AeroGrow International, Inc. (Form: 8-K, Received: 09/26/2017 06:04:54)

Exhibit 10.1

TERM LOAN AND SECURITY AGREEMENT

THIS TERM LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of September 13, 2017, is made by and among AEROGROW INTERNATIONAL, INC. , a Nevada corporation (the “ Borrower ”), and THE SCOTTS COMPANY LLC , an Ohio limited liability company (the, “ Lender ”).

RECITALS

WHEREAS, the Borrower has sought financing from unaffiliated third-parties and has been unable to obtain such financing;

WHEREAS, although the Lender is an affiliate of the Borrower, the Borrower has requested that the Lender make a term loan to the Borrower in multiple advances not to exceed $2,000,000 in the aggregate (the “ Term Loan ”) to be used to fund operations related to the Borrower’s existing lines of business; and

WHEREAS, although the Lender is an affiliate of Borrower, because of the Borrower’s financial needs and inability to obtain financing from unaffiliated third-parties, the Lender is willing to extend the Term Loan on the terms and subject to the conditions set forth herein.

NOW THEREFORE, in consideration of the mutual promises set forth herein and for other valuable consideration, the parties agree as follows:

1. Defined Terms . Capitalized terms used herein shall have the meanings set forth below. Unless otherwise defined herein, terms used herein that are defined in Article 9 of the Uniform Commercial Code, from time to time in effect in the State of Ohio (the “ UCC ”), shall have the meanings given in the UCC.

“ Borrowing Date ” shall have the meaning set forth in Section 2(a) of this Agreement.

“ Borrowing Notice ” shall have the meaning set forth in Section 2(b) of this Agreement.

“ Business Day ” means any day other than a Saturday or Sunday or a day when commercial banks are required or permitted by law to close in New York, New York or Columbus, Ohio.

“ Business Plan ” means the 2017-2018 business plan of the Borrower approved by its Board of Directors in May 2017.

“ Closing Date ” means September 1, 2017.

“ Collateral ” means all of the Borrower’s right, title and interest in the following property, whether now owned or hereafter acquired by the Borrower, and wherever located: (i) all Inventory of the Borrower, (ii) all Receivables of the Borrower and (ii) all products and Proceeds of the foregoing, including without limitation all distributions, dividends, cash, rights, instruments and other property and proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing.

“ Default ” means any Event of Default or any condition, occurrence or event which, after notice or lapse of time or both, would constitute an Event of Default.

“ Designated Funding Account ” means account #2032347 at First Western Trust Bank (or such other account designated by the Borrower to the Lender in writing) into which the Term Loan will be funded on each Borrowing Date.

“ Event of Default ” shall have the meaning set forth in Section 13 of this Agreement.

“ GAAP ” means generally accepted accounting principles in the United States.

“ Interest Rate ” shall have the meaning set forth in Section 4 of this Agreement.

“ Lien ” means any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any title retention agreement or financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Uniform Commercial Code or comparable law of any jurisdiction).

“ Loan Documents ” means this Agreement and all other agreements, instruments, documents and certificates executed and delivered to, or in favor of, the Lender and including all other powers of attorney, consents, assignments and contracts whether heretofore, now or hereafter executed by or on behalf of the Borrower and delivered to the Lender in connection with this Agreement or the transactions contemplated thereby. Any reference in this Agreement or any other Loan Document to a Loan Document shall include all appendices, exhibits or schedules thereto, and all amendments, restatements, supplements or other modifications thereto, and shall refer to such Loan Document as the same may be in effect at any and all times such reference becomes operative.

“ Material Adverse Effect ” means (i) a material adverse effect on the business, operations, results of operations, assets, liabilities or financial condition of the Borrower, (ii) the material impairment of the ability of the Borrower to perform its material obligations under the Loan Documents or (iii) a material adverse effect on the rights and remedies of the Lender under the Loan Documents.

“ Maturity Date ” means March 30, 2018.

“ Maximum Amount ” shall have the meaning set forth in Section 2(a) of this Agreement.

“ Period ” shall have the meaning set forth in Section 11(e)(i) of this Agreement.

“ Person ” means and includes any natural person, corporation, limited partnership, general partnership, limited liability company, joint venture, joint stock company, association, company, trust, bank, trust company, land trust, insurance trust or other organization, whether or not legal entities, and governments and agencies and political subdivisions thereof.

“ Receivable ” means any Account and any other right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance.

“ Responsible Officer ” means the Chief Executive Officer or the Vice President – Accounting and Finance of the Borrower.

“ Secured Obligations ” shall have the meaning set forth in Section 7 of this Agreement.

“ Term Loan ” shall have the meaning set forth in the Recitals of this Agreement.

2. Term Loan .

(a) Upon the terms and subject to the conditions of this Agreement, the Lender shall make the Term Loan to the Borrower in one or more term loan advances (each, a “ Term Loan Advance ”) from time to time from the date hereof until the Maturity Date, each in an amount which, when added to the sum of the principal amount of all Term Loan Advances then outstanding will not exceed $2,000,000 (the “ Maximum Amount ”). Each Term Loan Advance shall be in an amount that is an integral multiple of $500,000 and not less than $500,000. The Lender may endorse and attach a schedule to reflect borrowings evidenced by this Agreement and all payments and prepayments thereon; provided , that any failure to endorse such information shall not affect the obligation of the Borrower to pay amounts evidenced hereby.

(b) The Borrower shall give the Lender prior written notice substantially in the form of Exhibit A attached hereto (a “ Borrowing Notice ”), of each request for a Term Loan Advance. Such notice must be received by the Lender not later than 12:00 p.m. Central Time five Business Days preceding the day on which the Term Loan Advance is requested to be made. Each Borrowing Notice shall be signed by a Responsible Officer of the Borrower and certify that (i) the representations and warranties contained in this Agreement are correct in all material respects on and as of such date, before and after giving effect to the proposed Term Loan Advance as though made on and as of such date, (ii) the proceeds of the Term Loan Advance will be used solely for the purposes described in Section 3 below and (iii) all other conditions to the making of a Term Loan Advance set forth in Section 9 , as applicable, below have been satisfied. On the Borrowing Date, the Lender shall make the requested Term Loan Advance by payment of immediately available funds to the Designated Funding Account.

3. Use of Proceeds . The proceeds of the Term Loan made by the Lender to the Borrower hereunder shall be used solely to fund operations related to the Borrower’s existing lines of business.

