2. Liquidity and Basis of Presentation | 9 Months Ended |
Dec. 31, 2013 |
Disclosure Text Block [Abstract] | ' |
Basis of Presentation and Significant Accounting Policies [Text Block] | ' |
2. Liquidity and Basis of Presentation |
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Interim Financial Information |
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The unaudited interim financial statements of the Company included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These condensed statements do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual audited financial statements and should be read in conjunction with the Company’s audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013, as filed with the SEC on July 1, 2013. |
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In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments, including normal recurring adjustments, necessary to present fairly the financial position of the Company at December 31, 2013, the results of operations for the three- and nine–month periods ended December 31, 2013 and 2012, and the cash flows for the nine–month periods ended December 31, 2013 and 2012. The results of operations for the three and nine months ended December 31, 2013 are not necessarily indicative of the expected results of operations for the full year or any future period. In this regard, the Company’s business is highly seasonal, with approximately 49.3% of revenues in the fiscal year ended March 31, 2013 (“Fiscal 2013”) occurring in the four consecutive calendar months of October through January. Furthermore, during the nine-month period ended December 31, 2013, the Company has curtailed sales and incurred additional product and marketing expenses while it cobranded inventory and advertising materials with the Scotts Miracle-Gro trade name. The balance sheet as of March 31, 2013 is derived from the Company’s audited financial statements. |
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Sources of funding to meet prospective cash requirements include the Company’s existing cash balances, cash flow from operations, and borrowings under the Company’s debt arrangements. We may need to seek additional capital, however, to provide a cash reserve against contingencies, address the seasonal nature of our working capital needs, and to enable us to invest further in trying to increase the scale of our business. There can be no assurance we will be able to raise this additional capital. |
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Significant Accounting Policies |
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Use of Estimates |
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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. It is reasonably possible that a change in the Company’s estimates will occur in the near term. |
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Net Income (Loss) per Share of Common Stock |
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The Company computes net income (loss) per share of common stock in accordance with Accounting Standards Codification (“ASC”) 260. ASC 260 requires companies with complex capital structures to present basic and diluted earnings per share (“EPS”). Basic EPS is measured as the income or loss available to common stockholders 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. |
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The following table presents the computation of basic and diluted net income per share for the three months ended December 31, 2013 (in thousands, except per share amounts): |
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| | 31-Dec-13 | | | | | | | | | | | | |
Net income available to common shareholders | | $ | 76 | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | |
Weighted-average shares outstanding | | | 5,906 | | | | | | | | | | | | | |
Basic net income per share | | $ | 0.01 | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | |
Weighted-average shares outstanding | | | 5,906 | | | | | | | | | | | | | |
Add: Dilutive potential shares-Stock options | | | 86 | | | | | | | | | | | | | |
Weighted-average shares used in computing diluted net income per share | | | 5,992 | | | | | | | | | | | | | |
Diluted net income per share | | $ | 0.01 | | | | | | | | | | | | | |
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Employee stock options to purchase approximately 13,000 shares were outstanding and approximately 528,000 warrants to purchase common stock were outstanding but were not included in the computation of diluted net income per share because the effect of including such shares would have been antidilutive in the periods presented. |
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Reclassifications |
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Certain prior year amounts have been reclassified to conform to current year presentation. |
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Concentrations of Risk |
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ASC 825-10-50-20 requires disclosure of significant concentrations of credit risk regardless of the degree of such risk. Financial instruments with significant credit risk include cash deposits. The amount on deposit with one financial institution exceeded the $250,000 federally insured limit as of December 31, 2013. However, management believes that the financial institution is financially sound and the risk of loss is minimal. |
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Customers: |
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For the three months ended December 31, 2013, two customers, Amazon.com and Costco, represented 39.2% and 10.7% of the Company’s net revenue, respectively. For the three months ended December 31, 2012, two customers, Amazon.com and Canadian Tire Corporation, represented 19.3% and 12.8% of the Company’s net revenue, respectively. For the nine months ended December 31, 2013, two customers, Amazon.com and Costco, represented 33.6% and 7.9% of the Company’s net revenue, respectively. For the nine months ended December 31, 2012, two customers, Amazon.com and Canadian Tire Corporation, represented 10.4% and 7.9% of the Company’s net revenue, respectively. |
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Suppliers: |
