Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K/A-2
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of
Report:
(Date
of
earliest event reported)
February
24, 2006
AEROGROW
INTERNATIONAL, INC.
(Exact
name of registrant as specified in charter)
Nevada
(State
or
other Jurisdiction of Incorporation or Organization)
|
(Commission
File Number)
|
|
(IRS
Employer Identification No.)
|
|
000-50888
|
900
28th Street, Suite 201
Boulder,
Colorado 80303
(Address
of Principal Executive Offices and zip code)
|
46-0510685
|
(303)
444-7755
(Registrant’s
telephone umber, including area code)
936A
Beachland Boulevard, Suite 13
Vero
Beach, FL 32963
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of registrant under any of the following
provisions:
|
o
|
Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
|
|
o
|
Soliciting
material pursuant to Rule 14a-12(b) under the Exchange Act (17
CFR
240.14a-12(b))
|
|
o
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR
240.14d-2(b))
|
|
o
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR
240.13e-4(c))
|
Note:
Except as otherwise specifically stated herein, the information contained herein
is as of the date of this report, February 24th, 2006.
Safe
Harbor Statement under the Private Securities Litigation Reform Act of
1995
Information
included in this Form 8-K may contain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). This information may
involve known and unknown risks, uncertainties and other factors which may
cause
the actual results, performance, or achievements of AeroGrow International,
Inc.
(“AeroGrow”), including its predecessor, Wentworth I, Inc. (“Wentworth”), to be
materially different from future results, performance, or achievements expressed
or implied by any forward-looking statements. Forward-looking statements, which
involve assumptions and describe future plans, strategies, and expectations
of
AeroGrow, are generally identifiable by use of the words “may,” “will,”
“should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project,”
or the negative of these words or other variations on these words or comparable
terminology. These forward-looking statements are based on assumptions that
may
be incorrect, and there can be no assurance that the projections included in
these forward-looking statements will come to pass. Actual results of AeroGrow
could differ materially from those expressed or implied by the forward-looking
statements as a result of various factors. Except as required by applicable
laws, AeroGrow has no obligation, and does not intend, to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
Item
1.01 Entry
into a Material Definitive Agreement.
In
two
closings, held on February 24, 2006 and March 1, 2006, AeroGrow International,
Inc., a Nevada corporation (“AeroGrow” or the “Company”) completed the sale of
shares of its common stock and common stock purchase warrants in a private
placement (the “2006 Offering”). For a description of the 2006 Offering, and the
material agreements entered into in connection therewith, please see “2006
Offering” in Item 2.01 of this Current Report, which discussion is
incorporated herein by reference
Item
2.01 Completion
of Acquisition or Disposition of Assets.
Closing
of the Merger
History
of Wentworth
Wentworth
I, Inc., a Delaware corporation (“Wentworth”), and AeroGrow International, Inc.,
a Nevada corporation (“AeroGrow”) entered into an Agreement and Plan of Merger
(the “Merger Agreement”) on January 12, 2006, which was consummated on
February 24, 2006. Under the Merger Agreement, Wentworth merged with and
into AeroGrow, and AeroGrow was the surviving corporation (“Merger”). The
certificate of incorporation and by-laws of AeroGrow prior to the Merger are
now
those of the surviving company, and the surviving company is governed by the
corporate law of the State of Nevada.
Wentworth
was organized under the laws of the State of Delaware on March 6, 2001. Its
business plan was to seek, investigate and, if such investigation warranted,
enter into a business combination with a target operating company that primarily
desired to seek the perceived advantages of a U.S. reporting company under
the
Securities Exchange Act of 1934, as amended (“Exchange Act”). Wentworth’s
principal business objective was to seek long-term growth potential through
the
acquisition of a business rather than immediate, short-term earnings. Its search
was not restricted to any specific business, industry, or geographical location.
Wentworth was one of a number of shell companies with nominal assets and
operations owned, in part, by Keating Securities and its
affiliates.
Wentworth
filed a registration statement on Form SB-2 with the Securities and Exchange
Commission in order to undertake a public offering of 50,000 shares of its
common stock at a purchase price of $1.00 per share, which registration
statement was declared effective on August 12, 2001. Wentworth successfully
completed the offering and, pursuant to Rule 419 of the Securities Act of
1933, as amended (“1933 Act”), the offering proceeds, less ten percent, (which
was retained by Wentworth to cover its expenses), were placed in an escrow
account together with the shares of common stock issued in the public offering.
In
February 2003, when Wentworth determined that it was unable to consummate a
business combination within the 18 month time period from the date of the
effectiveness of its registration statement as required by
Rule 419(e)(2)(iv), all funds held in escrow were returned to the investors
who had purchased common stock in the offering and the 50,000 shares of common
stock held in the escrow account were returned as treasury stock. A
post-effective amendment to the registration statement was filed on
March 25, 2003, to remove from registration all shares of common stock that
were sold in the offering and to confirm the withdrawal of the registration
statement.
Wentworth
was dormant after March 2003, but management elected to continue the
implementation of its original business plan and sought a business combination
with an operating company. On August 4, 2004, Wentworth filed Form 10-SB to
register its shares of common stock under Section 12(g) of the Exchange
Act. At the time of the Merger, Wentworth was a reporting company under
Section 12(g) of the Exchange Act and was current in its reporting under
the Exchange Act.
Wentworth
and ENECO, Inc., a Utah corporation (“Eneco”), entered into an Agreement and
Plan of Merger (the “Eneco Merger Agreement”) on October 28, 2005, by which
Wentworth agreed to merge with and into Eneco, with Eneco being the surviving
corporation. Effective January 3, 2006, Wentworth terminated the Eneco
Merger Agreement due to the failure of the transactions contemplated thereunder
to have been consummated by January 1, 2006. It was only after termination
of the Eneco Merger Agreement that Wentworth was available as a vehicle for
AeroGrow. The decision to negotiate a merger between Wentworth and AeroGrow
was
made after the termination of the Eneco Merger Agreement.
Certain
Transactions by Wentworth
During
2002, Wentworth borrowed a total of $8,500 from Kevin R. Keating, its then
president. The amount loaned plus interest at 6% was due and payable upon the
completion of a business combination. For the years ended December 31, 2005
and 2004, interest on this loan of $510 each year is included in operations.
At
December 31, 2005, the principal balance of this loan together with accrued
interest totaled $10,290.
Wentworth’s
president, with two other shareholders, granted Keating Reverse Merger Fund,
LLC
an option to acquire an aggregate of 1,000,000 shares, owned by them, until
January 30, 2005, at a total purchase price of $125,000. This option
expired unexercised.
On
April 9, 2003 and August 7, 2003 Timothy Keating paid invoices on
behalf of Wentworth in an aggregate of $1,861. Timothy Keating is the managing
member of Keating Investments, LLC.
On
June 10, 2004, Wentworth entered into a contract with Vero Management,
L.L.C. for managerial and administrative services. Vero Management was not
engaged to provide, and did not render, legal, accounting, auditing, investment
banking. or capital formation services. Kevin R. Keating is the manager of
Vero Management. The term of the contract was for one year. In consideration
of
the services provided, Vero Management was paid $1,000 for each month in which
services were rendered. For the years ended December 31, 2005 and 2004, a
total of $12,000 and $7,000, respectively, was included in results of operations
as a result of the agreement.
Wentworth
entered into a financial advisory services agreement with Keating Securities,
LLC, an affiliate of Keating Investments, LLC, the managing member of
Wentworth’s controlling stockholder, and engaged Keating Investments, LLC to act
as a financial advisor in connection with the business combination between
Wentworth and AeroGrow for which it earned an advisory fee of $350,000 upon
completion of the Merger. The $350,000 was in addition to the sale price of
Wentworth. The services included introduction of Wentworth to AeroGrow and
advising Wentworth on the Merger. The advisory fee was paid at the closing
of
the Merger. Keating Securities, LLC made no assurances regarding completion
of
the private placement or the merger.
Keating
Securities, LLC filed a Form 211 with the NASD to cause the common stock to
be traded on the OTC Bulletin Board and has responded to application review
issues in connection with such filing. As part of that filing, Keating
Securities, LLC has indicated that it will act as a market maker in the common
stock at the time of its initial trading. There can be no assurance that Keating
Securities, LLC will continue to act as a market maker for the common stock
of
the Company. To the knowledge of the Company, Keating Securities, LLC does
not
intend to provide any other after market support to the common stock of the
Company.
Ownership
of Wentworth prior to Merger
Immediately
prior to the Merger, the stock ownership of Wentworth was as set forth below
in
the table of ownership. The number of shares includes those that were issued
and
outstanding and not adjusted for the conversion formula to be applied at the
consummation of the Merger.
|
Name
|
|
Number
of Shares of Wentworth
Common Stock
Beneficially
Owned
|
|
Percent
of Shares
|
|
|
Kevin
R. Keating
936A
Beachland Blvd., Suite 13
Vero
Beach, Florida 32963 (1), (2)
|
|
|
743,000
|
|
|
19.8
|
%
|
|
Keating
Investments, LLC
c/o
Timothy J. Keating, Manager
5251
DTC Parkway, Suite 1090
Greenwood
Village, Colorado 80111
|
|
|
565,000
|
|
|
15.1
|
%
|
|
Bertrand
T. Ungar
1362
South Elizabeth
Denver,
Colorado 8023 (4)
|
|
|
192,000
|
|
|
5.1
|
%
|
|
Garisch
Financial, Inc.
c/o
Frederic M. Schweiger, President
1753
Park Ridge Pointe
Park
Ridge, Illinois 60068 (5)
|
|
|
250,000
|
|
|
6.7
|
%
|
|
Keating
Reverse Merger Fund, LLC
c/o
Timothy J. Keating, Manager
5251
DTC Parkway, Suite 1090
Greenwood
Village, Colorado 80111 (6)
|
|
|
2,000,000
|
|
|
53.3
|
%
|
| (1) |
Kevin R.
Keating was the President, Secretary, Treasurer and sole director
of
Wentworth.
|
| (2) |
Kevin R.
Keating is not affiliated with and has no equity interest in Keating
Reverse Merger Fund, LLC or Keating Investments, LLC and disclaims
any
beneficial interest in the shares of Wentworth’s common stock owned by
Keating Reverse Merger Fund, LLC or Keating Investments,
LLC.
|
| (3) |
Timothy J.
Keating exercises voting and dispositive power of the shares held
by
Keating Investments, LLC. Keating Investments, LLC is not owned by
or
affiliated with Kevin R. Keating and disclaims any beneficial
interest in the shares of Wentworth’s common stock owned by Kevin R.
Keating.
|
| (4) |
Held
in the name of PG Ventures, LLC (153,600 shares) and Carmel Capital,
LLC
(38,400 shares), both of which are owned and controlled by
Mr. Ungar.
|
| (5) |
Frederic M.
Schweiger is the sole officer, director and stockholder of Garisch
Financial, Inc. and exercises voting and dispositive power of such
shares
held by Garisch Financial, Inc.
|
| (6) |
Timothy J.
Keating exercises voting and dispositive power of the shares held
by
Keating Reverse Merger Fund, LLC. Keating Reverse Merger Fund, LLC
is not
owned by or affiliated with Kevin R. Keating and disclaims any
beneficial interest in the shares of Wentworth’s common stock owned by
Kevin R. Keating.
|
Effect
of Merger
As
a
result of the Merger, AeroGrow became a “successor issuer” to Wentworth within
the meaning of Rule 12(g)-3 under the Exchange Act. As a “successor issuer”
AeroGrow is now a Section 12(g) reporting company under the Exchange Act.
As a result, the shares of common stock of AeroGrow are now registered
securities under Section 12(g) of the Exchange Act.
In
the
Merger, each of the Wentworth’s 3,750,000 shares of outstanding common stock
(“Wentworth common stock”) was converted into the right to receive 0.154703
shares of AeroGrow common stock (“Exchange Ratio”) resulting in the issuance of
580,136 shares of AeroGrow’s common stock to the Wentworth stockholders
representing 6.5% of the issued and outstanding common stock of AeroGrow
immediately after the Merger, the 2006 Offering, and the Note Conversion (as
defined below).
Each
share of AeroGrow common stock issued to the Wentworth’s stockholders in the
Merger is restricted stock, and the holder may not sell, transfer, or otherwise
dispose of such shares without registration under the 1933 Act or an available
exemption therefrom. The Merger Agreement contains piggy-back registration
rights provisions that allow each Wentworth stockholder to include their shares
in any registration statement filed for the public offering or resale of its
securities in the future. This registration right is required to satisfy certain
positions taken by the SEC in connection with shares issued to persons that
may
be considered promoters. The SEC’s position is that the shares held by promoters
may not be publicly sold pursuant to Rule 144, but may only be publicly
sold by the promoter pursuant to an effective resale registration statement.
It
has been determined by the Company that KRM Reverse Merger Fund, LLC (“KRM
Fund”), Kevin R. Keating, and Keating Investments, LLC are promoters under
this definition. The other shareholders of Wentworth I, Inc., Garisch Financial,
Inc., and Bertrand T. Unger are not promoters. As part of the 2006
Offering, AeroGrow agreed to register for resale the shares of AeroGrow’s common
stock issued to the investors in the 2006 Offering (together with the shares
of
AeroGrow’s common stock underlying the Warrants issued in the 2006 Offering) on
a registration statement to be filed with and declared effective by the SEC.
In
the event such registration statement is filed, the AeroGrow common stock issued
to the Wentworth stockholders in connection with the Merger will be included.
There can be no assurance that the shares of AeroGrow’s common stock received by
the Wentworth’s stockholders in connection with the Merger will become
registered under the Securities Act.
Pursuant
to the Merger Agreement, Keating Reverse Merger Fund, LLC (“KRM Fund”) entered
into a lock up agreement respecting 309,406 shares of common stock under which
it will be prohibited from selling or otherwise transferring: (i) any of
its shares of AeroGrow’s common stock for a period of 12 months following the
effective date of the resale registration statement that includes the common
stock issued in 2006 (“Initial Lock Up Period”), and (ii) 50% of its shares
of AeroGrow’s common stock for a period of 18 months following the effective
date of such registration statement. Approximately 87,407 shares of AeroGrow’s
common stock held by Keating Investments, LLC (“Keating Investments”), the
managing member of KRM Fund and the 90% owner of Keating Securities, LLC, are
also subject to lock up restrictions similar to those that apply to the KRM
Fund
shares. The foregoing lock up restrictions may be released by the mutual
agreement of AeroGrow and Keating Securities, LLC, the exclusive placement
agent
for the 2006 Offering.
As
post-closing covenants to the Merger Agreement, AeroGrow agreed that, unless
it
has the consent of KRM Fund, it will not issue any securities for one year
to
its officers and directors or 10% or greater stockholders, consultants, service
providers, or other parties, except for issuances with respect to outstanding
options, warrants, and convertible securities and pursuant to existing
obligations, grants pursuant to stock option and similar plans approved by
the
board and stockholders, capital raising requirements approved by the board,
or
third party, arms-length transactions. AeroGrow will also be obligated to:
(i) remain a 12(g) reporting company and comply with the reporting
requirements under the Exchange Act, (ii) use its commercially reasonable
efforts to obtain and maintain a quotation of its shares of AeroGrow common
stock on the Over-the-Counter
Bulletin Board (“OTC BB”)or
Nasdaq, and (iii) within 30 days following the Closing, procure key man
life insurance policies on certain officers of AeroGrow. AeroGrow also was
obliged to satisfy the independence, audit, and compensation committee and
other
corporate governance requirements under the Sarbanes-Oxley Act of 2002 (the
“SOX
Act”), the rules and regulations promulgated by the SEC, and the requirements of
either Nasdaq or American Stock Exchange (“AMEX”) (as selected by AeroGrow),
whether or not AeroGrow’s common stock is listed or quoted, or qualifies for
listing or quotation, on Nasdaq or AMEX. On March 28, 2006, AeroGrow
elected to use the requirements of Nasdaq for its corporate governance
standards.
AeroGrow
intends to use its commercially reasonable efforts to have its shares of common
stock commence quotation on the OTC BB. However, there can be no assurance
as to
when and if the shares of common stock will become quoted on the OTC BB and,
even if the shares of common stock are so quoted, there can be no assurance
that
an active trading market will develop for such shares. AeroGrow plans to seek
listing of its common stock on NASDAQ in the future if and when it satisfies
the
requirements for such listing.
Accounting
Treatment for Merger
The
Merger, for accounting and financial reporting purposes, will be accounted
as an
acquisition of Wentworth by AeroGrow. As such, AeroGrow will be the accounting
acquirer in the Merger, and the historical financial statements of AeroGrow
will
be the financial statements for AeroGrow following the Merger.
Corporate
Approval of Merger
Under
the
Delaware General Corporation Law (“DGCL”), the Wentworth stockholders had to
approve the Merger. On January 12, 2006, four Wentworth stockholders who,
in the aggregate, were the record owners of 3,558,000 shares of Wentworth’s
common stock, representing approximately 94.9% of the outstanding voting
securities of Wentworth, executed and delivered to Wentworth written consents
authorizing and approving the Merger. Notice of the consent action was given
under the DGCL and federal securities laws. The Wentworth stockholders who
did
not approve the transaction had appraisal rights as a result of their right
to
approve the transaction. Appraisal rights provided that a holder of shares
of
Wentworth common stock who did not vote in favor of the Merger Agreement and
the
Merger had the right to dissent from the merger and seek an appraisal of and
paid the fair value (exclusive of any element of value arising from the
accomplishment or expectation of the Merger) for such shareholders’ Wentworth
common stock, determined by a court and paid to the stockholder in cash,
together with a fair rate of interest, if any, provided that the stockholder
fully complied with the provisions of Section 262 of the DGCL. As such,
holders of 192,000 shares of Wentworth’s common stock were able to exercise
appraisal rights. These holders participated in the exchange of securities
and
terminated their appraisal rights.
The
stockholders of AeroGrow did not have any right to approve the Merger or related
transactions under the Nevada General Corporate Law, § 92A.130. Because
AeroGrow had sufficient authorized capital to exchange for the outstanding
Wentworth common stock and did not issue in excess of 20% of its common stock
as
calculated immediately before the Merger for the acquisition of the Wentworth
common stock, AeroGrow stockholder approval was not required.
Private
Placement in Connection with Merger
AeroGrow
conducted a private placement offering of its common stock and common stock
purchase warrants (“Warrants”) to institutional investors and other high net
worth individuals on a best efforts $5,000,000 minimum, $12,000,000 maximum
basis (“2006 Offering”) as a condition to consummation of the
Merger.
The
2006
Offering was commenced February 6, 2006, and there were closings on
February 24, 2006, and March 1, 2006. AeroGrow received gross proceeds
of $10,740,000. Pursuant to investor subscription agreements, AeroGrow sold
2,148,000 shares of its common stock and warrants to purchase 2,148,000 shares
of its common stock. Each unit in the offering consisted of 1 share of common
stock and a warrant to purchase 1 share of common stock expiring February 2001,
at an
exercise price of $6.25 per share. The price per unit was $5.00. AeroGrow
received net proceeds of $8,964,952 after commissions and offering expenses.
Keating
Securities, LLC was the exclusive placement agent for the 2006 Offering. For
their services, they were paid a fee of 10% of the gross proceeds or
$1,074,000,. AeroGrow also paid Keating Securities, LLC a non-accountable
expense allowance of 3% of the gross proceeds, or $322,200. In addition,
AeroGrow issued to Keating Securities, LLC and its designees warrants to
purchase an aggregate of 214,800 shares of common stock expiring
February 2011, at an exercise price of $6.25 per share (“Agent Warrants”).
The warrants are fully vested and may be exercised on a cashless or net issuance
basis. The holders of the Agent Warrants were granted the same registration
rights as the investors in the 2006 Offering.
AeroGrow
is required to register its shares of common stock issued to the investors
in
the 2006 Offering and the shares of common stock underlying the Warrants and
Agent Warrants for resale by the investors pursuant to a registration statement
declared effective by the SEC under the 1933 Act. If AeroGrow does not have
an
effective registration statement under the 1933 Act that registers for resale
the above listed common shares within 150 days of the closing date, then
AeroGrow must pay each of the investors (but not the holders of Warrants or
Agent Warrants) 1% of the purchase price paid by such investor for the common
stock for each month thereafter that the investor cannot publicly sell the
shares of common stock pursuant to an effective registration statement or other
exemptions from the federal securities laws. This penalty is payable in shares
of common stock at a deemed price of $2.00 per share. A registration statement
was filed by AeroGrow on April 10, 2006, but has not yet been declared
effective by the Securities and Exchange Commission.
Copies
of
the form of Subscription Agreement, Placement Agreement, Form of Common Stock
Purchase Warrant, and Form of Agent Warrant are attached to this Current Report
on Form 8-K.
The
issuance of shares of AeroGrow’s common stock and the Warrants to the investors
in the 2006 Offering was completed pursuant to an exemption from registration
contained in Regulations D and S, only to accredited investors. The shares
of AeroGrow’s common stock, the Warrants, and the shares of common stock
underlying the Warrants may not be offered or sold in the United States unless
they are registered under the Securities Act, or an exemption from the
registration requirements of the Securities Act is available.
Modification
of Convertible Notes
In
connection with the Merger, AeroGrow sought to modify the terms of the
outstanding Convertible Notes issued in the private placement conducted from
July to September 2005. The Convertible Notes were sold as part of 300 units
offered at a price of $10,000 per unit, consisting of a 10% unsecured
convertible note and 2,000 warrants expiring September 13, 2010. The notes
were
originally due and payable on June 30, 2006. The outstanding principal amount
of
notes originally issued was $3,000,000 (“Convertible Notes”). The note holders
of this debt were offered the opportunity to convert the principal and interest
at a reduced conversion rate, extend the maturity for a lesser reduced
conversion rate than immediate conversion, or maintain the current terms
unchanged.
Holders
of Convertible Notes representing $2,130,000 in principal amount converted
their
notes into AeroGrow common stock at a conversion price of $3.00 per share,
a
reduction from the original conversion price of $4.00 per share. Accordingly,
at
the closing of the Merger and 2006 Offering, AeroGrow issued 710,009 shares
of
its common stock (rounded up for fractional shares) to converting note holders
(“Note Conversion”). The converting note holders also were issued, pursuant to
the terms of the note offering, additional warrants to purchase 426,000 shares
of AeroGrow’s common stock expiring February 2011, at an exercise price of
$6.00 per share. Each share of AeroGrow common stock and each warrant issued
to
the converting note holders are restricted securities, and the holder thereof
may not sell, transfer or otherwise dispose of such securities without
registration under the Securities Act or an available exemption therefrom.
AeroGrow agreed to file a registration statement with the SEC under the 1933
Act
to register for resale the shares of AeroGrow’s common stock issued to
converting note holders (together with the shares of common stock underlying
the
warrants issued to the note holders in connection with the original note
issuance and upon the note conversion). Such registration statement must be
declared effective by the SEC before resales thereunder may be made.
Holders
of Convertible Notes representing $840,000 in principal amount agreed to extend
the maturity under their notes from June 30, 2006 to December 31, 2006 in
exchange for a reduction in their conversion price from $4.00 per share to
$3.50
per share.
The
remaining holders of Convertible Notes, representing $30,000 in principal
amount, did not elect to convert or extend the maturity of their notes and
are
able to demand payment in cash on June 30, 2006.
For
those
holders of Convertible Notes who elected to convert or extend the maturity
of
their notes as described above, (i) AeroGrow eliminated the 180 day lock-up
provisions on the shares of common stock underlying the Convertible Notes and
related warrants; (ii) AeroGrow eliminated the redemption provisions of the
$5.00 warrants issued to holders at the time of the issuance of the notes;
and
(iii) the holders of the Convertible Note waived any registration penalties
that they had in connection with any late filing or absence of effectiveness
under the registration rights provisions of their original subscription for
the
notes.
Liquidated
damages resulting from AeroGrow’s failure to file and have declared effective a
registration statement that would include the common stock issued as a result
of
the Convertible Notes and the shares of common stock underlying the warrants
related to and issued in conjunction with the Convertible Notes must be settled
through the issuance of additional common stock valued at a price of $2.00
per
share.
Keating
Securities, LLC acted as the placement agent for the offering of the Convertible
Notes and related warrants. Keating Securities, LLC did not provide any services
and did not receive any fees in connection with the modification of the
Convertible Notes.
Outstanding
Securities After the Merger
As
of
March 31, 2006, AeroGrow’s outstanding common stock, options, warrants, and
convertible securities were as follows:
| · |
9,082,885
shares of AeroGrow common stock issued and
outstanding;
|
| · |
Approximately
120,941 shares of common stock committed to be issued as of March 31,
2006 as compensation for services to directors and consultants and
grants
to employees pursuant to AeroGrow’s 2005 Equity Compensation
Plan;
|
| · |
2,148,000
shares of common stock issuable upon exercise of the Warrants sold
to
investors in the 2006 Offering, all of which are exercisable at $6.25
per
share until February 24, 2011;
|
| · |
240,006
shares of common stock issuable upon conversion of Convertible Notes
(rounded up for fractional shares) in the principal amount of $840,000
at
a conversion price of $3.50 by holders who elected to extend the
maturity
of their notes to December 31,
2006;
|
| · |
7,500
shares of common stock issuable upon conversion of Convertible Notes
in
the principal amount of $30,000 at a conversion price of $4.00 by
holders
who did not elect to extend the maturity of their notes beyond
June 30, 2006;
|
| · |
600,000
shares of common stock issuable upon exercise of outstanding warrants
held
by the initial holders of the Convertible Notes with an exercise
price of
$5.00 per share, of which 6,000 warrants held by those not electing
to
extend the maturity of their Convertible Notes to December 31, 2006
are redeemable under specified circumstances;
|
| · |
426,000
shares of common stock issuable upon exercise of warrants, at an
exercise
price of $6.00 per share, that were issued to holders which elected
to
convert notes in the principal amount of
$2,130,000;
|
| · |
174,000
shares of common stock issuable upon the exercise of warrants that
may be
issued if Convertible Notes in the principal amount of $870,000
(consisting of the notes due December 31, 2006 and June 30,
2006) are converted in the future, which warrants would be exercisable
at
$6.00 per share until February
2011;
|
| · |
60,000
shares of common stock issuable upon exercise of outstanding warrants
issued to Keating Securities, LLC and its designees with an exercise
price
of $6.00 per share in connection with the note offering until February
2011;
|
| · |
214,800
shares of common stock issuable upon exercise of outstanding warrants
issued to Keating Securities, LLC and its designees with an exercise
price
of $6.25 per share in connection with the 2006 Offering until February
2011;
|
| · |
892,858
shares of common stock issuable upon exercise of outstanding warrants
at
exercise prices ranging from $2.50 to $15.00 per share issued by
AeroGrow
in connection with various offerings from inception to March 31,
2006; and
|
| · |
1,111,423
shares of common stock issuable upon exercise of outstanding options
at an
exercise price ranging from $0.005 to $5.00 per share (“Stock Options”)
granted by AeroGrow to directors, employees, consultants and vendors,
at
various times from inception to March 31,
2006.
|
Based
on
the foregoing, AeroGrow has 15,052,595 shares of common stock outstanding on
a
fully diluted basis.
Lock
Up Restrictions
The
former stockholders of Wentworth holding an aggregate of 396,813 shares of
common stock entered into a lock up agreement under which they will be
prohibited from selling or otherwise transferring: (i) any of their shares
of common stock for a period of 12 months following the effective date of the
resale registration statement that includes the common stock issued in 2006
(“Initial Lock Up Period”), and (ii) 50% of its shares of common stock for
a period of 18 months following the effective date of such registration
statement.
Further,
as a condition of the closing of the Merger, 4,792,428 shares of AeroGrow’s
common stock held by existing AeroGrow stockholders (including all shares of
AeroGrow held by AeroGrow’s current officers and directors discussed elsewhere
in this Report), and 1,831,067 shares of common stock underlying AeroGrow’s
existing warrants and options outstanding are subject to lock up agreements
with
the same transfer restrictions set forth above and applicable to the former
stockholders of Wentworth.
The
following shares of common stock (or shares of common stock underlying warrants
and options) are not subject to any lock up agreement restrictions:
| · |
Approximately
544,228 shares of common stock held by investors in AeroGrow’s Colorado
intrastate offering (“Colorado Offering Shares”). The Colorado Offering
Shares are freely tradable without
restriction.
|
| · |
370,319
shares of outstanding common stock held by existing AeroGrow stockholders.
These shares of common stock may be freely tradable without restriction
depending on how long the holders thereof have held these shares
in
accordance with the requirements of Rules 144 and 701.
|
| · |
155,000
shares of common stock underlying existing warrants, and 20,944 shares
of
common stock underlying outstanding options issued to employees,
consultants and vendors. Upon exercise of these warrants by the holders
thereof, the shares will be restricted shares subject to the restrictions
on transfer imposed under Rule 144 and Rule 701 promulgated
under the Securities Act, which have different holding periods and
volume
limitations depending on the status of the holder and the time period
that
the holder has held the securities.
|
| · |
183,323
shares of common stock held by the former Wentworth stockholders
will not
be subject to lock up restrictions.
|
None
of
the shares of common stock issued in the 2006 Offering, issued upon conversion
of the Convertible Notes, underlying the warrants issued in the 2006 Offering
(including Agent Warrants), underlying the Convertible Notes, or underlying
the
warrants issued or to be issued to Convertible Note holders (including placement
agent warrants) are subject to lock up restrictions.
Item
3.02 Unregistered Sales of Equity Securities
During
the three years preceding the filing of this Current Report on Form 8-K,
AeroGrow sold shares of its capital stock in the following transactions, each
of
which was, except as discussed below, exempt from the registration requirements
of the 1933 Act pursuant to the exemptions listed below. All share amounts
and
exercise prices relating to AeroGrow capital stock have been adjusted to give
effect to the one-for-five reverse stock split to shareholders of record on
May 31, 2005.
On
July 2, 2002, AeroGrow issued 1,200,000 shares of common stock to its
former parent company, Mentor Capital Consultants, Inc., for aggregate
consideration in the amount of $6,000 and providing a $300,000 line of credit.
In October 2002, AeroGrow issued 600,000 shares of common stock to its founder
and president, W. Michael
Bissonnette,
in
exchange for stock in Mentor Capital valued at $10,000. Mr. Bissonnette was
an accredited investor. No selling commission or other compensation was paid
in
connection with such transactions. Such sales were exempt from registration
under the 1933 Act under the exemption provided by Section 4(2)
thereof.
Thereafter
AeroGrow conducted a private placement in three tranches, each at a different
price, for the purpose of raising working capital pursuant to exemptions
itemized below. As noted below, each tranche was exempt from registration
pursuant to Rule 506 of Regulation D.
In
the
first tranche, from December 7, 2002, through February 14, 2003,
AeroGrow sold 470,000 shares of common stock in a private offering to 9
accredited investors for an aggregate purchase price of $235,000, or $0.50
per
share. In addition, AeroGrow issued 160,000 warrants, each exercisable to
purchase one share of common stock at $1.25 per share. A total of 140,000
warrants were later exercised and 20,000 warrants remain outstanding. No selling
commission or other compensation was paid in connection with such transactions.
In
the
second tranche, from March 1, 2003 through August 31, 2003, AeroGrow
sold 920,800 shares of common stock at $1.25 per share in private transactions
to 59 investors (49 accredited and 10 non-accredited) for an aggregate
consideration of $1,151,000. AeroGrow also issued an additional 66,520 shares
of
common stock as bonus shares to certain of these investors. In addition,
AeroGrow offered 235,000 warrants to purchase one share of common stock at
$2.50
per share and offered 30,000 warrants to purchase one share of common stock
at
$5.00 per share. 20,000 warrants were exercised at $2.50 per share. No selling
commission or other compensation was paid in connection with such transactions.
In
the
third tranche, from September 30, 2003, through June 30, 2004,
AeroGrow sold 536,221 shares of common stock at $1.665 per share in private
transactions to 34 investors (29 accredited and 5 non-accredited) for an
aggregate purchase price of $893,244. Also, AeroGrow issued an additional 43,067
shares of common stock as bonus shares to certain investors. In addition,
AeroGrow offered 251,098 warrants to purchase one share of common stock at
$2.50
per share. No selling commission or other compensation was paid in connection
with such transactions. In the aggregate, AeroGrow sold common stock to 102
investors, of which 87 were accredited investors, and 15 were non-accredited
investors in these three tranches.
Certain
of the warrants previously described, were exercised during the period from
August 22, 2003 through January 15, 2004. Consequently, AeroGrow
issued 132,000 shares of common stock in private transactions to 7 accredited
investors for an aggregate purchase price of $165,000. Also, in connection
with
the second and third tranche, AeroGrow issued an additional 12,000 shares of
common stock as bonus shares to certain investors.
In
each
of the above transactions, the registrant relied on Rule 506 of
Regulation D and Section 4(2) of the 1933 Act for exemption from the
registration requirements of the 1933 Act. Each purchaser of common stock and
warrants was furnished a private placement memorandum and each had the
opportunity to verify the information supplied. AeroGrow obtained a signed
representation from each of the purchasers in connection with the offerings
of
his, her, or its intent to acquire such securities for the purpose of investment
only, and not with a view toward the subsequent distribution thereof.
Furthermore, each purchaser who was an accredited investor provided a signed
representation as to his status as an accredited investor as defined in
Rule 501 and Section 4(6) of the 1933 Act. Each of the certificates or
other evidence representing the securities sold carries a legend restricting
transfer of the securities represented thereby.