4. Interest Rate and Interest Payments .

(a) The unpaid principal balance of the Term Loan Advances outstanding from time to time shall bear interest at a simple rate of interest equal to 10.0% per annum (the “ Interest Rate ”). Interest on all Term Loan Advances outstanding under this Agreement shall be computed on the basis of a year of 360 days and paid quarterly in arrears on each of September 29, 2017, December 30, 2017 and March 30, 2018.

(b) After the occurrence and during the continuation of an Event of Default, interest shall accrue on all amounts due hereunder at the lesser of (i) a rate of 10% per annum above the Interest Rate and (ii) the maximum rate permitted by applicable law.

5. Maturity Date and Optional Prepayments .

(a) The Borrower shall repay the entire outstanding principal amount of the Term Loan plus all unpaid accrued interest thereon in cash on or before the Maturity Date.

(b) The Term Loan may be prepaid from time to time, in whole or in part, in an amount greater than or equal to $250,000, without penalty or premium, which prepayments shall be applied in accordance with Section 6 of this Agreement. Amounts repaid or prepaid in respect of the Term Loan may not be reborrowed.

(c) All payments under this Agreement shall be made in lawful money of the United States of America and in immediately available funds to the Lender. Whenever any payments to be made hereunder (including principal and interest) shall be stated to be due on a day on which Lender’s office is not open for business, that payment will be due on the next following Business Day, and any extension of time shall in each case be included in the computation of interest payable on this Agreement.

6. Application of Cash Payments . Payments made by the Borrower pursuant to the terms of this Agreement shall be applied as follows: first , to any unpaid accrued collection costs and expenses incurred pursuant to Section 18 of this Agreement or any other provision of any Loan Document; second , to any unpaid accrued interest on the Term Loan; and third , to the principal balance of the Term Loan in the inverse order of maturity.

7. Security Agreement .

(a) The Borrower hereby grants to the Lender a continuing, first-priority lien on and security interest in the Collateral, to secure the payment in full of the Term Loan and all other obligations of Borrower under this Agreement and any other Loan Document, including any extensions, modifications or renewals hereof (the “ Secured Obligations ”). In addition to any remedies specified herein, the Lender shall have all of the rights and remedies of a secured party under the UCC upon an Event of Default.

(b) The Borrower shall execute, deliver and file, or cause to be executed, delivered and filed, all documents, instruments and notices, in form and substance reasonably satisfactory to the Lender, that are necessary, in the opinion of the Lender, to perfect, maintain, and receive the full benefit of the Lender’s security interest in the Collateral, at such time or times as the Lender shall reasonably request, including, without limitation, filing of all financing statements and continuation statements, providing all notices and placing and maintaining signs. The Borrower hereby authorizes the Lender to file financing statements (and all amendments thereto and continuations thereof) on its behalf.

(c) All Collateral consisting of Inventory (whether now owned or hereafter acquired) is (or will be) located at the locations specified on Schedule 7 . The Collateral is of good and merchantable quality, free from any material defects. None of the Inventory is subject to any licensing, patent, trademark, trade name or copyright with any Person that restricts the Borrower’s ability to manufacture and/or sell such Inventory. The completion of the manufacturing process of such Inventory by a Person other than the Borrower would be permitted under any contract to which the Borrower is a party or to which the Inventory is subject.

(d) The Borrower shall maintain full, accurate and complete records of its Inventory describing the kind, type and quantity of such Inventory, withdrawals therefrom and additions thereto.

(e) In its sole discretion, the Lender may take, or at the request of the Lender, the Borrower will take, a physical verification of the Collateral as often as reasonably desired by the Lender and, in the case of the Borrower conducting the physical verification, a copy of such physical verification shall be promptly thereafter submitted to the Lender. If so requested by the Lender, the Borrower shall execute and deliver to the Lender a confirmatory written instrument, in form and substance satisfactory to the Lender, listing all its Inventory, but any failure to execute or deliver the same shall not limit or otherwise affect the Lender’s security interest in and to such Inventory. The Borrower shall deliver to the Lender a monthly report of its Inventory, based upon its perpetual inventory, which shall describe such Inventory by category, item (in reasonable detail) and location and report the then appraised value of such Inventory and its location.

(f) Upon the indefeasible payment in full of all Secured Obligations (other than contingent indemnification obligations) owing to the Lender under this Agreement or the other Loan Documents, the Lender will at the Borrower’s sole cost and expense, and without representation, warranty or recourse, express, statutory or implied, promptly deliver to the Borrower for filing, or authorize the Borrower to prepare and file, termination statements and releases of the Collateral.

8. Conditions to Closing . This Agreement and the obligations of the Lender under this Agreement shall be subject to the prior or concurrent satisfaction of the conditions precedent set forth below:

(a) the Borrower shall have duly executed and delivered to the Lender this Agreement and any other Loan Documents to which it is a party;

(b) the Borrower shall have delivered UCC financing statements and any notices or other documents or instruments in form satisfactory to the Lender necessary to evidence and perfect the security interest in the Collateral granted to the Lender hereunder;

(c) UCC and other Lien searches showing no existing security interests in or Liens on the Collateral, together with such payoff documentation reasonably acceptable to Lender as may be necessary to release any Liens on the Collateral;

(d) the Borrower shall have paid all reasonable out-of-pocket costs and expenses of the Lender that have been invoiced relating to this Agreement;

(e) each representation or warranty by the Borrower contained herein or in any other Loan Document shall be true and correct on and as of the Closing Date;

(f) no Default or Event of Default (i) shall have occurred and be continuing, or (ii) could reasonably be expected or anticipated to result from the Term Loan;

(g) the making of the Term Loan shall not violate any requirement of applicable law in any material respect and shall not be subject to any injunction or stay;

(h) upon the filing of any financing statements, the Liens in favor of the Lender shall have been duly perfected and shall constitute first priority Liens, and the Collateral shall be free and clear of all Liens other than Liens in favor of the Lender;

(i) the parties shall have executed an insurance services agreement; and

(j) the Borrower shall have delivered corporate resolutions, incumbency certificates, certified organizational documents, good standing certificates and similar documents, in form and substance reasonably satisfactory to the Lender.

The request and acceptance by the Borrower of the proceeds of the Term Loan shall be deemed to constitute, as of the date of such request or acceptance, a representation and warranty by the Borrower that the conditions in this Section 8 have been satisfied.

