United States

Securities and Exchange Commission

Washington, DC 20549

 

 

Form 10-Q

 

 

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the quarterly period ended:   Commission File No:
March 31, 2008   000-31279

 

 

OurPet’s Company

(Exact name of Registrant as specified in its charter)

 

 

 

Colorado   34-1480558

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1300 East Street, Fairport Harbor, OH   44077
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (440) 354-6500

 

 

Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company; See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large Accelerated Filer   ¨   Accelerated Filer   ¨
Non-Accelerated Filer   ¨   Smaller Reporting Company   x

Indicate the number of shares of outstanding of each of the Registrant’s classes of common equity, as of the last practicable date: As of April 30, 2008, the Registrant had outstanding 15,246,984 shares of Common Stock, 66,000 shares of Convertible Preferred Stock, convertible into 660,000 shares of Common Stock, and warrants exercisable for 4,336,509 shares of Common Stock.

 

 

 


Table of Contents

CONTENTS

 

     Page
Number

Part 1 – Financial Information

  

Item 1 – Financial Statements (Unaudited):

  

Consolidated Balance Sheets of OurPet’s Company and Subsidiaries as of March 31, 2008 and December 31, 2007

   3

Consolidated Statements of Operations of OurPet’s Company and Subsidiaries for the three month periods ended March 31, 2008 and 2007

   5

Consolidated Statement of Stockholders’ Equity of OurPet’s Company and Subsidiaries for the three month period ended March 31, 2008

   6

Consolidated Statements of Cash Flows of OurPet’s Company and Subsidiaries for the three month periods ended March 31, 2008 and 2007

   7

Notes to Consolidated Financial Statements

   8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operation:

  

Overview

   10

Results of Operations

   11

Liquidity and Capital Resources

   12

Critical Accounting Policies/Estimates

   13

Off-Balance Sheet Arrangements

   14

Item 3 – Controls and Procedures

   14

Part II – Other Information

  

Item 1 – Legal Proceedings

   14

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

   15

Item 3 – Defaults Upon Senior Securities

   15

Item 4 – Submission of Matters to a Vote of Security Holders

   15

Item 5 – Other Information

   15

Item 6 – Exhibits

   15

Signatures

   15

Certifications

   17

 

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OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     March 31,
2008
   December 31,
2007
     (Unaudited)     

ASSETS

     

CURRENT ASSETS

     

Cash and cash equivalents

   $ 79,764    $ 28,843

Accounts receivable - trade, less allowance for doubtful accounts of $ 22,716 and $ 22,216

     1,377,770      1,239,410

Inventories

     3,766,013      3,395,512

Prepaid expenses

     173,154      91,069
             

Total current assets

     5,396,701      4,754,834
             

PROPERTY AND EQUIPMENT

     

Computers and office equipment

     300,320      295,591

Warehouse equipment

     257,751      228,542

Leasehold improvements

     120,705      120,705

Tooling

     3,285,182      3,267,127

Construction in progress

     196,864      145,011
             

Total

     4,160,822      4,056,976

Less accumulated depreciation

     1,860,166      1,747,447
             

Net property and equipment

     2,300,656      2,309,529
             

OTHER ASSETS

     

Patents, less amortization of $119,179 and $112,442

     258,787      253,635

Goodwill

     67,511      67,511

Domain names and other assets

     16,879      16,821
             

Total other assets

     343,177      337,967
             

Total assets

   $ 8,040,534    $ 7,402,330
             

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

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OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

     March 31,
2008
    December 31,
2007
 
     (Unaudited)        

LIABILITIES

    

CURRENT LIABILITIES

    

Notes payable

   $ 1,600,000     $ 1,800,000  

Current maturities of long-term debt

     203,520       232,857  

Accounts payable - trade

     1,737,472       1,170,225  

Accrued expenses

     245,418       122,813  
                

Total current liabilities

     3,786,410       3,325,895  
                

LONG-TERM DEBT

    

Long-term debt - less current portion above

     815,655       250,655  
                

Total liabilities

     4,602,065       3,576,550  
                

STOCKHOLDERS’ EQUITY

    

