AeroGrow International's (AERO) CEO Mike Wolfe on Q4 2016 Results - Earnings Call Transcript

| About: Aero Grow (AERO)

AeroGrow International, Inc. (OTCQB:AERO)

Q4 2016 Earnings Call

June 16, 2016 12:00 PM ET

Executives

Mike Wolfe - Chief Executive Officer

Grey Gibbs - Senior Vice President of Finance & Accounting

Analysts

Jim Barrett - C.L. King

John Cassarini - JAC Capital

Operator

Welcome everyone to the Fourth Quarter and Full Year 2016 AeroGrow Earnings Call for the period ending on March 31, 2016. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Before we start today, I would like to make the following announcements.

Except for historical information contained herein, statements made during this conference call are forward-looking statements. These forward-looking statements include expectations related to factors including anticipated revenue, gross margins, expenses, earnings, inventory, and new product introductions. Investors are cautioned that all forward-looking statements involve risks and uncertainties, and several factors could cause actual results to differ materially from those in forward-looking statements. A more complete listing of these risk factors can be found in the company’s most recent report on Form 10-K. Thank you.

Yesterday, AeroGrow issued an earnings press release, which is available on the Investor Relations Section of their website at www.aerogrow.com/investors. The press release is also provided as an attachment to our Form 8-K filings available on our website and on the Securities and Exchange Commission’s website at www.sec.gov. Please also refer to their Form 10-K filed yesterday, which is available on their website and that of the SEC.

And now I would like to hand over the call to AeroGrow’s Chief Executive Officer, Mike Wolfe. Sir.

Mike Wolfe

Thank you, Amy. And thank you all for joining us this morning. We really appreciate your participation and I look forward to telling you about our 2016 results and providing you with a look ahead to our fiscal 2017. With me this morning is Mr. Grey Gibbs, our Senior Vice President of Finance & Accounting.

Our core strategy for fiscal 2016, which ended on March 31 of this year was to slow our growth just a bit to ensure laser focus on making improvements to our margins, and refining our distribution strategy. As a result, we grew by 10% last year with accelerated growth in the second half of the year highlighted by 43% growth in our Q4. And we improved our gross margin by nearly 500 basis points to 36%.

During the year, we also launched several new products that were very well received in the market and successfully tested a series of broad television and digital advertising campaigns that help drive our sell-through. Most important I think, we continue to build several proven distribution channels while unlocking several new ones to give us multiple proven platforms through which to announce our products.

All of this resulted in our second consecutive year of positive EBITDA earnings, the first time in the company's history that this has been achieved. So, I think we begin our fiscal 2017 with a lot of momentum. Grey will provide you with the financial details little bit later in the call, but first I want to provide you with some color around these results and review our fiscal 2016. I’ll then wrap up my comments with a forward look to our fiscal 2017.

Fiscal 2017 was really marked by distinct differences between the first half of the year and the second half. For those of you who have kept with the company for a while now, you will recall that when we first applied the Miracle-Gro brand to our product name, we were hopeful that this would unlock our ability to the sell at mass retail given the vast consumer and positive recognition of the Miracle-Gro brand. And while this brand has helped us an awful lot in awful lot of way ways, it turned out the brand alone was not enough to carry us at traditional mass retailers.

So, coming off our selling season one year ago, we were having great success in selling online at Amazon and other top tier dot-com retailers, but it became clear to us that we had to pivot in our distribution strategy just a bit as it related to selling in store. It also had become clear to us that in order to make in-store retail distribution work we had to develop an effective marketing program to drive awareness of the indoor gardening category generally and of the AeroGarden brand specifically.

While refining our distribution strategy and working to expand our marketing efforts, we also undertook a fairly significant product overhaul introducing numerous new products last fall while taking significant costs out of our supply chain. The effect of all these efforts last year led to the distinct differences between the first half of the year and the second half of the year that I noted earlier.

In the first half, our sales actually fell by 22% as we pivoted towards different distribution channels and our gross margin declined a bit as we sold out some of our older product models. But our second half was marked by very significant progress as we grew by 17% and saw a 700 basis point improvement in our margins; that was in the second half of the year. This momentum was even more in the amplified in the fourth quarter, as we grew by 43% and our EBITDA profit improved by $649,000, and as a result we posted just the second Q4 EBITDA profit in the company's history. Pretty good achievements I think.