9. Conditions to All Term Loan Advances .

The Lender shall not be obligated to make any Term Loan Advance unless each of the conditions precedent set forth below have been satisfied:

(a) the Lender shall have received, in each case in form and substance reasonably satisfactory to the Lender, evidence of casualty and liability insurance covering the Borrower (with appropriate endorsements naming the Lender as lender’s loss payee on all policies for casualty insurance and as additional insured on all policies for liability insurance);

(b) the representations and warranties contained in this Agreement are correct in all material respects on and as of such date, before and after giving effect to the proposed Term Loan Advance as though made on and as of such date;

(c) no Default or Event of Default (i) shall have occurred and be continuing, or (ii) could reasonably be expected or anticipated to result from such Term Loan Advance;

(d) the making of such Term Loan Advance shall not violate any requirement of applicable law in any material respect and shall not be subject to any injunction or stay; and

(e) after giving effect to any Term Loan Advance, the aggregate outstanding principal amount of all Term Loan Advances shall not exceed the Maximum Amount.

The request and acceptance by the Borrower of the proceeds of any Term Loan Advance shall be deemed to constitute, as of the date of such request or acceptance, (i) a representation and warranty by the Borrower that the conditions in Section 9 have been satisfied and (ii) a reaffirmation by the Borrower of the Borrower’s obligations set forth herein and in the other Loan Documents.

10. Representations and Warranties . The Borrower represents and warrants to the Lender on the date hereof that:

(a) The Borrower (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, (ii) has full corporate power and authority to own, lease and operate its properties and assets and to carry on its business as presently conducted and (iii) is duly qualified, authorized to do business and in good standing in each jurisdiction in which the conduct of its business requires such qualification or authorization, except to the extent that the failure to be so qualified or authorized or be in good standing could not reasonably be expected to have a Material Adverse Effect.

(b) The Borrower has all necessary corporate power and authority to enter into, and has taken all necessary corporate action to authorize the execution, delivery and performance of, this Agreement and all of the transactions contemplated herein. This Agreement has been duly executed and delivered by the Borrower and constitutes, and the other Loan Documents to which the Borrower is a party when executed and delivered will constitute, the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, except as may be limited by (i) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally, (ii) the application of general principles of equity (regardless of whether applied in a proceeding in equity or at law) and (iii) any implied warranty of good faith and fair dealing.

(c) Neither the execution and delivery by the Borrower of this Agreement and the other Loan Documents, nor the performance by the Borrower of its obligations hereunder or thereunder, results or will result in a breach of, or constitutes or will constitute a default under (i) any term or provision of the organizational documents of the Borrower, (ii) any law, rule, regulation, order, judgment, writ, injunction, or decree of any court or governmental entity having jurisdiction over the Borrower or the property of the Borrower or (iii) any loan agreement, mortgage, deed of trust, security agreement or lease, or any other material contract or instrument binding on or affecting the Borrower or the property of the Borrower.

(d) No judgments, orders, writs or decrees are outstanding against it, nor is there now pending or, to the knowledge of a Responsible Officer of the Borrower, any threatened litigation, contested claim, investigation, arbitration, or governmental proceeding by or against the Borrower that (i) individually or in the aggregate would reasonably be expected to have a Material Adverse Effect or (ii) purports to affect the legality, validity or enforceability of this Agreement, any other Loan Document or the consummation of the transactions contemplated hereby or thereby.

(e) The Borrower has good and marketable title to all of its assets. None of the Collateral is subject to any deed of trust, pledge, Lien, conditional sale or other title retention agreement, security interest, lease, charge or encumbrance (other than the Lien in favor of the Lender).

(f) Neither any Loan Document nor any written statement furnished by the Borrower, or to the knowledge of a Responsible Officer of the Borrower, by a third person on behalf of the Borrower, in connection with this Agreement (including, but not limited to, any financial statements) contains any untrue statement of a material fact or omits a material fact of which the Borrower is aware that is necessary to make the statements contained therein or herein not misleading. There is no fact of which the Borrower is aware that the Borrower has not disclosed in writing to the Lender that materially affects adversely the properties, business, profits or condition (financial or otherwise, but excluding general economic and real estate market conditions) of the Borrower or the ability of the Borrower to perform its obligations under the Loan Documents.

(g) Since March 31, 2017, no material adverse change has occurred in (i) the business, operations, results of operations, assets, liabilities or financial condition of the Borrower, (ii) the ability of the Borrower to perform its obligations under the Loan Documents or (iii) the ability of the Lender to enforce the Loan Documents and obligations of the Borrower thereunder.

(h) Borrower has used its best efforts to obtain financing from unaffiliated third-parties and has been unable to obtain such financing.

11. Affirmative Covenants . The Borrower covenants that for so long as this Agreement is outstanding:

(a) The Borrower shall comply in all material respects with all applicable federal, state and local laws, ordinances, regulations and restrictive covenants relating to the Borrower’s businesses and operations.

(b) The Borrower shall maintain its corporate existence and the right to carry on its business and duly procure all necessary renewals and extensions thereof and maintain, preserve and renew all rights, powers, privileges and franchises and conduct its business in the usual and ordinary course; provided , that the Borrower shall not be required to maintain, preserve or renew any such rights, powers, privileges or franchises that are immaterial to the business of the Borrower and if the Borrower reasonably determines that the preservation thereof is no longer desirable in the conduct of the Borrower’s business.

(c) The Borrower shall use the proceeds of the Term Loan solely for the purposes described in Section 3 of this Agreement.

(d) The Borrower shall maintain with financially sound and reputable independent insurers, insurance with respect to its assets and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons.

(e) The Borrower shall furnish to the Lender:

(i)

as soon as practicable, but in any event within two weeks of the end of each month, quarter and year (each a “ Period ”), an unaudited income statement and statement of cash flows for such Period, and an unaudited balance sheet and statement of stockholders’ equity as of the end of such Period and other information reasonably requested by the Lender, all prepared in accordance with GAAP, as applicable (except that such financial statements may (i) be subject to normal year-end audit adjustments and (ii) not contain all notes thereto that may be required in accordance with GAAP);

(ii)

as soon as practicable, but in any event within the earlier of ninety (90) days after the end of each fiscal year of the Borrower and five (5) days after they become available, (i) a balance sheet as of the end of such year, (ii) statements of income and of cash flows for such year, and (iii) a statement of stockholders’ equity as of the end of such year, all such financial statements audited and certified by independent public accountants of regionally recognized standing selected by the Borrower;

(iii)

as soon as practicable, but in any event within the earlier of forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Borrower and five (5) days after they become available, unaudited statements of income and of cash flows for such fiscal quarter, and an unaudited balance sheet and a statement of stockholders’ equity as of the end of such fiscal quarter, all prepared in accordance with GAAP (except that such financial statements may (i) be subject to normal year-end audit adjustments and (ii) not contain all notes thereto that may be required in accordance with GAAP);