From
July 30, 2004, through December 31, 2004, AeroGrow sold 498,596 shares
of common stock at $5.00 per share in a Colorado registered offering to 116
investors for an aggregate purchase price of $2,492,977, less offering costs
of
$185,240. Pursuant to the terms of the offering, AeroGrow issued an additional
45,633 shares of common stock as bonus shares to certain investors. In the
offering, AeroGrow offered and sold 390,880 warrants to purchase one share
of
common stock at $10.00 per share and 390,880 warrants to purchase one share
of
common stock at $15.00 per share. No selling commission or other compensation
was paid in connection with such transactions. AeroGrow attempted to qualify
for
an exemption from registration under the 1933 Act provided by Sections 3(b)
and 3(a)(11) of the 1933 Act and Rule 147 promulgated thereunder. Each of
the investors in the Colorado intrastate registered offering were and are
residents of the State of Colorado. The state of AeroGrow’s principal business
location and more than 80% of the proceeds of the offering were utilized within
the State of Colorado. Additionally, the securities were subject to the legend
requirements of Rule 147. Because AeroGrow is incorporated in the State of
Nevada, however, we were unable to qualify for the exemption. See “Infirmity of
Colorado Offering in 2004” below.
During
December 2004 AeroGrow’s former parent corporation, Mentor Capital, pursuant to
applicable Nevada Statutes, made a pro rata dividend distribution to its 172
shareholders of all 1,200,061 shares of our common stock held by it. No
consideration was required of any recipient. No commission or other compensation
was paid in connection with the distribution. The shares are subject to the
following restrictions on further transfer evidenced by a legend on its
accompanying certificate: “the common stock may not be further transferred
unless the transaction in which they are offered and sold is registered under
the Securities Act and applicable state securities laws, or qualifies for
exemption from such registration, and further, that no sales of said shares
may
be made in the public market until six months following the completion of our
first registration of shares of common stock under the 1933 Act, and listing
of
a class of our securities for trading on the OTC BB or other recognized
securities exchange.” The shares are further subject to the requirement that no
more than 25% of the shares held by any recipient may be sold in any public
market during each six-month period which commences following the expiration
of
six months following the aforesaid registration and listing. The dividend
distribution did not involve an offer or sale and was exempt under §2(3) of the
Act.
From
June 22, 2005, through September 30, 2005, AeroGrow issued 28,000
shares of common stock in private transactions through the exercise of warrants
by 3 accredited investors who had previously been issued warrants in the
2002-2004 private placement referenced above, which was conducted pursuant
to
Rule 506 of Regulation D, under the 1933 Act. A total of 20,000
warrants were exercised at a price of $2.50 per share and 8,000 warrants were
exercised at a price of $1.25 per share for an aggregate purchase price of
$60,000.
On
August 12, 2005, AeroGrow sold 1,600 shares of common stock at $1.00 per
share in a private transaction pursuant to an employment agreement with an
employee. Such sale was exempt from registration under the 1933 Act provided
by
Sections 4(2) and/or 4(6) thereof.
On
February 22, 2005, AeroGrow filed a registration statement on
Form SB-2 for a planned self-underwritten offering of units consisting of
one share of our common stock and a warrant to purchase one share of common
stock. AeroGrow subsequently withdrew this filing on May 3, 2005, to permit
the offer and sale of a private placement of notes, complying with
Rule 155(c) as noted in the following paragraph. The requirements of
Rule 155(c)(4) and (5) were satisfied. These sections provide that
investors are informed of the restricted nature of the securities they are
acquiring in the private offering, that Section 11 protections are not
available, and a public offering was withdrawn after filing and that the
investors receive updated disclosure about the company in which they are
investing.
On
May 27, 2005, AeroGrow engaged Keating Securities, LLC as placement agent
in connection with a proposed offering of notes. In July, August, and September
2005, pursuant to Rule 155(c) promulgated under the 1933 Act, AeroGrow sold
to 47 accredited investors notes in an aggregate amount of $3,000,000 bearing
interest at 10% per annum and payable on June 30, 2006, which were
convertible into shares of our common stock at a price equal to the lesser
of
(i) $4.00 per share or (ii) 80% of the price at which shares were sold
in the first registered offering of securities by the Company, and redeemable
2005 warrants, which may be exercised for up to five years from the final
closing date of the notes offering. The requirements of Rule 155(c)(4) and
(5) were satisfied. The redeemable 2005 warrants may be exercised for 600,000
shares of common stock at a price of the lesser of $6.00 per share or 120%
of
the price at which shares are sold in this offering. Holders of the notes were
also granted the right to receive conversion warrants to purchase an aggregate
600,000 shares of common stock if the holders convert their convertible notes
into common stock. AeroGrow paid commissions of $300,000 to the placement agent
in this offering, Keating Securities, LLC. The sales were exempt from
registration under the 1933 Act provided by Section 4(2) thereof and
Rule 506 of Regulation D promulgated thereunder. Each purchaser was
furnished a private placement memorandum and had the opportunity to verify
the
information supplied. AeroGrow obtained a signed representation from each of
the
purchasers in connection with this debt offering of such purchaser’s intent to
acquire such securities for the purpose of investment only and not with a view
toward its subsequent distribution thereof. Furthermore, each purchaser signed
a
representation as to his status as an accredited investor as defined in
Rule 501 and Section 4(6) of the 1933 Act. Each of the convertible
notes and redeemable 2005 warrants carries a legend restricting transfer of
the
securities represented thereby. This offering was the first that the Company
conducted using the placement agent services of Keating Securities, LLC. See
“Note Modification” below.
In
December 2005, AeroGrow sold an aggregate of 395,000 shares of common stock
upon
exercise of warrants previously issued in a Colorado registered offering. The
exercise prices were $1.25, $2.50 and $5.00 and AeroGrow raised aggregate
proceeds of $962,500. No selling commission or other compensation was paid
in
connection with such transactions. Such sales may not have been exempt from
registration under the 1933 Act provided by Sections 3(b) and 3(a)(11) and
Rule 147. See “Infirmity of Colorado Offering in 2004” below.
On
February 6, 2006, AeroGrow engaged Keating Securities, LLC as placement
agent in connection with a proposed private placement of securities. On
February 24, 2006 and March 1, 2006, through a private placement and
after meeting the requirements of Rule 155(c) under the 1933 Act (see
above), AeroGrow sold to 167 accredited investors an aggregate of 2,148,000
shares of common stock and common stock purchase warrants to acquire up to
2,148,000 shares of common stock, for $5.00 per unit of one share and one
warrant. The requirements of Rule 155(c)(4) and (5) were satisfied.
AeroGrow raised $10,740,000 in gross proceeds. AeroGrow paid commissions and
expenses of $1,775,048 to Keating Securities, LLC, the placement agent, and
issued warrants to designees of Keating Securities, LLC, to acquire up to
214,800 shares of common stock at $6.25 per share. The sales were exempt from
registration under the 1933 Act provided by Section 4(2) thereof and
Rule 506 of Regulation D promulgated thereunder. Each investor was
furnished a private placement memorandum and provided a representation and
questionnaire as to their status as an accredited investor and investment
intent. This was the second private placement transaction conducted by the
Company through Keating Securities, LLC. This private placement was in
connection with the merger with Wentworth I, in which Keating Securities, LLC
was also paid $350,000 as an advisory fee by Wentworth. Keating Securities,
LLC
had been designated the lead underwriter of a proposed initial public offering
that was abandoned by the Company in January 2006.
On
February 24, 2006, AeroGrow issued 580,136 shares in exchange of
outstanding securities of Wentworth I, pursuant to Section 4(2) of the 1933
Act. Each of the exchanging stockholders was provided with information about
us,
and each verified they were accredited investors.
Shares
Granted for Services
Periodically,
AeroGrow has issued shares of common stock to bona fide employees and
consultants who have provided services to AeroGrow in transactions exempt under
the 1933 Act.
From
July 2, 2002, through December 31, 2002, AeroGrow issued, in lieu of
cash compensation, 27,000 shares of common stock for services rendered to it
by
employees and consultants, which services AeroGrow recorded at an aggregate
expense of $32,400.00. In addition, AeroGrow issued 3,000 shares to its
directors as compensation for their services rendered as directors. No selling
commission or other compensation was paid in connection with any of such grants.
Such grants were exempt from registration under the 1933 Act provided by
Section 4(2) thereof and Regulation 701 promulgated under the 1933
Act.
In
2003,
AeroGrow issued, in lieu of cash compensation, 46,999 shares of common stock
for
services rendered to it by employees and consultants, which services AeroGrow
recorded at an aggregate expense of $58,548.75. AeroGrow issued a total of
40,199 shares to employees and consultants in lieu of cash compensation for
services rendered to it and 6,000 shares to its directors in lieu of cash
compensation. In addition, AeroGrow issued 130,120 shares of our common stock
in
exchange for 216,865 shares of Mentor Capital common stock held by members
of
its Advisory Board and in consideration of their services rendered to us. No
selling commission or other compensation was paid in connection with such
grants. Such grants were exempt from registration under the 1933 Act provided
by
Section 4(2) thereof and Regulation 701 promulgated under the 1933
Act.
In
2004,
AeroGrow issued, in lieu of cash compensation, 150,882 shares of common stock
for services rendered to it by employees and consultants, which services
AeroGrow recorded at an aggregate expense of $559,822.78. A total of 144,882
shares were granted to employees and consultants for services in lieu of cash
compensation rendered to it and 6,000 shares were issued to its directors in
lieu of cash compensation. No selling commission or other compensation was
paid
in connection with such grants. Such grants were exempt from registration under
the 1933 Act provided by Section 4(2) thereof and Regulation 701
promulgated under the 1933 Act.
From
January 1, 2005, through September 30, 2005, AeroGrow issued, in lieu
of cash compensation, 86,436 shares of common stock for services rendered to
it
by employees and consultants, which services AeroGrow recorded at an aggregate
expense of $432,180.00. No selling commission or other compensation was paid
in
connection with such grants. Such grants were exempt from registration under
the
1933 Act provided by Section 4(2) and/or Section 4(6) thereof and
Regulation 701 promulgated under the 1933 Act.
Shares
to Corporate Suppliers
We
have
granted a total of 96,000 shares of common stock to three corporate suppliers
in
the United States, 7,604 shares of common stock to one landlord and 10,000
shares of common stock to one foreign supplier in privately negotiated
transactions exempt from registration under Section 4(2) of the 1933 Act,
as amended. Each of the recipients was a key supplier of goods or services
with
whom AeroGrow had a pre-existing business relationship. All of the shares
granted to commercial suppliers were subject to restrictions on
resale.
Grants
of Options
Periodically,
AeroGrow has issued options to purchase shares of common stock to bona fide
employees and consultants who have provided services to AeroGrow in transactions
exempt under the 1933 Act. All of such issuances were made pursuant to a plan
adopted by AeroGrow.
In
2003
AeroGrow granted options for 106,562 shares of our common stock to 22 persons
(a
total of 3 employees and 19 non-employee consultants). All such options are
exercisable for a period of five years commencing from date of issuance. A
total
of 20,965 of such options are exercisable at the price of $0.005 per share;
9,885 of such options are exercisable at $0.05 per share; 68,009 are exercisable
at $1.25 per share; and 7,703 of such options are exercisable at $2.50 per
share. No selling commission or other compensation was paid in connection with
such grants. Such grants were exempt from registration under the 1933 Act
provided by Section 4(2) thereof and Regulation 701 promulgated under
the 1933 Act.
In
2004
AeroGrow granted options for 77,767 shares of its common stock to 18 persons
(including 9 employees and 9 non-employee consultants). All such options are
exercisable for a period of five years commencing from date of issuance. A
total
of 6,750 of such options are exercisable at the price of $0.05 per share; 33,086
are exercisable at $1.25 per share; 27,000 are exercisable at $2.50 per share;
and 10,931 are exercisable at $5.00 per share. No selling commission or other
compensation was paid in connection with such grants. Such grants were exempt
from registration under the 1933 Act provided by Section 4(2) thereof and
Regulation 701 promulgated under the 1933 Act.
From
January 1, 2005, through September 30, 2005, AeroGrow granted options covering
38,669 shares of common stock to 17 persons (12 employees and 5 non-employees).
All such options are exercisable for a period of five years commencing from
date
of issuance. A total of 1,366 of such options are exercisable at the price
of
$0.50 per share; 2,412 are exercisable at $1.25 per share; and 34,891 are
exercisable at $5.00 per share. A total of 18,129 of previously granted options
have been canceled. No selling commission or other compensation was paid in
connection with such grants. Such grants were exempt from registration under
the
1933 Act provided by Section 4(2) thereof and Regulation 701
promulgated under the 1933 Act.
As
of
March 28, 2006, AeroGrow had granted a total of 878,153 options to purchase
the
Company’s common stock and 82,737 shares of common stock to employees,
consultants, and directors of the Company.
Infirmity
of Colorado Offering in 2004
In
2004,
the Company commenced a private placement intended to qualify under
Regulation D, Rule 504. The offering size was increased which
prevented use of the Rule 504 exemption, but because the offering was
wholly within the state of Colorado, the Company sought to comply with the
intrastate exemption for private placement offerings under the Federal and
state
securities laws, including Section 3(a)(11) of the Securities Act of 1933.
Although the Company believed it met all the requirements for this exemption,
after the transaction, it realized that its incorporation in the State of Nevada
precluded the use of the exemption for an offering in the State of Colorado.
Therefore, the exemption relied on was not available. There is no other
exemption under Federal law on which the Company can rely. Under Section 5
of the Securities Act, it is unlawful to sell unregistered, non-exempt
securities. Under Section 12(a)(1) of the Securities Act, investors who are
sold unregistered, non-exempt transaction securities may bring an action to
get
their money back, plus interest. Under Section 13 of the Securities Act,
investors have one year from the date of such violation to file such an action,
although in certain circumstances where a company fraudulently concealed or
hid
the truth about the violation, the time period can be three years in which
to
bring an action. The Company has now disclosed the potential liability.
Therefore, it believes that the extent of potential damages would be the amount
of the Colorado offering, plus interest, to the extent that persons are not
time
barred. No provision for this contingency has been made in the financial
statements of the Company.
Reference
is made to the disclosure set forth under Items 2.01 and 8.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
Item
3.03 Material Modification to Rights of Security Holders.
Reference
is made to the disclosure set forth under Items 2.01 and 8.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
The
holders of Wentworth common stock, by the terms of the Merger Agreement,
exchanged their shares of Wentworth common stock for shares of common stock
of
AeroGrow. The common stock of AeroGrow is governed by the terms of the laws
of
the State of Nevada, the state of incorporation of AeroGrow, and the terms
of
the certificate of incorporation and by-laws of AeroGrow. Copies of the
certificate of incorporation and the by-laws of AeroGrow are filed with this
Current Report on Form 8-K. Also, see the Description of Securities under
Item 8.01.
Item
5.01 Changes
in Control of Registrant.
Reference
is made to the disclosure set forth under Items 2.01 and 5.02 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
Item
5.02 Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report
on Form 8-K, which disclosure is incorporated herein by
reference.
Management
The
corporate existence of Wentworth ceased upon the Merger and the following
persons who were the directors and officers of AeroGrow at that time continued
in those positions after the Merger. Each of the directors of AeroGrow was
elected to their positions at an annual meeting of the stockholders of AeroGrow
held February 23, 2006. Immediately thereafter, the newly elected directors
held a meeting and appointed the officers of AeroGrow and took other action
to
establish the corporate governance of the company.
|
Name
|
|
Age
|
|
Position
with AeroGrow
|
|
Serving
as a Director Since
|
|
W.
Michael Bissonnette
|
|
57
|
|
Chief
Executive Officer, President and Director
|
|
2002
|
|
Richard
A. Kranitz
|
|
61
|
|
Director
|
|
2002
|
|
Wayne
Harding
|
|
50
|
|
Director
|
|
2005
|
|
Jack
J. Walker
|
|
71
|
|
Director
|
|
2006
|
|
Kenneth
Leung
|
|
61
|
|
Director
|
|
2006
|
W. Michael
Bissonnette
is our
founding shareholder and has served as chief executive officer, president and
a
director of AeroGrow since July 2002. Concurrently, he has served as chief
executive officer, president, and a director of our former parent company,
Mentor Capital Consultants, Inc. since March 2000. Mentor Capital currently
has
no active operating business. From 1994 through 2000, Mr. Bissonnette was a
private investor. From 1989 to 1994, he was the founder, chief executive
officer, president, and a director of Voice Powered Technology International,
Inc., an international consumer electronics company. From 1977 to 1989,
Mr. Bissonnette was the founder, chief executive officer and president of
Knight Protective Industries, Inc., an international consumer security products
company. Prior to 1977, he was founder, chief executive officer and president
of
Shagrila Carpets, Inc., a multi-store retailer of commercial and home carpeting.
Both Voice Powered Technology and Knight Protective Industries specialized
in
the funding, development, and marketing of technology-based consumer
products.
Richard A.
Kranitz
has been
a director of AeroGrow since July 2002. He has also served as a director of
Mentor Capital since March 2000. Mr. Kranitz has been an attorney in
private practice since 1970 emphasizing securities, banking and business law.
From 1990 to the present he has been an attorney in Kranitz & Philipp
in Grafton, Wisconsin. Previously, following the death of a partner in 1976,
he
formed the Law Offices of Richard A. Kranitz. From 1982 to 1983 he also was
a member of Fretty & Kranitz and from 1977 to 1978 he was also a member
of Habush, Gillick, Habush, Davis, Murphy, Kraemer & Kranitz. He was a
member of McKay, Martin & Kranitz from 1973 to 1976, and was employed
by Reinhart, Boerner, Van Deuren, Norris & Reiselbach, s.c. from 1970
to 1973. Mr. Kranitz served as Law Clerk to the Honorable Myron L.
Gordon in the U.S. District Court (E.D. Wisconsin) from 1969 to 1970.
Mr. Kranitz has served as a director of the Grafton State Bank from 1990 to
present. He served as a venture capital consultant to, and director of, various
companies, and he has served at various times as a director of various
professional, civic, or charitable organizations.
Wayne
Harding
has been
a director since October 2005. He has served as vice president business
development of Rivet Software since December 2004. From August 2002 to December
2004 Mr. Harding was owner and President of Wayne Harding &
Company CPAs and from 2000 until August 2002 he was director-business
development of CPA2Biz. He provided consulting services for AeroGrow from
December 2003 through March 2004. Mr. Harding is a certified public
accountant licensed in Colorado. He is past president of the Colorado Society
of
CPAs and past member of the Governing Council for the American Institute of
CPAs.
Jack J.
Walker has
been
a director since the February 23, 2006, annual meeting of shareholders. He
has served as president of English & Continental Properties, Inc., a
real estate investment and development company, since 1980 to present. From
1976
to 1985, Mr. Walker was president of March Trade & Finance, Inc.,
a private investment company. From 1974 to 1976, Mr. Walker acquired
control of Charles Spreckly Industries, Town & Commercial Properties
and Associated Development Holdings. In 1961 he started English &
Continental Property Company, and became joint Managing Director of this
commercial development company until 1976. Mr. Walker began his career in
1957 as a lawyer in London, England specializing in real estate, financing,
international tax, and corporate affairs. Mr. Walker has served as a
director of Megafoods Stores Inc. from 1984 to 1993. In addition, since 1975
through the present, he has served as a venture capital consultant to companies
on financial and pre-IPO strategies. In addition, he created the Walker
Foundation for Charitable Activities and he has served at various times as
a
director of various professional, civic, and charitable
organizations.
Kenneth
Leung
has been
a director since the February 23, 2006, annual meeting of shareholders.
From 1995 to the present he has been Managing Director of Investment
Banking-Environmental and the Chief Investment Officer of the Environmental
Opportunities Fund at Sanders Morris Harris. Previously Mr. Leung served as
Managing Director Investment Banking & Research-Environmental at Smith
Barney from 1978 to 1994. He was Vice President Investment Banking &
Research-Environmental with F. Eberstadt & Co. from 1974 to 1978.
Previously, he was an Assistant Treasurer Investment Research-Environmental
with
Chemical Bank from 1968-1974. Mr. Leung served on the boards of American
Ecology since February 2005 and SystemOne Technologies since June 2000, both
of
which are public companies. He has served at various times as a director of
various civic and charitable organizations.
All
directors are elected to annual terms by the holders of common stock. All
directors hold office until the next annual meeting of shareholders and the
election and qualification of their successors. Officers are elected annually
by
the board of directors and serve at the discretion of the Board.
Description
of Other Officers of the Corporation
All
of
the officers of the corporation are appointed by the board of directors to
serve
until their termination or resignation or appointment of a successor. The
current officers are:
Mitchell
Rubin was
elected chief financial officer and treasurer of AeroGrow on February 23,
2006. Prior to joining AeroGrow, from January 2003 through February 2006,
Mr. Rubin was an independent financial consultant. From July 1999 to
December 2002, Mr. Rubin was the Chief Financial Officer of Web-Ideals LLC,
a privately owned application service provider that offered a web-based
application for managing direct to consumer commerce. From January 1994 to
June
1999, Mr. Rubin held various positions including Chief Financial Officer,
Chief Executive Officer, and director with Voice Powered Technology
International Inc., a publicly held developer and manufacturer of consumer
electronic products. From July 1991 to December 1993, Mr. Rubin served as
Executive Vice President and Chief Operating Officer of Regal Group, Inc.,
a
television direct-response company. Mr. Rubin began his career as a
certified public accountant.
Randy
Seffren
has been
chief marketing officer of AeroGrow since April 2004 on a consulting basis
through Prometheus Communications Group, a company of which he is the principal
owner, and through which he has billed AeroGrow. Mr. Seffren has 25 years
of senior executive level marketing experience with major advertising and direct
response agencies. From 1999 to 2004, Mr. Seffren headed the marketing
efforts for healthcare communications companies, including Orbis Broadcast
Group
and MedEd Architects. From 1993 to 1999, he was executive vice president with
Reebok Home Fitness/DP Fitness/Body By Jake Fitness/Kent & Spiegel Direct.
From 1989 to 1993, Mr. Seffren led the marketing, communications and
product development efforts as director of marketing communications with Life
Fitness, a fitness equipment company. In these positions Mr. Seffren
introduced numerous consumer products on a global scale from product development
through marketing and communications. He leveraged the brand image and direct
response marketing of these products through distribution into specialty and
mass retail channels.
There
are
no family relationships (whether by blood, marriage or adoption) between or
among the AeroGrow directors or executive officers or the
directors.
The
business addresses of the directors are: W. Michael Bissonnette, AeroGrow
International, Inc., 900 28th Street, Suite 201, Boulder, Colorado
80303; Richard A. Kranitz, Kranitz & Philipp, 1238 12th
Avenue, Grafton, Wisconsin 53024; Wayne Harding, 5206 S. Hanover Way,
Englewood, Colorado 80111; Jack J. Walker, English & Continental
Properties, Inc., 5600 Arapahoe Road, Suite 205, Boulder, Colorado
80303; Kenneth Leung, Sanders Morris Harris, 527 Madison Avenue, New York,
New York 10022.
Board
Committees, Meetings and Compensation
Committees
of the Board
Our
board
of directors considers all major decisions. AeroGrow has established two
standing committees so that some matters can be addressed in more depth than
may
be possible in a full board meeting: an audit committee and a governance,
compensation and nominating committee. These two committees each operate under
a
written charter. The board has affirmatively determined that Mr. Harding is
independent as defined by applicable securities law and NASDAQ corporate
governance guidelines. As of March 28, 2006, AeroGrow elected to comply with
the
corporate governance requirements of NASDQ which satisfied its obligation
pursuant to the Merger Agreement. Following is a description of both of these
committees.
Audit
Committee.
The
current members of our audit committee are Mr. Harding (chairman), Mr. Jack
Walker, and Mr. Kenneth Leung. Mr. Harding is considered a financial
expert and Messrs Walker and Leung are considered financially literate under
the
rules of the Securities and Exchange Commission for audit committee members.
As
AeroGrow adds additional independent members to our board of directors as
required by applicable securities law or exchange listing guidelines when
applicable, such independent directors may be appointed to our audit committee
or the membership of the committee may be changed. This committee’s charter
provides that the committee shall:
| · |
oversee
the accounting and financial reporting processes and audits of the
financial statements,
|
| · |
assist
the board with oversight of the integrity of our financial statements,
company compliance with legal and regulatory requirements, its independent
auditors’ qualifications and independence and the performance of the
independent auditors, and
|
| · |
provide
the board with the results of its
monitoring.
|
Governance,
Compensation and Nominating Committee.
The
current members of the governance, compensation and nominating committee are
Mr. Harding (chairman), Mr. Jack Walker and Mr. Kenneth Leung.
Each of these persons is an independent director. This committee’s charter
provides that the committee shall:
| · |
recommend
to the board the corporate governance guidelines to be
followed,
|
| · |
review
and recommend the nomination of board members,
|
| · |
set
the compensation for the chief executive officer and other officer,
and
|
| · |
administer
the equity performance plans of
AeroGrow.
|
Meetings.
During
fiscal year ended December 31, 2005, the board of directors met 15 times.
Each director attended all of the meetings held by the board during the period
that he served as a director of AeroGrow.
Director
Compensation
In
2004
and 2005 each director received 2,000 shares of common stock for his service
as
director. Mr. Bissonnette has agreed to forego any future stock-based
compensation for serving as a director of AeroGrow. AeroGrow compensates
directors $500 for attending meetings and reimburses them for their
out-of-pocket expenses for attending meetings. On March 28, 2006, AeroGrow
granted to each of its four outside directors 2,500 shares of the Company’s
common stock at a value of $5.00 per share for a total of $12,500 for each
director, or an aggregate total of $50,000, and 10,000 fully vested five-year
options to purchase AeroGrow common stock at an exercise price of $5.00 per
share for services for the fiscal year ending December 31,
2005.
Management
Compensation
The
following table provides information concerning compensation earned by
Mr. Bissonnette, our chief executive officer, Mr. Gutterman, our
former chief financial officer, and Mr. Seffren, our chief marketing
officer during 2005, 2004 and 2003. No other executive officer of AeroGrow
was
paid in excess of $100,000 in 2005.
|
Summary
Compensation Table Annual
|
|
| |
|
|
|
|
|
Compensation
|
|
|
|
|
|
Name
and Principal Position
|
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
All
Other
Compensation
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W.
Michael Bissonnette, CEO, President and Director(1)
|
|
|
2005
2004
2003
|
|
$
|
156,954
134,428
123,046
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
10,000(2
10,000(2
2,500(2
|
)
)
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Randy
Seffren, CMO
|
|
|
2005
2004
2005
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
404,653(3)
215,566(3)
0
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerry
L. Gutterman, Former, CFO
|
|
|
2005
2004
2003
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
277,005(4
56,723(4
89,355(4
|
)
)
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mitchell
Rubin, CFO
|
|
|
2005
2004
2003
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
29,937(5)
0
0
|
|
| (1) |
Mr.
Bissonnette also received perquisites and other personal benefits
totaling
$31,954 in 2005, $24,504 in 2004, and $22,566 in
2003.
|
| (2) |
Other
compensation reflects the value at the time of grant of shares of
our
common stock received by Mr. Bissonnette in each
year.
|
| (3) |
Other
compensation reflects consulting fees of $164,153 and $84,466 and
the
value at the time of grant of shares of our common stock received
by
Prometheus Communications Group, LLC of which Mr. Seffren is the 100%
owner and managing member, in 2005 and 2004, respectively.
Mr. Seffren provided marketing services through his company and
billed AeroGrow through his
company.
|
| (4) |
Other
compensation reflects consulting fees of $139,330 and the value at
the
time of grant of shares of our common stock received by Mr. Gutterman
in
2005. Also reflected are 10,000 shares valued at $0.25 in 2003, and
10,000
shares valued at $1.00 per share in 2004, all on a pre-Reverse Split
basis. Other compensation also includes $46,723 and $67,955 of consulting
fees paid in 2004 and 2003, respectively, and 75,600 shares of our
common
stock issued in 2003 for services rendered on the Advisory Board,
which
services AeroGrow recorded as an expense of $0.25 per share, on a
pre-Reverse Split basis. In 2004, Mr. Gutterman received options to
purchase 99,612 shares of our common stock at an exercise price of
$.025
per share, on a pre-Reverse Split basis. In 2003, Mr. Gutterman
received options to purchase 235,451 shares of our common stock at
an
exercise price of $.025 per share, on a pre-Reverse Split basis.
The value
of these stock options is not included in the above
table.
|
| (5) |
Other
compensation reflects consulting fees of
$29,937.
|
Compensation
Plans
Amended
2003 Stock Option Plan.
On
January 3, 2003, the board of directors adopted a stock option plan for key
employees (including key employees who are directors), non-employee directors,
consultants and investors which provides that an aggregate of 400,000 shares
of
our common stock may be granted under the plan (“2003 Plan”). On
December 31, 2005, there were options for 204,869 shares outstanding and
the remaining options of 195,131 were merged into the 2005 Equity Compensation
Plan on August 22, 2005, and the 2003 plan no longer separately exists.
Vesting schedules are determined individually for each grant.
Administration.
The
plan is administered by our Governance, Compensation and Nominating Committee,
and in the past was administered by the board. The plan provides that it may
be
administered by either the committee or board, and in its administration it
may:
| · |
determine
the date of grant, exercise price and other terms of
options,
|
| · |
establish
rules and regulations to administer the
plan,
|
| · |
amend,
suspend, or discontinue the plan subject to applicable shareholder
approval,
|
| · |
interpret
the rules relating to the plan, and
|
| · |
otherwise
administer the plan.
|
Stock
Options.
The plan
provides that the committee may grant both incentive stock options, which can
result in potentially favorable tax treatment to the participant, and
non-qualified stock options. The committee determines the terms and vesting
provisions, including the exercise price. The maximum term of each option and
the times at which each option will be exercisable generally are fixed by the
committee, except that no option may have a term exceeding ten years. Shares
subject to options that expire or otherwise terminate remain available for
awards under the plan. Shares issued under the plan may be either newly issued
shares or shares which AeroGrow has reacquired.
2005
Equity Compensation Plan.
In
August 2005 AeroGrow adopted the 2005 Equity Compensation Plan (“2005 Plan”) to
promote the interests of AeroGrow and our shareholders by attracting, retaining,
and motivating our key officers, employees, directors, and consultants. A total
of 1,505,000 shares of our common stock may be granted under this plan pursuant
to stock options or awards of shares of restricted stock. As of December 31,
2005, 28,401 options and 157,192 shares of restricted stock had been granted
under this plan and 1,319,407 remain available for grant. Our 2003 stock option
plan was merged into this plan in August 2005, which modification was approved
by the stockholders in February 23, 2006; the 2003 Plan no longer separately
exists. The options for the 204,869 shares issued under the 2003 Plan continue
to be governed by their grant agreements but are administered under the 2005
Plan. The 2005 Plan was approved by our stockholders at the annual meeting
of
stockholders held February 23, 2006. As of March 28, 2006, AeroGrow granted
an
additional 888,153 options and 83,737 shares of its common stock pursuant to
the
2005 Plan. As of that date, there were 351,671 unallocated shares that may
be
the subject of awards in the future.
Shares
Available for Awards.
Shares
subject to an award that is cancelled, expired unexercised, forfeited, settled
in cash or otherwise terminated remain available for awards under the plan.
Shares issued under the 2005 Plan may be either newly issued shares or shares
which AeroGrow has reacquired. The plan imposes individual limitations on the
amount of certain awards in order to comply with Section 162(m) of the
Internal Revenue Code of 1986. Under these limitations no single participant
may
generally receive awards in any calendar year that relate to more than $1
million. Finally, awards may generally be adjusted to prevent dilution or
enlargement of benefits when certain events occur such as a stock dividend,
reorganization, recapitalization, stock split, combination, merger, or
consolidation.
Eligibility.
Our
employees, directors and consultants may be granted awards under the plan.
As of
March 31, 2006, approximately 57 individuals were eligible to
participate.
Administration.
The
plan is administered by the Governance, Compensation and Nominating Committee.
Awards to directors serving on the committee are determined and administered
by
the full board of directors. The committee may:
| · |
determine
the type and number of awards to be
granted,
|
| · |
determine
the exercise or purchase price, vesting periods and any performance
goals,
|
| · |
determine
and later amend the terms and conditions of any
award,
|
| · |
interpret
the rules relating to the plan, and
|
| · |
otherwise
administer the plan.
|
Stock
Options.
The
committee may grant both incentive stock options, which can result in
potentially favorable tax treatment to the participant, and non-qualified stock
options. The committee determines the terms and individual vesting schedules
for
each grant including the exercise price which may not be less than the fair
market value of a share of common stock on the date of the grant.
Restricted
Shares.
The
committee may grant restricted shares of common stock. Restricted shares are
shares of common stock with transfer restrictions. These restrictions lapse
on
the basis of performance and/or continued employment as determined in advance
by
the committee. They may be forfeited by participants as specified by the
committee in the award agreement. A participant who has received a grant of
restricted shares will receive dividends and the right to vote those shares.
Restricted shares may not be transferred, encumbered or disposed of during
the
restricted period or until after the restrictive conditions are
met.
Other
Terms.
All
outstanding awards vest, become immediately exercisable or payable, and have
all
restrictions lifted immediately when AeroGrow experiences a change in control.
The Board may amend or terminate the plan subject to applicable stockholder
approval. The committee may not amend the terms of previously granted options
to
reduce the exercise price or cancel options and grant substitute options with
a
lower exercise price than the cancelled options. The committee also may not
adversely affect the rights of any award holder without the award holder’s
consent.
