As filed with the Securities and Exchange Commission on March 29, 2007

United States

Securities and Exchange Commission

Washington, DC 20549

 


Form 10-KSB

x Annual Report Pursuant to Section 13 or 15(d)

Of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

OR

¨ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Commission file number: 000-31279

OurPet’s Company

(Exact name of Small Business Issuer 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)

Issuer’s telephone number: (440) 354-6500

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value

 


Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   ¨

Check whether the issuer: (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 past 90 days.   x   Yes     ¨   No

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.   x

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

Issuer’s revenues for the fiscal year ended December 31, 2006 were $9,441,697. The aggregate market value of the common stock of the registrant, no par value per share (the “Common Stock”), held by non-affiliates of registrant was $5,342,960 as of March 15, 2007. As of March 15, 2007, the issuer had outstanding 15,095,927 shares of Common Stock.

Documents Incorporated by Reference

Part III—Portions of the registrant’s definitive proxy statement to be issued in conjunction with registrant’s annual meeting to be held on May 7, 2007.

Transitional Small Business Disclosure Format (Check one):  Yes   ¨     No   x

www.ourpets.com

 



Table of Contents

OURPET’S COMPANY

FORM 10-KSB

For The Fiscal Year Ended December 31, 2006

INDEX

 

            Page

PART I

     

Item 1.

   Description of Business    3

Item 2.

   Description of Property    6

Item 3.

   Legal Proceedings    7

Item 4.

   Submission of Matters to a Vote of Security Holders    7

PART II

     

Item 5.

   Market for Common Equity and Related Stockholder Matters.    8

Item 6.

   Management’s Discussion and Analysis or Plan of Operation    9

Item 7.

   Financial Statements    14

Item 8.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    14

Item 8A.

   Controls and Procedures    14

Item 8B.

   Other Information    14

PART III

     

Item 9.

   Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act    15

Item 10.

   Executive Compensation    15

Item 11.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    15

Item 12.

   Certain Relationships, Related Transactions and Director Independence    15

Item 13.

   Exhibits    15

Item 14.

   Principal Accountant Fees and Services    17
   Signatures    18
   Certifications   

 


Table of Contents

This report on the Form 10-KSB (this “Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, without limitation, statements regarding our cash needs and ability to fund our requirements, building of our market presence and ability to succeed as planned and our ability to successfully obtain and protect our patents. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. See “Item 1. Description of Business – Risk Factors” for a discussion of these risks. When used in this Report, statements that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “anticipates”, “plans”, “intends”, “expects” and similar expressions are intended to identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. 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.

Introductory Note

OurPet’s Company, a Colorado corporation, is engaged in developing, manufacturing and marketing various proprietary products for the retail pet business. As used herein, the terms “OurPet’s,” “we,” “us” and “our” include each of our subsidiaries, unless the context otherwise requires.

PART I

Item 1. Description of Business.

Our management originally founded Napro, Inc. (“Napro”), an Ohio corporation, in 1985 as an enterprise for launching new ventures and acquiring companies in various lines of business. In 1996, Napro formed a wholly owned Ohio subsidiary, Virtu Company (“Virtu”), to market proprietary products to the retail pet business under the OurPet’s ® label. Napro then changed its name to OurPet’s Company effective March 19, 1998. On July 16, 1998, Manticus, Inc. (“Manticus”), a Colorado corporation, obtained all of the outstanding shares of OurPet’s/Napro in exchange for 8,000,000 shares of Manticus common stock. After the transaction, the former holders of OurPet’s/Napro shares owned approximately 89% of Manticus’ shares. Effective August 10, 1998, OurPet’s/Napro was merged into Manticus and ceased to exist. Prior to this merger no affiliation or other relationship existed between Manticus and us or our shareholders. As operations for the newly merged entity were, and continue to be, conducted in Ohio, Manticus proceeded to become licensed in the State of Ohio as a foreign corporation, known as OurPet’s Company. Effective October 12, 1998, Manticus’Articles of Incorporation was amended in the State of Colorado to reflect its new name as OurPet’s Company. After the merger, management of the former OurPet’s/Napro assumed management of the surviving company.

