| Basis of Presentation and Significant Accounting Policies [Text Block] | 2. Liquidity and Basis of Presentation
Interim Financial Information
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, 2015, as filed with the SEC on June 29, 2015.
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, 2015, the results of operations for the three- and nine–month periods ended December 31, 2015 and 2014, and the cash flows for the nine–month periods ended December 31, 2015 and 2014. The results of operations for the three and nine months ended December 31, 2015 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 70.5% of revenues in the fiscal year ended March 31, 2015 (“Fiscal 2015”) occurring in the four consecutive calendar months of October through January. Furthermore, during the nine-month period ended December 31, 2015, the Company continued to expand its distribution channel to prepare for the peak sales season. The balance sheet as of March 31, 2015 is derived from the Company’s audited financial statements.
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.
On July 6, 2015, the Company entered into a Term Loan Agreement in the principal amount of up to $6.0 million with a wholly owned subsidiary of The Scotts Miracle-Gro Company (collectively with its subsidiary, “SMG” or “Scotts Miracle-Gro”). See Note 3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” below.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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 could occur in the near term as information becomes available.
Net Income (Loss) per Share of Common Stock
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. Employee stock options to purchase approximately 656,000 shares and warrants to purchase approximately 444,000 shares of 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 for the three months ended December 31, 2015, and 93,000 shares of employee stock options and approximately 525,000 warrants to purchase common stock were outstanding but were not included in the computation of diluted net income for December 31, 2014. All potentially dilutive securities outstanding have been excluded for the nine months ended December 31, 2015 and December 31, 2014 since their effect would be antidilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation.
Concentrations of Risk
ASC 825-10-50-20
Customers:
For the three months ended December 31, 2015, one customer, Amazon.com, that represented 61.0% of the Company’s net revenue. For the three months ended December 31, 2014, three customers, Amazon.com, Wal-Mart, and Costco warehouses, represented 27.2%, 25.0% and 17.4% of the Company’s net revenue, respectively. For the nine months ended December 31, 2015, one customer, Amazon.com, that represented 57.1% of the Company’s net revenue. For the nine months ended December 31, 2014, three customers, Amazon.com, Wal-Mart, and Costco, represented 24.6%, 19.1% and 13.5% of the Company’s net revenue, respectively.
Suppliers:
For the three months ended December 31, 2015, the Company purchased inventories and other inventory-related items from one supplier totaling $4.1 million, representing 55.4%, of cost of revenue. For the three months ended December 31, 2014, the Company purchased inventories and other inventory-related items from one supplier totaling $1.7 million, representing 22.0% of cost of revenue. For the nine months ended December 31, 2015, the Company purchased inventories and other inventory-related items from one supplier totaling $6.7 million representing 72.2% of cost of revenue. For the nine months ended December 31, 2014, the Company purchased inventories and other inventory-related items from three suppliers totaling $4.5 million, $1.7 million, and $1.2 million representing 45.7%, 17.2%, and 11.7% of cost of revenue, respectively.
The Company’s primary contract manufacturers are located in China. As a result, the Company may be subject to political, currency, regulatory, transportation, third-party labor 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.
Accounts Receivable:
As of December 31, 2015, the Company had three customers, Amazon.com, QVC, and Bed, Bath and Beyond, that represented 49.4%, 20.2%, and 13.0% of the Company’s outstanding accounts receivable, respectively. As of March 31, 2015, the Company had five customers, Amazon.com, Wal-Mart Stores, QVC, Costco.com and Wal-Mart.com, that represented 54.2%, 21.1%, 14.8%, 14.6% and 11.1%, respectively, of outstanding accounts receivable. The Company believes that all receivables from these customers are collectible.
Fair Value of Financial Instruments
The Company follows the guidance in ASC 820, Fair Value Measurements and Disclosures
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.
Level 1 – Quoted prices in active markets for identical assets.
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.
Level 3 – Unobservable inputs that are supported by little or no market activity.
The carrying value of financial instruments including cash, receivables, accounts payable and accrued expenses, approximates their fair value at December 31, 2015 and March 31, 2015 due to the relatively short-term nature of these instruments.