Mr. Gutterman
was granted 69,429 stock options at an exercise price of $1.25 per share stock
options under the 2003 Plan. Mr. Rubin was granted 1,366 stock options at
an exercise price of $0.50 per share stock options under the 2003 Plan. They
are
the only executive officers who have been granted stock options under that
Plan.
Mr. Bissonnette,
Mr. Gutterman and Mr. Seffren were granted 2,000, 24,710, and 28,520
restricted shares of common stock, respectively, under the 2005 Plan.
Mr. Rubin was granted 2,402 stock options at an exercise price of $0.50 per
share stock options under the 2005 Plan.
Equity
Compensation Plan Information.
The
following table shows the total shares of common stock reserved for issuance
for
outstanding options granted under the 2003 Plan and the 2005 Plan as of
December 31, 2005.
|
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options
|
|
Weighted
average exercise price of outstanding options
|
|
Number
of securities remaining available for issuance under our Amended
2003
Stock Option Plan
|
|
Number
of securities remaining available for issuance under our 2005 Equity
Compensation Plan
|
|
|
Equity
compensation plans not approved by stockholders
|
|
|
204,869
|
|
$
|
2.13
|
|
|
0
|
|
|
N/A
|
|
|
Equity
compensation plans approved by stockholders
|
|
|
28,401
|
|
$
|
3.81
|
|
|
NA
|
|
|
1,239,803
|
|
|
Total
|
|
|
233,270
|
|
$
|
2.34
|
|
|
|
|
|
1,239,803
|
|
This
table does not reflect 86,436 and 358,008 shares of common stock issued through
December 31, 2005 and 2004, respectively, to employees and consultants as
compensation and not as part of a plan.
Employment
Contracts
AeroGrow
has entered into employment agreements with W. Michael Bissonnette,
Mitchell Rubin, and Jeff Brainard.
The
employment agreement of Mr. Bissonnette provides that he will be employed
as the chief executive officer of AeroGrow for an initial term of 24 months,
renewable automatically for successive one year terms. He will be paid a base
salary of $225,000. Mr. Bissonnette will also be able to participate in
equity compensation plans as determined by the compensation committee.
Mr. Bissonnette will be reimbursed car and home office expenses at the rate
of $2,500 per month and participate in regular employee benefit plans as
provided by the Company. If Mr. Bissonnette is terminated without cause by
the Company or Mr. Bissonnette terminates upon a Company breach, he will be
paid his base salary, medical benefits, and pro rata portion of the bonus for
one year. If he terminates his employment without cause, he will be paid his
salary to the end of the month of such notice. Mr. Bissonnette has agreed
to regular confidentiality provisions and agreed not to compete with AeroGrow
in
the area of aeroponics products and business for two years after the termination
of employment. Any inventions, including modifications, are assigned to the
Company by the terms of the agreement.
The
employment agreement of Mr. Rubin provides that he will be employed as the
chief financial officer of the Company. He will devote his entire business
time
to the affairs of the Company, provided that for the first four months of his
employment he may devote a limited amount of time to non-competitive business
activities during the work day in transition from his prior consulting business.
The initial term is two years and renewable for successive one year terms.
Mr. Rubin shall receive base compensation of $200,000 per year and a bonus
per fiscal year of not less than 1.5% of EBITDA. In the event of termination
of
the agreement by AeroGrow without cause or breach by AeroGrow, Mr. Rubin
shall be entitled to receive severance compensation equivalent to six months
base salary and the pro rata bonus. The agreement also provides for medical,
vacation and other benefits commensurate with the policies and programs as
adopted by AeroGrow for its senior executives. Further, the agreement provides
for Mr. Rubin to receive a grant of 125,000 options to purchase AeroGrow’s
common stock under AeroGrow’s 2005 Equity Compensation Plan at an exercise price
of not greater than $5.00. The options shall: (i) vest pursuant to terms no
less than a minimum of 50% of the amount of the grant per each 12 month period
from the date of grant; (ii) shall not expire in less than five years from
the date of grant; (iii) shall be subject to other standard terms and
conditions under the 2005 Equity Compensation Plan; and; (iv) shall have
other terms and conditions no less favorable than that granted to other senior
executives of the Company. Mr. Rubin has agreed to regular confidentiality
and inventions assignment provisions and agreed not to compete with AeroGrow
for
two years after the termination of employment.
The
employment agreement of Mr. Brainard provides that he will be employed as
the vice president, sales of the Company. He will devote his entire business
time to the affairs of the Company working from his home office in Lexington,
Massachusetts. The initial term is two years and renewable for successive one
year terms. Mr. Brainard shall receive base compensation of $150,000 per year
and a bonus per fiscal year in an amount not less than the greater of;
a) $50,000; b) 0.5 per cent of retail net sales, net of all customer
deductions including but not limited to returns, allowances, bad debts and
other
deductions; or c) 1.5% of the EBITDA of the Company as determined by the
Company’s annual financial statements and pro rated for any portion of such
annual period covered under this Agreement. Such bonus shall be
payable
for the
initial year in
two
installments, $25,000 to be paid six months following the initial date hereof
and an additional $25,000 12 months following the date hereof and the balance
not later than 120 days after the end of the each of the Company’s fiscal years
covered under this agreement. The agreement also provides for medical, vacation
and other benefits commensurate with the policies and programs as adopted by
AeroGrow for its senior executives. Further, the agreement provides for
Mr. Brainard to receive a grant of 125,000 options to purchase AeroGrow’s
common stock under AeroGrow’s 2005 Equity Compensation Plan at an exercise price
of not greater than $5.00. The options (i) shall vest pursuant to terms no
less than a minimum of 33% of the amount of the grant at the date granted and
33% per each 12 month period from the date of grant; (ii) shall not expire
in less than five years from the date of grant; and (iii) shall be subject
to other standard terms and conditions under the 2005 Equity Compensation Plan.
Mr. Brainard has agreed to regular confidentiality and inventions
assignment provisions and agreed not to compete with AeroGrow for a period
equal
to the term employed after the termination of employment. In addition, in the
event of a change in control of AeroGrow, including a change in chief executive
officer, Mr. Brainard shall be entitled to receive severance for one
year.
Except
as
set forth above, all employees of AeroGrow are employed on “at will”
basis.
Item
5.03 Amendments to Articles of Incorporation or Bylaws.
On
February 24, 2006, AeroGrow filed a Certificate of Amendment to the Certificate
of Incorporation to change the corporate name to “AeroGrow International, Inc.”
This was a corrective amendment to remove the space in the “AeroGrow” part of
the name.
Effective
as of the Merger, pursuant to the provisions of the bylaws of AeroGrow, the
board of directors, by resolution, set the number of directors on the board
of
directors of AeroGrow to be five. At the annual meeting held February 23, 2006,
five persons were elected directors of AeroGrow.
Item
5.06 Change In Shell Company Status
Please
see the discussion of “Closing of the Merger” in Item 2.01 above, which
discussion is incorporated herein by reference.
Item
8.01 Other Events.
The
following is a description of AeroGrow’s business as of February 24,
2006.
Overview
AeroGrow
was formed as a Nevada corporation on March 25, 2002. AeroGrow’s principal
business is developing and marketing advanced indoor aeroponic garden systems
designed and priced to appeal to the gardening, cooking and small kitchen
appliance, healthy eating, and home and office décor markets worldwide. Guided
by the consumer product marketing experience of its founder, AeroGrow’s
principal activities since its formation through March 2006 have consisted
of
product research and development resulting in the filing of 14 patent
applications and ten trademark applications, the development of two proprietary
growing systems and six proprietary seed kits, research into the markets for
AeroGrow’s products and the best channels through which to sell them, product
engineering, business planning, and raising the capital necessary to fund these
activities. These development activities included an iterative process of
experimentation, consumer testing, and adjustment, in consultation with
scientists familiar with the technology. AeroGrow’s experimentation included
more than 500 internal tests on nutrients, lighting, water quality, and seed
varieties in our greenhouses and labs between August 2002 and December 2005.
Often, these tests were combined with in-home use of our systems by sample
consumers picked from our employees and investors. User feedback from these
tests was often incorporated in next generation products and development. In
December 2005, AeroGrow commenced pilot production of its AeroGarden™ system,
and in March 2006, AeroGrow began shipping these systems to retail and catalogue
customers.
AeroGrow’s
principal products are “kitchen garden” indoor growing systems and proprietary
seed kits that will allow consumers, with or without gardening experience,
to
easily grow cherry tomatoes, cilantro, chives, basil, dill, oregano, mint,
flowers, chili peppers, and lettuce throughout the year. AeroGrow’s kitchen
garden systems are designed to be simple, consistently successful, and
affordable. AeroGrow believes that its focus on the design and features of
its
kitchen garden systems will make them the first of their kind on the consumer
market. We reached this conclusion using standard means of market research,
including focus groups and potential customer interview techniques, review
of
potentially competitive products offered at all ranges of functionality and
price, and testing of products that may be considered competitive in function
although not necessarily competitive in terms of market
orientation.
AeroGrow
has filed 13 patent applications in the United States and one international
patent application to protect its core inventions. No patents have been grated
and there is no assurance such applications will be granted. Although aeroponic
technology cannot in and of itself be patented, the patent applications include
aeroponic technological advances (described below) as well as product, nutrient
and seed pod inventions designed to enhance plant growth. Many of AeroGrow’s
patent-pending companion technologies are based on its innovations in the fields
of biology, plant physiology, chemistry and adaptive learning computer science.
In addition, AeroGrow has developed certain trade secrets which simplify,
combine, and integrate its core technologies into its indoor kitchen garden
systems.
AeroGrow
believes that its inventions and combined technologies will allow almost anyone,
from consumers who have no gardening experience to professional gardeners,
to
produce year-round harvests of cherry tomatoes, cilantro, chives, basil, dill,
oregano, mint, flowers, chili peppers, and lettuce, which are provided in its
seed kits regardless of season, weather, or lack of natural light. AeroGrow
believes that its kitchen garden systems’ unique and attractive designs make
them appropriate for use in almost any location, including kitchens, bathrooms,
living areas, and offices.
AeroGrow’s
basic kitchen garden system and its deluxe kitchen garden system are projected
to retail at prices ranging from $99 to $149 based on the channel of
distribution in which they are sold and the specific product features provided.
Hydroponics
Industry - Background and Opportunity
Hydroponics
is the science of growing plants in water instead of soil. Used commercially
worldwide, hydroponics is considered an advanced and often preferred crop
production method. Hydroponics is typically used inside greenhouses to give
growers the ability to better regulate and control nutrient delivery, light,
air, water, humidity, pests, and temperature. Hydroponic growers benefit by
producing crops faster and enjoying higher crop yields per acre than traditional
soil-based growers.
Aeroponic
technology is derived from hydroponics and occurs when plant roots are suspended
in an air chamber and bathed at regular intervals with nutrient solution.
AeroGrow believes that the aeroponic technology used in its kitchen garden
systems is a technological advance over hydroponics because plant roots are
suspended in a near-100% humidity enclosed air chamber and bathed in a
nutrient-rich solution. Aeroponic methods ensure the plants not only have
sufficient water, nutrients and, of course, oxygen, but the temperature inside
the root chamber can be easily controlled, ensuring temperature stress of the
plant does not limit growth. For this reason, the use of a well-designed and
maintained aeroponic system can yield increases in growth rate and plant
survival when compared to hydroponics systems.
From
August 2002 through July 2005, AeroGrow conducted research with approximately
500 individuals who were identified because they either signed up on the Company
website to pre-order the basic AeroGrow product, agreed to be beta testers
of
the basic product, came to preview meetings concerning the Company, or were
friends of employees and consultants of the Company that were asked to locate
persons for market testing. Persons found AeroGrow’s website through referrals,
web searches, or as a result of fund raising and hiring activities. The research
consisted of face to face and internet interviews/surveys with potential
consumers and standard focus group experiences. From some of the contacts,
AeroGrow obtained a 10 page questionnaire, and in other instances the responses
were taped for later review. Persons from approximately 35 states responded
to
the surveys and focus groups. A professional market research consultant assisted
with the design, implementation, and analysis of the focus groups, individual
interviews, and surveys. From this research, it appears to AeroGrow that there
is a potential sizeable national market for its countertop soil-less kitchen
garden systems for use indoors in homes and offices. Until the development
of
AeroGrow’s kitchen garden systems, significant barriers have prevented
hydroponic or aeroponic technology from being incorporated into mainstream,
mass-marketed consumer products, including:
· Consumers
generally lack the specialized knowledge required to select, set up, operate,
and maintain the various components for a typical hydroponic or aeroponic
system, including growing trays, irrigation channels, growing media nutrient
reservoirs and nutrient delivery systems consisting of electronic timers, pumps,
motors, tubing, and nozzles.
· Consumers
generally do not possess the specialized knowledge required to select, set
up,
operate and maintain the varied indoor lighting systems that are necessary
to
grow plants in the absence of adequate indoor natural light.
· Consumers
are required to properly mix and measure complex hydroponic nutrient formulas
which change depending on the plant variety and the stage of plant growth.
In
addition, consumers must deal with the problem of nutrient
spoilage.
· Federally-mandated
water quality reports show that the water in many large cities is not suitable
for hydroponic or aeroponic growing and requires chemical treatments. Consumers
generally are unaware of how to adjust the water for healthy plant
growth.
AeroGrow
believes that these complexities have been accepted in existing hydroponic
market channels because its research has indicated that hydroponic manufacturers
have generally focused their product development and marketing efforts on
satisfying the needs of the commercial greenhouse and dedicated hobbyist
markets. AeroGrow’s research has indicated that the hydroponic growing equipment
currently available in these markets is bulky, expensive and comprised of many
parts. These users are motivated to gain the specialized knowledge, equipment
and experience currently required to successfully grow plants with these
products.
AeroGrow
believes that the complexities of currently available commercial hydroponic
products fail to address the needs and wants of the mass consumer market,
leaving that market unserved. AeroGrow further believes that its trade secrets,
patent-pending inventions, and companion technologies have simplified and
improved hydroponic and aeroponic technologies and enabled it to create the
first indoor aeroponic gardening system appropriate for the mass consumer
market.
AeroGrow’s
Proprietary Technology
AeroGrow
has spent more than three years innovating, simplifying, combining, and
integrating numerous proprietary technologies and inventions into a family
of
“plug and grow” aeroponic kitchen garden systems and related seed kits
specifically designed and priced for the mass consumer market. AeroGrow has
filed 13 patent applications in the United States and one international patent
application to protect its inventions. Following is a description of AeroGrow’s
proprietary technologies and inventions which are used together in its kitchen
garden system and seed kits. The inventions under the patent applications have
not been granted patents, and there can be no assurance that patents will be
granted.
Rainforest
Nutrient Delivery System.
AeroGrow’s “rainforest” nutrient delivery system combines its patent-pending
technologies with features from several hydroponics or aeroponic methodologies
into a proprietary system designed to provide aeroponic plant growth. These
hydroponics or aeroponic methodologies include:
· Drip
Technologies.
Drip
systems create nutrient irrigation by pumping nutrient solution from a reservoir
up to the base of the plant and saturating a soil-less growing medium. The
growing medium delivers nutrients and moisture to plant roots which is similar
to rainwater as it drips through the soil and past plant roots.
· Ein
Gedi Aeroponic Technologies.
Plant
roots in aeroponic systems are suspended in an air chamber and bathed at regular
intervals with nutrient solution. In the Ein Gedi variation of aeroponics,
plant
roots are allowed to grow directly into nutrient solution after passing through
an air space.
AeroGrow’s
rainforest technology suspends plant roots into a 2 to 4 inch air chamber above
an oxygenated nutrient solution. Nutrients are pumped from the nutrient
reservoir to the base of each plant where a regulated flow of nutrients drips
down through plant roots.
Pre-Seeded
Bio-Grow Seed Pods.
AeroGrow’s proprietary bio-grow seed pods include pre-implanted seeds, a
bio-sponge growing medium, removable bio-dome covers, and a grow basket to
assist with the proper distribution of moisture. AeroGrow’s seed pods must be
used in its kitchen garden systems in order to grow plants. AeroGrow believes
consumers may use seeds purchased from other sources for use in its kitchen
garden system, although AeroGrow cannot provide any assurances on germination
and growth in such cases.
AeroGrow
selected the seeds to pre-implant in its bio-grow seed pods after two years
of
extensive research which included:
· analyzing
thousands of seed varieties,
· growing
and testing several hundred varieties of plants in its greenhouse and grow
laboratories, and
· testing
the taste and appearance of its grown vegetables, herbs and flowers with
consumers.
AeroGrow
implants its selected seeds in a bio-sponge growing medium that, based upon
research by AeroGrow, facilitates rapid germination and enhanced root growth
in
comparison to other mediums tested, as well as supporting plant roots from
germination through maturity and harvest. AeroGrow’s bio-grow domes create a
mini-greenhouse environment by covering the grow surface to create a near-100%
humidity air chamber which is optimal for most plant germination and initial
growth. Bio-grow domes help regulate moisture and temperature to levels optimal
for plant germination.
AeroGrow’s
proprietary bio-grow seed pods are a vital component of its kitchen garden
system. AeroGrow’s bio-grow seed pods will be packaged along with nutrients in
its proprietary seed kits to be used exclusively in its kitchen garden systems.
These seed kits currently include seeds for cherry tomatoes, cilantro, chives,
basil, dill, oregano, mint, chili peppers and flowers. In addition to pre-seeded
pods, AeroGrow also plans to allow consumers to purchase unseeded pods to give
them the opportunity to grow their own seeds in AeroGrow’s kitchen garden
systems. AeroGrow seed pods will be required for use with the kitchen garden
systems. However, not all plants are appropriate to grow in the kitchen garden
system.
Microprocessor-Based
Control Panel and Nutrient Cycle Delivery System.
AeroGrow believes that certain common problems face both experienced gardeners
and beginning gardeners, including:
· improperly
watering plants,
· improperly
feeding plants, and
· failing
to provide plants with sufficient light needed for healthy growth.
To
assist
consumers, especially inexperienced gardeners, AeroGrow has developed two
patent-pending microprocessor-based technologies that address these common
problems. These technologies are designed to:
· regulate
the lighting system,
· automatically
alert users when it is time to add water and nutrients,
· help
simplify and reduce consumers’ time and involvement in caring for
plants,
· reduce
the variables and errors often made by consumers in plant care, and
· enhance
plant growth.
AeroGrow
has developed two kitchen garden systems with different control systems which
are described below at “AeroGrow’s Kitchen Garden Systems.” AeroGrow’s
microprocessor-based control panel will be available as an accessory for its
basic kitchen garden system and is included as a standard feature on its deluxe
kitchen garden system. This control panel includes an electronic nutrient and
water reminder system and microprocessor-controlled lights that alert consumers
to add water and nutrients when needed and help ensure that plants are properly
fed and receive the proper lighting. Without the microprocessor control panel,
the user is required to track the time since the last nutrient tablets were
added and needs to monitor the system visually to determine when to add
water.
In
addition, AeroGrow’s deluxe kitchen garden system includes its
microprocessor-based nutrient cycle delivery system as a standard feature.
With
its nutrient cycle delivery system, the consumer selects from four plant types
(lettuce, herbs, tomatoes, or flowers) and the system then automatically adjusts
and optimizes the nutrient, water and lighting cycles based on the plant variety
selected.
Time-Release
Nutrient Tablets.
Plants
require a balanced mixture of nutrients for optimal growth. Certain nutrient
combinations, including calcium nitrate and magnesium sulphate, generally cannot
be combined, mixed or stored in the same container due to specific chemical
reactions that bind them together and renders them useless to plants. Hydroponic
growers seek to solve this problem by packaging various nutrient concentrations
in up to four separate containers which are individually measured and added
as
needed by the consumer. These nutrient complexities require consumers using
hydroponic systems to:
· understand
the blends of nutrient fertilizer that are best suited for the specific variety
of plants they are growing,
· understand
the nutrient requirements for the specific plant variety at each of three stages
of its growth and maturity,
· measure
and blend nutrients from up to four different concentrated solutions and add
them to specific measured quantities of water, and
· monitor,
adjust and re-mix nutrient fertilizers over time.
AeroGrow
believes that current plant nutrition processes required for successful
hydroponic growing have created barriers to mass consumer use and acceptance
because they are cumbersome and complex. To help overcome these barriers,
AeroGrow has spent nearly three years developing time-release nutrient tablets
designed specifically to deliver the proper nutrients to the plants, while
offering consumers a user-friendly nutrient system. The consumer simply adds
the
plant-specific nutrient tablets to the kitchen garden systems when instructed
by
the microprocessor-based nutrient cycle delivery system, usually once every
two
weeks. The nutrient tablets eliminate the need for measuring and mixing
multi-part nutrient formulas and storing various nutrients in separate
containers. The nutrient tablets customize multiple nutrients and minerals
such
as calcium, magnesium and iron for specific plant varieties at different stages
of their growth.
Water
Quality.
Tap
water as supplied by local municipalities often is not conducive to aeroponic
or
hydroponic growth. To address these problems, most hydroponic growers monitor
and chemically adjust the water they use on a daily or weekly
basis.
AeroGrow
believes that the problems associated with the wide range of water chemistry
found throughout the United States (and possibly internationally), as well
as
the complexities involved in monitoring water chemistry, are significant
barriers which limit the use of hydroponic gardening by the general public.
AeroGrow has developed a patent-pending formula that automatically adjusts
and
balances the water to a level capable of sustaining healthy plant growth in
an
aeroponic environment. This formula is pre-mixed into AeroGrow’s time-release
nutrient tablet described above, which eliminates the need for consumers to
understand water chemistry.
Integrated
and Automated Lighting System.
Hydroponic systems typically do not incorporate built-in lighting systems.
Lighting systems must typically be purchased as separate components and
assembled by the consumers. Hydroponic lighting systems generally consist of
a
ballast, reflector hood, lights, and an electronic timer. The consumer must
suspend the lighting system over the hydroponic unit and then continually raise
the lights as the plants grow. Complete lighting systems often cost hundreds
of
dollars, which is considerably more than the cost of AeroGrow’s entire kitchen
garden system.
AeroGrow’s
kitchen garden systems include built-in adjustable grow lights with ballast,
reflector hood, lights and electronic timer. AeroGrow’s integrated lighting
systems include high-output compact fluorescent light bulbs that deliver a
spectrum and intensity of light designed to help optimize plant growth without
natural light. In addition, AeroGrow’s lighting system is fully automated and
controlled by its microprocessor-based control panel described
above.
Adaptive
Growth Software.
Through
continual research and testing in AeroGrow’s grow laboratory, AeroGrow’s plant
scientists have determined that better plant growth can be achieved if
nutrients, moisture, and lighting are adapted and customized to the specific
stages of the plant’s growth: germination, initial growth and advanced growth.
AeroGrow has developed a proprietary software technology entitled “adaptive
growth technology” which automatically analyzes and adjusts the nutrient
delivery schedules based on plant maturity. AeroGrow intends to introduce this
technology into its deluxe kitchen garden system as an added feature for
specialty retailers in the future.
AeroGrow’s
Kitchen Garden Systems
AeroGrow
has initially developed two kitchen garden systems with projected initial retail
prices ranging from approximately $99 to $149 depending on the features and
model selected and the channels of distribution through which they will be
marketed.
Basic
Kitchen Garden System.
AeroGrow’s basic kitchen garden system features its rainforest nutrient delivery
system and an integrated lighting system. This product is projected to retail
for $99. AeroGrow’s microprocessor-based control panel will be available as an
optional accessory with a projected retail price of $29.
Deluxe
Kitchen Garden System.
AeroGrow’s deluxe kitchen garden system contains the features of its basic
kitchen garden system, including the microprocessor-based control panel, and
adds its microprocessor-based nutrient cycle delivery system. AeroGrow has
launched this product in selected retailers and catalogues and currently plans
to launch this product as part of an initial direct marketing campaign in the
second quarter 2006 at a price of $149.
AeroGrow’s
Seed Kits
AeroGrow
has developed and is producing a variety of seed kits to be used in its kitchen
garden systems. These seed kits include pre-seeded bio-grow seed pods and a
3-
to 6-month supply of nutrients, including its formula for adjusting water
quality. AeroGrow expects its seed kits to retail at prices ranging from $14.99
to $19.99. Currently developed seed kits include:
· cherry
tomato garden,
· chili
pepper garden,
· gourmet
herb garden,
· salad
greens garden,
· grandiflora
petunia garden, and
· international
basil garden.
AeroGrow’s
seed kits, time-release nutrient tablets, and replacement light bulbs will
be
sold to consumers for use with its kitchen garden system. Additionally, seed
pods will be sold for use by consumers who wish to try to grow their own seeds,
but no assurance can be given that all varieties of plants will grow with the
AeroGrow kitchen garden system.
Additional
Future Products
In
addition to its kitchen garden systems, AeroGrow is developing and plans to
market in the future companion products designed to provide a successful
gardening experience for consumers of all experience levels while providing
a
potentially continuing and profitable revenue stream for it. AeroGrow’s
development and production of the following additional products will depend
in
large part on the revenues generated from future product sales and the
availability of additional financings.
Magic
Garden.
AeroGrow’s children’s magic garden is designed for simplicity and ease of use.
AeroGrow anticipates introducing this garden system in the toy
market.
Decorator
Office Garden.
AeroGrow is developing a garden system designed specifically for use in offices
and work stations to introduce decorative and fragrant living flowers into
the
workplace.
Professional
System.
A
larger-scale garden system is planned for small businesses, florists,
restaurants, large families and gardening enthusiasts who want to grow large
quantities of vegetables, herbs and flowers.
Future
Seed Kits.
AeroGrow plans to complete development and start producing an additional six
to
ten seed kits in 2006. AeroGrow currently anticipates that these seed kits
could
include strawberries, cilantro garden, sunny flower garden, baby bell peppers,
Asian hot peppers, Italian basil garden, Italian herb garden, French herb garden
and salsa garden with cherry tomatoes, jalapenos, and cilantro.
Other
Additional Future Products.
AeroGrow is considering other products for future development,
including:
· a
solar-powered system for outdoor use,
· educational
units specifically designed for use in schools,
· a
“vacation-friendly” water reservoir attachment that will hold sufficient water
to enable plants to remain healthy for about three weeks while untended,
and
· tiered
“wall farm” systems that will contain several kitchen garden systems designed to
produce larger quantities of crops.
Development
of the additional range of systems, including units for the office, some seed
kits, water reservoir development, and wall units, are included in the estimated
research and development expenses for the future. For other product expansions
and new products, AeroGrow has not budgeted amounts for their research and
development at this time, and in connection therewith may need to raise
additional capital.
Markets
Based
on
AeroGrow’s informal market research, consisting of individual consumer
interviews, focus groups and Internet survey responses, AeroGrow believes that
its kitchen garden systems will appeal to a broad spectrum of the people in
the
United States and internationally, including Europe and Japan. AeroGrow believes
that its products will appeal to at least four major market
segments:
· experienced
gardeners,
· novice
and “want-to-be” gardeners,
· the
kitchen products and small appliances market, and
· the
office and home décor markets.
Further,
based on its discussions with potential distributors, AeroGrow believes that
its
kitchen garden systems also present opportunities in the specialized toy,
educational, gift, and hydroponic hobbyist markets.
Gardener
Market.
The
2002 National Gardening Survey conducted by the National Gardening Association
states that gardening was America’s number one hobby with more than 70 million
active gardeners. In the United States in 2002 there were estimated to be 27
million vegetable gardeners with one out of every four households having a
vegetable garden, over 15 million fresh herb gardeners and over 20 million
flower gardeners. AeroGrow believes that its kitchen garden systems and related
products can offer both expert and novice gardeners several major benefits
not
readily available through traditional gardening methods, including:
· the
ability to grow fresh herbs, lettuces, vegetables, tomatoes and flowers
year-round, regardless of indoor light levels or seasonal weather
conditions,
· the
ability to easily start plants indoors during colder months and then transplant
them outdoors at the onset of the outdoor growing season,
· the
ability to use stem cuttings to propagate multiple reproductions of the desired
plants in AeroGrow’s kitchen garden systems,
· the
reasonable assurance that crops can grow successfully by significantly reducing
potential obstacles such as uncertain weather and garden pests,
· the
ease
of growing hydroponically in contrast to the toil associated with traditional
gardening, including preparing the soil, planting, thinning, weeding and
watering.
“Want-to-be”
Gardener Market.
AeroGrow believes that many people have an interest in gardening but lack the
knowledge, confidence, available space, equipment or time to garden. AeroGrow
has observed the following barriers to beginning to garden:
· gardening
requires an ongoing time commitment,
· apartment,
high-rise and condominium dwellers often lack the land needed for a traditional
garden,
· gardening
requires physical work which can be a significant barrier to older people or
people with limited mobility or health issues,
· buying
the necessary equipment to garden can be expensive, and
· gardening
requires knowledge and expertise.
AeroGrow
believes that its kitchen garden systems overcome many of these barriers and
provide a simple, convenient way for many current non-gardeners to begin to
garden.
Kitchen
Products and Small Appliances Market.
AeroGrow believes that many Americans now enjoy cooking as a form of
entertainment or hobby and that these people repeatedly purchase new kitchen
appliances and will be motivated to purchase AeroGrow’s kitchen garden systems
and related seed kits. Consumers in this potential market include:
· people
interested in cooking who would appreciate the convenience and satisfaction
of
having a readily available supply of fresh-cut herbs and basils to flavor soups,
salads and other dishes,
· people
who prefer the distinctive texture and taste of freshly picked, vine-ripened
tomatoes, basils, lettuces and other vegetables over days-old supermarket
produce, and
· people
interested in healthy, pesticide-free foods for themselves and their families,
reflecting both the rapidly growing interest in naturally and organically grown
foods and the increasing number of people who, for health or weight concerns,
include salads and fresh vegetables as part of their families’
diets.
AeroGrow
believes that its kitchen garden systems will be embraced in this market by
people who understand the value of having an ongoing supply of fresh herbs
and
vine-ripened produce throughout the year.
Office
and Home Decor Market.
Flowers
are frequently used to brighten homes and offices around the world. It is
difficult to readily grow flowers indoors due to a lack of sufficient light
and
growing knowledge. As a result, people often use cut flowers which are
expensive, short-lived and require ongoing maintenance. AeroGrow’s kitchen
garden systems enable colorful and fragrant flowers to be easily grown indoors
year-round. Flowers grown with its kitchen garden systems will last for months
with minimal care and maintenance. Flowers can be grown in a wide variety of
indoor locations, including kitchen and bathroom countertops, living rooms,
bedrooms, family rooms, offices, work stations, waiting rooms, and lobbies.
In
addition, professional plant caretakers may be motivated to include AeroGrow’s
kitchen garden systems among their traditional plant options because of the
relatively low cost and ease of maintenance of AeroGrow’s systems.
Specialty
Markets.
AeroGrow’s informal market research indicates that several specialized markets
potentially exist for AeroGrow’s kitchen garden systems in the future,
including:
· toy
market for a children’s “root-viewing” garden,
· classroom
market for student education relating to plant growth,
· gift
market,
· hydroponic
enthusiast market, and
· international
markets, particularly in large cities with limited outdoor garden space.
Marketing
and Sales Strategy
AeroGrow
began launching its kitchen garden system in the United States during the first
quarter of 2006 with a nationwide public relations campaign. Initial test
marketing shipments to retail launch partners, including Sur La Table,
Frontgate, and others commenced in March 2006. As launch partners, the Company
had agreed to feature Sur La Table and Frontgate in the Company’s public
relations efforts. In addition, the Company agreed to pay to Sur La Table a
$30,000 fee for a full page advertisement in Sur La Table’s catalogue
distributed to over one million consumers. With regard to Frontgate, the Company
granted exclusive rights within a select group of catalogue retailers through
December 1, 2006 in exchange for Frontgate’s agreement to provide full page
advertisements within their catalogues for the AeroGarden through the end of
2006. AeroGrow
has developed many of its marketing materials, including its website, product
brochures, retail packaging, and other retail collateral materials and public
relations kits. Additional development is in process for in-store point of
purchase supplies, infomercial and short-form television show, and print media
items. Many of these items will be completed in the period of March to June
2006. AeroGrow’s planned marketing strategy is to follow this initial launch
with sales of its products through direct marketing vehicles and then expanded
distribution through retail channels as described below in “AeroGrow’s Plan of
Operation.” AeroGrow plans to expand its marketing and distribution
internationally when its products have been successfully launched and
established in the United States. AeroGrow’s proposed direct marketing
activities may include a 60-second television spots, 30-minute infomercials,
home shopping networks, print advertising, and Internet-based advertising.
AeroGrow’s plan is designed to educate prospective customers while creating
widespread awareness of its kitchen garden systems and generating direct sales
in four key target markets: the experienced gardener market, the “want-to-be”
gardener market, the kitchen products and small appliances markets, and the
office and home décor market.
Competition
Aeroponic
and hydroponic technologies have historically been limited to ardent hobbyists
and commercial growing facilities worldwide. AeroGrow believes that it is the
first company to develop and offer a simple soil-less indoor growing system
for
the mass consumer market. AeroGrow further believes that its proprietary and
patent-pending technologies, trade secrets, and product development efforts
to
date will provide certain barriers to entry for potential
competitors.
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. AeroGrow
believes that these products are substantially more expensive than the proposed
selling prices of the Company’s products.
