECT EXISTING AEROGARDEN INDOOR GARDEN UNITS
 
 
 
 
 
EXHIBIT B
EXISTING AEROGARDEN SEED KITS


 
 
 

EXHIBIT C
LICENSED MG TRADEMARKS


MIRACLE-GRO® (and associated logos):
 
GRAPHIC   GRAPHIC
 
 
 
 
 
 
 EXHIBIT D
OTHER LICENSED TRADEMARKS

REC. NO.
SERIAL NO.
NAME OF MARK
FILING DATE (MM/DD/YYYY)
STATUS
3455606
78882877
FARMER'S MARKET FRESH
5/12/2006
Active
3525830
78836718
BIO-DOME
3/14/2006
Active
3773031
77651442
VEGGIEPRO
1/16/2009
Active
3663301
77550915
HERB 'N SAVE
8/19/2008
Active
3570754
77476610
HERB 'N ICE
5/16/2008
Active
3522253
77347195
AGS ADVANCED GROWING SYSTEM
12/7/2007
Active
3573608
773045572
CHEF IN A BOX
10/15/2007
Active
3573607
77304513
FLORIST IN A BOX
10/15/2007
Active
3528760
7730401
MOUNTAIN MEADOW
10/15/2007
Active
3592304
77303344
SPLASH OF COLOR
10/12/2007
Active
3592303
77303340
ENGLISH COTTAGE
10/12/2007
Active
3659815
7730333
RED VELVET
10/12/2007
Active
3592160
77238309
HERB IT UP
7/25/2007
Active
3568213
77185032
FLORIST IN A BOX
5/18/2007
Active
3413666
77170403
VEG-E-GARDEN
5/1/2007
Active
3392651
77132449
ULTIMATE KITCHEN GARDENER
3/15/2007
Active
3389625
77129826
WALL GARDEN
3/13/2007
Active
3389624
77129806
WALL FARM
3/13/2007
Active
3373707
77127173
CHEF IN A BOX
3/9/2007
Active
3376411
77095536
HERB 'N SERVE
1/31/2007
Active
3565083
77058534
PLUG & GROW
12/6/2006
Active
3370002
77058522
SWEET RUBIES
12/6/2006
Active
3524683
77045636
HERB APPEAL
11/16/2006
Active

EXHIBIT 10. 4
 
SUPPLY CHAIN SERVICES AGREEMENT
 
This Supply Chain Services Agreement (this “ Agreement ”), dated as of April 22, 2013 (the “ Effective Date ”), is entered into by and between The Scotts Company, LLC, an Ohio limited liability company having its principal place of business at 14111 Scottslawn Road, Marysville, Ohio 43041 (“ Scotts Company ”), and OMS Investments, Inc., a Delaware corporation having its principal place of business at 10250 Constellation Blvd., Ste. 2800, Los Angeles, CA 90067 (“ OMS ,” and together with Scotts Company, “ Scotts ”), and AeroGrow International, Inc., a Nevada corporation having its principal place of business at 6075 Longbow Dr. Suite 200, Boulder, Colorado 80301 (“ AeroGrow ”). Scotts and AeroGrow are referred to herein, together as the “Parties,” and each, a “Party.”
 
RECITALS:
 
A.           AeroGrow wishes to provide to Scotts certain supply chain management services, as further described in and in accordance with the terms and conditions of this Agreement.
 
B.           Scotts wishes to engage AeroGrow in connection with such services in accordance with the terms and conditions of this Agreement.
 
C.           Contemporaneously with the execution and delivery of this Agreement, AeroGrow and OMS are executing and delivering, among other agreements, a technology license agreement (the “ Technology License Agreement ”) and a brand license agreement (the “ Brand License Agreement ”).
 
AGREEMENT:
 
NOW , THEREFORE , in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Scotts and AeroGrow hereby agree as follows:
 
1.   Services.
 
As Scotts may request from time to time during the term of this Agreement, AeroGrow will perform for Scotts the services set forth in the Scope of Services attached hereto as Exhibit A (the “ Services ”).  Nothing in this Agreement creates any obligation for Scotts to request or purchase any minimum amount of Services.
 