COMMON STOCK ,
no par value; authorized 50,000,000 shares, issued and outstanding 15,243,984 shares

     4,167,804       4,167,804  

CONVERTIBLE PREFERRED STOCK ,
no par value; convertible into Common Stock at the rate of 10 common shares for each preferred share; authorized 5,000,000 shares, issued and outstanding 66,000 shares

     602,679       602,679  

PAID-IN CAPITAL

     44,970       40,809  

ACCUMULATED DEFICIT

     (1,376,984 )     (985,512 )
                

Total stockholders’ equity

     3,438,469       3,825,780  
                

Total liabilities and stockholders’ equity

   $ 8,040,534     $ 7,402,330  
                

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

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OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     For the Three Months Ended March 31,  
     2008     2007  

Net revenue

   $ 2,905,264     $ 2,583,370  

Cost of goods sold

     2,038,401       1,896,505  
                

Gross profit on sales

     866,863       686,865  

Selling, general and administrative expenses

     654,203       534,680  
                

Income from operations

     212,660       152,185  

Other income and expense, net

     (217 )     2,068  

Interest expense

     (44,793 )     (38,740 )
                

Income before litigation expense and income taxes

     167,650       115,513  

Litigation expense

     (559,122 )     —    
                

Income (loss) before income taxes

     (391,472 )     115,513  

Income tax expense

     —         —    
                

Net income (loss)

   $ (391,472 )   $ 115,513  
                

Basic and Diluted Earnings Per Common Share After Dividend Requirements For Preferred Stock:

    

Net Income (loss)

   $ (0.02 )   $ 0.01  
                

Weighted average number of common and equivalent shares outstanding used to calculate basic and diluted earnings per share

     16,361,732       17,137,861  
                

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

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OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

 

     Preferred Stock    Common Stock    Paid-In
Capital
   Accumulated
Deficit
    Total
Stockholders’
Equity
 
   Number of
Shares
   Amount    Number of
Shares
   Amount        

Balance at December 31, 2007

   66,000    $ 602,679    15,243,984    $ 4,167,804    $ 40,809    $ (985,512 )   $ 3,825,780  

Net loss

   —        —      —        —        —        (391,472 )     (391,472 )

Stock-based compensation expense

   —        —      —        —        4,161      —         4,161  
                                               

Balance at March 31, 2008

   66,000    $ 602,679    15,243,984    $ 4,167,804    $ 44,970    $ (1,376,984 )   $ 3,438,469  
                                               

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

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OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the Three Months
Ended March 31,
 
     2008     2007  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income (loss)

   $ (391,472 )   $ 115,513  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Depreciation expense

     112,719       107,889  

Amortization expense

     6,738       6,188  

Stock option expense

     4,161       4,651  

(Increase) decrease in assets:

    

Accounts receivable - trade

     (138,360 )     (58,236 )

Inventories

     (370,501 )     88,422  

Prepaid expenses

     (82,085 )     (87,051 )

Patent costs

     (11,890 )     (5,270 )

Domain names and other assets

     (58 )     (195 )

Increase (decrease) in liabilities:

    

Accounts payable - trade

     567,247       49,618  

Accrued expenses

     122,605       13,166  
                

Net cash provided by (used in) operating activities

     (180,896 )     234,695  
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Acquisition of property and equipment

     (103,846 )     (217,522 )
                

Net cash used in investing activities

     (103,846 )     (217,522 )
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Principal payments on long-term debt

     (64,337 )     (41,070 )

Net repayment on bank line of credit

     (200,000 )     —    

Issuance of common stock

     —         53,100  

Issuance of long-term debt

     600,000       —    
                

Net cash provided by financing activities

     335,663       12,030  
                

Net increase in cash

     50,921       29,203  

CASH AT BEGINNING OF PERIOD

     28,843       30,400  
                

CASH AT END OF PERIOD

   $ 79,764     $ 59,603  
                

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

    

Interest paid

   $ 37,901     $ 36,006  
                

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

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OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008

( Unaudited )

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements and include the accounts of OurPet’s Company and its wholly-owned subsidiaries (the “Company”), Virtu Company (“Virtu”) and SMP Company, Incorporated (“SMP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been included. All intercompany transactions have been eliminated. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended December 31, 2007 included in the Company’s Form 10-KSB filed with the Securities and Exchange Commission on March 28, 2008.