AeroGrow
believes that its simplified and complete kitchen garden systems and planned
methods of distribution offer significant benefits from these traditional
hydroponic industry practices. However, AeroGrow recognizes that there are
companies that are better funded and have greater experience in producing
hydroponic products in commercial markets, including, but not limited to,
companies such as General Hydroponics and American Hydroponics. These companies
could potentially decide to focus on the consumer market with competing
products. AeroGrow could also potentially face competition from gardening
wholesalers and large and profitable soil-based gardening companies, including,
but not limited to, the Burpee Seed Company and Gardener’s Supply Company,
should they decide to produce a competitive product.
Nevertheless,
AeroGrow believes that its kitchen garden systems and related products can
compete effectively in the marketplace on the basis of their affordable cost,
user-friendly design, and the benefits offered by its proprietary and
patent-pending technologies. Further, to the best of AeroGrow’s knowledge, none
of the growing systems currently available for use in the home at AeroGrow’s
projected retail prices provide an integrated grow lighting system and are
therefore unsuited to growing fresh herbs, vegetables, and flowers indoors
without the additional purchase of a separate bulky lighting system.
Manufacturing
AeroGrow
manufactures its products using contract manufacturing sources that are
supervised by its internal engineering and manufacturing teams. Its bio-grow
seed pods will initially be produced and assembled in its laboratory facilities
in Longmont, Colorado.
AeroGrow
has signed a tri-party manufacturing agreement with Source Plus, Inc., an
Alabama corporation (“Source Plus”), and Mingkeda Industries Co., Ltd., a
Chinese company (“Mingkeda”), for the initial manufacture of its kitchen garden
systems and accessories. Source Plus assisted AeroGrow in identifying companies
in China that had the capability to manufacture AeroGrow’s kitchen garden
systems. Source Plus advanced monies to Mingkeda for tooling and molds to build
AeroGrow’s products. To reimburse Source Plus for its advances to Mingkeda for
tooling, AeroGrow issued 62,000 shares of its common stock to Source Plus in
October 2005 . AeroGrow recorded a $310,000 asset for tooling which AeroGrow
will depreciate over a period of three years to reflect the estimated useful
life of the tooling. Source Plus is also obligated to provide quality control
inspection services at Mingkeda’s factory for AeroGrow.
Mingkeda
has informed AeroGrow that it can produce approximately 25,000 kitchen garden
systems per month with its existing set of tools and can increase its production
to approximately 100,000 kitchen garden systems per month by adding an
additional set of tools and injection molding presses. Mingkeda estimates that
it can add the additional set of tools and presses within 60 to 90 days
following AeroGrow’s notification. There is no assurance that Mingkeda will be
able to meet the projected estimated deliveries. If it is not able to meet
the
orders, the Company’s sales will be adversely effected. To date, AeroGrow has
received approximately 5,000 units from Mingkeda with over 10,000 additional
units in process. In addition to the Mingkeda plant, AeroGrow is exploring
relationships with other manufacturers located in China as an alternative supply
source should sales volumes require added production. In the event Mingkeda
in
unable to meet its anticipated production capacity before AeroGrow is able
to
develop additional contract manufacturing sources, sales could be adversely
affected if sales demand exceed production capacity.
AeroGrow’s
manufacturing costs for its initial model of the AeroGarden are anticipated
to
allow AeroGrow to achieve gross margins before selling expenses from wholesale
sales ranging from 40% to 50% once manufacturing volumes are at a sufficient
level (in excess of 10,000 per month) to enable AeroGrow to i) achieve economies
of scale in its seed kit production; ii) obtain volume discounts for parts
and
components related to the manufacture of its kitchen garden systems; and iii)
minimize transportation and logistics costs. However, no assurance can be given
that such volume will be realized, that the price of our products will not
be
subject to downward price pressure, or that our margins will be attained or
maintained.
AeroGrow
intends to initially produce and assemble its bio-grow seed pods in its
laboratory facilities in Longmont, Colorado. The seed pods and kitchen garden
systems will be shipped to a fulfillment center in Reno, Nevada. Innotrac
Corporation will provide warehousing, order fulfillment and shipping for
AeroGrow’s products. AeroGrow’s agreement with Innotrac is described below at
“Distribution.”
Product
Returns and Warranties
AeroGrow
has had limited sales to date and thus has no experience dealing with returns.
AeroGrow currently anticipates that products may be returned to it at its
facilities in Longmont, Colorado. AeroGrow anticipates that the returned
products will go to inventory and AeroGrow may repair the products to sell
as
refurbished products. Mingkeda will provide AeroGrow with replacement part
assemblies for products which are deemed defective due to materials or
manufacturing complications. AeroGrow have not yet determined the form of
warranties AeroGrow will grant for its products.
Intellectual
Property
AeroGrow
has filed 14 patent applications in the United States to protect its
technologies and products. These applications are for:
· seed
germination pods that transport, support, and germinate seedlings in aeroponic
or hydroponic devices and support the growth of the plant to maturity (filed
in
November 2003, application serial number 10/714,786, and responded to examiner’s
second action),
· use
of
infrared beams to measure plant roots which creates a basis for the regulation
of nutrients, oxygen and plant growth (filed in December 2003, application
serial number 10/748,321, and responded to examiner’s first
action),
· PONDS
(passive, osmotic nutrient delivery system) technology which is a nutrient
delivery system using no moving parts (filed in March 2005, application serial
number 11/079,054),
· RAIN
(rain-aerated ionized nutrient) system technology which hyper-oxygenates and
ionizes plant roots in AeroGrow’s kitchen garden systems (filed in March 2005,
application serial number 10/528,110),
· rainforest
growing dome for maximizing germination (filed in April 2005, application serial
number 11/098,176, and responding to examiner’s second action),
· growing
basket for optimizing liquid and nutrient delivery (filed in April 2005,
application serial number 11/111,553, and responding to examiner’s second
action),
· methods
for growing plants using seed germination pods (filed in April 2005, application
serial number 11/112,269, and responding to examiner’s second
action),
· devices
and methods for growing plants by measuring liquid or nutrient usage rate,
the
adaptive growth learning technologies (filed in December 2005, application
serial number 11/321,368),
· time-release
oxygen generating nutrient compositions and methods for growing plants (filed
in
December 2005, application serial number 11/321,910),
· pH
buffered plant nutrient compositions and methods for growing plants (filed
in
December 2005, application serial number 11/321,023),
· apparatus
and methods for delivering photoradiation to plants (filed in June 2006,
application serial number 60/814,853),
· smart
garden devices and methods for hydroponic gardens (filed in June 2006,
application serial number 11/455,364),
· indoor
gardening appliance (filed in August 2005, application serial number
29/235,880), and
· master
gardener baskets and methods for growing plants (filed in August 2006,
application serial number 60/840,575).
AeroGrow
believes that these patent applications do not infringe on issued patents owned
by others. AeroGrow believes that failure to obtain patents will enable
competition to more easily bring competitive products to market, which could
adversely effect AeroGrow’s operations if such competitive products performed
better and/or were marketed by companies with greater financial and distribution
resources than AeroGrow. In addition to the patents being sought, AeroGrow
maintains some crucial information about its products as trade secrets. The
inventions under the patent applications have not been granted patents, and
there can be no assurance that patents will be granted.
AeroGrow
has filed 14 trademark applications in the United States and three trademark
applications designating 33 countries which it intends to prosecute to protect
its products and brand equity. The applications are for:
· Farmers
Market Fresh (filed in July 2005, application serial number 78671280, and
responded to examiners’ first action),
· Kitchen
Harvest (filed in December 2005, application serial number 78781094),
· AeroGarden
(filed in December 2005, application serial number 78781935),
· Farmer’s
Market in Your Kitchen (filed in March 2006, application serial number
78836826),
· We
Grow
Green Thumbs (filed in March 2006, application serial number
78836659),
· Off
the
Plant and Into the Pot (filed in March 2006, application serial number
78836758),
· Cut
&
Cook (filed in March 2006, application serial number 78836746),
· Bio-Dome
(filed in March 2006, application serial number 78836718),
· AeroPod
(filed in March 2006, application serial number 78836577),
· AeroGarden
(filed in Mexico in June 2006, application serial number 790722),
· AeroGarden
(filed in 31 countries under the Madrid Protocol in June 2006, application
serial number A0005030),
· AeroGarden
(filed in Canada in June 2006, application serial number
1,305,822),
· International
Gourmet (filed in May 2006, application serial number 78874379),
· Farmer’s
Market Fresh (filed in May 2006, application serial number
78882877),
· AeroGrow
(filed in April 2005, application serial number 78614573, and responded to
examiners first action),
· MiniGarden
(filed in August 2006, application serial number 78955675), and
· GrowNow
(filed in August 2006 application serial number 78955695).
Each
of
AeroGrow’s employees, independent contractors, and consultants has executed
assignment of application agreements and nondisclosure agreements. The
assignment of application agreements grant to AeroGrow the right to own
inventions and related patents which may be granted in the United States. The
nondisclosure agreements generally provide that these people will not disclose
AeroGrow’s confidential information to any other person without its prior
written consent. AeroGrow has also obtained the domain names for AeroGrow.com
and AeroGarden.com, AeroGarden.net and AeroGarden.biz, among
others.
Governmental
Regulation and Certification
To
the
best of its knowledge, AeroGrow believes that it is complying with United States
regulations concerning the shipping and labeling of seeds and nutrients.
Currently, the components for the kitchen garden system are UL certified.
AeroGrow has filed initial applications for UL certification and ETL
certification for the kitchen garden system as a whole. 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.
Personnel
AeroGrow
currently employs approximately 43 persons with 28 full-time and 15 part-time.
In addition, AeroGrow contracts for the services of 31 part-time and project
consultants. AeroGrow believes that its employee relations are good. AeroGrow
intends to continue to conduct its business primarily using employees, and
it is
likely that some consultants will become employees in the future, including
its
chief marketing officer, Randy Seffren. AeroGrow believes that it will hire
additional employees and/or consultants in the future as its operations grow.
AeroGrow is planning to outsource some activities, in whole or part, such as
manufacturing, telemarketing, public relations, infomercial production,
fulfillment and shipping.
Facilities
AeroGrow
leases approximately 918 square feet in Boulder, Colorado, pursuant to a lease
agreement that expires on December 30, 2005, which was extended on a
month-to-month basis. AeroGrow maintains a grow room, laboratory and research
facility in this space. The lease agreement requires AeroGrow to pay monthly
rent in the amount of $1,000.
`
AeroGrow
leases approximately 800 square feet in Boulder, Colorado, pursuant to a
month-to-month rental agreement. AeroGrow is preparing this space to use as
an
additional laboratory facility. The rental agreement requires AeroGrow to pay
monthly rent in the amount of $700.
AeroGrow
leases 3,075 square feet of office space in Boulder, Colorado, from one of
its
consultants pursuant to a lease agreement that expires in April 2006. The lease
agreement requires AeroGrow to pay monthly rent in the amount of $2,534.
AeroGrow is also required to issue 1,267 shares of AeroGrow common stock per
month to this consultant as additional rent for an aggregate of 7,604 additional
shares through the end of the lease. AeroGrow plans to renew this lease in
April
2006 with rental payments solely in cash.
AeroGrow
also rents 1,800 square feet of laboratory, prototyping and manufacturing space
in Longmont, Colorado, pursuant to a month-to-month rental agreement. The rental
agreement requires AeroGrow to pay monthly rent in the amount of $1,200.
AeroGrow uses this space to manufacture its seed pods.
While
its
facilities appear adequate for the foreseeable future, AeroGrow may add space
to
meet future growth as needed. Upon expiration of its current leases, AeroGrow
believes that it will be able to either renew its existing leases or arrange
new
leases in nearby locations on acceptable terms. AeroGrow believes that these
properties are adequately covered by insurance.
Legal
Proceedings
AeroGrow
is not a party in any bankruptcy, receivership or other legal proceeding, and
to
the best of AeroGrow’s knowledge, no such proceedings by or against AeroGrow
have been threatened.
PLAN
OF OPERATIONS
The
following plan of operation provides information which AeroGrow’s management
believes is relevant to an assessment and understanding of AeroGrow’s business,
operations and financial condition. The discussion should be read in conjunction
with the audited financial statements and notes thereto which are included
in
this Memorandum. This plan of operation contains forward-looking statements
that
involve risks, uncertainties and assumptions. AeroGrow’s actual results may
differ substantially from those anticipated in any forward-looking statements
included in this discussion as a result of various factors, including those
set
forth in “Risk Factors.”
Overview
AeroGrow
is in the business of developing, marketing and distributing advanced indoor
aeroponic garden systems. Since formation, through its development stage ending
February 2006, its principal activities consisted of product research and
development, market research, business planning and raising the capital
necessary to fund these activities. AeroGrow has completed development of its
kitchen garden systems and related bio-grow seed pods, has contracted with
a
third-party manufacturer who has commenced production activities and has
actively began sales activities as of March 2006. AeroGrow
placed its initial manufacturing order for 4,000 units in December 2005 and
began taking delivery of units in the first quarter of 2006. AeroGrow
commenced its initial marketing and distribution of its products in the first
quarter of 2006.
Liquidity
and Capital Resources
As
of
March 31, 2006, AeroGrow has generated net proceeds from the sale of the
following securities:
· $2,279,444
from private placements of 2,040,611 shares of its common stock during 2002,
2003, and 2004,
· $215,000
from the exercise of its redeemable $1.25 warrants and $2.50 warrants for
164,000 shares of common stock in 2003, 2004, and through June 30,
2005,
· $2,307,737
from a Colorado registered offering of units consisting of 544,228 shares of
common stock and its redeemable $10.00 warrants and $15.00 warrants during
2004,
· $2,591,554
from its debt offering of convertible notes and redeemable 2005 warrants in
June, July, August, and September 2005,
· $8,000
from the issuance of 1,600 shares of common stock pursuant to an agreement
with
an employee at $5.00 per share during the period June 30, 2005 through September
30, 2005,
· $85,000
from the issuance of 38,000 shares of common stock pursuant to the exercise
of
$1.25 and $2.50 warrants,
· $962,500
from the exercise of outstanding $1.25, $2.50 and $5.00 warrants for 395,000
shares of common stock during December 2005, and
· $8,964,952
in net proceeds from the sale of common stock and warrants in the 2006 Offering,
consummated February 24, 2006 and March 1, 2006 (see “Private Placement in
Connection with Merger” in Item 2.01.
As
of
March 31, 2006, AeroGrow had a cash balance of approximately $8,840,168. This
amount of cash capital will be sufficient to meet its liquidity requirements
for
the next 12 to 18 months. AeroGrow anticipates its principal sources of
liquidity during 2006 will be the net proceeds from the 2006 Offering and
proceeds from initial sales of AeroGrow’s products.
AeroGrow
expects to incur additional losses in the foreseeable future and at least until
such time as it successfully launches its marketing and public relations
campaigns generating wide scale domestic and international sales and
distribution for its products and successfully obtains additional contract
manufacturers needed for volume production of its products. Accordingly, there
is no historical financial or other information about AeroGrow which you could
use to determine its future performance.
AeroGrow
has used the funds raised to date to:
· complete
the research and development of its basic and deluxe kitchen garden
systems,
· commence
manufacturing of its deluxe kitchen garden system and six varieties of seed
kits,
· commence
development of its direct response marketing advertisements including one
30-minute infomercial and 60-second television commercials, and
· commence
development of its public relations launch scheduled for the first half of
2006.
AeroGrow
anticipates that existing cash resources will be sufficient to complete these
activities. AeroGrow plans to launch the sale of its kitchen garden systems
nationally through a direct-to-consumer advertising campaign and through
selected retail outlets and to date has shipped products to Sur La Table, a
retailer, and Frontgate, a nationally recognized catalogue. AeroGrow intends
to
use its working capital principally to purchase inventory, fund its initial
media advertising, and fund a portion of its public relations campaign and
trade
show costs.
Plan
of Operation
During
the balance of 2006, AeroGrow intends to expand its efforts in manufacturing,
marketing, distributing, and selling its kitchen garden systems. Manufacturing
activities began in January 2006 for pilot production and production capacity
is
being expanded, both in terms of capacity at its current contract manufacturer
as well as seeking additional contract manufacturers, for the balance of
calendar year 2006. AeroGrow intends to complete its infomercial in the second
calendar quarter of 2006 and begin test marketing. Initial test marketing
shipments to retail launch partners, including Sur La Table, Frontgate and
others commenced in March 2006. In order to transition from its development
stage to an operating company, AeroGrow has strengthened its management team
with the addition of a Vice President of Sales, a Vice President of Operations,
a new Chief Financial Officer and other operations and administrative staff.
AeroGrow also is expanding its new product development activities to sustain
operations beyond its initial product offerings.
AeroGrow
has developed many of its marketing materials, including its website, product
brochures, retail packaging and other retail collateral materials and public
relations kits. Additional development is in process for in-store point of
purchase supplies, infomercial and short-form television show, and print media
items. Many of these items will be completed in the period of March to June
2006.
AeroGrow’s
plan of operation for the balance of the 2006 and early 2007 fiscal years will
depend, in part, on the assumptions used to develop its business plan and
whether they were or have been inaccurate or need to be changed to respond
to
different assumptions or different business needs or objectives. Any changes
could cause the working capital to be insufficient to fund its operations and
it
could be required to seek additional financing sooner than it currently
anticipates.
Manufacturing.
AeroGrow
plans to manufacture its products using contract manufacturing sources that
are
supervised by its internal engineering and manufacturing teams. Its bio-grow
seed pods will initially be produced and assembled in its laboratory facilities
in Longmont, Colorado.
On
September 30, 2005, AeroGrow entered into a manufacturing agreement with Source
Plus, Inc. (“Source Plus”) an Alabama corporation, and Mingkeda Industries Co.,
Ltd. (“Mingkeda”), a Chinese company located in the Guangdong Province of China
that has primarily manufactured light fixtures in the past. This agreement
supersedes a prior agreement with Mingkeda and Source Plus. Under the terms
of
this agreement, Source Plus advanced monies to Mingkeda for tooling and molds
to
build AeroGrow’s products. To reimburse Source Plus for its advance to Mingkeda,
AeroGrow issued 62,000 shares of its common stock to Source Plus in October
2005. AeroGrow recorded a $310,000 asset for tooling which AeroGrow will
depreciate over a period of three years to reflect the estimated useful life
of
the tooling. AeroGrow and Source Plus have agreed to certain selling
restrictions on its sale of AeroGrow common stock. In the event certain capital
raising is not completed by June 1, 2006, Source Plus may require AeroGrow
to
repay the $155,000 in exchange for its return of AeroGrow stock. If the market
value of AeroGrow common stock issued to Source Plus is less than $155,000
one
year after the closing of the 2006 Offering, then AeroGrow has agreed to pay
such difference to Source Plus in cash within 60 days following the one year
date, plus interest at 5% per annum. Further, in return for a $0.50 per unit
price concession from Mingkeda for products AeroGrow has purchased, AeroGrow
issued 10,000 shares of its common stock to Mingkeda in October 2005. These
shares are subject to the same selling restrictions as the stock issued to
Source Plus. AeroGrow recorded a $50,000 expense for inventory which AeroGrow
will charge to cost of sales at a rate of $0.50 per unit for each unit sold
or
one year, whichever occurs sooner.
The
new
agreement provides for payment of the purchase price of products manufactured
by
Mingkeda as follows: 30% paid 25 days prior to shipment, 50% paid upon shipment,
and the remaining 20% paid 20 days after shipment. The purchase price is
determined based upon a fixed percentage (29% except for light bulbs which
are
14%) for profit, overhead and labor applied to actual component costs. AeroGrow
has also agreed to pay to Source Plus a commission of 2% of the total purchases
of the product with such payments to be made using the same proportions as
AeroGrow’s payments to Mingkeda. In addition, Source Plus is entitled to receive
2% of all purchases by AeroGrow of kitchen gardens, from all sources, for a
period of 18 months from the date of the initial shipment from Mingkeda.
Mingkeda will manufacture and ship the products as and when required by AeroGrow
and will maintain an agreed level of quality. Mingkeda has agreed to develop
sufficient capacity to manufacture up to 25,000 kitchen garden systems per
month. AeroGrow will have the right to audit Mingkeda’s manufacturing
performance periodically and maintain an agent in the Mingkeda plant to inspect
its production. AeroGrow believes that its products will be manufactured to
the
highest quality standards at acceptable costs. In order to diversify its risk
to
a single manufacturer, as well as provide for capacity beyond that of Mingkeda,
AeroGrow is actively seeking additional contract manufacturing
sources.
The
manufacturing agreement with Mingkeda and Source Plus provides for protection
of
the intellectual property rights of AeroGrow. Under the agreement, Source Plus
is specifically responsible for working as the liaison between AeroGrow and
Mingkeda with responsibility for oversight of quality control in the
manufacturing of the products, reviewing of specifications and making sure
that
Mingkeda complies, monitoring order fulfillment, and similar tasks related
to
quality of the finished goods. Source Plus receives a 2% commission for their
work. Mingkeda manufactures the product to the specifications of AeroGrow at
a
predetermined line item component and assembly cost and is subject to cost
fluctuations only due to changes in exchange rate and cost of raw materials,
which must be pre-approved by AeroGrow.
Public
Relations Program.
During
the first calendar quarter of 2006, AeroGrow initiated a public relations
program designed to gain a wide exposure for AeroGrow and its kitchen garden
systems through news stories:
· on
radio
and television,
· in
food
and gardening sections of newspapers,
· in
food
and gardening magazines, and
· on
the
Internet.
AeroGrow’s
products were sent to selected major food and gardening editors, other
recognized gardening and cooking authorities and celebrities to familiarize
them
with the products. The public relations program to date has yielded placements
in newspapers such as the New
York Times,
magazines such as Readers
Digest,
and
television shows such as Good Morning America. AeroGrow signed a letter
agreement with Patrice Tanaka & Company, Inc. (“Tanaka”) in June 2005, to
manage its public relations activities. This agreement is cancelable by either
party at any time. AeroGrow has agreed that, through March 2006, 25% of Tanaka’s
hourly compensation will be paid in shares of its common stock at the then
current market or fair value. The total stock compensation payable to Tanaka
as
of March 31, 2006 is 11,354 shares, and the Company recorded $56,770 in
compensation. AeroGrow expects Tanaka to execute a lock-up agreement with
restrictions similar to those agreed to by KRM Fund. AeroGrow anticipates
continuing to have Tanaka manage public relations activities through March
2007.
Direct
Response Marketing and Sales.
AeroGrow
will begin testing various direct marketing advertisements during the second
calendar quarter of 2006 including:
· 60-second
television commercials,
· 30-minute
infomercials,
· home
shopping networks, and
· print
and
Internet advertising.
AeroGrow
will develop a plan based on the results of this testing to generate direct
sales nationally in the experienced gardener market, the “want-to-be” gardener
market, the kitchen products and small appliance markets, and the office and
home décor markets.
AeroGrow
receives the full retail selling price for its products when AeroGrow markets
directly to consumers, which yields higher gross profit margins than sales
made
at wholesale prices. However, the gross margins for direct-to-consumer sales
have a higher marketing cost associated with them. Accordingly, the level of
product awareness achieved by these direct marketing programs will depend on
the
level of consumer response generated by AeroGrow’s advertisements. The consumer
response, in turn, generates revenues which allows AeroGrow to maintain higher
levels of media expenditures.
AeroGrow
entered into an agreement with Respond2, Inc. (“Respond2”) to develop and
produce one 30-minute infomercial and 60-second television commercials. AeroGrow
has paid to Respond2 a creative fee of $15,000 in cash plus 3,000 shares of
its
common stock (for which the Company recorded $5,000 in compensation expense).
AeroGrow also agreed to pay to Respond2 all actual approved production costs
currently estimated at approximately $400,000, and a profit percentage equal
to
33% of the production costs. The profit percentage will be paid in shares of
AeroGrow’s common stock valued at 80% of the then current market price. AeroGrow
currently estimates that the total compensation payable to Respond2 during
the
term of this agreement will be approximately $415,000 in cash and 30,000 shares
of common stock (for which the Company will record $150,000 of compensation
expense).
AeroGrow
intends to launch its products nationally through direct response marketing
channels and to maintain a dedicated e-commerce website. AeroGrow plans to
initially allocate $1.9 million to purchase television time for direct response
advertising, $200,000 to purchase print advertisements in newspapers and
magazines and $50,000 to maintain its website.
Retail
Marketing and Sales.
During
the 2006 fiscal year, AeroGrow plans to expand the distribution of its products
to additional channels including:
· television
shopping networks,
· catalog
companies, and
· specialty
retailers including cooking and gourmet, gardening, and housewares.
AeroGrow
has developed a nationwide network of manufacturer sales representative
organizations with experience in each of these retail categories to manage
sales
activities for these channels. These sales representatives will be independent
contractors compensated by commission based on the sales they generate. Although
AeroGrow’s gross profit margins will be lower when selling through retail
channels, AeroGrow will not incur the relatively higher advertising costs
associated with its direct response marketing. AeroGrow’s ability to establish
and maintain sales through retail channels will depend on the success of its
public relations and direct marketing campaigns in generating awareness for
its
products, the retailers’ ability and willingness to merchandise its products,
and consumer acceptance for its kitchen garden systems.
Distribution.
AeroGrow’s
kitchen garden systems will be shipped from its manufacturer in China primarily
via ocean cargo to a fulfillment center in Reno, Nevada, however, initial
shipments are being shipped via airfreight to meet customer delivery dates
and
allow for additional quality inspection during the early stages of production.
Its seed pods are being shipped from its manufacturing facility in Longmont,
Colorado, to the fulfillment center. AeroGrow has contracted with Innotrac
Corporation (“Innotrac”), a Georgia corporation, to fulfill, store and ship its
products. Innotrac will provide warehousing, order packing and shipping for
the
products sold through both its direct response channels and retail channels
on
primarily a variable cost basis. Costs for warehousing, order packing, and
shipping for the products sold through direct response channels are estimated
to
be about $1.50 to $2.00 per units plus actual freight costs forecasted between
$5.00 and $10.00 per order. These costs are included in the shipping and
handling charge paid by the direct response purchaser. For retail distribution,
the costs for warehousing, order packing, and shipping are estimated to be
between $.50 and $1.00 per unit because of the efficiencies gained in shipping
larger quantities per order. Freight costs will vary significantly depending
upon quantity ordered and destination, but they are projected to be in the
range
of 2% to 4% of the sales net of reimbursement from customers. Innotrac also
provides payment processing, database management, and customer support services
for the direct response sales. These costs are projected to be approximately
2.5% of sales for payment processing and 1% of sales for customer support,
with
database management costs included in the foregoing. The contract with Innotrac
is for an initial term of three years, but provides for termination by either
party on 90 days written notice.
AeroGrow
is negotiating with a telemarketing company to provide operators who will take
calls from consumers responding to its direct response marketing. These orders
and the orders received on its website will be provided to Innotrac once each
day to be fulfilled. Telemarketing costs per order are projected at 4% of direct
response sales.
International
Sales. Once
AeroGrow has established consumer acceptance of its products in the United
States, it intends to actively seek to establish international distributors
in
key markets in Europe and Asia. Its goal is to partner with successful
distribution companies that possess both direct and retail marketing experience.
These partnerships will most likely be in the form of exclusive distributor
or
licensing agreements tied to performance criteria. AeroGrow anticipates that
such distributors will modify AeroGrow’s marketing and advertising materials
developed for United States’ markets for use in their respective
markets.
Inflation
and Seasonality. AeroGrow
does not expect inflation to have a significant effect on its operations in
the
foreseeable future. Because its kitchen garden systems are designed for an
indoor gardening experience, it is possible that AeroGrow may experience slower
sales in the United States during April through September when its consumers
may
tend to garden outdoors. However, AeroGrow currently anticipates increased
sales
during the holiday season in the fourth calendar quarter and in the first
calendar quarter due to additional marketing AeroGrow plans to
undertake.
Research
and Development
During
the year ended December 31, 2005, AeroGrow incurred $577,302 in research and
development costs. During the year ended December 31, 2004, AeroGrow incurred
$333,253 in research and development costs. During the year ended December
31,
2003, AeroGrow incurred $344,164 in research and development costs. AeroGrow
initially focused its efforts on determining if an aeroponic product could
be
developed for consumer use in the home at attractive prices. AeroGrow then
focused on developing the design, technology and various prototype models.
In
addition, AeroGrow set up a greenhouse and laboratory to measure the success
of
growing herbs, vegetables, and flowers with various seeds, cuttings and
nutrients under different lighting conditions. Finally, AeroGrow filed patent
applications for the technology used in its kitchen garden systems.
In
the
next 12 months AeroGrow intends to continue researching and developing new
product designs and product extensions including, but not limited to, nutrient
delivery systems and additional seed varieties for its seed kits.
Off-Balance
Sheet Arrangements
AeroGrow
has certain current commitments under operating leases and has not entered
into
any capital leases or contracts for financial derivative instruments such as
futures, swaps and options.
Critical
Accounting Policies and Estimates
Significant
estimates include valuation of AeroGrow’s non-monetary transactions in
connection with issuances of common stock and common stock warrants and options.
This estimate has had a material or substantial effect upon AeroGrow’s
operations.
RISK
FACTORS
The
business, financial conditions and operating results of AeroGrow could be
adversely affected by any of the following factors, in which event the value
of
the equity securities of AeroGrow could decline, and investors could lose part
or all of their investment. The risks and uncertainties described below are
not
the only ones that the combined company faces. Additional risks and
uncertainties not presently known to management, or that management currently
thinks are immaterial, may also impair future business
operations.
Because
AeroGrow has a limited operating history, AeroGrow may not be able to
successfully manage its business or achieve profitability.
AeroGrow
has a limited operating history upon which you can base your evaluation of
its
prospects and the potential value of its common stock. AeroGrow is just now
starting to produce its garden systems and seed kits. AeroGrow is confronted
with the risks inherent in a start-up company, including difficulties and delays
in connection with the production and sales of its kitchen garden systems,
operational difficulties, and its potential under-estimation of production
and
administrative costs. If AeroGrow cannot successfully manage its business,
AeroGrow may not be able to generate future profits and may not be able to
support its operations.
AeroGrow
has incurred substantial losses since inception and may never achieve
profitability.
Since
AeroGrow commenced its operations in 2002, AeroGrow has incurred substantial
operating losses. For the year ended December 31, 2005, AeroGrow had a net
loss
of $7,717,577; for the year ended December 31, 2004, AeroGrow had a net loss
of
$2,389,044; and for the year ended December 31, 2003, AeroGrow had a net
loss of $1,159,535. AeroGrow’s losses from operations have resulted in an
accumulated deficit of $11,862,369 at December 31, 2005. AeroGrow expects that
its operating expenses will outpace revenues for the near future and result
in
continued losses. The success of its business will depend on its ability to
introduce and sell its kitchen garden systems to consumers and develop new
product extensions and applications. You should consider the costs and
difficulties frequently encountered by companies in their early stages of
launching a product and establishing a market presence. There is no assurance
that AeroGrow will ever obtain profitability which may lead to the entire loss
of your investment.
If
AeroGrow’s kitchen garden systems fail to perform properly, its business could
suffer with increased costs and reduced income.
Although
AeroGrow has been internally testing its products in its laboratories and with
users for three years, its products may fail to meet consumer expectations.
AeroGrow has had no experience in returns and has no history with respect to
warranty claims for its products. AeroGrow may be required to replace or repair
products or refund the purchase price to consumers. Failure of AeroGrow’s
products to meet expectations could:
· damage
its reputation,
· decrease
sales,
· incur
costs related to returns and repairs,
· delay
market acceptance of its products,
· result
in
unpaid accounts receivable, and
· divert
its resources to remedy the malfunctions.
AeroGrow
may need additional capital to fund its growth.
AeroGrow
anticipates that it has sufficient capital to satisfy its requirements for
the
next 12 to 18 months. However, AeroGrow may require additional capital to
support its growth and cover operational expenses as AeroGrow expands its
marketing and product development. AeroGrow may need to issue equity, debt,
or
securities convertible into equity which will dilute the current stock ownership
in AeroGrow. If AeroGrow cannot obtain additional financing on reasonable terms,
AeroGrow may not have sufficient capital to operate its business as planned
and
would have to modify its business plan or curtail some or all of its
operations.
If
the holders of AeroGrow’s convertible notes choose repayment instead of
conversion or the extension of maturity, AeroGrow will not be able to implement
its full plan of operation.
AeroGrow’s
convertible notes with an aggregate principal amount of $30,000 are repayable
on
demand at any time after June 30, 2006, unless converted into shares of
AeroGrow’s common stock. In addition, $840,000 of principal amount will be
repayable on December 31, 2006 unless converted. If these holders choose to
demand payment rather than converting their notes to common stock, up to
$870,000 of principal plus related interest may have to be paid. If such holders
choose not to convert or extend the maturity, AeroGrow would use a portion
of
its current capital to repay the convertible notes instead of funding its full
plan of operations, and AeroGrow may not be able to maximize revenues or
profitability.
AeroGrow’s
intellectual property and proprietary rights give it only limited protection
and
can be expensive to defend.
AeroGrow’s
ability to produce and sell kitchen garden systems exclusively depends in part
on securing patent protection for the components of its systems, maintaining
various trademarks and protecting its operational trade secrets. To protect
its
proprietary technology, AeroGrow relies on a combination of patents pending
(and
if granted, patents), trade secrets, and non-disclosure agreements, each of
which affords only limited protection. AeroGrow owns the rights to 13 United
States patent applications and one foreign patent application. However, these
patent applications may not result in issued patents and even issued patents
may
be challenged. AeroGrow plans to begin selling its kitchen garden systems prior
to receiving issued patents relating to its patent applications. All of
AeroGrow’s intellectual property rights may be challenged, invalidated, or
circumvented. Claims for infringement may be asserted or prosecuted against
AeroGrow in the future and AeroGrow may not be able to protect its patents,
if
any are obtained, and intellectual property rights against others. AeroGrow’s
former employees or consultants may violate their non-disclosure agreements
with
AeroGrow, leading to a loss of proprietary intellectual property. AeroGrow
also
could incur substantial costs to assert its intellectual property or proprietary
rights against others.