2.   Compensation, Invoices and Payment.
 
(a)   Fee .  In payment of the Services performed (including any materials provided in connection therewith) pursuant to this Agreement, Scotts will pay AeroGrow an annual fee equal to seven percent of the cost of goods of all products that Scotts purchases from AeroGrow or a vendor in exploiting the Hydroponic IP outside the U.S. over the course of each Contract Year during the term of this Agreement (the " Fee ").
 
(b)   Reimbursable Expenses. Scotts will reimburse AeroGrow for any reasonable and competitively priced out-of-pocket expenses (with no mark-up) for travel, lodging and meals that are incurred by AeroGrow specifically and solely for the performance of the Services and that AeroGrow otherwise would not have incurred but for the performance of the Services (the " Reimbursable Expenses "), provided that AeroGrow complies with the Corporate Travel and Business Expense Reimbursement Policy attached hereto as Exhibit B. For purposes of clarity, Reimbursable Expenses shall not include any expense that AeroGrow incurs for or in connection with any other business purpose or AeroGrow customer.
 
 
 
 
 
(c)   Full and Complete Compensation . The Fee and any Reimbursable Expenses constitute the full and complete compensation for AeroGrow's performance of the Services and includes compensation for all services, fees, labor, fringe benefits, insurance, profit, overhead and taxes (except sales and use taxes, if any) in connection with the Services. No compensation in addition to the Fee and Reimbursable Expenses will be payable by Scotts.
 
(a)   Fee Report. Invoices and Payment . The Fee shall be payable annually for each Contract Year. No later than the April 30 th following the end of each Contract Year, and the April 30 th following expiration or termination of the Agreement for any reason, Scotts shall provide AeroGrow with a report, including (i) the cost of goods of all products that Scotts purchases from AeroGrow or a vendor in exploiting the Hydroponic IP outside the U.S. for such Contract Year, itemized according to each product and country, and (ii) all other information and calculations necessary to allow AeroGrow to verify the accuracy of the Fee calculation. Concurrently with providing each such report, Scotts shall pay AeroGrow the Fee for the recently concluded Contract Year (i.e., the Contract Year covered by such report). Within 15 days after the end of each calendar month, AeroGrow shall submit an invoice to Scotts requesting reimbursement of any Reimbursable Expenses incurred during such month. Each such invoice shall be accompanied by all required documentation necessary to support all charges. Scotts will pay all undisputed portions of properly documented invoices within 30 days after receipt. If Scotts disputes any portion of an invoice, Scotts will provide written notice to AeroGrow indicating the reason Scotts is withholding any amount, and will pay the undisputed portion of the invoice.
 
3.   Term and Termination.
 
(a)   Limited Term .  Except as may be earlier terminated pursuant to Sections 3(b)  and 3(c) , the term of this Agreement will be coterminous with the term of the Technology License Agreement (as defined in the Recitals to this Agreement) and will automatically terminate upon the termination or expiration of the Technology License Agreement.
 
(b)     Early Termination by Scotts .  Scotts may terminate this Agreement by giving written notice to AeroGrow under the following circumstances:  (i) if AeroGrow defaults in the performance of any of its material obligations under, or breaches any of its warranties or covenants set forth in, this Agreement, and such default or breach shall continue and not be remedied for a period of 30 days after Scotts has given written notice to AeroGrow specifying such default or breach and requiring it to be remedied; or (ii) if a Bankruptcy Event has occurred with respect to AeroGrow.
 
(c)   Early Termination by AeroGrow . AeroGrow may terminate this Agreement by giving written notice to Scotts under the following circumstances: (i) if Scotts defaults in the performance of any of its material obligations under, or breaches any of its warranties or covenants set forth in, this Agreement and such default or breach shall continue and not be remedied for a period of 30 days after AeroGrow has given written notice to Scotts specifying such default or breach and requiring it to be remedied; or (ii) if a Bankruptcy Event has occurred with respect to Scotts and Scotts has ceased to make payments due under this Agreement in accordance with its terms.
 
 
 
 
 
(d)   Survival .  Termination or expiration of this Agreement shall not operate to release the Parties from obligations that, by their nature or as expressly provided herein, survive the termination or expiration of this Agreement, including obligations of confidentiality, remedial obligations respecting warranties and promises of indemnity.  No termination or expiration of this Agreement shall affect (i) any rights a Party may have with respect to any Services performed prior to the effective date of termination or expiration, (ii) any pending dispute, or (iii) any rights a Party may have with respect to any breach by the other Party of any provision of this Agreement prior to termination or expiration.
 