When last year began, I outlined a number of key initiatives that we’d identified as being critical to our success in 2016. Following are a few remarks about some of the more critical of these initiatives. The first was our expansion of retail. I think to fully understand our retail distribution model, we have to talk about dot-com and then we have to talk about in-store. So, first is dot-com.

Amazonia is a big, big story for us. With year-over-year growth again last year of nearly 80%, that’s Amazon.com in the U.S. And that’s off of what it already had become a pretty significant base. When you add the growth at Amazon in Canada of over 300% last year, you can see I think that we clearly unlocked a significant distribution channel with Amazon. Net sales at Amazon were actually larger in fiscal 2016 than they were in our own direct response business. And, for the first time in our company's history, I think gives us a proven profitable second leg of the stool if you will in addition to our DR channel through which we can distribute our products.

I can't stress how important this is in building a long-term strategy, one that we can count on to grow and provide meaningful long-term distribution. In addition to Amazon, we also saw good progress in our dot-com channel with other online retailers such as Walmart.com, Costco.com, we launched at Costco.ca that’s Canada and several others as well. So we feel really good about the status of our dot-com business.

Now let’s talk about in-store. After the challenges we faced in selling in-store a year ago, a critically important achievement I think in fiscal 2016 were getting to unlock in-store retail. In fiscal 2015, we tested in-store at places like Walmart, Sam's, Costco, Home Depot, and several others. And let me tell you, we sold a lot of AeroGardens, but we had a lot of challenges to due to store placement, occasional store execution issues, et cetera. But through it all, we learned something very important.

When we replaced in the housewares department at the right time of the year and with the right presentation, we really sold quite well. So, over the course of last year, we pivoted our strategy and began testing at more traditional houseware retailers and the results were very encouraging. We had a successful 400 store test at Bed, Bath & Beyond during the Holiday Season and a very successful 135 store test at Solartab earlier this spring.

Solartab is a high end culinary retailer. Both of these retailers will be rolling with us this fall and it’s also worth noting that we did very well on bedbathandbeyond.com and solartab.com and we had a very strong test on williams-sonoma.com as well earlier this spring. And finally, well not turn in-store retailer per se, we also had good success in selling on QVC. So in wrapping up our channel strategy, I want to go back and make one final comment about our distribution of mass retailers.

I believe at some point we will successfully sell Walmart, Costco, Home Depot and other mass retail stores. We will sell very well there I think. I just think it’s going to take driving more consumer awareness of our product, so that when people encounter the AeroGarden at one of these stores they already know what it is, and we don't have to try and do the entire selling job at the retail store itself. This is where we had hoped the Miracle-Gro brand might help us a little bit and carry the day, but we're going to have to supplement it with more traditional brand building as well and that’s an assignment we look forward to.

Our second initiative in 2016 fiscal was product development. Honestly, I think we hit a homerun with our new product launches in 2016. Our efforts were based on the fact that consumers have so thoroughly embraced LED lighting systems on their AeroGardens with sales of LED-based units lighting having exploded over the past couple of years from 10% in 2014 to 93% purchasing LED-based gardens last year.

Beyond migrating virtually our entire line of AeroGardens to LED lights, we also work to introducing two really important new products last year. The harvest line has allowed us to capture the right footprint for use on the countertop and was the product that we use in our successful test at Bed, Bath and Solartab. The bounty, our biggest garden and ever with nine pods and a 45 watt LED lighting system was an immediate hit on Amazon and AeroGarden.com and a stainless version of that product is what's been working so well with Williams Sonoma.

We also introduced touch screens and other features that have proven very popular products so we had a very good year last year on the product development front. Our third focus last year was improving our gross margins. And perhaps our bigger success we had last year was in this improvement. This was a critical goal last year. We just had to generate more contribution per dollar of sales in order to fund the advertising we wanted to go through and to generate more profitability for the company over the long term. And I'm very pleased to report that we improved our year-over-year margins by nearly 500 basis points and by over 700 basis points in the second half of the year after our new products were introduced. That’s big progress.

