UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended March 31, 2019 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
(Commission File No.) 001-33531
AEROGROW INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Nevada |
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46-0510685 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
6075 Longbow Drive, Suite 200
Boulder, Colorado 80301
(303) 444-7755
(Address, including zip code and telephone number, including area code, of registrant’s of principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, par value $0.001 per share |
AERO |
OTCQB |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☐ |
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Non-accelerated filer ☒ |
Smaller reporting company ☒ |
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Emerging growth company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of September 30, 2018 was $17,728,157, the last day of our most recent second quarter. For the purpose of the foregoing calculation only, all directors and executive officers of the registrant and owners of more than 5% of the registrant’s common stock are assumed to be affiliates of the registrant. This determination of affiliate status is not necessarily conclusive for any other purpose.
The number of shares of the registrant’s common stock outstanding as of June 17, 2019 is 34,328,036
DOCUMENTS INCORPORATED BY REFERENCE
None
Annual Report on Form 10-K
Year Ended March 31, 2019
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PART I |
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Item 1. |
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Item 1A. |
9 |
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Item 1B. |
13 |
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Item 2. |
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Item 3. |
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Item 4. |
13 |
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PART II |
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Item 5. |
14 |
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Item 6. |
15 |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
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Item 7A. |
29 |
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Item 8. |
29 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
29 |
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Item 9A. |
29 |
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Item 9B. |
30 |
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PART III |
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Item 10. |
31 |
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Item 11. |
35 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
40 |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
43 |
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PART IV |
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Item 15. |
44 |
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Item 16. |
69 |
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70 |
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NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”) for AeroGrow International, Inc. (“AeroGrow,” the “Company,” “we,” “our” or “us”), including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “may,” “will,” “would,” “could,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” as well as variations of such words and similar expressions, are intended to identify such forward-looking statements. These forward looking statements may include, among others, statements concerning our expectations regarding our business, growth prospects, revenue trends, operating costs, working capital requirements, access to funding, competition, results of operations and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. These forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from expectations expressed or implied in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section entitled “Risk Factors” in Part I Item 1A of and elsewhere in this Annual Report, and in other reports we file with the SEC, including the most recent quarterly reports on Form 10-Q and current reports on Form 8-K. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
PART I
Corporate History
AeroGrow International, Inc. (“AeroGrow,” the “Company,” “we,” “us” and “our”) was formed as a Nevada corporation in March, 2002. After more than three years of initial research and product development, we began sales activities in 2006. Our principal executive offices are located at 6075 Longbow Drive, Suite 200, Boulder, Colorado 80301 and our main telephone number is (303) 444-7755.
Our Business
AeroGrow is a developer, marketer, direct-seller, and wholesaler of advanced indoor garden systems designed for consumer use and priced to appeal to the gardening, cooking, healthy eating, and home and office decor markets. We offer multiple lines of proprietary indoor gardens, grow lights, a patented nutrient formula, more than 40 corresponding proprietary seed pod kits, and various cooking, gardening and decor accessories, primarily in the United States and Canada, as well as selected countries in Europe. As of March 31, 2019, we have manufactured and shipped approximately 2.2 million AeroGarden® units and approximately 4.5 million seed pod kits to consumers worldwide, through the following two sales channels:
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Retail Sales Channel, both online and in-store retail distribution (with about 2,400 brick and mortar store fronts carrying our products) in North America and in five European countries; and |
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Direct-to-Consumer Sales Channel, predominantly online via our website based upon traffic from our catalogues, commercials and other awareness campaigns. In the fiscal year ended March 31, 2019 (“Fiscal 2019”), we mailed approximately 200,000 catalogues, tested and utilized several forms of digital advertising and ran some 30, 60 and 120 second television commercials. In prior years, we also utilized direct television sales, including infomercials and 60 and 120 second television commercials, mall kiosks, and print and radio advertisements. |
We commenced initial marketing and distribution of our products in March 2006 with an emphasis on our retail sales channel, which typically generates lower margins and requires much higher investments in inventory than our direct sales channel. As a result of the downturn in the economy in 2009 and the corresponding lack of funding, we shifted our sales and marketing efforts away from retail distribution. During the four-year period ending March 31, 2013, we emphasized our higher margin “direct-to-consumer” sales channels by utilizing in-house direct mail catalogues, e-mail marketing, and internet marketing, while continuing to sell to a limited number of international customers.
Beginning in April 2013, we began to sell to retail customers again due to improving economic conditions and our strategic alliance with a subsidiary of The Scotts Miracle-Gro Company (“Scotts Miracle-Gro”). In July 2018, Scotts Miracle-Gro provided us with up to $6.0 million of incremental working capital on an as needed basis. Interest was charged at the stated rate of 10% per annum. 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. See “April 2013 Scotts Miracle-Gro Strategic Alliance” below.
Our principal products are indoor gardens and proprietary seed pod kits that allow consumers, with or without gardening experience, to grow: (i) vegetables, such as tomatoes, chili peppers and salad greens; (ii) fresh herbs, including cilantro, chives, basil, dill, oregano, and mint; and (iii) flowers, such as petunias, snapdragons, geraniums and vinca. Consumers can also plant and grow their own seeds using our proprietary “grow anything” kits, or use their AeroGardens as seed starters for their outdoor gardens with our “seed starting” systems.
Our indoor gardens are designed to be simple, consistently successful, and affordable. We believe that our products enable almost anyone, from consumers who have little or no gardening experience to those who are professional gardeners, to produce year-round harvests of a variety of herbs, vegetables, and flowers, regardless of season, weather, or availability of natural light. We believe that our unique and attractive designs make our indoor gardening products appropriate for use in almost any location, including kitchens, living areas, and offices.
Our indoor gardening units are designed to match customer needs and interests with the appropriate garden unit features and benefits at retail list prices ranging from approximately $50 to $700, depending on size, design elements, light intensity and other automated features. As is customary, we sometimes offer temporary discounts and targeted promotions that are designed to generate new customer sales and higher sales volume.
April 2013 Scotts Miracle-Gro Strategic Alliance
In April 2013, the first month of the fiscal year ended March 31, 2014 (“Fiscal 2014”), we entered into a Securities Purchase Agreement and strategic alliance with a wholly owned subsidiary of Scotts Miracle-Gro. In conjunction with this transaction, we entered into several other agreements, including: (i) an Intellectual Property Sale Agreement; (ii) a Technology Licensing Agreement; (iii) a Brand Licensing Agreement; and (iv) a Supply Chain Management Agreement. For further information on the strategic alliance with Scotts Miracle-Gro, please see Note 3 “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements.
Intellectual Property Sale Agreement . Pursuant to the Intellectual Property Sale 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; we also agreed to pay 2% of our revenue to Scotts Miracle-Gro for a defined period. Scotts Miracle-Gro has the right to use the AeroGrow and AeroGarden trademarks in connection with the sale of products incorporating the Hydroponic IP.
Technology Licensing Agreement . Under the Technology Licensing Agreement, Scotts Miracle-Gro granted us an exclusive license to use the Hydroponic IP in North America and certain European Countries ( collectively, the “AeroGrow Markets”) in return for a royalty of 2% of annual net sales, as determined at the end of each fiscal year through March 2019. For the first four years of the agreement, we paid the royalty in shares of common stock. The initial term of the Technology Licensing Agreement was five years, but is renewable for additional five-year terms by providing notice to Scotts Miracle-Gro at least six months in advance of the expiration of each five-year term. As disclosed in a Current Report on Form 8-K filed on April 4, 2018, we renewed the Technology Licensing Agreement for an additional five-year term ending in March 2023.
Brand Licensing Agreement . Under the Brand Licensing Agreement, we may use certain of Scotts Miracle-Gro trade names, trademarks and/or service marks to rebrand the AeroGarden, and, with the written consent of Scotts Miracle-Gro, other products in the AeroGrow Markets in exchange for our payment to Scotts Miracle-Gro of an amount equal to 5% of incremental growth in net sales, as compared to net sales during the fiscal year ended March 31, 2013 (“Fiscal 2013”). The initial term of the Brand Licensing Agreement was five years, but is renewable for additional five-year terms by providing notice to Scotts Miracle-Gro at least six months in advance of the expiration of each five-year term. As disclosed in a Current Report on Form 8-K filed on April 4, 2018, we renewed the Brand Licensing Agreement for an additional five-year term ending in March 2023.
Supply Chain Services Agreement . Under the Supply Chain Services Agreement, Scotts Miracle-Gro will pay AeroGrow an annual fee equal to 7% of the cost of goods of all products and services requested by Scotts Miracle-Gro during the term of the Technology Licensing Agreement (referenced above), thereby assisting AeroGrow in exploiting the Hydroponic IP internationally (outside of the AeroGrow Markets).
Hydroponics and Aeroponics Industry - Background
Hydroponics is the science of growing plants using nutrients suspended in water instead of soil. Used commercially worldwide, hydroponics is considered an advanced and often preferred crop production method. Hydroponics is typically used inside greenhouses to give growers the ability to better regulate and control nutrient delivery, light, air, water, humidity, pests, and temperature. Hydroponic growers benefit by producing crops faster and with higher crop yields per acre than traditional soil-based growers.
Aeroponic technology is derived from hydroponics and occurs when plant roots are suspended in an air chamber and bathed with a nutrient solution. We believe that the aeroponic technology used in our indoor gardening products is a technological advance over most hydroponic growing systems because plant roots are partially suspended in air and allowed direct access to oxygen, while being bathed in a highly oxygenated, nutrient rich solution. For these reasons, we believe the use of a well-designed and maintained aeroponic system can yield increases in growth rates and plant survival when compared to most hydroponic or soil-based systems.
Until the development of our indoor gardening products, certain barriers prevented hydroponic or aeroponic technology from being incorporated into mainstream, mass-marketed consumer products, including:
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Consumers generally lack the specialized knowledge required to select, set up, operate, and maintain the various components for a typical hydroponic or aeroponic system, including growing trays, irrigation channels, growing media, nutrient reservoirs, and nutrient delivery systems consisting of electronic timers, pumps, motors, tubing, and nozzles; |
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In the absence of adequate natural light, consumers generally do not possess the specific knowledge required to select, set up, operate, and maintain the varied indoor lighting systems that are necessary to grow plants indoors; |
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Consumers are often unable to properly mix and measure complex hydroponic nutrient formulas, which change depending on the plant variety and the stage of plant growth; |
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Consumers are unable to deal with the problem of nutrient spoilage; and |
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Federally mandated water quality reports show that the water in many large cities is not suitable for hydroponic or aeroponic growing and requires treatments in order to sustain growth. |
Our research leads us to believe that these complexities have been accepted in existing hydroponic market channels because manufacturers have generally focused their product development and marketing efforts on satisfying the needs of the commercial greenhouse and dedicated hobbyist markets. These users are motivated to gain the specialized knowledge, equipment and experience currently required to successfully grow plants with these products. Our research also indicates that the hydroponic growing equipment currently available in these markets is bulky, expensive and comprised of many, often unintegrated, parts.
We believe that the complexities of currently available commercial hydroponic and aeroponic products fail to address the needs and wants of the mass consumer market, leaving that market underserved. We further believe that our patented inventions, companion technologies, and trade secrets have simplified and improved hydroponic and aeroponic technologies and have enabled us to create an indoor hydroponic and aeroponic gardening system appropriate for the mass consumer market.
Proprietary Technology and Intellectual Property
Since our inception in 2002, we have been innovating, simplifying, and integrating proprietary technologies and inventions into a family of “plug and grow” indoor gardening products and related seed pod kits specifically designed and priced for the mass consumer market. We have used this technology platform to develop eight different models of indoor gardens, each with different features and technology groupings, with list prices ranging from approximately $50 to $700. Multiple patent applications have been filed in the United States and internationally to protect the inventions that are exclusively used in our indoor garden system and seed pod kits, and seven patents have been issued (four in the United States and three internationally). We have also obtained access to, both domestically and internationally, trademarks and certain domain names, including AeroGrow.com, AeroGarden.com, AeroGarden.net, AeroGarden.tv, AeroGarden.biz, and Getthegarden.com, among others.
Our success and ability to compete are substantially dependent upon our exclusive access to technology and expertise. While we rely on patent, copyright, trade secret, and trademark law to protect the use of such technology, we also believe that factors such as the technological and creative skills of our personnel, new product developments, product enhancements, and reliable product maintenance are essential to establishing and maintaining a technology leadership position. There can be no assurance, however, that others will not develop technologies that are similar or superior to our technologies. Each of our employees, independent contractors, interns, and consultants has executed assignment of rights to intellectual property agreements and nondisclosure agreements. The assignment of application rights to intellectual property agreements grant us the right to own inventions and related patents which may be granted in the United States and throughout the world. The nondisclosure agreements generally provide that these people will not disclose our confidential information to any other person without our prior written consent.
Following is a description of the proprietary technologies, all of which were sold to Scott Miracle-Gro, and inventions that are exclusively used in our indoor garden system and seed pod kits.
Rainforest Nutrient Delivery System . The “rainforest” nutrient delivery system combines technologies with features from several hydroponic and aeroponic methodologies into a proprietary system that leaves plant roots suspended in an air gap. Plant roots take oxygen directly out of the air and, in testing of aeroponic systems by multiple different sources, including lettuce studies by NASA Small Business Innovation Research, plants grow faster as a result.
Advanced Growing System . The Advanced Growing System (“AGS”) is available on several of our indoor gardens and combines features from the rainforest delivery system with technologies that deliver increased nutrient oxygenation, faster and healthier root growth, decreased consumer maintenance requirements, and increased product reliability. With AGS, plant roots are suspended in air in a 100% humid aeroponic chamber and then grow into a continuously oxygenated nutrient bath.
Pre-Seeded Bio-Grow Seed Pods . The proprietary bio-grow seed pods include specially selected, pre-implanted seeds, a growing medium, removable bio-dome covers, and a grow basket.
Microprocessor-Based Control Panel and Nutrient Cycle Delivery System . The microprocessor-based controls include automated grow lights to ensure that plants receive the proper amount of lighting, and feature nutrient and water reminder systems that alert consumers to add water and nutrients when needed. In addition, some systems allow consumers to select from multiple plant types (for example, lettuce, herbs, tomatoes, or flowers) and the system then automatically adjusts the nutrient, water and lighting cycles to optimize growth. In addition, some systems take into account stage of growth of the specific plants when optimizing these factors. Our ULTRA gardens, which were first introduced in Fiscal 2013, include a display screen that walks consumers step-by-step through planting, tending and harvest, and allows for complete customization of all aspects of the grow cycle, including photo period, pump cycle and nutrient cycle.
Custom Nutrients and Automatic pH Adjustment . The patented nutrient solutions have been designed specifically to deliver the proper nutrients to plants, while offering consumers a user-friendly application methodology. Plant specific nutrients are included with each seed pod kit, and consumers simply add them when instructed by the microprocessor-based nutrient reminder. The pre-measured and mixed nutrients eliminate the need for mixing multi-part nutrient formulas and storing various nutrients in separate containers. A proprietary buffer has been formulated and included into the nutrients that automatically adjusts tap water from around the country to the right pH ranges for plant growth. Without this adjustment, tap water from many areas in the country will severely limit or inhibit plant growth in most aeroponic and hydroponic systems.
Integrated and Automated Lighting System . Hydroponic systems typically do not incorporate built-in lighting systems. Our indoor gardening products include built-in adjustable grow lights with ballast, reflector hood, grow bulbs and an electronic timer. The integrated lighting systems include proprietary high-output compact fluorescent light LED bulbs that deliver a spectrum and intensity of light designed to optimize plant growth without supplemental sunlight needed. In addition, the lighting system is fully automated and controlled by a microprocessor-based control panel described above. Variations in lighting are a differentiator in our product lines, and we have several gardens on the market with “50% more light and twice the height” of our initial gardens, thereby allowing consumers to grow larger plants such as full-sized tomatoes in our indoor gardens, and deliver higher yields.
New Technologies in Development . We continue to develop improvements in lights, nutrients, oxygenation, seed variety selection, and style and design innovations, each of which are applied to our products on an ongoing basis.
Business Segments
We divide our business into the following reportable segments:
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Direct-to-Consumer |
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Retail |
This division of reportable segments is consistent with how the segments report to and are managed by our Chief Executive Officer (the chief operating decision-maker of the Company). Financial information about these segments for the fiscal year ended March 31, 2019 is presented in Note 9 - “Segment Information” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. The products described throughout this form are not mutually exclusive to a specific segment. The description of products and processes throughout this form are applicable to both segments.
Markets
Based on our historical sales and our existing channels of distribution, and supplemented by our own formal and informal market research consisting of individual consumer interviews, focus groups, blog monitoring, customer modeling, and Internet survey responses, we believe that our indoor gardening products appeal to a broad spectrum of consumers across multiple areas of interest. We believe that our products appeal to at least four major market segments:
Gardener Market . A recent study conducted by the National Gardening Association states that gardening is America’s number one hobby with more than 81 million households active in gardening. Based upon this survey, there were estimated to be 36 million households participating in food gardening and 13 million households participating in fresh herb gardening. We believe that our indoor gardening products and related products offer both expert and novice gardeners several major benefits not readily available through traditional gardening methods, including:
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the ability to grow fresh herbs, lettuces, vegetables, tomatoes, and flowers year-round, regardless of indoor light levels or seasonal weather conditions; |
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the ability to easily start growing plants indoors during colder months and then transplant them outdoors at the onset of the outdoor growing season; |
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the ability to use stem cuttings to propagate multiple reproductions of the desired plants in our indoor gardening products; and |
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the ease of growing in our indoor gardens, in contrast to the toil associated with traditional gardening, including preparing the soil, planting, thinning, weeding, watering, and removing pests. |
“Want-to-be” Gardener Market . We believe that many people have an interest in gardening but lack the knowledge, confidence, available space, equipment, or time to garden. We have observed the following barriers that often prevent people from gardening:
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gardening requires an ongoing time commitment; |
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apartment, high-rise, and condominium dwellers often lack the land needed for a traditional garden; |
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gardening requires physical work, which can be a significant barrier to people with limited mobility or health issues; |
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buying the necessary equipment to garden can be expensive; and |
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gardening requires knowledge and expertise. |
We believe that our indoor gardening products overcome many of these barriers and provide a simple, convenient way for many current non-gardeners to begin to garden.
Cooking and Healthy Eating Market . Many customers enjoy cooking as a hobby, including those who:
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are interested in cooking and appreciate the convenience and satisfaction of having a readily available supply of fresh-cut herbs to flavor soups, salads, and other dishes; |
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prefer the distinctive texture and taste of freshly picked, vine-ripened tomatoes, basil, lettuces, and other vegetables over days-old supermarket produce; and |
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are interested in healthy, pesticide-free foods for themselves and their families, reflecting both the rapidly growing interest in naturally and organically grown foods and the increasing number of people who, for health or weight concerns, include salads and fresh vegetables as part of their families’ diets. |
We believe that our indoor gardening products are embraced in this market by people who understand the value of having an ongoing supply of fresh herbs and fresh produce throughout the year.
Home and Office Decor Market . Flowers are frequently used to brighten homes and offices worldwide. It is difficult to readily grow flowers indoors due to a lack of sufficient light and growing knowledge. As a result, people often use cut flowers, which are expensive, short-lived, and require ongoing maintenance. Our indoor gardening products enable colorful and fragrant flowers to be easily grown indoors year round and at a lower cost. Flowers grown with our indoor gardening products will last for months with minimal care and maintenance. Flowers can be grown in a wide variety of indoor locations, including kitchen and bathroom countertops, living rooms, bedrooms, family rooms, offices, work stations, waiting rooms, and lobbies.
Products
AeroGarden Indoor Gardens . We offer eight different indoor garden models with list prices ranging from approximately $50 to $700 and differentiated based on size, design, light intensity, degree of automation, inclusion of Adaptive Growth Technology or Advanced Growing Systems, height potential of light hoods, and inclusion of plant support systems.
Our AeroGarden product line is divided into eight main categories:
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AeroGarden Sprout Series – The AeroGarden Sprout series features the Advanced Growing System, grow lights, a smaller footprint, and an attractive, slim, elegant design that makes it suitable for use as a decorative feature throughout the home or office. AeroGarden Sprouts fit easily on kitchen counters, night stands, and end tables. Some models include upgraded trim and designs such as the red and blue garden targeted at all-family usage. List prices start at $89.95. |
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AeroGarden 6 Series – The AeroGarden 6 series has a compact, triangular shape that is a perfect fit for kitchen counter-top corners with energy efficient LED lighting. It has a smaller footprint than the AeroGarden 7 and as a result features six pods for planting. The list prices start at $159.95. |
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AeroGarden Harvest Series – The AeroGarden Harvest series has a compact, beautiful design that has a smaller footprint and is perfect fit for a kitchen counter-top with energy efficient LED lighting. It has a smaller footprint than the AeroGarden 7 and as a result features six pods for planting. It features a variety of trim and touch screen control panels. The starting list price is $149.95. |
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AeroGarden 7 Series – Includes our original products which feature the rainforest nutrient delivery system, automated LED lights, and reminder systems. The list price is $199.95. |
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AeroGarden Extra Series – A seven pod garden with extended lamp arms and greater light output for growing larger vegetables. Some models also include stainless steel trim. This garden offers a model with an LED light that delivers faster growth with higher yields but uses less energy. List prices start at $219.95. |
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AeroGarden ULTRA Series - The ULTRA features the new MyGarden control panel – an automated garden “brain” that makes gardening easier than ever for beginners and offers complete customization for experts. It also includes a LED lighting system as is consistent in all our gardens but the LED system can have different wattage outputs, the widest, easiest range of Grow Light adjustment from small to tall, an improved trellis system, a 20% larger reservoir, and a “QuickPlant” button that walks users step-by-step through the planting process. This garden comes with an LED light that delivers faster growth with higher yields but uses less energy. List prices start at $279.95. |
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AeroGarden Bounty Series – A nine pod garden with a more powerful LED lighting system to deliver higher yields and the ability to grow more plants. This garden includes and interactive LCD display panel that utilizes screen prompts to walk users through the planting process. Some models also include stainless steel trim. List prices start at $349.95. |
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AeroGarden Farm Series – A twenty-four pod garden, the biggest garden to date, with a more powerful LED lighting system to deliver higher yields and the ability to grow more plants. This garden includes and interactive LCD display panel that utilizes screen prompts to walk users through the planting process and two independently adjustable lighting panels. List prices start at $599.95. |
In fiscal year 2015, we introduced a series of LED grow light systems that enhance plant growth and were generally well-received in the market. The LED lighting systems were available on the AeroGarden 7, the AeroGarden Extra and the AeroGarden ULTRA. The Company has continued to release additional LED grow light systems and AeroGardens with different control panel options and colors and has almost completely moved away from any models with CFL lighting systems.
AeroGarden Seed Pod Kits . We offer more than 40 seed pod kits for use in our indoor gardening products. These seed pod kits include pre-seeded bio-grow seed pods and a three-to-six-month supply of nutrients, including our patented formula for adjusting water quality. Our seed pod kits have list prices ranging from $13 to $30, and include:
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Vegetable Gardens: tomato, pepper, and salsa garden. |
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Herb Gardens: gourmet herbs, Italian herbs, and pesto basil. |
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Flower Gardens: cascading petunias, English cottage, scented blooms, and mountain meadow. |
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Salad Gardens: salad greens, romaine lettuce. |
Our seed pod kits are sold to consumers for use with our indoor gardening products. Individual seed pod kits are grown by consumers for three to six months and then new seed pod kits may be purchased for replanting.
AeroGarden Seed-Starting Kits . Our line of Garden Starter Systems and Grow Anything Kits are designed to allow consumers to plant and grow their own seeds in the AeroGarden. With our Garden Starter Systems, consumers can start up to 66 seedlings in our indoor gardens for transplant into their outdoor gardens when weather allows. With the Grow Anything Kits, consumers can grow their own seeds to maturity in the AeroGarden, or transplant seeds outdoors when weather allows, including plant nutrients, nutrient dispensers, and other products.
Other Accessories . To complement and expand the functionality of our indoor gardening products, we have developed a variety of accessory products.
Future Products . The core technology platform can be leveraged by bundling different components into new products with a wide variety of features and price points that then can be sold through a variety of direct and retail channels for use in different settings around the home or office. Examples include significantly larger, modular gardens, and less expensive, more decorative gardens.
Integrated Marketing and Sales Channel Strategy
We consider our products to be an entirely new product category and our primary objective has been to maximize the exposure of the product and educate consumers on the benefits of indoor gardening through an integrated marketing and distribution strategy. We launched our products in 2006 with a nationwide public relations campaign, and received extensive media exposure, with multiple features on national talk shows as well as local television coverage, local and national print articles and blog and Internet pieces. We combined the public relations launch with a retail and direct-to-consumer strategy focusing on high visibility partners and media, including product sales through retailers, national cataloguers, home shopping channels, direct television commercials, our own in-house catalogues, internet sales, and inbound and outbound telemarketing.
Channel/Consumer Strategy. As of March 31, 2019, our products were offered in approximately 2,400 storefronts in North America, as well as through select online retailers such as Amazon.com, bedbathandbeyond.com and Kohls.com. We plan to expand and revise our retail presence during the coming fiscal year as our trials with specific retailers and brick and mortar stores are revised and examined.
Direct-to-Consumer Sales. In 2007, we began mailing our own in-house, direct mail product catalogue, which tested successfully with a mailing of approximately 60,000 catalogues. In Fiscal 2019, we mailed approximately 200,000 catalogues. With our catalogue sales we focus on remarketing to current customers and also prospecting for new customers using database marketing techniques.
We established our first consumer product website in the fall of 2006 and supplemented this website in late 2007 with search engine advertising, banner advertising, email campaigns and web affiliate programs. In the fall of 2008 we took on in-house management of many of these programs from third-party providers and have seen resulting increases in efficiency.
A key focus of our web and catalogue marketing is to maximize the lifetime value of AeroGrow customers through repeat sales of our seed pod kits, light bulbs and accessories. During Fiscal 2019, direct-to-consumer sales represented 23.5% of our total net sales.
Retail Sales . Initial shipments to retailers commenced in March 2006. Over the next several years, we rapidly grew our retail distribution and as of March 31, 2009 our products were being sold through approximately 7,500 stores in North America. We then began to reduce our sales to retailers (as discussed above) and as of March 31, 2013 our products were only sold through 72 stores in North America. Since March 31, 2013, we have renewed our focus on reaching the end-consumer through select retail markets and increased our visibility in stores. In Fiscal 2019, our products were sold in approximately 2,400 stores and sales to retailers represented 72.4% of our total net sales.
During Fiscal 2019, sales to Amazon.com, Inc. represented approximately 55.9% of our retailer sales and approximately 40.5% of our total sales. As we continue our expansion of our retail sales efforts during the coming fiscal year, we expect to continue our sales with strong retailers as a result of our strategic alliance with Scotts Miracle-Gro. For further information on the strategic alliance with Scotts Miracle-Gro, please see Note 3 “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements.
International Sales. In Fiscal 2019, international sales have been conducted through third-party distributors but we have begun to focus efforts on new retailers such as Amazon.co.uk, Amazon Spain, Amazon Germany, Amazon France and Amazon Italy. During Fiscal 2019, international sales represented 4.1% of our total net sales, as we continued to expand into Europe, including the United Kingdom, Germany, Italy, Spain and France.
Competition
Aeroponic and hydroponic technologies have historically been limited to ardent hobbyists and commercial growing facilities. We believe that we are the first company to develop and offer a simple dirt-free indoor growing system for the mass consumer market.
Typical hydroponic manufacturers offer a range of equipment and accessories through distributors or small independent “hydro-shops” in a trade-oriented manner similar to plumbing or electrical suppliers. Purchasers typically mix and match equipment from various suppliers in an “a la carte” fashion to individually customize a large system that they then assemble on their premises. We believe that these products are substantially more expensive than our products.
We believe that our simplified and complete indoor gardening products and current and planned methods of distribution offer significant benefits from these traditional hydroponic industry practices. To date, we have discovered a few kitchen design firms that have tried to introduce an indoor growing system into the market, but we do not believe they have a significant presence in the market. In our laboratory tests, these systems have performed at levels far below our own systems in terms of germination success, longevity, speed-of-growth and overall yields. However, we recognize that there are other companies that are better funded and have greater experience in producing hydroponic products in commercial markets, or that have been more successful in manufacturing or selling consumer products or soil-based gardening products.
Manufacturing and Operations
We source our AeroGarden products and accessory items from contract manufacturing companies that manufacture products using tooling we own, in accordance with our specifications, and subject to our intellectual property rights provided by the Technology Licensing Agreement with Scotts Miracle-Gro. We have four Chinese manufacturers of our garden products. Several are capable of manufacturing multiple garden models. We believe the existing production capacity of these manufacturers is more than sufficient to meet our garden requirements for the short-to-medium term. In addition, capacity expansion is available in a reasonable period of time with a nominal tooling investment. We also try to have multiple, dual-sourced manufacturers of our many component parts and accessories. Indoor gardening products are shipped from China to the third-party fulfillment center in Missouri, as well as to third-party distribution facilities in countries outside North America.
Product Returns and Warranties
To date, product returns have been within our expectations for both retail and direct-to-consumer sales. At retail, we generally use a “destroy in field” methodology as the cost of shipping a used product back to us often does not justify the value of the recovered unit. We record warranty liabilities at the time of sale for the estimated costs that may be incurred under our basic warranty program. The specific warranty terms and conditions vary depending upon the product sold, but generally include technical support, repair parts, and labor for periods up to one year. Factors that affect our warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy our warranty obligation.
Governmental Regulation and Certification
We believe that we are in compliance with regulations in the United States and Canada concerning the shipping and labeling of seeds and nutrients. Currently, the components for the indoor garden system are Electrical Testing Laboratories “ETL” certified. These certifications confirm that the products have been tested and conform to a recognized level of fire and other safety standards for consumers. Such independent third-party certification is required for sales of products through many major retailers.
We believe that our costs of compliance with environmental laws will not be material.
Personnel
As of March 31, 2019, AeroGrow employed 40 full-time employees. In addition, we contract the services of part-time and project consultants on an “as needed” basis. We believe that our employee relations are good. Historically, our outsourced business also included manufacturing, telemarketing, infomercial production, fulfillment and shipping. Additional employees and/or consultants may be hired in the future as our operations merit.
Our business, future performance and forward-looking statements are affected by general industry and market conditions and growth rates, general economic and political conditions in the United States, Canada and worldwide, competition, interest rate and currency exchange rate fluctuations and other events. The following items are representative of the risks, uncertainties and other conditions that may impact our business.
Risks Related to our Business, Products and Markets
We have incurred substantial net losses since inception and may never achieve profitability.
Since we commenced operations in 2002, and through March 31, 2019, we incurred substantial losses, including a net loss of $291,000 for the twelve month period ended March 31, 2019. As of March 31, 2019, our losses have resulted in an accumulated deficit of $128.4 million. The future success of our business will depend in part on our ability to use the Scotts Miracle-Gro partnership to: (i) profitably expand sales of our AeroGarden indoor garden systems, seed pod kits and accessory products; (ii) develop new product extensions and applications; and (iii) efficiently spend marketing dollars to gain customer acceptance.
Our financial condition may limit our ability to borrow funds or to raise additional equity as may be required to fund our future operations.
Our ability to borrow funds or raise additional equity may be limited by our financial condition. In addition, a failure to obtain additional funding to support our working capital and operating requirements could prevent us from making expenditures that are needed to allow us to grow our operations. In the event we cannot raise additional funding to fulfill working capital needs, we will have to scale back on our operating plans for the current and future fiscal years. There can be no assurance that we will be able to secure the additional capital in an amount and in time to support all of our operating plans.
As we grow our sales into the retail channel and increase sales through individual retailers, the loss or significant reductions in orders from our top retail customers could have a material adverse impact on our business.
In Fiscal 2019, our net sales to one retail customer, Amazon.com, Inc., totaled 55.9% of our total net sales to retailers and 40.5% of our total net sales. The loss of this customer or other significant customers, or a significant decline in orders, could materially affect our sales of indoor garden systems, seed pod kits and accessories, and could therefore have a material adverse effect on our business, prospects, results of operations, and financial condition.
We do not have long-term sales agreements with, or other contractual assurances as to future sales to any of our current or planned major retail customers. In addition, our business may be negatively affected by changes in the policies of our retailers, such as payment terms, shelf space limitations, price demands and other conditions.
Our future success is completely dependent on our ability to market our indoor garden systems, seed pod kits and accessory products and generate consumer acceptance on a broader scale.
We have introduced our indoor garden systems and seed pod kits as new products to consumer markets unfamiliar with their use and benefits. Although we believe that we have penetrated only a small portion of the potential market for our products, our marketing efforts may not generate widespread consumer adoption. If our marketing strategies fail to attract customers, our product sales may not produce future revenue sufficient to meet our operating expenses or fund our future operations. Our business, prospects, results of operations, and financial condition will be materially and adversely affected.
A worsening of the economy, particularly in the United States and Canada, could materially adversely affect our business.
The success of our business operations depends significantly on consumer confidence and discretionary spending, which deteriorated during the worldwide economic downturn in 2008-2012. A re-occurrence of the economic downturn and the consequent impact on consumer spending, particularly in the United States and Canada, could adversely impact our revenue, ability to market our products, build customer loyalty, or otherwise implement our business strategy. In such a scenario, we would experience a material adverse effect on our business, prospects, results of operations, and financial condition.
Our revenue and level of business activity are highly seasonal, requiring us to staff our operations, incur overhead and marketing costs, purchase and manufacture inventory, and incur other operating costs in advance of having firm customer orders for our products. A material variance in actual orders relative to anticipated orders could have an adverse impact on our business.
For the fiscal year ended March 31, 2019, approximately 60.1% of our total net sales occurred during four consecutive calendar months (October through January). We must therefore estimate sales in advance of the anticipated peak months and operate our business during the balance of the year in such a way as to insure that we can meet the demand for our products during the peak months. This requires us to incur significant operating, marketing, and overhead expenses, and to utilize cash and other capital resources to invest in inventory in advance of having certainty as to the ultimate level of demand for our product during the peak months. Shortfalls in the supply of our products could result in a significant loss of revenue due to lack of adequate product inventory. For example, the cobranding of our product with the “Miracle-Gro AeroGarden” trade name caused a delay in available inventory during the first six months of Fiscal 2014. Additionally, during the third and fourth quarters of Fiscal 2013, a labor strike in the ports of Los Angeles and Long Beach delayed the delivery of AeroGarden inventory during the critical pre-Christmas season and caused a decline in sales during that time period. Alternatively, a shortfall in actual demand for our products, relative to forecast, during peak months could cause us to liquidate excess inventory at a loss or at substantially lower margins. In any of these cases, we may not generate enough revenue to cover expenses incurred throughout the balance of the year. Our business prospects, results of operations and financial condition would be materially and adversely affected.
Our current or future manufacturers could fail to fulfill our orders for indoor garden systems, which would disrupt our business, increase our costs, and could potentially cause us to lose our market.
We currently depend on four contract manufacturers in China to produce our indoor garden systems. These manufacturers could fail to produce the indoor garden system to our specifications or in a workmanlike manner and may not deliver the systems on a timely basis. Our manufacturers must also obtain inventories of the necessary parts and tools for production. Although we own the tools and dies used by our manufacturers, our manufacturers operate in China. As a result, our manufacturers may be subject to business risks that fall outside our control, including but not limited to, political, currency, regulatory and shipping/transportation risks, each of which may affect the manufacturer’s ability to fulfill our orders for indoor garden systems. As discussed in the preceding risk factor, the December 2012 labor strike in the ports of Los Angeles and Long Beach delayed the delivery of AeroGarden inventory during the critical pre-Christmas season and caused a decline in sales during the third and fourth quarters of Fiscal 2013. In addition, port congestion in October 2014 backed up deliveries and delayed ground transportation during the third quarter of Fiscal 2015. Weather or natural disasters in China could disrupt our supply of product. Any change in manufacturers could disrupt or delay our ability to fulfill orders for indoor garden systems while we search for alternative supply sources, provide specifications, and test initial production. Our business prospects, results of operations and financial condition would be materially and adversely affected.
If we are unable to recruit, train and retain key personnel necessary to operate our business, our ability to successfully manage our business and develop and market our products may be harmed.
To maintain our business position, we will need to attract, retain, and motivate highly skilled design, development, management, accounting, sales, merchandising, marketing, and customer service personnel. Competition for many of these types of personnel can be intense, depending on general economic conditions, alternative employment options, and job location. As a result, we may be unable to successfully attract or retain qualified personnel. Additionally, any of our officers or employees can terminate their employment with us at any time. The loss of any key employee, or our inability to attract or retain other qualified employees, could have a material adverse effect on our business, prospects, results of operations, and financial condition.