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For the three months ended December 31, 2013, the Company purchased inventories and other inventory-related items from three suppliers totaling $839,000, $707,000, and $205,000, representing 29.3%, 24.7%, and 7.2% of cost of revenue, respectively. For the three months ended December 31, 2012, the Company purchased inventories and other inventory-related items from two suppliers totaling $263,000 and $254,000, representing 15.8% and 15.3% of cost of revenue, respectively. For the nine months ended December 31, 2013, the Company purchased inventories and other inventory-related items from three suppliers totaling $1.4 million, $992,000, and $270,000 representing 34.4%, 24.9%, and 6.8%, of cost of revenue, respectively. For the nine months ended December 31, 2012, the Company purchased inventories and other inventory-related items from four suppliers totaling $587,000, $433,000, $392,000, and $334,000 representing 20.2%, 14.9%, 13.5%, and 11.5% of cost of revenue, respectively. |
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The Company’s primary contract manufacturers are located in China. As a result, the Company may be subject to political, currency, regulatory and weather/natural disaster risks. Although the Company believes alternate sources of manufacturing could be obtained, these risks could have an adverse impact on operations. |
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Accounts Receivable: |
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As of December 31, 2013, the Company had two customers, Amazon.com and Costco, that represented 62.3% and 23.6% of the Company’s outstanding accounts receivable, respectively. As of March 31, 2013, the Company one customer, Amazon.com who represented 61.2% of outstanding accounts receivable. The Company believes that all receivables from these customers are collectible. |
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Fair Value of Financial Instruments |
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The Company follows the guidance in ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), as it relates to the fair value of its financial assets and liabilities. ASC 820 provides for a standard definition of fair value to be used in new and existing pronouncements. This guidance requires disclosure of fair value information about certain financial instruments (insurance contracts, real estate, goodwill and taxes are excluded) for which it is practicable to estimate such values, whether or not these instruments are included in the balance sheet at fair value. The fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation. |
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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants. ASC 820 also provides a hierarchy for determining fair value, which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority given to Level 1 as these are the most reliable, and the lowest priority given to Level 3. |
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Level 1 – Quoted prices in active markets for identical assets. |
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Level 2 – Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations. |
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Level 3 – Unobservable inputs that are supported by little or no market activity. |
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The carrying value of financial instruments including receivables and accounts payable, approximates their fair value at December 31, 2013 and March 31, 2013 due to the relatively short-term nature of these instruments. As of December 31, 2013 and March 31, 2013, the fair value of the Company's debt, notes payable, and sale of intellectual property liability using Level 3 inputs was estimated using the discounted cash flow method, which is based on the future expected cash flows, discounted to their present values, using a discount rate of 15%. |
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In conjunction with a Securities Purchase Agreement and strategic alliance with a wholly owned subsidiary of The Scotts Miracle-Gro Company (collectively with the subsidiary, “Scotts Miracle-Gro”) on April 22, 2013, the Company issued a warrant that entitles, but does not obligate, Scotts Miracle-Gro to purchase a number of shares of common stock that, on a fully diluted basis, constitute 80% of the Company’s outstanding capital stock. This warrant was accounted for as a liability at its estimated fair value. The Company calculated the fair value of the warrant during the quarter ended December 31, 2013 using a multiple based valuation model. As of December 31, 2013, the Company measured the warrant at fair value and will continue to do so on a quarterly basis. As of March 31, 2013, the Company did not have any financial assets or liabilities that were measured at fair value on a recurring basis subsequent to initial recognition. |
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| | 31-Dec-13 | | | 31-Mar-13 | |
(in thousands) | (in thousands) |
| | Fair Value | | | Carry Value | | | Fair Value | | | Carry Value | |
Liabilities | | | | | | | | | | | | |
Notes payable | | $ | - | | | $ | - | | | $ | 610 | | | $ | 641 | |
Sale of intellectual property liability | | | 178 | | | | 271 | | | | - | | | | - | |
Derivative warrant liability | | | 595 | | | | 595 | | | | - | | | | - | |
Long-term debt | | | 109 | | | | 112 | | | | 1,726 | | | | 2,068 | |
Total | | $ | 882 | | | $ | 978 | | | $ | 2,336 | | | $ | 2,709 | |
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Accounts Receivable and Allowance for Doubtful Accounts |
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The Company sells its products to retailers and consumers. Consumer transactions are primarily paid by credit card. Retailer sales terms vary by customer, but generally range from net 30 days to net 60 days. Accounts receivable are reported at net realizable value and net of the allowance for doubtful accounts. The Company uses the allowance method to account for uncollectible accounts receivable. The Company's allowance estimate is based on a review of the current status of trade accounts receivable, which resulted in an allowance of $13,000 and $1,000 at December 31, 2013 and March 31, 2013, respectively. |
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Other Receivables |
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In conjunction with the Company’s processing of credit card transactions for its direct-to-consumer sales activities and as security with respect to the Company’s performance for credit card refunds and charge backs, the Company is required to maintain a cash reserve with Litle and Company, the Company’s credit card processor. This reserve is equal to 5% of the credit card sales processed during the previous six months. As of December 31, 2013 and March 31, 2013, the balance in this reserve account was $131,000 and $169,000, respectively. |