The Company has three liabilities for which the fair value is determined by Level 3 inputs: (1) Notes payable – related party; (2) sale of intellectual property liability; and (3) derivative warrant liability. As discussed below in Notes 3 and 4, each of these liabilities was incurred in conjunction with the Company’s strategic alliance with Scotts Miracle-Gro. As of December 31, 2015 and March 31, 2015, the fair value of the Company’s note payable and the sale of intellectual property liability were estimated using the discounted cash flow method, which is based on expected future cash flows, discounted to present value using a discount rate of 15%. The Company also issued a derivative warrant liability that entitles, but does not obligate, Scotts Miracle-Gro to purchase a number of shares of common stock that, on a fully diluted basis, would constitute 80% of the Company’s outstanding capital stock. The Company accounts for the warrant as a liability and measures the value of the warrant using the Monte Carlo simulation model as of the end of each quarterly reporting period until the warrant is exercised or expires. As of December 31, 2015, and March 31, 2015, the estimated fair value of the warrant was $470,000 and $1.7 million, respectively. As of December 31, 2015 and March 31, 2015, the Company did not have any financial assets or liabilities that were measured at fair value on a recurring basis subsequent to initial recognition, except for the derivative warrant liability. The table below summarizes the fair value and carry value of each Level 3 category liability:
December 31, 2015
(in thousands)
March 31, 2015
(in thousands)
Fair Value
Carry Value
Fair Value
Carry Value
Liabilities
Notes payable-related party
$
5,865
$
6,197
$
207
$
207
Derivative warrant liability
470
470
1,688
1,688
Sale of intellectual property liability
124
172
145
208
Total
$
6,459
$
6,839
$
2,040
$
2,103
Accounts Receivable and Allowance for Doubtful Accounts
The Company sells its products to retailers and direct-to-consumer. Direct-to-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 $61,000 and $10,000 at December 31, 2015 and March 31, 2015, respectively.
Other Receivables
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 Vantiv, 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, 2015 and March 31, 2015, the balance in this reserve account was $159,000 and $214,000, respectively.
Inventory
Inventories are valued at the lower of cost, determined on the basis of standard costing, which approximates the first-in, first-out method, or market. When the Company is the manufacturer raw materials, labor, and manufacturing overhead are included in inventory costs. 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 as prescribed under ASC 330 Inventory Pricing
December 31,
2015
March 31,
2015
(in thousands)
(in thousands)
Finished goods
$
4,045
$
1,919
Raw materials
729
684
$
4,774
$
2,603
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, 2015 and March 31, 2015, the Company had reserved $285,000 and $267,000 for inventory obsolescence, respectively.
Revenue Recognition
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.
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 the number of customers who will actually redeem the incentive based on industry experience. As of December 31, 2015 and March 31, 2015, the Company had accrued $715,000 and $110,000, respectively, as its estimate of the foregoing deductions and allowances. These expenses are included in the accrued expenses line of the condensed balance sheets.
Warranty and Return Reserves
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 provision for potential future warranty costs of $118,000 and $58,000 as of December 31, 2015 and March 31, 2015, respectively.
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, 2015 and March 31, 2015, the Company has recorded a reserve for customer returns of $267,000 and $119,000, respectively.
Advertising and Production Costs
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
Advertising expense for the three and nine months ended December 31, 2015 and December 31, 2014, were as follows:
Three Months Ended
December 31,
(in thousands)
Nine Months Ended
December 31,
(in thousands)
2015
2014
2015
2014
Direct-to-consumer
$
354
$
415
$
552
$
582
Retail
1,079
565
1,174
578
Brand and other
667
8
681
27
Total advertising expense
$
2,100
$
988
$
2,408
$
1,187
As of December 31, 2015 and March 31, 2015, the Company deferred $165,000 and $48,000, respectively, related to such media and advertising costs which include the catalogue cost described above and commercial production costs. The costs are included in the prepaid expenses and other line of the condensed balance sheets.
Recently Issued Accounting Pronouncements
In November 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify the presentation of deferred income taxes. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this update to have a material impact on its financial statements.
In August 2015, the FASB issued ASU 2015-14 which updated (to defer the effective date by one year) previously issued ASU 2014-09, "Revenue from Contracts with Customers," which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018 using one of two prescribed retrospective methods. Early adoption is not permitted. We have not yet selected a transition method, nor have we determined the effect of the standard on our ongoing financial reporting.
In July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management does not believe the adoption of ASU 2015-11 will have an impact on the Company's financial position or results of operations.
In August 2014, the FASB issued Accounting Standard Update ("ASU") No. 2014-15, "Presentation of Financial Statements - Going Concern, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern", which requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or within one year after the date that the financial statements are available to be issued, when applicable. The standard is effective for annual reporting periods ending after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating this new standard, and after adoption, it will incorporate this guidance in its assessment of going concern. |