(iv)

with respect to the financial statements called for in Section 11(e)(i), Section 11(e)(ii) and Section 11(e)(iii), an instrument executed by the chief financial officer and chief executive officer of the Borrower certifying that such financial statements were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (except as otherwise set forth in Section 11(e)(i) and Section 11(e)(iii)) and fairly present the financial condition of the Borrower and its results of operation for the periods specified therein;

(v)	promptly following the end of each quarter, an up-to-date capitalization table of the Borrower;

(vi)

promptly after any Responsible Officer becoming aware of the occurrence of any Default or Event of Default (but in any event within three Business Days thereafter), a certificate of a Responsible Officer setting forth the details thereof and the action that the Borrower is taking or proposes to take with respect thereto;

(vii)

promptly after any Responsible Officer becoming aware of any event or occurrence that could reasonably be expected to have a Material Adverse Effect (but in any event within three Business Days thereafter), a certificate of a Responsible Officer setting forth the details thereof and the action that the Borrower is taking or proposes to take with respect thereto;

(viii)

promptly upon request, such additional information regarding the financial position or business (including with respect to environmental matters) of the Borrower as the Lender may reasonably request from time to time; and

(ix)	promptly provide notice of any material adverse change in the business or deviation from the Business Plan.

12. Negative Covenants . The Borrower covenants that for so long as this Agreement is outstanding:

(a) The Borrower shall not create, assume, incur or suffer to be created, assumed, incurred or to exist any Lien upon the Collateral (or any part thereof). The Borrower shall not sell, convey, transfer, dispose or permit any sale, conveyance, transfer or disposition of its assets or any interest therein by operation of law or otherwise, other than sales, conveyances, transfers or dispositions of (i) inventory in the ordinary course of business or (ii) used, worn-out or surplus equipment.

(b) The Borrower shall not create, incur, assume or suffer to exist any indebtedness of the Borrower for borrowed money or guarantee the obligations of any Person, except (i) indebtedness under this Agreement and the other Loan Documents, (ii) indebtedness existing on the Closing Date as set forth on Schedule 12 hereto and (iii) current trade accounts payable under normal trade terms and which arise in the ordinary course of business.

13. Events of Default . Each of the following shall constitute an “ Event of Default ” under this Agreement:

(a) Failure to Pay Principal . The Borrower shall default in any payment of the principal amount of the Term Loan when and as due hereunder;

(b) Other Payment Default . The Borrower shall default in the payment of interest on the Term Loan or any other payment obligation under this Agreement after the same becomes due hereunder and such default shall continue unremedied for three days;

(c) Failure to Observe Other Covenants . The Borrower shall (i) fail to perform or observe any agreement, covenant, condition, provision or term contained in Sections 11(b), 11(c) or 12 or (ii) fail to perform or observe any other term, covenant, warranty or agreement contained (or incorporated by reference) herein or in any other Loan Document and such failure shall continue for a period of 30 days after the earlier to occur of (i) the date upon which a Responsible Officer of the Borrower has actual knowledge of such default and (ii) the date upon which written notice thereof is given to Borrower by the Lender;

(d) Representations and Warranties . Any representation or warranty of the Borrower contained herein on in any other Loan Document shall prove to have been untrue in any material respect when made;

(e) Voluntary Bankruptcy . The Borrower makes an assignment for the benefit of creditors, files a petition in bankruptcy, petitions or applies to any tribunal for any receiver or any trustee of the Borrower or any substantial part of the property of the Borrower or commences any proceeding relating to the Borrower under any reorganization, arrangement, composition, readjustment, liquidation or dissolution law or statute of any jurisdiction, whether in effect now or after this Agreement is executed;

(f) Involuntary Bankruptcy . If, within 60 days after the filing of a bankruptcy petition or the commencement of any proceeding against the Borrower seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the proceeding shall not have been dismissed, or, if within 30 days after the appointment, without the consent or acquiescence of the Borrower, of any trustee, receiver or liquidator of the Borrower or all or any substantial part of the properties of the Borrower, the appointment shall not have been vacated;

(g) Dissolution . Any action is taken that is intended to result, or results, in the dissolution, liquidation or termination of the existence of the Borrower;

(h) Cross-Default . The Borrower shall fail to pay any principal of any indebtedness owed by the Borrower (excluding the indebtedness of the Borrower hereunder) that is outstanding in a principal amount of $250,000 or more in the aggregate, or any interest or premium thereon, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration demand or otherwise), and such failure continues after the applicable grace period, if any, specified in the agreement or instrument relating to such indebtedness; any other event occurs or condition exists under any agreement or instrument relating to any such indebtedness and continues after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such indebtedness; or any such indebtedness is declared to be due and payable or is required to be prepaid, redeemed, purchased or defeased (other than by a regularly scheduled required prepayment, redemption, purchase or defeasance), or an offer to prepay, redeem, purchase or defease such indebtedness is required to be made, in each case before the stated maturity thereof; or

(i) Judgments . Any judgment or order for the payment of money in excess of $250,000 is rendered against the Borrower by a court of competent jurisdiction, and either (i) enforcement proceedings are commenced by any creditor upon such judgment or order or (ii) there is any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, is not in effect, unless such judgment or order has been vacated, satisfied, dismissed, or bonded pending appeal or, in the case of a judgment or order the entire amount of which is covered by insurance (subject to applicable deductibles), is the subject of a binding agreement with the plaintiff and the insurer covering payment therefor.

14. Remedies Upon Default .

(a) Upon the occurrence of an Event of Default and during the continuation thereof, the Lender may declare the Term Loan to be due and payable (provided that upon the occurrence of any Event of Default described in Section 13(e) or 13(f) of this Agreement, no such declaration shall be necessary and the acceleration hereinafter described shall occur automatically), whereupon the maturity of the then unpaid balance of the Term Loan shall be accelerated and the same and all interest accrued thereon shall forthwith become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Loan Documents to the contrary notwithstanding, and the Lender may exercise and shall have any and all rights and remedies available under applicable law and the Loan Documents, including with respect to the Collateral.

(b) No right or remedy herein conferred upon the Lender is intended to be exclusive of any other right or remedy contained herein or in any instrument or document delivered in connection with or pursuant to this Agreement, and every such right or remedy contained herein and therein or now or hereafter existing at law or in equity or by statute, or otherwise may be exercised separately or in any combination.