INVENTORIES

Inventories are carried at the lower of cost, first-in, first-out method or market. Inventories at March 31, 2008 and December 31, 2007 consist of:

 

     2008    2007

Finished goods

   $ 2,934,390    $ 2,525,024

Components and packaging

     831,623      870,488
             

Total

   $ 3,766,013    $ 3,395,512
             

All inventories are pledged as collateral for bank loans.

REVENUE RECOGNITION

With respect to revenue from product sales, revenue is recognized only upon shipment of products to customers. The Company derives its revenues from the sale of proprietary pet products under the OurPet’s, Pet Zone, SmartScoop, ecopure Naturals, Play-N-Squeak, Durapet, Go! Cat Go!, and DockDogs labels. Net revenue is comprised of gross sales less discounts given to distributors and returns and allowances.

For the three months ended March 31, 2008, 41.9% of the Company’s net revenue was derived from two major customers. Revenue generated from each of these customers amounted to $732,127 and $486,341, which represents 25.2% and 16.7% of total revenue, respectively.

For the three months ended March 31, 2007, 53.1% of the Company’s net revenue was derived from two major customers. Revenue generated from each of these customers amounted to $739,102 and $632,926, which represents 28.6% and 24.5% of total revenue, respectively.

 

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OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008

(Unaudited)

STOCK OPTIONS

In December 2004, the FASB issued FAS No.123R, “Share-Based Payment”, which revised FAS 123, “Accounting for Stock-Based Compensation”, and superseded ABP Opinion No. 25, “Accounting for Stock Issued to Employees” (ABP 25”) and related interpretations. FAS 123R requires the grant-date value of all share-based payment awards that are expected to vest, including employee share options, to be recognized as employee compensation expense over the requisite service period. The Company adopted FAS 123R on January 1, 2006 and applied the modified prospective transition method. Under this transition method, the Company (1) did not restate any prior periods and (2) is recognizing compensation expense for all share-based payment awards that were outstanding, but not yet vested, as of January 1, 2006, based upon the same estimated grant-date fair values and service periods used to prepare the FAS 123 pro-forma disclosures. The amount of compensation expense recognized in 2008 and 2007 as a result of stock options is not material.

NET INCOME PER COMMON SHARE

Basic and diluted net income per Common Share is based on the net income attributable to common stockholders after preferred stock dividend requirements for the period, divided by the weighted average number of common and equivalent dilutive shares outstanding during the period. Potential common shares whose effect would be antidilutive have not been included. As of March 31, 2008, common shares that are or could be potentially dilutive include 1,035,500 stock options at exercise prices from $0.21 to $1.55 a share, 4,336,509 warrants to purchase Common Stock at exercise prices from $0.284 to $1.444 a share and 660,000 shares underlying the Preferred Stock at a conversion rate of $1.00 per share. As of March 31, 2007, common shares that are or could be potentially dilutive include 980,500 stock options at exercise prices from $0.21 to $1.05 a share, 3,994,984 warrants to purchase Common Stock at exercise prices from $0.285 to $1.215 a share and 660,000 shares underlying the Preferred Stock at a conversion rate of $1.00 per share.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of FAS No. 157, Fair Value Measurements. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In September 2006, the FASB issued FAS No. 157, Fair Value Measurements , which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The Standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which removed leasing transactions accounted for under FAS No. 13 and

 

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related guidance from the scope of FAS No. 157. Also in February 2008, the FASB issued Staff Position No. 157-2, Partial Deferral of the Effective Date of Statement 157, which deferred the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

OurPet’s develops, designs, produces and markets a broad line of innovative, high-quality accessory and consumable pet products. These products include healthy feeding systems to improve the health and comfort of pets, interactive toys that provide fun, rewarding mental and physical challenges for pets, innovative maintenance to enhance the required maintenance needs of pets, and healthy consumable products for achieving and maintaining high mental, physical and immune levels of pets. Examples of products in each of these categories include the following.