We develop and market products for improving the health, safety, comfort and enjoyment of pets. The products sold have increased from the initial “Big Dog Feeder” to approximately 250 products for dogs, cats, domestic and wild birds and other small animals. Products are marketed under the OurPet’s and Pet Zone labels to customers, both domestic and foreign. The manufacturing of these products is subcontracted to other entities, both domestic and foreign, based upon price and quality.

According to the 2005/2006 APPMA National Pet Owners Survey, published by the American Pet Products Manufacturers Association, Inc ® , approximately 69.1 million U.S. households (63% of all households) currently own a pet, with approximately 45% of those households owning more than one pet. The most popular pets are dogs (40% of all households) and cats (34% of all households).

 

3


Table of Contents

We sell our products in the following market segments:

mass retailers—eg. Wal-Mart, Kmart

pet store chains—eg. PetsMart, Petco

pet catalogues—eg. Drs. Foster & Smith, Care-A-Lot

general catalogues—eg. Solutions

clubs—eg. Costco, Sam’s Club

grocery chains—eg. Ahold, Safeway, Publix

pet food makers—eg. Friskies, Ralston Purina

pet distributors/pet dealers—eg. Wolverton, Central Garden & Pet

The companies listed above are intended to serve as examples solely for illustrative purposes. As a standard industry practice, price lists are provided to distributors, who in turn place products with retailers. Larger retailers with a national presence will generally order product directly from us pursuant to the price list and subject to negotiated additional terms, if any. With the exception of a written price list, many of the arrangements with retailers or distributors are verbal and written contracts often do not exist. Customers submit their own standard purchase orders based on our current price list. Even the larger retailers, which might have written contracts with us, are under no obligation to purchase specific product from us. While all of the above companies may currently buy product from OurPet’s, none of these customers are under any contractual obligation to purchase a specific volume of product nor to continue making any purchases in the future. We currently have approximately 200 customers to whom we sell products, with the total number and identity of our customers changing from time to time. With the exceptions of PetsMart and Wal-Mart none of our customers account for 10% or more of our sales. While we had approximately 200 customers for the year ended December 31, 2006, 54.6% of our revenue was derived from Wal-Mart and PetsMart. Revenue generated from each of these customers amounted to $2,738,092 and $2,415,186, respectively, which represents 29.0% and 25.6% of total revenue.

We currently market products such as dog, cat and bird feeders, dog and cat toys, cat litter and related waste management products, and natural and nutritional pet supplements and treats. We conduct our marketing and sales activities through eight in-house officers and/or employees and 80 independent sales agents. Domestic independent sales agents are paid commissions, which range from 3% to 15% of net sales to customers.

Our marketing strategies include, among others, trade shows, customer visitation, telemarketing, direct mail, trade journal advertising, product sampling programs and customer support programs, such as advertising and promotional allowances.

We are one of many small companies in the accessory and consumable pet products market with no measurable percentage of that market. Our competition in the healthy feeding systems, interactive toys and healthy consumable products markets are both domestic and foreign companies, many of whom manufacture their products in low cost areas such as Mexico and the Far East. Our competition in the premium cat litter market are mainly larger domestic companies.

Most of our products are proprietary and we have been granted or assigned 33 United States patents for dog and cat feeders and have 60 United States patents pending for cat and dog toys, dog feeders and natural and nutritional pet supplements and treats. We registered our logo, “OurPet’s”, as a registered trademark. To protect our trade names we obtained 24 additional trademark registrations and applied for 14 trademark registrations, which are still pending.

As of March 15, 2007, we had 21 full-time employees consisting of four officers, five other employees in sales and marketing, one employee in engineering, three employees in finance and administration, two employees in operations and six employees in warehousing and shipping. We do not have any employees in manufacturing since that operation is subcontracted to outside vendors. None of our employees are subject to a collective bargaining agreement and we have not experienced any work stoppages, nor to our knowledge, are any threatened.

 

4


Table of Contents

We conduct our own research and development activities and also use outside sources to perform specific projects such as engineering drawings and prototype models. Research and development costs are charged to expenses as incurred, and totaled $113,622 for the year ended December 31, 2006 and $66,746 for the year ended December 31, 2005.

Risk Factors

We are still building our market presence and are subject to substantial competition that could inhibit our ability to succeed as planned.