Our current AeroGarden manufacturers are located in China and therefore our product costs may be subject to fluctuations in the value of the dollar against the Chinese currency and increases in Chinese labor rates.
Although we purchase our AeroGarden products in U.S. dollars, the prices charged by our factories are predicated upon their cost for components, labor and overhead. Therefore, increases in Chinese labor rates and 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 and have a material adverse effect on our business prospects, results of operations and financial condition.
Increases in tariffs or other taxes on our products or equipment and supplies could have an adverse impact on our operations.
We purchase a significant portion of supplies from suppliers outside the United States. The United States and other countries have levied tariffs and taxes on certain goods. Further tariffs, additional taxes, or trade barriers may increase our selling and/or manufacturing costs, decrease margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase necessary supplies, which could have a material adverse effect on our business, results of operations, or financial conditions.
We are highly reliant upon a single distribution and assembly facility. Any material disruption to the operation of this facility could adversely affect our business.
All of our North American fulfillment and distribution operations, and the entirety of our seed pod kit assembly operations are located in a third-party-managed facility based in Mexico, Missouri. Any material disruption to the operation of this facility, whether caused by internal or external factors could have a material adverse effect on our business prospects, results of operations and financial condition.
We rely on third-party providers in our manufacturing, warehouse, distribution, order processing, and fulfillment operations. If these parties are unwilling to continue providing services to us, or are unable to adequately perform such services for us on a cost effective basis, our business could be materially harmed.
We engage third parties to perform certain critical functions supporting our business operations. Any disruption in our relationship with any of our vendors could cause significant disruption to our business and we may not be able to locate another party that can provide comparable services in a manner that is timely, consistent with our business plan, or on acceptable commercial terms. Our business prospects, results of operations and financial condition would be materially and adversely affected.
We may face significant competition, and if we are unable to compete effectively, our sales may be adversely affected.
We believe that our complete indoor garden systems offer significant benefits over traditional hydroponic industry products. However, there are companies in a variety of related markets, including but not limited to, consumer electronics, commercial hydroponics, gardening wholesale, and soil-based gardening that are larger, better funded, and have experience in our channels of distribution. These companies may decide to develop products to compete with our products. These companies could use hydroponic technologies, and could achieve better consumer acceptance. The success of any competing products may have a material adverse effect on our business prospects, results of operations and financial condition.
Increases in energy prices, resulting from general economic conditions, or other factors, may raise our cost of goods sold and adversely affect our business, results of operations and financial condition.
Energy costs, especially gasoline and fuel costs, are significant expenses in the delivery of our products. Increased costs resulting from general economic conditions, war, acts of nature, or other factors, may result in declining margins and operating results if market conditions prevent us from passing these increased costs on to our customers through timely price increases on our products. Our business prospects, results of operations and financial condition would be materially and adversely affected.
If our indoor garden systems fail to perform properly, our business could incur increased warranty-related costs and reduced income.
From our inception through March 31, 2019, we have sold approximately 2.2 million AeroGardens and have provided a limited warranty with each garden sold. In addition, our indoor garden systems are “guaranteed to grow.” We therefore may be required to replace or repair products or refund the purchase price to consumers. Failure of our products to meet expectations could damage our reputation, decrease sales, increase costs related to returns and repairs, delay market acceptance of our products, result in unpaid accounts receivable, and divert our resources to remedy the malfunctions. The occurrence of any of these events would have a material adverse effect on our business prospects, results of operations and financial condition.
From time to time, we may be subject to litigation that, if decided adversely to us, could have a material adverse impact on our financial condition.
From time to time, we are a party to various litigation matters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such litigation. Although we do not believe that any current litigation poses a material threat to our business, defense of any lawsuits or proceedings, even if successful, may require management to spend a substantial time and attention on the part of our management personnel that otherwise would be spent on other aspects of our business, and may require the expenditure of significant amounts for legal fees and other related costs. Settlement of lawsuits also may result in significant payments and modifications to our operations. In addition, we also may be subject to adverse publicity as a result of litigation. Any of these events could have a material adverse effect on our business, prospects, results of operations, and financial condition.
Cyber-attacks targeting systems and infrastructure used by our Company may adversely impact our operations.
Our business has become increasingly dependent on digital technologies to conduct certain development, operating and sales activities. We depend on digital technology to communicate with our employees, third-party manufacturers, partners and customers. We have been the subject of cyber-attacks on our internal systems and through those of third parties. Nevertheless, unauthorized access to our proprietary or commercially sensitive information could lead to leaks of customer-sensitive information, data corruption, communication interruption, or other disruptions in our sales, product development, production or planned business transactions, any of which could have a material adverse impact on our results of operations. Further, as cyber-attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyber-attacks. In Fiscal 2019, we discovered that certain of our information technology systems had been the target of an external cyber-attack, as more fully described under Note 7, “Commitments and Contingencies,” to our audited consolidated financial statements included in Part II, of this Annual Report on Form 10-K
Risks Related to the Market for our Securities
The market price of our shares may fluctuate greatly. Investors in AeroGrow common stock bear the risk that they will not recover their investment.
Our common stock, like that of many emerging growth companies, is typically subject to price and volume volatility. Trading in our common stock is limited, and the price per share is likely to be influenced by the price at which and the amount of shares that selling security holders are attempting to sell at any time. If a large stockholder, including Scotts Miracle-Gro and its affiliates, decided to sell its shares, the price of our common stock would decline. Our common stock may also be subject to the activities of persons engaged in short selling securities, which generally has the effect of driving the price down. The price of our common stock has fluctuated, and may continue to fluctuate, widely. A full and stable trading market for our common stock may never develop and, as a result, stockholders may not be able to sell their shares at the time they elect, if at all.
We can issue debt securities and shares of preferred stock without approval of common stockholders, which could adversely affect your rights and undermine the value of your shares.
Our Articles of Incorporation allow our Board of Directors to approve the terms and conditions of debt securities and preferred stock for issuance by the Company, including but not limited to voting rights, conversion privileges and liquidation preferences, without the approval of common stockholders. The rights of the holders of our common stock may be adversely impacted as a result of the rights that could potentially be granted to holders of debt securities or preferred stock that we may issue. As a result, the price of our common stock may be adversely affected by future issuances of debt or preferred stock.
For example, in April 2013 (during the first quarter of fiscal year 2014), we entered into a Securities Purchase Agreement with SMG, a wholly owned subsidiary of Scotts Miracle-Gro. Pursuant to the Securities Purchase Agreement, SMG acquired 2,649,007 shares of the Company’s Series B Convertible Stock, par value $0.001 per share (the “ Series B Preferred Stock”), and (ii) a warrant to purchase shares of the Company’s common stock (the “Warrant”). The Series B Preferred Stock is convertible into 2,649,007 shares of common stock ($4.0 million divided by a conversion price of $1.51 per share). The Warrant entitled, but did 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 (when added to all other shares owned), as calculated as of the date or dates of exercise. The Warrant was able to be exercised at any time and from time to time for a period of five years between April 22, 2016 and April 22, 2021. On November 29, 2016, Scotts Miracle-Gro converted its Series B Preferred Stock into common stock and fully exercised its warrant to purchase 80% of the Company’s outstanding stock (the “Change of Control Transaction”). Please see Note 3 “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements for more detailed disclosure regarding the strategic relationship with Scotts Miracle-Gro and the terms of the Series B Convertible Preferred Stock, the Warrant and other transactions.
Scotts Miracle-Gro has a controlling interest in AeroGrow’s common stock and, as a result, has effective control over the Board of Directors and all matters affecting the Company.
The November 2016 Change of Control Transaction gave Scotts Miracle-Gro effective control over all matters affecting the Company, including the power to approve or reject significant corporate matters, such as mergers, acquisitions, dividends, loans, security issuances and all matters that require shareholder approval. Among other things, Scotts Miracle-Gro’s controlling interest could make it more difficult for a third party to acquire us, even if a proposed acquisition would be beneficial to you, and you may not realize the premium return that stockholders may realize in conjunction with corporate takeovers.
In addition, pursuant to the Securities Purchase Agreement, three of the five members of our Board of Directors are delegates of Scotts Miracle-Gro. As a result, Scotts Miracle-Gro has control over our business strategy, operations, managerial decisions and potential capital transactions. Your ability to influence key corporate decisions has been significantly diminished and you may disagree with decisions made by Scotts Miracle-Gro. The price of our common stock may be adversely affected and your ownership may be subject to substantial dilution.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. DESCRIPTION OF PROPERTY
In Fiscal 2019, we leased a 11,182 square foot office space in, Boulder, Colorado, with a monthly rent of $12,000, subject to annual increases of 3.5%. We also pay our proportionate share of building taxes, insurance and operating expenses. The current lease term expires on September 30, 2019 and we do not expect to renew the lease. The lease agreement contains other standard office lease provisions.
Effective June 1, 2019, we agreed to lease a 14,630 square feet of office space in Boulder, Colorado, with a monthly rent of $21,000, subject to annual increases of 3.5%. We are currently completing leasehold improvements and expect to move into the new office space during the second quarter of Fiscal 2020. The new lease, which is filed as Exhibit 10.36 to this Annual Report on Form 10-K, expires on September 30, 2026 and contains other standard office lease provisions.
While our facilities appear adequate for the foreseeable future, we may add space to meet future growth as needed. Upon expiration of our current leases, we believe that we will be able to either renew our existing leases or arrange new leases in nearby locations on acceptable terms. We believe that these properties are adequately covered by insurance.
From time to time, we are party to various litigation matters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to any such pending litigation matters. However, based on our examination, we believe of such matters, that our ultimate liability, if any, will not have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the OTCQB market tier under the symbol “AERO.”
Holders
As of June 15, 2019, we had approximately 494 holders of record of our common stock. A substantially greater number of stockholders are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions. See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for additional information about holders of our common stock.
Dividends
On November 29, 2016 (during Fiscal Year 2017), after Scotts Miracle-Gro exercised the warrant to purchase AeroGrow common stock, the board of directors declared a special one-time dividend of $1.21 per share of Common Stock. The dividend was paid on January 3, 2017 to shareholders of record on December 20, 2016. Otherwise, we have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to compliance with covenants under any existing financing agreements, which may restrict or limit our ability to declare or pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant.
Equity Compensation Plan Information
The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Part III of this Annual Report under the heading “Equity Compensation Plan Information.”
Unregistered Sales of Equity Securities and Use of Proceeds
We did not have any unregistered issuances of equity securities during Fiscal Year 2019.
Issuer Purchases of Equity Securities
We did not repurchase any shares of our common stock during Fiscal Year 2019.
ITEM 6. SELECTED FINANCIAL DATA
|
Statements of Operations Data |
||||||||
|
Fiscal Years ended March 31, |
||||||||
|
(in thousands, except per share data) |
2019 |
2018 |
||||||
|
Revenues |
$ | 34,366 | $ | 32,298 | ||||
|
Cost of revenue |
22,395 | 21,598 | ||||||
|
Gross profit |
11,971 | 10,700 | ||||||
|
Operating Expenses |
||||||||
|
Research and development |
590 | 558 | ||||||
|
Sales and marketing |
8,462 | 8,071 | ||||||
|
General and administrative |
2,913 | 2,519 | ||||||
|
Total operating expenses |
11,965 | 11,148 | ||||||
|
Income (loss) from operations |
6 | (448 |
) |
|||||
|
Other income (expense) |
(297 |
) |
6 | |||||
|
Net loss |
$ | (291 |
) |
$ | (442 |
) |
||
|
Change in fair value of stock to be distributed for Scotts Miracle-Gro transactions |
- | 534 | ||||||
|
Net income (loss) attributable to common shareholders |
$ | (291 |
) |
$ | 92 | |||
|
Net income (loss) per share, basic and diluted |
$ | (0.01 |
) |
$ | 0.00 | |||
|
Weighted average number of common shares outstanding, basic and diluted |
34,328 | 34,044 | ||||||
|
Weighted average number of common shares outstanding, diluted |
34,328 | 34,125 | ||||||
|
Balance Sheet Data |
||||||||
|
(in thousands) |
2019 |
2018 |
||||||
|
Cash and cash equivalents and restricted cash |
$ | 1,756 | $ | 7,497 | ||||
|
Total assets |
$ | 17,040 | $ | 18,167 | ||||
|
Total liabilities |
$ | 4,588 | $ | 5,424 | ||||
|
Total stockholders’ equity |
$ | 12,452 | $ | 12,743 | ||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K (“Annual Report”), including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “may,” “will,” “would,” “could,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward looking statements may include, among others, statements concerning our expectations regarding our business, growth prospects, revenue trends, operating costs, results of operations, working capital requirements, access to funding, competition and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. These forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from expectations expressed or implied in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled “Risk Factors” in Item 1A of Part I and elsewhere, and in other reports we file with the SEC, specifically the most recent reports on Form 10-Q. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Executive Overview
We are in the business of developing, marketing, and distributing advanced indoor aeroponic and hydroponic garden systems. After several years of initial research and product development, we began sales activities in March 2006. Since that time we have expanded our operations and currently offer eight different indoor garden models, more than 40 seed pod kits, and various gardening and kitchen accessories. Although our business is focused on the United States and Canada, our products are available in other countries and we have continued to expand our market into Europe, including the United Kingdom.
Background of Scotts Miracle-Gro Alliance – Fiscal Years 2014- 201 8
As disclosed above under the caption “Item 1. Business,” we entered into a Securities Purchase Agreement and strategic alliance in April 2013 with a wholly owned subsidiary of Scotts Miracle-Gro. Pursuant to the Securities Purchase Agreement, we issued (i) 2,649,007 shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock); and (ii) a warrant to purchase shares of our common stock for an aggregate purchase price of $4.0 million. In November 2016, Scotts Miracle-Gro converted all of its Series B Preferred Stock and exercised all of its warrants, thereby increasing its equity ownership to approximately 80% of the Company’s outstanding common stock. In addition, as part of the strategic alliance, we entered into several other agreements with Scotts Miracle-Gro, including: (i) an Intellectual Property Sale Agreement in which we agreed to sell all intellectual property associated with our hydroponic products, other than the AeroGrow and AeroGarden trademarks, free and clear of all encumbrances, to Scotts Miracle-Gro for $500,000; (ii) a Technology Licensing Agreement; (iii) a Brand License Agreement; and (iv) a Supply Chain Management Agreement. In addition to the initial working capital infusion of approximately $4.5 million in Fiscal Year 2014 from the Securities Purchase Agreement and Intellectual Property Sale Agreement, as well as ongoing seasonal term loans to fund operations through Fiscal Year 2019, we believe that the strategic alliance affords us the use of the globally recognized and highly trusted Miracle-Gro brand name.
We believe that the strategic alliance also 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 have used the opportunities provided by our strategic alliance with Scotts Miracle-Gro to re-establish our presence in the retail sales channels. During the first six months of Fiscal 2014, we cobranded our products with the Miracle-Gro AeroGarden trade name. We have since renewed our focus in growing the business via retail markets.
New Developments – Fiscal Year 2019
During Fiscal 2019, we continued our strategic growth initiative by offering our products in approximately 2,400 stores and we also enhanced the depth and breadth of our direct sales distribution channels by distributing approximately 200,000 direct mail catalogues, significantly increasing our web-selling presence and developing a robust e-mail marketing program. In Fiscal 2019, approximately 76.5% of our total sales were to retail customers and approximately 23.5% of our total sales were to direct customers. Amazon.com, Inc., our largest retailer customer, comprised approximately 55.9% of our sales to retailers and 40.5% of our total sales during Fiscal 2019.
The cobranding of products with Scotts Miracle-Gro was eliminated on AeroGardens but was kept in place with the seed pod kits. In July 2018, we also entered into a $6.0 million Term Loan Agreement with Scotts Miracle-Gro in order to provide incremental working capital in advance of our peak selling season. Interest was charged at the stated rate of 10% per annum.
Our Critical Accounting Policies
Inventory
Inventories are valued at the lower of cost, as determined by standard pricing which approximates the first-in, first-out method, or net realizable value. When the Company is the manufacturer, raw materials, labor and manufacturing overhead are included in inventory costs. We record the raw materials at delivered cost. Standard labor and manufacturing overhead costs are applied to the finished goods based on normal production capacity. A majority of our products are manufactured overseas and are recorded at cost, which includes product costs for purchased and manufactured products, and freight and transportation costs for inbound freight from manufacturers.
|
March 31, |
March 31, |
|||||||
|
2019 |
2018 |
|||||||
|
(in thousands) |
||||||||
|
Finished goods |
$ | 7,071 | $ | 4,117 | ||||
|
Raw materials |
1,369 | 930 | ||||||
| $ | 8,440 | $ | 5,047 | |||||
The Company determines an inventory obsolescence reserve based on management’s historical experience and establishes reserves against inventory according to the product lifecycle. As of March 31, 2019 and 2018, the Company reserved $126,000 and $66,000, respectively, for inventory obsolescence. The increase in the inventory obsolescence is attributable to examining aged inventory, including seeds, displays and replacement part and disposing of the inventory that had been reserved.
Revenue Recognition
The Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers,” and all the related amendments (collectively “ASC 606”) on April 1, 2018 using the modified retrospective method. The adoption did not have a material impact to the nature and timing of its revenues, results of operations, cash flows and statement of financial position. The comparative information has not been restated and continues to be reported under the accounting standards in effect in those periods.
The following table summarizes the effect of adopting ASC 606 on the Company’s unaudited consolidated balance sheets as of March 31, 2019 (in thousands):
|
As reported |
Adjustments |
Balance without adoption of ASC 606 |
||||||||||
|
Assets: |
||||||||||||
|
Accounts receivable, net |
$ | 5,102 | $ | (1,195 |
) |
$ | 6,297 | |||||
|
Liabilities: |
||||||||||||
|
Accrued expenses |
$ | 1,437 | $ | (1,195 |
) |
$ | 2,632 | |||||
The Company currently has two operating and reportable segments: (i) the Direct–to-Consumer segment, which is composed of sales directly from our website, mail order or customer calls to our customer service department and (ii) the Retail segment, which includes all sales related to retailers, including where possession of our product is taken and sold by the retailer in store or online, and drop ship orders that process from the retailer and drop directly to our warehouse for us to ship on behalf of the retailer.
The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products and the risk of loss to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of December 31, 2018 or March 31, 2018.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
There were no changes to the Company’s accounting for variable consideration under ASC 606. However, the change in classification of several accrued expenses from a liability to a contra asset results in a change in presentation of net realizable accounts receivable on the balance sheet. Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to retail customers including, but not limited to the following:
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● |
|
discounts granted off list prices to support price promotions to end-consumers by retailers; |
|
● |
|
the Company’s agreed share of fees given directly to retailers for advertising, in-store marketing and promotional activities; and |
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● |
|
incentives given to the Company’s retailers for achieving or exceeding certain predetermined purchases (i.e., rebates). |
The Company’s promotional allowance programs with its retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one day to one year. The Company’s promotional and other allowances are calculated based on various programs with retail customers, and accruals are established during the year for its anticipated liabilities. These accruals are based on agreed upon terms, as well as the Company’s historical experience with similar programs, and require management’s judgment with respect to estimating consumer participation and retail customer performance levels. Differences between such estimated expense and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.
The Company records estimated reductions to revenue for customer and distributor programs and incentive offerings, including promotions, rebates, and other volume-based incentives, based on historical rates. Certain incentive programs require the Company to estimate the number of customers who will actually redeem the incentive based on historical industry experience. As of March 31, 2019 and 2018, the Company reduced accounts receivable $1.2 million and accrued expenses $430,000, respectively, as an estimate for the foregoing deductions and allowances within the “accounts receivable, net” line of the balance sheets, respectively.
The Company reserves for known and potential returns and associated refunds or credits related to such returns based upon historical experience. In certain cases, customers are provided a fixed allowance, usually in the 1% to 2% range, to cover returned goods. This allowance is deducted from payments made to us by such retailers. As of March 31, 2019 and 2018, the Company recorded a reserve for customer returns of $313,000 and $293,000, respectively.
Warranty
The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its basic warranty program. The specific warranty terms and conditions vary depending upon the product sold but generally include technical support, repair parts and labor for periods up to one year. Factors that affect our warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy our warranty obligation. Based upon the foregoing, the Company recorded a provision for potential future warranty costs of $166,000 and $111,000, as of March 31, 2019 and 2018, respectively.
Shipping and Handling Costs
Shipping and handling costs associated with inbound freight are recorded in cost of revenue and are capitalized in inventory until the inventory is sold. Shipping and handling costs associated with freight out to customers are also included in cost of revenue. Shipping and handling charges paid by customers are included in product sales. Shipping and handling charges paid by customers are included in net revenue.
Stock Based Compensation
The Company accounts for share-based payments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718-10-55 Shared-Based Payment . The Company uses the Black-Scholes option valuation model to estimate the fair value of stock option awards issued. For the years ended March 31, 2019, and 2018, equity compensation in the form of stock options and grants of restricted stock that vested totaled $0.
Advertising and Production Costs
The Company expenses all production costs related to advertising, including, print, television, and radio advertisements when the advertisement has been broadcast or otherwise distributed. In contrast, we record media and marketing costs related to our direct-to-consumer advertisements, inclusive of postage and printing costs incurred in conjunction with mailings of direct response catalogues, and related direct response advertising costs, in accordance with ASC 340-20-25 Reporting on Advertising Costs . As prescribed by ASC 340-20-25, direct response advertising costs incurred are reported as assets and should be amortized over the estimated period of the benefits, based on the proportion of current period revenue from the advertisement to probable future revenue.
As the Company has re-entered the retail distribution channel, it has expanded advertising into online gateway and portal advertising, as well as placement in third party catalogues.
Advertising expenses for the years ended March 31, 2019 and March 31, 2018, were as follows:
|
Fiscal Year Ended March 31, (in thousands) |
||||||||
|
2019 |
2018 |
|||||||
|
Direct-to-consumer |
$ | 674 | $ | 579 | ||||
|
Retail |
3,093 | 3,412 | ||||||
|
General |
317 | 759 | ||||||
|
Total advertising expense |
$ | 4,084 | $ | 4,750 | ||||
As of March 31, 2019 and March 31, 2018, the Company deferred $3,000 and $14,000, respectively, related to such media and advertising costs, including catalogue costs (as described above) and commercial production costs. The costs are included in the prepaid expenses and other line of the balance sheets.
Research and Development
Research, development, and engineering costs are expensed as incurred. Research, development, and engineering expenses primarily include payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and development support.
New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period, and early adoption is permitted. The Company is in the process of evaluating the potential impact of this new guidance on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees are required to use a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected to result in all operating leases being capitalized and recorded as a current and/or long-term liability in the Company’s financial statements. Our preparation for the adoption of ASU 2016-02 is substantially complete. We have compiled an inventory of our lease arrangements in order to determine the impact the new guidance will have on our financial statements and disclosures. We have elected certain practical expedients available under the guidance, including a package of practical expedients which allows us to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. Based on our assessment to date, we expect that the adoption of ASU 2016-02 will result in the recognition of right-of-use assets and corresponding lease liabilities to be immaterial to our Balance Sheet as of April 1, 2019. We do not expect the new standard to have a material impact on our Statement of Consolidated Income or Statement of Consolidated Cash Flows.
Inflation, Seasonality and Currency Fluctuations
We do not currently expect inflation to have a significant effect on our operations. Because our garden systems are designed for indoor gardening use, we experience slower sales in the United States and Canada during the late spring and summer months when our consumers may tend to garden outdoors. In addition, we have experienced increased sales during the four-month holiday season beginning in October and continuing through January. We sell to our international distributors in U.S. dollars thereby minimizing effects from currency fluctuations. We purchase our gardens and other accessory products from Chinese manufacturers, and these purchases are denominated in U.S. dollars. However, over time, the cost of the products we procure from China may be affected by changes in the value of the U.S. dollar relative to the Chinese currency and/or by labor and material cost increases faced by our Chinese manufacturers.
Results of Operations
The following table sets forth, as a percentage of sales, our financial results for the last two fiscal years:
|
Fiscal Years Ended March 31, |
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|
2019 |
2018 |
|||||||
|
Net revenue |
||||||||
|
Direct-to-consumer |
23.5 |
% |
25.3 |
% |
||||
|
Retail |
72.4 |
% |
71.0 |
% |
||||
|
International |
4.1 |
% |
3.7 |
% |
||||
|
Total net revenue |
100.0 |
% |
100.0 |
% |
||||
|
Cost of revenue |
65.2 |
% |
66.9 |
% |
||||
|
Gross profit |
34.8 |
% |
33.1 |
% |
||||
|
Operating expenses |
||||||||
|
Research and development |
1.7 |
% |
1.7 |
% |
||||
|
Sales and marketing |
24.6 |
% |
25.0 |
% |
||||
|
General and administrative |
8.5 |
% |
7.8 |
% |
||||
|
Total operating expenses |
34.8 |
% |
34.5 |
% |
||||
|
Income (loss) from operations |
0.0 |
% |
(1.4 |
%) |
||||
|
Total other income/(expense), net |
(0.9 |
%) |
0.0 |
% |
||||
|
Net loss |
(0.9 |
%) |
(1.4 |
%) |
||||
Fiscal Years Ended March 31, 2019 and March 31, 2018
Summary Overview
Our net revenue in Fiscal 2019 totaled $34.4 million, an increase of 6.4% from Fiscal 2018 revenues. This increase was primarily due to our increased focus on selling through broader channels in store and web/internet channels (Amazon.com, woot!, Good Morning America, Macy’s, etc.) and further expansion into the retail channel through expanded housewares customer departments (namely Macy’s, and Kohl’s). Additionally, the sales increase relates to newly acquired retail accounts including Good Morning America and Costco.ca Warehouses and expanded in-store tests such as Target. In addition, we believe increased targeted and general advertising drove sales increases in all of our channels.
Our sales to retailer customers increased by 8.5% to $24.9 million during Fiscal 2019. Retailer sales encompass sales to both traditional in-store and on-line retailers. The increase in sales to retailers reflected sales to the existing Amazon.com, woot! and Macy’s accounts, as well as newly acquired retail accounts such as Good Morning America and Costco.ca warehouses. We spent $3.1 million in advertising in the retail distribution channel, including targeted campaigns such as pay per click and banner ads, primarily to promote general brand awareness which included more targeted campaigns such as pay per click and banner ads.
Direct-to-consumer sales during Fiscal 2019 decreased to $8.1 million, a decrease of 1.0%, in the face of alternative on-line retailer outlets (primarily Amazon.com). We believe that our increased presence on Amazon, and other select online retailers leads to greater visibility, as well as continued momentum from our general advertising and marketing campaign and an expanded user-base. However, the decrease resulted primarily from the timing and initial results from our newly redesigned website, which was more focused on brand building compared to the prior website design.
International sales during Fiscal 2019 increased to $1.4 million, an increase of 16.2%, as we continue to test the international markets and understand the trends and acceptance of our product in international markets. The international markets consisted primarily of sales to Amazon platforms in the United Kingdom, Germany, France, Italy and Spain.
For the year ended March 31, 2019, total gross dollar sales of AeroGardens and seed pod kit accessories increased by 7.8% and 12.3%, respectively. AeroGarden sales net of allowances represent 76.4% of total revenue as compared to 77.7% in the prior year period. This percentage decrease, on a product line basis, was primarily attributable to growth in customers purchasing more seed pod kits and accessories and the increase in several customer allowances during Fiscal 2019. Seed pod kit and accessory gross sales increased as a percent of the total sales from 22.3% in Fiscal 2018 to 23.6% in Fiscal 2019, primarily as a result of the continued popularity of AeroGardens that have been placed in service over the past few years and the growing acceptance of our redesigned products; additionally, as noted above, the total dollar sales associated with the seed pod kit and accessories increased by $887,000.
For Fiscal 2019, we incurred $4.1 million in advertising expenditures, a 14.0% year-over-year decrease compared to the Fiscal Year ended 2018, which included $750,000 in general television, YouTube, Facebook and other media advertising. The Company views this investment as a long term commitment to increasing awareness of the AeroGarden brand and indoor gardening category to support growth in both our direct-to-consumer and retail channels. Overall advertising efficiency (measured as total revenue per dollar of advertising expense) increased from $6.80 to $8.42 for the years ended March 31, 2018 and March 31, 2019, respectively, due to a strategic focus on retail advertising along with more measurable general advertising and brand awareness through digital channels. These expenditures included:
|
● |
Direct-to-consumer advertising increased 16.4% to $674,000 in Fiscal 2019 from $579,000 in Fiscal 2018, primarily as a result of increased pay-per-click and targeted advertising. Efficiency, as measured by dollars of direct-to-consumer sales per dollar of related advertising expense, declined to $12.00, or 14.9%, for Fiscal 2019, as compared to $14.11chan for Fiscal 2018. Pay-per-click advertising expenses increased during the year, and we spent more on other direct-to-consumer measurable media, which did not drive the same level of efficiency in advertising expenses. |
|
● |
Retail advertising decreased $320,000 to $3.1 million in Fiscal 2019, as we focused on driving product awareness on behalf of our retail partners and invested in: (i) platforms made available by our retailers; (ii) fewer promotional programs to increase product awareness with our housewares channel of retail accounts, including catalogues and email campaigns; and (iii) web-based advertising programs (e.g. inclusion in retail catalogues, website banner ads, email blasts, targeted search campaigns, etc.). We anticipate that the advertising in the retail channel will be more targeted and generate greater customer awareness and also help drive direct-to-consumer sales. |
|
● |
Finally, in support of driving increased levels of category and brand awareness during Fiscal 2019, we spent over $317,000 in general television, YouTube, Facebook and other media advertising. The Company views this investment as a long-term commitment to increasing awareness of the AeroGarden brand. |
The combination of all of the factors cited above helped drive a year-over-year increase in total net revenues of 6.4% to $34.4 million in Fiscal 2019.
Our gross margin for Fiscal 2019 was 34.8%, up from 33.1% in the prior fiscal year. This increase was caused by: (i) an increase in sales through more profitable retailers and continued high-margin direct-to-consumer sales; (ii) increased focus on pricing with existing retail accounts; (iii) removal of some costs in the production process which resulted in the introduction of new products with higher margins; and (iv) a reduction in expenses associated with the branding agreement with SMG. The increase in our margins was partially offset by frictional cost associated with returns in the retail channel and continued expansion into the European market, which entails additional start-up costs. Long term, we also believe that creating increased brand awareness through advertising will help us maintain higher prices and deliver better margins.
Operating expenses for Fiscal 2019 totaled $12.0 million, an increase of 7.3% or $815,000 over the prior fiscal year. As a percentage of total revenue, operating expenses increased 0.3% year-over-year. Gross spending increased in the following areas:
|
● |
A $776,000 increase in general market research, new product samples, testing and certification, public relations and new product programs, including testing, certification, samples and illustration/language translations for international distribution; and |
|
● |
A $382,000 increase in use of contracted services, legal, accounting, including the launch of our newly redesigned website and upgrades to some internal systems; |
|
● |
A $343,000 increase in general office categories such as depreciation, insurance, repairs and maintenance, supplies, equipment; and |
|
● |
A $109,000 increase in travel to manufacturers in China, domestic travel for discussions related to warehouse processes, corporate meetings and potential domestic and European customers. |
The increases in operating expenses were partially offset by:
|
● |
A $696,000 decrease in advertising, primarily related to efficiencies in our marketing spend and general brand awareness and marketing and promotional programs with our key retailers; and |
|
● |
A $152,000 decrease due to a changes to our compensation program that better align compensation with our growth initiatives and a small increase in headcount. |
General and administrative expense totaled $2.9 million during Fiscal 2019, an increase of 15.6% or $394,000 as compared to the prior year, primarily due to increases in travel, office supplies, building related maintenance and repairs, bad debt, depreciation and the use of outside contractors to launch new programs, such as our updated website and ERP system.
Research and development costs also increased 5.7% year-over-year, or $32,000 in Fiscal 2019. Research and development spending increased in Fiscal 2019, particularly due to: (i) the addition of full-time employees to expedite our new product development process to replace design and consulting contractors used in the prior year; (ii) travel to develop new product manufacturer capabilities; (iii) market research; and (iv) new product development and testing certifications, partially offset by reimbursable consulting fees based on agreements with Scotts Miracle-Gro.
Our income from operations totaled $6,000 for Fiscal 2019, as compared to a loss of $448,000 in the prior year, primarily as a result of the $2.1 million increase in sales, increased gross margin and decreased sales and marketing expenses (as discussed above).
Other loss for Fiscal 2019 totaled $297,000, as compared to other income of $6,000 in the prior year. The net other loss in the current year period included interest expense recognized from the Term Loan with Scotts Miracle-Gro. The net other income in the prior year included interest income recognized from our improved cash position.
Our net loss for Fiscal 2019 totaled $291,000, a $152,000 improvement over the net loss of $442,000 in Fiscal 2018, primarily due to increased sales volumes and an increase in operating margins as we continued to refine our selling strategy partially offset by increased interest expense related to the Term Loan with Scotts Miracle-Gro.
Revenue
The table set forth below shows quarterly revenues by sales channel for the fiscal years ended March 31, 2019, and March 31, 2018:
|
Fiscal 2019 |
Quarters ended |
Year ended |
||||||||||||||||||
|
(in thousands) |
30-Jun-1 8 |
30-Sep-1 8 |
31-Dec-1 8 |
31-Mar-1 9 |
31-Mar-1 9 |
|||||||||||||||
|
Sales – direct-to-consumer |
$ | 1,454 | $ | 1,154 | $ | 3,010 | $ | 2,473 | $ | 8,091 | ||||||||||
|
Sales – retail |
2,254 | 7,376 | 9,136 | 6,101 | 24,867 | |||||||||||||||
|
Sales – international |
35 | 46 | 795 | 532 | 1,408 | |||||||||||||||
| $ | 3,743 | $ | 8,576 | $ | 12,941 | $ | 9,106 | $ | 34,366 | |||||||||||
|
Fiscal 2018 |
Quarters ended |
Year ended |
||||||||||||||||||
|
(in thousands) |
30-Jun-17 |
30-Sep-17 |
31-Dec-17 |
31-Mar-18 |
31-Mar-18 |
|||||||||||||||
|
Sales – direct-to-consumer |
$ | 1,425 | $ | 911 | $ | 3,189 | $ | 2,647 | $ | 8,172 | ||||||||||
|
Sales – retail |
974 | 4,746 | 13,356 | 3,839 | 22,915 | |||||||||||||||
|
Sales – international |
63 | 84 | 806 | 258 | 1,211 | |||||||||||||||
| $ | 2,462 | $ | 5,741 | $ | 17,351 | $ | 6,744 | $ | 32,298 | |||||||||||
In Fiscal 2019, revenue totaled $34.4 million, an increase of $2.1 million, or 6.4%, from Fiscal 2018. Sales to retailer customers for Fiscal 2019 totaled $24.9 million, up $2.0 million, or 8.5%, from the same period a year earlier, principally reflecting AeroGarden sales to the existing retailer web/internet channels of Amazon.com, and woot! and in store accounts of Macy’s, as well as newly acquired retail accounts such as Good Morning America and Costco.ca Warehouses. Direct-to-consumer revenue totaled $8.1 million in Fiscal 2019 as compared to $8.2 million in Fiscal 2018, principally reflecting challenges related to the launch of our redesigned website during the busiest holiday month of December. International sales totaled $1.4 million, an increase of $200,000, as we test international markets in the United Kingdom, Germany France, Spain, and Italy primarily through the Amazon platforms.
The following table presents our quarterly sales by product category, in U.S. dollars and as a percent of total net revenue, for Fiscal 2019 and Fiscal 2018.
AeroGarden unit revenue totaled $34.1 million in Fiscal 2019, up $2.5 million from $31.6 million, or 7.8%, from a year ago, principally due to: (i) the increase in retail channel sales; (ii) the increase in general brand awareness; and (iii) the launch of the new AeroGarden Harvest and Bounty models. Sales of seed pod kits and accessories increased by $886,000, or 12.3%, resulting from an overall increase in brand awareness and growth of the existing customer base. In Fiscal 2019, sales of seed pod kits and accessories represented 23.6% of our total net revenue, an increase from 22.3% in the prior fiscal year, reflecting the expansion of AeroGarden sales in retail markets. The increase in seed pod kit and accessories was partially offset by decreases in compact fluorescent light bulb sales as we incorporate more LED lighting technology into our gardens. Discounts, allowances and other revenue (expense), which is comprised of items that are not specifically identifiable to a product, such as grow club revenue, shipping revenue, accruals and deductions, increased as a percentage of total revenue from (20.3)% in Fiscal 2018 to (22.8)% in Fiscal 2019 due to increases in revenue deductions for sales allowances and discounts in the in-store retail market.