I think three factors are responsible for these improved margins. First, are focused on cost outs primarily in our Asian supply chain also domestically. Second and related, our new products were designed with significant efficiencies in mind. We’re now making products that work better than ever and at lower cost than we ever had before. And finally, improved pricing strategy in the market that I think really held up well during the year.

It’s my belief that we can hold these margins while looking for an even and more additional improvements in fiscal 2017 and beyond. Our fourth key goal for last year was international distribution. We began testing on Amazon.uk in the United Kingdom in January of this year. The test results from the spring are very encouraging and give us a great deal of confidence that we can roll out of Amazon not just in the UK, but hopefully in other markets toward the EU.

At the final critical initiative last year was building brand awareness through media and digital advertising. If that’s stressed, at the beginning of last year, we were convinced that we needed to make some big changes in how we made target consumers aware of our product. So, we set about addressing these challenges and I’m pleased to report that we launched a television and digital media campaign with 15, 30, 16 and 120 second spots last November. And this campaign proved to be quite effective.

While it’s difficult to measure exactly the impact of media on sales, through our own website we are clearly able to detect meaningful signals of sales activity that correlated with the times that the ads were on the year. In addition, we strongly believe that some of the success that we had with both online and in-store retailers can be attributed to this campaign as well and we will look to expand this program in fiscal 2017.

Now media is not inexpensive and we've made a commitment to building a brand over the long haul and for the next few years. There is little doubt that we could have improved our bottom line results significantly last year had we not spent within the media and we spent over $3 million in total on advertising in fiscal 2016. But we thought it was critically important to execute this program as we build this company for the long term.

So that’s the recap from my perspective on fiscal 2016 and the key for us is to build on the success and leverage everything we've accomplished into 2017. I’m now going to turn over to Grey to discuss financial results in detail and then I’ll come back to lay out our plans and key initiatives for fiscal 2017 and provide a summary. Grey.

Grey Gibbs

Thanks Mike, and good morning everyone. I will be reviewing our fourth year and full year 2016 financial results. We are discussing our consolidated financial results, reflecting our primary operations. The financial statements provided in yesterday's release reflect consolidated Q4 and full year 2016 financial details. So you may refer to them for further clarifications.

I will first speak to the quarterly financial results and then will follow up with the discussion of the full year. For the three months ended March 31, 2016, the company recorded net revenue of $5.1 million, an increase of 43% from $3.5 million in the prior year period. We continue to see improvement in retail channel net revenue in the quarter to $2.8 million, an increase of 115% year-over-year.

Direct-to-consumer revenue remain flat staying at $2.2 million, which is a positive sign given the increase competition from other online retailers like Amazon.com and spending less advertising dedicated specifically to the channel.

In the fourth quarter, on a product line basis, the mix of AeroGardens as a percentage of revenue increased to 73% from 65%. Therefore resulting in a decrease as a percentage of revenue made from seed pod kit sales and accessories. This is important as our plans to grow depend on bringing in new customers into the franchise whether to direct-to-consumer or the retail channel. And these new customers almost always start out with the garden purchase. Although seed kit sales decreased as a percentage of revenue, they actually increased 11% year-over-year based on unit sales, which is also a very positive indicator for the business.

Gross margin for the fourth quarter was almost 34%, compared to 29% in fiscal 2015. The increase in our gross margin was attributable to the focus on reducing product cost, increasing supply chain efficiencies, focusing on general brand advertising instead of aggressively pricing with in-store retailers, maintaining higher prices for new AeroGarden products, and having larger online presence, as compared to large in-store presence in the prior year within the retail channel.

During the fourth quarter, operating expenses were almost $1.9 million, an increase of 12% from $1.7 million during the same period last year. This is due primarily to the increased media and related expenses to support ourselves and brand-building efforts. Importantly, as a percentage of net sales, our operating expenses declined to 37% from 47% in the prior year period, as our business continues to scale efficiently. Loss from operations in the fourth quarter was 160,000, an improvement from a loss of 624,000 in the fourth quarter or fiscal 2015, due to the higher sales and much better margins. Adjusted EBITDA in the fourth quarter was a positive 182,000, compared to a loss of 406,000 in the fourth quarter of fiscal 2015.