(c) No course of dealing between the Borrower, on the one hand, and the Lender, on the other hand, or any failure or delay on the Lender’s part in exercising any rights or remedies hereunder or under any Loan Document shall operate as a waiver of any rights or remedies of such parties and no single or partial exercise of any rights or remedies hereunder or thereunder shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder or thereunder.

15. Extensions; Amendments; Waivers . No amendment or waiver of any provision of this Agreement or any other Loan Document, or consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Borrower and the Lender, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

16. Indemnification . The Borrower agrees to indemnify and save the Lender and its officers, directors, employees, advisors and agents harmless from, and compensate the Lender and its officers, directors, employees, advisors and agents for, any and all losses, liabilities, claims, damages and expenses incurred by the Lender and its officers, directors, employees, advisors and agents with respect to, resulting from or in connection with any of the transactions contemplated by this Agreement, including, without limitation, the Borrower’s use of the Term Loan hereunder, except, to the extent that any losses, liabilities, claims, damages and expenses are determined by a final non-appealable decision of a court of competent jurisdiction to have resulted from such indemnified party’s gross negligence or willful misconduct. This agreement by the Borrower to indemnify and defend the Lender and its officers, directors, employees, advisors and agents will survive the payment in full of the Term Loan and the termination of this Agreement. The Borrower shall pay all reasonable out‑of‑pocket expenses incurred by the Lender (including the fees, charges and disbursements of any outside counsel), in connection with the preparation and execution of this agreement and the enforcement or protection of its rights under this Section 16 .

17. Notices . All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (i) delivered personally, (ii) mailed, certified or registered mail with postage prepaid, (iii) sent by next-day or overnight mail or delivery or (iv) sent by fax, as follows:

if to the Borrower,

AeroGrow International, Inc.
6075 Longbow Drive, Suite 200
Boulder, CO
Fax: (303) 350-4770
Telephone: (303) 350-4770
Attention: Grey Gibbs, Chief Financial Officer

if to the Lender,

The Scotts Company LLC

14111 Scottslawn Road

Marysville, OH 43041

Fax: (937) 578-5078
Telephone: (937) 578-5970
Attention: Ivan C. Smith, Executive Vice President and Secretary

or, in each case, at such other address as may be specified in writing to the other parties hereto.

All such notices, requests, demands, waivers and other communications shall be deemed to have been received (i) if by personal delivery, on the day after such delivery, (ii) if by certified or registered mail, on the third Business Day after the mailing thereof, (iii) if by next-day or overnight mail or delivery, on the day delivered or (iv) if by fax on the next day following the day on which such fax was sent, provided that a copy is also sent by certified or registered mail or by next-day or overnight mail or delivery. Notices delivered through electronic communications to the extent provided in the following paragraph, shall be effective as provided in said paragraph.

Notices and other communications to the Lender hereunder may be delivered or furnished by electronic communication (including e‑mail) pursuant to procedures approved by the Lender. Unless the Lender otherwise prescribes, notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient.

18. Expenses .

(a) The Borrower shall pay all reasonable out-of-pocket costs and expenses of the Lender (including reasonable fees and expenses of counsel) in connection with (i) the preparation, execution and delivery of this Agreement and the other Loan Documents and (ii) the administration (after the execution hereof and including advice of counsel for the Lender as to the rights and duties of the Lender with respect thereto) of, and in connection with, the preparation, execution and delivery of, recording or filing of, preservation of rights under, enforcement of, and, after a Default, refinancing, renegotiation or restructuring of, this Agreement and the other Loan Documents, and any amendment, waiver or consent relating thereto (including, but not limited to, after an Event of Default has occurred and is continuing, the reasonable fees and disbursements of counsel for the Lender for such purposes) and, in each case, promptly reimburse the Lender within five Business Days after presentation of an invoice in reasonable detail for all amounts expended, advanced, or incurred by the Lender to satisfy any obligation of the Borrower under this Agreement or any other Loan Document .

(b) The agreements in this Section 18 shall survive the termination of this Agreement and repayment of the Term Loan and all other amounts payable hereunder.

19. Severability . If any provision, including any phrase, sentence, clause, section or subsection, of this Agreement is invalid, inoperative or unenforceable for any reason, such circumstances shall not have the effect of rendering such provisions in question invalid, inoperative or unenforceable in any other case or circumstance, or of rendering any other provision herein contained invalid, inoperative, or unenforceable to any extent whatsoever. Any provision of this Agreement held invalid, inoperative, or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid, inoperative, or unenforceable.

20. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Borrower and the Lender, and their respective successors and permitted assigns. The Borrower may not assign or delegate its obligations hereunder without the prior written consent of the Lender, which consent may be withheld in the Lender’s sole discretion. The Lender may assign its obligations and the full amount of the Term Loan hereunder.

21. Offset . If an Event of Default occurs hereunder, then the Lender shall have the right to offset any amounts due hereunder against any amounts now or hereafter due from the Lender to the Borrower.

22. Governing Law, Submission to Jurisdiction, etc.

(a) 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) 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.

(c) The Borrower irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d) Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 17 of this Agreement (other than the provisions in Section 17 permitting notices to be delivered by electronic communications). Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by applicable law.

23 . Waiver of Jury Trial . EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

24. Counterparts; Integration; Effectiveness; Electronic Execution. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

[SIGNATURES ON FOLLOWING PAGE]

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized representatives as of the day and year first above written.

BORROWER :

AEROGROW INTERNATIONAL, INC.

By: _________________________________

Name: _______________________________

Title: _______________________________

LENDER :

THE SCOTTS COMPANY LLC

By: _________________________________

Name: _______________________________

Title: _______________________________

Exhibit A

Form of Notice of Borrowing

Date: ___________ ___, 201__

To:	The Scotts Company LLC, as the Lender under that certain Term Loan and Security Agreement dated as of ____ ___, 2017 (as extended, renewed, amended or restated from time to time, the “ Loan Agreement ”), by and between the Lender and AeroGrow International, Inc. (the “ Borrower ”)

Ladies and Gentlemen:

The undersigned, the Borrower, refers to the Loan Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2(b) of the Loan Agreement, of the proposed Term Loan Advance specified below:

1. The Business Day of the proposed Term Loan Advance is ___________, ____.

2. The aggregate amount of the proposed Term Loan Advance is $______________.

The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed Term Loan Advance, before and after giving effect thereto and to the application of the proceeds therefrom:

(a) the representations and warranties contained in the Loan Agreement are correct in all material respects on and as of such date, before and after giving effect to the proposed Term Loan Advance as though made on and as of such date;

(b) the proceeds of the Term Loan Advance will be used solely for the purposes described in Section 3 of the Loan Agreement; and

AeroGrow International, Inc.