AeroGrow
might not be able to hire and retain personnel with the appropriate experience
and talent to build its sales and marketing capability which will negatively
affect future revenue.
AeroGrow
intends to expand its sales and marketing personnel with additional hires during
2006. If AeroGrow is unable to identify, hire, or retain qualified sales and
marketing personnel, AeroGrow may not be able to implement its business plan
and
may not be able to achieve adequate revenues.
AeroGrow’s
future depends on the financial success of its kitchen garden systems. Since
AeroGrow is introducing entirely new products without comparable sales history,
AeroGrow does not know if its kitchen garden systems and seed kits will generate
wide acceptance by consumers.
AeroGrow
has introduced its kitchen garden systems and seed kits as new products to
consumer markets unfamiliar with their use and benefits. AeroGrow cannot be
certain that its products will generate widespread acceptance. If consumers
do
not purchase its products in sufficient numbers, AeroGrow will not be
profitable. Investors must consider AeroGrow’s prospects in light of the risks,
expenses, and challenges of attempting to introduce new products with unknown
consumer acceptance.
AeroGrow’s
marketing strategies may not be successful which would adversely affect its
future revenues and profitability.
AeroGrow’s
revenues and future depend on the successful marketing of its kitchen garden
systems. AeroGrow cannot give assurance that consumers will be interested in
purchasing its products. AeroGrow plans to use direct marketing to sell its
products via television commercials, infomercials, magazine and newspaper
advertising, and the Internet. Its infomercials and commercials may not generate
sufficient income to continue to air them. If AeroGrow’s marketing strategies
fail to attract customers, its product sales will not produce future revenues
sufficient to meet its operating expenses or fund its future operations. If
this
occurs, AeroGrow’s business may fail and investors may lose their entire
investment.
AeroGrow’s
current or future manufacturers could fail to fulfill AeroGrow’s orders for
kitchen garden systems which would disrupt its business, increase its costs
and
could potentially cause it to lose its market.
AeroGrow
currently depends on one contract manufacturer in China to produce its kitchen
garden systems. To date, AeroGrow has received only limited quantities of
finished products, and it does not yet have a sufficient operating history
demonstrating that this manufacturer can produce its kitchen garden systems
in a
timely manner or in volumes required. The manufacturer may also fail to produce
the kitchen garden system to AeroGrow’s specifications or in a workmanlike
manner and may not deliver the systems on a timely basis. AeroGrow is in the
process of identifying other manufacturers in China to assure them of
alternative sources of supply. Any change in manufacturers could disrupt its
business due to delays in finding a new manufacturer, providing specifications
and testing initial production. A new manufacturer must also obtain an inventory
of necessary parts and tools for production. AeroGrow owns the tools and dies
used by its manufacturer. AeroGrow’s manufacturer operates in China and may be
subject to business, political, currency, and regulatory risks outside the
control of AeroGrow that may affect its ability to fulfill AeroGrow’s orders for
kitchen garden systems.
If
an exemption from registration on which AeroGrow has relied for any of its
past
offerings of common stock or warrants were later challenged legally, its
principals may have to expend time defending claims and AeroGrow would then
risk
paying expenses for defense, rescission and/or regulatory
sanctions.
To
raise
working capital, AeroGrow offered common stock and warrants in private
transactions that AeroGrow believed to be exempt from registration under the
1933 Act, as amended, and state securities laws. In 2004 AeroGrow also conducted
a state registered offering in Colorado of common stock and warrants intended
to
be exempt from registration under the 1933 Act, as amended, as an intrastate
offering. However, because the Company is incorporated in Nevada it did not
satisfy all of the requirements for an intrastate offering. This could result
in
investors or regulators asserting that the Colorado offering and/or the private
transactions (if the private transactions were integrated with the Colorado
offering) violated the 1933 Act. There can be no assurance that investors or
regulators will not be successful in asserting a claim that these transactions
should not be integrated. In the event that one or more investors seeks
rescission, with resulting return of investment funds and interest at a market
rate, or that state or federal regulators seeks sanctions against AeroGrow
or
its principals, AeroGrow would spend time and financial resources, including
some of the net proceeds of the 2006 Offering, to pay expenses for defense,
rescission awards or regulatory sanctions. The use of funds would reduce the
capital available to implement its full plan of operation. No assurance can
be
given regarding the outcome of any such actions.
There
may be substantial sales of AeroGrow’s common stock by existing stockholders
which could cause the price of AeroGrow’s stock to fall.
Future
sales of substantial amounts of AeroGrow’s common stock in the public market, if
one develops, or the perception that such sales might occur, could cause the
market price of its common stock to decline and could impair the value of your
investment in AeroGrow’s common stock and its ability to raise equity capital in
the future. As of March 31, 2006, AeroGrow had 9,145,120 shares of common stock
outstanding, of which 544,228 shares may be sold without restriction. Of the
remaining shares, (i) 710,009 shares issued upon conversion of the
Convertible Notes in the principal amount of $2,130,000 at a conversion price
of
$3.00 per share are subject to registration rights and are not subject to lock
up restrictions, (ii) 2,148,000 shares issued in the 2006 Offering are
subject to registration rights and are not subject to lock up restrictions,
(iii) 580,136 shares issued to Wentworth stockholders in the Merger have
registration rights, but of these shares, 396,813 shares are subject to lock
up
restrictions for periods of 12 to 18 months, (iv) 811,391 shares were
issued during 2005 and are considered “restricted” shares under Rule 144,
(v) 4,285,121 shares have been held more than one year and may be
transferred and sold, subject to the restrictions under Rule 144 or Rule 701
depending on the status of the holder and the holding period, and (vi) 66,235
shares granted to employees and directors on March 30, 2006 under the Company’s
2005 Equity Compensation Plan. Of the shares identified in the last two
categories above, 4,642,326 shares are subject to lock-up agreements for periods
of 12 to 18 months. The lock up restrictions may be released by the agreement
of
AeroGrow and Keating Securities, LLC. The shares of AeroGrow’s common stock
underlying the Convertible Notes and the warrants issued or to be issued to
the
holders of Convertible Notes are required to be registered for resale by
AeroGrow following and are not subject to lock up restrictions. As part of
the
2006 Offering, AeroGrow agreed to register for resale the shares of common
stock
issued to investors in the 2006 Offering (together with the shares of common
stock underlying the 2,148,000 warrants issued in the 2006 Offering) on a
registration statement to be filed with the SEC. In the event such registration
statement is filed, the shares of common stock issued to the Wentworth’s
stockholders in connection with the Merger will also be included. There
can
be no assurance that the shares of common stock subject to registration rights
will become registered under the Securities Act. The sales of AeroGrow common
stock by these stockholders having registration rights or even the appearance
that such holders may make such sales once a registration statement becomes
effective may limit the market for the common stock or depress any trading
market volume and price before other investors are able to sell the common
stock.
AeroGrow’s
outstanding warrants, options and convertible notes, and additional future
obligations to issue AeroGrow securities to various parties, may dilute the
value of an investment in the Company and may adversely affect AeroGrow’s
ability to raise additional capital.
As
of
March 31, 2006, AeroGrow is committed to issue up to 5,941,756 additional shares
of common stock under the terms of outstanding convertible notes, warrants,
options, and other arrangements. There are warrants and options outstanding
that
can be exercised for 1,126,128 shares of its common stock at exercise prices
ranging from $0.005 to $15.00 per share and, as of March 31, 2006, the Company
granted an additional 888,153 options and 83,737 shares of its common stock
pursuant to the Company’s 2005 Equity Compensation Plan. There are 2,148,000
shares of common stock issuable upon exercise of the warrants issued to
investors in the 2006 Offering exercisable at $6.25 per share. There are also
240,006 shares of common stock issuable upon conversion of the Convertible
Notes
in the principal amount of $840,000 at a conversion price of $3.50 by holders
who have elected to extend the maturity of their notes to December 31, 2006
and
7,500 shares of common stock issuable upon conversion of Convertible Notes
in
the principal amount of $30,000 at a conversion price of $4.00 by holders who
have not elected to extend the maturity of their notes beyond June 30, 2006.
There are 600,000 shares of common stock issuable upon exercise of outstanding
warrants held by the initial holders of the Convertible Notes with exercise
price of $5.00 per share. There are 426,000 shares of common stock issuable
upon
exercise of warrants, at an exercise price of $6.00 per share, that were issued
to holders that elected to convert notes in the principal amount of $2,130,000.
There are 174,000 shares of common stock issuable upon the exercise of warrants
to be issued upon conversion of Convertible Notes in the principal amount of
$870,000 at an exercise price of $6.00 per share. There are 60,000 shares of
common stock issuable upon exercise of outstanding warrants issued in 2005
to
Keating Securities, LLC or its designees in connection with the Convertible
Notes offering with exercise price of $6.00 per share and 214,800 shares of
common stock issuable upon exercise of outstanding warrants issued to designees
of Keating Securities, LLC in the 2006 Offering with an exercise price of $6.25.
AeroGrow also has commitments to issue up to 38,204 shares of common stock
under
certain equity commitments.
AeroGrow
has historically issued shares of its common stock or granted stock options
to
employees, consultants and vendors as a means to conserve cash, and AeroGrow
may
continue to grant additional shares of stock and issue stock options in the
future. As of March 31, 2006, there were 351,671 shares of common stock under
its 2005 equity compensation plan available for issuance.
For
the
length of time these notes, warrants and options are outstanding, the holders
will have an opportunity to profit from a rise in the market price of AeroGrow’s
common stock without assuming the risks of ownership. This may adversely affect
the terms upon which AeroGrow can obtain additional capital. The holders of
such
derivative securities would likely exercise or convert them at a time when
AeroGrow would be able to obtain equity capital on terms more favorable than
the
exercise or conversion prices provided by the notes, warrants or
options.
If
AeroGrow’s common stock is traded, AeroGrow expects to be subject to the “penny
stock” rules for the foreseeable future.
The
market price of the shares may fluctuate greatly. Investors in the Company
bear
the risk that they will not recover their investment.
There
is
no clearly established market for AeroGrow’s shares at this time. If a public
market develops, the price is likely to be influenced by the price at which
and
the amount of shares the selling stockholders are attempting to sell at any
point in time with the possible effect of limiting the trading price or lowering
it to their offering price. Shares such as those of AeroGrow are also subject
to
the activities of persons engaged in short selling the securities, which
generally has the effect of driving the price down. Also, common stock of
emerging growth companies is subject to high price and volume volatility.
Therefore, the price of AeroGrow’s common stock may fluctuate widely. A full and
stable trading market for AeroGrow’s common stock may never develop in which
event any holder of such shares may not be able to sell at the time he elects
or
at all.
SECURITY
OWNERSHIP OF
CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding our common stock
beneficially owned on March 31, 2006, by:
· each
shareholder we know to be the beneficial owner of 5% or more of our outstanding
common stock,
· each
of
our executive officers and directors, and
· all
executive officers and directors as a group.
In
general, a person is deemed to be a “beneficial owner” of a security if that
person has or shares the power to vote or direct the voting of such security,
or
the power to dispose or to direct the disposition of such security. A person
is
also deemed to be a beneficial owner of any securities of which the person
has
the right to acquire beneficial ownership within 60 days. To the best of our
knowledge, subject to community and marital property laws, all persons named
have sole voting and investment power with respect to such shares except as
otherwise noted. The table assumes a total of 9,145,120 shares of common stock
outstanding.
|
Name
of Beneficial Owner (1)
|
|
Amount
of
Beneficial
Ownership
|
|
Percent
Beneficial
Ownership
|
|
|
W.
Michael Bissonnette
900
28th Street, Suite 201
Boulder,
CO 80303
|
|
|
956,297
|
|
|
10.45
|
%
|
| |
|
|
|
|
|
|
|
|
Mitchell
Rubin
900
28th Street, Suite 201
Boulder,
CO 80303 (2)
|
|
|
128,768
|
|
|
1.39
|
%
|
| |
|
|
|
|
|
|
|
|
Jeff
Brainard
900
28th
Street, Suite 201
Boulder,
CO 80303 (3)
|
|
|
131,000
|
|
|
1.41
|
%
|
| |
|
|
|
|
|
|
|
|
Richard
A. Kranitz
1238
Twelfth Avenue
Grafton,
WI 53024 (4)
|
|
|
67,579
|
|
|
0.74
|
%
|
| |
|
|
|
|
|
|
|
|
Randy
Seffren
900
28th Street, Suite 201
Boulder,
CO 80303 (3)
|
|
|
209,320
|
|
|
2.3
|
%
|
| |
|
|
|
|
|
|
|
|
Wayne
Harding
5206
South Hanover Way
Englewood,
CO 80111 (5)
|
|
|
144,673
|
|
|
1.58
|
%
|
| |
|
|
|
|
|
|
|
|
Jack
J. Walker
c/o
900 28th
Street, Suite 201
Boulder,
CO 80303 (6)
|
|
|
176,908
|
|
|
1.92
|
%
|
| |
|
|
|
|
|
|
|
|
Kenneth
Leung
c/o
900 28th
Street, Suite 201
Boulder,
CO 80303 (7)
|
|
|
12,500
|
|
|
0.14
|
%
|
| |
|
|
|
|
|
|
|
|
Timothy
J. Keating
5251
DTC Parkway, Suite 1090
Greenwood
Village, Colorado 80111 (8)
|
|
|
452,449
|
|
|
4.9
|
%
|
| |
|
|
|
|
|
|
|
|
All
AeroGrow Executive Officers and Directors as a Group (8 Persons)
(9)
|
|
|
1,827,045
|
|
|
19.0
|
%
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the Securities
and
Exchange Commission (“SEC”), which include holding voting and investment
power with respect to the securities. Shares of common stock subject
to
options or warrants currently exercisable, or exercisable within
60 days,
are deemed outstanding for computing the percentage of the total
number of
shares beneficially owned by the designated person, but are not deemed
outstanding for computing the percentage for any other
person.
|
|
(2)
|
Includes
options to purchase 3,768 shares of AeroGrow’s common stock at an exercise
price of $0.50 per share and options granted on March 28, 2006 to
purchase
125,000 shares of AeroGrow’s common stock at an exercise price of $5.00
per share.
|
|
(3)
|
Includes
options granted on March 28, 2006 to purchase 125,000 shares of AeroGrow’s
common stock at an exercise price of $5.00 per
share.
|
|
(4)
|
Includes
46,546 shares owned by Cedar Creek Ventures, LLC, of which Mr. Kranitz
is
a 50% owner and managing member. Also includes 10,000 fully vested
five-year options to purchase AeroGrow’s common stock at an exercise price
of $5.00 per share and 2,500 shares of common stock valued at $5.00
per
share granted as of March 28, 2006.
|
|
(5)
|
Includes
options to purchase 3,910 shares of AeroGrow’s common stock at an exercise
price of $2.50 per share, and warrants to purchase 5,000 shares of
AeroGrow’s common stock at an exercise price of $2.50 per share. Also
includes 10,000 fully vested five-year options to purchase AeroGrow’s
common stock at an exercise price of $5.00 per share and 2,500 shares
of
common stock valued at $5.00 per share granted as of March 28,
2006.
|
|
(6)
|
Includes
96,122 shares held of record by March Trade & Finance, Inc. of which
Mr. Walker is a controlling person and 24,000 shares underlying
immediately exercisable warrants at $5.00 per share and 34,286 shares
issuable under a convertible note in principal amount of $120,000.
Also
includes 10,000 fully vested 5-year options to purchase AeroGrow’s common
stock at an exercise price of $5.00 per share and 2,500 shares of
common
stock valued at $5.00 per share granted as of March 28,
2006.
|
|
(7)
|
Includes
10,000 fully vested five-year options to purchase AeroGrow’s common stock
at an exercise price of $5.00 per share and 2,500 shares of common
stock
valued at $5.00 per share granted as of March 28,
2006.
|
|
(8)
|
Includes
warrants to purchase 20,000 shares of common stock at an exercise
price of
$6.00 per share and warrants to purchase 47,800 shares of common
stock at
an exercise price of $6.25 per share. Includes 309,406 shares of
common
stock held by KRM Fund. Timothy J. Keating is the manager of KRM
Fund and
has voting and disposition power of the shares owned by KRM
Fund.
|
|
(9)
|
Includes
options and warrants to acquire 451,678 shares of common stock and
34,286
shares issuable on conversion of an outstanding
note.
|
DESCRIPTION
OF SECURITIES
General
The
articles of incorporation provide that AeroGrow is authorized to issue up to
75,000,000 shares of common stock, par value $0.001 per share, and 20,000,000
shares of preferred stock, par value $0.001 per share. As of March 31, 2006,
AeroGrow had 9,145,120 shares of common stock outstanding. No shares of
preferred stock were issued and outstanding. Nevada law allows AeroGrow board
of
directors to issue shares of common stock and preferred stock up to the total
amount of authorized shares without obtaining the prior approval of
shareholders.
The
following description of AeroGrow’s common stock, preferred stock, convertible
notes and various warrants summarizes the material provisions of each and is
qualified in its entirety by the provisions of AeroGrow’s articles of
incorporation, bylaws, convertible notes and warrant agreements, copies of
which
will be provided by us upon request.
Common
Stock
Holders
of AeroGrow’s outstanding common stock, have the following rights and privileges
in general:
|
|
· |
the
right to one vote for each share held of record on all matters submitted
to a vote of the stockholders, including the election of
directors,
|
|
|
· |
no
cumulative voting rights, which means that holders of a majority
of shares
outstanding can elect all of AeroGrow’s
directors,
|
|
|
· |
the
right to receive ratably dividends when, if and as may be declared
by
AeroGrow’s board of directors out of funds legally available for such
purposes, subject to the senior rights of any holders of preferred
stock
then outstanding,
|
|
|
· |
the
right to share ratably in the net assets legally available for
distribution to common stockholders after the payment of AeroGrow’s
liabilities on its liquidation, dissolution and winding-up,
and
|
|
|
· |
no
preemptive or conversion rights or other subscription rights, and
no
redemption privileges.
|
All
outstanding shares of AeroGrow’s common stock are fully paid and
nonassessable.
Preferred
Stock
AeroGrow’s
preferred stock may be issued from time to time, in one or more series, with
relative designations, preferences, priorities, powers and other special rights
for each series of preferred stock as may be approved by the board and
shareholders.
AeroGrow
believes that the preferred stock may provide it with increased flexibility
in
structuring possible future financings and acquisitions and in meeting other
corporate needs that might arise. Although AeroGrow’s board of directors
currently has no intention to issue preferred stock, in the event of any
issuance, its common stockholders will not have any preemptive or similar rights
to acquire any of the preferred stock. Issuances of preferred stock
could:
|
|
· |
dilute
the voting power of common
stockholders,
|
|
|
· |
adversely
affect the voting power of common
stockholders,
|
|
|
· |
adversely
affect the likelihood that common stockholders will receive dividend
payments and payments on liquidation,
and
|
|
|
· |
have
the effect of delaying or preventing a change in shareholder and
management control.
|
Debt
Warrants
In
June,
July, August and September 2005, AeroGrow sold in a private placement debt
offering to accredited investors 300 units consisting of convertible notes,
described below, and its redeemable warrants. The warrants are exercisable
for
the purchase of an aggregate 600,000 shares of its common stock, assuming an
exercise price of $5.01 per share.
The
warrants are exercisable in whole at any time or in part from time to time
prior
to September 13, 2010, at an exercise price of $5.01 per share. Upon the
expiration of the warrant exercise period, unless extended, each warrant will
expire and become void and of no value.
The
holder of each warrant is entitled, upon payment of the exercise price, to
purchase one share of AeroGrow’s common stock. The number and kind of securities
or other property for which the warrants are exercisable are subject to
adjustments in certain events, such as mergers, reorganizations or stock splits,
to prevent dilution. AeroGrow may redeem the warrants at any time on 15 days
prior written notice at a redemption price of $0.0001 per share of common stock
underlying the warrant, provided a registration statement is in effect covering
the common shares underlying the warrant, and further provided that for a period
of not less than 20 consecutive trading days the closing bid price as quoted
on
the Nasdaq Capital Market or NASD OTC Bulletin Board has been at least $7.50
per
share of common stock and the average daily trading volume exceeds 50,000 shares
per day. All of the outstanding warrants must be redeemed if any are redeemed.
The holders of the warrants will not possess the rights that AeroGrow’s
shareholders have unless and until the holders exercise the warrants and then
only as a holder of the common stock.
The
shares of common stock underlying the redeemable 2005 warrants have registration
rights. See “Registration Rights” below.
For
additional information on the Debt Warrants described above, see “Convertible
Note Modification Agreement” below.
Convertible
Notes and Conversion Warrants
AeroGrow
issued $3,000,000 in aggregate principal face amount of 10% unsecured
convertible notes as part of its debt offering in July, August and September
2005 along with the debt warrants described above. The principal amount is
convertible into its common stock at the option of the note holders, at any
time, at a conversion price equal to $4.00 per share. If not converted, these
notes and all accrued interest became repayable on demand by the note holders
on
June 30, 2006. The notes bear interest at the rate of 10% annually which is
payable quarterly beginning September 30, 2005. The principal was due on June
30, 2006. AeroGrow may not prepay the notes without the holder’s prior
consent.
On
conversion of the notes each holder shall also receive five-year warrants to
purchase 2,000 shares of common stock for each $10,000 principal amount
converted. These conversion warrants may be exercised at any time at an exercise
price equal to $6.00 per share. AeroGrow may not redeem these conversion
warrants.
The
shares of common stock underlying the convertible notes and the conversion
warrants have registration rights. See “Registration Rights” below.
For
additional information on the Convertible Notes and Conversion Warrants
described above, see “Convertible Note Modification Agreement”
below.
Convertible
Note Modification Agreement
In
connection with the Merger, AeroGrow sought to modify the terms of certain
outstanding convertible notes issued in 2005 with an outstanding principal
balance of $3,000,000 due June 30, 2006 (“Convertible Notes”). The note holders
of this debt were offered the opportunity to convert the principal and interest
at a reduced conversion rate, extend the maturity for a lesser reduced
conversion rate than immediate conversion, or maintain the current terms
unchanged.
The
holders of Convertible Notes representing $2,130,000 in principal amount have
converted their notes into AeroGrow common stock at a conversion price of $3.00
per share, a reduction from the original conversion price of $4.00 per share.
Accordingly, at the closing of the Merger and 2006 Offering, AeroGrow issued
710,009 shares of its common stock to converting note holders (rounded up for
fractional shares). The converting note holders also were issued, pursuant
to
the terms of the note offering, five-year warrants to purchase 426,000 shares
of
AeroGrow’s common stock at an exercise price of $6.00 per share.
Holders
of Convertible Notes representing $840,000 in principal amount have agreed
to
extend the maturity under their notes from June 30, 2006 to December 31, 2006
in
exchange for a reduction in their conversion price from $4.00 per share to
$3.50
per share.
The
remaining holders of Convertible Notes representing $30,000 in principal amount
have not elected to convert or extend the maturity of their notes and can demand
payment in cash at any time.
For
those
Convertible Note holders who elected to convert or extend the maturity of their
notes as described above, (i) AeroGrow eliminated the current 180 day lock-up
provisions on the shares of common stock underlying the Convertible Notes and
related warrants; (ii) AeroGrow eliminated the redemption provisions of the
$5.00 warrants issued to holders at the time of the issuance of the notes;
and
(iii) holders waived any registration penalties that they may have in connection
with any late filing or effectiveness under the registration rights provisions
of their original subscription for the notes.
As
of
February 24, 2006, the Convertible Notes and the warrants issued or to be issued
to convertible note holders can be summarized as follows:
| · |
710,009
shares of common stock were issued at the closing of the 2006 Offering
to
holders of Convertible Notes in the principal amount of $2,130,000
who
have elected to convert such notes at $3.00 per share;
|
| · |
240,006
shares of common stock will be issuable upon conversion of Convertible
Notes (rounded up for fractional shares) in the principal amount
of
$840,000 at a conversion price of $3.50 by holders who have elected
to
extend the maturity of their notes to December 31,
2006;
|
| · |
7,500
shares of common stock will be issuable upon conversion of Convertible
Notes in the principal amount of $30,000 at a conversion price of
$4.00 by
holders who have not elected to extend the maturity of their notes
beyond
June 30, 2006;
|
| · |
600,000
shares of common stock will be issuable upon exercise of outstanding
warrants held by the initial holders of the Convertible Notes with
exercise price of $5.01 per share, of which 6,000 warrants held by
those
not electing to extend the maturity of their Convertible Notes to
December
31, 2006 are redeemable;
|
| · |
426,000
shares of common stock issuable upon exercise of warrants, at an
exercise
price of $6.00 per share, that were issued to holders that elected
to
convert notes in the principal amount of $2,130,000;
and
|
| · |
174,000
shares of common stock issuable upon the exercise of warrants that
may be
issued if Convertible Notes in the principal amount of $870,000
(consisting of the notes due December 31, 2006 and June 30, 2006)
are
converted in the future, which warrants would be exercisable at $6.00
per
share.
|
$10.00
Redeemable Warrants and $15.00 Redeemable Warrants
In
2004
AeroGrow completed a Colorado registered offering of 544,228 shares of its
common stock, redeemable warrants to purchase 390,880 shares of its common
stock
at an exercise price of $10.00 and redeemable warrants to purchase 390,880
shares of its common stock at an exercise price of $15.00. The
$10.00 redeemable warrants and $15.00 redeemable warrants became exercisable
upon issue, provided that at least 500 shares must be purchased on each
exercise and
further provided that the Common Stock issuable upon exercise is, at the time
of
exercise, registered or otherwise qualified for sale under the Securities Act
of
1933, as amended, and the securities or “blue sky” laws of the jurisdiction in
which the exercise occurs. These warrants expire on December 31,
2007.
AeroGrow
may redeem all of these warrants at any time after its common stock is quoted
on
the OTC BB or a recognized exchange on 15 days prior written notice at a
redemption price of $0.01 per share, provided that the closing bid or sale
price
of its common stock exceeds $12.50 per share for the $10.00 redeemable warrants
and $17.50 per share for the $15.00 redeemable warrants for 20 consecutive
trading days ending within 15 days of the date the notice of redemption is
given.
$5.00
Non-Redeemable Warrants, $2.50 Non-Redeemable Warrants and $1.25 Non-Redeemable
Warrants
From
December 2002 through July 2004 AeroGrow sold in a private placement:
| · |
$5.00
non-redeemable warrants to purchase 30,000 shares of its common stock
at
an exercise price of $5.00 per share. As of January 31, 2006, warrants
to
purchase 5,000 shares have been exercised and warrants to purchase
25,000
have expired.
|
| · |
$2.50
non-redeemable warrants to purchase 501,098 shares of its common
stock at
an exercise price of $2.50 per share. As of January 31, 2006, warrants
to
purchase 390,000 shares have been exercised and warrants to purchase
111,098 shares remain outstanding and are exercisable during
2006.
|
| · |
$1.25
non-redeemable warrants to purchase 170,000 shares of its common
stock at
an exercise price of $1.25 per share. As of January 31, 2006, all
of these
warrants were exercised.
|
Stock
Options
AeroGrow
has outstanding options to purchase 233,270 shares of AeroGrow common stock
at
an exercise price ranging from $0.005 to $5.00 per share.
February
2006 Warrants
In
connection with the 2006 Offering, there were issued common stock purchase
warrants to purchase up to 2,362,800 shares of common stock at an exercise
price
of $6.25 per share. Of this amount, warrants for 2,148,000 shares were issued
to
investors and warrants for 214,800 shares were issued to the placement agent
of
the offering. Each warrant is non-redeemable and is exercisable until February
24, 2011. The exercise price and number of shares of common stock under the
warrants will be subject to adjustment on certain events, including reverse
stock splits, stock dividends and recapitalizations, combinations, and mergers
where AeroGrow is not the surviving company. AeroGrow will at all times reserve
and keep available, solely for issuance and delivery upon the exercise of the
warrants, such shares of common stock underlying the warrants as from time
to
time shall be issuable upon the exercise of the warrants. The warrants held
by
the Keating Securities, LLC and its designees also may be exercised on a net
cashless basis.
The
shares of the Underlying common stock have registration rights. See
“Registration Rights” below.
2005
Placement Agent Warrants
In
connection with its services as placement agent for AeroGrow’s 2005 debt
offering of units consisting of convertible notes and redeemable warrants,
AeroGrow sold to Keating Securities, LLC for a nominal consideration five-year
warrants to purchase 60,000 shares of AeroGrow’s common stock. These warrants
will be exercisable at any time after September 13, 2006, at a price equal
to
$6.00 per share on a net-issuance or cashless basis.
The
shares of common stock underlying the above placement agent warrants have
registration rights. See “Registration Rights” below.
Registration
Rights
AeroGrow
has agreed to register: (i) 2,148,000 shares of common stock issued to investors
in the 2006 Offering; (ii) 2,148,000 shares of common stock underlying the
Warrants issued to investors in the 2006 Offering; and (iii) 214,800 shares
of
common stock underlying the warrants issued to the Keating Securities, LLC
in
the 2006 Offering, on a registration statement to be filed by AeroGrow
(“Registration Statement”). AeroGrow agreed to file the registration statement
by April 10, 2006, which it did, and use its best efforts to have the
registration statement declared effective 150 days after February 24, 2006.
AeroGrow shall pay the usual costs of such registration. The registration
statement also will include : (i) 710,009 shares of common stock issued to
holders of Convertible Notes in the principal amount of $2,130,000 who elected
to convert their notes at $3.00 per share; (ii) 240,006 shares of common stock
issuable upon conversion of Convertible Notes in the principal amount of
$840,000 at a conversion price of $3.50 by holders who elected to extend the
maturity of their notes to December 31, 2006; (iii) 7,500 shares of common
stock
issuable upon conversion of Convertible Notes in the principal amount of $30,000
at a conversion price of $4.00 by holders who have not elected to extend the
maturity of their notes beyond June 30, 2006; (iv) 600,000 shares of common
stock underlying warrants, at an exercise price of $5.00 per share, held by
the
holders of the Convertible Notes (“Debt Warrants”); (v) 426,000 shares of common
stock underlying warrants, at an exercise price of $6.00 per share, held by
holders that have elected to convert their Convertible Notes in the principal
amount of $2,130,000, and 174,000 shares of common stock underlying warrants,
at
an exercise price of $6.00 per share, to be issued upon conversion of
Convertible Notes in the principal amount of $870,000 at an exercise price
of
$6.00 per share (collectively, the “Conversion Warrants”); (vi) 60,000 shares of
common stock underlying warrants, at an exercise price of $6.00 per share,
issued to Keating Securities, LLC or its designees in connection with the
Convertible Notes offering (“Agent Debt Warrants”); and (vii) up to 580,136
shares of common stock issued to Wentworth stockholders in the
Merger.
If
the
registration statement is not filed or does not become effective on a timely
basis, for any reason, AeroGrow will be required to pay the investors in the
2006 Offering and the investors in the Convertible Note offering an amount
equal
to 1% of the purchase price of the securities held by them for every 30 day
period (or part) after the relevant date, in each case until the registration
statement is filed or declared effective, as the case may be (“Registration
Penalty”).
After
the
effectiveness of the registration statement, AeroGrow also will be required
to
pay investors in the 2006 Offering and the investors in the Convertible Note
offering an amount equal to 1% of the purchase price of the securities held
by
them for every 30 day period that the registration statement is not available
for use to sell or transfer the registered shares (“Suspension Penalty”). This
Suspension Penalty shall be in addition to any other penalties
mentioned.
The
Registration Penalty and/or Suspension Penalty (the “Penalties”) shall be due
and payable only to the investors in the 2006 Offering and investors in the
Convertible Note offering based on the amount subscribed and not based on the
value of any warrants. Payment of the Penalties in the circumstances of a
registration statement not being filed or declared effective by designated
dates
will be made in shares of common stock calculated by taking the amount due
and
dividing it by $2.00 (“Penalty Shares”). The Penalty Shares will be included in
the registration statement. Payment of the Penalties that may be due after
the
effective date of the registration statement will be paid in cash. The Penalty
amount is 1% per month of the purchase price paid for the securities payable
for
up to a maximum of an aggregate of 18 months.
There
can
be no assurance that the shares of common stock subject to registration rights
as specified above will become registered under the Securities Act.
Lock
Up Agreements
Stockholders
of Wentworth holding an aggregate of 396,813 shares of common stock entered
into
a lock up agreement under which they will be prohibited from selling or
otherwise transferring: (i) any of their shares of common stock for a period
of
the effective date of the resale registration statement that includes the common
stock issued in 2006 (“Initial Lock Up Period”), and (ii) 50% of its shares of
common stock for a period of 18 months following the effective date of such
registration statement.
Further,
as a condition of the closing of the Merger Agreement, 4,792,428 shares of
AeroGrow’s common stock held by existing AeroGrow stockholders (including all
shares of AeroGrow held by AeroGrow’s current officers and directors discussed
elsewhere in this Report) and 1,831,067 shares of common stock underlying
AeroGrow’s existing warrants and options outstanding entered into lock up
agreements with the same transfer restrictions as set forth above and applicable
to the stockholders of Wentworth.