Cost of Revenue
Cost of revenue for Fiscal 2019 totaled $22.4 million, a 3.7% increase from the prior fiscal year. Cost of revenue includes product costs for purchased and manufactured products, freight costs for inbound freight from manufacturers and outbound freight to customers, costs related to warehousing, credit card processing fees for direct sales, and duties and customs applicable to imported products. The dollar amount of cost of revenue increased because of the 6.4% increase in total sales, along with increased supply chain costs. As a percent of total revenue, cost of revenue totaled 65.2% in Fiscal 2019, as compared to 66.9% in the year earlier period. The decrease in costs as a percent of revenue resulted from:
|
● |
Revenue mix shift to some higher margin customers from some lower margin retail customers, along with reductions in certain product costs; and |
|
● |
Change in the Brand Agreement in which we will no longer pay a 5% fee to Scotts Miracle-Gro on the sale of AeroGardens. |
The decrease in cost of revenues, as a percent of revenue, was partially offset by increases in:
|
● |
Supply chain costs such as domestic and international shipping; |
|
● |
The cost of product storage in several domestic and international locations; and |
|
● |
Continued payment of a 5% fee to Scotts Miracle-Gro on the sale of seed pod kits and related products. |
Gross Margin
Our gross margin varies based upon the factors affecting net revenue and cost of revenue as discussed above, as well as the mix of our revenue from high- and low-margin customers. In a direct-to-consumer sale, we recognize as revenue the full consumer purchase price for the product. In retail and international sales, by comparison, we recognize as revenue the wholesale price for the product which we charge to the retailer or international distributor, with fluctuations attributable to the mix of on-line and brick and mortar customers. Gross margins also vary based on specific products, as well as the maturity and size of the customer relationship. Media costs associated with direct sales are included in sales and marketing costs. Overall, the gross margin for Fiscal 2019 was 34.8% as compared to 33.1% in the prior year. The increase in our gross margin was primarily attributable to decreases in product costs, change in the Brand Agreement in which we no longer pay a 5% fee to Scotts Miracle-Gro on the sale of AeroGardens and increases in the revenue mix attributable to better margin customers, partially offset by increased supply chain expenses and inventory storage and order processing costs.
Research and Development
Research and development costs totaled $590,000 for Fiscal 2019, an increase of $32,000, or 5.7% from the prior fiscal year. Research and development costs are comprised of payroll, travel and other costs associated with (i) development of new AeroGarden models and technologies; (ii) our plant laboratories that research new plant varieties and growing technologies; (iii) new technologies, such as improved lighting and nutrient formulation; and (iv) costs to enhance the performance of our products. Our research and development spending increased in Fiscal 2019, particularly related to design and consulting service expenses for market research, new product development and ongoing certification and testing of all our AeroGarden garden units (as required by our retail partners), partially offset by reimbursements of certain R&D consulting fees by Scotts Miracle-Gro pursuant to contractual requirements costs.
Sales and Marketing
Sales and marketing costs for Fiscal 2019 totaled $8.5 million, an increase of $390,000, or 4.8%, from the prior fiscal year. Sales and marketing costs include all costs associated with the marketing, sales, operations, customer support, and sales order processing for our products. The following table breaks down the components of our sales and marketing costs for Fiscal 2019 and Fiscal 2018:
|
Fiscal Years Ended March 31, |
||||||||
|
2019 |
2018 |
|||||||
|
(in thousands) |
||||||||
|
Advertising |
$ | 4,084 | $ | 4,750 | ||||
|
Salaries and related expenses |
2,200 | 2,202 | ||||||
|
Sales commissions |
83 | 106 | ||||||
|
Trade shows |
52 | 51 | ||||||
|
Travel |
238 | 174 | ||||||
|
Media production and promotional products |
80 | 49 | ||||||
|
Quality control and processing fees |
240 | 200 | ||||||
|
General brand marketing |
788 | 174 | ||||||
|
Other |
697 | 365 | ||||||
|
Total |
$ | 8,462 | $ | 8,071 | ||||
Advertising is principally composed of the costs of developing and airing our infomercials, the costs of development, production, printing, and postage for our catalogues, and mailing and web media costs for search and affiliate web marketing programs and retail support placement. Each of these are key components of our integrated marketing strategy because they help build awareness of, and consumer demand for, our products in all our channels of distribution (retail and direct-to-consumer). Advertising expense totaled $4.1 million for Fiscal 2019, a year-over-year decrease of 14.0%, or $666,000, primarily because of our increased use of more measurable pay-per-click advertising, partially offset by our decreased focus on general retail advertising, including general television, YouTube, Facebook and other general media advertising. The decrease in specific advertising discussed above is offset by an increase in general marketing which increased $614,000 because of general type of marketing designed to reach a broad base.
Sales and marketing personnel costs include salaries, payroll taxes, employee benefits and other payroll costs for our sales, operations, customer service, graphics and marketing departments. Personnel costs for sales and marketing in Fiscal 2019 were $2.2 million, relatively flat from Fiscal 2018 levels.
Sales commissions, which generally include 1-7% of cash collections from some of our retailer customers, are paid to third-party sales representatives that assist us in developing and maintaining relationships with certain retailers. Sales commission expense totaled $83,000 for the fiscal year ended March 31, 2019, a decrease of 22.3% from the prior fiscal year as a result of lower overall sales to customers represented by third-party sales representatives.
Other marketing expenses increased $332,000, or 91.0%, year-over-year primarily as a result of increases in a variety of other marketing initiatives, including direct marketing consulting with several retailers, general marketing programs to develop brand recognition and understand target market customers, changes in overall promotional programs, including a significant increase in social media, market research and retailer marketing programs, and use of contractors to help drive sales.
General and Administrative
General and administrative expense for the fiscal year ended March 31, 2019 totaled $2.9 million, an increase of 15.6% or $394,000 as compared to the prior year. This increase was principally due to increases in travel, office supplies, building-related maintenance and repairs, bad debt, depreciation and the use of outside contractors for launching new programs, such as our upgraded website and ERP system,.
Operating Income and Loss
The income from operations totaled $6,000 in Fiscal 2019, an increase of $454,000, or 101.5%, from the prior year, primarily as a result of an increase in the gross profit and gross margin and a decrease in retail specific advertising programs and general television, YouTube, Facebook and other general media advertising.
Other Income and Expense
Other expense for Fiscal 2019 totaled $297,000, as compared to other income of $6,000 in the prior year. The net other loss in the current year period included interest expense recognized from the Term Loan with Scotts Miracle-Gro. Net other income for Fiscal 2018 included interest income recognized from our improved cash position.
Net Loss
Our net loss for Fiscal 2019 was $291,000, a $151,000 improvement over our net loss of $442,000 in Fiscal 2018, primarily attributable to increased sales volumes and an increase in operating margins, as we continued to refine our selling strategy, partially offset by increased interest expense related to the Term Loan.
Segment Results
We report our segment information in the same way that management assesses the business and makes decisions regarding the allocations of resources in accordance with the Segment Reporting Topic of the Financial Accounting Standards Board Accounting Standards Codification (ASC). We have two reportable segments. Retail and Direct-to-Consumer. Factors considered in determining our Reportable Segments include the nature of the business activities, the reports provided to the Company’s chief operating decision maker (CODM) for operating and administrative activities, available information and information that is presented to our Board of Directors.
The Company’s CODM has been identified as the Chief Executive Officer because he has final authority over the performance assessment and resource allocation decisions. The CODM regularly receives discrete financial information about each Reportable Segment. The CODM uses all such information for performance assessment and resource allocation decisions. The CODM evaluates the performance of and allocates resources based upon the contribution margins of each segment.
We divide our business into two reportable segments: Direct-to-Consumer and Retail. This division of reportable segments is consistent with how the segments report to and are managed by the chief operating decision maker of the Company. The Company evaluates performance based on the primary financial measure of contribution margin (“segment profit”). Segment profit reflects the income or loss from operations before corporate expenses, non-operating income, net interest expense, and income taxes.
|
Fiscal Year Ended March 31, 2019 |
||||||||||||||||
|
(in thousands) |
Direct-to-consumer |
Retail |
Corporate/Other |
Consolidated |
||||||||||||
|
Net sales |
$ | 8,091 | $ | 26,275 | $ | - | $ | 34,366 | ||||||||
|
Cost of revenue |
5,737 | 16,658 | - | 22,395 | ||||||||||||
|
Gross profit |
2,354 | 9,617 | - | 11,971 | ||||||||||||
|
Gross profit percentage |
29.1 |
% |
36.6 |
% |
- | 34.8 |
% |
|||||||||
|
Sales and marketing (1) |
332 | 4,026 | 1,343 | 5,701 | ||||||||||||
|
Segment profit |
2,022 | 5,591 | (1,343 |
) |
6,270 | |||||||||||
|
Segment profit percentage |
25.0 |
% |
21.3 |
% |
- | 18.2 |
% |
|||||||||
(1) Sales and marketing includes advertising, trade shows, media production and promotional products, general brand marketing and other as discussed in the sales and marketing section.
|
Fiscal Year Ended March 31, 2018 |
||||||||||||||||
|
(in thousands) |
Direct-to-consumer |
Retail |
Corporate/Other |
Consolidated |
||||||||||||
|
Net sales |
$ | 8,172 | $ | 24,126 | $ | - | $ | 32,298 | ||||||||
|
Cost of revenue |
5,672 | 15,926 | - | 21,598 | ||||||||||||
|
Gross profit |
2,500 | 8,200 | - | 10,700 | ||||||||||||
|
Gross profit percentage |
30.6 |
% |
33.9 |
% |
- | 33.1 |
% |
|||||||||
|
Sales and marketing (1) |
129 | 3,670 | 1,590 | 5,389 | ||||||||||||
|
Segment profit |
2,371 | 4,530 | (1,590 |
) |
5,311 | |||||||||||
|
Segment profit percentage |
29.0 |
% |
18.8 |
% |
- | 16.4 |
% |
|||||||||
(1) Sales and marketing includes advertising, trade shows, media production and promotional products, general brand marketing and other as discussed in the sales and marketing section.
Liquidity and Capital Resources
After adjusting the net loss for non-cash items and changes in operating assets and liabilities, net cash used by operating activities totaled $4.8 million in Fiscal 2019, as compared to net cash used by operating activities of $851,000 in the prior fiscal year.
Non-cash items, consisting of depreciation, amortization, bad debt allowances, accretion of debt association with sale of intellectual property, loss on write-off of assets and changes in inventory allowances totaled a net loss of $520,000 in Fiscal 2019, as compared to a net loss of $101,000 in the prior fiscal year.
Changes in current assets used cash of $4.2 million during Fiscal 2019, primarily due to increases in accounts receivable, inventory, and other current assets. In Fiscal 2018, changes in these assets used $3.6 million, reflecting increases in accounts receivable and inventory, partially offset by a decrease in other current assets. As of March 31, 2019, the inventory balance was $8.4 million, representing approximately 138 days of sales activity during Fiscal 2019. The inventory on hand will support anticipated growth for the next year and alleviates some uncertainty regarding potential tariff increases. Net accounts receivable totaled $5.1 million as of March 31, 2019, representing approximately 75 days of net retail sales activity at the average daily rate of sales recognized during Fiscal 2019. The days of sales in receivables and inventory calculations can fluctuate, and are greatly impacted by our seasonality and the timing of sales and inventory receipts during the period.
Current operating liabilities decreased $864,000 during Fiscal 2019, because of an $864,000 increase in accounts payable, accrued liabilities, customer deposits, and the SMG intellectual property and brand accrual. In the prior year period, current operating liabilities increased $1.8 million primarily due to increases in accounts payable and accrued liabilities, including accrued interest and customer deposits. Accounts payable as of March 31, 2019 totaled $2.6 million, representing approximately 28 days of daily expense activity at the average daily rate of expenses incurred during Fiscal 2019.
Net investment activity used $853,000 of cash, primarily due to purchases of equipment to manufacture our new products, as compared to cash used of $464,000 in the prior year.
Net financing activity, including the borrowing and repayment of debt, used cash of $21,000 during Fiscal 2019, as compared to cash used of $7,000 in the prior fiscal year.
As of March 31, 2019, we had a cash balance of $1.8 million, of which $15,000 was restricted as collateral for our various corporate obligations. This compares to a cash balance of $7.5 million as of March 31, 2018, of which $15,000 was restricted.
As of March 31, 2019 and March 31, 2018, the outstanding balance of our debt is as follows:
|
For the Fiscal Years Ended March 31, |
||||||||
|
2019 |
2018 |
|||||||
|
(in thousands) |
||||||||
|
Sale of intellectual property liability (see Note 3) |
$ | 48 | $ | 80 | ||||
|
Total debt |
48 | 80 | ||||||
|
Less current portion |
48 | 80 | ||||||
|
Long term debt |
$ | - | $ | - | ||||
As of March 31, 2019, we have $0 of debt requiring cash payments. The remaining debt in the current liability is related to the Scotts Miracle-Gro transaction, for further information see Note 3 to our financial statements.
We use, or have used, a variety of debt funding sources to meet our liquidity requirements, including the following:
Borrowing Agreements
During Fiscal 2019, we entered into a Term Loan Agreement in the principal amount of up to $6.0 million with Scotts Miracle-Gro. As of March 31, 2019, the outstanding balance of our note payable and debt, including accrued interest, was $0 as discussed in more detail in Note 2.
Cash Requirements
We generally require cash to:
|
● |
fund our operations and working capital requirements, |
|
● |
develop and execute our product development and market introduction plans, |
|
● |
execute our sales and marketing plans, |
|
● |
fund research and development efforts, and |
|
● |
pay debt obligations as they come due. |
At this time, we do not expect to enter into additional capital leases to finance major purchases. In addition, we do not currently have any binding commitments with third parties to obtain any material amount of equity or debt financing other than the financing arrangements described in this report.
Assessment of Future Liquidity and Results of Operations
Liquidity
To assess our ability to fund ongoing operating requirements, we developed assumptions regarding operating cash flow. Critical sources of funding, and key assumptions and areas of uncertainty include:
|
● |
our cash of $1.8 million ($15,000 of which is restricted as collateral for our various corporate obligations) as of March 31, 2019; |
|
● |
our cash of $1.5 million, ($15,000 of which is restricted as collateral for our various corporate obligations) as of June 17, 2019; |
|
● |
continued support of, and extensions of credit by, our suppliers and previous lenders, including Scotts Miracle-Gro, the Company and Scotts Miracle-Gro has agreed to a term loan in the amount of $10.0 million for the upcoming fiscal year; |
|
● |
our historical pattern of increased sales between September and March, and lower sales volume from April through August; |
|
● |
the level of spending necessary to support our planned initiatives; and |
|
● |
our sales to consumers, retailers, and international distributors, and the resulting cash flow from operations, which will depend in great measure on acceptance of our products by retail distribution customers and the success of planned direct-to-consumer sales initiatives. |
During Fiscal 2019 we took a number of actions to address our liquidity needs. Most importantly, we concentrated on increasing our margin by eliminating some production costs despite a shipping related problem in our domestic and international channels. Specifically, we utilized more targeted pay-per-click advertising along with general brand awareness marketing and strategically expanded sales to major retailers that have proven to be the best and most profitable business partners.
In second quarter of Fiscal 2019, the Company entered into a Term Loan Agreement in the principal amount of up to $6.0 million with Scotts Miracle-Gro with a maturity date of March 29, 2019. The Term Loan Agreement was secured by a lien on the assets of the Company. Interest was charged at the stated rate of 10% per annum. The funding provided general working capital and was used for the purpose of acquiring inventory to support our expansion into retail and its direct-to-consumer sales channels in advance of our peak selling season. The principal and accrued interest on the Term Loan were repaid in full during the fourth quarter of Fiscal 2019.
Based on these facts and assumptions, we believe our existing cash and cash equivalents, along with the cash generated by our anticipated results from operations, will be sufficient to meet our needs for the next twelve months from the filing date of this report based on current cash on hand and financing from Scotts Miracle-Gro similar to the last few years. However, we may need to seek additional debt or equity capital to provide a cash reserve against contingencies, address the seasonal nature of our working capital needs, and to purchase inventory and incur other expenses in an attempt to increase the scale of our business. There can be no assurance we will be able to raise this additional capital.
Results of Operations
There are several factors that could affect our future results of operations. These factors include, but are not limited to, the following:
|
● |
the effectiveness of our consumer marketing efforts in generating both direct-to-consumer sales, and sales to consumers by our retailer customers; |
|
● |
uncertainty regarding the impact of macroeconomic conditions on consumer spending; |
|
● |
uncertainty regarding the capital markets and our access to sufficient capital to support our current and projected scale of operations; |
|
● |
the seasonality of our business, in which we have historically experienced higher sales volume during the fall and winter months (September through March); |
|
● |
a continued, uninterrupted supply of product from our third-party manufacturing suppliers in China; and |
|
● |
the success of the Scotts Miracle-Gro relationship. |
Off-Balance Sheet Arrangements
We do not have current commitments under capital leases and have not entered into any contracts for financial derivative such as futures, swaps, and options other than those disclosed in this Annual Report.
Obligations and Commitments
As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts, such as leases and the timing and effect that such commitments are expected to have on our liquidity and cash flow in future periods. The following is a summary of these obligations as of March 31, 2019.
|
Less than 1 year |
1 -3 years |
More than 3 years |
Total |
|||||||||||||
|
(in thousands) |
||||||||||||||||
|
Capital leases |
$ | 43 | $ | 29 | $ | - | $ | 72 | ||||||||
|
Operating leases |
$ | 201 | $ | 797 | $ | 1,039 | $ | 2,037 | ||||||||
|
Totals: |
$ | 244 | $ | 826 | $ | 1,039 | $ | 2,109 | ||||||||
See Note 2, Note 3 and Note 7 to our financial statements for additional information related to our notes payable and long term debt and operating leases, respectively. Refer to Note 10 “Subsequent Events” for more information related to our new operating lease included in the table above.
ITEM 7A. 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 the value of those. Due to the short-term nature of our cash equivalents, we have concluded that a change in interest rates does not pose a material market risk to us with respect to our interest income. However, as discussed above, if we acquire additional debt changes in the general level of market interest rates could impact our interest expense during the terms of future debt arrangements. In this regard, interest on our Term Loan with Scotts Miracle-Gro was charged at the stated rate of 10% per annum.
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 Asia are predicated upon their cost for components, labor and overhead. Therefore, changes in the valuation of the U.S. dollar in relation to the Asian currencies 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.
Our financial statements appear in a separate section at the end of this Annual Report. Such information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Senior Vice President, Finance and Accounting, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on our assessment, management has concluded that, as of March 31, 2019, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission’s Internal Control-Integrated Framework (2013).
Based on our assessment, management has concluded that, as of March 31, 2019, our internal control over financial reporting was effective based on those criteria.
Management is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f), promulgated under the Securities Exchange Act of 1934, as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, 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 and includes those policies and procedures that:
|
● |
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and dispositions of the assets; |
|
● |
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
|
● |
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failure. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Attestation Report of the Independent Registered Public Accounting Firm
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year ended March 31, 2019 that have or are reasonably likely to materially affect our internal control over financial reporting identified in connection with the previously mentioned evaluation.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers
The following sets forth certain information with respect to our executive officers and significant employees, as of the filing date of this report. The executive officers have employment contracts with the Company as discussed in Item 11 below. All other employees are considered at-will.
|
Name |
|
Age |
|
Position with AeroGrow |
|
J. Michael Wolfe |
|
60 |
|
President and Chief Executive Officer |
|
Grey H. Gibbs |
|
52 |
|
SVP – Finance and Administration |
|
John K. Thompson |
|
58 |
|
EVP, Sales & Marketing and Secretary |
J. Michael Wolfe , age 60, became our Chief Operating Officer in January 2010, our President on February 9, 2011, and our Chief Executive Officer on March 31, 2011. He previously served as Vice President of Operations since April 2006. Prior to joining AeroGrow, Mr. Wolfe was an independent consultant. From 1992 to 2002, he was President and Chief Operating Officer of Concepts Direct and was its Chief Executive Officer from 2000 to 2001. At Concepts Direct, Mr. Wolfe oversaw the development, launch and operations of seven independent catalogues. From 1987 to 1992, Mr. Wolfe served as Vice President of Wiland Services, Inc., a database management company where he oversaw the redesign of the company’s product line, its sales and investor relations. The Board believes that Mr. Wolfe’s leadership experience, combined with his extensive direct-to-consumer marketing background, his executive experience at a variety of direct-to-consumer companies, and his knowledge of AeroGrow’s history and business, qualifies him to serve as President and Chief Executive Officer.
Grey H. Gibbs , age 52, has been employed by AeroGrow since November of 2007. He has served as Senior Vice President – Finance and Accounting since May 2015 and previously served as: (i) Vice President of Finance and Accounting from June 2014 to May 2015; (ii) Vice President of Accounting from February 2011 to June 2014; and (iii) Controller from November 2007 to June 2011. Before joining AeroGrow, Mr. Gibbs was employed by Swift Company, an animal protein processor, as Director of Sarbanes-Oxley Compliance from 2006 to 2007 and Assistant Corporate Controller from 2004 to 2006. From 2003 to 2004, Mr. Gibbs was the Chief Financial Officer of JCIT International, an educational and consulting firm in lean manufacturing. From 1994 to 2002, Mr. Gibbs served in a range of strategic and financial roles for Agilent Technologies and Hewlett Packard, including New Product Introduction Program Manager, Outsourcing Program Manager, Site Finance Manager, Planning and Reporting Analyst and Senior Internal Auditor. Mr. Gibbs was also an Audit Supervising Senior for KPMG LLP from 1991 to 1994.
John K. Thompson , age 58, became Executive Vice President of Sales and Marketing in April 2014. Mr. Thompson joined AeroGrow in 2002 and has served in a variety of senior management positions at AeroGrow, including his position as Vice President of Marketing from October 2009 to April 2014. Mr. Thompson also served as the Company’s International Division General Manager and Vice President of Investor Relations, and was instrumental in the research activities leading to the development and launch of the Company’s AeroGarden product line. Prior to joining AeroGrow, Mr. Thompson was Director of Marketing for Productivity Point International, a direct marketing and direct sales company, and Sales and Marketing Manager for CareerTrack, a direct marketing company that sold personal and professional growth products to the consumer and commercial markets.
Board of Directors
Our Board of Directors oversees the management of AeroGrow on your behalf. Among other things, the Board reviews our long-term strategic plans and exercises direct decision-making authority on key issues, including the appointment of our executive officers and setting the scope of their authority in managing AeroGrow’s day-to-day operations. Our Board is currently comprised of Chris Hagedorn (Chairman), H. MacGregor Clarke, David B. Kent, Cory J. Miller and Patricia M. Ziegler. Messrs. Hagedorn, Miller and Ms. Ziegler are representatives of Scotts Miracle-Gro. Biographical information about Mr. Wolfe is contained above under the caption heading “Executive Officers.” Biographical information for Messrs. Hagedorn, Clarke, Kent, Miller and Ms. Ziegler is presented below, along with Albert Messina and Peter Supron, who served as Board members during Fiscal 2019, prior to their resignation in April 2019.
H. MacGregor Clarke , age 58, has been a director since April 2018 and previously served as a director from July 2009 to March 2013. Mr. Clarke has served as Senior Vice President and Chief Financial Officer of Johns Manville, a Berkshire Hathaway company, since March 2013 and previously served as AeroGrow’s Chief Financial Officer from May 2008 through March 2013. From 2007 to 2008, Mr. Clarke was President and Chief Executive Officer, and from 2006 to 2007, Chief Financial Officer, of Ankmar, LLC, a garage door manufacturer, distributor and installer. From 2003 to 2006, Mr. Clarke was a senior investment banker with FMI Corporation, a management consulting and investment banking firm serving the building and construction industry. At FMI Corporation, Mr. Clarke was responsible for delivering consulting and investment banking services to clients, and for marketing to prospective clients in the financial services industry. Mr. Clarke’s extensive financial and executive experience, in particular his prior service as an executive officer of four companies, among other factors, led the Board to conclude that he should serve as a director.
Chris J. Hagedorn , age 34, has been a director since 2013 and Chairman of the Board since November 2016. Mr. Hagedorn was appointed the General Manager of The Hawthorne Gardening Company in October 2014 and was previously appointed Director of Indoor Gardening at Scotts Miracle-Gro in May of 2013. From 2011 to 2013, Mr. Hagedorn served as a Marketing Manager for the North Region at Scotts Miracle-Gro. Mr. Hagedorn was initially appointed to the Board by Scotts Miracle-Gro pursuant to a provision of the Securities Purchase Agreement between AeroGrow and Scotts Miracle-Gro which allowed Scotts Miracle-Gro, as holder of the Series B Preferred Convertible Stock, to appoint one member to the Board of Directors for so long as the convertible stock remained outstanding. For more details regarding the Securities Purchase Agreement, the Series B Preferred Stock, the Warrant, and related agreements, refer to Note 3. “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements. The Board believes that Mr. Hagedorn’s business experience and ties to Scotts Miracle-Gro, particularly in light of AeroGrow’s strategic alliance with Scotts Miracle-Gro, qualifies him to serve as a director.
David B. Kent , age 60, has been a director since April 2018. Mr. Kent has served in various senior managerial roles and is currently Co-Founder of Darcie Kent Vineyards. Mr. Kent served as a Brand Manager for Procter & Gamble, the world’s foremost consumer package goods company. Mr. Kent served as CEO of the Wine Group LLC from 2000 to 2012. Mr. Kent’s extensive experience in marketing, retail and brand building, among other factors, led the Board to conclude that he should serve as a director.
Cory J. Miller , age 45, has been a director since April 2019. Cory Miller joined the AeroGrow Board in 2019 and is currently the Vice President of Finance & Information Technology at The Hawthorne Gardening Company. The Hawthorne Gardening Company is a whole-owned subsidiary of the Scotts Miracle-Gro Company. Cory began his career at Scotts Miracle-Gro in 2000 and has held several roles of increasing responsibility. Previous leadership roles at Scotts include VP of Finance, Merger & Acquisition Integration; VP of Finance, Chief Internal Auditor; VP of Finance, Sales; and VP of Finance, Marketing. Prior to joining Scotts, Cory was a member of the audit practice of Ernst and Young. The Board believes that Mr. Miller’s business experience and ties to Scotts Miracle-Gro, particularly in light of AeroGrow’s strategic alliance with Scotts Miracle-Gro, qualifies him to serve as a director.
Patricia M. Ziegler , age 54, has been a director since April 2019. Patti Ziegler joined the AeroGrow Board in 2019 and is currently the Chief Digital and Marketing Services Officer at Scotts Miracle-Gro. Patti began her career at Scotts Miracle-Gro in 2011 and has held several roles within the marketing team with brand, advertising, and digital leadership responsibilities. Currently, Patti is responsible for driving growth with direct to consumer. Before joining the company, Patti held several leadership positions within an advertising agency holding company across a broad range of categories including Consumer Packaged Goods, Retail, Financial Services, Spirits, Healthcare, Restaurants, Utilities, and Tourism. The Board believes that Ms. Ziegler’s marketing and advertising experience, creativity and entrepreneurial approach qualifies her to serve as a director.
Former Board Members
As stated above, Albert Messina and Peter Supron, who served as Board members during Fiscal 2019 prior to their resignation in April 2019.
Albert (Bert) Messina , age 51, served as a director from November 2016 to April 2019. Mr. Messina has served in various senior managerial roles at the Hawthorne Gardening Company, a whole-owned subsidiary of the Scotts Miracle-Gro Company, since 2014. He previously served as Finance and Strategy Lead at Hawthorne from 2014-2018. From 2012 to 2013, Mr. Messina served as a Senior Director of Strategy & Development for Source Interlink Media. Prior to that, Mr. Messina served as a Managing Director for DeSilva & Phillips Investment Bank. The Board believes that Mr. Messina’s business experience and ties to Scotts Miracle-Gro, particularly in light of AeroGrow’s strategic alliance with Scotts Miracle-Gro, qualifies him to serve as a director.
Peter Supron, age 51, served as a director from November 2016 to April 2019. Mr. Supron currently serves as Chief of Staff to the President and Chief Operating officer of Scotts Miracle-Gro. In this role, Mr. Supron partners with the business units in strategy development and has played a key role in Scotts Miracle-Gro’s entry into the Internet of Things market for lawn & garden, as well as Scotts Miracle Gro’s entry into the direct-to-consumer space. Previously, Peter led Scott Miracle-Gro’s corporate strategy & mergers & acquisitions function, its procurement team, as well has held various roles in finance. The Board believes that Mr. Supron’s business experience and ties to Scotts Miracle-Gro, particularly in light of AeroGrow’s strategic alliance with Scotts Miracle-Gro, qualifies him to serve as a director.
Board Committees and Meetings
We have established two standing committees so that certain matters can be addressed in more depth than may be possible in a full Board meeting: an Audit Committee and a Governance, Compensation and Nominating Committee. The two committees each operate under a written charter.
Audit Committee. The current members of our Audit Committee are Messrs. Clarke (chairman), Hagedorn and Miller. Mr. Messina, who resigned from the Board in April 2019, served as a member of the committee during Fiscal 2019. The members were elected to the committee, and the chairman was appointed by the Board. The Board has determined that Mr. Clarke is considered an “audit committee financial expert,” as defined by Item 407(d)(5)(ii) of Regulation S-K, due to his extensive financial background and experience (as summarized in the biographical information for Mr. Clarke disclosed above). The Board has affirmatively determined that Mr. Clarke is an independent director as defined by applicable securities law and NASDAQ corporate governance guidelines. Due to their positions as representatives of Scotts Miracle-Gro, the Company’s most significant stockholder, Messrs. Hagedorn and Miller and Ms. Ziegler are not independent directors. The Audit Committee’s charter provides that the committee shall:
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● |
oversee the accounting and financial reporting processes and audits of the financial statements; |
|
● |
assist the Board with oversight of the integrity of our financial statements, our compliance with legal and regulatory requirements, our independent auditors’ qualifications and independence, and the performance of the independent auditors; and |
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● |
provide the Board with the results of its monitoring. |
Governance, Compensation and Nominating Committee. The current members of the Governance, Compensation and Nominating Committee are Ms. Ziegler (chairman), Messrs. Kent and Hagedorn. Mr. Supron, who resigned from the Board in April 2019, served as chairman of the committee during Fiscal 2019. The members were elected to the committee, and the chairman was appointed, by the Board. The Governance, Compensation and Nominating Committee’s charter provides that the committee shall:
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● |
recommend to the Board the corporate governance guidelines to be followed; |
|
● |
review and recommend the nomination of Board members; |
|
● |
set the compensation for the chief executive officer and other officers; and |
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● |
administer the equity-based performance compensation plans of AeroGrow. |
The Governance, Compensation and Nominating Committee does not have a formal policy concerning stockholder recommendations to the Board of Directors and we did not receive any recommendations from stockholders requesting that the Board consider a candidate for inclusion as a nominee. The Committee has determined that it is appropriate to not have such a policy given the infrequency of such recommendations. The absence of such a policy does not mean, however, that a recommendation would not have been considered had one been received. The Committee would consider any candidate proposed in good faith by a stockholder on the same basis as a candidate proposed directly by the Board. To do so, a stockholder should send the candidate’s name, credentials, contact information, and the candidate’s consent to be considered to the Governance, Compensation and Nominating Committee, c/o Corporate Secretary, AeroGrow International, Inc., 6075 Longbow Drive, Boulder, Colorado, 80301. The proposal should be received by the due date for a stockholder proposal, as set forth below under the caption heading “Submission of Stockholder Proposals,” in order to be considered timely for consideration by the Committee prior to the Annual Meeting of Stockholders or, in lieu of an annual meeting, for an action by written consent of the stockholders. The proposing stockholder should also include his or her contact information and a statement of his or her share ownership (how many shares owned and for how long).
In evaluating director nominees, the Governance, Compensation and Nominating Committee considers the appropriate skills and personal characteristics needed in light of the makeup of the current Board, including considerations of character, background, professional experience, education, skill, qualifications for committee membership, independence, race, gender, national origin, differences in viewpoint, and other individual qualities and attributes. Other than the foregoing, there are no stated minimum criteria for director nominees, although the Committee may also consider such other factors as it may deem are in the best interests of the AeroGrow and its stockholders. The Committee does, however, believe it is appropriate for a member or members of AeroGrow’s management to participate as members of the Committee.
The Governance, Compensation and Nominating Committee identify nominees by first evaluating the current members of the Board willing to continue in service. Current members of the Board with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination. If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Committee then identifies the desired skills and experience of a new nominee in light of the criteria above. Current members of the Board would be polled for suggestions as to individuals meeting the criteria described above. The Committee may also engage in research to identify qualified individuals. To date, we have not engaged third parties to identify or evaluate or assist in identifying potential nominees, although we reserve the right in the future to retain a third-party search firm, if appropriate.
Meetings. During Fiscal 2019 the Board held eight meetings. A quorum of directors attended all of the meetings held by the Board during the period that each person served as a director of AeroGrow. Also during Fiscal 2019, the Audit Committee held four meetings and the Governance, Compensation and Nominating Committee held two meetings. Each director attended, either in person or by telephone conference, at least 75% of the Board and committee meetings held while serving as a director or committee member in Fiscal 2019.
The Company encourages all incumbent directors, as well as all nominees for election as director, to attend the annual stockholder meetings, but they are not required to do so. We did not hold an annual meeting last year.
Code of Ethics
The Board of Directors has adopted a Code of Ethics to provide guidance to all of our directors, officers and employees, including our principal executive officer, principal financial and accounting officers, and persons performing similar functions. The Code of Ethics is posted on our website at www.aerogrow.com, and may be found by linking to “Investors” and then “Code of Ethics.” We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website.
Board Structure and Risk Oversight
Chris Hagedorn serves as Chairman of the Board. Scotts Miracle-Gro is the largest investor in AeroGrow and its financial support was instrumental in allowing AeroGrow to persevere through a very difficult economic period. Messrs. Hagedorn, Messina and Supron were representatives of Scotts Miracle-Gro and they were involved in setting the strategic direction for the Company.
Our Board has overall responsibility for risk oversight. Throughout the year, the Board dedicates a portion of their meetings to review and discuss specific risk topics in greater detail. Strategic and operational risks are presented and discussed in the context of the President’s report on operations to the Board at regularly scheduled board meetings and at presentations to the Board by our other employees and consultants. The Board’s risk oversight process builds upon management’s risk assessment and mitigation processes. The small size of AeroGrow allows our Board to develop in-depth knowledge of different facets of the business. This in-depth knowledge, coupled with exposure to and frequent communication with our management, assists the Board in performing its oversight responsibilities, including risk management, in an effective manner.
Communications with the Board of Directors
Stockholders and other interested parties may communicate with the Board or any individual director, by writing to:
AeroGrow International, Inc.
Attention: Board of Directors
c/o Corporate Secretary
6075 Longbow Drive, Suite 200
Boulder, Colorado 80301
If the letter is from a stockholder, the letter should state that the sender is a stockholder. Under a process approved by the Board, depending on the subject matter, management will:
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● |
forward the letter to the director or directors to whom it is addressed; or |
|
● |
attempt to handle the matter directly (as where information about our business or our stock is requested); or |
|
● |
not forward the letter if it is primarily commercial in nature or relates to an improper or irrelevant topic. |
A summary of all relevant communications that are received after the last meeting of the full Board and which are not forwarded will be presented at each Board meeting along with any specific communication requested by a director.
All communications will be handled in a confidential manner, to the degree the law allows. Communications may be made on an anonymous basis; however, in these cases the reporting individual must provide sufficient details for the matter to be reviewed and resolved. The Company will not tolerate any retaliation against an employee who makes a good faith report.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our executive officers and directors, and persons who own more than 10% of our common stock (herein collectively, our “Section 16 insiders”) to file with the SEC certain forms reporting their ownership and changes in beneficial ownership of our common stock and other equity with the SEC, and to furnish us with copies of these filings.
To our knowledge, based solely upon a review of the copies of such forms furnished to us and written representations that no other reports were required, we believe that, during the fiscal year ended March 31, 2019, all such filings required to be made by our Section 16 insiders were timely filed in accordance with the requirements of the Exchange Act except for the following: (i) a report filed by Michael J. Wolfe, President and CEO, relating to a sale of common stock on August 24, 2018 and August 27, 2018 was filed late on September 14, 2018; and (ii) a report filed by John K. Thompson, Executive Vice President of Sales and Marketing, relating to a purchase of common stock on February 25, 2019 was filed two business days late on March 1, 2019.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Philosophy
The Governance, Compensation and Nominating Committee of our Board is responsible for guiding and overseeing the formulation and application of the compensation and benefit programs for our executive officers and our directors. A description of compensation for our non-employee directors is included below under the caption “Director Compensation.” The Committee acts pursuant to a charter that has been approved by our Board.