 

Healthy Feeding Systems   -   Pet Diners  
    Stainless Steel Bowls  
    Automatic Feed and Water Dispensers  
    Portable Dog Products  
    Domestic and Wild Bird Feeders  
Interactive Toys   -   Dog and Cat Toys  
    Plush Toys  
    Food Delivery Toys  
    Talking Bird Mirrors  
Innovative Maintenance   -   Self-scooping Cat Litter Boxes  
    Waste Management Products  
    Premium Cat Litter  
Healthy Consumables   -   Nutritional Supplements  
    Ice Cream Alternatives  
    Gourmet Gravies  
    Gourmet Sprays  

These products are manufactured by domestic and foreign subcontractors and then sold by us to retailers and distributors who then sell the products to the end consumer. According to the 2007/2008 APPMA National Pet Owners Survey approximately 71.1 million U.S. households currently own a pet with an estimated pet population of 74.8 million dogs, 88.3 million cats and 16.0 million birds.

As discussed below and in Liquidity and Capital Resources on Pages 12 and 13, we have funded our operations principally from net cash provided by operating activities and with bank borrowings during the year ended December 31, 2007 and from borrowings in the three months ended March 31, 2008.

Under our line of credit facility with our bank we can borrow up to $2,000,000 based on the level of qualifying accounts receivable and inventories. At March 31, 2008 we had a balance of $1,500,000 under the line of credit with the bank at an interest rate of prime plus .75%.

 

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In February of 2008, we entered into contribution agreements with six contributors, all of which are affiliated with the Company, pursuant to which each contributor loaned certain funds to us totaling $600,000. These funds will be used by us for expenses related to litigation on certain of our SmartScoop™ products and for expenses related to new product development. In consideration for these loans we (a) executed promissory notes due in two years with interest accruing at prime plus 2%, (b) issued warrants for the purchase of 300,000 shares of our Common Stock at an option price of $0.825 per share and (c) entered into piggyback registration rights agreements with the contributors.

RESULTS OF OPERATIONS

In the following discussion all references to 2008 are for the three months ended March 31, 2008 and all references to 2007 are for the three months ended March 31, 2007.

Net revenue for 2008 was $2,905,264, an increase of 12.5% in revenue from $2,583,370 in 2007, consisting of net sales of proprietary products for the retail pet business. This increase of $321,894 was accomplished despite a reduction approximately $154,000 in sales to our two major customers due to soft retail sales and inventory adjustments. This sales decrease was more than offset by an increase of approximately $476,000 in sales to other customers including both sales of new products and sales to new customers. Total sales to all customers of new products in 2008 that were not sold in 2007, including the new Play-N-Squeak products, Healthy Pet Diners, and SmartScoop™ product items, were approximately $819,000. Our sales to foreign customers increased by approximately $29,000, or 30%, from 2007 mainly due to increased sales to customers in Canada.

While net revenue increased by 12.5% in 2008, cost of goods sold increased by 7.5%, from $1,896,505 in 2007 to $2,038,401 in 2008. This increase was the result of the cost of purchased products sold and freight increasing by 5.1% due mainly to the increased amount of purchased products needed for the increase in sales in 2008. Our variable and fixed warehouse and overhead costs increased by 17.9% from the comparable quarter in 2007 due to increased costs for salaries and wages for additional employees in warehouse operations. Also, costs increased due to the rental cost for our new warehouse which started in June 2007, increased costs for depreciation for warehouse equipment, and increased warehouse and shipping supplies.

The net revenue increased by 12.5% and the cost of goods sold increased by 7.5%, which resulted in our gross profit on sales increasing by 26.2%, or $179,998 from $686,865 in 2007 to $866,863 in 2008.

Selling, general and administrative expenses in 2008 were $654,203, an increase of 22.4% or $119,523 from $534,680 in 2007. The significant increases were in (i) increased salaries and wages, payroll taxes and employee benefits of approximately $46,000 due to two additional employees in sales and marketing and the increased accruals for managers’ bonus and employee profit sharing, (ii) increased sales and marketing expenses of approximately $32,000 mainly due to promotional expenses by our customers, increased cash discounts allowed to our customers resulting from higher sales, and advertising of our new products in trade magazines, and (iii) increased commissions accrued for our sales representatives of approximately $14,000 due to the increase in our sales for the quarter on which commissions are paid.