As
of
September 30, 2006, the following shares of common stock (or shares of common
stock underlying warrants and options) will not be subject to any lock up
agreement restrictions:
| · |
Approximately
544,228 shares of common stock held by investors in AeroGrow’s Colorado
intrastate offering (“Colorado Offering Shares”). The Colorado Offering
Shares will be freely tradable without
restriction.
|
| · |
370,319
shares of outstanding common stock held by existing AeroGrow stockholders.
These shares of common stock may be freely tradable without restriction
following the 2006 Offering depending on how long the holders thereof
have
held these shares depending on the requirements of Rules 144 and
701.
|
| · |
115,000
shares of common stock underlying existing warrants, and 20,944 shares
of
common stock underlying outstanding options issued to employees,
consultants and vendors. Upon exercise of these warrants by the holders
thereof, the shares will be restricted shares subject to the restrictions
on transfer imposed under Rule 144 and Rule 701 promulgated under the
Securities Act, which have different holding periods and volume
limitations depending on the status of the holder and the time period
that
the holder has held the securities.
|
| · |
183,323
shares of common stock held by
Wentworth.
|
None
of
the shares of common stock issued in the 2006 Offering, issued upon conversion
of the Convertible Notes, underlying the warrants issued in the 2006 Offering
(including Agent Warrants), underlying the Convertible Notes, or underlying
the
warrants issued or to be issued to Convertible Note holders (including placement
agent warrants) are subject to lock up restrictions.
Dividend
Policy
AeroGrow
has not declared or paid any cash dividends on its common stock. It intends
to
retain any future earnings to finance the growth and development of its
business, and therefore it does not anticipate paying any cash dividends on
the
common stock in the future. The board of directors will determine any future
payment of cash dividends depending on the financial condition, results of
operations, capital requirements, general business condition and other relevant
factors. If the Company issues preferred shares, although not currently
anticipated, no dividends may be paid on the outstanding common stock until
all
dividends then due on the outstanding preferred stock will have been
paid.
Transfer
Agent and Registrar
AeroGrow
has appointed Corporate Stock Transfer, Denver, Colorado, as its registrar
and
transfer agent and registrar of its common stock. The mailing address of
Corporate Stock Transfer is 3200 Cherry Creek South Drive, Denver, Colorado
80209-3246.
Director
Liability and Indemnification
Under
Nevada law and the AeroGrow’s bylaws, AeroGrow is required to indemnify its
officers, directors, employees and agents in certain situations. In some
instances, a court must approve indemnification. As permitted by Nevada
statutes, the articles of incorporation eliminate in certain circumstances
the
monetary liability of its directors for a breach of their fiduciary duties.
These provisions do not eliminate a director’s liability for:
| · |
a
willful failure to deal fairly with us or our shareholders in connection
with a matter in which the director has a material conflict of
interest,
|
| · |
a
violation of criminal law unless the director had reasonable cause
to
believe that his or her conduct was lawful or no reasonable cause
to
believe that his or her conduct was
unlawful,
|
| · |
a
transaction from which the director derived an improper personal
profit,
and
|
As
to
indemnification for liabilities arising under the Securities Act for directors,
officers or persons controlling the Company, AeroGrow has been informed that,
in
the opinion of the Securities and Exchange Commission, such indemnification
is
against public policy and therefore unenforceable.
Shareholder
Action
Under
our
bylaws, the affirmative vote of the holders of a majority of the shares of
common stock represented at a meeting at which a quorum is present is sufficient
to authorize, ratify or consent to any action required by the common
shareholders, except as otherwise provided by the Nevada General Corporation
Law. Under the Nevada General Corporation Law and our bylaws, our shareholders
may also take actions by written consent without holding a meeting. The written
consent must be signed by the holders of at least a majority of the voting
power, except that if a different proportion of voting power is required for
a
specific action, then that proportion. If this occurs, we are required to
provide prompt notice of any corporate action taken without a meeting to our
shareholders who did not consent in writing to the action.
Antitakeover
Provisions
Our
articles of incorporation and the Nevada General Corporation Law include a
number of provisions that may have the effect of encouraging persons considering
unsolicited tender offers or other unilateral takeover proposals to negotiate
with our board of directors rather than pursue non-negotiated takeover attempts.
We believe that the benefits of these provisions outweigh the potential
disadvantages of discouraging these proposals because, among other things,
negotiation of the proposals might result in an improvement of their terms.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
following transactions were or will be entered into with our executive officers,
directors and 5% or greater shareholders. These transactions may or will
continue in effect and may result in conflicts of interest between us and these
individuals. Although our executive officers and directors have fiduciary duties
to us and our shareholders, AeroGrow cannot assure that these conflicts of
interest will always be resolved in our favor or in the favor of our
shareholders.
Stock
Grants
AeroGrow
granted to its founder, W. Michael Bissonnette, 10,000 shares of common stock
from December 2002 through September 30, 2005, with a weighted value of $3.87
per share or $38,700 in the aggregate, as partial payment for services provided
since inception. In December 2002, Mr. Bissonnette purchased 50,000 shares
of
our common stock for $0.50 per share, or $25,000 in the aggregate, in one of
our
private offerings. We granted Mr. Bissonnette 2,000 shares for serving as our
chairman of the board during 2005 under our 2005 plan on December 31,
2005.
AeroGrow
granted to its former chief financial officer and secretary, Jerry Gutterman,
11,425 shares of our stock from December 2002 through September 30, 2005, with
a
weighted value of $2.69 per share, or $30,725 in the aggregate, as partial
payment for services provided since inception. AeroGrow granted
Mr. Gutterman 25,110 shares under our 2005 plan on December 31,
2005.
AeroGrow
granted to the current chief financial officer, Mitchell Rubin, 1,366 stock
options at an exercise price of $0.50 per share under the 2003 and 2,402 stock
options at an exercise price of $0.50 per shares under the 2005
Plan.
Richard
Kranitz, one of our directors, is a member of the law firm of Kranitz and
Philipp which provides legal services to AeroGrow. In 2004 Kranitz and Philipp
was paid $24,000 and received 100,000 shares of stock and in 2003 the firm
was
paid $25,000 for legal services performed on our behalf. From January 1 through
July 31, 2005, Kranitz and Philipp has been paid $14,000 for legal services
performed. In the future, Kranitz and Philipp may perform additional legal
services on our behalf on an as-needed basis at hourly rates based on the type
of legal services provided.
AeroGrow
granted to our chief marketing officer, Randy Seffren, 45,800 shares of our
common stock in 2004 and 2005 with a value of $5.00 per share, or $229,000
in
the aggregate, as partial payment for services provided since inception.
AeroGrow granted Mr. Seffren 28,520 shares under our 2005 plan on December
31,
2005.
Wayne
Harding, one of our directors, provided consulting services for AeroGrow from
December 2003 through March 2004. He received stock options for 3,910 shares
of
common stock with an exercise price of $2.50 per share.
Mentor
Capital
Mentor
Capital Consultants, Inc. was formerly our parent corporation. Mr. Bissonnette
is the principal shareholder and chief executive officer of Mentor Capital.
Mr.
Gutterman is the chief financial officer, secretary and a director of Mentor
Capital. Mr. Kranitz is a director of Mentor Capital.
On
October 15, 2002, Mr. Bissonnette exchanged 1 million shares of Mentor Capital’s
common stock for 3 million common shares of our common stock, not taking into
account the one-for-five reverse stock split to shareholders of record on
May 31, 2005. We valued this transaction at $300,000, which was the market
value of the AeroGrow shares of common stock at the time of the transaction.
The
$300,000 was treated as a compensation expense.
On
December 31, 2004, Mentor Capital made a pro rata liquidating distribution
to
its shareholders of all 6,000,000 shares of our common stock held by it. These
shares were issued with the restriction with AeroGrow that 25% may be sold
beginning six months after a public offering, 25% may be sold beginning 1 year
after a public offering, 25% may be sold beginning 18 months after a public
offering, and the remaining 25% may be sold beginning 24 months after a public
offering. In addition, these shareholders entered into a lock-up agreement
under
which they will be prohibited from selling or otherwise transferring: (i) any
of
their shares of common stock for a period of 12 months following the effective
date of the resale registration statement that includes the common stock issued
in 2006, and (ii) 50% of their shares of common stock after a period of 18
months following the effective date of such registration statement.
From
inception until May 31, 2005, AeroGrow leased from Mentor Capital our furniture,
computers, and other office equipment for a rental payment of $2,500 per month.
For each of the years ended December 31, 2004 and 2003, AeroGrow paid
$30,000 to rent the equipment. This lease was terminated as of May 31, 2005.
From January through April 2005 AeroGrow made interest-free unsecured loans
totaling $41,000 to Mentor Capital to allow Mentor Capital to redeem some of
its
stock from a shareholder who is not affiliated with AeroGrow. The lease payments
for the furniture of $2,500 per month were being used to offset a portion of
this loan. We acquired the fixed assets under the furniture lease in full
payment of the loan on May 31, 2005. At the time of these transactions, Michael
Bissonnette owned 41.4% of Mentor Capital.
Mentor
Capital entered into a research and development contract in 2002 with AgriHouse,
Inc. (“AgriHouse”) which provided for development of a nutrient delivery system
using proprietary aeroponic technology which could be used in a low cost
consumer product. If a product was developed, Mentor Capital was granted the
exclusive worldwide marketing rights for it, subject to the duty to pay a
royalty to AgriHouse of 10% of the manufacturing cost of each unit. Mentor
Capital assigned its rights under this contract to AeroGrow shortly after
AeroGrow was formed, and AeroGrow agreed to assume the royalty payment
obligations. Subsequently, AeroGrow developed a fractionator bar technology,
applied for two patents and was granted one patent. The fractionator bar
technology uses a spinning cylinder to disperse water to the roots of plants
in
an aeroponic growing system. In May 2005 we entered into an agreement with
AgriHouse, consented to by Mentor Capital, to collaborate on the development
of
an aeroponic product employing the fractionator bar technology (the “FB
Product”) which agreement; i) assigned all ownership and manufacturing rights to
the FB Product to AgriHouse along with two related patents, drawings, molds
and
other materials; ii) granted AeroGrow exclusive marketing rights to the FB
Product; iii) required the payment of $25,000 to AgriHouse by AeroGrow for
AgriHouse to act as a consultant to determine the feasibility of commercializing
the FB Product; and iv) superseded and terminated the 2002 agreement
thereby releasing AeroGrow from all obligations related thereto. The May 2005
agreement with AgriHouse was terminated by AeroGrow in accordance with its
terms
by AeroGrow electing not to proceed with the FB Product and thereby assigning
all rights to such product and technology associated therewith to AgriHouse.
AeroGrow had determined that the fractionator bar technology was not feasible
for mass production for consumer use and therefore believes the loss of this
technology did not and will not have a material effect on AeroGrow’s
operations.
Wentworth
During
2002, Wentworth borrowed a total of $8,500 from Kevin R. Keating, its then
president. The amount loaned plus interest at 6% is due and payable upon the
completion of a business combination. For the years ended December 31, 2005
and
2004, interest on this loan of $510 each year is included in operations. At
December 31, 2005, the principal balance of this loan together with accrued
interest totaled $10,290.
Wentworth’s
president, with two other shareholders, granted Keating Reverse Merger Fund,
LLC
an option to acquire an aggregate of 1,000,000 shares, owned by them, until
January 30, 2005 at a total purchase price of $125,000. This option expired
unexercised.
On
April
9, 2003 and August 7, 2003 Timothy Keating paid invoices on behalf of Wentworth
in an aggregate of $1,861. Timothy Keating is the managing member of Keating
Investments, LLC.
Kevin
R.
Keating, is the father of the principal member of Keating Investments, LLC.
Keating Investments, LLC is the managing member of KRM Fund, which was the
majority stockholder of Wentworth. Keating Investments, LLC is also the managing
member and 90% owner of Keating Securities, LLC, a registered broker-dealer.
Kevin R. Keating is not affiliated with and has no equity interest in Keating
Investments, LLC, KRM Fund or Keating Securities, LLC and disclaims any
beneficial interest in the shares of the Company’s Common Stock owned by KRM
Fund. Similarly, Keating Investments, LLC, KRM Fund and Keating Securities,
LLC
disclaim any beneficial interest in the shares of the Company’s Common Stock
currently owned by Kevin R. Keating.
On
June
10, 2004, Wentworth entered into a contract with Vero for managerial and
administrative services. Vero was not engaged to provide, and Vero did not
render, legal, accounting, auditing, investment banking, or capital formation
services. Kevin R. Keating is the manager of Vero. The term of the contract
was
for one year. In consideration of the services provided, Vero was paid $1,000
for each month in which services were rendered. For the years ended December
31,
2005 and 2004, a total of $12,000 and $7,000, respectively, was included in
results of operations as a result of the agreement.
Wentworth
engaged Keating Securities, LLC, an affiliate of Keating Investments, LLC,
the
managing member of Wentworth’s controlling stockholder, to act as a financial
advisor in connection with the business combination between Wentworth and
AeroGrow for which it earned an advisory fee of $350,000 upon completion of
the
Merger. The services included introduction of Wentworth to AeroGrow and advising
Wentworth on the Merger transaction. The advisory fee was paid at the closing
of
the Merger.
Keating
Securities, LLC
In
connection with the private placement of notes and warrants by AeroGrow in
the
period July 2005 and September 2005, Keating Securities, LLC was paid $300,000
and was issued a warrant to purchase up to 60,000 shares of common stock at
an
exercise price of $6.00 per share, exercisable for five years.
In
connection with the private placement of common stock and warrants by AeroGrow
with closings on February 24, 2006 and March 1, 2006, Keating Securities, LLC
was paid $1,775,048 and its designees were issued warrants to purchase up to
214,800 shares of common stock at $6.25 per share, exercisable for five
years.
Keating
Securities, LLC and Keating Investments, LLC did not receive any compensation
in
connection with the modification of the notes sold in July to September
2005.
Item
9.01 Financial
Statements and Exhibits.
(a) Financial
statements of business acquired.
Audited
Financial Statements of AeroGrow for the years ended December 31, 2005 and
2004
and for the period from inception (March 25, 2002) to December 31,
2005.
(b) Pro
forma financial statements of business acquired.
Pro
forma
Financial Statements for AeroGrow giving effect the Merger, the 2006 Offering
and the note conversions as of December 31, 2005 and for the year ended December
31, 2005.
(c) Exhibits
3.1 Articles
of Incorporation of the Registrant+
| |
3.2
|
Certificate
of Amendment to Articles of Incorporation, dated June 25, 2002
(Change of Name, Increase in Authorized Shares of Common
Stock)+
|
| |
3.3
|
Certificate
of Amendment to Articles of Incorporation, dated November 3, 2003
(Increase Authorized Shares of Common Stock; Addition of Authorized
Shares
of Preferred Stock)+
|
| |
3.4
|
Certificate
of Amendment to Articles of Incorporation, dated January 31, 2005
(Increase in Authorized Shares of Common
Stock)+
|
| |
3.5
|
Certificate
of Change to Articles of Incorporation, dated July 27, 2005
(One-for-five Reverse Split of Common
Stock)+
|
| |
3.6
|
Certificate
of Amendment to Articles of Incorporation, dated February 24, 2006
(Change
of Name)+
|
| |
3.7
|
Amended
Bylaws of the Registrant*
|
| |
4.1
|
Form
of Certificate of Common Stock of
Registrant*
|
| |
4.2
|
Form
of 2005 Warrant*
|
| |
4.3
|
Form
of 2006 Warrant*
|
| |
4.4
|
Form
of 10% Convertible Note*
|
| |
4.5
|
Form
of $10.00 Redeemable Warrant*
|
| |
4.6
|
Form
of $15.00 Redeemable Warrant*
|
| |
4.7
|
Form
of Conversion Warrant*
|
| |
4.8
|
Form
of 2005 Placement Agent Warrant *
|
| |
4.9
|
Form
of 2006 Placement Agent Warrant*
|
| |
4.10
|
Form
of $2.50 Warrant*
|
| |
4.11
|
Form
of $5.00 Warrant*
|
| |
4.12
|
Form
of $1.25 Warrant***
|
| |
10.1
|
Lease
Agreement between AeroGrow and United Professional Management, Inc.
dated
October 1, 2003, as amended by a Lease Amendment dated April 1, 2005,
and a Lease Amendment dated October 7,
2003*
|
| |
10.2
|
Amended
2003 Stock Option Plan*
|
| |
10.3
|
Form
of Stock Option Agreement relating to the 2003 Stock Option
Plan*
|
| |
10.4
|
2005
Equity Compensation Plan*
|
| |
10.5
|
Form
of Stock Option Agreement relating to the 2005 Equity Compensation
Plan*
|
| |
10.6
|
Form
of Restricted Stock Grant Agreement relating to the 2005 Equity
Compensation Plan*
|
| |
10.7
|
Form
of Lock-up Agreement for certain
investors*
|
| |
10.8
|
Placement
Agent Agreement between Keating Securities, LLC and AeroGrow dated
May 27,
2005 with respect to the Convertible Note
offering*
|
| |
10.9
|
Placement
Agent Agreement between Keating Securities, LLC and AeroGrow dated
February 6, 2006 with respect to the 2006
Offering*
|
| |
10.10
|
Business
Lease dated December 8, 2004, between AeroGrow and Investors Independent
Trust Company*
|
| |
10.11
|
Consulting
Arrangement between Randy Seffren and AeroGrow dated October 13,
2004*
|
| |
10.12
|
Contract
between AeroGrow and Innotrac Corporation dated October 7,
2005*
|
| |
10.13
|
Letter
of Agreement dated September 30, 2005, between AeroGrow and Kenneth
Dubach*
|
| |
10.14
|
Consulting
Agreement between AeroGrow and Jerry Gutterman dated May 16,
2005*
|
| |
10.15
|
Manufacturing
Agreement among Mingkeda Industries Co., LTD., Source Plus, Inc.
and
AeroGrow dated September 30, 2005*
|
| |
10.16
|
Form
of Subscription Agreement relating to the issuance of our convertible
notes and redeemable 2005 warrants*
|
| |
10.17
|
Form
of Assignment of Application Agreement between AeroGrow and our
executives, employees and
consultants*
|
| |
10.18
|
Form
of Non-disclosure Agreement between AeroGrow and our executives,
employees
and consultants*
|
| |
10.19
|
Form
of Statement of Confidentiality, Non-Disclosure and Non-Compete Agreement
between AeroGrow and our employees, consultants and other third-party
contractors*
|
| |
10.20
|
Letter
agreement dated July 15, 2005 between AeroGrow and Patrice Tanaka
&
Company*
|
| |
10.21
|
Production
Agreement dated October 3, 2005, between AeroGrow and Respond2,
Inc.*
|
| |
10.22
|
Form
of Subscription Agreement relating to offering consummated February
24,
2006 for the sale of common stock and
warrants*
|
| |
10.23
|
Employment
Agreement between AeroGrow and W. Michael Bissonnette*
|
| |
10.24
|
Employment
Agreement between AeroGrow and Mitchell Rubin*
|
| |
10.25
|
Employment
Agreement between AeroGrow and Jeff Brainard
*
|
| |
10.26
|
Agreement
rescinding right of KRM Fund LLC to send representative to observe
board
meetings.+
|
| |
10.27
|
Convertible
Note Modification Agreement.+
|
|
|
* |
Previously
filed with Form 8-K filed March 2,
2006.
|
|
|
** |
Previously
filed with Form 8-K filed April 3,
2006.
|
|
|
*** |
Previously
filed with Form SB-2 filed November 4,
2005.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, AeroGrow
International, Inc. has duly caused this Amendment No. 2 to its Current Report
on Form 8-K to be signed on its behalf by the undersigned hereunto duly
authorized.
| |
|
|
| |
AeroGrow
International, Inc. |
|
|
|
| Date:
November 16, 2006 |
By: |
/s/
Mitchell
B. Rubin |
| |
Mitchell
B. Rubin, CFO |
| |
|
INDEX
TO FINANCIAL STATEMENTS
| |
PAGE |
| |
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
| |
|
|
Balance
Sheets as of December 31, 2005 and 2004
|
F-2
|
| |
|
|
Statements
of Operations for the years ended December 31, 2005 and 2004 and
from
inception (July 2, 2002) to December 31, 2005
|
F-3
|
| |
|
|
Statement
of Stockholders’ Equity from inception (July 2, 2002) to December 31,
2005
|
F-4
- F-5
|
| |
|
|
Statements
of Cash Flows for the years ended December 31, 2005 and 2004 and
from
inception (July 2, 2002) to December 31, 2005
|
F-6
|
| |
|
|
Notes
to Audited Financial Statements
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Aero
Grow
International, Inc.
Boulder,
Colorado
We
have
audited the accompanying balances sheets of Aero Grow International, Inc. (a
development stage enterprise, the “Company”) as of December 31, 2005 and 2004,
and the related statements of operations, stockholders’ equity (deficit), and
cash flows for each of the two years then ended and for the cumulative period
from March 25, 2002 (inception) to December 31, 2005. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Aero Grow International, Inc.
as of
December 31, 2005 and 2004, and the results of its operations and its cash
flows
for the two years then ended, and for the cumulative period March 25, 2002
(inception) to December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
| |
|
|
|
| /s/
Gordon Hughes
& Banks, LLP |
|
|
|
Gordon,
Hughes & Banks, LLP
Greenwood
Village, Colorado
January
18, 2006
|
|
|
|
| |
|
|
|
AERO
GROW INTERNATIONAL, INC.
(A
DEVELOPMENT STAGE ENTERPRISE)
BALANCE
SHEETS
|
|
|
December
31,
|
|
|
|
|
2005
|
|
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
|
|
$
|
949,126
|
|
$
|
1,916,842
|
|
|
Subscriptions
receivable
|
|
|
840,000
|
|
|
41,000
|
|
|
Inventory
|
|
|
19,480
|
|
|
—
|
|
|
Prepaid
expenses and other
|
|
|
79,720
|
|
|
5,423
|
|
|
Total
current assets
|
|
|
1,888,326
|
|
|
1,963,265
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
482,043
|
|
|
38,561
|
|
|
Less
accumulated depreciation
|
|
|
(61,599
|
)
|
|
(7,840
|
)
|
|
Property
and equipment, net
|
|
|
420,444
|
|
|
30,721
|
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs, net of $209,737 accumulated amortization
|
|
|
209,737
|
|
|
—
|
|
|
Intangible
assets
|
|
|
20,407
|
|
|
—
|
|
|
Deposits
|
|
|
4,684
|
|
|
4,484
|
|
|
Total
assets
|
|
$
|
2,543,598
|
|
$
|
1,998,470
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
196,840
|
|
$
|
46,969
|
|
|
Accrued
expenses
|
|
|
56,900
|
|
|
27,745
|
|
|
Convertible
debentures, net of discounts of $904,740
|
|
|
2,095,260
|
|
|
—
|
|
|
Mandatorily
redeemable common stock
|
|
|
310,000
|
|
|
—
|
|
|
Accrued
compensation
|
|
|
—
|
|
|
11,833
|
|
|
Total
current liabilities
|
|
|
2,659,000
|
|
|
86,547
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit)
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 20,000,000 shares authorized, none
issued or outstanding
|
|
|
—
|
|
|
—
|
|
|
Common
stock, $.001 par value, 75,000,000 shares authorized,
5,578,740
and
4,882,908 shares issued and outstanding at December 31, 2005
and
December
31, 2004, respectively
|
|
|
5,579
|
|
|
4,883
|
|
|
Additional
paid-in capital
|
|
|
11,741,388
|
|
|
5,761,832
|
|
|
(Deficit)
accumulated during the development stage
|
|
|
(11,862,369
|
)
|
|
(3,854,792
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity (deficit)
|
|
|
(115,402
|
)
|
|
1,911,923
|
|
|
Total
liabilities and stockholders’ equity (deficit)
|
|
|
2,543,598
|
|
|
1,998,470
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
AERO
GROW INTERNATIONAL, INC.
(A
DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS
OF OPERATIONS
|
|
|
Cumulative
Period
from March
25 2002
(Inception)
to
|
|
Year
Ended December 31,
|
|
|
|
|
December
31, 2005
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Research
and development
|
|
|
1,271,691
|
|
|
577,302
|
|
|
333,253
|
|
|
Professional
consulting fees
|
|
|
2,721,308
|
|
|
1,594,102
|
|
|
676,906
|
|
|
Salaries
and wages
|
|
|
2,200,386
|
|
|
1,314,009
|
|
|
783,263
|
|
|
Other
general and administrative
|
|
|
4,864,775
|
|
|
1,601,109
|
|
|
603,186
|
|
|
Total
operating expenses
|
|
|
11,058,160
|
|
|
5,086,522
|
|
|
2,396,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(11,058,160
|
)
|
|
(5,086,522
|
)
|
|
(2,396,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
modification expense
|
|
|
— |
|
|
1,446,200
|
|
|
|
|
|
Interest
income
|
|
|
(48,670
|
)
|
|
(41,106
|
)
|
|
7,564
|
|
|
Interest
expense
|
|
|
1,600,961
|
|
|
1,225,961
|
|
|
|
|
|
Total
other income (expense), net
|
|
|
(804,209
|
)
|
|
2,631,055
|
|
|
7,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(11,862,369
|
)
|
$
|
(7,717,577
|
)
|
$
|
(2,389,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share, basic and diluted
|
|
|
|
|
$
|
(1.55
|
)
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
outstanding,
basic and diluted
|
|
|
|
|
|
4,971,857
|
|
|
4,252,626
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
AERO
GROW INTERNATIONAL, INC.
(A
DEVELOPMENT STAGE ENTERPRISE)
STATEMENT
OF STOCKHOLDERS’ EQUITY (DEFICIT)
Period
from March 25, 2002 (Inception) to December 31, 2005
|
|
|
Common
Stock
|
|
|
|
Accumulated
(Deficit) During
the Development
|
|
|
|
| |
|
Shares
|
|
Amount
|
|
Capital
|
|
|
|
Total
|
|
|
Issuance
of common stock in July 2002 to parent company
|
|
|
1,200,000
|
|
$
|
1,200
|
|
$
|
4,800
|
|
$
|
—
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
of common stock in parent company by president for common
stock
(restated)
|
|
|
600,000
|
|
|
600
|
|
|
299,400
|
|
|
—
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash during private placement from December 7,
2002
to
December 27, 2002 at $0.50 per share
|
|
|
380,000
|
|
|
380
|
|
|
189,620
|
|
|
—
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services provided at $1.20 per share
|
|
|
27,000
|
|
|
27
|
|
|
32,373
|
|
|
—
|
|
|
32,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to Board of Directors at $1.20 per share
|
|
|
3,000
|
|
|
3
|
|
|
3,597
|
|
|
—
|
|
|
3,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) for the period from July 2, 2002 (inception) to December 31,
2002
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(596,213
|
)
|
|
(596,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2002
|
|
|
2,210,000
|
|
|
2,210
|
|
|
529,790
|
|
|
(596,213
|
)
|
|
(64,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash during private placement from January 1
to
February
14, 2003 at $0.50 per share
|
|
|
90,000
|
|
|
90
|
|
|
44,910
|
|
|
—
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash during private placement from March 1 to
August
31, 2003 at $1.25 per share
|
|
|
880,800
|
|
|
881
|
|
|
1,100,119
|
|
|
—
|
|
|
1,101,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash during private placement from September
30
to
December 31, 2003 at $1.665 per share
|
|
|
175,763
|
|
|
176
|
|
|
292,568
|
|
|
—
|
|
|
292,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of additional shares of common stock to private placement
investors
|
|
|
93,888
|
|
|
94
|
|
|
(94
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services provided (4,000 shares at $1.20
per
share and
36,999 shares at $1.25 per share)
|
|
|
40,999
|
|
|
41
|
|
|
51,007
|
|
|
—
|
|
|
51,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock warrants at $1.25 per share
|
|
|
120,000
|
|
|
120
|
|
|
149,880
|
|
|
—
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options to non-employees for services provided from
January
1, 2003 to
December 31, 2003
|
|
|
—
|
|
|
—
|
|
|
73,151
|
|
|
—
|
|
|
73,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to Board of Directors at $1.25 per share
|
|
|
6,000
|
|
|
6
|
|
|
7,494
|
|
|
—
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to Advisory Board at $1.25 per share
|
|
|
130,120
|
|
|
130
|
|
|
162,520
|
|
|
—
|
|
|
162,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,159,535
|
)
|
|
(1,159,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2003
|
|
|
3,747,570
|
|
|
3,748
|
|
|
2,411,345
|
|
|
(1,755,748
|
)
|
|
659,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash from January 1 to January 30, 2004
at
$1.25 per share
|
|
|
40,000
|
|
|
40
|
|
|
49,960
|
|
|
—
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash during private placement from February
1
to
June 30, 2004 at
$1.665 per share
|
|
|
360,458
|
|
|
360
|
|
|
600,140
|
|
|
—
|
|
|
600,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash during public offering from July 30 to December
31, 2004 at
$5.00 per share, net of $185,240 in offering costs
|
|
|
498,596
|
|
|
498
|
|
|
2,307,239
|
|
|
—
|
|
|
2,307,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of additional shares of common stock to private placement
investors
|
|
|
27,700
|
|
|
28
|
|
|
(28
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of additional shares of common stock to public offering
investors
|
|
|
45,633
|
|
|
46
|
|
|
(46
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services provided (4,000 shares at
$0.05
per
share; 5,000 shares at
$1.25 per share; 38,332 shares
at
$1.65 per share and 97,550 shares
at $5.00 per share)
|
|
|
144,882
|
|
|
145
|
|
|
557,301
|
|
|
—
|
|
|
557,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock warrants at $1.25 per share
|
|
|
12,000
|
|
|
12
|
|
|
14,988
|
|
|
—
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options to non-employees for services provided from
January
1, 2004 to
December 31, 2004
|
|
|
—
|
|
|
—
|
|
|
80,939
|
|
|
—
|
|
|
80,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to Board of Directors at $5.00 per share
|
|
|
6,000
|
|
|
6
|
|
|
29,994
|
|
|
—
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,389,044
|
)
|
|
(2,389,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of 1 for 5 reverse stock split
|
|
|
69
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balances,
December 31, 2004
|
|
|
4,882,908
|
|
|
4,883
|
|
|
6,051,832
|
|
|
(4,144,792
|
)
|
|
1,911,923
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
AERO
GROW INTERNATIONAL, INC.
(A
DEVELOPMENT STAGE ENTERPRISE)
STATEMENT
OF STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
Period
from March 25, 2002 (Inception) to December 31, 2005
|
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Accumulated
(Deficit)
During
the
Development
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Total
|
|
|
Exercise
of common stock warrants from August to December 31, 2005 at $1.25
per
share
|
|
|
38,000
|
|
|
38
|
|
|
47,462
|
|
|
—
|
|
|
47,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock warrants from June to December 31, 2005 at $2.50
per
share
|
|
|
390,000
|
|
|
390
|
|
|
974,610
|
|
|
—
|
|
|
975,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock warrants at December 31, 2005 at $5.00 per
share
|
|
|
5,000
|
|
|
5
|
|
|
24,995
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash in August at $5.00 per share
|
|
|
1,600
|
|
|
2
|
|
|
7,998
|
|
|
—
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services provided, rent and equipment
purchases
from
January
to December 31, 2005 at $5.00 per share
|
|
|
261,232
|
|
|
261
|
|
|
1,305,875
|
|
|
—
|
|
|
1,306,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options to non-employees for services provided
|
|
|
—
|
|
|
—
|
|
|
72,936
|
|
|
—
|
|
|
72,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants to debt holders of convertible debentures
|
|
|
—
|
|
|
—
|
|
|
1,059,480
|
|
|
—
|
|
|
1,059,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
value of convertible debentures, beneficial conversion
feature
|
|
|
—
|
|
|
—
|
|
|
750,000
|
|
|
—
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of variable accounting on the modification of terms of outstanding
warrants
|
|
|
—
|
|
|
—
|
|
|
1,446,200
|
|
|
—
|
|
|
1,446,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,717,577
|
)
|
|
(7,717,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2005
|
|
|
5,578,740
|
|
$
|
5,579
|
|
$
|
11,741,388
|
|
$
|
(11,862,369
|
)
|
$
|
(115,402
|
)
|
See
accompanying summary of accounting policies and notes to financial
statements.
AERO
GROW INTERNATIONAL, INC.