The Governance, Compensation and Nominating Committee believes that the most effective compensation program is one that is designed to reward the achievement of specific annual, long-term, and strategic goals by AeroGrow, and which aligns executives’ interests with those of the stockholders by rewarding performance above established goals, with the ultimate objective of increasing stockholder value. The Governance, Compensation and Nominating Committee evaluates both performance and compensation to ensure that AeroGrow maintains its ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies. Accordingly, the Governance, Compensation and Nominating Committee believes executive compensation packages provided by AeroGrow to its executives, including the executive officers, should include salary compensation and annual cash incentives based on the Company’s ability to pay and fundamental measures of financial performance.
We compensate our executives through a mix of base salary, bonus, and equity compensation designed to be competitive with comparable employers and to align management’s incentives with the long-term interests of our stockholders. In making compensation decisions, the Governance, Compensation and Nominating Committee, may compare certain elements of total compensation against other comparable publicly traded and privately held companies that compete in our markets. A significant percentage of total compensation is allocated to incentive compensation as a result of the philosophy mentioned above. There is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Rather, the Governance, Compensation and Nominating Committee reviews information such as that referenced above with respect to our peers and our major shareholder, SMG, Scotts Miracle-Gro, to determine the appropriate level and mix of incentive compensation. Income from such incentive compensation is realized as a result of the performance of AeroGrow or the individual, depending on the type of award.
Compensation Process
Generally, base salaries and annual incentive awards will be reviewed at the end of each fiscal year with changes made to the base salaries effective April 1 of the following fiscal year. Whether an individual’s salary and incentive awards are increased or decreased depends on the individual’s performance as well as the overall performance of AeroGrow.
Although we have not issued stock options and other stock grants in the last two fiscal years, such equity grants are reviewed and approved at meetings of the Governance, Compensation and Nominating Committee and the full Board. By establishing the meeting schedule and agenda for these grants in advance, AeroGrow diminishes any opportunity for manipulation of exercise prices on option grants to the extent any recipients are in possession of non-public information at the time of the meetings. Approval of grants for any newly hired or promoted executives during the course of the year generally occurs at the Governance, Compensation and Nominating Committee’s meeting immediately following the hiring or promotion.
Role of Executive Officers in Compensation Decisions
The Governance, Compensation and Nominating Committee make all compensation decisions for the executive officers and approve recommendations regarding equity awards to all elected officers. The Chief Executive Officer annually reviews the performance of each Named Executive Officer (other than the Chief Executive Officer, whose performance is reviewed by disinterested members of the Governance, Compensation and Nominating Committee). As a “smaller reporting company,” our “Named Executive Officers” include our (i) Chief Executive Officer; and (ii) other two most highly compensated executive officers based on SEC regulations. Compensation ranges for our Named Executive Officers are based on the individual’s experience and prior performance, as well as AeroGrow’s operating performance. The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, are presented to the Governance, Compensation and Nominating Committee. The Governance, Compensation and Nominating Committee can exercise its discretion in modifying any recommended adjustments or awards to executives.
Components of Total Compensation
In Fiscal 2019, the principal components of compensation for executive officers were:
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● |
base salary; |
|
● |
performance-based annual incentive awards (cash bonuses); and |
|
● |
benefits and other perquisites. |
Each component is designed to achieve a specific purpose and to contribute to a total package that is competitive, appropriately performance-based, and valued by AeroGrow’s executives. Although we did not issue stock options in Fiscal 2019, we have utilized equity compensation in prior years and may again in the future.
Base Salaries
We provide executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. Base salary ranges for executive officers are determined for each executive based on his or her position and responsibility. During its review of base salaries for executives, the Governance, Compensation and Nominating Committee primarily considers:
|
● |
individual scope of responsibility; |
|
● |
years of experience; |
|
● |
market data, such as that obtained from a review of other similarly situated companies; |
|
● |
internal review of the executive’s compensation, both individually and relative to other officers; and |
|
● |
individual performance of the executive. |
Salary levels are typically considered annually as part of our performance review process as well as upon a promotion or other change in job responsibility.
Performance-Based Annual Incentive Compensation
Though markets dictate that base salaries must be competitive, we are moving toward basing a greater proportion of our executive compensation on the achievement of measurable individual and company results through the award of annual incentive bonuses. These bonuses are often tied to performance against AeroGrow’s sales growth and EBIT objectives. By increasing variable pay as a percentage of total compensation, the Governance, Compensation and Nominating Committee believes that executive compensation will be more aligned with value delivered to our stockholders. This limits fixed costs and also results in higher pay occurring only in years when merited by high performance. Due to company-wide improvements on sales and operations, we paid an aggregate of $254,000 in discretionary cash bonuses to our Named Executive Officers in Fiscal 2019. We accrued $20,000 in performance-based bonuses during Fiscal 2019 for payments that are to be paid to our Named Executive Officers during Fiscal 2019.
Long Term Stock-Based Compensation
This category of awards covers options granted to executives out of equity plans, and that vest over time, at different rates for different executives. Although we did not issue stock options in Fiscal 2019, we have utilized equity compensation in prior years and may again in the future. Because these awards vest over time and become more valuable to the recipient only as our stock price increases, the Governance, Compensation and Nominating Committee believes these are a useful form of long-term incentive compensation, with the potential to directly align the interests of shareholders and management. During Fiscal 2019, we granted options to purchase 0 shares of common stock. For more details about outstanding stock options held by our Named Executive Officers, please refer to the table below entitled “Outstanding Equity Awards at Fiscal Year End.”
At March 31, 2019, no options to purchase shares of our common stock were unvested. These options will result in $-0- of compensation expense.
Executives and Employment Arrangements
The following discussion and table relate to compensation arrangements on behalf of, and compensation paid by us during Fiscal 2019, to our Named Executive Officers who were employed by AeroGrow as of March 31, 2019.
Employment Contracts
We have employment agreements with J. Michael Wolfe and John K. Thompson.
J. Michael Wolfe
Effective as of March 4, 2012, AeroGrow and J. Michael Wolfe entered into an employment agreement (the “Wolfe Agreement”) that provides that he will be employed as the Chief Executive Officer and must devote substantially all of his working time and efforts to our business. The Wolfe Agreement superseded and replaced a previous agreement between the parties dated as of February 9, 2009. The Wolfe Agreement has an initial one year term, with automatic one year renewals unless advance notice is given by either party. Pursuant to the Wolfe Agreement, Mr. Wolfe’s annual base salary was set at $200,000 until September 2, 2012, at which time his annual base salary increased to $226,923. Beginning on April 1, 2013, and each April 1 thereafter, Mr. Wolfe’s annual base salary will be increased by 3%, or such higher percentage as may be determined by our Board of Directors. During Fiscal 2019, Mr. Wolfe’s annual base salary was $281,849. In addition, Mr. Wolfe will receive an automobile allowance of $750 per month during the term of the Wolfe Agreement. Mr. Wolfe is eligible to participate in our annual cash incentive compensation plan for senior managers, and in our 2005 Equity Compensation Plan, each as determined by the Board of Directors from time to time. The Wolfe Agreement also provides for medical, vacation, and other benefits commensurate with the policies and programs adopted by the Board of Directors for our senior executives. In the event that we terminate the employment of Mr. Wolfe without cause (as determined under the Wolfe Agreement), Mr. Wolfe will be entitled to receive his base salary for 12 months following the date of termination, plus a prorated portion of his annual cash bonus. In the event that we breach any term of the Wolfe Agreement and such breach is not cured within thirty days of notice being given, then Mr. Wolfe can terminate his employment and be entitled to receive his base salary for 12 months following the date of termination, plus a prorated portion of his annual cash bonus. The Wolfe Agreement also requires Mr. Wolfe to comply with certain restrictive covenants including but not limited to a covenant not to compete during the term of the Wolfe Agreement and for a period of twelve months following the termination of the Wolfe Agreement.
John K. Thompson
Effective as of March 4, 2012, AeroGrow and John K. Thompson entered into an employment agreement (the “Thompson Agreement”) that provides that he will be employed as the Senior Vice President, Sales and Marketing and must devote substantially all of his working time and efforts to our business. The Thompson Agreement superseded and replaced a previous agreement between the parties dated as of January 26, 2009. The Thompson Agreement has an initial one year term, with automatic one year renewals unless advance notice is given by either party. Pursuant to the Thompson Agreement, Mr. Thompson’s annual base salary was set at $150,000 until September 2, 2012, at which time his annual base salary increased to $167,307. Beginning on April 1, 2013, and each April 1 thereafter, Mr. Thompson’s annual base salary will be increased by 3%, or such higher percentage as may be determined by our Board of Directors. During Fiscal 2019, Mr. Thompson’s annual base salary was $212,615. Mr. Thompson is eligible to participate in our annual cash incentive compensation plan for senior managers, and in our 2005 Equity Compensation Plan, each as determined by the Board of Directors from time to time. The Thompson Agreement also provides for medical, vacation, and other benefits commensurate with the policies and programs adopted by the Board of Directors for our senior executives. In the event that we terminate the employment of Mr. Thompson without cause (as determined under the Thompson Agreement), then Mr. Thompson will be entitled to receive his base salary for 12 months following the date of termination, plus a prorated portion of his annual cash bonus. In the event that we breach any term of the Thompson Agreement and such breach is not cured within thirty days of notice being given, then Mr. Thompson can terminate his employment and be entitled to receive his base salary for 12 months following the date of termination, plus a prorated portion of his annual cash bonus. The Thompson Agreement also requires Mr. Thompson to comply with certain restrictive covenants including but not limited to a covenant not to compete during the term of the Thompson Agreement and for a period of twelve months following the termination of the Thompson Agreement.
Other Company officers who do not qualify as Named Executive Officers are employed on an “at will” basis, subject to varying lengths of employment agreements and severance agreements.
Summary Compensation Table
The following table sets forth information regarding all forms of compensation received by the Named Executive Officers during Fiscal 2019 and Fiscal 2018:
|
Name and Principal Position |
Fiscal Year |
Salary Paid |
Bonus |
Stock Awards |
Option Awards (1) |
All Other Compensation |
Total |
|||||||||||||||||||||||
|
J. Michael Wolfe, President and CEO |
2019 |
$ | 281,849 | (1 |
) |
$ | 163,721 | $ | - | $ | - | $ | 9,375 | (2 |
) |
$ | 454,945 | |||||||||||||
|
2018 |
$ | 273,793 | (1 |
) |
$ | 118,590 | $ | - | $ | - | $ | 9,000 | (2 |
) |
$ | 401,383 | ||||||||||||||
|
John K. Thompson, EVP, Sales and Marketing |
2019 |
$ | 212,615 | (1 |
) |
$ | 88,392 | $ | - | $ | - | $ | - | $ | 301,548 | |||||||||||||||
|
2018 |
$ | 200,000 | (1 |
) |
$ | 65,939 | $ | - | $ | - | $ | - | $ | 265,939 | ||||||||||||||||
|
Grey H. Gibbs, SVP of Finance and Administration |
2019 |
$ | 164,073 | (1 |
) |
$ | 57,920 | $ | - | $ | - | $ | - | $ | 221,992 | |||||||||||||||
|
2018 |
$ | 156,547 | (1 |
) |
$ | 31,459 | $ | - | $ | - | $ | - | $ | 188,006 | ||||||||||||||||
|
(1) |
Salaries are computed and disclosed on a cash basis. The executive officers did receive a pay increase in Fiscal 2019 (as determined by the employment agreements with respect to Messrs. Wolfe and Thompson). |
|
(2) |
Beginning in March 2012, Mr. Wolfe was paid $750 per month in accordance with his employment agreement. |
The following table provides information with respect to the Named Executive Officers concerning unexercised stock options held by them at March 31, 2019. During the year ended March 31, 2019, some options granted to the Named Executive Officers were exercised.
Outstanding Equity Awards at Fiscal Year End
|
Name |
Number of Securities Underlying Unexercised Options (Exercisable) |
Number of Securities Underlying Unexercised Options (Unexercisable) |
Exercise Price per Share |
Expiration Date |
|||||||||
|
J. Michael Wolfe |
33,000 | - | $ | 5.31 |
7-Aug-2019 |
||||||||
|
John K. Thompson |
17,000 | - | $ | 5.31 |
7-Aug-2019 |
||||||||
|
Grey H. Gibbs |
7,500 | - | $ | 5.31 |
7-Aug-2019 |
||||||||
|
|
(1) Stock options granted on August 7, 2014 have an exercise price of $5.31 per share and vest quarterly over a two year period. |
Compensation Committee Interlocks and Insider Participation
Disclosure under this section is not required for a “smaller reporting company.”
Report of the Compensation Committee
Disclosure under this section is not required for a “smaller reporting company.”
Director Compensation
The following table provides information on AeroGrow’s compensation practices during the fiscal year ended March 31, 2019 for non-employee directors:
Non-Employee Director Compensation Information
|
Annual retainer for all non-employee directors (paid in quarterly installments) |
$ | 30,000 | ||
|
Stock options granted for annual service on the Board by non-employee directors (1) |
- | |||
|
Stock options granted for annual service on the Audit Committee (1) |
- | |||
|
Stock options granted for annual service on the Governance, Compensation, and Nominating Committee (1) |
- | |||
|
Additional stock options granted for annual service as Board Chairman (1) |
- | |||
|
Reimbursement for expenses attendant to Board membership |
Yes |
|||
|
(1) |
The options vest pro-rata monthly (one-twelfth per month) on the last day of each month throughout the term of service. If a director is unable to finish his or her term of service by reason of death or disability, the director options vest immediately. |
Only Messrs. Clarke, and Kent, received non-employee director compensation during the fiscal year ended March 31, 2019. Chris J. Hagedorn, a full-time employee of The Scotts Miracle-Gro Company, was appointed to the Board and to both committees of the Board in April 2013 and was appointed as Chairman of the Board in November 2016. Under the terms of the Scotts Miracle-Gro transaction, Mr. Hagedorn is not entitled to receive non-employee Board compensation. Albert Messina and Peter Supron were also appointed to the Board in November 2016 and continued to serve until each retired from the Board in April 2019. Under the terms of the Scotts Miracle-Gro transaction, Messrs. Messina and Supron were not entitled to receive non-employee Board compensation. We maintain $10 million of director and officer liability insurance and we have entered into indemnification agreements with each director
Summary of Board and Committee Composition
|
Current Directors |
|
Board |
|
|
Audit |
|
|
Governance, Compensation, and Nominating |
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris J. Hagedorn, Chairman (1) |
|
X |
|
|
X |
|
|
X |
|
|
H. MacGregor Clarke (2) |
|
X |
|
|
X |
|
|
|
|
|
David B. Kent (2) |
|
X |
|
|
|
|
|
X |
|
|
Cory J. Miller (3) |
X |
X |
|||||||
|
Patricia M. Ziegler (3) |
X |
X |
|||||||
|
Albert Messina (4) |
|
X |
|
|
X |
|
|
|
|
|
Peter Supron (4) |
|
X |
|
|
|
|
|
X |
|
|
(1) |
Chris J. Hagedorn was appointed to the Board and to both committees of the Board in April 2013 and was appointed as Chairman of the Board in November 2016, concurrently with Scotts Miracle-Gro’s exercise of the warrant to purchase 80% of the Company’s outstanding common stock. |
|
(2) |
Messrs. Clarke and Kent were appointed to the Board on April 1, 2018. |
|
(3) |
Mr. Miller and Ms. Ziegler were appointed to the Board on April 1, 2019. |
|
(4) |
Messrs. Messina and Supron were appointed to the Board in November 2016, upon exercise of the warrant held by Scotts Miracle-Gro, and served until their respective resignations in April 2019. |
Director Compensation Table during Fiscal 2019
The following table sets forth information regarding all forms of compensation received by members of our Board of Directors during Fiscal 2019:
|
Director |
Director Fees Earned or Paid in Cash |
Stock Awards |
Option Awards (1) |
Warrant Awards |
All Other Compensation |
Total |
||||||||||||||||||
|
H. MacGregor Clarke, Director |
$ | 30,000 | $ | - | $ | - | $ | - | $ | - | $ | 30,000 | ||||||||||||
|
David B. Kent, Director |
$ | 30,000 | $ | - | $ | - | $ | - | $ | - | $ | 30,000 | ||||||||||||
|
Chris J. Hagedorn, Chairman (2) |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
Albert Messina, Director (2) |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
Peter Supron, Director (2) |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
|
(1) Represents the aggregate grant date fair value of stock option awards, as computed in accordance with FASB ASC Topic 718. |
|
|
(2) As an employee of The Scotts Miracle-Gro Company, Messrs. Hagedorn, Messina and Supron did not receive compensation for his service on the Board of Directors. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Stock Ownership
The following table sets forth certain information as of June 17, 2019 regarding our common stock owned of record or known by the Company to be owned beneficially by: (i) each director, (ii) each executive officer named in the Summary Compensation Table (the “Named Executive Officers”), (iii) all those known by the Company to beneficially own more than 5% of the Company’s common stock, and (iv) all directors and Named Executive Officers as a group.
In general, a person is deemed to be a “beneficial owner” of a security under SEC Rule 13d-3 if that person has or shares the power to vote or direct the voting of such security, or the power to dispose or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within 60 days. To the best of our knowledge, subject to community and marital property laws, all persons named have sole voting and investment power with respect to such shares except as otherwise noted. For purposes of calculating percent of class ownership, the table below assumes a total of 34,328,036 shares of common stock outstanding. However, shares of our common stock subject to convertible preferred stock, warrants and stock options that are convertible or exercisable within 60 days of June 17, 2019 are deemed outstanding for purposes of computing the percentage ownership of the person holding such convertible preferred stock, warrants and stock options, but are not deemed outstanding for computing the percentage of any other person.
|
Name of Beneficial Owner |
Number of Common Shares Beneficially Owned (1) |
Number of Common Shares Acquirable Within 60 Days (2) |
Percent Beneficial Ownership |
|||||||||
|
5% Stockholders |
||||||||||||
|
SMG Growing Media, Inc. (4), (6) |
27,639,294 | - | 80.52 |
% |
||||||||
|
Directors and Named Executive Officers |
||||||||||||
|
H. MacGregor Clarke (3) |
- | - | * | |||||||||
|
Chris J. Hagedorn (3) (5) |
- | - | * | |||||||||
|
David B. Kent (3) |
- | - | * | |||||||||
|
Albert Messina (3) |
- | - | * | |||||||||
|
Peter Supron (3) |
- | - | * | |||||||||
|
J. Michael Wolfe (3) |
139,790 | - | * | |||||||||
|
Grey H. Gibbs (3) |
7,500 | - | * | |||||||||
|
John K. Thompson (3) |
18,166 | - | * | |||||||||
|
All AeroGrow Named Executive Officers and Directors as a Group (8 Persons) |
165,457 | * | ||||||||||
|
* |
Represents less than 1% of our outstanding common stock as of June 15, 2019.
|
|
(1) |
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, which include holding voting and investment power with respect to the securities. Shares of common stock that are acquirable within 60 days, though conversion of preferred stock or exercise of options or warrants, are deemed outstanding for computing the percentage of the total number of shares beneficially owned by the designated person, but are not deemed outstanding for computing the percentage for any other person. Beneficial ownership is based on holdings known to the Company and may not include all shares of common stock beneficially owned but held in street name or reflect recent sales or purchases of securities that have not been made known to the Company. |
|
(2) |
The number of shares acquirable within 60 days includes any shares issuable upon conversion of convertible preferred stock or upon exercise of options or warrants that are currently exercisable or exercisable within the next 60 days. This number is included in the number of shares beneficially owned. |
|
(3) |
The address of the beneficial owner is 6075 Longbow Dr., Suite 200, Boulder, CO 80301. |
|
(4) |
Beneficial ownership is based on holdings known to the Company and includes information provided in a Schedule 13D filed with the SEC on August 30, 2018. SMG Growing Media, Inc. is a wholly-owned subsidiary of The Scotts Miracle-Gro. The address of SMG Growing Media, Inc. and The Scotts Miracle-Gro is 14111 Scottslawn Road, Marysville, Ohio 43041. The shares beneficially owned by SMG Growing Media, Inc. include shares of common stock that were issued on November 29, 2016 upon Scotts Miracle-Gro’s exercise of the Warrant and conversion of all outstanding Series B Convertible Preferred Stock. For further information refer to Note 3, “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements. |
|
(5) |
Mr. Hagedorn was elected to the Board by representative of SMG Growing Media, Inc. Mr. Hagedorn does not hold voting or investment power over the shares owned by SMG Growing Media, Inc. and therefore disclaims beneficial ownership over such shares. |
|
(6) |
The number referenced as acquirable within 60 days assumes the issuance of shares in accordance with the Scotts Miracle-Gro agreements discussed above. |
Equity Compensation Plan Information
The following table summarizes information about our equity compensation plans as of March 31, 2019.
|
Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance |
|||||||||
|
Equity compensation plans |
104,631 | $ | 4.90 | 12,438,091 | ||||||||
|
Equity compensation plans not approved by security holders |
- | $ | - | - | ||||||||
|
Total |
104,631 | $ | 4.90 | 12,438,091 | ||||||||
At March 31, 2019 the Company has no unvested options, and no future compensation expense.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
Review, Approval or Ratification of Transactions with Related Parties
Since April 1, 2018, the beginning of Fiscal 2019, our Board of Directors reviewed and did not object to any of the related party transactions reported in this Annual Report on Form 10-K. Our Board recognizes that related party transactions present a heightened risk of conflicts of interest and/or improper valuation (or the perception thereof) and therefore follows the procedures as described below to address such risks.
Our Board of Directors is required to review all related party transactions. AeroGrow is prohibited from entering or continuing a material related party transaction that has not been reviewed and approved or ratified by the Board. Additionally, in transactions where an executive officer is considered to be a related party of any provider of our goods or services, the Board of Directors must approve the transaction. In reviewing a related party transaction, the Board of Directors considers all of the relevant factors surrounding the transaction including:
|
● |
whether there is a valid business reason for us to enter into the related party transaction consistent with the best interests of AeroGrow and its stockholders; |
|
● |
whether the transaction is negotiated on an arm’s length basis on terms comparable to those provided to unrelated third parties or on terms comparable to those provided to employees generally; |
|
● |
whether the Board of Directors determines that it has been duly apprised of all significant conflicts that may exist or may otherwise arise on account of the transaction, and it believes, nonetheless, that we are warranted in entering into the related party transaction and have developed an appropriate plan to manage the potential conflicts of interest; |
|
● |
whether the rates or charges involved in the transaction are determined by competitive bids, or the transaction involves rates or charges fixed in conformity with law or governmental authority; and/or |
|
● |
whether the interest of the related party or that of a member of the immediate family of the related party arises solely from the ownership of our class of equity securities and all holders of our equity securities received the same benefit on a pro-rata basis. |
During the fiscal year ended March 31, 2019, and in prior years, we relied upon a variety of debt funding sources to meet our liquidity requirements, including transactions that: (i) involved members of our Board, management team and certain stockholders that beneficially own more than five percent of our outstanding voting securities and (ii) are required to be disclosed pursuant to Item 404 of Regulation S-K. In each case, these related parties received the same terms and conditions as other third-party investors. These transactions are disclosed above under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation– Liquidity and Capital Resources” and in Note 2, “Notes Payable and Long Term Debt,” Note 6 “Related Party Transactions,” and Note 8 “Stockholders’ Equity,” to our financial statements.
Board Independence
Our common stock trades on the OTCQB market tier and we are considered to be a “smaller reporting company” under applicable SEC rules. As such, we are not currently subject to corporate governance standards of other listed companies, which require, among other things, that the majority of the Board of Directors be independent. Because we are not currently subject to corporate governance standards defining the independence of our directors, we have chosen to define an “independent” director in accordance with the NASDAQ Global Market’s requirements for independent directors. Under the NASDAQ definition, an independent director is a person who is not an executive officer or employee of the Company and who does not have a relationship with the Company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Our Board has determined that Mr. Clarke and Mr. Kent are the only independent members of our Board of Directors during Fiscal 2019. Mr. Clarke served as the Chairman of the Audit Committee during Fiscal 2019.
Chris J. Hagedorn was initially appointed to the Board by Scotts Miracle-Gro pursuant to a condition to the Securities Purchase Agreement between AeroGrow and Scotts Miracle-Gro which allows Scotts Miracle-Gro, as holder of the Series B Preferred Stock, to appoint one member to the Board of Directors. Additionally, Albert Messina and Peter Supron were appointed to the Board on November 29, 2016 by Scotts Miracle-Gro pursuant to Scotts Miracle-Gro’s exercise of the Warrant. Upon exercise of the Warrant, Scotts Miracle-Gro was entitled to appoint three of the five members of the Board (currently, Messrs. Hagedorn and Miller and Ms. Ziegler). For more details regarding the Securities Purchase Agreement, the Series B Preferred Stock, the Warrant, and related agreements, refer to Note 3, “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees of the Independent Registered Public Accountants
Aggregate fees billed by Plante & Moran, PLLC (“Plante Moran”) (formally EKS&H LLLP) for the fiscal years ended March 31, 2019 and 2018 are as follows:
|
For the Fiscal Years Ended March 31, |
||||||||
|
2019 |
2018 |
|||||||
|
(in thousands) |
||||||||
|
Plante Moran |
||||||||
|
Audit Fees |
131 | 110 | ||||||
|
Audit Related Fees |
- | - | ||||||
|
Tax Fees |
- | - | ||||||
|
All Other Fees |
- | - | ||||||
|
Total Plante Moran |
131 | 110 | ||||||
|
Grand Total |
$ | 131 | $ | 110 | ||||
As reported in a Current Report on Form 8-K filed with the SEC on October 4, 2018, EKS&H LLLP, the Company’s independent registered public accounting firm for the fiscal year ended March 31, 2018, combined with Plante Moran effective as of October 1, 2018. The aggregate fees reflected in the table above show the combined payments to EKS&H and Plante Moran.
Audit Fees: This category includes the audit of our annual financial statements included in our Annual Report on Form 10-K, review of quarterly financial statements included in our Quarterly Reports on Form 10-Q, and if and when required or requested, the audit of the effectiveness of our internal controls.
Audit-related fees: This category consists of assurance and related services provided by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.”
Tax fees: This category consists of professional services rendered primarily in connection with our tax planning and compliance activities, including the preparation of tax returns. Although we did incur $28,000 and $26,000 in tax fees during Fiscal 2019 and 2018, respectively, we did not engage Plante Moran for any tax services.
All other fees: This category consists of fees for other corporate services, primarily the review of SEC reports other than annual and quarterly reports.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
The primary purpose of the Audit Committee is to assist the Board in monitoring (i) the integrity of our financial statements and disclosures, including oversight of the accounting and financial reporting processes and the audits of our financial statements, (ii) compliance with our legal, ethical, and regulatory requirements, and (iii) the independence and performance of our independent registered public accounting firm.
The Audit Committee’s policy is to pre-approve all audit and non-audit services, other than de minimis non-audit services, provided by the independent registered public accounting firm. In this regard, all fees incurred in Fiscal 2018 and Fiscal 2019, as disclosed above under the caption “Fees of the Independent Registered Public Accountants,” were pre-approved by the Audit Committee. These services may include, among others, audit services, audit-related services, tax services, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular services or categories of services and is generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the full Board regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date.
The Audit Committee considers the provision of non-audit services by our independent registered public accounting firm compatible with its independence. The Audit Committee will continue to approve all audit and permissible non-audit services provided by our independent registered public accounting firm.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The financial statements filed as part of this report are provided below.
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not required, are not applicable or the information is included in the Financial Statements or Notes thereto.
(3) Exhibits
See exhibit index which follows immediately after the financials below.
AEROGROW INTERNATIONAL, INC.
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of AeroGrow International, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of AeroGrow International, Inc. (the “Company”) as of March 31, 2019, the related statements of operations, stockholders' equity, and cash flows for the year ended March 31, 2019, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2019, and the results of its operations and its cash flows for the year ended March 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Plante Moran PLLC
We have served as the Company’s auditors since 2011.
Denver, Colorado
June 24, 2019
Report of Independent Public Accounting Firm
To the Audit Committee, Board of Directors, and Stockholders
AeroGrow International, Inc.
Boulder, Colorado
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying balance sheet of AeroGrow International, Inc. (the “Company”) as of March 31, 2018, and the related statements of operations, changes in stockholders’ equity, and cash flows, for the year ended March 31, 2018, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2018, and the results of its operations and its cash flows for the year ended March 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
BASIS FOR OPINIONS
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
EKS&H LLLP
June 24, 2018
Boulder, Colorado
BALANCE SHEETS
|
March 31, |
March 31, |
|||||||
|
2019 |
2018 |
|||||||
|
(in thousands, except share and per share data) |
||||||||
|
ASSETS |
||||||||
|
Current assets |
||||||||
|
Cash and cash equivalents |
$ | 1,741 | $ | 7,482 | ||||
|
Restricted cash |
15 | 15 | ||||||
|
Accounts receivable, net of allowance for doubtful accounts of $89 and $39 at March 31, 2019 and 2018, respectively |
5,102 | 4,296 | ||||||
|
Other receivables |
207 | 281 | ||||||
|
Inventory, net |
8,440 | 5,047 | ||||||
|
Prepaid expenses and other |
490 | 493 | ||||||
|
Total current assets |
15,995 | 17,614 | ||||||
|
Property and equipment and intangible assets, net of accumulated depreciation of $4,828 and $4,386 at March 31, 2019 and 2018, respectively |
1,006 | 514 | ||||||
|
Deposits |
39 | 39 | ||||||
|
Total assets |
$ | 17,040 | $ | 18,167 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
|
Current liabilities |
||||||||
|
Accounts payable |
$ | 2,610 | $ | 2,748 | ||||
|
Accrued expenses |
1,437 | 2,231 | ||||||
|
Customer deposits |
181 | 163 | ||||||
|
Debt associated with sale of intellectual property-current portion |
25 | 32 | ||||||
|
Total current liabilities |
4,253 | 5,174 | ||||||
|
Long term liabilities |
||||||||
|
Debt associated with sale of intellectual property |
23 | 48 | ||||||
|
Capital lease liability |
72 | 12 | ||||||
|
Other liability |
240 | 190 | ||||||
|
Total liabilities |
4,588 | 5,424 | ||||||
|
Commitments and contingencies (Note 7) |
||||||||
|
Stockholders’ equity |
||||||||
|
Preferred stock, $.001 par value, 20,000,000 shares authorized, 0 issued and outstanding at March 31, 2019 and 2018, respectively |
- | - | ||||||
|
Common stock, $.001 par value, 750,000,000 shares authorized, 34,328,036 shares issued and outstanding at March 31, 2019 and 2018 |
34 | 34 | ||||||
|
Additional paid-in capital |
140,817 | 140,817 | ||||||
|
Accumulated deficit |
(128,399 |
) |
(128,108 |
) |
||||
|
Total stockholders’ equity |
12,452 | 12,743 | ||||||
|
Total liabilities and stockholders’ equity |
$ | 17,040 | $ | 18,167 | ||||
See accompanying notes to the financial statements
STATEMENTS OF OPERATIONS
|
Years ended March 31, |
||||||||
|
2019 |
2018 |
|||||||
|
(in thousands, except per share data) |
||||||||
|
Net revenue |
$ | 34,366 | $ | 32,298 | ||||
|
Cost of revenue |
22,395 | 21,598 | ||||||
|
Gross profit |
11,971 | 10,700 | ||||||
|
Operating expenses |
||||||||
|
Research and development |
590 | 558 | ||||||
|
Sales and marketing |
8,462 | 8,071 | ||||||
|
General and administrative |
2,913 | 2,519 | ||||||
|
Total operating expenses |
11,965 | 11,148 | ||||||
|
Income (loss) from operations |
6 | (448 |
) |
|||||
|
Other income (expense), net |
||||||||
|
Interest expense – related party |
(301 |
) |
(21 |
) |
||||
|
Other income (expense), net |
4 | 27 | ||||||
|
Total other income (expense), net |
(297 | ) | 6 | |||||
|
Net loss |
$ | (291 |
) |
$ | (442 |
) |
||
|
Change in fair value of stock to be distributed for Scotts Miracle-Gro transactions |
- | 534 | ||||||
|
Net income (loss) attributable to common shareholders |
$ | (291 | ) | $ | 92 | |||
|
Net loss per common share, basic and diluted |
$ | (0.01 |
) |
$ | 0.00 | |||
|
Weighted average number of common shares outstanding, basic |
34,328 | 34,044 | ||||||
|
Weighted average number of common shares outstanding, diluted |
34,328 | 34,125 | ||||||
See accompanying notes to the financial statements
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
|
(in thousands, except share data) |
Preferred Stock |
Common Stock |
Additional Paid-in Capital |
Stock dividend to be distributed |
Accumulated (Deficit) |
Total Stockholders Equity |
||||||||||||||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||||||
|
Balances, March 31, 201 7 |
- | $ | - | 33,477,287 | $ | 33 | $ | 138,757 | $ | 2,595 | $ | (129,486 |
) |
$ | 11,899 | |||||||||||||||||
|
Common stock dividend distribution issued in connection with Scotts Miracle-Gro agreements |
- | - | 850,749 | 1 | 2,060 | (2,061 |
) |
1,286 | 1,286 | |||||||||||||||||||||||
|
Change in fair value of stock to be distributed for Scotts Miracle-Gro transactions |
- | - | - | - | - | (534 |
) |
534 | - | |||||||||||||||||||||||
|
Net (loss) |
- | - | - | - | - | - | (442 |
) |
(442 |
) |
||||||||||||||||||||||
|
Balances, March 31, 2018 |
- | $ | - | 34,328,036 | $ | 34 | $ | 140,817 | $ | - | $ | (128,108 |
) |
$ | 12,743 | |||||||||||||||||
|
Net (loss) |
- | - | - | - | - | - | (291 |
) |
(291 |
) |
||||||||||||||||||||||
|
Balances, March 31, 2019 |
- | $ | - | 34,328,036 | $ | 34 | $ | 140,817 | $ | - | $ | (128,399 |
) |
$ | 12,452 | |||||||||||||||||
See accompanying notes to the financial statements
STATEMENTS OF CASH FLOWS
|
Years Ended March 31, |
||||||||
|
2019 |
2018 |
|||||||
|
(in thousands) |
||||||||
|
Cash flows from operating activities: |
||||||||
|
Net (loss) |
$ | (291 |
) |
$ | (442 |
) |
||
|
Adjustments to reconcile net (loss) to cash and cash equivalents used by operations: |
||||||||
|
Depreciation and amortization expense |
443 | 346 | ||||||
|
Bad debt expense |
49 | 69 | ||||||
|
Inventory allowance |
60 | (296 |
) |
|||||
|
Accretion of debt associated with sale of intellectual property |
(32 |
) |
(37 |
) |
||||
|
Loss on write-off of assets |
- | 19 | ||||||
|
Change in operating assets and liabilities: |
||||||||
|
(Increase) in accounts receivable |
(855 |
) |
(1,881 |
) |
||||
|
Decrease (increase) in other receivable |
74 | (23 |
) |
|||||
|
(Increase) in inventory |
(3,453 |
) |
(1,830 |
) |
||||
|
Decrease in prepaid expenses and other |
3 | 18 | ||||||
|
Decrease in deposits |
- | 67 | ||||||
|
Increase (decrease) in accounts payable |
(138 |
) |
2,181 | |||||
|
Increase (decrease) in accrued expenses and other liability |
(744 |
) |
901 | |||||
|
Increase in customer deposits |
18 | 57 | ||||||
|
Net cash and cash equivalents (used) by operating activities |
(4,866 |
) |
(851 |
) |
||||
|
Cash flows from investing activities: |
||||||||
|
Purchases of equipment |
(854 |
) |
(464 |
) |
||||
|
Net cash and cash equivalents (used) by investing activities |
(854 |
) |
(464 |
) |
||||
|
Cash flows from financing activities: |
||||||||
|
Proceeds from notes payable – related party |
6,000 | 1,000 | ||||||
|
Repayments of notes payable – related party |
(6,000 |
) |
(1,000 |
) |
||||
|
Repayments of capital lease |
(21 |
) |
(7 |
) |
||||
|
Net cash (used) by financing activities |
(21 |
) |
(7 |
) |
||||
|
Net (decrease) in cash and cash equivalents and restricted cash |
(5,741 |
) |
(1,322 |
) |
||||
|
Cash and cash equivalents and restricted cash, beginning of period |
7,497 | 8,819 | ||||||
|
Cash and cash equivalents and restricted cash, end of period |
$ | 1,756 | $ | 7,497 | ||||
(continued on next page)
See supplemental disclosures on the following page and the accompanying notes to the financial statements
|
Years Ended March 31, |
||||||||
|
2019 |
2018 |
|||||||
|
Interest paid in cash |
$ | 301 | $ | 20 | ||||
|
Income taxes paid |
$ | - | $ | - | ||||
|
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
|
Property and equipment acquired through capital lease |
$ | 81 | $ | - | ||||
|
Change in fair value of SMG intellectual property royalty, branding license and interest on notes payable-related party |
$ | - | $ | 485 | ||||
|
Change in fair value of stock dividends accrued on convertible preferred stock |
$ | - | $ | 49 | ||||
|
Decrease in liability due to issuance of stock to SMG for intellectual property and branding license |
$ | - | $ | 1,286 | ||||
See accompanying notes to the financial statements
NOTES TO FINANCIAL STATEMENTS
Note 1 – Description of the Business and Summary of Significant Accounting Policies
Organization and Description of the Business
AeroGrow International, Inc. (the “Company,” “we,” “AeroGrow,” or “our “) was incorporated in the State of Nevada on March 25, 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 eight 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 (brick and mortar and online), catalogue and direct-to-consumer sales in the United States and Canada.