4.   Representations and Warranties.
 
(a)   AeroGrow’s Performance Warranty .   AeroGrow warrants to Scotts that:  (i) the Services will be performed in a good and workmanlike manner; (ii) its performance of the Services and the creation and production of any deliverables in connection therewith will not violate any applicable federal, state or local laws, rules, or regulations, or orders of any governmental body or agency; and (iii) its performance of the Services and the creation and production of any deliverables in connection therewith will strictly conform to all requirements of this Agreement.
 
(a)   Anti-Bribery Laws . AeroGrow represents and warrants that: (i) neither it nor any of its employees or officers is an official, employee, or active member of the armed services of any government; an official or employee of any government, an official of a political party, or a candidate for political office; and (ii) as of the Effective Date and during the term of this Agreement, no government official, and no official of any government agency or instrumentality, is Or will become associated with, or will own or presently owns an interest, whether direct or indirect, in AeroGrow or has or will have any legal or beneficial interest in this Agreement. AeroGrow further agrees to promptly inform Scotts of any change in such status or representation. In addition, AeroGrow warrants that, in connection with its performance under this Agreement, it has not and will not make or authorize any payments or gifts of any kind or any offers or promises of payments or gifts of any kind, directly or indirectly, to any political party, official of a political party or government (or any agency or instrumentality thereof), or candidate for governmental or political party office, for the purpose of influencing any act or decision of such party or official or to induce such party or official to use its/his/her influence with a government or any instrumentality thereof. AeroGrow further agrees that it will not make or authorize any payments or gifts of any kind or any offers or promises of payments or gifts of any kind to any person or entity, if AeroGrow knows or has reason to know that all or any portion of such payment or gift will be offered or given directly or indirectly to any political party, official of a political party or government (or any agency or instrumentality thereof), or candidate for governmental or political party office, for the purpose of influencing or inducing any such party or official to use its/his/her influence with a government or any instrumentality thereof. AeroGrow warrants that it has not and will not pay, offer or tender, directly or indirectly, any political contributions or donations, or any commission or finder's or referral fee to any person or firm in connection with its activities under this Agreement. AeroGrow is in compliance with and will continue to comply in all respects with the U.S. Foreign Corrupt Practices Act and similar laws with effect outside of the U.S. and all other applicable anti-bribery laws. AeroGrow hereby acknowledges receipt of a copy of Scotts' Foreign Corrupt Practices Act Policy and by execution of this Agreement, AeroGrow warrants and certifies that AeroGrow will do nothing in the performance of its obligations under this Agreement that will be in conflict with Scotts' FCPA Policy.
 
 
 
 
 
(b)   General Warranties .  Each Party represents and warrants to the other Party that (i) it has all necessary corporate right, power and authority to execute, deliver and fully perform this Agreement; (ii) this Agreement has been duly executed and delivered by an authorized officer of such Party, and is or will be upon its execution and delivery, as applicable, a legal, valid and binding obligation of such Party enforceable against it in accordance with its terms; and (iii) such Party’s execution, delivery and performance of this Agreement shall not constitute a breach or default under any contract or agreement to which such Party is a party or by which it is bound or otherwise violate the rights of any third party under any such contract or agreement.
 
(c)   Disclaimer of Other Warranties .   EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING TO THIS AGREEMENT OR THE SERVICES PROVIDED HEREUNDER
 
5.   Records and Audits.
 
(a)   Records .  AeroGrow shall maintain complete, accurate and detailed records, books of account, reports and other information necessary for the proper administration of this Agreement.  If requested by Scotts, AeroGrow shall provide Scotts with periodic reports containing such information.  AeroGrow shall retain all records required by this Section 5(a) for [one] year after final payment by Scotts, or longer if required by governmental authorities with jurisdiction over AeroGrow.
 
(b)   Audits .  Scotts or its designee has the right (but not the obligation) to audit and inspect AeroGrow’s records with respect to invoices and AeroGrow’s compliance with the provisions of this Agreement.  Scotts will give AeroGrow reasonable prior notice of its audit or inspection.  If an audit or inspection reveals an error in the amounts paid hereunder, then an appropriate adjustment must be made within 30 days by either Scotts or AeroGrow, as applicable.  The rights in this Section 5(b) extend during the term of this Agreement and for one year after final payment by Scotts.  Scotts and AeroGrow will each pay their own expenses incurred in conducting and supporting the audit and inspection.
 