Now, turning to the financial results for the fiscal year-ended March 31, 2016. Net revenue totaled $19.6 million, an increase of 10% from $17.9 million in the prior year. Direct-to-consumer revenue remains steady at $6.7 million, principally reflecting the impact of additional distribution competing with our online sales and a decrease in our advertising expenditures in this channel. Retail revenue increased 15% to $12.8 million from $11.5 million during fiscal 2016.

Retailer sales encompass sales to traditional in-store and online retailers. This increase was primarily due to our increased focus on selling through internet retailers such as Amazon.com, costco.com and test in the houseware channel namely QBC and in-store a Bed, Bath and Beyond and Solartop. Our success in selling to these retailers more than offset the revenue that was not repeated this year with test at mass retail stores such as Home Depot, Wal-Mart and Sam Club that occurred in the previous year.

In addition, we believe in increased level of general advertising, positively impacted sales in all of our channels. On an annual basis, AeroGardens made up 88% of sales oppose to 86% in fiscal 2015. Once again, we see this is important and very good news as our plans to grow depend on bringing new customers into the franchise and the increasing garden mix is a good sign. Seed kit sales also increased to 29% year-over-year as our established base of AeroGardeners continuous to grow and remained engaged.

Gross margin for fiscal 2016 was 36%, up from 31% in prior year. As noted previously, the increase in our gross margin was attributable to the focus on reducing product cost, increasing supply chain efficiencies, focusing on general brand advertising instead of aggressive pricing with in-store retailers, maintaining higher pricing for new AeroGarden products and having a large online presence as compared to larger in-store presence in the prior year.

For fiscal 2016, we invested $3 million in advertising expenditures, a 68% year-over-year increase, compared to the fiscal year-ended 2005. This was due to our increased focus on the retail advertising and more importantly, the introduction of general television campaign and other general media advertising in order to create awareness of the indoor and gardening categories, and more specifically our brand. Operating expenses for fiscal 2016 totaled $8.3 million, an increase of 30% from $6.4 million in fiscal 2015. Sales and marketing costs increased by 39% to $5.4 million, primarily due to the increase in general advertising spend. General and administrative expenses totaled $2.4 million during the fiscal year, up 15% from $2.1 million in the prior year.

The increase is attributable to expenses associated with the addition of a full time IT employee, additional depreciation expense for fixed assets, legal fees, and increased payroll related expenses for existing personnel. Research and development costs also increased 23% year-over-year or 91,000, largely reflecting support of new product development activities, including the ongoing certification and testing on all of our AeroGarden units as required by our retail partners and design and consulting services for testing required once again by our retail customers.

Loss from operations totaled $1.3 million in the fiscal year, an increase of a loss from $827,000 in the prior fiscal year. The increased loss is primary result of increased in general television, YouTube, Facebook and other general media advertising. Adjusted EBITDA for fiscal 2016 totaled 304,000, down from 609,000 in the prior fiscal year.

Turning to the balance sheet, we’re happy where it stands today, as noted previously certain liabilities do not require cash payments and we’re incurred as a result of the strategic alliance of Scotts Miracle-Gro Company. Under generally accepted accounting principles, the warrant granted to Scotts Mracle-Gro requires classification as a liability and its estimated fair value.

With that in mind, we’re proud to say that we have entirely paid-off our working capital borrowing that was outstanding the year-end and as it currently stands there is zero debt that requires cash payment on our balance sheet. Cash on hand at the end of the quarter was roughly $1.4 million, accounts receivables totaled $1.6 million, and inventories amounted to $3.1 million. All in all, we’re excited about the prospects with the year ahead.

With that, let me turn the call back to Mike for some closing remarks. Mike?

Mike Wolfe

Thank you, Grey. We’re entering our fiscal 2017 I think with a lot of momentum. Instead of having to redesign our product line, we get to refine it. Instead of having the unlock advertising in distribution, we get to extend what we know is working. Instead of having to work so much on gross margins we get to leverage the big improvements we’ve already made and as even more planned. As a result, I think we’re on the verge of accomplishing some really great things, but now we have to do it. In preparing these remarks, I was struck by over the past few years, just how vigorous the set of initiatives that we’d be undertaking in the coming year really was.

