AeroGrow Reports 85% Increase in Q4 2012 Shipments

AeroGrow Reports 85% Increase in Q4 2012 Shipments

AeroGrow, makers of the AeroGarden line of indoor gardening products, announced results for the three months ended December 31, 2012, the third quarter of its fiscal year ending March 31, 2013.

"We successfully executed a number of our initiatives for the holiday season," said Mike Wolfe, President and CEO of AeroGrow. "We re-entered the retail market with highly successful product launches at Amazon.com and other retailers, launched our innovative new AeroGarden ULTRA product, broadened our marketing efforts to reach new AeroGarden purchasers, and, most importantly, drove an 85% increase in the number of AeroGarden units shipped during the quarter. This growth in AeroGarden shipments - the razors in our razor/razor blade business model - is expected to result in a resurgence of our recurring revenue from seed kits, grow bulbs, and other accessories in the coming quarters and years."

The new AeroGarden ULTRA, launched on November 1st exclusively into the direct-to-consumer channels, was the Company's highest selling product during the holiday season. The ULTRA offers over 100 improvements that make indoor growing easier and faster for beginners, and is fully customizable, allowing the advanced indoor gardener to grow a wide variety of plants at home.

"We were very pleased by the consumer demand for AeroGardens this holiday season," continued Mr. Wolfe. "Our AeroGarden products were consistently ranked among the top 10 sellers in the Patio, Lawn & Garden category at Amazon, even though they were only launched in mid-November. We believe this demonstrates the kind of consumer demand we can expect for our products when we expand the reach of our marketing message to customers who are new to indoor gardening and to the AeroGarden franchise."

Despite the strong AeroGarden shipments, AeroGrow's total sales declined 1.8% during the quarter in large part because of the effects of a labor strike in early December at West Coast ports that adversely impacted the Company's inventory availability and therefore its ability to meet pre-Christmas demand. The Company's net loss of $296,788 was greater than the $139,221 net loss reported in the previous year because of a significant year-over-year increase in business building activities like product development spending related to the AeroGarden ULTRA, and increased investment in brand and market-building spending.

RESULTS OF OPERATIONS

For the three months ended December 31, 2012, total revenue of $2,972,493 was down 1.8%, or $53,452, relative to the same period in the prior year. Direct-to-consumer sales fell 17.0%, to $2,322,967, in part reflecting the impact of a labor strike that shut down most of the activity at the Los Angeles and Long Beach port complexes for the eight-day period ended December 6, 2012. The strike and its aftermath delayed the delivery of container loads of AeroGardens en route from manufacturers in Asia during the critical pre-Christmas selling period, causing us to be out-of-stock of key AeroGarden inventory items in both our direct response and retailer channels and adversely impacting sales. In addition, we experienced lower sales of recurring revenue items such as seed kits and accessory items. The decline in direct-to-consumer sales was for the most part offset by a 203.9% increase in sales to retailers, to $626,072, as we successfully launched the AeroGarden product line in a number of new retailer customer accounts, including Amazon.com.

On a product line basis, sales of AeroGardens increased by 9.0%, to $1,846,612. On a unit basis, the total number of AeroGardens shipped to consumers and to retailer customers during the quarter increased by almost 85% relative to the same period in the prior year. AeroGarden sales as a percent of total sales increased to 62.1% from 56.0% in the prior year as we shifted more of our marketing efforts to prospecting for new direct-to-consumer customers, and because of stocking orders from new retailer customers. Seed kit and accessory sales declined by 15.4%, to $1,125,881, because of the shift in the marketing mix and because of an increase in the average age of the installed base of AeroGardens.

Our gross margin for the three months ended December 31, 2012 was 44.0%, down from 48.7% in the prior year period, reflecting the increased mix of lower-margin sales to retailers and of AeroGardens, combined with higher costs we incurred to expedite the delivery of container loads of AeroGardens following the port strike.

In aggregate, our total operating expenses increased 24.6%, or $269,942, year-over-year, principally because our investment in new product and channel development spending increased by $119,320, and because we increased our advertising expenditures by $219,930. While these investments depressed earnings in the current quarter, they represent critical elements in our longer-term strategy.

As a result of the lower sales and the increase in investments in business development and advertising activities, our operating loss was $59,175 for the three months ended December 31, 2012, as compared to a $377,870 operating profit in the prior year period.

Net other expense for the three months ended December 31, 2012 totaled $237,613, as compared to net other expense of $517,091 in the prior year period. The current year period included the impact of $108,140 in non-cash amortization expense related to short-term promissory notes that were issued in September 2012. The net other expense in the prior year period included the impact of $398,373 in gains related to accounts payable balance concessions we negotiated with certain of our vendors, as well as $732,185 in non-cash expense related to the amortization of costs related to the 2010 issuance of convertible promissory notes. These convertible notes were fully converted to common stock in April 2012.

The net loss for the three months ended December 31, 2012 was $296,788, as compared to the $139,221 loss recognized a year earlier. The increased loss reflected the impact of lower sales and higher business development spending, as well as the comparison to one-time gains recognized in the prior year period.