6.   Ownership .
 
This Agreement and the performance of this Agreement will not affect the ownership of any copyrights or other intellectual property rights addressed in the other Transaction Agreements.  AeroGrow will not gain, by virtue of this Agreement, any rights of ownership of copyrights, patents, trade secrets, trademarks or any other intellectual property rights owned by Scotts.  AeroGrow acknowledges and agrees that Scotts shall retain exclusive ownership of all Scotts’ data and other intellectual property provided to AeroGrow in connection with this Agreement.  AeroGrow shall not use or disclose Scott’s data for any purpose other than the performance of this Agreement in accordance with its provisions.  If Scotts requests, AeroGrow shall return the data to Scotts, together with any copies that AeroGrow may have made.  Scotts will own all data generated by or for Scotts in the course of AeroGrow’s performance of the Services and shall at all times have a right to access and be provided with copies of that data.
 
 
 
 
 
7.   Confidentiality.
 
(a)   Confidentiality .  “ Confidential Information ” of a Party means any and all information of such Party that is disclosed to the other Party under this Agreement and the terms and existence of this Agreement.  Each Party agrees that, during the term of this Agreement and for a period of six months thereafter, it shall keep confidential and shall not publish or otherwise disclose and shall not use for any purpose other than as provided for in this Agreement (which includes the exercise of any rights or the performance of any obligations hereunder) any Confidential Information furnished to it by the other Party pursuant to this Agreement, except to the extent expressly authorized by this Agreement or otherwise agreed in writing by the Parties.  The foregoing confidentiality and non-use obligations shall not apply to any portion of the other Party’s Confidential Information that the receiving Party can demonstrate by competent written proof: (i) was already known to the receiving Party or its Affiliate, other than under an obligation of confidentiality, at the time of disclosure by the other Party; (ii) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (iii) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (iv) was disclosed to the receiving Party or its Affiliate on a non-confidential basis by a third party who has a legal right to make such disclosure and who did not obtain such information directly or indirectly from the other Party; or (v) was independently discovered or developed by the receiving Party or its Affiliate without access to or aid, application or use of the other Party’s Confidential Information, as evidenced by a contemporaneous writing.
 
(b)   Authorized Disclosure .  Notwithstanding the obligations set forth in Section 7(a), a Party may disclose the other Party’s Confidential Information [and the terms and existence of this Agreement] to the extent:  (i) such disclosure is reasonably necessary for prosecuting or defending litigation as contemplated by this Agreement; (ii) such disclosure is reasonably necessary to its employees, agents, consultants, contractors, licensees or sublicensees on a need-to-know basis for the sole purpose of performing its obligations or exercising its rights under this Agreement; provided that in each case, the disclosees are bound by written obligations of confidentiality and non-use consistent with those contained in this Agreement; (iii) such disclosure is reasonably necessary to any bona fide potential or actual investor, acquiror, merger partner, licensee, sublicensee, or other financial or commercial partner for the sole purpose of evaluating an actual or potential investment, acquisition or other business relationship; provided that in connection with such disclosure, such Party shall use all reasonable efforts to inform each disclosee of the confidential nature of such Confidential Information and, in each case, the disclosees are bound by written obligations of confidentiality and non-use consistent with those contained in this Agreement; or (iv) such disclosure is reasonably necessary to comply with applicable laws, including regulations promulgated by applicable security exchanges, court order, administrative subpoena or order.  Notwithstanding the foregoing, in the event a Party is required to make a disclosure of the other Party’s Confidential Information pursuant to Section clause (iv) of this Section 7(b), such Party shall promptly notify the other Party of such required disclosure and shall use reasonable efforts to obtain, or to assist the other Party in obtaining, a protective order preventing or limiting the required disclosure.
 