The income from operations improved by $60,475 from $152,185 in 2007 to $212,660 in 2008 as a result of our gross profit on sales increasing by $179,998 or 26.2%, which was more than the increase in selling, general and administrative expenses of $119,523 or 22.4%.

Interest expense for 2008 was $44,793, an increase of $6,053, from $38,740 in 2007. This increase was primarily due to the interest expense of approximately $7,000 for the new promissory notes payable to the six contributors executed in February 2008.

Income before litigation expense increased by $52,137 or 45.1% from $115,513 in 2007 to $167,650 in 2008 as a result of the income from operations increasing by $60,475 or 39.7%, which was more than the increase in interest and other expenses of $8,338 or 22.7%.

 

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Litigation expenses were $559,122 for legal fees and expenses in 2008 as a result of us defending patent infringement actions filed against us in late 2007 by a competitor alleging that our SmartScoop™ self-scooping cat litter box infringes on their patents.

The net loss for 2008 was $(391,472) as compared to net income of $115,513 for 2007 or an decrease in profit of $506,985. This decrease was as a result of the following changes from 2007 to 2008:

 

Net revenue increase of 12.5%

   $ 321,894  

Cost of goods sold increase of 7.5%

     (141,896 )
        

Gross profit on sales increase of 26.2%

     179,998  

Selling, general and administrative expenses increase of 22.4%

     (119,523 )
        

Income from operations increase of 39.7%

     60,475  

Other income and expense, net decrease

     (2,285 )

Interest expense increase of 15.6%

     (6,053 )
        

Income before litigation expense

  

Increase of 45.1%

     52,137  

Litigation expense

     (559,122 )
        

Decrease in Profitability

   $ (506,985 )
        

LIQUIDITY AND CAPITAL RESOURCES

Our operating activities provide cash by the sale of our products to customers with the principal use of cash being for the payments to suppliers that manufacture our products and for freight charges for shipments to our warehouse and to our customers. Our investing activities use cash mostly for the acquisition of equipment such as tooling, computers and software. Our financing activities provide cash, if needed, under our line of credit with our bank that had approximately $500,000 in available funds at March 31, 2008 based upon the balance of accounts receivable and inventories at that date.

As of March 31, 2008, we had $2,619,175 in principal amount of indebtedness consisting of:

 

Bank line of credit

   Prime plus .75%    $ 1,500,000

Bank term note

   7.60%      231,669

Bank term note

   7.75%      62,029

Contributor notes payable

   Prime plus 2%      600,000

Pet Zone Products Ltd (“Pet Zone”) term loan

   7.75%      97,022

Installment notes payable

   6.999% to 7.517%      28,455

Other notes payable

   Prime plus 3% & 10%      100,000

The bank line of credit borrowing of $1,500,000 is under our line of credit agreement with our bank which allows us to borrow up to $2,000,000 based on the level of qualifying accounts receivable and inventories. The line of credit agreement is renewable annually by the bank and therefore is classified as a current liability on our balance sheet. Currently the agreement has been renewed by the bank through September 30, 2008. Under our agreements with the bank we are currently required to maintain a debt service coverage ratio of 1.15, a tangible net worth of $3,000,000, and obtain permission from the bank for any of the following: (a) to incur additional indebtedness, (b) enter additional leases if it would require total lease payments exceeding $190,280 in any fiscal year, (c) make any expenditures for property and equipment in excess of $300,000 in any fiscal year, and (d) pay cash dividends or redeem any of our capital stock other than dividends on our Preferred Stock subject to meeting the debt service coverage ratio or redeem any of our capital stock.

The installment notes payable are due in decreasing monthly payments from $3,554 to $801 including interest through March 2012. The other notes payable are due in the amount of $75,000 on February 1, 2009, to Beachcraft L.P. and $25,000 on August 1, 2008 to Over the Hill Ltd., plus accrued interest. Our indebtedness, which is secured by liens on our assets, was used to finance our equipment and working capital requirements. The agreements related to such indebtedness contain the customary covenants and default provisions.