Name

Title

Schedule 7

Collateral Locations

2201 Lakeview Road
Mexico, MO 65265
Landlord: Cagney Global (previously dba Wilderness Logistics Solutions, Inc.)

From time to time, the Borrower has a small amount of consigned inventory at other third party locations

Schedule 12

Indebtedness

None

Exhibit 99.1

September 26, 2017

Dear Shareholder:

Our Fiscal Year 2017 was the best year in AeroGrow’s history.

Sales were up over 20%; adjusted EBITDA increased by an impressive 365%, beginning to prove the leverage that we believe is in our business as we continue to grow; we successfully tapped into several new channels of distribution; we had our most successful new product launches ever; and – critically – our balance sheet has never been in better shape, with no debt and ending the year with nearly $9 million in cash.

As a result, I have never been more proud of our accomplishments nor more excited about our future. Fiscal Year 2018 is shaping up to be another breakthrough year for us. I’ll give you more context about our performance over the past year and provide plenty of details regarding our plans for the upcoming year a little bit later in this letter.

But I want to begin this letter by talking about our longer term future – and a major “pivot” that we have undertaken. This is a concept that I’ve been referring to a lot lately as I challenge our entire team here at AeroGrow to pivot toward becoming a truly great company, one that I envision will be measured against what are considered world class companies and world class products.

The distance that we have traveled over the past few years is significant…from a company that was quite literally on financial life support to one that has begun to accomplish some great things – and is positioned to accomplish many more. But I’ve challenged our team to think that whatever we’ve accomplished in the past isn’t good enough…and going forward I want all of us to view every action we take through the lens of being great. That goes for me, our management team, our staff, our vendors, our Board…everybody

Now I assure you that we’re not going to lose the many qualities that have helped make our company as successful as it is today. We’re still going to be scrappy, we’re always going to have a sense of urgency about everything we do, and we’re never going to forget what having that “near death” financial experience was like – all of these qualities are a part of our DNA…and so they will be an important part of our future as well.

But at the same time we’re going to be raising the bar on everything we do. Starting in Fiscal Year 2018 we’re going to pivot and accept the challenge of building a world class company here at AeroGrow – one that strives to do everything exceptionally well. From product development to marketing and brand initiatives…from customer service to packaging….from information technology to management reporting and – of course – from the top line to the bottom line. We’re going to challenge ourselves to be great.

This pivot won’t happen overnight. But I hope that in the months, quarters and years ahead we see a new, even stronger AeroGrow emerge – one that is built for long-term success and will ultimately be considered a truly great company.

RECAPPING FISCAL YEAR 2017:

I think any recap of our Fiscal 2017 must begin with the transaction that occurred on November 30th of last year when the Scotts Miracle-Gro Company (SMG) exercised its outstanding warrants to establish an 80 percent ownership stake in AeroGrow in exchange for $47.8 million in cash, of which $41 million was distributed to shareholders and – at the time – left about $7 million in the business to retire all of our outstanding short term debt and leave us with a healthy cash balance. This investment was a transformational event for our company and has positioned us very well with a greatly improved balance sheet to support our future growth.

From an operational standpoint, I think Fiscal Year 2017, which ended on March 31, 2017, was the best in our company’s history:

·	Sales increased 20% to $23.6 million.

·	Adjusted EBITDA – the measure we have used to track our profitability and cash flow – was up a very strong 365% to a record of over $1.4 million, indicating the leverage that we are beginning to see in the business as we grow.

·	We successfully launched several new and highly innovative products that were immediate hits in the market place.

·	We made great progress in identifying and developing new channels of distribution here in the North American market along with a successful launch of the AeroGarden line in Europe.

·	And – perhaps most important of all – we used the infusion of cash from the November SMG transaction to completely transform our balance sheet, which as of March 31 ^st showed no debt and over $8.8 million of cash on hand.

And all of this while improving our year-over-year gross margins, holding our overhead in check and improving our overall advertising efficiency.

As the year began, our core strategy was to focus on three key areas: (1) Driving sales growth in proven channels while opening new channels of distribution; (2) Expanding on our commitment to product development by launching several new highly innovative products while driving costs out of our supply chain; and (3) Continuing to build awareness of our product, our brand and our nascent category. Here are the important details about each of these key initiatives:

Channel Growth and Development: Over the past year I’ve spoken on our investor calls and in my letter to shareholders about our “legs of the stool.” Up until last year, we only really had one leg of our stool – that being our Direct Response business. As last year unfolded it became apparent that we had developed a very solid second leg in the .com channel, led by Amazon.com, which actually surpassed our DR business in sales for the year.

And during Fiscal Year 2017 we saw both our Direct Response and .com channels perform very well – particularly in this most recent holiday selling season. So I think we can now confidently say that the first two legs of our stool are well established. But the big news coming out of our Fiscal Year 2017 is that we have now begun seeing some very strong results suggesting that a 3 ^rd leg and potentially even a 4 ^th leg of the stool are developing rapidly with very successful sell-thru results in our in-store channel and in our international efforts. I’d like to highlight a couple of points regarding each of these channels:

·	Our Direct Response business continued to be very strong, with double-digit growth and very high margins. The performance of our AeroGarden catalog and AeroGarden.com last year was the best in our history.

Our .com business (this is how we think about sales to retailers in the on-line channel), was also excellent, led by Amazon.com achieving + 38% sell-thru growth (off of a well-established base). In addition, Amazon.ca – Amazon’s Canadian web platform – registered + 144% sell-thru growth and is becoming a very strong channel for us as well. We also had good results with our other on-line retailers, including a very successful launch at Target.com and excellent results this spring on TheHomeDepot.com.

We also used the Amazon platform for a successful launch in Europe – with first year sales results on the Amazon platforms in the UK, in France and in Germany approaching $500K (USD). Now that may not sound like much…but it compares very favorably to our launches on the Amazon platforms in the US and in Canada, and gives us a great deal of optimism about our ability to build a very strong European business.

But I think the most important development for us was the success we had with several in-store initiatives, particularly in the housewares channel. In-store selling has always been the hardest piece of the puzzle for us to solve as it has proven difficult to drive meaningful sell-thru with a product, a brand and a category that is new and – frankly – not very well known. We’ve been able to overcome these issues in our on-line selling efforts through targeted marketing and rich web content that helps explain the product and its feature/benefit set. But this is much harder in stores where you have limited space to tell your story and just seconds to grab the attention of prospective consumers as they walk by your product.