We are one of many small companies in the pet product market with no measurable percentage of that market. We are still attempting to build our market presence as we compete with both domestic and foreign companies, many of whom manufacture their products in low cost areas such as Mexico and the Far East. Any reputation that we may successfully gain with retailers for quality product does not necessarily translate into name recognition or increased market share with the end consumer. Our products may not be well received by the pet owners, or other companies may surpass us in product innovations. Certain retailers have been adversely impacted by economic conditions causing them to file for bankruptcy protection. This could adversely effect our sales, if this trend continues or these retailers are unable to emerge from bankruptcy protection.

Additional financing may not be available when required by us.

We may need additional financing for new product launches, warehouse equipment, working capital, research and development of new products, strategic acquisitions, and molds and tooling to produce new products. If the financial resources are not available when needed, or are not available on affordable terms, then our ability to increase our sales and profits will be hampered, which in turn harms our financial performance.

The loss of key personnel could adversely affect our operations.

We are and will continue to be dependent on our key management personnel: Dr. Steven Tsengas, Chairman, President and Chief Executive Officer; Konstantine S. Tsengas, Vice President of Operations and Secretary; Scott T. Fitzhugh, Vice President of Sales and Marketing, and John G. Murchie, Vice President, Treasurer and Controller. The loss of one or more of these individuals could have a material adverse effect on our business and operations. In addition, we will need to attract and retain other qualified individuals to satisfy our personnel needs. We do not have employee contracts with our key personnel and may not succeed in retaining our key management personnel or in attracting and retaining new employees.

The inability to successfully obtain or protect our patents could harm our competitive advantage.

Our success will depend, in part, on our ability to maintain protection for our products under United States patent laws, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We have 33 U.S. patents issued or assigned and 60 U.S. patent applications pending. Patent applications may not successfully result in an issued patent. Issued patents are still subject to challenges and infringements. Furthermore, others may independently develop similar products or otherwise circumvent our patent protection. Should we fail to obtain and protect our patents, our competitive advantage will be harmed.

The exercise of too many warrants and stock options would dilute the value of the Common Stock, and stockholder voting power.

We currently have 15,095,927 shares of Common Stock outstanding which could be diluted by the following potential issuances of Common Stock. As of March 15, 2007, we had outstanding 66,000 shares of Convertible Preferred Stock (“Preferred Stock”) convertible into 660,000 shares of Common Stock at a conversion rate of $1.00 per share. Also as of March 15, 2007, we had outstanding 3,994,984 warrants to purchase an aggregate of 3,994,984 shares of Common Stock at exercise prices ranging from $0.285 to $1.215

 

5


Table of Contents

per share and options to purchase an aggregate of 980,500 shares of Common Stock at exercise prices ranging from $0.21 to $1.05 per share. We have reserved an aggregate of 1,350,000 shares of Common Stock for issuance under the 1999 Stock Option Plan as of the date of this Report. In addition, the exercise of such warrants and options could have a material adverse effect on the future market price of, and liquidity in the market for, shares of Common Stock trading in the over-the-counter market. Further, while these warrants and options are outstanding, our ability to obtain additional financing on favorable terms may be adversely affected.

Resale of our securities are and will continue to be subject to restrictions.

Our securities are subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on broker-dealers that sell securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by such rule, a broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Consequently, this rule may adversely affect the ability of broker-dealers to sell our securities and may adversely affect the ability of the holders of our securities to sell such securities in the secondary market.

SEC regulations define a “penny stock” to be any non-NASDAQ equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. Prior to any transaction involving a penny stock, unless exempt, SEC rules require delivery of a disclosure schedule prepared by the broker-dealer relating to the penny stock market. Disclosure is also required to be made about commissions payable to both the broker-dealer and the registered representative and about current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

Possible Volatility of Market Price of Common Stock.

The market price of our securities, like that of many other emerging companies, has been highly volatile, experiencing wide fluctuations not necessarily related to the operating performance of such companies. Factors such as our operating results, announcements by us or our competitors concerning innovations and new products or systems may have a significant impact on the market price of our securities. In addition, we have experienced, and expect to continue experiencing limited trading volume in our Common Stock.

Item 2. Description of Property.