 

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The note payable to Beachcraft L.P. was originally for $150,000, $75,000 of which was repaid in 2003. As of February 1, 2004, a new note payable to Beachcraft L.P. was issued to replace the $75,000 remaining balance. The replacement note is due on February 1, 2009 with interest payable quarterly at prime plus 3%. In consideration for this refinancing we issued warrants for the purchase of 56,250 shares of Common Stock to Beachcraft L.P. at an exercise price of $0.30 per share with an expiration date of February 1, 2010. Subsequent to their issuance the warrants were adjusted to 57,204 warrants exercisable at $0.295 per share in accordance with the anti-dilution provisions of the warrants. These warrants were exercised in 2007.

Our short-term and long-term liquidity will depend on our ability to achieve cash-flow break even on our operations and to increase sales of our products. We recorded a profit of approximately $187,000 for the year ended 2007 and $561,000 for the year ended 2006. Absent a failure to maintain the required debt service coverage ratio and the tangible net worth required by our bank to maintain our line of credit, we should be able to fund our operating cash requirements for 2008. We have no material commitments for capital expenditures.

Net cash used in operating activities for the three months ended March 31, 2008 was $180,896. Cash was used by the net loss for the three months of $267,854, including the non-cash charges for depreciation of $112,719, amortization of $6,738, and stock option expense of $4,161. Cash was provided by the net change of $86,958 in our operating assets and liabilities as follows:

 

Accounts receivable increase

   $ (138,360 )

Inventories increase

     (370,501 )

Prepaid expenses increase

     (82,085 )

Patent costs increase

     (11,890 )

Other assets increase

     (58 )

Accounts payable increase

     567,247  

Accrued expenses increase

     122,605  
        

Net change

   $ 86,958  
        

Net cash used in investing activities for the three months ended March 31, 2008 was $103,846, which was used for the acquisition of property and equipment. Cash provided by financing activities for the three months was $335,663 from the issuance of long-term debt of $600,000 and cash of $264,337 was used for the repayment on the bank line of credit and principal payments on long-term debt.

CRITICAL ACCOUNTING POLICIES/ESTIMATES

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles. We have identified the accounting policies below as critical to our business operations and understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see Summary of Significant Accounting Policies footnote to our unaudited consolidated financial statements included elsewhere in this quarterly report on Form 10-Q. The application of these policies may require management to make judgments and estimates that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

Inventories. Inventories are stated at the lower of cost or net realizable value. We estimate net realizable value based on intended use, current market value and inventory ageing analyses. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 

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Impairment of Long-Lived Assets . We review long-lived assets for possible impairment by evaluating whether the carrying amount of assets exceed its recoverable amount. Our judgment regarding the existence of impairment is based on legal factors, market conditions and operational performance of our assets. Future adverse changes in legal environment, market conditions or poor operating results could result in losses or an inability to recover the carrying value of the long-lived assets, thereby possibly requiring an impairment charge in the future.

Research and Development Expenses. Research and development expenditures are charged to operations when incurred and are included in cost of goods sold. If funding is not available from operations our ability to develop new and/or improved products could be adversely affected.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that have or are likely to have a current of future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

FORWARD LOOKING STATEMENTS

When used in this Form 10-Q, statements that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “anticipates”, “intends”, “expects” and similar expressions are intended to identify such forward-looking statements, which speak only as of the date of this Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Uncertainties, risks, and other factors that may cause actual results or performance to differ materially from any results of performance expressed or implied by forward-looking statements in this Form 10-Q include: (1) our ability to manage our operating expenses and realize operating efficiencies, (2) our ability to maintain and grow our sales with existing and new customers, (3) our ability to retain existing members of our senior management team and to attract additional management employees, (4) our ability to manage fluctuations in the availability and cost of key materials and tools of production, (5) general economic conditions that might impact demand for our products, (6) competition from existing or new participants in the pet products industry, (7) our ability to design and bring to market new products on a timely and profitable basis, (8) challenges to our patents or trademarks on existing or new products, (9) our ability to secure access to sufficient capital on favorable terms to manage and grow our business, or (10) our ability to successfully defend the alleged patent infringement actions against us.