This year we worked closely with several best-in-class retailers in an effort to solve this challenge and the results were outstanding. We had a chain-wide roll out at Bed Bath & Beyond – over 1,000 stores. If you went into a BBB store during November and December you likely saw the AeroGarden display right out front – on the primary drive aisle. The combination of this placement, our in-store merchandising, and a terrific product featured at BBB worked well as we achieved over 96% sell-thru in their stores – and also realized strong results on BBB.com. In fact, we were told that the AeroGarden was the #1 selling item in the kitchen electrics category this past holiday season at BBB – which is impressive considering they feature such established brands as Keurig, Brevil, Kitchen Aid and others.

We had even better results at culinary retailer Sur La Table – with feature merchandising sets at all of their stores throughout the holiday season. Our performance at Sur La Table was exceptional as we achieved – essentially – 100% sell-thru in their stores. The results at SurLaTable.com were also very strong

Our second key objective, new product development – and by extension driving costs out of our supply chain – was also a big area of success for us. Our key product launch in Fiscal Year 2017 was not a new form factor, but rather integrating Wi-Fi capability into our best-selling line of gardens. This was no easy undertaking as the programming required to launch a useful, user-friendly and secure interface is quite intricate. But thanks to the exceptional work of our product development team both here and in China, we introduced our Wi-Fi product last November and the results were exceptional. During November and December of last year, nearly half of the AeroGarden products that had a Wi-Fi option were sold with this upgrade…all with higher average selling prices and higher margins. Even more impressive has been the consumer acceptance of the functionality, with very positive feedback and essentially no returns or complaints of any kind. It was an outstanding product launch by any measure and sets us up nicely for future product launches using this technology, which we believe will increase long term user satisfaction and engagement.

Another central part of our strategy to effectively unlock our selling in the Housewares channel was to design AeroGardens to look more like main-stream countertop products that accent any kitchen. Again, I think we delivered on this goal quite effectively. We introduced numerous stainless steel models, many in colors and high-end finishes that are in step with modern kitchens. We also began upgrading the control panels on several of our models to make them better looking and easier to use. All in all, I think the look and feel of AeroGardens has come a very long way over the past 1-2 years. If you haven’t seen our new line of Gardens that have been introduced over the past year or so, please take a look and I think you’ll be impressed with how far we’ve come.

Just a quick word about our cost savings efforts. Our Gross Margin improved by 60 basis points in Fiscal Year 2017 vs. the prior year. While not a huge increase vs. our progress of the past two years, when you consider that we had significantly increased sales into what has traditionally been lower margin housewares and instore channels, we think it was a big achievement.

Our third key objective for the past year was to continue our efforts to build our brand and category awareness. Two years ago, we made a big commitment to drive broad awareness through various campaigns using television, YouTube, Facebook and other media advertising. We’ve also had a lot of success using Amazon directly and many other digital platforms .

We expanded upon these efforts in Fiscal Year 2017 and I think the cumulative effect of this investment in media has had a lot to do with the success we experienced in our sell-thru results. And we drove significant increases in our media efficiency. Against a media spend increase of 26% vs. the prior year, we saw a 147% increase in brand searches on Google, a 199% increase in overall impressions, and – critically – a 57% increase in our TV media efficiency ratio – the amount of sales directly attributable to TV media on our web site vs. our investment in TV media.

However, media is not inexpensive…and we think it’s going to take a continued commitment to making a media investment in building our brand over the next few years to truly build the awareness that we need. There is little doubt that we could have had improved bottom line results last year had we not spent what we did on marketing and media – nearly $3.7 million on advertising and promotion in our fiscal 2017 (up over 21% vs. last year) – but we thought it was important to execute this program as we build the company for the long-term. As we look forward you’ll see that we are committed to continuing this investment in media and advertising as we try to drive our growth in an evolving category.

I hope you’ll agree that we had a great Fiscal Year 2017. We delivered on all of our key strategic initiatives and the progress ultimately showed up in significantly improved financial results.

So we are entering our Fiscal 2018 with a lot of momentum…and I anticipate that we’ll continue to see big progress throughout our business.

A LOOK AHEAD…OUR PLANS FOR FISCAL YEAR 2018:

AeroGrow has come a long way over the past few years. I am extremely proud of the progress that we’ve made on a number of fronts, with sales up over 3X over the past five years, distribution expanding not only in the USA but also in Canada and Europe, three straight years of EBITDA profitability, successful product innovation, and greatly increased gross margins and brand building.

But that’s the whole point of our executing on our pivot strategy. We can’t be satisfied with anything we’ve done in the past…we need to raise the bar higher than ever so that our sights are set on accomplishing significantly more in the future. And the future begins in Fiscal Year 2018, with an emphasis on the upcoming 2017 Holiday selling season and the spring of 2018.

Given all of the progress we have made, I am more excited about this upcoming year than I have ever been. The key to our having a great Fiscal Year 2018 will ride on our continued ability to execute in three areas: (1) Expansion of our channels of distribution, (2) successful launch of new products and (3) continued brand building efforts that will aid us in driving sell-thru

Regarding expansion of our selling channels, in Amazon and our Direct-to-Consumer business, we have two very well-established channels of distribution that continue to grow and generate significant contribution to our profitability. In addition, we’ve now proven that we can be successful in a third channel, in-store retail, which is a highly scalable opportunity that can grow significantly in Fiscal Year 2018 and beyond. Look for us to add significantly to our portfolio of in-store retailers this coming year. In addition to Bed, Bath & Beyond and Sur La Table, we’ll be launching at Kohl’s, Macy’s, Home Depot, Hudson’s Bay, Canadian Tire Corp. (Canada’s largest retailer), and several other major retailers.

We will also look to expand upon the very promising start to our international distribution efforts by growing our sales on the Amazon platform throughout Europe, selling in the UK, France, Germany, Spain and Italy. In the UK, we’re also finalizing plans to be on QVC and launching chain-wide, on-shelf in a top flight culinary retailer. At the end of this upcoming holiday selling season, we should start to gain significant visibility into how big a business we can develop in Europe in the coming years.

Expanding on the success of the products that we launched last year, our second key initiative will be to accelerate our pace and scope of new product introductions this year. In October we’ll be launching the biggest new product in our history – the AeroGarden Farm. By biggest…I mean both literally in terms of size as well as most significant in terms of market potential. The Farm has 24 pods, is Wi-Fi enabled, grows to a height of up to 24 inches, and has two 60 watt LED lighting panels, each of which can be automatically raised and lowered as your plants grow.