Liquidity and Basis of Presentation
As shown in the accompanying financial statements, we have incurred net losses of $291,000 and $442,000 for the years ended March 31, 2019 and 2018, respectively, and have an accumulated deficit of $128.4 million as of March 31, 2019. As more fully discussed in the Liquidity and Capital Resources section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company has developed sources of funding that management believes are sufficient to support the Company’s operating plan for one year from the date these financials were filed. The Company’s operating plan is predicated on a variety of assumptions including, but not limited to, the level of customer and consumer demand, the effect of cost reduction programs, and the state of the general economic environment in which the Company operates. There can be no assurance that these assumptions will prove to be accurate in all material respects, or that the Company will be able to successfully execute its operating plan.
We may need to seek additional debt or equity capital during the fiscal year ending March 31, 2020 to address the seasonal nature of our working capital needs, and to enable us to increase the scale of our business. Sources of funding to meet prospective cash requirements include the Company’s existing cash balances, cash flow from operations and financing from Scotts Miracle-Gro. There can be no assurance we will be able to raise this additional capital. As part of our efforts to seek additional funding of our operations, in April 2013, we entered into a strategic alliance with SMG Growing Media, Inc., a wholly owned subsidiary of Scotts Miracle-Gro Company, a worldwide marketer of branded consumer lawn and garden products (“Scotts Miracle-Gro”). As part of the strategic alliance, in April 2013 Scotts Miracle-Gro (i) acquired 2,649,007 shares of the Company’s Series B Convertible Preferred Stock and a warrant to purchase shares of the Company’s common stock for an aggregate purchase price of $4.0 million; and (ii) purchased all of the Company’s intellectual property associated with hydroponic products, other than the AeroGrow and AeroGarden trademarks, for $500,000. In November 2016, Scotts Miracle-Gro exercised the warrant and converted its Series B Convertible Preferred Stock into shares of common stock, thereby bringing Scotts Miracle-Gro’s ownership of our common stock to approximately 80%. In every year since Fiscal Year 2014, Scotts Miracle-Gro has provided term loan funding to enable us to meet prospective cash flow requirements to fund inventory demands in advance of our peak selling season. For Fiscal Year 2019, we entered into a $6.0 million Term Loan with Scotts Miracle-Gro on July 6, 2018. As of March 31, 2019, the outstanding balance of the Term Loan and accrued interest was repaid in full. For further information on the debt arrangement with Scotts Miracle-Gro, please see Note 2 “Notes Payable and Long Term Debt” and the strategic alliance with Scotts Miracle-Gro, please see Note 3 “Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions” to our financial statements. Additionally, refer to Note 10 “Subsequent Events” as Scotts Miracle-Gro has agreed to term loan funding in advance of our current inventory demand season and a term loan for lease liability obligations.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 will occur in the near term and such change could be material as information becomes available. Our significant estimates include the warranty and return reserves, going concern, inventory obsolescence reserves and allowances for sales and cooperative advertising.
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 to present basic and diluted Earnings per Share (“EPS”). Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average shares of common stock outstanding for the period. Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of common stock equivalents (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 include the following: (i) employee stock options to purchase 94,000 shares of common stock for the period ended March 31, 2019; and (ii) employee stock options to purchase 93,000 shares for the period ended March 31, 2018.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at March 31, 2019 and 2018.
Restricted Cash
The Company has secured activity related to its corporate credit card purchase account with a restricted money market account. The balance in this account as of March 31, 2019 and 2018 was $15,000.
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 amounts on deposit with two financial institutions exceeded the $250,000 federally insured limit as of March 31, 2019. However, management believes that the financial institution is financially sound and the risk of loss is minimal.
Customers and Accounts Receivable:
For the year ended March 31, 2019, the Company had one customer, Amazon.com, who represented 40.5%, of the Company’s net revenue. For the year ended March 31, 2018, the Company had one customer, Amazon.com, who represented 30.2%, of the Company’s net revenue.
As of March 31, 2019, the Company had two customers, Amazon.com and Target, which represented 44.3% and 12.0%, respectively of outstanding accounts receivable. As of March 31, 2018, the Company had two customers, Canadian Tire Corporation and Amazon.com, which represented 27.3% and 22.3%, respectively, of outstanding accounts receivable. Management believes that all receivables from these customers are collectible.
Suppliers:
For the year ended March 31, 2019, the Company purchased inventories and other inventory related items from one supplier totaling $17.1 million representing 76.5% of cost of revenue. For the year ended March 31, 2018, the Company purchased inventories and other inventory related items from one supplier totaling $14.7 million representing 68.0% of cost of revenue.
The Company’s primary contract manufacturers are located in China. As a result, the Company may be subject to political, currency, regulatory, shipping, labor and weather/natural disaster risks. Although the Company believes alternate sources of manufacturing could be obtained, these risks and any potential loss of supply could have an adverse impact on operations.
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. This guidance requires disclosure of fair value information about certain financial instruments 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., 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. The three levels of the fair value hierarchy are described below:
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Level 1: |
Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
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Level 2: |
Quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations. |
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Level 3: |
Unobservable inputs that are supported by little or no market activity. |
The carrying value of financial instruments, including cash, receivables, accounts payable and accrued expenses, approximates their fair value at March 31, 2019 and 2018 due to the relatively short-term nature of these instruments.
The Company’s intellectual property liability carrying value was determined by Level 3 inputs. As discussed below in Notes 2 and 3, this liability was incurred in conjunction with the Company’s strategic alliance with Scotts Miracle-Gro. As of March 31, 2019 and 2018, the fair value of the Company’s sale of intellectual property liability was 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 table below summarizes the fair value and carry value of each Level 3 category liability:
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March 31, 2019 |
March 31, 2018 |
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Fair Value |
Carry Value |
Fair Value |
Carry Value |
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(in thousands) |
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Liabilities |
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Sale of intellectual property liability |
$ | 41 | $ | 48 | $ | 65 | $ | 80 | ||||||||
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Total |
$ | 41 | $ | 48 | $ | 65 | $ | 80 | ||||||||
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the periods ended March 31, 2019 and March 31, 2018.
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(in thousands) |
|||||
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Sale of intellectual property liability |
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Balance, March 31, 2017 |
$ | 90 | |||
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Amortization of intellectual property |
(25 |
) |
|||
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Balance, March 31, 2018 |
$ | 65 | |||
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Amortization of intellectual property |
(24 |
) |
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Balance, March 31, 2019 |
$ | 41 | |||
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation for financial accounting purposes is computed using the straight-line method over the estimated lives of the respective assets. Computer equipment and computer software are depreciated over three years. Office equipment and manufacturing equipment are depreciated over five years. Tooling is depreciated over three years. Leasehold improvements are being amortized over the life of the lease.
Property and equipment consist of the following:
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March 31, |
March 31, |
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2019 |
2018 |
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(in thousands) |
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Manufacturing equipment and tooling |
$ | 4,419 | $ | 3,797 | ||||
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Computer equipment and software |
857 | 626 | ||||||
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Leasehold improvements |
116 | 116 | ||||||
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Other equipment and intangible assets |
442 | 360 | ||||||
| 5,834 | 4,899 | |||||||
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Less: accumulated depreciation and amortization |
(4,828 |
) |
(4,385 |
) |
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Property and equipment, net |
$ | 1,006 | $ | 514 | ||||
Depreciation and amortization expense for the years ended March 31, 2019 and 2018, was $443,000, and $346,000, respectively.
Inventory
Inventories are valued at the lower of cost, determined on the basis of standard costing, which approximates the first-in, first-out method, or net realizable value. When the Company is the manufacturer, raw materials, labor and manufacturing overhead are included in inventory costs. 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 standard cost, which includes product costs for purchased and manufactured products, and freight and transportation costs for inbound freight from manufacturers.
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March 31, |
March 31, |
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2019 |
2018 |
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(in thousands) |
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Finished goods |
$ | 7,071 | $ | 4,117 | ||||
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Raw materials |
1,369 | 930 | ||||||
| $ | 8,440 | $ | 5,047 | |||||
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 March 31, 2019 and 2018, the Company had reserved $126,000 and $66,000, respectively, for inventory obsolescence.
Accounts Receivable and Allowance for Doubtful Accounts
The Company sells its products to retailers and direct-to-consumer. Direct-to-consumer transactions are primarily paid by credit card. Retailer sales terms vary by customer, but are generally 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 $89,000 and $39,000 at March 31, 2019 and 2018, 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 required credit card refunds and charge backs, the Company is required to maintain a cash reserve with Vanity, 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 March 31, 2019 and March 31, 2018, the balance in this reserve account was $207,000 and $281,000, 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. In contrast, the Company records media and marketing 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 ASC 340-20 Capitalized Advertising Costs. As prescribed by ASC 340-20-25, direct-to-consumer advertising costs incurred are reported as assets and should be amortized over the estimated period of the benefits, based on the proportion of current period revenue from the advertisement to probable future revenue.
As the Company has re-entered the retail distribution channel, the Company has expanded its advertising to online gateway and portal advertising, as well as placement in third party catalogues.
Advertising expenses for the years ended March 31, 2019 and March 31, 2018, were as follows:
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Fiscal Year Ended March 31, |
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2019 |
2018 |
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(in thousands) |
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Direct-to-consumer |
$ | 674 | $ | 579 | ||||
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Retail |
3,093 | 3,412 | ||||||
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Other |
317 | 759 | ||||||
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Total advertising expense |
$ | 4,084 | $ | 4,750 | ||||
As of March 31, 2019 and March 31, 2018, the Company had deferred $3,000 and $14,000, respectively, related to such media and advertising costs, which include the catalogue cost described above and commercial production costs. These costs are included in the prepaid expenses and other line of the balance sheet.
Research and Development
Research, development, and engineering costs are expensed as incurred. Research, development, and engineering expenses primarily include payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and development support.
Stock-Based Compensation
The Company accounts for share-based payments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718-10-55 Shared-Based Payment . The Company uses the Black-Scholes option valuation model to estimate the fair value of stock option awards issued. For the years ended March 31, 2019, and 2018, equity compensation in the form of stock options and grants of restricted stock that vested totaled $0.
Income Taxes
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 that it is “more likely than not” that the value of such asset will be realized. As of March 31, 2019 and 2018, the Company recognized a valuation allowance equal to 100% of the net deferred tax asset balance.
Revenue Recognition
The Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers,” and all the related amendments (collectively “ASC 606”) on April 1, 2018 using the modified retrospective method. The adoption did not have a material impact to the nature and timing of its revenues, results of operations, cash flows and statement of financial position. The comparative information has not been restated and continues to be reported under the accounting standards in effect in those periods.
The following table summarizes the effect of adopting ASC 606 on the Company’s unaudited consolidated balance sheets as of March 31, 2019 (in thousands):
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As reported |
Adjustments |
Balance without adoption of ASC 606 |
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Assets |
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Accounts receivable, net |
$ | 5,102 | $ | (1,195 |
) |
$ | 6,297 | |||||
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Liabilities |
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Accrued expenses |
$ | 1,437 | $ | (1,195 |
) |
$ | 2,632 | |||||
The Company currently has two operating and reportable segments, (i) the Direct–to-Consumer segment, which is composed of sales directly from our website, mail order or customer calls to our customer service department and (ii) the Retail segment, which includes all sales related to retailers, including where possession of our product is taken and sold by the retailer in store or online, and drop ship orders that process from the retailer and drop directly to our warehouse for us to ship on behalf of the retailer.
The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products and the risk of loss to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of December 31, 2018 or March 31, 2018.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
There were no changes to the Company’s accounting for variable consideration under ASC 606. However, the change in classification of several accrued expenses from a liability to a contra asset results in a change in presentation of net realizable accounts receivable on the balance sheet. Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to retail customers including, but not limited to the following:
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● |
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discounts granted off list prices to support price promotions to end-consumers by retailers; |
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● |
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the Company’s agreed share of fees given directly to retailers for advertising, in-store marketing and promotional activities; and |
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● |
|
incentives given to the Company’s retailers for achieving or exceeding certain predetermined purchases (i.e., rebates). |
The Company’s promotional allowance programs with its retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one day to one year. The Company’s promotional and other allowances are calculated based on various programs with retail customers, and accruals are established during the year for its anticipated liabilities. These accruals are based on agreed upon terms, as well as the Company’s historical experience with similar programs, and require management’s judgment with respect to estimating consumer participation and retail customer performance levels. Differences between such estimated expense and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.
The Company records estimated reductions to revenue for customer and distributor programs and incentive offerings, including promotions, rebates, and other volume-based incentives, based on historical rates. Certain incentive programs require the Company to estimate the number of customers who will actually redeem the incentive based on historical industry experience. As of March 31, 2019 and March 31, 2018, the Company reduced accounts receivable $1.2 million and accrued expenses $430,000, as an estimate for the foregoing deductions and allowances within the “accounts receivable, net” line of the balance sheets, respectively.
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 as of March 31, 2019 and 2018 a provision for potential future warranty costs of $166,000 and $111,000, respectively. These reserves are recorded in the accrued expenses line of the balance sheets.
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, retail 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 March 31, 2019 and 2018, the Company has recorded a reserve for customer returns of $313,000 and $293,000, respectively. These expenses are included in the accrued expenses line of the balance sheets.
Shipping and Handling Costs
Shipping and handling costs associated with inbound freight are recorded in cost of revenue and are capitalized in inventory until the inventory is sold. Shipping and handling costs associated with freight out to customers are also included in cost of revenue. Shipping and handling charges paid by customers are included in net revenue.
Segments of an Enterprise and Related Information
GAAP utilizes a management approach based on allocating resources and assessing performance as the source of the Company’s reportable segments. GAAP also requires disclosures about products and services, geographic areas and major customers. At present, the Company operates in two segments, Direct-to-Consumer and Retail Sales.
New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period, and early adoption is permitted. The Company is in the process of evaluating the potential impact of this new guidance on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees are required to use a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected to result in all operating leases being capitalized and recorded as a current and/or long-term liability in the Company’s financial statements. Our preparation for the adoption of ASU 2016-02 is substantially complete. We have compiled an inventory of our lease arrangements in order to determine the impact the new guidance will have on our financial statements and disclosures. We have elected certain practical expedients available under the guidance, including a package of practical expedients which allows us to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. Based on our assessment to date, we expect that the adoption of ASU 2016-02 will result in the recognition of right-of-use assets and corresponding lease liabilities to be immaterial to our Balance Sheet as of April 1, 2019. We do not expect the new standard to have a material impact on our Statement of Consolidated Income or Statement of Consolidated Cash Flows.
Note 2 – Notes Payable and Long Term Debt
We relied upon a variety of debt funding sources to meet our liquidity requirements during the fiscal years ended March 31, 2019 and 2018, as summarized below:
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March 31, |
March 31, |
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2019 (in thousands) |
2018 (in thousands) |
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Sale of intellectual property liability (see Note 3) |
$ | 48 | $ | 80 | ||||
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Total debt |
48 | 80 | ||||||
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Less current portion |
48 | 80 | ||||||
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Long term debt |
$ | - | $ | - | ||||
Scotts Miracle-Gro Term Loan Agreement
On July 6, 2018, the Company entered into a Term Loan Agreement in the principal amount of up to $6.0 million with Scotts Miracle-Gro. The proceeds will be made available as needed in increments of $500,000, the Company may pay down and reborrow during the Term Loan, not to exceed $6.0 million with a due date of March 29, 2019. The Company repaid the principal and interest in full on March 29, 2019. As a result the Company’s note payable balance was $0 on March 31, 2019. The Term Loan Agreement was secured by a lien on the assets of the Company. Interest was charged at the stated rate of 10% per annum and was paid, in cash, quarterly in arrears at the end of each September, December and March. The funds provided under the Term Loan are used for general working capital and to acquire inventory to support anticipated growth as the Company expands its retail and its direct-to-consumer sales channels. The Company borrowed $6.0 million under the Term Loan during fiscal 2019. The Term Loan permits prepayments without penalty or premium and as of March 31, 2019 the Company repaid the outstanding balance of the Term Loan and accrued interest in full.
Liability Associated with Scotts Miracle-Gro Transaction
On April 22, 2013, the Company and Scotts Miracle-Gro 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. Because 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 March 31, 2019 and 2018, the Company recorded a liability of $48,000 and $80,000, respectively, was recorded on the balance sheets for the Intellectual Property Sale Agreement.
Note 3 – Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions
On April 22, 2013, the Company entered into a Securities Purchase Agreement with SMG Growing Media, Inc. (the “Investor”), a wholly owned subsidiary of Scotts Miracle-Gro (NYSE: “SMG”), a worldwide marketer of branded consumer lawn and garden products. 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 (the “ Series B Preferred Stock”), 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. The Securities Purchase Agreement, Certificates of Designations for the Series B Preferred Stock, Form of Warrant, Indemnification Agreement, Investor’s Rights Agreement and Voting Agreement have been filed as exhibits to a Current Report on Form 8-K that was filed with the SEC on April 23, 2013. On November 29, 2016 Scotts Miracle-Gro fully exercised the Warrant and upon exercise of the Warrant the Series B Preferred Stock converted into shares of common stock.
Upon exercise of the Warrants 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.
Under the Securities Purchase Agreement, the Company’s Board of Directors (the “Board”) is required to consist of five members, which shall be set forth in the Company’s Bylaws. In addition, Scotts Miracle-Gro is entitled to appoint one member to the Board and have one additional Board observer while the Warrant remains outstanding, pursuant to provision, Scotts Miracle-Gro has appointed Chris J. Hagedorn to the Company’s Board effective as of April 22, 2013. Upon exercise of the Warrant, Scotts Miracle-Gro was entitled to appoint three of the five members of the Board.
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. The derivative warrant liability was re-measured to fair value, on a recurring basis, at the end of each reporting period until it was exercised. The Company accounted for the warrant as a liability and measured the value of the warrant using the Monte Carlo simulation model as of the end of each quarterly reporting period until the warrant was exercised. On November 29, 2016, Scotts Miracle-Gro fully exercised its warrant to purchase 80% of the Company’s outstanding stock, when the derivative warrant liability was extinguished and the Convertible Preferred Stock was converted to common stock.
In conjunction with the Private Offering described above, the Company and Scotts Miracle-Gro also agreed to the following:
Intellectual Property Sale . The Company also agreed to sell to Scotts Miracle-Gro all intellectual property associated with the Company’s hydroponic products (the “Hydroponic IP”), other than the AeroGrow and AeroGarden trademarks, free and clear of all encumbrances, 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. The Intellectual Property Sale Agreement and the Technology License constitute an agreement of sales of future revenues. Because the Company received cash from Scotts Miracle-Gro and agreed to pay for a defined period a specified percentage of the revenue, and the Company has significant involvement in the generation of the revenue, the excess paid over net book value is classified as a liability and is being amortized under the effective interest method. As of March 31, 2019 and 2018, $48,000 and $80,000 was recorded as a liability on the balance sheets.
Technology Licensing Agreement . The Company was granted an exclusive license (the “Technology License”) to use the Hydroponic IP in North America and certain European countries (collectively, the “Company Markets”) in return for a royalty of 2% of annual net sales (the “Royalty”), as determined at the end of each fiscal year. As of March 31, 2019 and 2018, the Company has accrued as a liability $680,000 and $648,000, respectively, for the Technology Licensing Agreement. The accrual is calculated as 2% of the annual net sales and recorded as a liability. The initial term of the Technology License is five years, and the Company may renew the Technology License for an additional five-year terms by providing notice to Scotts Miracle-Gro at least six months in advance of the expiration of each five-year term, provided that Scotts Miracle-Gro is not in default under the Technology Licensing Agreement at the time of renewal. The Technology License may not be assigned.
Brand License . The Company and Scotts Miracle-Gro also entered a brand license whereby the Company may use certain of Scotts Miracle-Gro’s trade name, trademark and/or service mark to rebrand the AeroGarden and, with the written consent of Scotts Miracle-Gro, other products in the Company Markets in exchange for the Company’s payment to Scotts Miracle-Gro of an amount equal to 5% of incremental growth in annual net sales. The initial term of the brand license will be five years, and the Company may renew the license for additional five-year terms by providing notice to Scotts Miracle-Gro at least six months in advance of the expiration of each five-year term, provided that Scotts Miracle-Gro is not in default under the brand license at the time of renewal. The brand license may not be assigned. The brand license may only be terminated by Scotts Miracle-Gro in the event of an uncured default, under the terms of the brand license. The Brand License Agreement was filed with the SEC on February 17, 2015 as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2014. Effective April 1, 2018, the Company and Scotts Miracle-Gro entered into a revised brand license agreement. The accrued liability for the Brand License Agreement which is calculated at an amount equal to 5% of all seed pod kit and seed pod kit related sales and is recorded as a liability and amounts to $422,000 and $1.3 million as of March 31, 2019 and March 31, 2018, respectively.
Collaboration . During the term of the Brand License, the Company has access to Scotts Miracle-Gro’s business development team, selling, marketing and supply chain resources, customer and email lists, for reasonable “out of pocket” costs, and Scotts Miracle-Gro will have access to the Company’s consumer email lists.
Supply Chain Services Agreement . During the term of the Technology License Agreement, Scotts Miracle-Gro will pay the Company an annual fee equal to 7% of the cost of goods of all products that Scotts Miracle-Gro purchases from the Company or a vendor, in exploiting the Hydroponic IP internationally (outside of the Company Markets) over the course of each contract year during the term of the Securities Purchase Agreement.
Note 4 – Equity Compensation Plans and Employee Benefit Plans
In August 2005, the Company’s Board of Directors approved the 2005 Equity Compensation Plan (the “2005 Plan”) pursuant to which both qualified and nonqualified stock options as well as restricted shares of common stock are reserved for issuance to eligible employees, consultants and directors of the Company. A total of 13,505,000 shares of our common stock may be granted under the 2005 Plan. The 2005 Equity Compensation plan has expired and we currently do not anticipate a shareholder meeting to approve a new plan. The 2005 Plan was administered by the Company’s Governance, Compensation and Nominating Committee.
For the years ended March 31, 2019 and 2018, the Company did not grant any options to purchase the Company’s common stock under the 2005 Equity Compensation Plan. As of March 31, 2019, the Company had a total of 105,000 options outstanding with exercise prices ranging from $1.55 to $5.31 per share.
No compensation expense for stock options was recognized for the years ended March 31, 2019 and 2018.
A summary of option activity in the 2005 Plan is as follows:
|
Exercise price |
||||||||||||||||
|
Options |
Weighted- |
|||||||||||||||
|
(in thousands) |
Low |
High |
Average |
|||||||||||||
|
Balances at April 1, 2017 |
175 | $ | 1.10 | $ | 5.31 | $ | 3.50 | |||||||||
|
Granted |
- | - | - | - | ||||||||||||
|
Exercised |
- | - | - | - | ||||||||||||
|
Forfeited |
- | - | - | - | ||||||||||||
|
Balances at March 31, 2018 |
175 | $ | 1.10 | $ | 5.31 | $ | 3.50 | |||||||||
|
Granted |
- | - | - | - | ||||||||||||
|
Exercised |
- | - | - | - | ||||||||||||
|
Forfeited |
70 | 2.20 | 2.20 | - | ||||||||||||
|
Balances at March 31, 2019 |
105 | $ | 1.55 | $ | 5.31 | $ | 4.90 | |||||||||
Information regarding all stock options outstanding under the 2005 Plan as of March 31, 2019 is as follows:
|
OPTIONS OUTSTANDING AND EXERCISABLE |
||||||||||||||||||
|
Weighted- |
||||||||||||||||||
|
average |
Weighted- |
Aggregate |
||||||||||||||||
|
Remaining |
average |
Intrinsic |
||||||||||||||||
|
Exercise |
Options |
Contractual |
Exercise |
Value |
||||||||||||||
|
price |
(in thousands) |
Life (years) |
Price |
(in thousands) |
||||||||||||||
| $ | 1.55 | 11 | 1.38 | $ | 1.55 | |||||||||||||
| $ | 5.31 | 94 | 0.35 | $ | 5.31 | |||||||||||||
| 105 | 0.46 | $ | 4.90 | $ | 0 | |||||||||||||
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 March 29, 2019.
At March 31, 2019, there are no unvested outstanding options to purchase shares of the Company’s common stock and that will result in no additional compensation expense.
We sponsor a defined contribution 401(k) plan adopted in fiscal year 2017, under which eligible associates voluntarily contribute to the plan, up to IRS maximums, through payroll deductions. We match a percentage of contributions, up to a stated limit, with all matching contributions being fully vested immediately. Our matching contributions under the 401(k) plan were $41,000 and $33,000 for the fiscal years ended March 31, 2019 and 2018, respectively.
Note 5 – Income Taxes
Under the provisions of GAAP, a deferred tax asset or liability (net of valuation allowance) is provided in the financial statements by applying the provisions of applicable laws to measure the deferred tax consequences of temporary differences that will result in taxable or deductible amounts in the future years as a result of events recognized in the financial statements in the current or preceding years.
|
(in thousands) |
||||||||
|
As of March 31, |
||||||||
|
2019 |
2018 |
|||||||
|
Non-Current Deferred Tax Assets and Liabilities: |
||||||||
|
Net Operating Loss |
$ | 3,441 | $ | 2,697 | ||||
|
R & D credit carryforwards |
597 | 597 | ||||||
|
Intangibles and fixed assets |
40 | 64 | ||||||
|
Accrued compensation |
121 | 226 | ||||||
|
Allowance for bad debt |
22 | 10 | ||||||
|
Reserve for customer returns |
78 | 73 | ||||||
|
Warranty reserve |
42 | 27 | ||||||
|
Reserve for obsolete inventory |
32 | 71 | ||||||
|
Stock-compensation |
44 | 72 | ||||||
|
Royalty Payments made with Stock |
- | 462 | ||||||
|
Other |
15 | 29 | ||||||
|
Prepaid expenses |
(77 |
) |
(70 |
) |
||||
|
Valuation allowance |
(4,355 |
) |
(4,258 |
) |
||||
|
Non-Current Deferred Tax Assets and Liabilities, Net |
$ | - | $ | - | ||||
ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance.
The valuation allowance increased (decreased) by $97,000 during 2019 and $(21.5) million during 2018.
ASC 740 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold before a benefit is recognized in the financial statements. As of March 31, 2019, the Company has not recorded a liability for uncertain tax positions. Included in net deferred tax assets is $597,000 of federal research credits that may offset future taxable income through 2022. While the Company believes that the credit calculations are correct, it is possible that upon an examination by taxing authorities, the research credits available to offset future taxable income may be reduced in whole or in part. However, as the Company is not currently recognizing a benefit for the research credits, there is no impact to the financial statements pursuant to ASC 740. There have been no income tax related interest or penalties assessed or recorded and if interest and penalties were to be assessed, the Company would charge interest and penalties to income tax expense. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date. The Company files income tax returns in the U.S. and various state jurisdictions and there are open statutes of limitations for taxing authorities to audit the Company’s tax returns from years ended March 31, 2014 through the current period.
Note 6 – Related Party Transactions
See Note 2 “Notes Payable and Long Term Debt,” and Note 8 “Stockholders’ Equity” to our financial statements for discussion related to debt and equity transactions involving our officers, directors and 5% or greater shareholders.
On July 6, 2018, the Company entered into a Term Loan Agreement in the principal amount of up to $6.0 million with Scotts Miracle-Gro. Interest was charged at the stated rate of 10% per annum, but the principal and accrued interest on the Term Loan were repaid in full as of March 31, 2019. As disclosed above in Note 2 under the caption “Scotts Miracle-Gro Term Loan,” the principal and interest balance of the Term Loan at March 31, 2019, was $0 and was paid in full during March 2019. During the year ended March 31, 2019 and 2018, the Company sold product to Scotts Miracle-Gro for approximately $5,000 and $877,000, respectively. Additionally, for the year ended March 31, 2019, we paid Scotts Miracle-Gro $176,000 for charges incurred related to insurance for directors and officers, use of equipment purchased by Scotts Miracle-Gro and consulting expertise from select employees. For the year ended March 31, 2018, we paid Scotts Miracle-Gro $61,000 for charges incurred from a warehouse fully owned by Scotts Miracle-Gro to fulfill and order with one of our customers. Refer to Note 10 “Subsequent Events” for additional Loan Agreements with Scotts Miracle-Gro.
Note 7 – Commitments and Contingencies
We lease an office space in Boulder, Colorado. We lease 11,182 square feet with a current monthly rent of $12,000. We also pay our proportionate share of building taxes, insurance and operating expenses. The lease term was expires September 30, 2019 and we do not expect to renew the lease. The agreement contains other standard office lease provisions.
Effective June 1, 2019, we entered into a lease agreement to lease office space in Boulder, Colorado at a new location commencing on October 1, 2019. We will lease 14,630 square feet with a current monthly rent of $21,000. We also pay our proportionate share of building taxes, insurance and operating expenses. The lease term was expires to September 30, 2026. The agreement contains other standard office lease provisions.
In May 2011, the Company reached an agreement with Wildernest Logistics Solutions to provide warehousing, distribution and fulfillment operations, and seed pod kit manufacturing. The agreement calls for a monthly $10,000 facility charge. The Company has extended its agreement with Wildernest Logistics Solutions effective April 17, 2014 for a two-year term with automatic one-year renewals.
Future cash payments under such agreements for the remaining years are as follows:
|
Year Ending |
Rent |
|||
|
(in thousands) |
||||
|
March 31, 2020 |
$ | 201 | ||
|
March 31, 2021 |
257 | |||
|
March 31, 2022 |
266 | |||
|
March 31, 2023 |
275 | |||
|
March 31, 2024 |
285 | |||
|
Thereafter |
755 | |||
| $ | 2,039 | |||
Rent expense for the years ended March 31, 2019 and 2018, was $331,000 and $311,000, respectively.
During Fiscal 2019, we were the target of a sophisticated external cyber-attack. The attackers gained unauthorized access to certain of our information technology systems. We have continued to implement security enhancements since this incident and are supporting federal law enforcement efforts to identify the responsible parties. Upon discovery of the cyber-attack, we took immediate action to remediate the security vulnerability and identify solutions based on the evolving landscape. We have incurred expenses subsequent to the cyber-attack to investigate and remediate this matter and expect to continue to incur expenses of this nature in the foreseeable future. We will recognize these expenses in the periods in which they are incurred and there are no material liabilities that exist as of March 31, 2019 related to this cyber-attack.
Note 8 – Stockholders’ Equity
Common Stock and Common Stock Warrants
As of March 31, 2019, the Company had 34,328,036 common shares issued and outstanding out of the 750,000,000 shares (par value $0.001 per share) that have been authorized by the Company’s shareholders.
A summary of the Company’s common stock warrant activity for the period from April 1, 2017 through March 31, 2019 is presented below:
|
|
|
Warrants Outstanding (in thousands) |
|
|
Weighted Average Exercise Price |
|
|
Aggregate Intrinsic Value |
|
|||
|
Outstanding, April 1, 2017 |
|
|
396 |
|
|
$ |
6.97 |
|
|
$ |
2 |
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Expired |
|
|
(394 |
) |
|
|
7.00 |
|
|
|
|
|
|
Outstanding, March 31, 2018 |
|
|
2 |
|
|
$ |
2.10 |
|
|
$ |
1 |
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Expired |
|
|
(2 |
) |
|
|
2.10 |
|
|
|
|
|
|
Outstanding, March 31, 2019 |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
Note 9 – Segment Information
The Company has determined that its reportable segments are those that are based on its method of internal reporting and the perspective of the chief operating decision maker. The Company has two reportable segments, Retail Sales and Direct-to-Consumers. The Company evaluates performance based on the primary financial measure of contribution margin (“segment profit”). Segment profit reflects the income or loss from operations before corporate expenses, non-operating income, net interest expense, and income taxes. The Company doesn’t have an individually identified assets regarding specific segments as all processes to manufacture products are not different based on segment.
|
Fiscal Year Ended March 31, 2019 |
||||||||||||||||
|
(in thousands) |
Direct-to-consumer |
Retail |
Corporate/Other |
Consolidated |
||||||||||||
|
Net sales |
$ | 8,091 | $ | 26,275 | $ | - | $ | 34,366 | ||||||||
|
Cost of revenue |
5,737 | 16,658 | - | 22,395 | ||||||||||||
|
Gross profit |
2,354 | 9,617 | - | 11,971 | ||||||||||||
|
Gross profit percentage |
29.1 |
% |
36.6 |
% |
- | 34.8 |
% |
|||||||||
|
Sales and marketing (1) |
332 | 4,026 | 1,343 | 5,701 | ||||||||||||
|
Segment profit |
2,022 | 5,591 | (1,343 |
) |
6,270 | |||||||||||
|
Segment profit percentage |
25.0 |
% |
21.3 |
% |
- | 18.2 |
% |
|||||||||
(1) Sales and marketing includes advertising, trade shows, media production and promotional products, general brand marketing and other as discussed in the sales and marketing section.
|
Fiscal Year Ended March 31, 2018 |
||||||||||||||||
|
(in thousands) |
Direct-to-consumer |
Retail |
Corporate/Other |
Consolidated |
||||||||||||
|
Net sales |
$ | 8,172 | $ | 24,126 | $ | - | $ | 32,298 | ||||||||
|
Cost of revenue |
5,672 | 15,926 | - | 21,598 | ||||||||||||
|
Gross profit |
2,500 | 8,200 | - | 10,700 | ||||||||||||
|
Gross profit percentage |
30.6 |
% |
33.9 |
% |
- | 33.1 |
% |
|||||||||
|
Sales and marketing (1) |
129 | 3,670 | 1,590 | 5,389 | ||||||||||||
|
Segment profit |
2,371 | 4,530 | (1,590 |
) |
5,311 | |||||||||||
|
Segment profit percentage |
29.0 |
% |
18.8 |
% |
- | 16.4 |
% |
|||||||||
(1) Sales and marketing includes advertising, trade shows, media production and promotional products, general brand marketing and other as discussed in the sales and marketing section.
Note 10 – Subsequent Events
On April 15, 2019 our Board of Directors accepted the resignation of Board Members Peter D. Supron and Albert J. Messina. On that same date, the Board of Directors appointed Patricia M. Ziegler and Cory J. Miller, to fill the vacancies.
In May 2019, the Company entered into a lease agreement to move its office space to another location in Boulder, Colorado commencing on October 1, 2019. We will lease 14,630 square feet with a current monthly rent of $21,000. We will also pay our proportionate share of building taxes, insurance and operating expenses. The lease term expires September 30, 2026. The agreement contains other standard office lease provisions. The lease requires a $700,000 initial security deposit which $100,000 will be returned at the beginning of each lease year starting October 2020. Additionally, the Landlord has allowed approximately $585,000 in tenant improvements which the tenant will fund until completed and tenant moves into the premises, at such time and with proper documents, the landlord with repay the tenant allowance.
On June 20, 2019, the Company entered into a Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro. The funding will provide capital to fund real estate related lease obligations. The proceeds will be made available as needed in increments of $100,000 not to exceed $1.5 million with a due date of March 31, 2022. Interest will be charged at the stated rate of 10% and will be paid quarterly in arrears on each of April 30, July 31, October 31 and January 31.
On June 20, 2019, the Company entered into a Term Loan Agreement in the principal amount of up to $10.0 million with Scotts Miracle-Gro. The funding will provide general working capital to support anticipated growth as the Company expands its retail and its direct-to-consumer sales channels. The proceeds will be made available as needed in increments of $500,000 not to exceed $10.0 million with a due date of March 31, 2020. Interest will be charged at the stated rate of 10% and will be paid quarterly in arrears on each of June 28, 2019, September 27, 2019, December 31, 2019 and March 31, 2020.