From a complete overhaul on our supply chain a few years ago to a makeover in our product line to launching products in foreign countries, we’ve successfully taken on some pretty significant challenges. The theme with this coming year will not be quite so far reaching, but rather to build on the solid foundation we’ve now built with an eye toward consistently delivering strong top and bottom line results, here’s what we’ll be focused on.

First, continued expansion of our distribution. Our plan is to further leverage the channels that are proven, expand those that are successfully been tested and continue testing new channels for future expansion. Here’s a brief comment on each. In the proven channels, we’ve become a very proven seller on many online platforms, I mentioned Amazon, Costco, Wal-Mart and others, a little bit earlier. We’ve had excellent line reviews with each of these buyers this spring and we have plans for aggressive expansion with each of these online retailers this fall and next spring.

Second, we’re going to expand channels that have successfully been tested. We made a real consorted effort to establish new channels of distribution last year, particularly in the housewares channel. Look for us to significantly expand our presence in this channel this year with a full store roll out at Bed, Bath & Beyond and Silver Top. William Sonoma as I mentioned is also off to a great start for us and we’ve had really good results on QBCs kitchen shows. In fact, we just received work from QBC yesterday that they’ll be featuring our items throughout the fall this coming year.

New channels, it was important last year that we unlocked housewares who want to continue the testing efforts to do that in the future. We’ll continue testing new venues for the AeroGarden and we have small test plan this year at home center and hardware channels, and we look to unlock these areas for continued future growth as well. An addition to these channels, our direct response business continues to produce strong results for us despite as Grey mentioned, a lot of competition, we’ve created with Amazon and others. In fact in our current quarter Q1 of fiscal 2017, it’s running about 23% ahead of last year, it’s pretty impressive and we think it speaks to the steady growth of our user base of AeroGardens. As I mentioned earlier, we’ll also be looking to expand our international efforts with a ramp up in the UK and plan tests in other EU markets.

Let’s now talk about product development real quickly. We have tried very hard to make innovation cornerstone of our company’s culture and our DNA. So we will always be looking to renew products, features and functions to the market. In fiscal 2017, that will be no different but rather than changing the fundamental look and feel of several of our products, this year we’ll be doing a bit more fine tuning. We have three big product development goals for this year. First is adding Wi-Fi capabilities to several of our gardens. This is a significant undertaking. We’ve learned a lot about Wi-Fi over the last couple of months, but we’re hopeful that by later this year, AeroGardens will be able to communicate with our AeroGardens and track its progress on our smart devices from receiving reminders on when to water and fertilize the garden to making it super easy to reorder seed kits and accessories in even other gardens and we think Wi-Fi is a big idea that’ll drive further engagement with AeroGardens on behalf of our customers.

Our second big effort is high end finishes. The central part of our strategy to effectively unlock our selling in the housewares channel has been to design AeroGardens that look like mainstream countertop products that could accent any kitchen. We try to take on much more of a kitchen aid or Keurig look than we ever have in the past. I think a lot of the success we able to achieve at Bed, Bath and Silver Top QBC William Sonoma can be attributed to the strategy. In the coming year, look for us to escalate these efforts and we’ll be introducing models that look even better and are easier than ever to use.

And finally, do know that we’re working on buying gardens. We think the AeroGarden has become the undisputable leader in the countertop gardening category and now we’re thinking even bigger. We’re working on a product, tentatively name the AeroGarden farm that will allow AeroGardens to grow even bigger crops and generate even bigger harvest. Our goal is to help AeroGardeners perpetually grow all of the fresh herbs, salads, tomatoes whatever they’ll need without ever having to purchase these items at a grocery store and to do it year around. We’re excited about all of that.