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Advertising and Production Costs |
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The Company expenses all production costs related to advertising, including print, television, and radio advertisements when the advertisement has been broadcast or otherwise distributed. The Company records media costs related to its direct-to-consumer advertisements, inclusive of postage and printing costs incurred in conjunction with mailings of direct-response catalogues, and related direct-response advertising costs, in accordance with ASC 340-20-Reporting on Advertising Costs. As prescribed by ASC 340-20-25, direct-to-consumer advertising costs incurred are reported as assets and are amortized over the estimated period of the benefits, based on the proportion of current period revenue from the advertisement to probable future revenue. |
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As the Company has re-entered the retail distribution channel, the Company has expanded its advertising to online gateway and portal advertising, as well as placement in third party catalogues. |
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Advertising expense for the three and nine months ended December 31, 2013 and December 31, 2012, were as follows: |
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| | Three Months Ended | | | Nine Months Ended | |
December 31, | December 31, |
(in thousands) | (in thousands) |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Direct-to-consumer | | $ | 391 | | | $ | 534 | | | $ | 506 | | | $ | 825 | |
Retail | | | 390 | | | | 1 | | | | 393 | | | | 1 | |
Total advertising expense | | $ | 781 | | | $ | 535 | | | $ | 899 | | | $ | 826 | |
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As of December 31, 2013 and March 31, 2013, the Company deferred $6,000 and $4,000, respectively, related to such media and advertising costs. |
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| | December 31, | | | March 31, | | | | | | | | | |
| | 2013 | | | 2013 | | | | | | | | | |
(in thousands) | (in thousands) | | | | | | | | |
Deferred advertising and media | | $ | 6 | | | $ | 4 | | | | | | | | | |
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Inventory |
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Inventories are valued at the lower of cost, determined by the first-in, first-out method, or market. Included in inventory costs where the Company is the manufacturer are raw materials, labor, and manufacturing overhead. The Company records the raw materials at delivered cost. Standard labor and manufacturing overhead costs are applied to the finished goods based on normal production capacity. A majority of the Company’s products are manufactured overseas and are recorded at cost. |
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| | December 31, | | | March 31, | | | | | | | | | |
| | 2013 | | | 2013 | | | | | | | | | |
(in thousands) | (in thousands) | | | | | | | | |
Finished goods | | $ | 1,124 | | | $ | 606 | | | | | | | | | |
Raw materials | | | 474 | | | | 623 | | | | | | | | | |
| | $ | 1,598 | | | $ | 1,229 | | | | | | | | | |
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The Company determines an inventory obsolescence reserve based on management’s historical experience and establishes reserves against inventory according to the age of the product. As of December 31, 2013 and March 31, 2013, the Company had reserved $332,000 for inventory obsolescence. |
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Revenue Recognition |
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The Company recognizes revenue from product sales, net of estimated returns, when persuasive evidence of a sale exists: that is, a product is shipped under an agreement with a customer; risk of loss and title has passed to the customer; the fee is fixed or determinable; and collection of the resulting receivable is reasonably assured. |
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The Company records estimated reductions to revenue for customer and distributor programs and incentive offerings, including promotions, rebates, and other volume-based incentives. Certain incentive programs require the Company to estimate based on industry experience the number of customers who will actually redeem the incentive. As of December 31, 2013 and March 31, 2013, the Company had accrued $236,000 and $43,000, respectively, as its estimate for the foregoing deductions and allowances. |
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Warranty and Return Reserves |
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The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its basic warranty program. The specific warranty terms and conditions vary depending upon the product sold, but generally include technical support, repair parts, and labor for periods up to one year. Factors that affect the Company’s warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy the Company’s warranty obligation. Based upon the foregoing, the Company has recorded a reserve for potential future warranty costs of $14,000 and $10,000 as of December 31, 2013 and March 31, 2013, respectively. |
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The Company reserves for known and potential returns from customers and associated refunds or credits related to such returns based upon historical experience. In certain cases, retailer customers are provided a fixed allowance, usually in the 1% to 2% range, to cover returned goods and this allowance is deducted from payments made to us by such customers. As of December 31, 2013 and March 31, 2013, the Company has recorded a reserve for customer returns of $80,000 and $27,000, respectively. |
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Recently Issued Accounting Pronouncements |
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In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which among other things, requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as denoted within the ASU. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. This new guidance will not have a material impact on our financial statements. |
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