 

ITEM 3. CONTROLS AND PROCEDURES

As of March 31, 2008, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Rule 13a-14. Based upon that evaluation, our President and Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. There have been no changes in our internal control over financial reporting in the first quarter of 2008 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are party to certain material legal proceedings which are described in our Annual Report on Form 10-KSB under the caption “Item 3 – Legal Proceedings” filed on March 28, 2008. During the fiscal quarter covered by this Quarterly Report on Form 10-Q, we have not been named in any new material legal proceedings and there have been no material developments in the previously reported legal proceedings.

 

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Additionally, in the normal course of conducting its business, we may become involved in various other litigation, including, but not limited to, preference claims by debtors in bankruptcy proceedings. We are not a party to any litigation or governmental proceeding which our management or legal representatives believe could result in any judgments or fines against us that would have a material adverse effect or impact in our financial position, liquidity or results of operation.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

 

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBITS

 

11*   Statement of Computation of Net Income Per Share.
31.1*   Rule 13a–14(a) Certification of the Chief Executive Officer.
31.2*   Rule 13a–14(a) Certification of the Principal Financial Officer.
32.1*   Section 1350 Certification of the Chief Executive Officer.
32.2*   Section 1350 Certification of the Principal Financial Officer.

 

* Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  OURPET’S COMPANY
Dated: May 14, 2008    

/s/ Steven Tsengas

    Steven Tsengas
    Chairman, President and Chief Executive Officer
    (Principal Executive Officer)
Dated: May 14, 2008    

/s/ John G. Murchie

    John G. Murchie
    Vice President, Treasurer and Controller
    (Principal Financial Officer)

 

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Exhibit 11

OURPET’S COMPANY AND SUBSIDIARIES

STATEMENT OF COMPUTATION OF NET INCOME PER SHARE

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND MARCH 31, 2007

 

     2008     2007  

Net income (loss)

   $ (391,472 )   $ 115,513  

Preferred Stock dividend requirements

     (9,682 )     (14,647 )
                

Net income (loss) attributable to common stockholders

   $ (401,154 )   $ 100,866  
                

Weighted average number of common shares and dilutive common equivalent outstanding

     16,361,732       17,137,861  
                

Net income (loss) per common share

   $ (0.02 )   $ 0.01  
                

 

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Exhibit 31.1

Rule 13a-14(a) Certification of the Chief Executive Officer

I, Steven Tsengas, certify that:

1. I have reviewed this quarterly report on Form 10-Q of OurPet’s Company.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2008

 

/s/ Steven Tsengas

Chairman, President and Chief Executive Officer
(Principal Executive Officer)

 

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Exhibit 31.2

Rule 13a-14(a) Certification of the Principal Financial Officer

I, John G. Murchie, certify that:

1. I have reviewed this quarterly report on Form 10-Q of OurPet’s Company.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2008

 

/s/ John G. Murchie

Vice President, Treasurer and Controller
(Principal Financial Officer)

 

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Exhibit 32.1

Section 1350 Certification of the Chief Executive Officer

In connection with the Quarterly Report of OurPet’s Company (the Company) on Form 10-Q for the quarter ended March 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, being the Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) This Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report.

 

/s/ Steven Tsengas

BY STEVEN TSENGAS
Chairman of the Board, President and Chief Executive Officer

Dated: May 14, 2008

This certification is made solely for the purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained in that statute, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to OurPet’s Company and will be retained by OurPet’s Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

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Exhibit 32.2

Section 1350 Certification of the Principal Financial Officer

In connection with the Quarterly Report of OurPet’s Company (the Company) on Form 10-Q for the quarter ended March 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, being the Vice President, Treasurer and Controller of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) This Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report.

 

/s/ John G. Murchie

BY JOHN G. MURCHIE
Vice President, Treasurer and Controller

Dated: May 14, 2008

This certification is made solely for the purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained in that statute, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to OurPet’s Company and will be retained by OurPet’s Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

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