Our third big effort this year will be to continue our efforts to build our brand and our category and I thought to do that I’d share just a quick story with you regarding brand and awareness. Two weeks ago, I was checking into a buyer meeting at the Amazon office up in Seattle. I handed the receptionist my business card for check-in and she said AeroGarden, I love the AeroGarden, I can’t wait only. Two years ago, it was rare that anyone ever heard of AeroGarden in my experience, but today it seems as though more and more people are getting familiar with our product. I think it’s a big job that we get this done, but I do think that our efforts to build brand and category are beginning to work and beginning to pay-off. We spent aggressively last year on marketing support and will look to continue these efforts in the coming year, hopefully by as much as double last year. We’re committed to making the investments in advertising, promotion and media to drive general awareness to the AeroGarden brand for the long-term as we believe this is an essential component of our strategy to drive broader distribution and long-term growth.

And our final major initiative for this year will be to drive further improvements to our supply chain and to our gross margin. We’ll continue to aggressively pursue cost out of products both in Asia and domestically and to refine our supply chain so that we’re able to be more nimble in ordering and receiving our goods. We’ve come over long, long way on this front but I do think there is still room for improvement in our supply chain and it is a constant focus of our management team. I think we can do all of this without significantly increasing our headcount, probably only two to three people on top of the 23 full time people that we had at the end of last year, excluding our customer service staff that expands in contracts with our seasonality. So hopefully, you agree that there is a lot of emerging strength in the company and sure I believe that we have a lot of momentum as we enter 2017.

So, in summary, I’m sometimes asked why we don’t just grow more rapidly and where about earnings down the road or why don’t we invest even more in product development to built AeroGardens that generate even bigger crops, and others wonder why we don’t focus more on the bottom line in a short term and generally bigger profits. The answer is that I and our management team and we’ve been really focused on seeking the right balance of all these factors, so that we can attempt to build a significant sustainable business for the long-term. And I believe that in fiscal 2017, we’ll begin to see this company emerge with good top and bottom line performance consistently and a product line and brand of which we can all be proud.

I want to once again close by acknowledging all of our key stakeholders and thanking you for your outstanding support of AeroGrow, whether you’re a long-term investor or just recently come to another company I want you to know that we take very seriously to task of building a great company, one that strives to consistently deliver solid results on the top and bottom lines. I also want to thank our partners Scotts and Harper and Gardening company who have been very supportive of our vision to build a great company in the indoor gardening space and we look forward to continuing our work quite closely with them. And finally, I’d like to again recognize the entire team here at AeroGrow for all their hard work and their great commitment to our company.

I have one more piece of business to cover before concluding my remarks and I’m going to read from my prepared statement. On June 02, Scotts Miracle-Gro informed the company of its intention to exercise all or some of its warrants sometime prior to December 31, 2016. The company has no further information on the timing or exercise of the warrants other than set forth in schedule 13D/A filed by SMG growing media inc on June 06, 2016. The Board of Directors of AeroGrow has appointed a special committee of the board comprised of Michael Barris who will chair the committee, Jack Walker and Wayne Harding to supervise the implementation of the exercise if and when it should occur.

So, with that, that concludes my prepared remarks and we’d now be happy to answer any questions that you may have. Thank you for your attention. I know we had a lot to say this morning, but I really appreciate your listening and I welcome your questions. Amy, I’m going to turn it back over to you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Jim Barrett at C.L. King.

Jim Barrett

Good morning everyone.

Mike Wolfe

Good morning, Jim. How are you?

Jim Barrett

I’m doing well. Thanks.

Mike Wolfe

Good.

Jim Barrett

Mike, this is a question for either you or Grey, if SMG Growing Media were to exercise all of its warrants tomorrow, next week, could you tell us how much cash would be coming into AeroGrow at that point if I were to exercise the entire amount?

Mike Wolfe

I’m going to let Grey to give you a specific answer, but the calculation for that is based on 1.34 times trailing 12 month earnings. So it is subject to change in evolution constantly. So, any answer Grey gives you is going to subject to a lot of change, but Grey what would you say about that.

Grey Gibbs

Also you have taken deletion of warrants and options outstanding, but it would be to $45 million to $55 million range depending on where the stock gets on any given day.

Jim Barrett

Right. Okay, thanks Grey. And then secondly, this is a question for one of you, assuming that were to happen with the board and let’s prefer discussions like I assume that it happens at the numbers, the range you quoted, would there be – Mike, how would you view the allocation of those fund? How would you want to invest them and/or return them to shareholders?