We lease a 28,000 square foot production, warehouse and office facility in Fairport Harbor, Ohio from a related entity, Senk Properties at a current monthly rental of $12,867 plus real estate taxes. Senk Properties is a general partnership comprised of Dr. Steven Tsengas, Konstantine S. Tsengas, Nicholas S. Tsengas and Evangelia S. Tsengas. Dr. Tsengas is our Chairman, President, Chief Executive Officer, a director and a major stockholder of the Company. Konstantine Tsengas is our Vice President and Secretary, as well as being a stockholder. Nicholas Tsengas and Evangelia Tsengas are both stockholders of OurPet’s. We have entered into a new ten year lease with Senk Properties which will be effective upon completion of the 36,000 square foot warehouse expansion in 2007. The monthly rental will be increased to $26,667 for the first two years, $28,417 for the next two years, $30,167 for the next three years, $32,000 for the next two years, and $33,750 for the last year, all plus real estate taxes. We have the option to extend the lease for an additional ten years at a rent amount to be mutually agreed upon. We believe that this facility will provide adequate warehouse and office space to meet our needs for the foreseeable future. Any longer-range future growth can be accommodated by expanding that facility or leasing nearby space.

In the opinion of our management, all of the properties described here are adequately covered by insurance and such coverage is in accordance with the requirements contained in our various debt agreements.

 

6


Table of Contents

Item 3. Legal Proceedings.

On March 31, 2000, SMP Company, Incorporated (formerly known as Sanar Manufacturing, Inc.) (“SMP”), a wholly-owned subsidiary of the Company, entered into an asset purchase agreement with Akon Plastic Enterprises, Inc. (“Akon”) whereby Akon agreed to purchase substantially all of the assets used by SMP in molding plastics. Further, as part of the sale, Akon and its President, David F. Harman (“Harman”), entered into an Indemnity Agreement whereby Akon and Harman, jointly and severally, agreed to indemnify us and the individual guarantors of the Small Business Administration loans to SMP against any liability for such loans, which were assumed as a part of the asset purchase by Akon. On June 5, 2003, we filed an action against Akon, the directors of Akon, and Harman in the Court of Common Pleas of Lake County, Ohio for damages, including non-payment of loans, due to Akon’s breach of the asset purchase agreement. Discovery has been completed and the parties to the litigation have each filed motions for summary judgment. The action remains pending as the court has not ruled yet on the summary judgment motions. While we believe that our case against Akon, its directors, and Harman is strong, we cannot predict the likely outcome of this action.

In addition to the above matters and 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 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2006.

 

7


Table of Contents

PART II

Item 5 . Market For Common Equity and Related Stockholder Matters.

Our Common Stock has been quoted on the Over-The-Counter Bulletin Board Market under the symbol “OPCO” since December 13, 2001. The following table sets forth, for each of the quarters indicated, the high and low bid quotations per share of Common Stock in the over-the-counter market (source, the Nasdaq Stock Chart). The bid quotations in the over-the-counter market represent prices between securities dealers, do not include retail markups, markdowns or commissions and may not represent actual transactions.

 

Quarter Ended

   High    Low

March 31, 2005

   0.30    0.24

June 30, 2005

   0.38    0.22

September 30, 2005

   0.68    0.25

December 31, 2005

   0.50    0.26

March 31, 2006

   0.55    0.40

June 30, 2006

   0.74    0.41

September 30, 2006

   0.70    0.35

December 31, 2006

   1.15    0.38

As of March 15, 2007, we had approximately 152 holders of record of Common Stock.

During 2006 and the first quarter of 2007, the Company granted stock options to its employees under its 1999 Stock Option Plan, which issuances we believe are exempt transactions under Section 4(2) of the Securities Act. The options granted are as follows:

 

Date
Granted

  

Employee

   Number of Shares    Price    Expiration Date  

1/9/2006

   Jerome A. Spelic    20,000    $ 0.45    1/9/2011  

2/1/2006

   David S. Deily    10,000    $ 0.46    2/1/2011  

2/14/2006

   Christina M. Dakis    10,000    $ 0.47    7/14/2006 (a)

5/24/2006

   Bridget M. Gallagher    500    $ 0.65    5/24/2011  

5/24/2006

   Evan T. Kovacic    500    $ 0.65    5/24/2011  

5/24/2006

   Raymond P. Lillstrung    500    $ 0.65    6/9/2006 (a)

8/22/2006

   Anita M. DiDomenico    500    $ 0.50    8/22/2011  

8/22/2006

   Anthony J. Gugliotta    500    $ 0.50    9/29/2006 (a)

10/25/2006

   Scott T. Fitzhugh    40,000    $ 0.53    10/25/2011  

10/25/2006

   John G. Murchie    50,000    $ 0.53    10/25/2011  

10/25/2006

   Jerome A. Spelic    5,000    $ 0.53    10/25/2011  

10/26/2006

   Fern L. Peters    15,000    $ 0.44    1/19/2007 (a)

10/27/2006

   Theophilos Mezaris    15,000    $ 0.46    10/27/2011  

2/12/2007

   Judith L. Swank    15,000    $ 1.05    2/12/2012  

(a) Termination of employment.