INDEX TO EXHIBITS
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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3.5 |
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3.6 |
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3.7 |
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3.8 |
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3.9 |
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3.10 |
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3.11 |
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4.1 |
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4.2 |
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10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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10.9 |
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10.10 |
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10.11 |
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10.12 |
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10.13 |
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10.14 |
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10.15 |
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10.16 |
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10.17 |
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10.18 |
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10.19 |
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10.20 |
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10.21 |
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10.22 |
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10.23 |
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10.24 |
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10.25 |
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
AEROGROW INTERNATIONAL, INC., A NEVADA CORPORATION |
|
|
|
|
|
|
|
|
Date: JUNE 24, 2019 |
By: |
/s/ J. Michael Wolfe |
|
|
|
|
J. Michael Wolfe |
|
|
|
|
Title |
|
|
|
|
President and Chief Executive Officer |
|
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint either of J. Michael Wolfe or Grey H. Gibbs, with full power of substitution and full power, to act as his or her true and lawful attorney-in-fact and agent with full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney-in-fact and agent may or shall lawfully do, or cause to be done, in connection with the proposed filing by AeroGrow International, Inc. with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the fiscal year ended March 31, 2019 (the “Annual Report”), including but not limited to, such full power and authority to do the following: (i) execute and file such Annual Report; (ii) execute and file any amendment or amendments thereto; (iii) receive and respond to comments from the Securities and Exchange Commission related in any way to such Annual Report or any amendment or amendments thereto; and (iv) execute and deliver any and all certificates, instruments or other documents related to the matters enumerated above, as the attorney-in-fact in her sole discretion deems appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 24th day of June 2019.
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
/s/ J. MICHAEL WOLFE |
|
President and Chief Executive Officer |
|
JUNE 24, 2019 |
|
J. Michael Wolfe |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
/s/ GREY H. GIBBS |
|
Senior Vice- President – Finance and Administration |
|
JUNE 24, 2019 |
|
Grey H. Gibbs |
|
( Principal Financial and Accounting Officer ) |
|
|
|
|
|
|
|
|
|
/s/ CHRIS J. HAGEDORN |
|
Chairman of the Board |
|
JUNE 24, 2019 |
|
Chris J. Hagedorn |
|
|
|
|
|
|
|
|
|
|
|
/s/ H. MACGREGOR CLARKE |
|
Director |
|
JUNE 24, 2019 |
|
H. Macgregor Clarke |
|
|
|
|
|
|
|
|
|
|
|
/s/ CORY MILLER |
|
Director |
|
JUNE 24, 2019 |
| Cory Miller |
|
|
|
|
|
|
|
|
|
|
|
/s/ PATRICIA ZIEGLER |
|
Director |
|
JUNE 24, 2019 |
| Patricia Ziegler |
|
|
|
|
|
|
|
|
|
|
|
/s/ DAVID B. KENT |
|
Director |
|
JUNE 24, 2019 |
|
David B. Kent |
|
|
|
|
Exhibit 10.36
________________________________
LEASE
________________________________
Between
SPINEBARREL, LLC
and
AEROGROW INTERNATIONAL, INC.
May 29, 2019
SUMMARY OF BASIC LEASE TERMS
1. Tenant: Aerogrow International, Inc.
(a) Tenant’s entity form and jurisdiction: Nevada corporation
(b) Tenant’s federal taxpayer identification number: 46-0510685
2. Building/Premises: 5405 Spine Road, Boulder, Colorado 80301
(a) Type: Single Tenant
(b) Total Rentable Square Footage: approximately 14,630 sf
3. Initial Lease Term:
(a) Period: Seven (7) years
(b) Delivery Date: June 1, 2019
(c) Commencement Date: October 1, 2019
(d) Expiration Date: September 30, 2026
4. Extension Options: Tenant shall have two (2) options to renew or extend the term of the lease for a period of five (5) years each as provided in Section 3.2.
5. Termination Options: One-Time right to terminate after the fifth (5 th ) year of the Lease with payment of termination fee as provided in Section 15.1.
6. Base Rent Schedule:
|
Lease Year |
$PSF NNN |
Annual |
Monthly |
|
6/1/2019-9/30/2019 * |
$0.00 |
$0.00 |
$0.00 |
|
10/1/2019-9/30/2020 |
$17.25 |
$252,367.50 |
$21,030.63 |
|
10/1/2020-9/30/2021 |
$17.85 |
$261,145.50 |
$21,762.13 |
|
10/1/2021-9/30/2022 |
$18.48 |
$270,362.40 |
$22,530.20 |
|
10/1/2022-9/30/2023 |
$19.13 |
$279,871.90 |
$23,322.66 |
|
10/1/2023-9/30/2024 |
$19.79 |
$289,527.70 |
$24,127.31 |
|
10/1/2024-9/30/2025 |
$20.49 |
$299,768.70 |
$24,980.73 |
|
10/1/2025-9/30/2026 |
$21.20 |
$310,156.00 |
$25,846.33 |
*Gross Rent (Base Rent and Additional Rent) shall be abated during the first four (4) months.
7. Additional Rent:
(a) Tenant shall pay 100% of Additional Rent $8,461.02 per month, based on an estimate of $6.94 per square foot of the Premises
(b) Monthly Deposits commence on the Commencement Date
(c) Initial Monthly Deposits: $29,491.65 (Base Rent plus Additional Rent)
8. Security Deposit Amount: $700,000.00
9. Place for Payments: SpineBarrel, LLC
c/o The Colorado Group
3434 47 th Street, Suite 220
Boulder, CO 80301
10. Place for Notices:
|
Landlord : |
with a copy to : |
|
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SpineBarrel, LLC c/o The Colorado Group 3434 47 th Street, Suite 220 Boulder, CO 80301 Attn: Neil Littman |
Packard and Dierking, LLC 2595 Canyon Blvd., Suite 200 Boulder, CO 80302 Attn: Kimberly Lord |
|
|
Tenant: |
with copies to: |
|
|
Prior to Commencement Date:
AeroGrow International, Inc. 6075 Longbow Dr., Suite 200 Boulder, CO 80301 Attn: Grey Gibbs
|
The Scotts Miracle-Gro Company 14111 Scottslawn Rd Marysville, OH 43041 Attention Real Estate Department |
|
|
After Commencement Date:
Aerogrow International, Inc. 5404 Spine Road Boulder, CO 80301 Attn: Grey Gibbs |
The Scotts Miracle-Gro Company 14111 Scottslawn Road Marysville, OH 43041 Attn: Legal Department |
11. Permitted Uses: General office and lab related uses.
12. Brokers: Tenant’s Broker : Brian McClenahan and Jeremy Kroner, CBRE, Inc.
Landlord’s Broker : Neil Littmann, W. Scott Reichenberg, Jessica Cashmore and Aaron Baney, The Colorado Group, Inc. Furthermore, the Parties acknowledge timely disclosure that Neil Littmann and W. Scott Reichenberg are members of the Landlord.
13. Utilities: Direct to Tenant
14. Tenant Finish Contribution: Up to a maximum amount of $40.00 psf ($585,200.00) payable on receipt of documented invoices from Tenant and in accordance with the Work Letter.
LEASE
This Lease is made and entered into by and between SpineBarrel, LLC, a Colorado limited liability company (“Landlord”), and Aerogrow International, Inc., a Nevada corporation (“Tenant”), and shall be effective on the date of its execution by the last party to sign (the “Effective Date”).
ARTICLE 1
GENERAL
1.1 Consideration . Landlord enters into this Lease in consideration of the payment by Tenant of the Rents herein reserved and the keeping, observance and performance by Tenant of the covenants and agreements of Tenant herein contained.
1.2 Exhibits and Addenda to Lease . The Exhibits and Addenda listed below shall be attached to this Lease and deemed incorporated in this Lease by this reference. In the event of any inconsistency or conflict between such Exhibits and Addenda and the terms and provisions of this Lease, the terms and provisions of the Exhibits and Addenda shall control. The Exhibits and Addenda to this Lease are:
Summary of Basic Lease Terms
Exhibit A Notice of Non-Liability for Mechanics’ Liens
Exhibit B Work Letter
Exhibit C Rules and Regulations
Exhibit D Bill of Sale with Furniture Fixtures & Equipment List
ARTICLE 2
DEFINITIONS; DEMISE OF PREMISES
2.1 Building . “Building” shall mean the building or buildings constructed on the Land, as the same may be expanded, remodeled, reconstructed or otherwise modified from time to time by Tenant, with Landlord’s consent as provided in Section 8.12, currently containing approximately the number of square feet of interior floor area set forth on the Summary of Basic Lease Terms.
2.2 Improvements . “Improvements” shall mean the Building, the Parking Area and all other fixtures and improvements on the Land, including landscaping thereon.
2.3 Land . “Land” shall mean the parcel or parcels of real property upon which the Building is located, as the same may be replatted, resubdivided or adjusted from time to time by Landlord in its sole discretion.
2.4 Lease Year . “Lease Year” shall mean a period of twelve (12) consecutive calendar months commencing, if the Commencement Date is the first day of a month, on the Commencement Date. If the Commencement Date is not the first day of a month, “Lease Year” shall mean a period of twelve (12) consecutive calendar months commencing on the first day of the month immediately following the Commencement Date, and the first Lease Year shall include such partial month.
2.5 Parking Area . “Parking Area” shall mean that portion of the Land that is or is to be paved and otherwise improved or designated unimproved land for the parking of motor vehicles containing approximately thirty-eight (38) parking stalls.
2.6 Premises . The “Premises” shall mean the Building that is located on the Land.
2.7 Property . “Property” shall mean the Land, the Building and the Improvements and any fixtures and personal property used in operation and maintenance of the Land, Building and Improvements other than fixtures and personal property of Tenant.
2.8 Demise . Subject to the provisions, covenants and agreements herein contained, Landlord hereby leases and demises to Tenant, and Tenant hereby leases from Landlord, the Premises as hereinafter defined, for the Lease Term as hereinafter defined, subject to existing covenants, conditions, restrictions, easements and encumbrances affecting the same.
2.9 Square Footage and Address . The Premises contains approximately the rentable floor area set forth in the Summary of Basic Lease Terms. The address of the Premises is the address set forth in the Summary of Basic Lease Terms.
2.10 Use of Parking Area /Bike Storage . Tenant is hereby granted a right and license to use the Parking Area. Landlord shall not be responsible for any injuries to any person nor any damage to any automobile, vehicle or other property that occurs in or about the Parking Area. Tenant shall be permitted to store bicycles within the Building in designated storage areas.
2.11 Building Access . Tenant will have 7 days per week, 24 hours per day, access.
2.12 Covenant of Quiet Enjoyment . Landlord covenants and agrees that, provided Tenant is not in default and keeps, observes and performs the covenants and agreements of Tenant contained in this Lease, Tenant shall have quiet and peaceable possession of the Premises, and such possession shall not be disturbed or interfered with by Landlord or by any person claiming by, through or under Landlord.
2.13 Condition of Premises . Landlord agrees that to the best of Landlord’s current knowledge, the Property and the Premises and the systems serving the Premises (i.e., HVAC, fire suppression, electrical), including the Building and restrooms, are in compliance with all applicable governmental regulations, codes, rules and laws, including the Americans with Disabilities Act. Window coverings as currently exist in the Premises will be retained for Tenant’s use. Electrical distribution is present at the Premises but Tenant is responsible for any upgrades that it may desire and these will be covered as part of Tenant’s Work under the Work Letter. No submetering is present as it is a single tenant Building; however, there a three (3) services that support the Building as it was a multi-tenant building in the past. Tenant covenants and agrees that Tenant accepts the Premises “as is” and Tenant hereby waives any warranty of condition or habitability, suitability for occupancy, use or habitation, fitness for a particular purpose or merchantability, express or implied, relating to the Premises.
ARTICLE 3
TERM OF LEASE
3.1 Lease Term . “Lease Term” or “Term” shall mean the period of time specified in the Summary of Basic Lease Terms commencing at midnight on the Commencement Date as set forth in the Summary of Basic Lease Terms and expiring at midnight on the Expiration Date, as specified in the Summary of Basic Lease Terms. The term “Lease Term” or “Term” shall include the Option Terms provided in this Lease if Tenant’s Extension Options are exercised in accordance with the terms and conditions hereof.
3.2 Options to Extend Lease . Provided that the Lease is then in full force and effect and there exists no uncured default by Tenant, Tenant shall have the right and option (each, an “Extension Option”) to extend this Lease for two (2) additional terms of five (5) years each (each, an “Option Term”), as provided herein. Tenant must exercise the Extension Options, if at all, by providing Landlord with written notice thereof at least nine (9) months prior to the expiration date of the initial 5-year Term, or the first Option Term, as the case may be (“Extension Notice”). If Tenant does not provide Landlord with the Extension Notice as and when herein specified, all Extension Options shall terminate and be of no further force or effect. If Tenant exercises an Extension Option, the Term shall be extended upon the same terms and conditions as set forth in the Lease, except that the Base Rent shall be adjusted as provided herein and the Extension Option applicable to such Option Term shall be of no further force and effect. The Base Rent for the first year of an Option Term shall be the then current Market Rate (as defined below), and will be increased annually thereafter by the greater of three and one half percent (3.5%) or the CPI Escalator as set forth in Section 3.2.3 below. Landlord shall not be obligated to pay any commission or fee to any Tenant broker or agent with respect to Tenant’s exercise of the Extension Options. Each Extension Option shall apply to the entire Premises and may not be exercised as to only a portion of the Premises. If Tenant is in material default of its obligations under the Lease beyond all applicable grace periods at either the time it exercises an Extension Option or the date upon which an Option Term is to commence, then Landlord at its option may elect to treat the exercise of such Extension Option as ineffective in which case this Lease shall terminate upon expiration of the initial 5-year Term, or first Option Term, as the case may be.
3.2.1 Market Rate . Upon exercise by Tenant of an Extension Option and for a period of thirty (30) days thereafter, Landlord and Tenant shall make a good faith effort to agree upon the Market Rate. The “Market Rate” means the rate at which Landlord under no compulsion to lease the Premises and a tenant under no compulsion to lease the Premises would determine as the rental as of the commencement date of such Option Term, taking into consideration all relevant factors, including, without limitation, the uses permitted under the Lease, the quality, size, design and location of the Premises, and the rental for comparable space located in the City of Boulder. The Base Rent for the first year of an Option Term shall not be less than 95% of the Base Rent provided during the last year of the preceding Term.
3.2.2 Market Rate Dispute Resolution . In the event that Landlord and Tenant fail to agree on the Market Rate within such thirty (30) day period, then Tenant shall within ten (10) business days after the expiration of such 30-day period give written notice to Landlord of either (a) the withdrawal by Tenant of its Extension Notice, whereupon all existing Extension
Options shall terminate and the Lease shall expire on the expiration date of the then-current Term, or (b) that Tenant is requiring the Market Rate to be determined by arbitration. If Tenant does not provide such notice within said 10-day period, then Tenant shall be deemed to have withdrawn its Extension Notice, the Extension Option(s) shall terminate and the Lease shall expire on the expiration date of the then-current Term. If Tenant timely provides notice and requires arbitration, then the parties shall within ten (10) days after Tenant’s notice of arbitration select an arbitrator to render a final determination of the Market Rate. The arbitrator shall be a licensed commercial real estate broker who has at least (10) years continuous experience in the business of commercial real estate brokerage in Boulder, Colorado, and shall be a member in good standing of the Denver Metropolitan Commercial Association of Realtors (“DMCAR”) and Commercial Brokers of Boulder (“CBB”), or if either of such organizations is not then in existence, such other trade group(s) or professional organization(s) as leading commercial real estate brokers in Boulder, Colorado, customarily participate in at such time. The arbitrator shall conduct such hearings and investigations as the arbitrator shall deem appropriate and shall, within thirty (30) days after having been appointed, establish the Market Rate. The fees of the arbitrator shall be divided equally between Landlord and Tenant. The determination rendered in accordance with the provisions of this Section shall be final and binding in fixing the Market Rate. The arbitrator shall not have the power to add to, modify, or change any of the provisions of this Lease. In the event Landlord and Tenant are unable to agree upon an arbitrator, Landlord and Tenant shall each, at its own expense, select an arbitrator and those two arbitrators shall then choose an arbitrator meeting the qualifications set forth above to make the determination. If any party fails to select an arbitrator as described above, the arbitrator selected by the other party shall be deemed to be the arbitrator selected by the parties under this paragraph. If for any reason the Market Rate shall not have been determined prior to the commencement of the Option Term, then, until the Market Rate has been finally determined in accordance with this Section, the amount of Base Rent shall remain the same as payable during the prior year of the Lease. Upon final determination of the Market Rate, an appropriate adjustment to the Base Rent shall be made reflecting such final determination, and an adjustment shall be made between Landlord and Tenant with respect to any overpayment or underpayment of Base Rent from the commencement of the Option Term to the date of such final determination, together with interest accruing at the rate of eight percent (8%) per annum.
3.2.3 CPI Escalator . During any Option Term the amount of Base Rent shall be increased annually by the greater of 3.5% or the CPI Escalator (defined below) on October 1 of each year during the Option Term. As used herein, the term “CPI Escalator” shall refer to the following formula:
The increase in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (Denver-Boulder, Colorado area, 1982-1984 = 100) (“CPI”) between (i) the most recently published CPI prior to the date which is three months prior to the relevant anniversary date of the Lease (the “Comparison Date”) and (ii) the most recently published CPI prior to the date which is one year prior to the Comparison Date.
In no event shall the Base Rent be reduced. Landlord shall notify Tenant of the amount of each increase in Base Rent by a written statement. If the Base Rent is increased by the CPI
Escalator, such notice shall include the CPI for the Comparison Date and for the date that is one year prior to the Comparison Date. If the format or components of the CPI are materially changed, Landlord shall substitute an index which is published by the Bureau of Labor Statistics or a similar agency and which is most nearly equivalent to the CPI on the Comparison Date.
In the event Landlord has not given Tenant a written statement setting forth the amount of the increase in Base Rent for a given year by October 1, Tenant shall continue to pay Base Rent in the same amount applicable during the prior year until such time as Landlord has provided Tenant with such written statement. Within 10 days after Landlord provides such written statement, Tenant shall pay to Landlord the aggregate amount of additional Base Rent owed from the anniversary date based upon the increase in Base Rent applicable for such year.
ARTICLE 4
RENT AND OTHER AMOUNTS PAYABLE
4.1 Base Rent . Tenant covenants and agrees to pay to Landlord, without prior notice, demand, offset, deduction or abatement, Base Rent specified in the Summary of Basic Lease Terms for the full Lease Term beginning on the Commencement Date.
4.2 Monthly Rent . Base Rent shall be payable monthly in advance, without notice, in equal installments, together with the Monthly Deposits in the amounts specified in the Summary of Basic Lease Terms (“Monthly Rent”). The first monthly installment shall be due and payable on the Commencement Date and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the Commencement Date during the Lease Term, except that the rental payment for any fractional calendar month, if applicable, at the commencement or end of the Lease Term shall be prorated based on a 30-day month.
4.3 Place of Payments . Base Rent and all other sums payable by Tenant to Landlord under this Lease shall be paid to Landlord at the place for payments specified in the Summary of Basic Lease Terms, or such other place as Landlord may from time to time designate in writing.
4.4 Lease a Net Lease and Rent Absolute . It is the intent of the parties that: (i) the Base Rent provided in this Lease shall be a net payment to Landlord; (ii) except as otherwise expressly provided herein, the Lease shall continue for the full Lease Term notwithstanding any occurrence preventing or restricting use and occupancy of the Premises, including any damage or destruction affecting the Premises, and any action by governmental authority relating to or affecting the Premises; (iii) the Base Rent shall be absolutely payable without offset, reduction or abatement for any cause except as otherwise specifically provided in this Lease; (iv) Landlord shall not bear any costs or expenses relating to the Premises or provide any services or do any act in connection with the Premises except as otherwise specifically provided in this Lease; and (v) Tenant shall pay, in addition to Base Rent, Additional Rent to cover costs and expenses relating to the Premises and the Property, all as hereinafter provided.
4.5 Additional Rent . Commencing on the Commencement Date, Tenant covenants and agrees to pay all costs and expenses relating to the operation, maintenance and repair of Premises and Property, including utilities; Taxes and proportionate Assessments and costs and expenses of Landlord’s Insurance; the Management Fee; and all other costs and expenses that
Tenant is obligated to pay under this Lease (all such costs and expenses other than Base Rent are referred to herein collectively, “Additional Rent”). Landlord covenants and agrees that Landlord shall pay the costs and expenses for which Landlord has collected Additional Rent as and when due. Tenant shall not be responsible or otherwise obligated to pay Landlord for any late fees, interest, penalties or other charges resulting from Landlord’s failure to make such payments when due.
4.6 Monthly Deposits for Taxes, Insurance and Management Fee . Tenant will pay to Landlord monthly in advance, without notice, commencing on the Commencement Date and on the first day of each month thereafter, amounts as hereinafter specified, for payment of Taxes and Assessments (defined in Section 5.1), Landlord’s Insurance (defined in Section 6.2), the Management Fee (defined in Section 7.2), and any other charges payable with respect to the Premises hereunder as Additional Rent (collectively “Monthly Deposits”). The Monthly Deposits shall each be equal to 1/12 of the amounts, as reasonably estimated and re-estimated from time to time by Landlord, of the annual Taxes and Assessments, annual Landlord’s Insurance premiums, and annual Management Fee payable with respect to the Property. Landlord shall submit to Tenant before the beginning of each calendar year during the Term, or as soon thereafter as reasonably practicable, a statement of Landlord’s estimate of Monthly Deposits due from Tenant during such calendar year. If Landlord fails to give Tenant notice of its estimated Monthly Deposits due for any calendar year, then Tenant shall continue making estimated Monthly Deposits in accordance with the estimate for the previous calendar year until a new estimate is provided. If Landlord determines that, because of unexpected increases in Taxes and Assessments or Landlord’s Insurance, Landlord’s estimate of the Monthly Deposits was too low, then Landlord shall have the right to give a new statement thereof due from Tenant for the balance of the applicable calendar year and bill Tenant for any deficiency, which amount Tenant shall pay within thirty (30) days. Tenant shall thereafter pay estimated Monthly Deposits based on such new statement. If Tenant so requests in writing within thirty (30) days after receipt of a new statement, Landlord shall furnish Tenant with a copy of invoices or receipts for the expenses giving rise to Landlord’s re-estimation of Monthly Deposits.
4.7 Reconciliation Statement . Within ninety (90) days after the expiration of each calendar year during the Term, or as soon thereafter as is reasonably practicable, Landlord shall submit a statement (the “Reconciliation Statement”) to Tenant showing the actual Taxes and Assessments and Landlord’s Insurance premiums due from Tenant for such calendar year. If for any calendar year, Tenant’s estimated payments therefor exceed the actual amount due from Tenant, then Landlord shall give Tenant a credit in the amount of the overpayment toward Tenant’s next monthly payments of Monthly Rent (until exhausted), or, in the event the Lease has expired or terminated and no Default by Tenant exists, Landlord shall pay Tenant the total amount of such excess upon delivery of the Reconciliation Statement to Tenant. If for any calendar year, Tenant’s estimated payments are less than the actual amount due from Tenant, then Tenant shall pay the total amount of such deficiency to Landlord within thirty (30) days after receipt of the Reconciliation Statement from Landlord. If Tenant so requests in writing within thirty (30) days after receipt of the Reconciliation Statement for a calendar year, Landlord shall furnish Tenant with a copy of invoices or receipts for Taxes and Assessments and Landlord’s Insurance for such calendar year. Landlord’s and Tenant’s obligations with respect to any overpayment or underpayment of Taxes and Assessments and Landlord’s Insurance shall survive the expiration or termination of this Lease.
4.8 Security Deposit . Upon execution of this Lease by Tenant, Tenant shall deposit with Landlord the amount specified as a security deposit in the Summary of Basic Lease Terms (the “Security Deposit”). The amount of the Security Deposit shall be decreased by $100,000 every twelve (12) months following the Commencement Date (i.e., date of first $100,000 reduction would be October 1, 2020), so long as Tenant has not had any uncured event of default during the prior twelve (12) month period. The Security Deposit shall be retained by Landlord and may be applied by Landlord, to the extent necessary, to pay and cover any loss, cost, damage or expense, including attorneys’ fees, sustained by Landlord by reason of the failure of Tenant to comply with any provisions, covenant or agreement of Tenant contained in this Lease. To the extent not necessary to cover such loss, cost, damage or expense, the Security Deposit, without any interest thereon, shall be returned to Tenant within 60 days after expiration of the Lease Term or the date Tenant surrenders the Premises to Landlord in the condition required hereunder, whichever is later; provided, however, that Landlord may also deduct any amount from the Security Deposit Landlord estimates may be required to cover any shortfall in Monthly Deposits made by Tenant in the final year of the Lease until such time as Landlord has completed its annual Additional Rent reconciliation for such year. The Security Deposit shall not be considered as an advance payment of rent or as a measure of the loss, cost, damage or expense which is or may be sustained by Landlord. In the event all or any portion of the Security Deposit is applied by Landlord to pay any such loss, cost, damage or expense, Tenant shall, from time to time, within five (5) business day of receipt of Landlord’s written demand, deposit with Landlord such amounts as may be necessary to replenish the Security Deposit to its original amount.
4.9 General Provisions as to Monthly Deposits and Security Deposit . Landlord shall not be required to hold the Security Deposit in an escrow or trust deposit account, and Landlord shall not commingle the Monthly Deposits with Landlord’s own funds. Landlord shall not be obligated to pay interest to Tenant on account of the Monthly Deposits and Security Deposit. In the event of a transfer by Landlord of Landlord’s interest in the Premises to a third party, Landlord shall deliver the Monthly Deposits and Security Deposit to the transferee of Landlord’s interest, and Landlord shall thereupon be discharged from any further liability to Tenant with respect to such Monthly Deposits and Security Deposit. In the event of a transfer by Tenant of Tenant’s interest in the Premises, Landlord shall be entitled to return the Monthly Deposits and Security Deposit to Tenant’s successor in interest, and Landlord shall thereupon be discharged from any further liability with respect to the Monthly Deposits and Security Deposit.
ARTICLE 5
TAXES AND ASSESSMENTS
5.1 Covenant to Pay Taxes and Assessments . Tenant covenants and agrees to pay as Additional Rent all Taxes and proportionate Assessments that accrue during or are attributable to the Lease Term. “Taxes and Assessments” means all taxes, assessments or other impositions, general or special, ordinary or extraordinary, of every kind or nature, which may be levied, assessed or imposed upon or with respect to the Property or any part thereof, or upon any building, improvements or personal property at any time situated thereon, but excluding Landlord’s state or federal income, franchise, estate or inheritance taxes.
5.2 Proration at Commencement and Expiration of Term . Taxes and Assessments shall be prorated between Landlord and Tenant for the year in which the Lease Term commences
and for the year in which the Lease Term expires as of, respectively, the Commencement Date and Expiration Date (as extended, if applicable), except as herein provided. Additionally, for the year in which the Lease Term expires, Tenant shall be liable without proration for the full amount of Taxes and Assessments relating to any improvements, fixtures, equipment or personal property that Tenant is required to remove or in fact removes as of the expiration of the Lease Term. Proration of Taxes and Assessments shall be made on the basis of actual Taxes and Assessments. Taxes and Assessments for the years in which the Lease Term commences and expires shall be paid and deposited with the Landlord through Monthly Deposits as hereinabove provided. In the event actual Taxes and Assessments for either year are greater or less than as estimated for purposes of Monthly Deposits, appropriate adjustment and payment shall be made between the parties at the time the actual Taxes and Assessments are known, as may be necessary to accomplish proration, as hereinafter provided, and such obligation shall survive the termination or expiration of this Lease.
5.3 Special Assessments . If any Taxes and Assessments are payable in installments over a period of years, Tenant shall be responsible only for installments for periods during the Lease Term with proration, as above provided, of any installment payable prior to or after expiration of the Lease Term.
5.4 New or Additional Taxes . Tenant’s obligation to pay Taxes and Assessments shall include any Taxes and Assessments of a nature not presently in effect but which may hereafter be levied, assessed or imposed upon Landlord or upon the Property if such tax shall be based upon or arise out of the ownership, use or operation of or the rents received from the Property, other than income taxes or estate taxes of Landlord. For the purposes of computing Tenant’s liability for such new type of tax or assessment, the Property shall be deemed the only property owned by Landlord. Notwithstanding anything to the contrary in the foregoing, Tenant’s obligation to pay any such Taxes and Assessments shall only be attributable to those levied, assessed or imposed for periods during the Lease Term or when Tenant was in possession of the Property.
5.5 Right to Contest Taxes . Landlord shall have the right to contest any Taxes and Assessments. If Landlord does not contest any Taxes and Assessments, then Tenant shall have the right to do so at Tenant’s cost and expense. Landlord, at Tenant’s expense, agrees to execute and deliver to Tenant any commercially reasonable documents that may be necessary or proper to permit Tenant to contest any such Taxes and Assessments. Landlord shall pay to or credit Tenant with any abatement, reduction or recovery of any Taxes and Assessments attributable to the Lease Term less all costs and expenses incurred by Landlord, including attorneys’ fees, in connection with pursuing such abatement, reduction or recovery.
ARTICLE 6
INSURANCE
6.1 Casualty Insurance . Landlord covenants and agrees to obtain and keep in full force and effect during the Lease Term property insurance including “special form” coverage with respect to the Property, in an amount equal to the full replacement cost thereof, with coinsurance clauses of no less than ninety percent (90%), and with coverage, at Landlord’s
option, by endorsement or otherwise, for all risks, flood, vandalism and malicious mischief, sprinkler leakage, boilers, and loss of rents and with a deductible in the amount for each occurrence as Landlord, in its reasonable discretion, may determine from time to time (“Casualty Insurance”). Casualty Insurance obtained by Landlord will not name Tenant as an insured party, but will, at Landlord’s option, name any mortgagee or holder of a deed of trust as an insured party as its interest may appear. Any Casualty Insurance coverage Landlord obtains pursuant to this Section 6.1 shall contain a waiver of rights of subrogation as among Tenant, Landlord and the holder of any such mortgage or deed of trust. Tenant covenants and agrees to pay, as Additional Rent, the cost of Casualty Insurance obtained by Landlord, and to pay, as Additional Rent, the cost of any deductible paid under such Casualty Insurance for any processed claim. Tenant shall be responsible for obtaining, at Tenant’s cost and expense, insurance coverage for personal property and Changes or other leasehold improvements made by Tenant, and for business interruption of Tenant.
6.2 Liability Insurance . Tenant covenants and agrees to obtain and keep in full force and effect during the Lease Term, and to pay the premiums and costs of, commercial general liability insurance (“Liability Insurance”) covering public liability for claims for bodily injury, personal injury, and property damage with respect to the use and operation of the Premises and the Property by Tenant, with minimum limits of $2,000,000 each occurrence and $5,000,000 general aggregate, a portion of which may be provided through an excess policy. Landlord may also obtain and keep in full force and effect during the Lease Term liability insurance covering public liability with respect to the ownership, use and operation of the Property (any such liability insurance and the Casualty Insurance, collectively, the “Landlord’s Insurance”). Tenant covenants and agrees to pay the premiums and costs of Landlord’s Insurance as Additional Rent hereunder.
6.3 Other Insurance . Tenant covenants and agrees to obtain and keep in full force and effect during the Lease Term, and to pay the premiums and costs of, reasonable other types of insurance relating to the Property or Tenant’s occupancy, use and operation of the Premises that Landlord or any mortgagee or holder of a deed of trust on the Property may hereafter reasonably require. Tenant shall cause such other insurance to be in effect within 30 days after receipt of written notice from Landlord.
6.4 General Provisions Respecting Insurance . Except as otherwise approved in writing by Landlord, all insurance obtained by Tenant shall (a) be on forms and with insurers approved by Landlord, which approval shall not be unreasonably withheld; (b) name Landlord, Landlord’s managers and agents, and the holder of any mortgage or deed of trust encumbering the Property as additional insured with respect to liability insurance, as their interests may appear; (c) contain a waiver of rights of subrogation as among Tenant, Landlord and the holder of any such mortgage or deed of trust; (d) provide coverage on an occurrence basis; and (e) provide, by certificate of insurance or otherwise, proof of coverage. Tenant shall promptly notify Landlord in writing if it receives any notice that insurance coverage will be canceled or reduced. Certificates of insurance obtained by Tenant shall be delivered to Landlord who may deposit the same with the holder of any such first mortgage or deed of trust.
6.5 Cooperation in the Event of Loss . Landlord and Tenant shall cooperate with each other in the collection of any insurance proceeds which may be payable in the event of any loss,
including the execution and delivery of any proof of loss or other actions required to effect recovery.
ARTICLE 7
UTILITY, OPERATING, MAINTENANCE AND REPAIR EXPENSES; MANAGEMENT FEE
7.1 Utility Charges . Tenant covenants and agrees to contract in Tenant’s own name and to pay directly to the providers thereof, all charges for water, sewage, disposal, storm drainage fees, gas, electricity, light, heat, power, telephone or other utility services used, rendered or supplied to or for the Premises.
7.2 Operating Expenses; Management Fee . Tenant covenants and agrees to perform or contract for those services required to operate, repair and maintain the Property as defined in Section 7.3 herein, and to pay for all costs and expenses related thereto. Tenant shall pay to Landlord, as Additional Rent, a commercially reasonable and market rate management fee that is no more than five percent (5%) of the gross rents collected (“Management Fee”) for Lease administration obligations of Landlord as required herein. Landlord agrees that annual increases to controllable Operating Expenses shall not exceed four percent (4%) per year. For purposes of this Lease, “Controllable Operating Expenses” means all Operating Expenses other than Real Estate Taxes and Insurance, including deductibles, weather-related maintenance and repair expenses (including snow removal), utilities costs and expenses, maintenance and repair expenses, expenses incurred to comply with governmental requirements becoming effective or applicable after the Effective Date, and any other expenses not reasonably within the control of Landlord.
7.3 Tenant’s Maintenance Obligation . Except as set forth in Section 7.4 below, Tenant, at its sole cost and expense, will maintain, repair, replace and keep the Property and Premises and all improvements, fixtures and personal property thereon in good, safe and sanitary condition, order and repair and in accordance with all applicable laws, ordinances, orders, rules and regulations of governmental authorities having jurisdiction. Without limiting the generality of the foregoing, Tenant will perform or contract for and promptly pay for all necessary or appropriate maintenance and repairs of the HVAC systems, signage, doors, and glass, within the premises, and for trash and garbage disposal, janitorial and cleaning services, security services, interior painting, window washing, replacement of light bulbs and light fixtures. All maintenance and repairs (as set forth above) are to be performed by Tenant and shall be done promptly, in a good and workmanlike fashion. Landlord is responsible for the delivery, appropriate maintenance and repairs of the plumbing, electrical and other systems to the Premises from a public source; provided, however, that Tenant will promptly pay for such services once delivered to the Premises.
7.4 Landlord ’ s Maintenance Obligation . Landlord will maintain and repair the Parking Area (including, without limitation, seal coats, striping and resurfacing/repaving), Building roof, landscaping, irrigation system, exterior painting, and snow removal; however, such costs shall be passed through to the Tenant as a part of the Operating Expenses as defined in Section 4.4 and 4.5 herein. This Lease is a NNN lease, and the Landlord is responsible only for costs associated with the actual replacement of HVAC units, foundations and load-bearing walls
of the Building, roof replacement, and parking lot replacement; provided, however, that , Tenant’s obligations to pay for the following repairs in any given year will be split over two years except in the final year of the Lease as follows: HVAC unit repairs in excess of $2,500, roof repairs in excess of $5,000, and parking lot repaving and repairs in excess of $5,000. In the event Landlord incurs any other costs or expenses relating to maintenance or repairs to the Premises or the Property, Tenant shall pay or reimburse Landlord for any such costs or expenses within 30 days of receiving notice thereof.
ARTICLE 8
OTHER COVENANTS OF TENANT
8.1 Limitation on Use by Tenant . Tenant covenants and agrees to use the Premises only for the use or uses set forth as Permitted Uses by Tenant in the Summary of Basic Lease Terms and for no other purposes, except with the prior written consent of Landlord. Landlord has made no investigation of and makes no representations or warranties whatsoever regarding the permissibility of Tenant’s Permitted Uses under applicable zoning or land use laws, rules, regulations or approvals.
8.2 Compliance with Laws . Tenant covenants and agrees that at all times during the Lease Term, Tenant’s use of the Premises shall be in compliance with all zoning, land use and other applicable laws, rules and regulations with respect thereto, and that nothing shall be done or kept on the Property in violation of any law, ordinance, order, rule or regulation of any governmental authority having jurisdiction, and that the Property shall be used, kept and maintained in compliance with any such law, ordinance, order, rule or regulation and with the certificate of occupancy issued for the Building.
8.3 Compliance with Insurance Requirements . Tenant covenants and agrees that nothing shall be done or kept on the Property which might impair or increase the cost of insurance maintained with respect to the Premises, which might increase the insured risks or which might result in cancellation of any such insurance.
8.4 No Waste or Impairment of Value . Tenant covenants and agrees that nothing shall be done or kept on the Property that might impair the value of the Property, or which would constitute excessive wear and tear or waste.
