AeroGrow (OTC:AERO) Shifts Business Model from Costly Retail Channel

AeroGrow International (OTC:AERO), makers of the AeroGarden line of indoor gardening products, announced results for the quarter ended December 31, 2010. The December quarter is the third quarter of AeroGrow's fiscal year. As I write, shares of AeroGrow are down 14 percent at $0.06 per share on volume of just over 20,000 shares compared to its average daily volume of 33,000 shares. AeroGrow has a 52-week range between $0.05 and $0.20 per share.

Financial Highlights for the Three Months Ended December 31, 2010:

-- EBITDA profit of $213,933 for the quarter, versus a loss of $168,977
for the same quarter prior year

-- Operating profit of $35,619 for the quarter, up $403,451 from a loss of
$367,832 in the quarter ended December 31, 2009

-- Gross margin improved to 42.4%, a 17.7 percentage point improvement
from the September 30, 2010 quarter

-- Overhead expense was reduced 37% year-over-year, and was down more than
70% over the past two years

-- Seed kit and accessory sales, the recurring revenue portion of the
business, represented 35% of total sales and continues to grow

-- Unit sales of grow lights, a component of recurring revenue,
increased 51% year-over-year

-- Cumulative gardens sold surpassed 1 million units

-- Proprietary database, including purchasers and active buyers, reached
almost 700,000 names

-- Successfully implemented a new in-house order management system,
improving fulfillment, online ordering and real-time marketing
visibility

"One year ago we began the transformation from an unprofitable company generating revenue largely through wholesale sales to retailers, to a profitable one generating the majority of its revenue by selling directly to the consumer," said Jack Walker, Chairman and CEO of AeroGrow. "We believe that with our enhanced advertising effectiveness, improved gross margins and reduced overhead, we are now well-positioned to invest in the growth of our revenue base to drive towards a full year of profitability. Executing these plans will require new capital, which we are currently seeking to acquire."

Mr. Walker continued, "During the third quarter we experienced successful pilot tests in our mall kiosk programs, as well as print and TV advertising campaigns that we believe can provide strong growth in the coming years. The Company sold approximately 50,000 AeroGardens in the quarter, which bodes well for our recurring revenue plan of selling seed kits, lighting equipment, and other accessories. Going forward, management remains committed to maximizing its presence amongst all relevant markets, increasing profitability and improving overall shareholder value."

For the three months ended December 31, 2010, sales totaled $5,002,871, a $2,936,377, or 37.0% decrease from the same period in the prior year.

Profit from operations totaled $35,619 for the three months ended December 31, 2010, as compared to a loss of $367,832 in the prior year period. EBITDA totaled to a profit of $213,933 as compared to an EBITDA loss in the prior year period of $168,977, representing a year-over-year improvement of $382,910. The improved operating performance reflected the higher gross margin in the 2010 period combined with a decrease in operating expenses other than cost of revenue, partially offset by the impact of lower sales.

Founded in 2002 in Boulder, Colorado, AeroGrow International is dedicated to the research, development and marketing of the AeroGarden line of dirt-free indoor gardens. AeroGardens allow anyone to grow farmer's market fresh herbs, salad greens, tomatoes, chili peppers, flowers and more, indoors, year-round.

For more information please visit: www.aerogrow.com.

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