 
 
 
 
8.   Indemnity.
 
(a)   Indemnification by AeroGrow .  AeroGrow agrees to indemnify, hold harmless and defend Scotts, its Affiliates and their respective officers, directors, agents and employees (collectively, the “ Scotts Indemnified Parties ”) from and against any and all claims, allegations, suits, actions, proceedings, liabilities, losses, damages, costs, expenses and fees, including reasonable attorneys’ fees, to the extent arising out of or relating to (i) the breach of any of AeroGrow’s covenants, representations or warranties under this Agreement, or (ii) the gross negligence, intentional misconduct or other wrongful acts or omissions of AeroGrow, its Affiliates or their respective officers, directors, agents, contractors or employees, in the performance of this Agreement.
 
(b)   Indemnification by Scotts . Scotts agrees to indemnify, hold harmless and defend AeroGrow, its Affiliates and their respective officers, directors, agents and employees (collectively, the " AeroGrow Indemnified Parties ") from and against any and all claims, allegations, suits, actions, proceedings, liabilities, losses, damages, costs, expenses and fees, including reasonable attorneys' fees, to the extent arising out of or relating to the breach of any of Scotts' covenants, representations or warranties under this Agreement.
 
(c)   Procedure .  If a Scotts Indemnified Party or an AeroGrow Indemnified (as applicable, the “Indemnified Party”) is seeking indemnification under Section 8(a) or 8(b), the Indemnified Party shall inform AeroGrow or Scotts, as applicable, of the claim giving rise to the obligation to indemnify pursuant to such Section as soon as reasonably practicable after receiving notice of the claim ( provided , however , that any delay or failure to provide such notice shall not constitute a waiver or release of, or otherwise limit, the Indemnified Party’s rights to indemnification under Section 8(a) or 8(b), as applicable, except to the extent that such delay or failure materially prejudices the indemnifying party’s ability to defend against the relevant claims).  The indemnifying party shall have the right to assume the defense of any such claim for which it is obligated to indemnify the Indemnified Party.  The Indemnified Party shall cooperate with the indemnifying party and its insurer as the indemnifying party may reasonably request, and at the indemnifying party's cost and expense. The Indemnified Party shall have the right to participate, at its own expense and with counsel of its choice, in the defense of any claim or suit that has been assumed by the indemnifying party. The indemnifying party shall not settle any claim without the prior written consent of the Indemnified Party, not to be unreasonably withheld or delayed. If the Parties cannot agree as to the application of Section 8(a) or 8(b), as applicable, to any claim, the Parties may conduct separate defenses of such claims, with the Indemnified Party retaining the right to claim indemnification from the indemnifying party in accordance with Section 8(a) or 8(b), as applicable, upon resolution of the underlying claim.
 
 
 
 
 
9.   Insurance.
 
AeroGrow agrees to obtain and maintain, at its own cost and expense, Commercial General Liability Insurance (including Excess/Umbrella Insurance) in an amount not less than five million dollars ($5,000,000) covering bodily injury, property damage, products – completed operations and personal injury, including death resulting therefrom and Automobile Liability in an amount not less than one million dollars ($1,000,000) covering bodily injury and property damage.  This required insurance shall be written by companies licensed to do business in the state in which the Services will be provided and shall have a Best’s Key rating of no less than A-VII.  Such policy shall name Scotts as Additional Insured including providing defense costs and be primary with respect to any insurance or self-insurance programs maintained by Scotts.  The policy must be endorsed to reflect that the Additional Insured will be provided no less than 30 days’ advance written notice of cancellation or material change in the policy required to be carried as part of this Agreement.  AeroGrow shall deliver to Scotts a certificate of insurance that specifies the required coverage immediately following execution of this Agreement by both Parties.  AeroGrow also shall obtain and maintain at its own cost and expense, any and all statutorily required insurance, including, but not limited to Workers’ Compensation insurance with statutory limits, and Employer’s Liability insurance.  The Commercial General Liability, Automobile Liability and Workers Compensation/Employer’s Liability policy will include a Waiver of Subrogation in favor of Scotts.  The limits required to be evidenced do not limit the liability of AeroGrow in any claim or suit.
 
10.   Independent Contractor.
 
AeroGrow is an independent contractor of Scotts, and this Agreement will not be construed to create an association, partnership, joint venture or relation of principal and agent or employer and employee between the Parties or between one Party and any of the other Party’s employees or agents within the meaning of any federal, state or local law.  Nothing in this Agreement authorizes either Party to act as agent for the other Party or to bind or enter into contracts on behalf of the other Party.
 