8.5 No Overloading . Tenant covenants and agrees that nothing shall be done or kept on the Property and that no improvements, changes, alterations, additions, maintenance or repairs shall be made to the Property which might (a) impair the structural soundness of the Building, Improvements or Parking Area, (b) result in an overload of electrical lines serving the Building or cause excessive tripping of circuit breakers, (c) interfere with any telephone lines or equipment or any other electric or electronic equipment in the Building or on any adjacent or nearby property, (d) place excessive demands on or exceed the capacity of the water lines or sewer lines servicing the Building, or (e) in any other way overload any portion of the Premises or any equipment or facilities servicing the same. In the event of violations hereof, Tenant covenants and agrees to immediately remedy the violation at Tenant’s expense and in compliance with all requirements of governmental authorities and insurance underwriters.
8.6 No Nuisance, Noxious or Offensive Activity . Tenant covenants and agrees that nothing shall be done or kept on the Property that may be or become a public or private nuisance or which may cause unreasonable disturbance or annoyance to others on adjacent or nearby property. Tenant covenants and agrees that it will not use or permit to be used any part of the Premises for: (a) any adult book store or a store or any other establishment primarily selling or exhibiting pornographic materials or a store or club permitting the partial or complete exposure of any human genitalia, or topless or bottomless entertainment; (b) the sale of paraphernalia for use with illicit drugs or marijuana; or (c) growing, storing, selling or otherwise supplying, using or consuming illicit drugs or marijuana.
8.7 No Annoying Lights, Sounds or Odors . Tenant covenants and agrees that no light shall be emitted from the Premises which is unreasonably bright or causes unreasonable glare; no sound shall be emitted from the Premises which is unreasonably loud or annoying; and no odor shall be emitted from the Premises which is or might be noxious or offensive to others on adjacent or nearby property.
8.8 No Unsightliness . Tenant covenants and agrees that no unsightliness shall be permitted on the Property that is visible from any adjacent or nearby property. Without limiting the generality of the foregoing, all unsightly conditions, equipment, objects and conditions shall be kept enclosed within the Premises; no refuse, scrap, debris, garbage, trash, bulk materials or waste shall be kept, stored or allowed to accumulate on the Premises or the Property in an unsightly manner; and all pipes, wires, poles, antennas and other facilities for utilities or the transmission or reception of audio or visual signals or electricity shall be kept and maintained underground or enclosed within the Premises or appropriately screened from view.
8.9 No Animals . With the exception of certain pets pre-approved by Tenant for permission on the Property during working hours only, Tenant covenants and agrees that no animals shall be permitted or kept on the Property; provided, however, that nothing herein shall be construed as prohibiting qualified service animals which may not be legally excluded from the Premises pursuant to the Americans with Disabilities Act or any similar law, rule or regulation applicable to the Premises.
8.10 Restriction on Signs and Exterior Lighting . No directory or suite signature exists; however, Tenant shall be permitted (at its sole cost and expense) to use the monuments signs on the South and East sides of the Property. Tenant covenants and agrees that no other signs or advertising devices of any nature shall be erected or maintained by Tenant on the Property and no exterior lighting shall be permitted on the Property except as approved in writing by Landlord, which approval shall not be unreasonably withheld. All signage and lighting shall comply with applicable laws and covenants. Tenant shall remove all of its signage at the end of the Term and repair any damage caused by such removal.
8.11 No Violation of Covenants . Tenant covenants and agrees not to commit, suffer or permit any violation of any covenant, condition or restriction affecting the Property, including those Rules and Regulations for the Building which are attached hereto as Exhibit C and which may be revised by Landlord from time to time.
8.12 Restriction on Changes and Alterations . Tenant covenants and agrees not to improve, change, alter, add to, remove or demolish any Improvements (collectively, “Changes”) having a cost or value in excess of $5,000.00, or that affect the structural elements, building systems or foundations of the Premises, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, and unless Tenant complies with all conditions which may be imposed by Landlord, in its reasonable discretion, in connection with such consent. Tenant shall pay to Landlord the reasonable costs and expenses of Landlord for architectural, engineering, legal or other consultants that may be reasonably incurred by Landlord in determining whether to approve any such Changes. Landlord’s consent to any Changes and the conditions imposed in connection therewith shall be subject to all requirements and restrictions of any holder of a mortgage or deed of trust encumbering the Property. If such consent is given, no such Changes shall be permitted unless: (a) Tenant shall have procured and paid for all necessary permits and authorizations from any governmental authorities having jurisdiction; (b) such Changes will not reduce the value of the Property, and will not affect or impair existing insurance on the Property; and (c) Tenant, at Tenant’s sole cost and expense, shall maintain or cause to be maintained workmen’s compensation insurance covering all persons employed in connection with the work and obtain liability insurance covering any loss or damage to persons or property arising in connection with any such Changes and such other insurance or bonds as Landlord may reasonably require. Tenant covenants and agrees that any such Changes approved by Landlord shall be completed with due diligence and in a good and workmanlike fashion and in compliance with all conditions imposed by Landlord and all applicable permits, authorizations, laws, ordinances, orders, rules and regulations of governmental authorities having jurisdiction, and that the costs and expenses with respect to such Changes shall be paid promptly when due and that the Changes shall be accomplished free of liens of mechanics and materialmen. Tenant covenants and agrees that all such Changes shall become the property of the Landlord at the expiration of the Lease Term or, if Landlord so requests, Tenant shall, at or prior to expiration of the Lease Term and at its sole cost and expense, remove such Changes and restore the Property to its condition prior to such Changes.
8.13 No Mechanics ’ Liens . Tenant covenants and agrees not to permit or suffer, and to cause to be removed and released, any mechanic’s, materialmen’s or other lien on account of supplies, machinery, tools, equipment, labor or material furnished or used in connection with the construction, alteration, improvement, addition to or repair of the Premises by, through or under Tenant. If a lien is filed, Tenant shall within fifteen (15) days after receipt of notice thereof, at Landlord’s option, remove the lien by paying it in full, furnish Landlord a bond sufficient to discharge the lien or deposit in an escrow approved by Landlord 150% of the amount of such lien. At least fifteen (15) days prior to any Changes, Tenant shall provide written notice to Landlord of the date of commencement of any Changes. Prior to the commencement of any Changes, Tenant shall post in conspicuous locations and maintain on the Premises Notices of Owner’s Non-Liability in the form attached hereto as Exhibit A or in such other form as Landlord may from time to time require in writing.
8.14 No Other Encumbrances . Tenant covenants and agrees not to obtain any financing secured by Tenant’s interest in the Premises and not to encumber the Property or Landlord’s or Tenant’s interest therein, without the prior written consent of Landlord, and to keep the Property free from all liens and encumbrances by, through or under Tenant.
8.15 Subordination to Landlord Mortgages . Tenant covenants and agrees that this Lease and Tenant’s interest in the Premises shall be junior and subordinate to any mortgage or deed of trust now or hereafter encumbering the Property, provided that such subordination shall be conditioned on any mortgagee under a mortgage, beneficiary under a deed of trust and their successors-in-interest agreeing that this Lease and the rights of Tenant hereunder shall not be disturbed and shall continue in full force and effect so long as an uncured Default by Tenant has not occurred. In the event of a foreclosure of any such mortgage or deed of trust, Tenant shall attorn to the party acquiring title to the Property as the result of such foreclosure. Tenant covenants and agrees, within 10 business days after receipt of written request from Landlord, to execute a commercially reasonable Subordination, Nondisturbance and Attornment Agreement as may be necessary or appropriate to confirm and establish this Lease as subordinate to any such mortgage or deed of trust in accordance with the foregoing provisions. Alternatively, Tenant covenants and agrees that, at the option of any mortgagee or beneficiary under a deed of trust, Tenant shall within 10 business days after receipt of written request therefor execute and deliver such commercially reasonable documents as may be necessary to establish this Lease and Tenant’s interest in the Premises as superior to any such mortgage or deed of trust. If Tenant fails to execute any documents as required under the provisions hereof, Tenant hereby makes, constitutes and irrevocably appoints Landlord as Tenant’s attorney in fact and in Tenant’s name, place and stead to execute any such document.
8.16 Assignment or Subletting . Tenant shall have the right to sublease or assign this Lease to a parent, subsidiary, affiliate, or other entity controlling or in common control with Tenant (collectively, an “Affiliate”) upon prior written notice to Landlord but without the requirement of prior written consent so long as the entity is of equal or better financial strength and provides a security deposit equal to the current security deposit being held by Landlord or $400,000, whichever is greater (unless otherwise agreed by the Landlord, at Landlord’s sole discretion) acceptable to Landlord and Landlord has been provided with a copy of such Affiliate’s financials prior to execution of the sublease or assignment. Except for a Transfer by Tenant to an Affiliate as set forth above, Tenant covenants and agrees not to make or permit a Transfer by Tenant, as hereinafter defined, without Landlord’s prior written consent, which consent shall not be unreasonably withheld. A “Transfer by Tenant” shall include an assignment of this Lease, a sublease of all or any part of the Premises, any transfer of 30% or more of the voting stock or interests of Tenant, or any assignment, sublease, license, franchise, transfer, mortgage, pledge or encumbrance of all or any part of Tenant’s interest under this Lease or in the Premises, by operation of law or otherwise, or the use or occupancy of all or any part of the Premises by anyone other than Tenant. Except as otherwise provided herein, any such Transfer by Tenant without Landlord’s written consent shall be void and shall constitute a default under this Lease. In the event Landlord consents to any Transfer by Tenant, Tenant shall not be relieved of its obligations under this Lease and Tenant shall remain liable, jointly and severally and as a principal, and not as a guarantor or surety, under this Lease to the same extent as though no Transfer by Tenant had been made. The acceptance of rent by Landlord from any person other than Tenant shall not be deemed to be a waiver by Landlord of the provisions of this Section or of any other provision of this Lease and any consent by Landlord to Transfer by Tenant shall not be deemed a consent to any subsequent Transfer by Tenant. Landlord shall be entitled to consider any reasonable factor in giving or withholding its consent to a proposed Transfer by Tenant.
Tenant covenants and agrees that in the event Landlord consents to a sublease by Tenant, Tenant and Tenant’s subtenant shall enter into the form of agreement then being used by Landlord for subleases, and in the event Landlord consents to an assignment, Tenant and Tenant’s assignee shall enter into the form of agreement then being used by Landlord for assignments. In the event Tenant or Tenant’s transferee requests any changes or revisions to any such agreement, Tenant shall pay to Landlord, within 10 days after demand by Landlord, the reasonable costs and expenses of Landlord in connection with any request by Tenant for consent to a Transfer, including attorneys’ fees.
8.17 Annual Financial Statements . Tenant covenants and agrees to furnish to Landlord, within fifteen (15) days after Landlord’s written request, copies of Tenant’s most recent year-end financial statements and year-to-date financial statements through the end of the preceding calendar month. Other than as required by a potential lender, mortgagee, investor or purchaser, Landlord covenants and agrees that it will not deliver or otherwise share such financial statements with any third party. The financial statements shall include a balance sheet as of the end of, and a statement of profit and loss for, the periods described herein and, if regularly prepared by Tenant, a statement of sources and use of funds for the preceding fiscal year of Tenant.
8.18 Payment of Income and Other Taxes . Tenant covenants and agrees to pay promptly when due all personal property taxes on personal property of Tenant on the Premises and all federal, state and local income taxes, sales taxes, use taxes, Social Security taxes, unemployment taxes and taxes withheld from wages or salaries paid to Tenant’s employees, the nonpayment of which might give rise to a lien on the Premises or Tenant’s interest therein, and to furnish, if requested by Landlord, evidence of such payments.
8.19 Estoppel Certificates . Tenant covenants and agrees to execute, acknowledge and deliver to Landlord, upon Landlord’s written request, a written estoppel certificate certifying that this Lease is unmodified (or, if modified, stating the modifications) and in full force and effect; stating the dates to which Base Rent has been paid, stating the amount of the Security Deposit held by Landlord; stating the amount of the Monthly Deposits held by Landlord for the then calendar year; stating whether or not Landlord is in default under this Lease (and, if so, specifying the nature of the default); and stating such other matters concerning this Lease as Landlord may reasonably request. Tenant agrees that such statement may be delivered to and relied upon by any existing or prospective mortgagee or purchaser of the Property; provided, however, that any such reliance will be subject to Tenant’s knowledge and statements made in the estoppel certificate as of the date of that estoppel certificate. Further, such estoppel certificate shall not be deemed to alter or modify any terms of this Lease with the exception of any attornment to the party acquiring the Property. Tenant agrees that a failure to deliver such a statement within 10 business days after written request from Landlord shall be conclusive upon Tenant that this Lease is in full force and effect without modification except as may be represented by Landlord; that there are no uncured defaults by Landlord under this Lease; and that any representations by Landlord with respect to Base Rent, the Security Deposit and Monthly Deposits are true. In the event Tenant requests any changes or revisions to any estoppel certificate, Tenant shall pay to Landlord, within 10 days after demand by Landlord, the reasonable costs and expense Landlord incurred in excess of $1,000 (if any) in connection with the negotiation, drafting and revision of such estoppel certificate, including attorneys’ fees.
8.20 Landlord Right to Inspect and Show Premises and to Install “ For Sale ” Signs . Tenant covenants and agrees that Landlord and its authorized representatives shall have the right to enter the Premises at any reasonable time upon reasonable prior telephonic or email notice to Tenant for the purposes of inspecting the same or performing any other obligations of Tenant that Tenant has failed to perform hereunder within the applicable cure period set forth in Article 12 below, or for the purposes of showing the Premises to any existing or prospective mortgagee, purchaser or (if during the last nine (9) months of the Lease Term or any extension thereof) lessee of the Premises. Tenant covenants and agrees that Landlord may at any time and from time to time place on the Property a sign advertising the Property for sale or (if during the last nine (9) months of the Lease Term or any extension thereof) for lease. Landlord shall make commercially reasonable efforts to give Tenant advance notice of entry and to avoid any unreasonable disturbance of Tenant’s use and enjoyment of the Premises.
8.21 Landlord Title to Fixtures, Improvements and Equipment /Tenant Purchase of Certain FF&E . Tenant covenants and agrees that all fixtures and improvements on the Premises (excluding Tenant’s Equipment, defined below and the FF&E sold to Tenant) including all plumbing, heating, lighting, electrical and air conditioning fixtures and equipment, whether or not attached or affixed to the Premises, and whether now or hereafter located upon the Premises, shall be and remain the property of the Landlord upon expiration of the Lease Term. Concurrently with the Effective Date and subject to Landlord’s acquisition of the FF&E from the prior Tenant, Tenant agrees to purchase for $26,882 certain FF&E as identified in Exhibit D and to be conveyed by through Bill of Sale in the form also included as part of Exhibit D. The purchased FF&E is and shall become part of Tenant’s Equipment as defined in Section 8.22 below.
8.22 Removal of Tenant ’ s Equipment . Unless otherwise agreed by the parties, in writing, Tenant covenants and agrees to remove, at or prior to the expiration or earlier termination of the Term, all movable trade fixtures, equipment, apparatus, machinery, signs, furniture, furnishings and personal property used in the operation of the business of Tenant or purchased and used by Tenant in connection with the use and operation of the Premises (collectively, “Tenant’s Equipment”). If such removal shall injure or damage the Premises, Tenant covenants and agrees, at its sole cost and expense, at or prior to the expiration or earlier termination of the Term, to repair such injury and damage in good and workmanlike fashion and to place the Premises in the same condition as the Premises would have been if such Tenant’s Equipment had not been installed. If Tenant fails to remove any Tenant’s Equipment as required hereunder, Landlord may, at its option, keep and retain any such Tenant’s Equipment or dispose of the same and retain any proceeds therefrom, and Tenant shall reimburse Landlord for any costs or expenses of Landlord in removing the same and in restoring the Premises in excess of the actual proceeds, if any, received by Landlord from disposition thereof. Tenant releases and discharges Landlord from any and all claims and liabilities of any kind arising out of Landlord’s disposition of Tenant’s Equipment. Tenant shall not be required to remove any approved alterations in the Premises at the end of the term including data and phone cabling.
8.23 Tenant Indemnification of Landlord . Tenant covenants and agrees to protect, indemnify, defend and hold harmless Landlord from and against all liability, obligations, claims, damages, penalties, causes of action, costs and expenses, including reasonable attorneys’ fees, imposed upon, incurred by or asserted against Landlord by reason of: (a) any accident, injury to
or death of any person or loss of or damage to any property occurring on or about the Premises or Property; (b) any act or omission of Tenant or Tenant’s officers, employees, agents, guests or invitees or of anyone claiming by, through or under Tenant; (c) any use which may be made of, or condition existing upon, the Premises or Property; (d) any improvements, fixtures or equipment upon the Premises or Property; (e) any violation of any law, ordinance, order, rule or regulation of governmental authorities having jurisdiction by Tenant or Tenant’s officers, employees, agents, guests or invitees or by anyone claiming by, through or under Tenant; and (f) any repairs or maintenance of Changes to the Property made or caused to be made by, through or under Tenant. Tenant further covenants and agrees that, in case any action, suit or proceeding is brought against Landlord by reason of any of the foregoing, Tenant will, at Tenant’s sole cost and expense, pay all costs and expenses to defend Landlord in any such action, suit or proceeding with counsel of Landlord’s choosing.
8.24 Liability of Landlord . Landlord covenants and agrees to protect, indemnify, defend and hold harmless Tenant from and against all liability, obligations, claims, damages, penalties, causes of action, costs and expenses, including reasonable attorneys’ fees, imposed upon, incurred by or asserted against Tenant by reason of Landlord’s negligence or willful misconduct. Notwithstanding anything to the contrary contained in this Lease, Landlord, its beneficiaries, successors and assigns, shall not be personally liable with respect to any of the terms, covenants and conditions of this Lease, and Tenant shall look solely to the equity of Landlord in the Property in the event of any default or liability of Landlord under this Lease, such exculpation of liability to be absolute and without any exception whatsoever.
8.25 Release upon Transfer .
8.25.1 Release upon Transfer by Landlord . In the event of a Transfer by Landlord of the Property or of Landlord’s interest as Landlord under this Lease, Landlord’s successor or assignee shall take subject to and be bound by this Lease and, in such event, Tenant covenants and agrees that Landlord shall be released from all obligations of Landlord under this Lease, except obligations which arose and matured prior to such Transfer by Landlord; that Tenant shall thereafter look solely to Landlord’s successor or assign for satisfaction of the obligations of Landlord under this Lease; and that, upon demand by Landlord or Landlord’s successor or assign, Tenant shall attorn to such successor or assign.
8.25.2 Release upon Transfer by Tenant . In the event of a Transfer by Tenant of Tenant’s interest as Tenant under this Lease, Tenant’s successor or assignee shall take subject to and be bound by this Lease and, in such event, Landlord covenants and agrees that Tenant shall be released from all obligations of Tenant under this Lease, except obligations which arose and matured prior to such Transfer by Tenant; that Landlord shall thereafter look solely to Tenant’s successor or assign for satisfaction of the obligations of Tenant under this Lease.
8.26 Monitoring Equipment . Should equipment for monitoring fire systems and/or security systems be deemed necessary by Tenant or Landlord or be required for the Premises by federal, state or local governing agencies because of Tenant’s equipment, the nature of Tenant’s business or Tenant’s modification of the Premises, Tenant shall be responsible for installation of such monitoring system, for any required building permits, monthly monitoring fees, and any fines, penalties or other charges for false alarms.
ARTICLE 9
ENVIRONMENTAL MATTERS
9.1 Definitions .
9.1.1 Hazardous Material . “Hazardous Material” means any substance:
9.1.1.1 which is or becomes defined as a “hazardous material,” “hazardous waste,” “hazardous substance,” “regulated substance,” “pollutant” or “contaminant” under any federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. § 9601 et seq.) and the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.); or
9.1.1.2 which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, the State of Colorado or any political subdivision thereof; or
9.1.1.3 the presence of which on the Premises causes or threatens to cause a nuisance upon the Premises or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about the Premises, including radon gas; or
9.1.1.4 which contains gasoline, diesel fuel or other petroleum hydrocarbons; or
9.1.1.5 which contains polychlorinated bipheynls (PCBs), asbestos or urea formaldehyde foam insulation.
9.1.2 Environmental Requirements . “Environmental Requirements” means all applicable present and future statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations, concessions, franchises and similar items, of all governmental agencies, departments, commissions, boards, bureaus or instrumentalities of the United States, states and political subdivisions thereof and all applicable judicial, administrative and regulatory decrees, judgments and orders relating to the protection of human health or the environment.
9.1.3 Environmental Damages . “Environmental Damages” means all claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability), encumbrances, liens, costs and expenses of investigation and defense of any claim, whether or not such claim is ultimately defeated, and of any good faith settlement or judgment, of whatever kind or nature, contingent or otherwise, matured or unmatured, foreseeable or unforeseeable, including without limitation reasonable attorneys’ fees and disbursements and consultants’ and witnesses’ fees, any of which are incurred at any time as a result of the existence of Hazardous Material upon, about, beneath the Premises or migrating or threatening to migrate to or from the Premises, or the existence of a violation of Environmental Requirements pertaining to the Premises.
9.2 Tenant ’ s Obligation to Indemnify, Defend and Hold Harmless . Tenant, its successors and assigns, agrees to indemnify, defend, reimburse and hold harmless the following persons from and against any and all Environmental Damages arising from activities of Tenant or its employees, agents, contractors, subcontractors, guests, licensees or invitees which (1) result in the presence of Hazardous Materials upon, about or beneath the Property or migrating to or from the Property, or (2) result in the violation of any Environmental Requirements pertaining to the Property and the activities thereon:
9.2.1 Landlord;
9.2.2 any other person who acquires an interest in the Premises through Landlord in any manner, including but not limited to purchase at a foreclosure sale or otherwise; and
9.2.3 the directors, officers, shareholders, employees, partners, agents, contractors, subcontractors, experts, licensees, affiliates, lessees, mortgagees, trustees, heirs, devisees, successors, assigns, guests and invitees of such persons.
This obligation shall include, but not be limited to, the burden and expense of investigating and defending all claims, suits and administrative proceedings (with counsel reasonably approved by the indemnified parties), including attorneys’ fees and expert witness and consulting fees, even if such claims, suits or proceedings are groundless, false or fraudulent, and conducting all negotiations of any description, and paying and discharging, when and as the same become due, any and all judgments, penalties or other sums due against such indemnified persons, and all such expenses incurred in enforcing the obligation to indemnify. Tenant, at its sole expense, may employ additional counsel of its choice to associate with counsel representing the indemnified parties.
9.3 Tenant ’ s Obligation to Remediate . Notwithstanding the obligation of Tenant to indemnify Landlord pursuant to this agreement, Tenant shall, upon demand of Landlord, and at its sole cost and expense, promptly take all actions to remediate the Property that are reasonably necessary to mitigate Environmental Damages or to allow full economic use of the Property, or are required by Environmental Requirements, which remediation is necessitated by the (1) introduction of a Hazardous Material upon, about or beneath the Property or (2) a violation of Environmental Requirements, either of which is caused by the actions of Tenant, its employees, agents, contractors, subcontractors, guests, invitees or licensees. Tenant shall promptly provide to Landlord copies of testing results and reports that are generated in connection with the above activities, and copies of any correspondence with any governmental entity related to such activities.
9.4 Notification . If Tenant shall become aware of or receive notice or other communication concerning any actual, alleged, suspected or threatened violation of Environmental Requirements, or liability of Tenant for Environmental Damages in connection with the Premises or past or present activities of any person thereon, or that any representation set forth in this agreement is not or is no longer accurate, then Tenant shall deliver to Landlord, within 10 days of the receipt of such notice or communication by Tenant, a written description of said violation, liability, correcting information or actual or threatened event or condition,
together with copies of any such notice or communication. Receipt of such notice shall not be deemed to create any obligation on the part of Landlord to defend or otherwise respond to any such notification or communication.
9.5 Negative Covenants .
9.5.1 No Hazardous Material on Premises . Except in strict compliance with all Environmental Requirements, Tenant shall not cause, permit or suffer any Hazardous Material to be brought upon, treated, kept, stored, disposed of, discharged, released, produced, manufactured, generated, refined or used upon, about or beneath the Premises by Tenant, its agents, employees, contractors, subcontractors, guests, licensees or invitees or any other person. Tenant shall deliver to Landlord copies of all documents that Tenant provides to any governmental body in connection with compliance with Environmental Requirements with respect to the Premises, such delivery to be contemporaneous with provision of the documents to the governmental agency.
9.5.2 No Violations of Environmental Requirements . Tenant shall not cause, permit or suffer the existence or the commission by Tenant, its agents, employees, contractors, subcontractors or guests, licensees or invitees or by any other person of a violation of any Environmental Requirements upon, about or beneath the Premises or any portion of the Building or Land.
9.6 Landlord ’ s Right to Inspect and to Audit Tenant ’ s Records . Upon reasonable prior written notice to Tenant, Landlord shall have the right, but not the duty, to enter and conduct an inspection of the Premises and to inspect and audit Tenant’s records concerning Hazardous Materials at a reasonable time to be mutually scheduled by the parties to determine whether Tenant is complying with the terms of the Lease, including but not limited to the compliance of the Premises and the activities thereon with Environmental Requirements and the existence of Environmental Damages. On the dates and times to be mutually scheduled by the parties, Tenant hereby grants to Landlord the right to enter the Premises and to perform such tests on the Premises as are reasonably necessary in the opinion of Landlord to assist in such audits and investigations. Landlord shall use reasonable efforts to minimize interference with the business of Tenant by such tests inspections and audits, but Landlord shall not be liable for any interference caused thereby.
9.7 Landlord ’ s Right to Remediate . Should Tenant fail to perform or observe any of its obligations or agreements pertaining to Hazardous Materials or Environmental Requirements, then Landlord shall have the right, but not the duty, without limitation upon any of the rights of Landlord pursuant to this Lease, to enter the Premises personally or through its agents, consultants or contractors and perform the same. Tenant agrees to indemnify Landlord for the costs thereof and liabilities therefrom as set forth in Section 9.2.
9.8 Tenant shall not be responsible for costs and expenses related to Hazardous Material present, discharged, leaked, released, disposed, or emitted in, under, about, from or on the Property prior to the Effective Date in violation of Environmental Requirements and/or any Hazardous Materials present, discharged, leaked, released, disposed, or emitted in, under, about,
from, or otherwise made present on the Property by Landlord or its officers, directors, employees and agents during the Term.
9.9 Survival of Environmental Obligations . The rights and obligations of Landlord and Tenant as set forth in this Article 9 and all of its sections shall survive expiration or termination of this Lease.
ARTICLE 10
DAMAGE OR DESTRUCTION
10.1 Notice of Damage to Premises . If any portion of the Property shall be damaged or destroyed by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord (“Tenant’s Notice of Damage”).
10.2 Options to Terminate if Damage is Substantial . Upon receipt of Tenant’s Notice of Damage, Landlord shall promptly proceed to determine the nature and extent of the damage or destruction and to estimate the time necessary to repair or restore the Property. As soon as reasonably possible, Landlord shall give written notice to Tenant stating Landlord’s estimate of the time necessary to repair or restore the Property (“Landlord’s Notice of Repair Time”). If Landlord reasonably estimates that the repair or restoration cannot be completed within one (1) year from the time of Landlord’s Notice of Repair Time, Landlord and Tenant shall each have the option to terminate this Lease. If, however, the damage or destruction was caused by the act or omission of Tenant or Tenant’s officers, employees, agents, guests or invitees or of anyone claiming by, through or under Tenant, Landlord shall have the option to terminate this Lease if Landlord reasonably estimates that the repair or restoration cannot reasonably be completed within one (1) year from the time of Landlord’s Notice of Repair Time, but Tenant shall not have the option to terminate this Lease. Any option granted hereunder shall be exercised by written notice to the other party given within 10 days after Landlord’s Notice of Repair Time. If either Landlord or Tenant exercises its option to terminate this Lease, the Lease Term shall expire 30 days after the notice by either Landlord or Tenant exercising such party’s option to terminate this Lease. Following termination of this Lease under the provisions hereof, Landlord shall refund to Tenant such amounts of Base Rent and Additional Rent theretofore paid by Tenant as may be applicable to the period subsequent to the time of Tenant’s Notice of Damage less the reasonable value of any use or occupation of the Property by Tenant subsequent to the time of Tenant’s Notice of Damage.
10.3 Damage to Building . If the Building shall be damaged or destroyed by fire or other casualty (whether or not the rest of the Property is affected) to the extent of fifty percent (50%) or more of the replacement value thereof and within 30 days after the happening of such damage Landlord shall decide not to reconstruct or rebuild the Building, then upon written notice to Tenant within such 30 days, this Lease shall terminate and Landlord shall refund to Tenant such amounts of Base Rent and Additional Rent paid by Tenant for the period after such damage less the reasonable value of any use or occupation of the Premises by Tenant during such period.
10.4 Obligations to Repair and Restore . If repair and restoration of the Premises can be completed within the period specified in Section 10.2, in Landlord’s reasonable estimation, or if neither Landlord nor Tenant terminate this Lease as provided in Sections 10.2 or 10.3, this
Lease shall continue in full force and effect and Landlord shall proceed forthwith to cause the Premises to be repaired and restored to the condition existing on the date Tenant originally occupied the Premises with reasonable diligence and there shall be abatement of Base Rent and Additional Rent proportionate to the extent of the space and period of time that Tenant is unable to use and enjoy the Premises. Landlord may, at its option, require Tenant to arrange for and supervise the repair and restoration of the Premises, in which case Landlord shall furnish Tenant with the insurance proceeds for such repair and restoration at the time or times such funds are needed, provided such proceeds are sufficient to cover the costs of repair or restoration. Landlord shall have no responsibility or obligation to restore any Changes or other leasehold improvements installed by Tenant. If Tenant elects to restore any such items, Tenant shall be responsible for doing so and may pay for the same with the proceeds of any casualty insurance maintained by Tenant. Landlord and Tenant shall cooperate reasonably and in good faith to coordinate repair and restoration of the Premises and any Tenant improvements at the same time and using the same contractor, if applicable and if reasonably practicable.
10.5 Application of Insurance Proceeds . The proceeds of any Casualty Insurance maintained on the Property by Landlord shall be paid to and become the property of Landlord, subject to any obligation of Landlord to cause the Premises to be repaired and restored and further subject to any rights of a holder of a mortgage or deed of trust encumbering the Property to such proceeds. Landlord’s obligation to repair and restore the Premises provided in this Article 10 is limited to the repair and restoration that can be accomplished with the proceeds of any Casualty Insurance maintained by Landlord on the Property. The amount of any such insurance proceeds is subject to any right of a holder of a mortgage or deed of trust encumbering the Property to apply such proceeds to its secured debt.
ARTICLE 11
CONDEMNATION
11.1 Taking . A “Taking” shall mean the taking of all or any portion of the Premises as a result of the exercise of the power of eminent domain or condemnation for public or quasi-public use or the sale of all or part of the Premises under the threat of condemnation. A “Substantial Taking” shall mean a Taking of twenty-five percent (25%) or more of the area (in square feet) of the Premises. An “Insubstantial Taking” shall mean a Taking that does not constitute a Substantial Taking.
11.2 Termination upon Substantial Taking . If there is a Substantial Taking with respect to the Premises, the Lease Term shall expire on the date of vesting of title pursuant to such Taking. In the event of termination of this Lease under the provisions hereof, Landlord shall refund to Tenant such amounts of Base Rent and Additional Rent theretofore paid by Tenant as may be applicable to the period subsequent to the time of termination of this Lease.
11.3 Restoration upon Insubstantial Taking . In the event of an Insubstantial Taking, this Lease shall continue in full force and effect, Landlord shall proceed forthwith to cause the Premises, less such Taking, to be restored as near as may be to the condition existing on the date Tenant originally occupied the Premises, and there shall be abatement of Base Rent and Additional Rent proportionate to the extent of the space so taken. Landlord may, at its option, require Tenant to arrange for and handle the restoration of the Premises, in which case Landlord
shall furnish Tenant with sufficient funds for such restoration at the time or times such funds are needed.
11.4 Right to Award . The total award, compensation, damages or consideration received or receivable as a result of a Taking (“Award”) shall be paid to and be the property of Landlord, including, without limitation, any part of the Award made as compensation for diminution of the value of the leasehold or the fee of the Premises. Tenant hereby assigns to Landlord all of Tenant’s right, title and interest in and to any such Award. Tenant covenants and agrees to execute, immediately upon demand by Landlord, such documents as may be necessary to facilitate collection by Landlord of any such Award. Notwithstanding Landlord’s right to the entire Award, Tenant shall be entitled to any separate award, if any, for the loss of Tenant’s personal property or the loss of Tenant’s business and profits and/or Tenant’s relocation costs.
ARTICLE 12
DEFAULTS BY TENANT
12.1 Defaults Generally . Each of the following shall constitute a “Default by Tenant” under this Lease.
12.2 Failure to Pay Rent or Other Amounts . A Default by Tenant shall exist if Tenant fails to pay Base Rent, Additional Rent, Monthly Deposits or any other amounts payable by Tenant under the terms of this Lease, within three days after such amount is due.
12.3 Violation of Lease Terms . A Default by Tenant shall exist if Tenant breaches or fails to comply with any agreement, term, covenant or condition in this Lease applicable to Tenant, and Tenant does not cure such breach or failure within 15 business days after written notice thereof by Landlord to Tenant, or, if such breach or failure to comply cannot be reasonably cured within such 15-day period, if Tenant shall not in good faith commence to cure such breach or failure to comply within such 15-day period or shall not diligently proceed therewith to completion within 60 days following the occurrence of the breach or failure.
12.4 Nonoccupancy of Premises . A Default by Tenant shall exist if Tenant shall leave the Premises continuously unoccupied without the payment of rent or shall vacate and abandon the Premises.
12.5 Transfer of Interest Without Consent . A Default by Tenant shall exist if Tenant’s interest under this Lease or in the Premises shall be transferred to or pass to or devolve upon any other party without Landlord’s prior written consent.
12.6 Execution and Attachment Against . A Default by Tenant shall exist if Tenant’s interest under this Lease or in the Premises shall be taken upon execution or by other process of law directed against Tenant, or shall be subject to any attachment at the instance of any creditor or claimant against Tenant and said attachment shall not be discharged or disposed of within 30 days after the levy thereof.
12.7 Bankruptcy or Related Proceedings . A Default by Tenant shall exist if Tenant shall file a petition in bankruptcy or insolvency or for reorganization or arrangement under the bankruptcy laws of the United States (and Tenant does not assume this Lease in a reorganization
proceeding) or under any similar act of any state, or shall voluntarily take advantage of any such law or act by answer or otherwise, or shall be dissolved or shall make an assignment for the benefit of creditors or if involuntary proceedings under any such bankruptcy or insolvency law or for the dissolution of Tenant shall be instituted against Tenant or a receiver or trustee shall be appointed for the Premises or for all or substantially all of the property of Tenant, and such proceedings shall not be dismissed or such receivership or trustee-ship vacated within 90 days after such institution or appointment.
ARTICLE 13
LANDLORD ’ S REMEDIES
13.1 Remedies Generally . Upon the occurrence of any Default by Tenant, Landlord shall have the right, at Landlord’s election, then or at any time thereafter, to exercise any one or more of the following remedies.
13.2 Cure by Landlord . In the event of a Default by Tenant, Landlord may, at Landlord’s option, but without obligation to do so, and without releasing Tenant from any obligations under this Lease, make any payment or take any action as Landlord may deem necessary or desirable to cure any such Default by Tenant in such manner and to such extent as Landlord may deem necessary or desirable. Landlord may do so without demand on, or written notice to, Tenant and without giving Tenant any opportunity to cure such Default by Tenant. Tenant covenants and agrees to pay to Landlord, within 10 business days after demand, all advances, costs and expenses of Landlord in connection with the making of any such payment or the taking of any such action, including reasonable attorneys’ fees, together with interest as hereinafter provided from the day of payment of any such advances, costs and expenses by Landlord. Action taken by Landlord may include commencing, appearing in, defending or otherwise participating in any action or proceedings and paying, purchasing, contesting or compromising any claim, right, encumbrance, charge or lien with respect to the Premises which Landlord, in its discretion, may deem necessary or desirable to protect its interest in the Premises and under this Lease.
13.3 Termination of Lease and Damages . In the event of a Default by Tenant, Landlord may, at Landlord’s option, terminate this Lease, effective at such time as may be specified by written notice to Tenant, and demand (and, if such demand is refused, recover) possession of the Premises from Tenant. Tenant shall remain liable to Landlord for damages in an amount equal to the Base Rent, Additional Rent and other sums which would have been owing by Tenant hereunder for the balance of the Lease Term, had this Lease not been terminated, less the net proceeds, if any, of reletting of the Premises by Landlord subsequent to such termination, after deducting all of Landlord’s expenses in connection with such recovery of possession or reletting. Landlord shall be entitled to collect and receive such damages from Tenant on the days on which the Base Rent, Additional Rent and other amounts would have been payable if this Lease had not been terminated. Alternatively, at the option of Landlord, Landlord shall be entitled to recover forthwith from Tenant, as damages for loss of the bargain and not as a penalty, an aggregate sum which, at the time of such termination of this Lease, represents the excess, if any, of (a) the aggregate of the Base Rent, Additional Rent and all other sums payable by Tenant hereunder that would have accrued for the balance of the Lease Term, over (b) the
aggregate rental value of the Premises for the balance of the Lease Term, both discounted to present worth at the then applicable federal rate.
