AeroGrow Due for Some Pruning, Vertical Branding Waiting to Fly

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 |  Includes: AGWI, VBDG
by: Dave Gentry

You’ve got to hand it to the merchant bankers behind the AeroGrow (OTC:AGWI) deal. They executed a brilliant reverse merger and a funding at $5.00 raising over $8 million for the Company.

The stock closed at $6.30 on Thursday, down 3 percent. The stock is currently trading 25 x book value (mrq) and 9 x sales (ttm). The Company reported a net loss of (8,389,893) on $6.7 million in revenues for the nine months ended December 31, 2006. They sell a dirt-free aeroponic kit, the AeroGarden, that grows “fresh herbs, salad greens, tomatoes, chili peppers, strawberries and more indoors, year-round, so simply and easily that no green thumb is required.” Revolutionary indeed. The technology has been praised in major magazines and talk-shows. Williams-Sonoma is now carrying the AeroGarden; the testimonials from chefs and housewives are overwhelmingly positive. They have sold over 100,000 units of the AeroGarden in their first year of commercialization at $149.00 each. And they have a built-in recurring revenue stream selling plant seeds to buyers of their AeroGardens.

But the Company is burning cash faster than they can package and ship their dirt-less indoor tomato making machines. AeroGrow spent $6.5 million operating their company for the nine months ended December 31, 2006. No one-time non-cash charges here, just $0.90 per share in losses. In this case, it takes a lot of green to make greens. Can this company make money selling revolutionary salad gardens?

The verdict is still out. Losses are down from $1.37 per share for the nine months ended December 2005 and sales are strong. But why is this stock trading at 9 x sales (ttm) and 25 x book value? Follow the money, as they say. In this case, follow the merchant bankers and you will find a well-orchestrated, perfectly executed reverse merger in January 2007, a sight seldom witnessed in the high octane and often traumatized world of small-cap RMs. A small tight float and the national publicity generated by its ground-breaking garden has sent this stock on a Jack Kerouac high. The stock, you could say, has certainly been “On the Road.”

Now, let’s compare AeroGrow with Vertical Branding (OTC:VBDG) a consumer products, branding, marketing, and distribution company. Like AGWI, Vertical Branding uses television, online media, print advertising as well as traditional retail distribution to market its products. And VBDG, like AGWI also has a mega-hit product. It’s called the Hercules Hook, used for hanging pictures, shelves, and just about anything. It’s a twisted wiry piece of art that can hold up to 75 pounds without putting a nail in the wall.

That’s right, while AeroGrow’s hit product uses “no dirt,” Vertical Branding’s hit product uses “no nails.” One of the largest retailers in the world recently placed a $2 million order for this hot-selling picture hanger. The Company sold 100,000 units in the month of January alone. Now homemakers can hang their heaviest pictures in seconds, giving them more time to enjoy their home grown aeroponic strawberries. Life is good in 21st century America. Both AGWI and VBDG’s products have been featured on Good Morning America and praised as a homemaker’s dream. The Hercules Hook received its highest award, an “A” rating.

Before I continue, let’s make sure I am properly disclosed. Vertical Branding is a RedChip Visibility client. In fact, they paid RedChip Visibility, a division of RedChip Companies, $36,000 to write and distribute a high-quality, easy-to-read research report written by one of our CFA’s. VBDG also hired our specialist marketing team to present their story to micro-cap funds and retail brokers. They have also participated in two of our small-cap conferences and will be a featured speaker at our San Francisco conference on May 29th and 30th at the Ritz–Carlton San Francisco. Am I biased? You bet I am. But probably not anymore biased than the investor relations firm who represented NutriSystem Inc. (NASDAQ:NTRI) in 2002 when the stock was trading at $0.67. The stock appreciated to $56.00 in just three years. That rocket-ship changed a lot of a lot of lives and made the world a better place for a lot of people.

I must confess, I am inclined to dream. A nasty habit I admit, given the volatile world I live in. I’m looking for a Vertical moon-shot. I’ve spent a considerable amount of time with the CEO and the COO of Vertical Branding, and I am quite pleased that RedChip has been given the opportunity to assist them in presenting their story to Wall-Street’s small-cap equity players. We have been paid 70,000 shares of Rule 144 stock for our work and we receive a monthly cash fee of $7500 (see disclosures). If that bothers you, it shouldn’t. The average NYS company spends about $300,000 a year on investor relations.

The Vertical Branding management team is one of the best I’ve seen. CEO Nancy Duitch (remember that name) is one focused, disciplined leader. With thirty years in the retail and direct marketing business, her product campaigns have generated over $1 billion in revenues. She’s sold more Botopical, and more Bun and Thigh machines than any other living person. She’s got an eagle’s eye for discovering best-selling homecare products. COO Alan Gerson is the consummate blocker and tackler. He was a senior executive at NBC-TV and an EVP of the Home Shopping Network . He keeps a tight reign on the war chest. Chris Lipp, Vice-President, was General Counsel of Intermix Media, Inc., owner of MySpace.com; in fact, he was part of the team that negotiated the sale of MySpace.com to News Corporation for $650 million.

VBDG burned $4.2 million, or $0.17 per share, operating the Company for the nine months ended September 30, 2006, about 50 percent less cash than AGWI spent operating its company for its latest nine months. Also VBDG generated revenues of $12.4 million, or about two (2) times the revenues generated by AGWI for its latest nine months.

VBDG generated $5.2 million in revenues in the third quarter, up 342 percent over the same period in 2005. Third quarter losses were narrowed to $530,000 or $0.02 per share. AeroGrow by contrast, reported third quarter losses of $2.9 million or $0.30 per share on revenues of $4.9 million. In fact, AeroGrow lost six (6) times times as much money as Vertical Branding. And yet AGWI’s stock is currently trading six times higher than VBDG's. From my perspective, there is something wrong with this picture. But nothing a Hercules Hook won’t cure, of course.

I’m in Vertical Branding for the long-term (since they hired RedChip five months ago, their market cap has doubled and the stock is up 90 percent). But we still have a long way to go. Our twelve month price target is $3.20, but that could prove to be conservative. VBDG reported preliminary fourth quarter revenue results of $11 million, up 645 percent over the same quarter last year and 100 percent quarter-over-quarter growth. Vertical Branding’s business model makes sense. It works. And we expect profitability soon.

Eventually, the plants get trimmed, the pigs get slaughtered and the chickens come home to roost. I think they call that the efficient market theory. In sum, efficiency here means AeroGrow is due for some pruning and Vertical Branding is still on the runway waiting for take off.

Disclosures: The analysts contributing to this report do not hold any shares in the above-mentioned securities.