11.   Publicity and Use of Names.
 
Neither Party may advertise or otherwise publicize the existence or terms of this Agreement or any other aspect of their relationship, without the other Party’s prior written approval.  Nor may either Party use the other Party’s (including Affiliates) name, trade name, trademark or service mark in press releases or in any form of advertising without the other Party’s prior written approval.  If a third party, including the media, contacts AeroGrow concerning Scotts, its Affiliates or this Agreement, AeroGrow must make no comment.  Instead, AeroGrow shall refer the third party to Scotts and promptly notify Scotts of the contact.
 
12.   Miscellaneous.
 
(a)   Governing Law .  This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, as applied to contracts entered into and to be performed in Ohio.
 
 
 
 
 
(b)   Non-Solicitation .  Both Parties agree that they will not knowingly or intentionally solicit or hire any employee or personnel of the other Party upon whom the other Party substantially depends, in whole or in part, for performance of its obligations under this Agreement without first giving the non-soliciting Party written notice of its intent to do so, and a reasonable time within which to secure a replacement.  This restriction shall not apply to persons answering advertisements for positions in generally circulated newspapers or other media.
 
(c)   Severability .  Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision hereof shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.
 
(d)   Amendment and Assignment .  This Agreement may not be modified, amended or assigned except in a writing signed by both Parties.  If an assignment occurs, the assignment will not relieve the assigning Party of its liabilities or obligations under this Agreement.  This Agreement shall inure to the benefit of each Party and to each Party’s successors and permitted assignees.
 
(e)   Waiver .  A waiver by either Party of any term or condition of this Agreement in one or more instances will not constitute a permanent waiver of the term or condition or any other term or condition of this Agreement or a general waiver.  If either Party fails to require the other Party to perform any term of this Agreement, that failure does not prevent the Party from later enforcing that term.
 
(f)   Non-Exclusive Relationship .  The relationship between the Parties is non-exclusive and the Services shall be performed without any minimum commitments as to the volume, scope or value of such Services.
 
(g)   Headings .  The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
 
(h)   Notices .  All notices, consents, and other communications required or permitted under this Agreement shall be in writing and sent first class mail, postage prepaid, or transmitted by facsimile transmission confirmed by mail to the address specified below, or such other address as either Party may indicate by notice to the other Party
 
If to Scotts Company:

The Scotts Company, LLC
14111 Scottslawn Road
Marysville, Ohio  43041
Attention: General Counsel
Fax: 937-578-5078
 
 
 
 
 
If to OMS:

OMS Investments, Inc.
10250 Constellation Blvd., Ste. 2800
Los Angeles, CA 90067
Attention: Luis A. Rodriguez
Fax: (310) 300-3051

In the case of notices to Scotts Company or OMS, copies to (which shall not constitute notice):

Hunton & Williams, LLP
2200 Pennsylvania Avenue, N.W.
Washington, D.C. 20036
Attention: J. Steven Patterson
Facsimile: (202) 778-2201

If to AeroGrow:

AeroGrow International, Inc.
6075 Longbow Dr. Suite 200,
Boulder, Colorado 80301
Attention: President and CEO
Fax: (303) 444-0406

In the case of notices to AeroGrow, copies to (which shall not constitute notice):

Hutchinson Black and Cook, LLC
921 Walnut Street, Suite 200
Boulder, CO 80302
Attention: James L. Carpenter, Jr.
Facsimile: (303) 442-6593

(i)   Entire Agreement .  This Agreement, together with the Transaction Agreements, sets forth the entire agreement between the Parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous agreements or understandings respecting such subject matter.
 
(j)   Certain Definitions .  For purposes of this Agreement, the following terms (as capitalized below) will have the following meanings when used herein
 
(i)   “ Affiliate ” means, with respect to a particular Party, a person, corporation, partnership, or other entity that controls, is controlled by or is under common control with such Party.  For the purposes of this definition, the word “control” (including, with correlative meaning, the terms “controlled by” or “under common control with”) shall mean the actual power, either directly or indirectly through one or more intermediaries, to direct or cause the direction of the management and policies of such entity, whether by the ownership of fifty percent (50%) or more of the voting stock of such entity, or by contract or otherwise.
 