Mike Wolfe

I don’t think it’s not my place to comment on that, it’s obviously premature. We do recognize that if ever to occur, there would be a change of control of that too and I think it’s just premature to comment on that. If the question is, do I have lots of good idea, I had to spend a lot of money to build our business, that I do but I think there is some very careful procedural things we’re going to have to go through in order to do that. And I just think it’s premature to get into some of that. Is that okay?

Jim Barrett

Fair enough and thank you very much. Thanks both of you.

Mike Wolfe

You bet.

Grey Gibbs

Thanks, Jim.

Operator

[Operator Instructions] Our next question is from John Cassarini at JAC Capital.

John Cassarini

Good morning, gentlemen.

Mike Wolfe

Hi, John.

John Cassarini

Mike, can you talk about a little bit about your advertising expenditures? You significantly increased in this past year and you’ve seen a nice effect of them. How do you measure the effect and what do you think the long term reflex or dollar spent on advertising today, how long do you think that will last? And have you also – next question one. Question two, you previously spoke about the lifetime dollar spent by AeroGrow customer. Can you talk about that? Also and in fact you’ve seen this, question three, you’ve seen the increase in seed sales nicely which is [indiscernible] things. Can you talk about how that was trended and what you’re doing to continue to improve that? I know that’s a lot.

Mike Wolfe

Thanks for your question, John, that’s great. Thank you. Let me talk about each of those as best I can and I really appreciate the question. I can talk about media and advertising all day. I think to break our advertising expenditures into three buckets. The first is work that we do with our individual retail partners to help drive sales within their channel. An example might be a point of purchases play at Bed, Bath and Beyond or purchasing a banner at Amazon.com that type of thing. The second bucket is going to be promotional funds. In order to get a deal today at Amazon or maybe a Cyber Monday feature, we offer promotional funding for that and that’s proven to be extremely effective for us. And both of those have grown in lockstep with our overall spending in the last couple of years and I think those will continue to grow as we see these various retailers continue to grow along with us.

The big change last year for us was this notion I spoke of a little bit during my remarks that we felt like we needed more broad based general advertising to drive awareness of the brand and really awareness of the category. And we spent quite a bit of money on that last year, the production cost of an ad were significant and then we drove quite a bit of media that way. It’s so difficult to know exactly what your return is on that investment, but we really were able to detect a lot of signals on our own dot.com website when those ads were running, the kind of return we thought we were seeing, we were very pleased with that. I also don’t think it’s an accident that we saw such huge increases at places like Amazon and did so well with that. So we think the advertising really worked and we are hoping to at least double at this coming year, that’s certainly is our plan. So we are really committed to that, it’s a long term strategy. As you indicated in your question I think, we think it’s going to take three maybe even four years for that to fully come together but that’s a commitment we have to make. So that’s the media answer I’ll give you.

Second, you asked about lifetime value and I think here is the best answer I can give you. We track the number of dollars that a customer is spending with us with AeroGarden.com over a three year period perpetually. We were always watching this. And over the last year an AeroGarden.com customer who has state engaged, the amount of money they spend with us over a three year period has increased from $434 a year to $518 a year, it’s a big increase in just one year time. And remember that despite moving to LED lights, which don’t have to be replenished as often as our older CFL lights did. So we really think that is speaking to a lot more engagement, we think that is speaking to a better product with a higher degree of efficacy and we just think we have a lot more people getting engaged with the platform in the brand and then stay engaged. I think that’s a really, really big trend we’re seeing.

And thirdly you asked to seed kit sales, I think Grey have some specific numbers, I don’t have in front of mind here, we can share those again with you. But here is what I would say, we are seeing tremendous seed cut sales happen, not only at aerogarden.com but especially our retail partners. I mentioned the line reviewers of Amazon a couple of weeks. I know we talked about the fact that we have more than doubled sales of seed kits up at Amazon over the last year. So I really think we are seeing the engagement here and as I mentioned in my remarks, I [indiscernible] is some really exciting things in this company and we show to determine to deliver that in the coming year.