(A
DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS
OF CASH FLOWS
| |
|
Cumulative
Period
from
March
25, 2002 (Inception) to
|
|
Year
Ended December 31,
|
|
|
|
|
December
31, 2005
|
|
2005
|
|
2004
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(11,862,369
|
)
|
$
|
(7,717,577
|
)
|
$
|
(2,389,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net (loss) to cash provided (used) by
operations:
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock and options for services
|
|
|
2,347,806
|
|
|
1,349,072
|
|
|
668,385
|
|
|
Depreciation
expense
|
|
|
61,599
|
|
|
53,759
|
|
|
5,920
|
|
|
Amortization
of debt issuance costs
|
|
|
209,737
|
|
|
209,737
|
|
|
—
|
|
|
Amortization
of convertible debentures, beneficial conversion feature
|
|
|
375,000
|
|
|
375,000
|
|
|
—
|
|
|
Interest
expense associated with warrants issued with convertible
debentures
|
|
|
529,740
|
|
|
529,740
|
|
|
—
|
|
|
Issuance
of common stock as compensation expense
|
|
|
300,000
|
|
|
—
|
|
|
—
|
|
|
Effects
of variable accounting for modification of warrant terms
|
|
|
1,446,200
|
|
|
1,446,200
|
|
|
—
|
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
in inventory
|
|
|
(19,480
|
)
|
|
(19,480
|
)
|
|
—
|
|
|
(Increase)
in other current assets
|
|
|
(919,699
|
)
|
|
(873,297
|
)
|
|
(3,323
|
)
|
|
(Increase)
in deposits
|
|
|
(4,684
|
)
|
|
(200
|
)
|
|
(2,484
|
)
|
|
Increase
in accounts payable
|
|
|
196,819
|
|
|
149,871
|
|
|
39,480
|
|
|
Increase
in accrued expenses and mandatorily redeemable stock
|
|
|
366,900
|
|
|
339,155
|
|
|
18,469
|
|
|
(Decrease)
in accrued compensation
|
|
|
—
|
|
|
(11,833
|
)
|
|
(25,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used) by operating activities
|
|
|
(6,972,431
|
)
|
|
(4,169,853
|
)
|
|
(1,688,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of equipment
|
|
|
(452,043
|
)
|
|
(413,482
|
)
|
|
(11,556
|
)
|
|
Patent
expenses
|
|
|
(20,407
|
)
|
|
(20,407
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used) by investing activities
|
|
|
(472,450
|
)
|
|
(433,889
|
)
|
|
(11,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
in due to parent company
|
|
|
—
|
|
|
—
|
|
|
(17,884
|
)
|
|
Proceeds
from issuance of common stock
|
|
|
5,807,481
|
|
|
1,055,500
|
|
|
3,002,237
|
|
|
Proceeds
from issuance of convertible debentures
|
|
|
3,000,000
|
|
|
3,000,000
|
|
|
—
|
|
|
Issuance
costs associated with debentures
|
|
|
(419,474
|
)
|
|
(419,474
|
)
|
|
—
|
|
|
Proceeds
from initial investment by parent company
|
|
|
6,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
8,394,007
|
|
|
3,636,026
|
|
|
2,984,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
949,126
|
|
|
(967,716
|
)
|
|
1,284,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
—
|
|
|
1,916,842
|
|
|
632,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
949,126
|
|
$
|
949,126
|
|
$
|
1,916,842
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
113,729
|
|
$
|
111,487
|
|
$
|
324
|
|
|
Issuance
of mandatorily redeemable common stock for tooling
|
|
$
|
310,000
|
|
$
|
—
|
|
$
|
—
|
|
|
Issuance
of common stock for equipment purchases
|
|
$
|
30,000
|
|
$
|
30,000
|
|
$
|
—
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
Note
1 - Description of the Business and Summary of Significant Accounting
Policies
Description
of the Business
Aero
Grow
International, Inc. (“the Company”) was incorporated in the State of Nevada on
March 25, 2002. The Company was organized for the purpose of researching,
developing, manufacturing, and marketing indoor, turnkey, “plug and grow” Aero
Grow “Kitchen garden” systems designed and priced for the consumer market
worldwide. The Company’s offices are in Boulder, Colorado.
From
the
period March 25, 2002 (Inception) to December 31, 2005, the Company has raised
$4,967,481, from shares sold through private placements, a Colorado public
offering and, $3,000,000, through a private convertible debenture offering
from
June 6, 2005 thru December 31, 2005. However, the Company has experienced
significant operating losses since inception and has an accumulated deficit
of
$11,862,369 as of December 31, 2005.
As
noted
in the subsequent events footnote 10, the Company has entered into a merger
agreement for a reverse merger and is scheduled to close the merger by the
end
of February 2006. Concurrently, the Company is scheduled to close its private
placement offering and has currently raised approximately $9.0 million. The
Company believes these actions, if successful, will enable it to generate
revenues to the level necessary to create positive cash flow from
operations.
Additionally,
the Company has signed a manufacturing agreement with a Chinese contract
manufacturer with the intention of launching its product for sale during the
first half of 2006.
Significant
Accounting Policies
Use
of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Net
Income (Loss) per Share of Common Stock
The
Company computes net income (loss) per share of common stock in accordance
with
SFAS No. 128, “Earnings per Share,” and Securities and Exchange Commission Staff
Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with
complex capital structures to present basic and diluted EPS. Basic EPS is
measured as the income or loss available to common stock shareholders divided
by
the weighted average shares of common stock outstanding for the period. Diluted
EPS is similar to basic EPS but presents the dilutive effect on a per share
basis of potential common stock (e.g., convertible securities, options and
warrants) as if they had been converted at the beginning of the periods
presented. Potential shares of common stock that have an anti-dilutive effect
(i.e., those that increase income per share or decrease loss per share) are
excluded from the calculation of diluted EPS.
Note
1 - Description of the Business and Summary of Significant Accounting Policies
(cont.)
Significant
Accounting Policies (continued)
Reclassifications
& Restatement
Certain
prior year amounts have been reclassified to conform to current year
presentation.
The
accompanying balance sheet and statement of changes in stockholders’ equity
(deficit) has been restated from previously issued financial statements. For
the
period ended December 31, 2002, the Company has recorded $300,000 in
compensation expense to properly reflect the fair value of the exchange of
an
officer’s holdings of one million shares of common stock in Mentor Capital
Consultants, Inc. (the then parent company) for three million shares of common
stock of the Company. The transaction was initially recorded as a reciprocal
stockholding in its former parent of $10,000, and subsequent $10,000 impairment.
The effects of the restatement include the retained (deficit) being increased
by
$290,000 for each of the periods ended December 31, 2004 and 2003, and the
statement of changes in stockholders’ equity reflecting an increase to
additional paid in capital of $300,000, effective in fiscal year
2002.
The
accompanying Statement of Operations for the year ended December 31,2005
reflects a reclassification of $375,000 in expense from general and
administrative expense to interest expense related to the beneficial conversion
feature of convertible debentures issued by the Company (see Note 9) and
$1,446,200 in expense from general and administrative expense to a segregated
item under other income and expense that was related to modification of the
terms of certain of the Company’s outstanding warrants (see Note
6).
Cash
and cash equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents.
Concentration
of Credit Risk and Financial Instruments
Statement
of Financial Accounting Standards (“SFAS”) No. 105, “Disclosure of Information
About Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk”, requires disclosure of
significant concentrations of credit risk regardless of the degree of such
risk.
Financial instruments with significant credit risk include cash. The amount
on
deposit with a financial institution exceeded the $100,000 federally insured
limit as of December 31, 2005 and 2004. However, management believes that the
financial institution is financially sound and the risk of loss is
minimal.
Financial
instruments consist of cash and cash equivalents, subscriptions receivable
and
accounts payable. The carrying values of all financial instruments approximate
their fair value. The carrying value of the convertible debentures approximate
their fair value based on the current interest rate of 5%.
Property
and equipment
Property
and equipment are stated at cost. Depreciation for financial accounting purposes
is computed using the straight-line method over the estimated lives of the
respective assets. Office equipment and computer hardware are depreciated over
five years. The Company has purchased and built its own manufacturing equipment
and tools. The equipment is being amortized over a period of seven years
commencing July 1, 2003. Direct internal labor incurred in the manufacturing
of
the equipment totaled $12,714 as of December 31, 2005, and $6,240 as of December
31, 2004, and has been capitalized. The Company does not capitalize any overhead
or other administrative costs in conjunction with the manufacturing of
equipment.
Note
1 - Description of the Business and Summary of Significant Accounting Policies
(cont.)
Significant
Accounting Policies (continued)
Property
and equipment consist of the following as of:
|
|
|
December
31,
|
|
|
|
|
2005
|
|
2004
|
|
|
Manufacturing
equipment and tooling
|
|
$
|
402,639
|
|
$
|
11,772
|
|
|
Computer
hardware
|
|
|
40,973
|
|
|
17,575
|
|
|
Office
equipment
|
|
|
38,431
|
|
|
9,214
|
|
|
|
|
|
482,043
|
|
|
38,561
|
|
|
Less:
accumulated depreciation
|
|
|
(61,599
|
)
|
|
(7,840
|
)
|
|
Property
and equipment, net
|
|
$
|
420,444
|
|
$
|
30,721
|
|
Research
and Development
The
costs
incurred to develop products to be sold or otherwise marketed are currently
charged to expense. When a product is ready for general release, its capitalized
costs will be amortized using the straight-line method of amortization over
a
reasonable period. During the years ended December 31, 2005 and 2004, no
research and development costs have been capitalized.
Inventory
Inventories
consist of finished goods purchased from third-party manufacturers and is
valued at the lower of average cost or market, average cost being determined
using the first-in, first-out method of accounting. At December 31, 2005,
total inventory of $19,480 consisted of product purchased for re-sale in fiscal
year 2006.
General
and Administrative Costs
General
and administrative costs consist of the following for the years ended December
31, 2005 and 2004:
| |
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
Costs
for abandoned offering
|
|
|
212,580
|
|
|
—
|
|
|
Marketing
|
|
|
436,203
|
|
|
23,060
|
|
|
Office
and postage
|
|
|
111,868
|
|
|
93,332
|
|
|
Rent
|
|
|
114,244
|
|
|
91,741
|
|
|
Travel
and entertainment
|
|
|
292,095
|
|
|
63,453
|
|
|
Other
|
|
|
434,119
|
|
|
331,600
|
|
| |
|
$
|
1,601,109
|
|
$
|
603,186
|
|
Note
1 - Description of the Business and Summary of Significant Accounting Policies
(cont.)
Significant
Accounting Policies (continued)
Stock
Based Compensation
The
Company accounts for its stock-based compensation using Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees,
(“APB
No. 25”), and related interpretations, as permitted by SFAS No. 123, Accounting
for Stock-based Compensation, (“SFAS No. 123”), as amended by SFAS No. 148,
Accounting for Stock-based Compensation-Transition and Disclosure. Under APB
25,
compensation expense is recognized for stock options with an exercise price
that
is less than the market price on the grant date of the option. For stock options
with exercise prices at or above the market value of the stock on the grant
date, the Company adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for these options. As
of
December 31, 2005, and since inception, 90,613 options have been issued to
employees or directors of the Company and 609 options have expired.
The
following table illustrates the effect on net loss if the Company had applied
the fair value recognition provisions, as prescribed by SFAS 123, to stock-based
compensation for all awards.
|
|
|
Year
Ended December 31
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
loss, as reported
|
|
$
|
(7,717,577
|
)
|
$
|
(2,389,044
|
)
|
|
Net
income (loss) per share, basic and diluted, as reported
|
|
$
|
(1.55
|
)
|
$
|
(0.56
|
)
|
|
Deduct:
Stock-based compensation expense, as determined under fair-value
based
method for all awards
|
|
|
(225,127
|
)
|
|
(96,294
|
)
|
|
Pro
forma net loss
|
|
$
|
(7,942,704
|
)
|
$
|
(2,485,338
|
)
|
|
Pro
forma net income (loss) per share, basic and diluted
|
|
$
|
(1.60
|
)
|
$
|
(0.58
|
)
|
For
purposes of calculating fair value under SFAS 123, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: no dividend yield,
expected volatility rate of 129.67%; risk free interest rate of 5%; and average
lives of 5 years.
Income
taxes
The
Company accounts for deferred income taxes in accordance with the liability
method as required by Statement of Financial Accounting Standards No. 109
“Accounting for Income Taxes” (“SFAS 109”). Deferred income taxes are recognized
for the tax consequences in future years for differences between the tax basis
of assets and liabilities and their financial reporting amounts at the end
of
each period, based on enacted laws and statutory rates applicable to the periods
in which the differences are expected to affect taxable income. Any liability
for actual taxes to taxing authorities is recorded as income tax
liability.
Comprehensive
Income
Statement
of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”
requires the presentation and disclosure of all changes in equity from non-owner
sources as “Comprehensive Income”. The Company had no items of comprehensive
income for the years ended December 31, 2005 and December 31, 2004.
Note
1 - Description of the Business and Summary of Significant Accounting Policies
(cont.)
Significant
Accounting Policies (continued)
Segments
Of An Enterprise And Related Information
Statement
of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS 131”) replaces the industry segment
approach under previously issued pronouncements with the management approach.
The management approach designates the internal organization that is used by
management for allocating resources and assessing performance as the source
of
the Company’s reportable segments. SFAS 131 also requires disclosures about
products and services, geographic areas and major customers. At present, the
Company only operates in one segment.
Debt
Issuance Costs
Debt
issuance costs consist of consideration paid to third parties with respect
to
debt financing transactions, including cash payments for legal fees and
placement agent fees. Such costs are being deferred and amortized over the
term
of the related debt which is one year. As of December 31, 2005, a six month
term
remains to be amortized.
Intangible
Assets
Intangible
assets, to date, have consisted of the direct costs incurred for application
fees and legal expenses associated with patents and trademarks on the Company’s
products. The Company periodically reviews the recoverability from future
operations using undiscounted cash flows. To the extent carrying values
exceed fair values, an impairment loss will be evaluated for possible
recording. The Company will amortize its patent costs over 17
years.
Intangible
assets consist of the following as of December 31, 2005:
|
Patent
applications
|
|
$
|
15,503
|
|
|
Trademark
applications
|
|
|
4,904
|
|
|
Total
intangible assets
|
|
$
|
20,407
|
|
Beneficial
Conversion Feature of Debentures
In
accordance with Emerging Issues Task Force No. 98-5 (“EITF 98-5”), Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, and No. 00-27, Application of Issue No. 98-5
to
Certain Convertible Instruments, the Company recognizes the advantageous value
of conversion rights attached to convertible debt. Such rights gives the debt
holder the ability to convert debt into shares of common stock at a price per
share that is less than the fair market value of the common stock on the day
the
loan is made to the Company. The beneficial value is calculated as the intrinsic
value (the fair market value of the stock at the commitment date in excess
of
the conversion rate) of the beneficial conversion feature of the debentures
and
the related accrued interest and is recorded as a discount to the related debt
and an addition to additional paid in capital. The discount is subsequently
amortized to interest expense over the remaining outstanding period of the
related debt using the interest method.
Registration
Penalties
The
Company has convertible debentures and related warrants outstanding that require
limited liquidating payments if the shares underlying these instruments are
not
registered. The Company’s policy is to accrue these penalties, if any, as
incurred. Payments can be made in unregistered shares of the Company’s common
stock.
Note
1 - Description of the Business and Summary of Significant Accounting Policies
(cont.)
Significant
Accounting Policies (continued)
New
Accounting Pronouncements
In
December 2004, the FASB issued a revision to FASB Statement 123, “Accounting for
Stock Based Compensation”. This Statement supersedes APB Opinion No. 25,
“Accounting for Stock Issued to employees”, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity’s equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement does not change the accounting guidance for
share-based payment transactions with parties other than employees provided
in
Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for
Equity Instruments That Are Issued to Other Than Employees, or in Connection
with Selling Goods or Services.” This Statement does not address the accounting
for employee share ownership plans, which are subject to AICPA Statement of
Position 93-6, “Employees’ Accounting for Employee Stock Ownership
Plans”.
A
public
entity will initially measure the cost of employee services received in exchange
for an award of liability instruments based on its current fair value; the
fair
value of that award will be re-measured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period.
The
grant-date fair value of employee share options and similar instruments will
be
estimated using the option-pricing models adjusted for the unique
characteristics of those instruments (unless observable market prices for the
same or similar instruments are available).
Excess
tax benefits, as defined by this Statement, will be recognized as an addition
to
paid-in-capital. Cash retained as a result of those excess tax benefits will
be
presented in the statement of cash flows as financing cash inflows. The
write-off of deferred tax assets relating to unrealized tax benefits associated
with recognized compensation cost will be recognized as income tax expense
unless there are excess tax benefits from previous awards remaining in paid-in
capital to which it can be offset.
The
notes
to the financial statements will disclose information to assist users of
financial information to understand the nature of share-based payment
transactions and the effects of those transactions on the financial
statements.
The
effective date for public entities that do not file as small business issuers
will be as of the beginning of the first interim or annual reporting period
that
begins after June 15, 2005. For public entities that file as small business
issuers and nonpublic entities the effective date will be as of the beginning
of
the first interim or annual reporting period that begins after December 15,
2005. Management expects that the effect of this pronouncement could have a
material impact upon its future financial statements and intends to comply
with
this Statement at the scheduled effective date.
Note
1 - Description of the Business and Summary of Significant Accounting Policies
(cont.)
Significant
Accounting Policies (continued)
In
June
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
replacement of APB No. 20, and FAS No. 3.” SFAS No. 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections. It
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle.
SFAS
No. 154 also provides guidance for determining whether retrospective application
of a change in accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. The correction of an error
in
previously issued financial statements is not an accounting change. However,
the
reporting of an error correction involves adjustments to previously issued
financial statements similar to those generally applicable to reporting an
accounting change retrospectively. Therefore, the reporting of a correction
of
an error by restating previously issued financial statements is also addressed
by SFAS No. 154. SFAS No. 154 is required to be adopted in fiscal years
beginning after December 15, 2005. The Company does not believe adoption of
SFAS
No. 154 will have a material impact on its financial position, results of
operations or cash flows.
Note
2 - Income Taxes
The
Company did not record any provision for federal and state income taxes for
the
years ended December 31, 2005, and December 31, 2004. Variations from the
federal statutory rate are as follows:
|
|
|
Cumulative
period
from
March
25, 2002
(Inception)
to
|
|
Years
Ended December 31,
|
|
|
|
|
December
31, 2005
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Expected
income tax benefit at the statutory rate of 34%
|
|
|
3,094,946
|
|
|
2,091,806
|
|
|
794,910
|
|
|
Net
operating (loss) carryforward
|
|
|
(3,094,946
|
)
|
|
(2,091,806
|
)
|
|
(794,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
tax expense
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Deferred
income tax assets result from federal and state operating loss carryforwards
in
the amounts of $7,758,420, and $3,777,190 for the years ended December 31,
2005
and 2004, respectively. The loss carry forwards will begin to expire in 2022.
At
December 31, 2005 and 2004, the Company has research and development tax credit
carryforwards of $118,285 and $83,942, respectively, which begin to expire
in
2022.
Note
2 - Income Taxes (cont.)
Net
deferred tax assets consist of the following as of:
|
|
|
December
31,
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Tax
effect of net operating loss carryforwards
|
|
$
|
2,997,078
|
|
$
|
1,459,129
|
|
|
Tax
effect of non-employee stock based compensation
|
|
|
—
|
|
|
385,811
|
|
|
Tax
effect of other temporary differences
|
|
|
(20,417
|
)
|
|
(7,196
|
)
|
|
Research
and development tax credit
|
|
|
118,285
|
|
|
83,942
|
|
|
Less
valuation allowance
|
|
|
(3,094,946
|
)
|
|
(1,921,686
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
In
assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some or the entire deferred tax asset
will not be realized. The Company believes that sufficient uncertainty exists
regarding the realizability of the deferred tax assets such that valuation
allowances equal to the entire balance of the deferred tax assets are necessary.
In accordance with Sections 382 and 383 of the Internal Revenue Code, a change
in ownership of greater than 50% of a corporation within a three-year period
will place an annual limitation on our ability to utilize our existing tax
loss
and tax credit carryforwards.
Note
3 - Stock Options
In
2003,
the Company’s Board of Directors approved a Stock Option Plan (the Plan)
pursuant to which nonqualified stock options are reserved for issuance to
eligible employees, consultants and directors of the Company. The Plan is
administered by the Board of Directors, which has the authority to select the
individual’s to whom awards are to be granted, the number of shares of common
stock to be covered by each award, the vesting schedule of stock options, and
all other terms and conditions of each award. The Company has granted
nonqualified stock options to purchase shares of common stock to certain
employees at exercise prices ranging from $.05 to $5.00 per share. In August
2005, the Plan was merged into the 2005 Equity Compensation Plan and it no
longer separately exists. However, options issued and outstanding under this
Plan continue to be governed by their grant agreements but are administered
under the 2005 Equity Compensation Plan.
In
August
2005, the Company’s Board of Directors approved the 2005 Equity Compensation
Plan (the 2005 Plan) pursuant to which both qualified and nonqualified stock
options as well as restricted shares of common stock are reserved for issuance
to eligible employees, consultants and directors of the Company. The 2005
Plan is administered by the Company’s compensation committee which has the
authority to select the individual’s to whom awards are to be granted, the
number of shares of common stock to be covered by each award, the vesting
schedule of stock options, and all other terms and conditions of each award.
The
Company has granted qualified stock options to purchase shares of common stock
to certain employees at exercise prices ranging from $2.50 to $5.00 per
share.
The
Company has adopted the disclosure only provisions of Statement of Financial
accounting Standards No. 123 “Accounting for Stock-Based compensation” (“SFAS
No. 123”). Accordingly, the Company continues to account for options using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25
(“APB No. 25”).
Note
3 - Stock Options (cont.)
A
summary
of activity in the Plan is as follows:
|
|
|
Cumulative
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March
25, 2002 (Inception) to
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
|
December
31, 2005
|
|
December
31, 2005
|
|
December
31, 2004
|
|
| |
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
| |
|
Number
of
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
|
Outstanding
at the beginning of the period
|
|
|
—
|
|
$
|
—
|
|
|
38,994
|
|
$
|
2.85
|
|
|
4,737
|
|
$
|
2.00
|
|
|
Granted
during the period
|
|
|
90,613
|
|
|
4.00
|
|
|
51,625
|
|
|
4.88
|
|
|
34,257
|
|
|
2.95
|
|
|
Cancelled
during the period
|
|
|
(609
|
)
|
|
(0.05
|
)
|
|
(615
|
)
|
|
(0.05
|
)
|
|
—
|
|
|
—
|
|
|
Exercised
during the period
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding
at the end of the period
|
|
|
90,004
|
|
$
|
4.03
|
|
|
90,004
|
|
$
|
4.03
|
|
|
38,994
|
|
$
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
90,004
|
|
$
|
4.03
|
|
|
90,004
|
|
$
|
4.03
|
|
|
38,994
|
|
$
|
2.85
|
|
As
of
December 31, 2005, outstanding options had weighted average contractual lives
remaining of approximately four years with an exercise price of $4.03 per share.
Of those options outstanding at December 31, 2005, all are fully vested. As
of
December 31, 2004, outstanding options have weighted average contractual lives
remaining of approximately four and one half years with an exercise price of
$2.85 per share.
In
addition to stock options granted to employees, the Company granted options
to
purchase shares of common stock to certain consultants in exchange for services
provided. The compensation cost of these options, measured by the fair value
of
the options provided in lieu of cash, has been included in general and
administrative expense. The assumptions utilized to value employee options
in
accordance with the disclosure requirements of SFAS No. 123 were also used
to
value the options issued to the consultants. For the years ended December 31,
2005, and December 31, 2004, the Company has recognized consulting expense
related to the non-employee options of $72,936 and $80,939, respectively.
Note
3 —Stock Options (cont.)
Following
is a reconciliation of transactions during the period for options granted to
consultants:
|
|
|
Cumulative
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
March
25, 2002 (Inception) to
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
|
December
31, 2005
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
| |
|
Number
of
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
|
Outstanding
at the beginning of the period
|
|
|
—
|
|
$
|
—
|
|
|
145,335
|
|
$
|
1.10
|
|
|
101,825
|
|
$
|
1.00
|
|
|
Granted
during the period
|
|
|
160,769
|
|
|
1.19
|
|
|
15,445
|
|
|
2.00
|
|
|
43,510
|
|
|
1.45
|
|
|
Cancelled
during the period
|
|
|
(17,603
|
)
|
|
(0.64
|
)
|
|
(17,614
|
)
|
|
(0.64
|
)
|
|
—
|
|
|
—
|
|
|
Exercised
during the period
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding
at the end of the period
|
|
|
143,166
|
|
$
|
1.27
|
|
|
143,166
|
|
$
|
1.27
|
|
|
145,335
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
143,166
|
|
$
|
1.27
|
|
|
143,166
|
|
$
|
1.27
|
|
|
145,335
|
|
$
|
1.10
|
|
As
of
December 31, 2005, outstanding options had weighted average contractual lives
remaining of approximately four years with an exercise price of $1.27 per share.
Of those options outstanding at December 31, 2005, all are fully vested. As
of
December 31, 2004, outstanding non-employee options have a weighted average
contractual life remaining of approximately four and one half years with an
average exercise price of $1.10 per share. Of those options outstanding at
December 31, 2004, all are fully vested.
Note
4 - Related Party Transactions
During
the years ended December 31, 2005 and December 31, 2004, the Company retained
one member of their board as a consultant who was granted shares of common
stock
and fees for services provided, which services AeroGrow recorded at an aggregate
expense of $286,167 and $46,723, respectively. During the years ended December
31, 2005 and December 31, 2004, the Company paid legal fees to a director in
the
amount of $37,438 and $24,000, respectively, and issued shares of common stock
for services provided, which services AeroGrow recorded at an aggregate expense
of $10,000 and $83,250, respectively. The Company also issued shares of common
stock to its Board of Directors for services provided, which services AeroGrow
recorded at an aggregate expense of $30,000, for both of the years ended
December 31, 2005 and December 31, 2004.
The
Company leased their office space during the year ended December 31, 2005 from
a
landlord who is a minority shareholder. The Company paid rent to the shareholder
in the amount of $30,408 and issued shares of common stock for rent provided,
which rent AeroGrow recorded at an aggregate expense of $76,036. Thru July
2005,
the Company leased certain laboratory space from an employee. Rent expense
paid
to the employee totaled $7,574 and $5,200 for the years ended December 31,
2005
and 2004, respectively.
The
Company was renting office furniture, office equipment, and computers from
its
former parent, Mentor Capital Consultants, Inc., at the rate of $2,500 per
month. For the year ended December 31, 2004, the Company paid $30,000 to rent
the equipment. For the first five months of 2005, the Company continued to
rent
equipment from its parent for a total of $12,500. On May 31, 2005, the Company
acquired these fixed assets for their net book value of $33,901.
Note
4 - Related Party Transactions (cont.)
On
October 15, 2002, Mentor Capital Consultants, Inc.’s principal shareholder and
chief executive officer exchanged one million (1,000,000), of his outstanding
shares in Mentor Capital for three million (3,000,000) shares of common stock
of
the Company. As a result of this transaction, the Company has restated it’s
previously issued 2002 financial statements by recording $300,000, in
compensation expense.
Note
5 - Operating Leases
The
Company leases certain facilities and office space under a non-cancelable
operating lease agreement. Rent expense for the years ended December 31, 2005,
and December 31, 2004, was approximately $106,444 and $91,741, respectively.
This includes the fair value of 15,208 shares and 15,531 shares of common stock
granted to the landlord for the years ended December 31, 2005 and December
31,
2004, respectively.
One
of
the Company’s operating leases ended on December 31, 2005. The Company is
currently in negotiations for a new operating lease and is on a month-to-month
basis at $1,000 per month. In addition, the Company is on a month-to-month
basis
with the same landlord for additional space beginning in November at the rate
of
$700 per month.
The
Company leased certain laboratory space under a month-to-month lease beginning
November 2005 at the rate of $600 per month.
The
Company leased certain production space under a month-to-month lease beginning
in August 2005, at the rate of $1,315 per month.
Note
6 - Shareholders’ Equity
During
the period from December 1, 2002 to December 31, 2002, the Company issued a
private placement memorandum for the purpose of raising capital for
administrative costs, research and development, and for the establishment of
a
cash reserve. Pursuant to the private placement, the Company sold 380,000 shares
of its common stock at $0.50 per share.
The
Company issued 3,000 shares of common stock, and 27,000 shares of common stock
valued at $1.20 per share to its Board of Directors and consultants for
marketing, administrative, financial, and research and development services
provided in the period from March 25, 2002 (Inception) to December 31, 2002,
respectively. In conjunction with the private placement offering, certain
investors who purchased a minimum of $25,000 of shares of common stock were
provided two year warrants to purchase additional shares of common stock at
$1.25 per share. As of December 31, 2002, a total of 140,000 warrants were
issued and outstanding. All of the foregoing warrants were initially exercisable
for a two year period from date of issue, did not require registration of the
common stock underlying the warrants nor was registration of shares issued
upon
exercise required.
During
the years ended December 31, 2004 and 2003, the Company continued its private
placement offering initiated in 2002, and issued shares of common stock to
new
investors at $0.50 per share for 90,000 shares, and at $1.25 per share for
880,800 shares. On August 1, 2003, the Company initiated a new private placement
offering, and issued shares of common stock to new investors at $1.665 per
share
for 175,763 shares. During the year ended December 31, 2004, an additional
360,458 shares were issued at $1.665 per share. In conjunction with the
continuing and new private placement offerings, certain investors who purchased
minimum amounts of shares of common stock were provided with additional bonus
shares of common stock. If investors contributed a minimum of $15,000, to the
Company, they were awarded 10% bonus common stock award. In total, 27,700 and
81,888 shares of common stock were issued as bonus shares for the years ended
December 31, 2004 and December 31, 2003, respectively.
Note
6 - Shareholders’ Equity (cont.)
As
of
December 31, 2003, in conjunction with the private placement offerings, certain
investors who purchased a minimum of $25,000, of shares of common stock were
provided warrants to purchase additional shares of common stock. 30,000 warrants
were issued at $1.25 per share, 324,098 warrants were issued at $2.50 per share
and 30,000 warrants were issued at $5.00 per share. A total of 374,098 warrants
have been issued in conjunction with the private placement offerings during
2003. All of the foregoing warrants were initially exercisable for a two year
period from date of issue, did not require registration of the common stock
underlying the warrants nor was registration of shares issued upon exercise
required.
A
total
of 12,000 warrants have been exercised at $1.25 per share, and a total of
120,000 warrants have been exercised at $1.25 per share as of December 31,
2004
and December 31, 2003, respectively. Certain investors who exercised minimum
amounts of their warrants were provided with bonus shares of stock. If investors
contributed a minimum of $25,000, to the Company, they were awarded a 10% bonus
stock award. For the year ended December 31, 2003, 12,000 shares of common
stock
were issued as bonus shares.
The
Company also issued shares of common stock to its Board of Directors for
services provided valued at $30,000 and $7,500 for the years ended December
31,
2004, and December 31, 2003, respectively.
As
of
December 31, 2004, in conjunction with the private placement offerings, certain
investors who purchased a minimum of $25,000, of shares of common stock were
provided warrants to purchase additional shares of common stock. One hundred
seventy seven thousand (177,000) warrants were issued at $2.50 per share. All
of
the foregoing warrants were initially exercisable for a two year period from
date of issue, did not require registration of the common stock underlying
the
warrants nor was registration of shares issued upon exercise
required.
During
the year ended December 31, 2004, the Company issued a total of 144,882 shares
of common stock to landlords and consultants. Four thousand (4,000) shares
were
issued at $0.05, 5,000 shares at $1.25, 38,332 shares at $1.665, and 97,550
shares at $5.00 for legal, information technology, marketing, administrative,
and research and development services provided. During the year ended December
31, 2003, the Company issued a total of 40,999 shares of common stock to
landlords and consultants. Four thousand (4,000) shares were issued at $1.20
and
36,999 shares at $1.25 per share to a landlord and consultants for marketing,
administrative, financial, and research and development services provided.
These
shares were priced based on the fair value at which shares were being issued,
based on private placement offerings, at the time services were
rendered.
On
July
1, 2004, the Company was approved for an initial public offering in the State
of
Colorado, and issued shares of common stock to new investors at $5.00 per share
for 498,596 shares. In conjunction with the Colorado public offering, certain
investors who purchased minimum amounts of shares of common stock were provided
with additional bonus shares of common stock. If investors contributed a minimum
of $15,000, to the Company, they were awarded 10% bonus stock award. In total,
45,633 shares of common stock were issued as bonus shares for the year ended
December 31, 2004. Also, in conjunction with the public offering, certain
investors who purchased a minimum of $25,000 of shares of common stock were
provided two warrants to purchase additional shares of common stock. One warrant
is exercisable to purchase a share of common stock at the price of $10.00 per
share and the other warrant is exercisable at $15.00 per share. In total,
390,880 warrants were issued at the exercise price of $10.00, and the same
total
was issued at the exercise price of $15.00 in conjunction with the Colorado
public offering for year ended December 31, 2004. None of the warrants were
exercised during 2005 and 2004. The warrants are exercisable upon issue,
provided that at least 500 shares must be purchased on each exercise and further
provided that the common stock issuable upon exercise is, at the time of
exercise, registered or otherwise qualified for sale under the Securities Act
of
1933, as amended and the securities or “blue sky” laws of the jurisdiction in
which the exercise occurs, through and including December 31, 2007, at the
exercise price of $10.00 and $15.00 per share of Common Stock purchased,
respectively. These warrants may not be transferred, except to Colorado
residents, during the period in which the common stock unless (i) such warrants
and are registered under the Securities Act of 1933 and applicable state
securities laws, or exempt from such registration; or (ii) such transfer is
exempt from registration.
As
of
December 31, 2004, the Company has recorded subscriptions receivable of $41,000,
for shares sold. This amount was subsequently collected in cash.
On
January 31, 2005, the State of Nevada approved the Board of Director’s amendment
to the articles of incorporation which increased the authorized shares of the
Company’s common stock from 40,000,000 shares to 75,000,000 shares. On May 31,
2005, the Company’s Board of Directors approved a one-for-five reverse stock
split of all outstanding shares. The historical share and per share amounts
included in the accompanying financial statement have been retroactively
adjusted to reflect the split.