 
 
 
 
(ii)   “ Bankruptcy Event ” with respect to a Party shall mean any corporate action, legal proceedings or other procedure or step is taken in relation to: (i) the suspension of payments, a moratorium of any indebtedness, winding-up, dissolution, administration or reorganization of such Party; (ii) a composition, compromise, assignment or arrangement with any creditor of such Party; (iii) the appointment of a liquidator, trustee in bankruptcy, special administrator or other similar officer in respect of such Party or any of its assets; (iv) the commencement of a case or proceeding, whether voluntary or involuntary, under any applicable bankruptcy or insolvency law; (v) enforcement of any liens over any assets of such Party having an aggregate value in excess of $50,000 (or its equivalent in any other currency or currencies), or (vi) any analogous procedure or step is taken in any jurisdiction, and, in each case, such action is not dismissed, removed or otherwise cured within thirty (30) days.
 
(iii)   “ Contract Year ” means each 12-month period that commences on the Effective Date and each anniversary thereafter.
 
(iv)   " Hydroponic IP”   has the meaning set forth in the Technology License Agreement.
 
(v)   “ Transaction Agreements ” means this Agreement, the Securities Purchase Agreement, dated as of April 22, 2013, between Scotts and AeroGrow (the “ Securities Purchase Agreement ”), the Warrant, the Investor’s Rights Agreement, the Brand License Agreement, the Intellectual Property Purchase Agreement, the Technology License Agreement, the Indemnification Agreement and the Voting Agreement (as such terms are defined in the Securities Purchase Agreement).
 
[Remainder of page intentionally left blank.  Signatures follow on next page.]
 
 
 
 
 
 
 
IN WITNESS WHEREOF, the Parties have executed this Supply Chain Services Agreement as of the Effective Date.
 
AEROGROW INTERNATIONAL, INC.


By:                                                                        
Name:                                                                   
Title:                                                                     

THE SCOTTS COMPANY, LLC

By:                                                                        
Name:                                                                   
Title:                                                                     
 
 
OMS INVESTMENTS, INC.

By:                                                                        
Name:                                                                   
Title:                                                                     

 
 
 

EXHIBIT A
 
SCOPE OF SERVICES
 
Upon request, AeroGrow will assist Scotts with vendor selection, vendor management and logistics management to get products that Scotts requests delivered to the locations that Scotts requests in exploiting the Hydroponic IP outside the U.S. AeroGrow shall have no payment or other obligations to such vendors in connection with such products.
 
 
 
 
 
 
EXHIBIT B
 
CORPORATE TRAVEL AND BUSINESS EXPENSE REIMBURSEMENT POLICY
 

EXHIBIT 10. 7
 
 
February 13, 2015
 
AMENDMENT NO.1 TO TERM LOAN AND SECURITY AGREEMENT

 
THIS AMENDMENT NO.1 TO TERM LOAN AND SECURITY AGREEMENT (this " Amendment ") is made as of February 13, 2015 (the " Effective Date' ') between AeroGrow International, Inc., a Nevada corporation (the " Borrower "), and SMG Growing Media, Inc., an Ohio corporation (the " Lender ''). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings given to them in the Loan Agreement (defined below).

WHEREAS, the Borrower and the Lender are parties to that certain Term Loan and Security Agreement dated as of July 10, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the " Loan Agreement ");
 
WHEREAS, the Borrower has requested that the Lender agree to amend the Loan Agreement to extend the Maturity Date to April 15,2015, and the Lender has agreed to such extension subject to implementation of the default rate of interest; and
 
WHEREAS, the Borrower and the Lender have agreed to amend the Loan Agreement on the terms and conditions set forth herein.
 
NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby agree to enter into this Amendment.
 
1.               Amendments to the Loan Agreement . Effective as of the date of satisfaction of  the conditions precedent set forth in Section 2 below, the parties hereto agree that the Loan Agreement is hereby amended as follows:
 
(a)              The definition of " Maturity Date " is hereby amended and restated in its entirety as follows:
 
" Maturity Date " means April 15, 2015.
 
(b)              The first sentence of Section 4(a) of the Loan Agreement is hereby amended and restated as follows:
 
"The unpaid principal balance of the Term Loan shall bear interest at a rate equal to (i) 10% per annum (the " Interest Rate ") until February 15, 2015 and (ii) 20% per annum from February 16, 2015 through and including the Interest Payment Trigger Date (reflecting implementation of the default rate of interest under Section 4{b) below)."
 