Grey Gibbs

Did that grow over, John.

Mike Wolfe

I was great. I also have a follow-on, another one that I have to, can you – 1:1 is retail you have some positive experiences from [indiscernible].

John Cassarini

How many doors do you think you’re optimal? What’s your goal to increase store count for this fiscal year and next fiscal year say just because you’re claiming things that are better suited. And then as your exposure increases as you spoke to earlier, I don’t think you can get back into Wal-Mart and be very successful. As far as for a year or two, have you look for the reason in doors.

Mike Wolfe

I don’t know that I have a specific number in mind. If I can you this, we were in 400 Bed, Bath and Beyond stores last year and we are rolling out this year. So their total store count is about 12,000 and that’s a big achievement for us for our little company getting except to that level at Bed Bath and beyond. So, I don’t know what you should expect, but I think you can look for us this year to have a pretty significant increase in store count and as I said and you certainly reiterate there we’re determined to get this product a little bit more at mass at Wal-Mart, the target some of those, but I think we just have to be very methodical about doing that and make sure we build the brand.

So that when we go into those kind of stores where there. I see no reason over the little bit longer term you know that this product can’t be fairly ubiquities in terms of its retail presence, that’s certainly is my goal John.

John Cassarini

Well, that’s great. Keep up the good work.

Grey Gibbs

All with your pleasure, John. Thank you.

Operator

The next question is from [indiscernible] with Private Investor.

Unidentified Analyst

Hi, good morning and congrats on all the progress.

Grey Gibbs

Thanks [indiscernible].

Unidentified Analyst

Great. Relating to question 1, just a point of clarification. You responded in regards to the formula as being calculated on 1.34 times trailing earnings and my understanding is on 1.34 trailing sales.

Grey Gibbs

Yeah. If I’ve said that, I’m very sorry I misspoke. You’re actually right. It is trailing sales. I apologize. 1.34 is trailing sales.

Unidentified Analyst

There is a couple of follow-up questions on that formula. So it’s in fact the board was exercise in whole apart today with that sales number be the loss reported sales i.e. the 331 number or does it throughout to the actual day even though you haven’t reported it. It’s the first part of the question. The second is maybe Grey you gave the aggregate cash infusion that would come in, could you articulate that on a per share basis? And then the second question is given the projected large increase in sales and you guys are operating as if SMG is not going to exercise the board and so you need to plan for working capital needs i.e. your working capital loan if you could talk about the progress on that front, who the perspective lenders are, is it SMG, is it a commercial bank or anything you just share not for?

Mike Wolfe

Remi, its Mike, I’ll address the last point first and then if Grey want to try he certainly can. I think you had the nail on the dead, despite this announcement by SMG, the growing media and their proclamation to our board a couple of weeks ago. We’re absolutely running the business as we always have for its long term health and we’re making long-term decisions as I spoke to my remarks we’re trying to find a balance of sales, profitability growth, gross margin improvement. We’re doing that day and day out and I’m very, very encouraged that we’re building a very strong company for the long-term here. So that’s not going to change as a result of they’re making this announcement.

With regards to working capital, yeah, we’re not quite ready to make any sort of formal announcements yet, but we’re working hard on that. We’ve been able to talk to a couple of entities this year, but do know that we are satisfied that we will have adequate access to capital in our fiscal 2017 to achieve our growth objectives. And then to answer your previous two questions, it is not based on report, the last reported, so every month it gets recalculated the price and if I gave you a range of how much money will come in, I’m also going to give you a range of the price per share, but it’s somewhere in the 230 or so.

Unidentified Analyst

Great. Thank you.

Mike Wolfe

Thanks, Remi.

Operator

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back to Mr. Wolfe for closing remarks.

Mike Wolfe

Thanks, Amy and thanks to all of you for joining us today. I really enjoyed briefing you on the last year and outlining what we’re going to try to accomplish in the coming year and more over really appreciate the really good questions you asked. Thank you. I look forward to catching up with you again on our first quarter call on August and briefing you throughout the coming fiscal year of 2017. I appreciate it very much and I’ll turn it back over to Amy and that concludes our morning. Thank you very much.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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