Each share of Common Stock has an equal right to receive dividends when and if the Board of Directors decides to declare a dividend after payment of any accrued dividends on Preferred Stock. We have never paid any cash dividends nor do we intend, in the foreseeable future, to make any cash distributions to our common stockholders as dividends. We cannot currently distribute cash dividends without violating our loan agreement with our bank.

There are no conversion rights or redemption or sinking fund provisions with respect to the Common Stock. All of the outstanding shares of Common Stock are fully paid and non-assessable.

 

8


Table of Contents

Item 6. Management’s Discussion and Analysis or Plan 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

     -   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 sell the products to the end consumer. According to the 2005/2006 APPMA National Pet Owners Survey approximately 69.1 million U.S. households currently own a pet with an estimated pet population of 73.9 million dogs, 90.5 million cats and 18.2 million birds.

As discussed below and in Liquidity and Capital Resources on Pages 11, 12 and 13, we have funded our operations principally from net cash provided by operating activities and with bank borrowings during 2006 and with bank borrowings in 2005.

In November of 2005, we executed a promissory note in favor of our bank under which we could borrow up to $300,000 for working capital purposes. The note is payable in monthly payments of $9,870 including interest at 7.75% beginning in February of 2006. During 2005 we borrowed a total of $82,405 under the agreement and during 2006 we borrowed the balance of $217,595.

In January of 2006, we entered into a subordinated note with Pet Zone under which we borrowed $250,000 for the development of new products. The note was payable in quarterly installments of $15,197 including interest at 7.75% beginning March 31, 2006. On October 18, 2006 the note was amended to require the remaining 17 quarterly payments be reduced to $9,878 including interest.

During 2006 we had a net borrowing of $300,000 from our line of credit facility with our bank under which we can borrow up to $2,000,000 based on the level of qualifying accounts receivable and inventories. At December 31, 2006 and December 31, 2005 we had balances of $1,300,000 and $1,000,000, respectively, under the line of credit with the bank at interest rates of prime plus .75% at December 31, 2006 and prime plus 1% at December 31, 2005.

 

9


Table of Contents

In March of 2007, we executed an additional promissory note in favor of our bank under which we could borrow up to $300,000 for working capital and equipment purchase purposes. The note is payable in monthly payment of $9,362 including interest at 7.60% beginning in July of 2007 with interest only on amounts borrowed beginning in April of 2007. In connection with this new borrowing, we entered into an Amendment to Loan Agreement with our bank to modify our borrowing base and certain loan covenants. Copies of the loan documents are attached hereto as Exhibits 10.29, 10.30 and 10.31.

Results of Operations

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

In the following discussion all references to 2006 are for the year ended December 31, 2006 and all references to 2005 are for the year ended December 31, 2005.

Net revenue for 2006 was $9,441,697, an increase of 43.8% in revenue from $6,566,407 in 2005, consisting of sales of proprietary products for the retail pet business. This increase of $2,875,290 was primarily the result of an increase in sales of approximately $2,085,000 to our two major customers due to promotions of existing products and sales of new products. The balance of the increase was from sales to other customers which increased by approximately $790,000 including both sales of new products and sales to new customers. Total sales to all customers of new products in 2006 that were not sold in 2005, including the Signature Series Designer Diners, Flex-O-Lid Food Lids, Selecta and Non-Tip Bowls, 4” Healthy Pet Diner, and Play-N-Squeak product extensions, were approximately $1,004,000. Total sales of products acquired in the acquisition of Pet Zone in 2006 were approximately $1,400,000 to all customers. Our sales to foreign customers increased by approximately $102,000, or 60.2%, from 2005 mainly due to increased sales to customers in Canada, Finland and Japan.