2.               Conditions of Effectiveness . The effectiveness of this Amendment is subject to the conditions precedent that the Lender shall have received (i) counterparts of this Amendment duly executed by the Borrower and the Lender and (ii) payment and/or reimbursement of the Lender's reasonable out-of-pocket fees and expenses (to the extent invoiced) in connection with this Amendment.
 
3.               Representations and Warranties of the Borrower . The Borrower hereby represents and warrants as follows:
 
 
 
 
 
(a)              This Amendment and the Loan Agreement (as modified hereby), as applicable, each constitute legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms, except as such enforceability (i) may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting the enforcement of creditors' rights and remedies generally and (ii) is subject to general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).
 
(b)              As of the date hereof and after giving effect to the terms of this Amendment, (i) no Default or Event of Default has occurred and is continuing and (ii) the representations and warranties of the Borrower set forth in the Loan Agreement, as amended hereby, are true and correct in all material respects, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date.
 
4.     Reference to and Effect on the Loan Agreement .
 
(a)              Upon the effectiveness hereof, each reference to the Loan Agreement in the Loan Agreement or any other Loan Document shall mean and be a reference to the Loan Agreement as amended hereby.
 
(b)              Each Loan Document and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed.
 
(c)              Except with respect to the subject matter hereof, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Lender, nor constitute a waiver of any provision of the Loan Agreement, the Loan Documents or any other documents, instruments and agreements executed and/or delivered in connection therewith.
 
5.               GOVERNING LAW . THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF OHIO.
 
6.               Headings . Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.
 
7.               Counterparts . This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Amendment by facsimile or other electronic imaging shall be effective as delivery of a manually executed counterpart of this Amendment.
 
[Signature Pages Follow]
 
 
 
 

 

 
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the Effective Date.
 
AEROGROW INTERNATIONAL, INC.,
as the borrower
 
By:                                                                    
 
Name:
 
Title:
 

 
SMG GROWING MEDIA, INC.,
as the lender
 
By:                                                                    
 
Name:
 
Title:

 

 

 

 

 

 

 

 

 


Signature Page to Amendment No. 1 to
Term Loan and Security Agreement dated as of July 10, 2014
AeroGrow International, Inc.
 
EXHIBIT 31. 1
CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, J. Michael Wolfe certify that:

1.             I have reviewed this report on Form 10-Q for the period ended December 31, 2014 of AeroGrow International, Inc.;

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:  February 17, 2015
By:
/s/ J. Michael Wolfe  
    J. Michael Wolfe  
    President and Chief Executive Officer  
    (Principal Executive Officer)  
 
EXHIBIT 31.2
CERTIFICATIONS OF THE CHIEF FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, Grey H. Gibbs, certify that:

1.            I have reviewed this report on Form 10-Q for the period ended December 31, 2014 of AeroGrow International, Inc.;

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:  February 17, 2015
By:
/s/ Grey H. Gibbs   
    Grey H. Gibbs  
    Vice President Finance and Accounting
(Principal Accounting Officer)
 
       

 

 
EXHIBIT 32.1
 
CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER
UNDER SECTION 906 OF THE SARBANES-OXLEY ACT


In connection with the Quarterly Report of AeroGrow International, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2014 (the “Report”), as filed with the Securities and Exchange Commission, I, J. Michael Wolfe, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

       
Date:  February 17, 2015
By:
/s/ J. Michael Wolfe
 
 
J. Michael Wolfe
 
 
President and Chief Executive Officer
(Principal Executive Officer)

EXHIBIT 32.2
 
CERTIFICATIONS OF THE CHIEF FINANCIAL OFFICER
UNDER SECTION 906 OF THE SARBANES-OXLEY ACT
 
 
            In connection with the Quarterly Report of AeroGrow International, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2014 (the “Report”), as filed with the Securities and Exchange Commission, I, Grey H. Gibbs, Vice President Accounting of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
 (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by this Report.
 
       
Date:  February 17, 2015
By:
 /s/Grey H. Gibbs
 
 
Grey H. Gibbs
 
 
Vice President Finance and Accounting
(Principal Accounting Officer)