On
September 2, 2005, the Board approved the modification of 504,098 warrants
whereby the expiration dates of the aforementioned warrants was extended from
various dates throughout 2005, through and including December 31, 2005. The
Company accounted for this modification in warrant terms in accordance with
variable accounting in that the extension of the expiration dates of the
outstanding warrants results in a new measurement of compensation cost as if
the
award were newly granted. Therefore, in applying variable accounting, the
Company revalued the warrants as if they were granted on September 2, 2005
and
recognized as compensation expense the difference between the fair value
determined on September 2, 2005 and the fair value of the warrants determined
when originally issued in 2002 and 2003. The warrants, when originally issued,
were determined to have a fair value of $198,844. The warrants, when re-valued
on September 2, 2005, were determined to have a fair value of $1,645,044, or
a
difference of $1,446,200. This modification resulted in additional expense
of
$1,446,200 being recorded in the year ending December 31, 2005. The
Black-Scholes valuation model was utilized to value the warrants in accordance
with fair value as of both the original warrant issuance date and September
2,
2005.
During
the year ended December 31, 2005, 1,600 shares of common stock were sold at
$5.00 per share to an employee per an employment agreement. In addition, 38,000
warrants were exercised at $1.25 per share and 64,000 warrants were exercised
at
$2.50 per share. As of December 31, 2005, the Company has recorded subscriptions
receivable of $840,000 representing the exercises of 326,000 warrants at $2.50
per share and 5,000 warrants at $5.00 per share. This amount has subsequently
been collected in cash in January 2006.
During
2005, the Company issued a total of 261,232 shares of common stock at a $5.00
per share to directors, vendors, landlords, consultants and employees for
information technology, marketing, administrative, financial, manufacturing,
engineering and research and development services provided. The fair value
of
these shares was determined based upon sales of other stock transactions in
the
private market just prior to the services being provided.
The
Company’s Articles of Incorporation authorize the issuance of 20,000,000 shares
of preferred stock with $.001 par value. The preferred stock may be issued
from
time to time by the Board of Directors. As of December 31, 2005 and 2004, no
shares of preferred stock have been issued.
Note
6 - Shareholders’ Equity (continued)
A
summary
of the Company’s warrant activity for the period from Inception through December
31, 2005 is presented below:
|
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Granted
|
|
|
140,000
|
|
$
|
1.25
|
|
|
Outstanding,
December 31, 2002
|
|
|
140,000
|
|
$
|
1.25
|
|
|
Granted
|
|
|
384,098
|
|
$
|
2.60
|
|
|
Exercised
|
|
|
(120,000
|
)
|
$
|
1.25
|
|
|
Outstanding,
December 31, 2003
|
|
|
404,098
|
|
$
|
2.53
|
|
|
Granted
|
|
|
958,760
|
|
$
|
10.65
|
|
|
Exercised
|
|
|
(12,000
|
)
|
$
|
1.25
|
|
|
Outstanding,
December 31, 2004
|
|
|
1,350,858
|
|
$
|
8.31
|
|
|
Granted
|
|
|
660,000
|
|
$
|
5.10
|
|
|
Exercised
|
|
|
(433,000
|
)
|
$
|
1.25
|
|
|
Expired
|
|
|
(25,000
|
)
|
$
|
5.00
|
|
|
Outstanding,
December 31, 2005
|
|
|
1,552,858
|
|
$
|
8.64
|
|
| |
|
|
|
|
|
|
|
|
Summary
of Outstanding Warrants
|
|
|
|
|
|
|
|
| |
|
|
111,098
|
(1)
|
$
|
2.50
|
|
|
|
|
|
— |
|
$
|
5.00
|
|
| |
|
|
600,000
|
(2)
|
$
|
5.01
|
|
| |
|
|
60,000
|
(3)
|
$
|
6.00
|
|
| |
|
|
390,880
|
(4)
|
$
|
10.00
|
|
| |
|
|
390,880
|
(4)
|
$
|
15.00
|
|
|
Total
|
|
|
1,552,858
|
|
$
|
8.64
|
|
| (1) |
Warrants
granted in 2003 and 2004. All of the foregoing warrants were initially
exercisable for a two year period from date of issue, did not require
registration of the common stock underlying the warrants nor was
registration of shares issued upon exercise
required.
|
| (2) |
Warrants
granted in conjunction with Convertible Debt Offering that require
registration of the common stock underlying the warrants as described
in
Note 9-Convertible Debentures.
|
| (3) |
Placement
agent warrants granted in conjunction with Convertible Debt Offering
that
require registration of the common stock underlying the warrants
as
described in Note
9-Convertible
Debentures.
|
| (4) |
Warrants
granted in conjunction with the Company’s Colorado Public
Offering,
exercisable upon issue, provided that at least 500 shares must be
purchased on each exercise and further provided that the Common Stock
issuable upon exercise is, at the time of exercise, registered or
otherwise qualified for sale under the Securities Act of 1933, as
amended,
and the securities or “blue sky” laws of the jurisdiction in which the
exercise occurs, through and including December 31, 2007, at the
exercise
price of $10.00 and $15.00 per share of Common Stock purchased,
respectively. These warrants may not be transferred, except to Colorado
residents, during the period in which the common stock unless (i)
such
warrants and are registered under the Securities Act of 1933 and
applicable state securities laws, or exempt from such registration;
or
(ii) such transfer is exempt from
registration.
|
Note
7 - Exchange Options
On
April
12, 2003, the Board of Directors of Aero Grow offered the option to each of
the
Advisory Board Members of the Company to exchange from 25,000
to 33,333 of each person’s shares of Mentor Capital Consultants, Inc. for
15,000 to 20,000 shares of common stock (3 to 1 ratio) of Aero Grow
International, Inc. This option was offered to the Aero Grow Advisory
Board Members as compensation for their first year of service on the Advisory
Board, as well as acknowledgement for their consulting services for the
Company.
As
of
August 1, 2003, all members of AeroGrow’s Advisory Board had exercised their
options exchanging 216,865 shares of Mentor Capital for 130,120 shares of common
stock of Aero Grow. For the year ended December 31, 2003, the Company recognized
$162,650, in compensation and consulting expense equal to the fair value of
the
shares received by the Advisory Board. The fair value of the shares was
determined based on the sales price of other stock transactions in the private
market just prior to the exchange.
Note
8 - Mandatorily Redeemable Common Stock
On
September 30, 2005, the Company entered into a manufacturing agreement with
Source Plus, Inc. (“Source Plus”) and Mingkeda Industries Co. Ltd. (“Mingkeda”).
Source Plus advanced monies to Mingkeda for tooling and molds to build the
Company’s products. To reimburse Source Plus for its advances to Mingkeda, the
Company issued 62,000 shares of common stock to Source Plus in October 2005.
As
a result of the foregoing, the Company recorded a $310,000 asset for tooling
which is being depreciated over a period of three years to reflect the estimated
useful life of the tooling. If an offering or other transaction to enable Source
Plus an ability to register their issued shares is not completed on or before
June 1, 2006, Source Plus may require the Company to repay $310,000 in exchange
for its return of the shares of common stock. In accordance with SFAS No. 150,
the Company has recorded the shares issued as a liability until such time as
the
registration contingency can be removed.
The
tooling is located in China and the Company holds title to the tooling equipment
and is able to move the tooling to another manufacturer, if required, in future
periods.
Further,
in return for a future $0.50 per unit price concession from Mingkeda for
products the Company will purchase, the Company issued 10,000 shares of common
stock to Mingkeda in October 2005. The Company recorded a $50,000 expense for
inventory which it will charge to cost of sales at a rate of $0.50 per unit
for
each unit sold or one year, whichever occurs sooner. The Company also agreed
to
pay to Source Plus a commission of 2% of the total purchases of the product
with
such payments to be made using the same terms as payments to
Mingkeda.
Note
9 - Convertible Debentures
On
May
27, 2005, the Company entered into an exclusive Placement Agreement with Keating
Securities, LLC to raise up to $3,000,000, through a private placement offering
consisting of up to 300 Units at an offering price of $10,000 per Unit. Each
Unit is comprised of a 10% Unsecured Convertible Promissory Note in the
principal amount of $10,000, and 2,000 five-year warrants, each warrant
providing for the purchase of one share of the Company’s common stock at the
exercise price of $5.01 per share. The Unsecured Convertible Promissory Notes
bear interest at the rate of 10% annually which is payable quarterly beginning
September 30, 2005. The principal is due on June 30, 2006. During the fifteen
days following the completion of an additional financing, each note holder
has
the opportunity to request full payment of the principal amount of the notes
and
interest instead of converting their convertible notes into shares of common
stock and convertible warrants. As of December 31, 2005, the Company had
received proceeds of $3,000,000 from this private placement less $419,471,
in
directly incurred debt issuance costs. In
addition to the foregoing, for each share of common stock issuable upon
conversion, each note holder shall receive an additional five year warrant
to
purchase one share of the common stock at an exercise price of $6.00 per share.
The Company had agreed to registration rights related to both the shares
underlying the convertible debt and the related warrants associated with such
offering. In the event the Company fails to fulfill in registration
obligations the
Company agreed to pay liquidated damages under
the
following circumstances: (a) if the registration statement is not filed by
the
Company on or prior to 60 days after the final closing of the offering (such
an
event, a “Filing Default”); (b) if the registration statement is not declared
effective by the SEC on or prior to 150 days after the final Closing in the
offering (such an event, an “Effectiveness Default”); or (c) if the Company does
not file its required periodic reports under the Exchange Act when due (such
an
event, a “Reporting Default” and together with a Filing Default and an
Effectiveness Default, a “SEC Default”). In the event of an SEC Default, the
Company is required, as liquidated damages, to pay, for each 30-day period
of an
SEC Default, an amount equal to
Note
9 - Convertible Debentures (cont.)
1%
of the
principal amount of the notes up to a maximum aggregate of 24 months of SEC
Defaults. The Company must pay the Liquidated Damages in shares of Common Stock,
priced at $2.00 per share as follows: (i) in connection with a Filing Default,
on the 61st day after the initial closing, and each 30th day thereafter until
the registration statement is filed with the SEC; (ii) in connection with an
Effectiveness Default, on the 151st day after the initial closing, and each
30th
day thereafter until the Registration Statement is declared effective by the
SEC; or (iii) in connection with a Reporting Default, on the 31st consecutive
day of after a Reporting Default has occurred, provided that if the Reporting
Default has been cured, then such days during which a Reporting Default were
accruing will be added to any future Reporting Default period for the purposes
of calculating the payment of the liquidated damages provided for in this
provision.
In
conjunction with this $3,000,000 private placement, the Company recognized
$750,000 of beneficial conversion costs, representing the value of the
beneficial conversion rights of the Convertible Debentures, determined by
calculating the difference of the fair market value of the stock at the
commitment date, or $5.00 per share, less the conversion exercise price of
$4.00
times the number of shares to be issued upon conversion or 750,000 shares.
This
value is recorded as a discount to the Convertible Debentures and an addition
to
additional paid in capital. This discount will be amortized over the term of
the
Convertible Debentures which are due, if not converted, by June 30, 2006. (
See
Note 10 - Subsequent events)
Also
in
conjunction with this $3,000,000 private placement, the Company recognized
$1,059,480 representing the fair value of the five year warrants issued with
the
Convertible Debentures. The value of these
warrants was determined in accordance with the Black-Scholes pricing model
utilizing a historic volatility factor of 129.67%, a risk free interest rate
of
5.0% and an expected life for the warrants of five years, resulting in a value
of $2.73 per warrant. This value was recorded as an additional discount to
the
Convertible Debentures and an addition to additional paid in capital. This
discount will be amortized to interest expense over the term of the Convertible
Debentures which are due if not converted by June 30, 2006.
The
balance presented for the Convertible Debentures, net of discounts, as of
December 31, 2005 is as follows:
|
Face
amount of convertible promissory notes payable
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
|
Discount
as a result of Beneficial Conversion Feature, net of amortization
of
$375,000.
|
|
|
(375,000
|
)
|
|
Discount
as a result of fair value of warrants issued, net of amortization
of
$529,740.
|
|
|
(529,740
|
)
|
|
Net
balance - December 31, 2005
|
|
$
|
2,095,260
|
|
The
Company evaluated both the warrants and the conversion features implicit in
the
Convertible Debentures as to whether the were derivatives under FAS 133
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in, a Company’s Own Stock” and determined that they had been properly
recorded and that the value ascribed to the Beneficial Conversion Feature and
the Warrants are properly classified as equity.
Note
10 - Events Subsequent to December 31, 2005 (unaudited)
The
Company entered into a Letter of Intent on January 4, 2006, and a Merger
Agreement on January 12, 2006, with Wentworth I, Inc., a Delaware corporation.
Wentworth is a non-operating entity without significant assets. On January
12,
2006, Wentworth’s Board of Directors and its shareholders approved the Merger
Agreement and the Company’s Board of Directors approved the Merger Agreement.
Under the terms of the Merger Agreement and subject to certain adjustments,
the
Company will issue not more than 5% of its outstanding common stock on a fully
diluted basis to the Wentworth stockholders.
Note
10 - Events Subsequent to December 31, 2005 (unaudited)
(cont.)
As
a
condition of the closing of the Merger Agreement, the Company was required
to
complete a private placement offering of its common stock shares and common
stock warrants with gross proceeds of not less that $5 million. The private
placement offering will be for a minimum amount of $5 million and a maximum
amount of $12 million. Under the terms of the Merger Agreement, the Company
has
agreed to pay a financial advisory fee of $350,000 to Wentworth’s financial
advisor in the transaction if the gross proceeds from the offering exceed $10
million.
The
closings of the Merger Agreement and the private placement offering occurred
on
February 24, 2006 and March 1, 2006. AeroGrow received gross proceeds of
$10,740,000 in the Offering. Pursuant to Subscription Agreements entered into
with these Investors, AeroGrow sold 2,148,000 shares of its common stock and
warrants to purchase 2,148,000 shares of its common stock. Each Unit in the
Offering consisted of one share of common stock and a five-year warrant to
purchase one share of common stock at an exercise price of $6.25 per share.
The
price per Unit in the Offering was $5.00. Immediately after the closing of
the
Offering, the investors will own 2,148,000 shares of AeroGrow’s common stock
representing 23.7% of the issued and outstanding common stock of AeroGrow
immediately after the Merger, the Offering and the Note Conversion. After
commissions, expenses and the reverse merger fee payable to Keating Securities,
AeroGrow received net proceeds of $8,964,952 in the Offering. This offering
required registration of the common stock issued and the shares of common stock
underlying the warrants. Liquidated damages are payable to investors under
the
following circumstances: (a) if a registration statement is not filed by the
AeroGrow on or prior to 45 days after the closing date (such an event, a “Filing
Default”); (b) if the registration statement is not declared effective by the
SEC on or prior to the 150th day after the Closing Date (such an event, an
“Effectiveness Default”); and/or (c) if the Registration Statement (after its
effectiveness date) ceases to be effective and available to investors for any
continuous period that exceeds
30
days
or for one or more periods that exceeds in the aggregate 60 days in any 12-month
period (such an event, a “Suspension Default” and together with a Filing Default
and an Effectiveness Default, a “Registration Default”). In the event of a
Registration Default, AeroGrow shall pay as Liquidated Damages, for each 30-day
period of a Registration Default, an amount equal to 1% of the aggregate
purchase price paid by the investors up to a maximum of 18% of the aggregate
purchase price paid, provided that liquidation damages in respect of a
Suspension Default shall not be payable in relation to any securities not owned
by the investors at the time of the Suspension Default and, provided further,
that no liquidated damages are due in respect of the warrants. In the event
of a
Filing Default or an Effectiveness Default, the Liquidated Damages shall be
paid
by the issuance of additional Common Stock at the rate of the amount of the
liquidated damages due divided by $2.00. In the event of a Suspension Default,
the liquidated damages shall be paid in cash.
In
the
Merger each of the Wentworth’s 3,750,000 shares of outstanding common stock was
converted into the right to receive 0.154703 shares of AeroGrow common stock
resulting in the issuance of 580,136 shares of AeroGrow’s common stock to the
Wentworth stockholders representing 6.4% of the issued and outstanding common
stock of AeroGrow immediately after the Merger, the Offering and the Note
Conversion.
Note
10 - Events Subsequent to December 31, 2005 (unaudited)
(cont.)
In
February 2006, the Company entered into agreements with the convertible debt
holders (Note 9) whereby certain debt holders converted their outstanding debt
obligations into common stock of the Company at a conversion price of $3.00
per
share and certain other debt holders agreed to extend the maturity dates of
their debt obligations from June 30, 2006 to December 31, 2006. The portion
of
debt converted immediately totaled $2,130,000 resulting in additional beneficial
conversion expense of $887,500 to account for the additional fair value
attributed to the additional shares of common stock which will be issued as
a
result of the change in the conversion price change to $3 per share from the
originally issued $4 per share. The fair value of the foregoing additional
shares was based upon a price of $5.00 per share. The converting note holders
also were issued, pursuant to the terms of the original note offering, five-year
warrants to purchase 426,000 shares of AeroGrow’s common stock at an exercise
price of $6.00 per share.
With
respect to the $840,000 of convertible debentures that were modified by
extension of the due date from June 30, 2006 and modification of the and the
embedded conversion feature from a conversion price of $4.00 per share to a
conversion price of $3.50 per share, Based on the significant change in the
terms of these $840,000 in debentures, the original debt is deemed extinguished
and a debt extinguishment gain or loss may need to be recognized based on the
fair value of the new debt instrument in accordance with EITF 96-19,
Debtor’s
Accounting for a Modification or Exchange of Debt Instruments and EITF 05-07,
Accounting for Modifications to Conversion Options Embedded in Debt Instruments
and Related Issues. The Company will recognize a loss on extinguishment of
debt
of $132,578. This loss was determined by calculating the change in net present
value of the cash flows from the convertible debt, inclusive of the change
in
the embedded conversion feature determined by comparing the fair value of the
conversion option immediately following such modification with its fair value
immediately prior to the modification. This loss will be recorded as of February
2006 with a corresponding increase in fair value of the modified convertible
debenture balance and will be amortized over the remaining term of these
debentures to additional paid in capital.
Of
the
original amount of $3 million disclosed as outstanding in Note 9 as of December
31, 2005, $30,000 is due on June 30, 2006 and $840,000 is due December 31,
2006.
The
holders of securities issued in the private placement offering and the
convertible debt offering have registration rights under the common stock and
for the common stock underlying the warrants held by them. Liquidated damages
for failure to register and maintain registration for the
common stock and for the common stock underlying the warrants held by investors
are payable under the following circumstances: (a) if a registration statement
is not filed by the AeroGrow on or prior to 45 days after the closing date
(such
an event, a “Filing Default”); (b) if the registration statement is not declared
effective by the SEC on or prior to the 150th day after the Closing Date (such
an event, an “Effectiveness Default”); and/or (c) if the Registration Statement
(after its effectiveness date) ceases to be effective and available to Investor
for any continuous period that exceeds 30 days or for one or more period that
exceeds in the aggregate 60 days in any 12-month period (such an event, a
“Suspension Default” and together with a Filing Default and an Effectiveness
Default, a “Registration Default”). In the event of a Registration Default, the
AeroGrow shall pay to Investor as Liquidated Damages, for each 30-day period
of
a Registration Default, an amount equal to 1% of the aggregate purchase price
paid by Investor pursuant to this Agreement up to a maximum of 18% of the
aggregate purchase price paid by the Investor, provided that liquidation damages
in respect of a Suspension Default shall not be payable in relation to any
securities not owned by the Investor at the time of the Suspension Default
and,
provided further, that no liquidated damages are due in respect of the warrants.
In the event of a Filing Default or an Effectiveness Default, the Liquidated
Damages shall be paid by the issuance of additional Common Stock at the rate
of
the amount of the liquidated damages due divided by $2.00. In the event of
a
Suspension Default, the liquidated damages shall be paid in cash. In summary.
the liquidated damages are either settled with common stock in the case of
a
delay in filing having declared effective a registration statement, or in cash
but only related to actual stock issued (excluding common stock underlying
warrants) for failure to maintain effectiveness of a registration.
Aerogrow
International, Inc.
Proforma
Condensed Balance Sheet
December
31, 2005
(Unaudited)
| |
|
|
Wentworth I
|
|
|
Aerogrow
|
|
|
Total
|
|
|
Adjustments
DR
(CR)
|
|
|
|
|
Proforma
Total
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,274
|
|
$
|
49,126
|
|
$
|
952,400
|
|
|
8,321,252
|
|
(d
|
)
|
$
|
9,273,652
|
|
|
Subscriptions
receivable
|
|
|
—
|
|
|
840,000
|
|
|
840,000
|
|
|
|
|
|
|
|
840,000
|
|
|
Other
current assets
|
|
|
—
|
|
|
99,200
|
|
|
99,200
|
|
|
|
|
|
|
|
99,200
|
|
|
Fixed
assets, net
|
|
|
—
|
|
|
420,444
|
|
|
420,444
|
|
|
|
|
|
|
|
420,444
|
|
|
Debt
issuance costs
|
|
|
—
|
|
|
209,737
|
|
|
209,737
|
|
|
|
|
|
|
|
209,737
|
|
|
Other
assets
|
|
|
—
|
|
|
25,091
|
|
|
25,091
|
|
|
|
|
|
|
|
25,091
|
|
|
Total
assets
|
|
$
|
3,274
|
|
$
|
2,543,598
|
|
$
|
2,546,872
|
|
|
|
|
|
|
$
|
10,868,124
|
|
|
LIABILITIES
AND STOCKHOLDER’S EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
50,300
|
|
$
|
253,740
|
|
$
|
304,040
|
|
|
|
|
|
|
$
|
304,040
|
|
|
Accrued
liabilities-related party
|
|
|
12,151
|
|
|
—
|
|
|
12,151
|
|
|
|
|
|
|
|
12,151
|
|
|
Mandatorily
redeemable common stock
|
|
|
|
|
|
310,000
|
|
|
310,000
|
|
|
|
|
|
|
|
310,000
|
|
|
Convertible
debentures, net of discounts
|
|
|
|
|
|
2,095,260
|
|
|
2,095,260
|
|
|
1,487,635
|
|
(d
|
)
|
|
607,625
|
|
|
Total
liabilities
|
|
|
62,451
|
|
|
2,659,000
|
|
|
2,721,451
|
|
|
|
|
|
|
|
1,233,816
|
|
|
Common
stock
|
|
|
38,000
|
|
|
5,579
|
|
|
43,579
|
|
|
(580
|
)
|
(a
|
)
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
38,000
|
|
(b
|
)
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
(c
|
)
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
(710
|
)
|
(d
|
)
|
|
8,869
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
580
|
|
(a
|
)
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
168,697
|
|
(b
|
)
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
(8,319,252
|
)
|
(c
|
)
|
|
|
|
| |
|
|
168,697
|
|
|
11,741,388
|
|
|
11,910,085
|
|
|
(3,016,790
|
)
|
(d
|
)
|
|
23,076,850
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock
|
|
|
(45,000
|
)
|
|
—
|
|
|
(45,000
|
)
|
|
(45,000
|
)
|
(b
|
)
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
(161,697
|
)
|
(b
|
)
|
|
|
|
|
Retained
(deficit) earnings
|
|
|
(220,874
|
)
|
|
(11,862,369
|
)
|
|
(12,083,243
|
)
|
|
1,529,865
|
|
(d
|
)
|
|
(13,451,412
|
)
|
|
Total
stockholders’ equity (deficit)
|
|
|
(59,177
|
)
|
|
(115,402
|
)
|
|
(174,579
|
)
|
|
|
|
|
|
|
9,634,307
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
3,274
|
|
$
|
2,543,598
|
|
$
|
2,546,872
|
|
$
|
0
|
|
|
|
$
|
10,868,124
|
|
(a)
Record issuance of shares for reverse-merger with Wentworth I,
Inc.
(b)
Eliminate Wentworth’s stockholders’ equity balances.
(c)
Record Offering proceeds and stock issued
(d)
Record modification, extension and conversion of convertible
debt
See
notes
to the unaudited proforma financial statements
Aerogrow
International, Inc.
Proforma
Condensed Statement of Operations
Year
Ended December 31, 2005
(Unaudited)
| |
|
|
Wentworth
I
|
|
|
Aerogrow
|
|
|
Total
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
Cost
of revenues
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
Gross
profit
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
& development
|
|
|
—
|
|
|
577,302
|
|
|
577,302
|
|
|
|
|
|
577,302
|
|
|
Professional
consulting fees
|
|
|
22,486
|
|
|
1,594,102
|
|
|
1,616,588
|
|
|
|
|
|
1,616,588
|
|
|
Salaries
and wages
|
|
|
|
|
|
1,314,009
|
|
|
1,314,009
|
|
|
|
|
|
1,314,009
|
|
|
Other
general and administrative expenses
|
|
|
18,222
|
|
|
3,422,309
|
|
|
3,440,531
|
|
|
59,757
|
(e)
|
|
3,500,288
|
|
|
Total
operating expenses
|
|
|
40,708
|
|
|
6,907,722
|
|
|
6,948,430
|
|
|
|
|
|
7,008,187
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(40,708
|
)
|
|
(6,907,722
|
)
|
|
(6,948,430
|
)
|
|
|
|
|
(7,008,187
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
—
|
|
|
(809,855
|
)
|
|
(809,855
|
)
|
|
1,529,865
|
(d)
|
|
(2,339,720
|
)
|
|
Total
other income (expense)
|
|
|
—
|
|
|
(809,855
|
)
|
|
(809,855
|
)
|
|
|
|
|
(2,339,720
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before provision for income taxes
|
|
|
(40,708
|
)
|
|
(7,717,577
|
)
|
|
(7,758,285
|
)
|
|
|
|
|
(9,347,908
|
)
|
|
Provision
for income taxes
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(40,708
|
)
|
$
|
(7,717,577
|
)
|
$
|
(7,758,285
|
)
|
$
|
1,589,623
|
|
$
|
(9,347,908
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
|
|
|
|
|
|
$
|
(0.87
|
)
|
|
|
|
$
|
(1.05
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
8,930,885
|
|
|
|
|
|
8,930,885
|
|
(d)
Record modification, extension and conversion of convertible debt
(e)
Record reverse-merger expense.
See
notes
to the unaudited proforma financial statements
Aerogrow
International, Inc.
Notes
to
the Unaudited Proforma Financial Statements
December
31, 2005
The
following unaudited pro forma condensed financial statements give effect to
the
merger transaction of Wentworth I Inc. (the “Company”) with and into Aerogrow
International, Inc. (“Aerogrow”). In addition, the unaudited pro forma condensed
financial statements give effect to a private placement offering which was
completed in conjunction with the merger as well as a conversion of convertible
debt securities of Aerogrow which converted contingent upon and conjunction
with
the merger and the private placement offering.
The
following unaudited pro forma condensed balance sheet combines the balance
sheet
of the Company with Aerogrow as of December 31, 2005, as if the merger, private
placement offering conversion of convertible debt securities and occurred on
that date. The following unaudited pro forma condensed statements of operations
combine the results of operations of the Company with Aerogrow for the year
ended December 31, 2005 as if the aforementioned transaction had occurred at
the
beginning of such period.
The
unaudited pro forma condensed financial statements should be read in conjunction
with the separate historical financial statements of the Company and Aerogrow,
appearing elsewhere herein, and the historical financial statements of the
Company as filed with the Securities and Exchange Commission. These pro forma
financial statements are not necessarily indicative of the combined financial
position, had the acquisition occurred on December 31, 2005, or the combined
results of operations which might have existed for the periods indicated or
the
results of operations as they may be in the future.
On
January 4, 2006, Wentworth I, Inc. (“Wentworth,” the “Company”) entered into an
Agreement and Plan of Merger (“Agreement”) with AeroGrow International, Inc.
(“AeroGrow”) by which the Company will merge with and into AeroGrow, with
AeroGrow being the surviving corporation. This merger transaction may also
be
referred to as a reverse-merger. Prior to this acquisition, the Company has
no
operations and nominal assets and liabilities.
As
a
condition to the merger, AeroGrow conducted a private placement offering of
its
common stock and common stock purchase warrants to institutional investors
and
other high net worth individuals on a best efforts $5,000,000 minimum,
$12,000,000 maximum basis. The offering was a condition to the merger, and
the
merger was contingent on the offering. On February 24, 2006, AeroGrow completed
a sale of shares of its common stock and common stock purchase warrants in
a
private placement transaction (the “Offering”). AeroGrow sold 2,148,000 shares
of its common stock and warrants to purchase 2,148,000 shares of its common
stock and AeroGrow received gross proceeds of $10,000,000. Each Unit in the
Offering consisted of one share of common stock and a five-year warrant to
purchase one share of common stock at an exercise price of $6.25 per share.
The
price per Unit in the Offering was $5.00. This Offering required registration
of
the common stock issued and the shares of common stock underlying the warrants.
Liquidated damages are payable to investors under the following circumstances:
(a) if a registration statement is not filed by the AeroGrow on or prior to
45
days after the closing date (such an event, a “Filing Default”); (b) if the
registration statement is not declared effective by the SEC on or prior to
the
150th day after the Closing Date (such an event, an “Effectiveness Default”);
and/or (c) if the Registration Statement (after its effectiveness date) ceases
to be effective and available to investors for any continuous period that
exceeds 30 days or for one or more periods that exceeds in the aggregate 60
days
in any 12-month period (such an event, a “Suspension Default” and together with
a Filing Default and an Effectiveness Default, a “Registration Default”). In the
event of a Registration Default, AeroGrow shall pay as Liquidated Damages,
for
each 30-day period of a Registration Default, an amount equal to 1% of the
aggregate purchase price paid by the investors up to a maximum of 18% of the
aggregate purchase price paid, provided that liquidation damages in respect
of a
Suspension Default shall not be payable in relation to any securities not owned
by the investors at the time of the Suspension Default and, provided further,
that no liquidated damages are due in respect of the warrants. In the event
of a
Filing Default or an Effectiveness Default, the Liquidated Damages shall be
paid
by the issuance of additional Common Stock at the rate of the amount of the
liquidated damages due divided by $2.00. In the event of a Suspension Default,
the liquidated damages shall be paid in cash.
After
commissions, expenses and the reverse merger fees, AeroGrow received net
proceeds of $8,321,252 in the Offering.
For
their
services as placement agent, AeroGrow paid Keating Securities a fee equal to
10%, or $1,000,000, of the gross proceeds from the Offering. AeroGrow also
paid
Keating Securities a non-accountable expense allowance equal to 3%, or
approximately $300,000, of the gross proceeds from the Offering. In addition,
AeroGrow issued to Keating Securities and its designee’s five-year warrants to
purchase an aggregate of 200,000 shares of its common stock at an exercise
price
of $6.25 per share (“Agent Warrants”). The warrants are fully vested and may be
exercised on a cashless or net issuance basis.
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4.
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Conversion
of Convertible Debt
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In
connection with the Merger, AeroGrow sought to modify the terms of certain
outstanding convertible notes issued in 2005 with an outstanding principal
balance of $3,000,000, originally due June 30, 2006 (“Convertible Notes”). The
Company entered into agreements with the convertible debt holders whereby
certain debt holders converted their outstanding debt obligations into common
stock of the Company at a conversion price of $3.00 per share and certain other
debt holders agreed to extend the maturity dates of their debt obligations
from
June 30, 2006 to December 31, 2006. The portion of debt converted immediately
totaled $2,130,000 resulting in additional beneficial conversion expense of
$887,500 to account for the additional fair value attributed to the additional
shares of common stock which will be issued as a result of the change in the
conversion price change to $3 per share from the originally issued $4 per share.
The fair value of the foregoing additional shares was based upon a price of
$5.00 per share. The converting note holders also were issued, pursuant to
the
terms of the original note offering, five-year warrants to purchase 426,000
shares of AeroGrow’s common stock at an exercise price of $6.00 per share.
With
respect to the $840,000 of convertible debentures that were modified by
extension of the due date from June 30, 2006 and modification of the and the
embedded conversion feature from a conversion price of $4.00 per share to a
conversion price of $3.50 per share, Based on the significant change in the
terms of these $840,000 in debentures, the original debt is deemed extinguished
and a debt extinguishment gain or loss may need to be recognized based on the
fair value of the new debt instrument in accordance with EITF 96-19, Debtor’s
Accounting for a Modification or Exchange of Debt Instruments and EITF 05-07,
Accounting for Modifications to Conversion Options Embedded in Debt Instruments
and Related Issues. The Company will recognize a loss on extinguishment of
debt
of $132,578. This loss was determined by calculating the change in net present
value of the cash flows from the convertible debt, inclusive of the change
in
the embedded conversion feature determined by comparing the fair value of the
conversion option immediately following such modification with its fair value
immediately prior to the modification. This loss will be recorded as of February
2006 with a corresponding increase in fair value of the modified convertible
debenture balance and will be amortized over the remaining term of these
debentures to additional paid in capital.
Condensed
Balance Sheet – December 31, 2005
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(a)
|
Record
issuance of 580,136 shares of AeroGrow common stock to shareholders
of
Wentworth I, Inc.
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(b)
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Eliminate
stockholders’ equity balances of Wentworth I,
Inc.
|
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(c)
|
Record
receipt of offering proceeds, common stock issued and the associated
adjustments to additional paid in
capital.
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(d)
|
Record
modification, extension and conversion of convertible debt and associated
adjustment to retained earnings for the charge to interest expense
as a
result of the write off of the original beneficial conversion feature
of
associated with the $2,130,000 in notes converted and the additional
beneficial conversion feature granted to such note
holders.
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Condensed
Statement of Operations for the year ended December 31, 2005
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(e)
|
Record
reverse-merger expense as a result of Wentworth I shareholder
deficit.
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