While net revenue increased by 43.8% in 2006, cost of goods sold also increased by 44.9%, from $4,745,084 in 2005 to $6,874,036 in 2006. This increase of $2,128,952 was as a result of an increase of 47.1% in the cost of purchased products sold and freight, due to higher freight costs as a result of larger fuel surcharges by our freight carriers and lower gross margins on certain of our products. Our variable and fixed warehouse and overhead costs increased by 35.5% from 2005 due to (i) increased costs for salaries and wages of approximately $92,000 for additional employees in engineering for product development and in warehouse supervision and operations to make displays for customer promotions and (ii) the increased level of shipments. Also, costs increased for depreciation expense for tooling of approximately $90,000 and the addition of an outside warehouse at a cost of approximately $66,000 to store additional inventory.

The net revenue increased by 43.8% and the cost of goods sold increased by 44.9% , which resulted in our gross profit on sales increasing by only 41.0%, or $746,338, from $1,821,323 in 2005 to $2,567,661 in 2006.

Selling, general and administrative expenses in 2006 were $1,934,482, an increase of $447,131, or 30.1%, from $1,487,351 in 2005. The significant increases were in (i) increased salaries and wages, payroll taxes and employee benefits of approximately $193,000 due to two additional employees in sales and marketing and an additional employee in administration and the increased accruals for managers’ bonus and employee profit sharing, (ii) increased sales and marketing expenses of approximately $136,000 mainly due to promotional expenses by our customers and increased cash discounts allowed to our customers resulting from higher sales, (iii) increased stockholder and investor relations expenses of approximately $29,000 due to increased public and investor relations fees and expenses in 2006, and (iv) accruals for professional services of approximately $20,000 mainly due to increased legal fees in 2006.

Income from our operations improved by $299,207, from $333,972 in 2005 to $633,179 in 2006 as a result of our gross profit on sales increasing by $746,338, or 41.0%, which was more than the increase in selling, general and administrative expenses of $447,131, or 30.1%.

Interest expense for 2006 was $167,397 an increase of 113.5%, or $88,994, from $78,403 in 2005. This increase was primarily due to the interest expense for the bank line of credit which increased by approximately $60,000 due to (i) an increase in our average interest rate paid for the year from 7.40% in 2005 to 9.09% in 2006

 

10


Table of Contents

and (ii) the increase in average principal balance from $827,500 in 2005 to $1,332,700 in 2006. Also in 2006, we had interest expense of approximately $31,400 due to new borrowings with an average principal balance of $400,600 during the year.

Income before extraordinary items for 2006 was $473,425 as compared to $254,238 for 2005 or an improvement in profitability of $219,187. This improvement was mainly the result of our income from operations increasing by $299,207, or 89.6%, which was more than the increase in interest expense of $88,994, or 113.5%.

In 2006 we had an extraordinary gain realized from the debt forgiveness of $87,500 as a result of our executing an amended subordinated promissory note agreement with Pet Zone which reduced the subsequent payments due under the agreement.

The net income for 2006 was $560,925 as compared to net income in 2005 of $254,238 or an improvement in profitability of $306,687. This improvement was as a result of the following changes from 2005 to 2006:

 

Net revenue increase of 43.8%

   $ 2,875,290  

Cost of goods sold increase of 44.9%

     (2,128,952 )
        

Gross profit on sales increase of 41.0%

     746,338  

Selling, general and administrative expenses increase of 30.1

     (447,131 )

Other income and expense

     8,974  

Interest expense increase of 113.5%

     (88,994 )

Extraordinary item

     87,500  
        

Improvement in Profitability

   $ 306,687  
        

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 $168,000 in available funds at December 31, 2006 based upon the balance of accounts receivable and inventories at that date.

As of December 31, 2006, we had $1,760,043 in principal amount of indebtedness consisting of:

 

Bank line of credit

   Prime plus .75%    $ 1,300,000

Bank term note

   7.75%      196,603

Pet Zone Products Ltd term loan

   7.75%      134,789

Installment notes payable

   6.999% to 7.517%      28,651

Other notes payable

   Prime plus 3% & 10%      100,000

The bank line of credit borrowing of $1,300,000 is under our line of credit agreement with our bank under which we can 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 June 30, 2007. Under our agreement with the bank we are currently required to: (i) maintain a debt service coverage ratio of 1.15; (ii) maintain a tangible net worth of $1,500,000; and (iii) obtain permission from the bank to incur additional indebtedness, enter into additional leases that would cause total lease payments to exceed $190,280 in any fiscal year, make any expenditures for property and equipment in excess of $300,000 in any fiscal year, or pay cash dividends or redeem any of our capital stock.