13.4 Repossession and Reletting . In the event of Default by Tenant, Landlord may reenter and take possession of the Premises or any part thereof, without demand or notice, and repossess the same and expel Tenant and any party claiming by, under or through Tenant, and remove the effects of both, without breach of the peace, without being liable for prosecution on account thereof or being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of rent or right to bring any proceeding for breach of covenants or conditions. No such reentry or taking possession of the Premises by Landlord shall be construed as an election by Landlord to terminate this Lease unless a written notice of such intention is given to Tenant. No notice from Landlord hereunder or under a forcible entry and detainer statute or similar law shall constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right, following any reentry or reletting, to exercise its right to terminate this Lease by giving Tenant such written notice, in which event the Lease will terminate as specified in said notice. After recovering possession of the Premises, Landlord may, from time to time, but shall not be obligated to, relet the Premises, or any part thereof, for the account of Tenant, for such term or terms and on such conditions and upon such other terms as Landlord, in its absolute discretion, may determine. Landlord may make such repairs, alterations or improvements as Landlord may consider appropriate to accomplish such reletting, and Tenant shall reimburse Landlord upon demand for all costs and expenses, including brokers’ commissions and attorneys’ fees, which Landlord may incur in connection with such reletting. Landlord may collect and receive the rents for such reletting but Landlord shall in no way be responsible or liable for any failure to relet the Premises, or any part thereof, or for any failure to collect any rent due upon such reletting. Notwithstanding Landlord’s recovery of possession of the Premises, Tenant shall continue to pay on the dates herein specified, the Base Rent, Additional Rent and other amounts which would be payable hereunder if such repossession had not occurred. Upon the expiration or earlier termination of this Lease, Landlord shall refund to Tenant any amount, without interest, by which the amounts paid by Tenant, when added to the net amount, if any, recovered by Landlord through any reletting of the Premises, exceeds the amounts payable by Tenant under this Lease. If, in connection with any reletting, the new lease term extends beyond the existing term, or the premises covered thereby include other premises not part of the Premises, a fair apportionment of the rent received from such reletting and the expenses incurred in connection therewith will be made in determining the net amount recovered from such reletting.
13.5 Suits by Landlord . Actions or suits for the recovery of amounts and damages payable under this Lease may be brought by Landlord from time to time, at Landlord’s election, and Landlord shall not be required to await the date upon which the Lease Term would have expired to bring any such action or suit.
13.6 Recovery of Landlord Enforcement Costs . All costs and expenses incurred by Landlord in connection with collecting any amounts and damages owing by Tenant pursuant to the provisions of this Lease or to enforce any provision of this Lease, including reasonable attorneys’ fees, whether or not any action is commenced by Landlord, shall be paid by Tenant to Landlord upon demand.
13.7 Administrative Late Charge . Other remedies for nonpayment of rent notwithstanding, if the Monthly Rent payment is not received by Landlord on or before the third day of the month for which the rent is due, or if any other payment due Landlord by Tenant is not received by Landlord on or before the last day of the month next following the month in which Tenant was invoiced, an Administrative Late Charge of five percent (5%) of such past due amount shall be come due and payable in addition to such amounts owed under this Lease to help defray the additional cost to Landlord for processing such late payments.
13.8 Interest on Past-Due Payments and Advances . Tenant covenants and agrees to pay to Landlord interest on demand at the rate of fifteen percent (15%) per annum, compounded on a monthly basis, on the amount of any Monthly Rent or other charges not paid when due, from the date due and payable, and on the amount of any payment made by Landlord required to have been made by Tenant under this Lease and on the amount of any costs and expenses, including reasonable attorneys’ fees, paid by Landlord in connection with the taking of any action to cure any Default by Tenant, from the date of making any such payment or the advancement of such costs and expenses by Landlord.
13.9 Landlord ’ s Bankruptcy Remedies . Nothing contained in this Lease shall limit or prejudice the right of Landlord to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding, an amount equal to the maximum allowable by any statute or rule of law governing such proceeding in effect at the time when such damages are to be proved, whether or not such amount be greater, equal or less than the amounts recoverable, either as damages or rent, under this Lease.
13.10 Remedies Cumulative . Exercise of any of the remedies of Landlord under this Lease shall not prevent the concurrent or subsequent exercise of any other remedy provided for in this Lease or otherwise available to Landlord at law or in equity.
ARTICLE 14
SURRENDER AND HOLDING OVER
14.1 Surrender upon Lease . Upon the expiration or earlier termination of this Lease, or on the date specified in any demand for possession by Landlord after any Default by Tenant, Tenant covenants and agrees to surrender possession of the Premises to Landlord broom clean, with all lighting, doors and electrical and mechanical systems (including, without limitation, all HVAC facilities) in good working order and condition, all walls in clean condition and holes or punctures in the walls repaired and otherwise in the same condition as when Tenant first occupied the Premises, ordinary wear and tear excepted.
14.2 Holding Over . If Tenant shall hold over after the expiration of the Lease Term, without written agreement providing otherwise, Tenant shall be deemed to be a Tenant at sufferance, at a monthly rental, payable in advance, equal to one hundred fifty percent (150%) of the Monthly Rent due during the last month of the Lease Term, and Tenant shall be bound by all of the other terms, covenants and agreements of this Lease. Nothing contained herein shall be construed to give Tenant the right to hold over at any time, and Landlord may exercise any and all remedies at law or in equity to recover possession of the Premises, as well as any damages
incurred by Landlord, due to Tenant’s failure to vacate the Premises and deliver possession to Landlord as herein provided.
ARTICLE 15
TENANT RIGHT TO TERMINATE
15.1 Tenant Right to Terminate 15.2 . Tenant shall have a one-time right to terminate this Lease at the end of the fifth (5 th ) year of the Initial Lease Term upon at least nine (9) months’ prior written notice to Landlord before the end of the fifth (5 th ) year, and payment to Landlord of a termination fee equal to three (3) months gross rent plus all unamortized transaction costs. Transaction costs shall include, but may not be limited to Tenant Finish Allowance, Real Estate Commissions, legal fees and 2/7 th of the gross rental abatement provided during the first four (4) months of the Lease Term. Within 30 days following lease execution, Landlord agrees to provides a letter agreement to set forth the termination fee.
ARTICLE 16
MISCELLANEOUS
16.1 No Implied Waiver . No failure by Landlord to insist upon the strict performance of any term, covenant or agreement contained in this Lease, no failure by Landlord to exercise any right or remedy under this Lease, and no acceptance of full or partial payment during the continuance of any Default by Tenant, shall constitute a waiver of any such term, covenant or agreement, or a waiver of any such right or remedy or a waiver of any such Default by Tenant.
16.2 Survival of Provisions . Notwithstanding any termination of this Lease, the same shall continue in force and effect as to any provisions hereof which require observance or performance by Landlord or Tenant subsequent to termination.
16.3 Covenants Independent . This Lease shall be construed as if the covenants herein between Landlord and Tenant are independent, and not dependent, and Tenant shall not be entitled to any offset against Landlord if Landlord fails to perform its obligations under this Lease.
16.4 Covenants as Conditions . Each provision of this Lease performable by Tenant shall be deemed both a covenant and a condition.
16.5 Tenant ’ s Remedies . Tenant may bring a separate action against Landlord for any claim Tenant may have against Landlord under this Lease, provided Tenant shall first give written notice thereof to Landlord and shall afford Landlord a reasonable opportunity to cure any such default. In no event will Landlord be responsible for any incidental, consequential or special damages incurred by Tenant, including, but not limited to, loss of profits or interruption of business as a result of any default by Landlord hereunder.
16.6 Prevailing Parties ’ Fees and Expenses . In the event of any lawsuit between Landlord and Tenant arising under or relating to this Lease, the prevailing party in such lawsuit shall be awarded from the other its costs and expenses incurred in connection therewith, including reasonable attorney fees.
16.7 Binding Effect . This Lease shall extend to and be binding upon the heirs, executors, legal representatives, successors and assigns of the respective parties hereto. The terms, covenants, agreements and conditions in this Lease shall be construed as covenants running with the Land.
16.8 Short Form Lease . This Lease shall not be recorded, but Tenant agrees, at the request of Landlord, to execute a short form lease for recording, containing the names of the parties, a description of the Premises and the Lease Term.
16.9 Notices and Demands . All notices, demands or billings that Landlord or Tenant may be required or may desire to serve on the other shall, except as otherwise expressly set forth in this Lease, be in writing and shall be served by mailing the same by certified mail, postage prepaid and return receipt requested, or by recognized overnight courier, addressed as set forth in the Summary of Basic Lease Terms or addressed to such other address or addresses as either Landlord or Tenant may from time to time designate to the other in writing in accordance with this Section. Any notice so given shall be deemed effectively given upon the date received (or refused). The customary receipt shall be conclusive evidence of service of any notice given by overnight courier or certified mail.
16.10 Force Majeure . In the event that either party shall be delayed or hindered in, or prevented from, the performance of any act required hereunder (with the exception of monetary obligations) by reason of strikes, lock-outs, labor troubles, inability to procure materials, the inability to obtain building inspections, approvals or permits, stop work orders, the inability to obtain a certificate of occupancy, failure of power or unavailability of utilities, riots, insurrection, war or other reason of like nature not the fault of such party, or not within its reasonable control, the performance of such acts shall be excused for the period of delay, and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay (including extension of both the commencement and expiration dates of this Lease); provided, however, that if Tenant is not in any way responsible for the delay and does not have use or occupancy of the Premises during the period of delay, the rent and other charges payable hereunder shall be abated for such period of delay.
16.11 Time of the Essence . Time is of the essence under this Lease, and all provisions herein relating thereto shall be strictly construed.
16.12 Captions for Convenience . The headings and captions hereof are for convenience only and shall not be considered in interpreting the provisions hereof.
16.13 Severability . If any provision of this Lease shall be held invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and there shall be deemed substituted for the affected provision a valid and enforceable provision as similar as possible to the affected provision.
16.14 Governing Law and Venue. This Lease shall be interpreted and enforced according to the laws of the State of Colorado. Any action or proceeding arising out of this Lease, its modification or termination, or the performance or breach of either party hereto, shall be brought exclusively in courts of the state and county in which the Property is located. The
parties agree that such courts are a convenient forum and waive any right to alter or change venue, including removal. THE PARTIES IRREVOCABLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR PERTAINING IN ANY WAY TO THIS LEASE.
16.15 Entire Agreement/Further Assurances . This Lease and any exhibits and addenda referred to herein, constitute the final and complete expression of the parties’ agreement with respect to the Premises and Tenant’s occupancy thereof. Each party agrees that it has not relied upon or regarded as binding any prior agreements, negotiations, representations or understandings, whether oral or written, except as expressly set forth herein. The parties agree that if there should be any clerical or typographical errors in this Lease, the Summary of Basic Lease Terms, any exhibit or addendum hereto, the party requested to do so will use its reasonable, good faith efforts to execute such corrective instruments or do all things necessary or appropriate to correct such errors. Further, the parties agree that if it becomes necessary or desirable to execute further instruments or to make other assurances, the party requested to do so will use its reasonable, good faith efforts to provide such executed instruments or do all things reasonably necessary or appropriate to carry out this Lease.
16.16 No Oral Amendment or Modifications . No amendment or modification of this Lease, and no approvals, consents or waivers by Landlord under this Lease, shall be valid and binding unless in writing and executed by the party to be bound.
16.17 Real Estate Brokers . Tenant represents and warrants that it has dealt only with the Brokers listed in the Summary of Basic Lease Terms in the negotiation of this Lease. Landlord shall make payment of the brokerage fee due to the Brokers pursuant to and in accordance with the Landlord’s separate written agreement with The Colorado Group, Inc.. Tenant hereby agrees to indemnify and hold the Landlord harmless of and from any and all loss, costs, damages or expenses (including, without limitation, all attorneys’ fees and disbursements) by reason of any claim or of liability to any other broker, agent or person claiming through or under Tenant. Additionally, Tenant acknowledges and agrees that Landlord shall have no obligation for payment of any brokerage fee or similar compensation to any person with whom Tenant has dealt or may in the future deal with respect to renewals or extensions of the Lease Term. In the event any claim is made against Landlord by any other broker who shall claim to have negotiated this Lease on behalf of Tenant or to have introduced Tenant to the Building or to Landlord, Tenant shall be liable for payment of all reasonable attorneys’ fees, costs, expenses and other charges of any kind incurred by Landlord in defending against the same. W. Scott Reichenberg and Neil Littman with The Colorado Group, Inc. also have an ownership interest in Landlord.
16.18 Relationship of Landlord and Tenant . Nothing contained herein shall be deemed or construed as creating the relationship of principal and agent or of partnership or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of landlord and tenant.
16.19 Authority of Tenant . Tenant represents and warrants that each individual executing this Lease on behalf of Tenant is duly authorized to deliver this Lease on behalf of Tenant and that this Lease is binding upon Tenant in accordance with its terms.
16.20 Counterparts . This Lease may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. An executed facsimile copy or electronic PDF of this Lease shall be binding for all purposes.
[Signature page follows.]
IN WITNESS WHEREOF, each party has caused this Lease to be executed the day and year set forth next to its signature below.
TENANT:
AeroGrow International, Inc. ,
a Nevada corporation
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By:
Name:
Title: |
Date: __________________ |
LANDLORD:
SpineBarrel, LLC ,
a Colorado limited liability company
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By:
Name:
Title: |
Date: __________________ |
EXHIBIT A
NOTICE OF NON-LIABILITY FOR MECHANICS ’ LIENS
Pursuant to C.R.S. § 38-22-105, SpineBarrel, LLC, a Colorado limited liability company, the owner of these premises located at 5405 Spine Road, Boulder, Colorado 80301, hereby gives notice to all persons performing labor or furnishing skill, materials, machinery or other fixtures in connection with any construction, alteration, removal, addition, repair or other improvement on or to these premises, that the owner shall not be liable therefor and the interests of said owner shall not be subject to any lien for the same.
EXHIBIT B
WORK LETTER
Landlord: SpineBarrel, LLC
Tenant: AeroGrow International, Inc.
Premises: 54052 Spine Road, Boulder, Colorado
Concurrently herewith, Tenant and Landlord have executed a Lease (the “Lease”) covering the Premises. This Work Letter is hereby attached to and made part of that Lease as Exhibit B and terms used herein shall have the same meaning as set forth in the Lease. In consideration of the execution of the Lease, Landlord and Tenant mutually agree as follows:
Landlord’s Work :
1. Landlord shall deliver, at Landlord’s cost and expense, the following Base Building Improvements, which shall be known as “Landlord’s Work”: Above ceiling components including HVAC, ducting and controls and sprinkler/life safety system, which shall be in good working order upon delivery; however, any modifications of said systems required based on the tenant improvement modifications will be under the Tenant’s scope of work and shall be paid for as part of the Tenant Improvement Allowance.
2. Landlord shall provide all utilities during the initial construction of the Premises at no cost to Tenant, not to exceed the four (4) period of rent abatement provided for in the Lease during buildout (6/1/2019-9/30/2019).
Tenant’s Work :
1. All work that is necessary to permit Tenant to commence its business in the Premises, including installation of trade fixtures and furnishings, shall be completed by Tenant at Tenant’s sole cost and expense (“Tenant’s Work”). All permanent fixtures installed in the Premises by Tenant shall be deemed part of the Premises upon installation and the property of the Landlord.
2. Preliminary Plans/Working Drawings .
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(a) |
Landlord shall pay for preliminary space planning expense up to $0.15/sf. Tenant shall submit an invoice for this space planning to Landlord for payment. |
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(b) |
Tenant shall have the right to contract directly with its contractor and architect. Tenant will have the right to competitively bid the Tenant’s Work with several mutually acceptable qualified contractors (at least three) and to select the |
acceptable bidder to construct Tenant’s Work. Tenant agrees that it will interview and include Landlord’s preferred contractor, Commercial Building Service, Inc. (“CBS”) as one of the qualified contractors. Tenant must contract with an architect/engineer of its choice to obtain plans and specifications of Tenant’s Work at Tenant’s sole cost and expense, subject to reimbursement from Tenant Improvement Allowance. Tenant’s architect/engineer shall prepare plans and specifications (stamped by the architect/engineer) for Tenant’s Work to be completed in the Premises (the “Plans and Specifications”). All plans and Specifications are subject to review and approval by Landlord and Tenant is required to submit the Plans and Specifications for such review and approval prior to commencement of Tenant’s Work. Landlord shall, within seven (7) business days after receipt of the Plans and Specifications by Landlord for its review and approval, submit to Tenant the Plans and Specifications with the required approvals noted thereon, or submit comments to Tenant setting forth changes to be made in the Plans and Specifications. If changes are required by Landlord, Tenant shall have the Plans and Specifications modified and resubmitted to Landlord for approval and such process shall be repeated until Landlord has approved the Plans and Specifications for the Premises (hereinafter referred to as “Approved Plans and Specifications”). Changes to the Approved Plans and Specifications shall be made only upon prior written approval of Landlord and shall be at Tenant’s sole cost and expense. Tenant will not be required to remove any alterations in the Premises at the end of the Term if approved by Landlord as part of the Plans and Specifications, including data and phone cabling
3. Contracts .
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(a) |
Tenant shall contract directly for the Tenant’s Work to be completed in accordance with the approved Plans and Specifications. Tenant’s contractor shall bill Tenant and Tenant shall be solely responsible for paying all costs for Tenant’s Work as set forth on the approved Plans and Specifications. All Tenant’s Work shall: (i) be performed pursuant to written contracts with workmen and mechanics, which shall be acceptable to Landlord; (ii) comply with all reasonable restrictions and requirements as Landlord may impose with respect to Tenant’s Work; (iii) be performed in a workmanlike manner, in line with standard market finish level and conform to the standards of the Building; and (iii) be done in a safe and lawful manner in compliance with applicable laws, governmental regulations and requirements. Tenant shall cause such contractor to take all steps necessary to cooperate in the coordination of the performance of Tenant’s Work with the work of Landlord or Landlord’s contractors in the Premises or in the Building, including, without limitation, exchanging information about and coordination their respective schedules, attending coordination meetings, and cooperating in allowing and obtaining access to and availability of portions of the site for performance of Tenant’s Work and the work of such other contractors. |
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(b) |
There shall be no specified subcontractors unless Landlord is willing to pay for any increased cost. Landlord asks that tenant’s contractor consider using Control Service Center for the HVAC as they are familiar with the Building systems. |
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(c) |
Tenant and Tenant’s contractor shall indemnify Landlord from any mechanic’s or materialmen’s lien against Landlord’s interest in the Building or Premises. If a lien is filed, Tenant or Tenant’s contractor shall, at Landlord’s option, remove the lien by paying it in full, furnish Landlord a bond sufficient to discharge the lien or deposit in an escrow approved by Landlord 150% of the amount of such lien. In the event Tenant or Tenant’s contractor shall fail to remove the lien, provide a bond or cash escrow, Landlord shall be entitled to take such action at law, in equity or under the Lease as Landlord deems appropriate and Tenant shall be responsible for all monies Landlord may pay in discharging any lien including all costs and reasonable attorneys’ fees incurred by Landlord in settling, defending against, appealing or in any manner dealing with lien. |
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(d) |
The Commencement Date, Tenant’s rental obligations, and other obligations under the Lease will not be delayed or extended by any delays in construction. |
4. Tenant Improvement Allowance .
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(a) |
Landlord shall pay up to $40 per square foot of Premises (for a total of up to $585,200) (“ Tenant Improvement Allowance ”) for the costs of the Tenant Improvements. The Tenant Improvement Allowance may be used for any and all hard and soft costs, including, but not limited to, the cost to construct improvement to the Premises, design and any fees associated with Tenant’s third-party management or supervisions of the project. Tenant shall be responsible for and shall pay all costs of the Tenant Improvements in excess of the Tenant Improvement Allowance. In the event that the costs of the Tenant Improvements are less than the Tenant Improvement Allowance, Tenant shall be entitled to a reduction in Base Rent as follows: for any unused Tenant Improvement Allowance up to $5.00 per square foot Tenant shall get a $1.00 reduction for each $1.00 not spent and, in the event, that the unused Tenant Improvement Allowance exceeds $5.00 per square foot then any additional reduction in Base Rent is limited to $.0677 per square foot for each full dollar of the $40 per square foot allowance that is not utilized. Any reduction shall be applied to the first year of the lease term and the same annual escalations outlined herein shall be used to create a new rent schedule. In such event, Landlord and Tenant shall enter into an amendment to the Lease memorializing the decrease in the Tenant Improvement Allowance and the Base Rent. Tenant shall also be allowed to utilize excess Tenant Improvement Allowance (allowance remaining after the approved Plans and Specifications are completed) towards the purchase and installation of furniture, fixtures, equipment, moving costs and telecommunications cabling, so long as those items or expenses do not exceed $7.50 per square foot. |
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(b) |
If the costs of the Tenant Improvements exceed the Tenant Improvement Allowance, Tenant shall have the right to require Landlord to pay up to an additional $5.00 per square foot of Premises (for a total of up to $73,150) for the cost of the Tenant Improvements. Such additional contribution shall be a part of the Tenant Improvement Allowance and subject to all the terms and conditions of the Lease and this Work Letter affecting same. Such additional contribution by Landlord to the cost of the Tenant Improvements shall be reimbursed by Tenant by increasing the Base Rent by a monthly amount determined by amortizing such additional amount at an interest rate of eight percent (8%) per annum over the Initial Lease Term. In such event, Landlord and Tenant shall enter into an amendment to the Lease memorializing the increase in the Tenant Improvement Allowance and the Base Rent. Notwithstanding anything to the contrary contained in the Lease, no rental abatement provided for in the Lease shall apply to Tenant’s obligation to repay the additional Tenant Improvement Allowance. |
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(c) |
Landlord shall pay the Tenant Improvement Allowance to Tenant in one lump sum as requested upon the occurrence of the following: (a) the City of Boulder issues a Certificate of Completion regarding the entirety of the Tenant work; and (b) Tenant submits to Landlord a request for the Tenant Improvement Allowance (the “Allowance Request”), which Allowance Request shall include the following: (i) invoices establishing the basis of the cost of work for which Tenant is seeking payment of the Allowance; (iii) affidavits from Tenant’s contractor and architect affirming that all payrolls, bills for materials and any equipment and other indebtedness related to that portion of the Tenant Work performed by or on behalf of contractor or architect, as appropriate, and any of its subcontractors, suppliers, consultants or sub-consultants have been paid in full; (iv) full, final and unconditional lien releases from parties designated by Landlord and in a form reasonably acceptable to Landlord; and (v) any other data, to the extent and in such form as may be reasonably designated by Landlord, that establishes: (1) the amount of the cost of work for which reimbursement is sought; and (2) that the Property will be free from liens related to the Tenant Work. Notwithstanding anything herein to the contrary: (a) Tenant must submit its Allowance Request no later than 180 days after the City of Boulder’s issuance of the Certificate of Occupancy (the “Request Submittal Deadline”); and (b) in the event that Tenant fails to submit a complete Allowance Request containing all of the information required above on or before the Request Submittal Deadline, Tenant shall forfeit its right to the Allowance. |
5. Commencement of Construction . Tenant shall construct the tenant improvements for the Premises in accordance with the Plans and Specifications (the “ Tenant Improvements ”). Tenant shall commence construction of the Tenant Improvements upon approval of the Plans and Specifications, approval of contracts, issuance of the building permit and all other government approvals required for the construction of the Tenant Improvements. Tenant shall be responsible for management of the Tenant Improvements including their timely completion.
6. Delays . The Commencement Date of the Lease Term and the commencement of Tenant’s obligation to pay rentals due under the Lease shall be on the date specified as the Commencement Date in the Summary of Basic Lease Terms. In no event shall Landlord be responsible or liable for any delays caused in whole or in part by the Contractor, Architect,
governmental or quasi-governmental delays, force majeure or other causes unless the direct result of Landlord’s actions.
7. Change Orders . Subject to Landlord’s prior written approval, Tenant may request changes in the Tenant Improvements.
8. Governmental Requirements . If any changes to the Tenant Improvements are required by any applicable governmental authority and/or quasi-governmental authority including, without limitation, any county or municipal planning department, building department, fire department or utility provider, then Landlord and Tenant agree to either (a) modify the Plans and Specification to either eliminate or comply with the government requirement, or (b) Tenant agrees to pay any additional expenditure that cannot be paid out of the Tenant Improvement Allowance.
9. Management and Planning . Landlord shall be permitted to provide a reasonable level of oversight (at its sole cost). In the event Landlord is requested to undertake construction management functions, Landlord shall charge a construction management fee to compensate Landlord for administering the design and construction of the Tenant Improvements. The construction management fee shall be in the amount of five percent (5%) of the total cost of the Tenant Improvements, which fee may be disbursed by Landlord from the Tenant Improvement Allowance.
EXHIBIT C
RULES AND REGULATIONS
1. The sidewalk, entries, and driveways of the Property shall not be obstructed by Tenant, or its agents, or used by them, or any invitees, for any purpose other than ingress and egress to and from the Demised Premises.
2. Tenant shall not place any objects including, without limitation, any antennas, satellite dishes, aerials, outdoor furniture, other similar devices or property on the roof or exterior walls of the Building or any other part of the Property.
3. If Tenant desires telegraphic, telephonic or other electric connections in the Premises, Landlord or its agent will direct the electrician as to where and how the wires may be introduced; and, without such direction, no boring or cutting of wires will be permitted. Any such installation or connection shall be made at Tenant's expense.
4. Tenant shall not install or operate any steam or gas engine or boiler, or other mechanical apparatus in the Premises, except as specifically approved in the Lease. The use of oil, gas, or flammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Property.
5. Tenant shall not engage in or permit: (a) the sale, distribution, dispensing, storage, processing, cultivation or use of marijuana or products containing marijuana or THC, whether or not designated or used for medicinal purposes, or any other Controlled Substances (as herein defined) upon the Premises or the Property; and (b) any doctor’s office or appointments, prescription or recommendation services, or services related to medical marijuana or products containing marijuana or THC upon the Premises or the Property. “Controlled Substances” shall mean any controlled substances as defined in Section 802(6) of the Controlled Substances Act, as amended, 21 U.S.C. § 801 et seq.
6. Parking any type of recreational vehicles is specifically prohibited on or about the Property. No vehicle of any type shall be stored in the parking areas at any time other than trucks which are operable and owned by the Tenant or its employees and then only overnight and in front of the Premises. In the event that a vehicle is disabled, it shall be removed within 48 hours. There shall not be "For Sale" or other advertising signs on or about any parked vehicle. All vehicles shall be parked in the designated parking areas in conformity with all signs and other markings. All parking will be open parking, and no reserved parking, numbering or lettering of individual spaces will be permitted except as specified by Landlord.
7. Tenant shall maintain the Premises free from rodents, insects and other pests. Tenant, at its sole cost, shall be responsible for any pests or other extermination services, which Landlord shall be entitled to request of Tenant from time to time. Tenant shall not burn any trash or garbage of any kind in or about the Premises or the Property.
8. Landlord reserves the right to exclude or expel from the Property any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs or who shall in any manner do any act in violation of these Rules and Regulations or the Lease.
9. Tenant shall give Landlord prompt notice of any defects in the water, lawn sprinkler, sewage, gas pipes, electrical lights and fixtures, heating apparatus, or any other service equipment affecting the Premises.
10. Tenant shall not permit storage outside the Premises, including without limitation, outside storage of trucks and other vehicles (except as provided for in Paragraph 6 above), or dumping of waste or refuse or permit any harmful materials to be placed in any drainage system or sanitary system in or about the Premises.
11. All moveable trash receptacles provided by the trash disposal firm for the Premises must be kept in the trash enclosure areas, if any, provided for that purpose.
12. No auction, public or private, will be permitted on the Premises or the Property.
13. No awnings shall be placed over the windows in the Premises except with the prior written consent of Landlord.
14. The Premises shall not be used for lodging, sleeping or cooking or for any immoral or illegal purposes or for any purpose other than that specified in the Lease. No gaming devices shall be operated in the Premises.
15. Tenant assumes full responsibility for reasonable protection of the Premises from theft, robbery, pilferage, arson, vandalism or other destruction of property.
16. Tenant shall not install or operate on the Premises any machinery or mechanical devices of a nature not directly related to Tenant's ordinary use of the Premises and shall keep all such machinery free of vibration, noise and air waves which may be transmitted beyond the Premises.
17. All loading and unloading of goods, inventory and other property from the Premises shall be made only through loading dock areas or areas designated by the Landlord for such purpose.
18. Tenant shall keep the Premises at a sufficient temperature to prevent freezing of water in pipes and fixtures. The plumbing facilities shall not be used for any purpose other than the Permitted Uses and only in a manner consistent with the construction thereof. Tenant shall not deposit or permit to be deposited any foreign substance in the plumbing facilities. Tenant shall bear the expense of any breakage, stoppage or damage resulting therefrom.
19. Pets are not allowed in the Premises without the written consent of Landlord; provided, however, that nothing herein shall be construed as prohibiting qualified service animals which may not be legally excluded from the Premises pursuant to the Americans with Disabilities Act or any similar law.
EXHIBIT D
FF&E
BILL OF SALE
SpineBarrel , LLC , a Colorado limited liability company (“ Assignor ”), in consideration of Ten Dollars ($10.00) and other good and valuable consideration received from AeroGrow International, Inc . , a Nevada corporation (“ Assignee ”), has bargained and sold, and by these presents does grant and convey unto Assignee all of Assignor’s right, title and interest in and to all of the furniture, fixtures and equipment listed on Exhibit A attached hereto (collectively referred to as the “ FF&E ”), AS IS, WHERE IS” without warranty to have and to hold, all and singular, the FF&E to Assignee and its successors and assigns forever.
Assignor further covenants and agrees with Assignee that it will, from time to time, at the request of Assignee, execute and deliver or cause to be executed and delivered all such further bills of sale, certificates, assignments, instruments of transfer and agreements as may reasonably be required by Assignee in order to more effectively vest title in Assignee to the FF&E.
IN WITNESS WHEREOF, the Assignor has executed this instrument effective as of the ____ day of _____________, 2019.
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ASSIGNOR: |
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SpineBarrel, LLC , a Colorado limited liability company
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By: __________________________ Name: ________________________ Title: _________________________ |
EXHIBIT A
to General Assignment and Bill of Sale
List of FF&E
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FURNISHINGS AND EQUIPMENT TO REMAIN |
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AT 5405 SPINE RD FOR AEROGROW |
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Quantity |
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Desks |
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Executive |
3 |
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Private office |
33 |
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Meeting table |
10 |
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Task chairs |
38 |
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Side chairs |
Leather |
Wood frame |
Standard Black |
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12 |
20 |
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41 |
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Veridesk |
13 |
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Cubicles |
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Note: All hydraulic Desks |
14 |
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Task chairs |
12 |
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All Cubical Walls |
UNK |
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Bookcases |
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16 |
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File cabinets |
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2-drawer lateral |
16 |
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4-drawer lateral |
4 |
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3- drawer lateral |
26 |
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standing |
4 drawer |
2 drawer |
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3 drawer |
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4 |
2 |
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1 |
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Sliding Door Cabinets |
6 |
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Black Cabinets with drawers |
5 |
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Black Cabinets w/out drawers |
2 |
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White boards |
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Conf. rms |
1 |
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private offices |
29 |
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Cubicles |
2 |
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Conference rooms |
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Tables |
3 |
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Chairs |
27 |
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TV |
3 |
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Kitchen |
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Tables |
6 |
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Chairs |
23 |
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Microwave |
2 |
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Fridge |
1 |
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Reception |
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Table |
1 |
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Chairs |
2 |
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Armoire |
Large - 2 |
Small - 2 |
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Additional |
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Picnic Tables |
2 |
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Dedicated A/C in Server room |
1 |
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All the installed network cabling and wall jacks |
UNK |
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Network patch panels in data room |
UNK |
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All the exiting network/server racks and ladder racking |
UNK |
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FM-200 Fire Suppression System in the data room and IT Closet |
2 |
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Building Alarm, Security and Entry systems (control panels to be handled separately outside this transaction) |
UNK |
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Exhibit 10.37
TERM LOAN AND SECURITY AGREEMENT
THIS TERM LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of June 20, 2019, 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 $10,000,000 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 the 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.
“ Change of Control ” means the consummation of any transaction or series of transactions (including, without limitation, any sale, merger or consolidation) the result of which is that (i) neither SMG Growing Media, Inc. nor any affiliate of SMG Growing Media, Inc. owns directly or indirectly, 50% or more of the voting stock of the Borrower, measured by voting power rather than number of shares or (ii) Lender is no longer an affiliate of Borrower.
“ Closing Date ” means June 24, 2019.
“ 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 (iii) 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 31, 2020.
“ 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 Senior Vice President, Finance and Accounting 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 $10,000,000 (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 June 28, 2019, September 27, 2019, December 31, 2019 and March 31, 2020.
(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 $500,000, without penalty or premium, which prepayments shall be applied in accordance with Section 6 of this Agreement.
(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; and
(i) 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 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;
(b) 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;
(c) 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
(d) 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. Other than as set forth in Schedule 10(e), 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 December 31, 2018, 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.
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:
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(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); |
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(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;
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(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); |
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(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; |
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(v) |
promptly following the end of each quarter, an up-to-date capitalization table of the Borrower; |
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(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; |
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(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; and |
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(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. |
12. Negative Covenants . The Borrower covenants that for so long as this Agreement is outstanding:
(a) Other than as set forth in Schedule 10(e), 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, in each case, with anyone outside of the Lender (or an affiliate of the Lender), except 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;
(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; or
(j) Change of Control . A Change of Control has occurred.
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
Fax: (303) 350-4770
Telephone: (303) 350-4770
Attention: Grey Gibbs, SVP, Finance and Accounting
if to the Lender,
The Scotts Company LLC
14111 Scottslawn Road
Marysville, OH 43041
Fax: (937) 578-5078
Telephone: (937) 578-5970
Attention: Kelly S. Berry, Vice President and Treasurer
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: ___________ ___, 20___
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To: |
The Scotts Company LLC, as the Lender under that certain Term Loan and Security Agreement dated as of June 20, 2019 (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
(c) all other conditions set forth in Section 9 of the Loan Agreement have been satisfied as of the date hereof.
AeroGrow International, Inc.
By
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 10(e)
Liens
Borrower has a restricted cash account to fund/collateralize a credit card program for its operations. Such restricted cash account does not exceed $35,000.
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Rules 13a-14(a) and 15d-14(a) under
The Securities Exchange Act of 1934, as Amended
I, J. Michael Wolfe, certify that:
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1. |
I have reviewed this Annual Report on Form 10-K of AeroGrow International, Inc.; |
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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; |
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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(s) 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 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(s) 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. |
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Date: June 24, 2019 |
/s/ J. Michael Wolfe |
|
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J. Michael Wolfe President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Rules 13a-14(a) and 15d-14(a) under
The Securities Exchange Act of 1934, as Amended
I, Grey H. Gibbs, certify that:
|
1. |
I have reviewed this Annual Report on Form 10-K 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(s) 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 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(s) 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: June 24, 2019 |
/s/ Grey H. Gibbs |
|
|
Grey H. Gibbs Senior Vice President – Finance and Administration (Principal Accounting Officer) |
Exhibit 32.1
Certification of Chief Executive Officer of
AeroGrow International, Inc.
Pursuant to 18 U.S.C. Section 1350
(Adopted by Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Annual Report on Form 10-K of AeroGrow International, Inc. (the “Company”) for the year ended March 31, 2019, as filed with the Securities and Exchange Commission (the “Report”), I, J. Michael Wolfe, President and Chief Executive Officer, 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. |
|
Date: June 24, 2019 |
/s/ J. Michael Wolfe |
|
|
J. Michael Wolfe President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
Certification of Controller and Chief Accounting Officer of
AeroGrow International, Inc.
Pursuant to 18 U.S.C. Section 1350
(Adopted by Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Annual Report on Form 10-K of AeroGrow International, Inc. (the “Company”) for the year ended March 31, 2019, as filed with the Securities and Exchange Commission (the “Report”), I, Grey H. Gibbs, Senior Vice President of Finance and Accounting and Chief Accounting Officer, 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. |
|
Date: June 24, 2019 |
/s/ Grey H. Gibbs |
|
|
Grey H. Gibbs Senior Vice President – Finance and Administration (Principal Accounting Officer) |