AeroGrow International, Inc.

On January 11, 2021, an alleged stockholder of the Company, Overbrook Capital, LLC, filed a putative class action complaint in the Eighth Judicial District Court, Clark County Nevada, against the Company, each of the members of the Board, Parent and Scotts Miracle-Gro, purportedly in relation to the Company’s entry into the Merger Agreement. The complaint asserts claims for breach of fiduciary duty against the defendants. The complaint alleges, among other things, that (i) the directors breached their fiduciary duties in connection with the Merger due to, among other things, the fairness and adequacy of Merger Consideration for the Company’s unaffiliated minority stockholders and a lack of certain measures in the Merger Agreement that the complaint alleges would have better protected the interests of Company’s unaffiliated minority stockholders, (ii) Parent and Scotts Miracle-Gro (as controlling stockholders) breached their fiduciary duties to the Company’s unaffiliated minority stockholders in connection with the Merger due to, among other things, an alleged lack of fairness to the Company’s unaffiliated stockholders, both in terms of price and process, and (iii) Parent, Scotts Miracle-Gro and the Company breached their fiduciary duties in connection with the Merger by, among other things, allegedly aiding and abetting the foregoing alleged breaches of fiduciary duty by the directors. The complaint seeks, among other things, in the event the Merger is consummated, an order rescinding it and setting it aside or awarding rescissory damages, and unspecified attorneys’ and experts’ fees.

On January 12, 2021, an alleged stockholder of the Company, Nicoya Capital, LLC, filed a putative class action complaint in the Eighth Judicial District Court, Clark County Nevada, against each of the members of the Board, James Hagedorn, Chairman and Chief Executive Officer of Scotts Miracle-Gro, Peter Supron, Chief of Staff to the President of Scotts Miracle-Gro, the Company, Merger Sub, Parent and Scotts Miracle-Gro, purportedly in relation to the Company’s entry into the Merger Agreement. The complaint asserts a claim for breach of fiduciary duty against the defendants. The complaint alleges, among other things, that (i) Scotts Miracle-Gro, James Hagedorn and Parent (as controlling stockholders) breached their fiduciary duties of loyalty and care to the Company’s unaffiliated minority stockholders in connection with the Merger due to, among other things, an alleged lack of fairness to the Company’s unaffiliated stockholders, (ii) James Hagedorn, Peter Supron, the Company, Merger Sub and the directors breached their fiduciary duties in connection with the Merger due by, among other things, allegedly aiding and abetting a breach of fiduciary duty via selling the Company for what was alleged to be an unfair price, and (iii) the directors breached their fiduciary duties in connection with the Merger by, among other things, allegedly failing to protect the Company’s unaffiliated minority stockholders. The complaint seeks, among other things, an award of damages and unspecified attorneys’, accountant’s and experts’ fees.

The discussion contained herein is for the three and nine months ended December 31, 2020 and December 31, 2019.  The following discussion should be read in conjunction with the financial statements of AeroGrow International, Inc. (the “Company,” “AeroGrow,” “we,” “our,” or “us”) and the notes to the financial statements included in Item 1 above in this Quarterly Report on Form 10-Q for the period ended December 31, 2020 (this “Quarterly Report”). The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements that include words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “may,” “will,” or similar expressions that are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements include, but are not limited to, statements regarding the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement, the failure to satisfy the closing conditions in the Merger Agreement, risks related to disruption of management’s attention from our ongoing business operations due to the proposed Merger, the effect of the announcement of the proposed Merger on our ability to retain and hire key personnel and maintain relationships with our customers, suppliers, other business partners and employees, unexpected costs, liabilities or delays involving the proposed Merger, uncertainty surrounding the proposed Merger, including the timing of the consummation of the Merger, the outcome of any legal proceeding relating to the proposed Merger, other statements regarding the Merger, our intent, belief, or current expectations regarding our strategies, plans, and objectives, our product release schedules, our ability to design, develop, manufacture, and market products, the ability of our products to achieve or maintain commercial acceptance, our ability to obtain financing and/or generate cash flow sufficient to fund our future operations, and our ability to continue as a going concern. Such statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Factors that could cause or contribute to the differences are discussed in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2020.  Except as required by applicable law or regulation, we undertake no obligation to revise or update any forward-looking statements contained in this Quarterly Report. The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. Each reader should carefully review and consider the various disclosures we made in this Quarterly Report and in our other filings with the U.S. Securities and Exchange Commission (“SEC”).

Advertising expense is composed primarily of television advertising, catalogue development, production, printing, and postage costs, web media expenses for search and affiliate web marketing programs, and the cost of developing and employing other forms of advertising.  Each is a key component of our integrated marketing strategy because it helps build consumer awareness and demand for our products in the retailer and direct-to-consumer sales channels.  As noted above, during the three months ended December 31, 2020, we spent $5.6 million in advertising expenditures to support our retail and direct-to-consumer channels, a 105.1% year-over-year increase compared to the same period in Fiscal 2020.  The increase resulted from  investments in driving brand product awareness through: (1) platforms made available by our retail partners, including increased spending in general TV, YouTube, Facebook and other general media advertising; and (2) pay-per click advertising, including keyword search campaigns and other web-based advertising programs.

For the nine months ended December 31, 2020, total revenue increased $41.7 million, or 151.9%, to $69.1 million relative to the same period in the prior year.  The current year sales growth is driven primarily by continued strength of the business, customer acceptance and knowledge, growing demand for our product, increased interest during the pandemic in indoor gardening, fresh, safe food sources and at-home meal preparation and sales to new accounts including BestBuy, Big Lots and Menards. Retail sales increased $21.6 million, or 115.2%, due to increased sales into existing online channels, including Amazon.com, Kohls.com, Costco.ca and the new accounts mentioned above. Sales in our direct-to-consumer channel increased 242.8%, or $19.9 million, primarily due to visibility and continued momentum from our general advertising and marketing campaign, increased user base, increased presence of other online accounts and amplified demand in the indoor gardening market from customers seeking healthy, fresh food.  Sales to international distributors increased $177,000 to $658,000 in the nine months ended December 31, 2020, relative to the same period in the prior year, primarily due to increased distribution in certain international markets such as Amazon.uk, France, Germany, Spain and Italy. 

As described in Note 10 “Subsequent Events” to our condensed financial statements, two complaints have been filed by alleged stockholders of the Company, one of which is against the Company, each of the members of the Company’s board of directors, Parent and Scotts Miracle-Gro, and the other of which is against each of the members of the Company’s board of directors, James Hagedorn, Chairman and Chief Executive Officer of Scotts Miracle-Gro, Peter Supron, Chief of Staff to the President of Scotts Miracle-Gro, the Company, Merger Sub, Parent and Scotts Miracle-Gro, in each case, purportedly in relation to the Company’s entry into the Merger Agreement. The first complaint seeks, among other things, in the event the Merger is consummated, an order rescinding it and setting it aside or awarding rescissory damages, and unspecified attorneys’ and experts’ fees. The second complaint seeks, among other things, an award of damages and unspecified attorneys’, accountant’s and experts’ fees. If injunctive relief is granted in any one or more of the lawsuits, then the Merger may not be consummated at all or within the expected timeframe. Also, if our insurance provider were to deny coverage under the existing insurance policies covering such actions or should such policies fail to cover the costs of defending any one or more of the lawsuits, we may incur substantial costs.