The AeroGarden Farm comes in two sizes – the Farm and the Farm Plus – and the gardens can be modularized to create a vertical “wall of growth.” Our vision here is that consumers will now be able to grow all of their herbs and vegetables right in their home – always having fresh produce right at their fingertips and never having to go to the market if they so choose. I’ve been saying this is a “big idea” as I’ve been updating you on our development progress on the Farm over the past year – and now that we’re in Beta testing I can tell you that this product has even exceeded my expectations for it. I can’t wait for you to see it when it becomes available this fall…and I think it truly could be a game changer not only in the indoor gardening space, but even more globally in how consumers procure the herbs and vegetables they prepare for their families.

We’ll also be introducing two other new products this fall – an AeroGarden designed to appeal specifically to kids and a special Wi-Fi version of our popular Harvest AeroGarden. Look for these to hit the market in late October or early November.

Our third key operational initiative in Fiscal Year 2018 will be to continue to build upon our efforts to generate awareness of our brand – and awareness of our category in general – as we look to drive sales and use of the AeroGarden over the long-term. We will continue to direct our advertising to the traditional buyers of the AeroGarden – more mature, affluent families – while also beginning to broaden our appeal with a highly coveted younger demographic. Working with SMG, we’ve done extensive market research on this rapidly emerging demographic and have found them to be highly resonant with indoor gardening.

Look for us to bolster our television advertising, while at the same time expanding our digital, video and social efforts. We’ll also have extensive point of purchase displays in-store at our retail partners, and we will continue to have a significant promotional presence on all of our Amazon platforms.

Along with these great opportunities comes the inevitable challenges that are present when you’re trying to grow so quickly

Chief among our challenges will be continuing our recent history of posting annual improvements to our gross margin. Over the past three years we have improved our margin by a total of 5300 basis points. This is a consistent goal that we have set as a company, but we are currently facing some “headwinds” that will make achieving this goal in the upcoming year a bit more difficult.

This difficulty is driven by two factors. The first is channel shift, as we are beginning to sell a higher percentage of goods into traditionally lower-margin retail channels. The second is that we have been encountering cost increases in our manufacturing supply chain. I just returned from a week-long trip to China to visit our key manufacturers and supply chain partners, and while we are well underway with numerous plans to drive our costs down over the next year, we have been experiencing consistent upward cost pressures and in the short term we must be wary of what may be some “cost creep.”

The other significant challenge that we’ll face this year is ensuring that we achieve strong sell-thru during the fall, holiday and spring (2018) selling seasons. We’ve done a great job of building on the sell-thru success that we achieved in Fiscal Year 2016 to (1) expand our existing programs, and (2) add many additional retailers to our distribution line-up – both in North America and in Europe.

I’ve talked before about “what keeps me awake at night,” and driving exceptional sell-thru is always at the top of the list. I feel great about our sell-in this year; and I also believe we’ve budgeted sufficient marketing dollars to accomplish our sell-thru goals. But ensuring that we spend this budget in the optimal way to drive our target consumers to our retailer partners continues to be among our key challenges. This is especially true given our expansion this year into many new and high-profile retail accounts.

I hope that this overview gives you a sense of the key initiatives that we’ll be focusing on in our Fiscal Year 2018 and a sense of why I am more excited about our future than I have ever been. We are now better capitalized than ever, with no debt, and a strong cash position due to our improved performance combined with the warrant being exercised by The Scotts Miracle-Gro Company last November. When you combine a greatly improved balance sheet with our sales momentum, expanding distribution, excellent capitalization, and the continued innovation of our product line, we believe we are in a very strong position to grow rapidly in Fiscal Year 2018 and beyond.

SUMMARY:

It’s a great time to be a part of the rapidly-growing indoor gardening market – and particularly to be a part of the emergence of AeroGarden as a mainstream brand and company. As I said earlier in this letter, I have never been more proud of our accomplishments nor more excited about our future.

Our balance sheet and capital structure have never been stronger. We had a great Fiscal Year 2017 – I think clearly our best year ever. We’re poised to have an even stronger Fiscal Year 2018. And as we “pivot” to becoming a top-tier company in everything we do, you can see why I’m so excited about both our near-term and long-term future.

The AeroGarden is a product that is “right for the times,” with consumers wanting fresh, safe, convenient food grown right in their homes. Smart gardens, indoor gardening and hydroponic gardening all appear to be trending significantly upward, and as the market leader – well-funded and with an emerging brand – we are uniquely qualified to address each of these major trends.

Given our momentum, our trends, and the broadening of our distribution strategy, I’m optimistic that we’re entering a period of strong, sustainable sales and earnings growth

I want to close by acknowledging all of our key stakeholders and thank each of them for their outstanding support of AeroGrow. I think the turnaround we’ve seen in this business over the past few years is a considerable achievement. Quite simply, we couldn’t have done it without the Scotts Miracle-Gro Company and their commitment to our vision to build the leading indoor gardening company in the world. I am extremely grateful for the support of SMG and their subsidiary The Hawthorne Gardening Company – certainly financially but also from a strategic and executional standpoint. But it has taken many other stakeholders too, including an incredibly dedicated team here at AeroGrow, numerous vendors who have been so very helpful to our efforts and the patience of many long-term shareholders and “friends of the mission” who have been unwavering in their support of our company. Thanks to all of you.

I look forward to updating you on our progress in Fiscal 2018 and beyond.

Thank you,

/s/ J. MICHAEL WOLFE

J. Michael Wolfe

President & Chief Executive Officer

PS – If you’re ever in Boulder, Colorado and would like to stop by our offices and meet the team and take a tour of our grow labs, please just let us know. We’d be happy to show you around.

001-33531	46-0510685
(Commission File Number)	(IRS Employee Identification No.)

6075 Longbow Drive, Suite 200, Boulder, Colorado	80301
(Address of principal executive offices)	(Zip Code)

Exhibit Number		Description

10.1		Term Loan and Security Agreement
10.2		Second Amendment to Collaboration Services Agreement
99.1		Letter to Shareholders


	AeroGrow International, Inc.
	(Registrant)

Date: September 26, 2017	By:	/s/ Grey H. Gibbs
		Grey H. Gibbs Principal Accounting Officer

Exhibit Number		Description

10.1		Term Loan and Security Agreement
10.2		Second Amendment to Collaboration Services Agreement
99.1		Letter to Shareholders

	THE SCOTTS COMPANY LLC By: __________________________________ Name: Title:
	OMS INVESTMENTS, INC. By: __________________________________ Name: Title:
	AEROGROW INTERNATIONAL, INC. By: __________________________________ Name: Title:

	Delaware
	(State or other jurisdiction of incorporation)