 

11


Table of Contents

The installment notes payable are due in decreasing monthly payments from $3,554 to $1,374 including interest through June 2008. The other notes payable are due in the amount of $75,000 on February 1, 2008 to Beachcraft L.P. and $25,000 on August 1, 2007 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.

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, 2008 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 warrant anti-dilution provisions.

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 $561,000 for the year ended 2006 and $254,000 for the year ended 2005. 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 2007. We have no material commitments for capital expenditures.

A schedule of our contractual obligations as of December 31, 2006 is as follows:

 

     Payments Due By Period

Contractual Obligation

   Total   

Less than

1 year

  

1-3

years

  

4-5

years

  

After 5

years

Long-Term Debt

   $ 1,760,043    $ 1,548,911    $ 173,458    $ 37,674    $ -0-

Capital Lease Obligations

     -0-      -0-      -0-      -0-      -0-

Purchase Obligations

     -0-      -0-      -0-      -0-      -0-

Other Long Term Liabilities

     -0-      -0-      -0-      -0-      -0-

Operating Leases

     4,264,566      309,389      732,809      797,110      2,425,258
                                  

Total Contractual Cash Obligations

   $ 6,024,609    $ 1,858,300    $ 906,267    $ 834,784    $ 2,425,258
                                  

Net cash provided by operating activities for the year ended December 31, 2006 was $499,611. Cash was provided by the net operating income for the year of $825,477, including the non-cash charges for depreciation of $330,907, amortization of $21,145, and extraordinary item of $87,500. Cash was used for the net change of $(325,866) in our operating assets and liabilities excluding the changes as a result of the Pet Zone purchase as follows:

 

Accounts receivable decrease

   $ 22,954  

Inventories increase

     (259,909 )

Prepaid expenses decrease

     62,223  

Patent cost increase

     (23,625 )

Other assets increase

     (768 )

Accounts payable decrease

     (128,002 )

Accrued expenses increase

     1,261  
        

Net change

   $ (325,866 )
        

The increase in inventory of $259,909 from December 31, 2005 to December 31, 2006 was caused principally by the increase in finished goods inventory due to an increase in the number of products that we sell. Our accounts payable decreased from December 31, 2005 to December 31, 2006 by $128,002 mainly due to the decreased amount of finished goods being purchased in December 2006 as compared to December 2005.

 

12


Table of Contents

Net cash used in investing activities for the year ended December 31, 2006 was $1,064,881, which was used for the acquisition of a business and property and equipment. Net cash provided by financing activities for the year was $589,193. Cash of $300,000 was provided by the net borrowing under the line of credit agreement with the bank and $467,595 was provided by the issuance of long-term debt. Cash of $178,402 was used for the principal payments on long-term debt.

Net cash used in operating activities for the year ended December 31, 2005 was $75,676. Cash was provided by the net operating income for the year of $497,926, including the non-cash charges for depreciation of $223,949 and amortization of $19,739. Cash was used for the net change of $(573,602) in our operating assets and liabilities. These changes consisted of increases in accounts receivable of $229,739, inventories of $634,520, patent cost of $15,840 and other assets of $153, which were partially offset by a decrease in prepaid expenses of $13,788 and increases in accounts payable of $236,078 and in accrued expenses of $56,784.

Net cash used in investing activities for the year ended December 31, 2005 was $342,320, which was used for the acquisition of property and equipment. Net cash provided by financing activities for the year was $395,484. Cash of $350,000 was provided by the net borrowing under the line of credit with the bank and $82,405 was provided by the borrowing under the term note with the bank. Cash of $36,921 was used for the 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 audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KSB. 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.

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.

 

13


Table of Contents

Off-Balance Sheet Arrangements

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

Item 7. Financial Statements

The financial statements of OurPet’s Company as of December 31, 2006 and 2005, and for the years then ended together with the Report of Independent Registered Public Accounting Firm are included in this Form 10-KSB on the pages indicated below.

 

     Page No.

Report of Independent Registered Public Accounting Firm

   19

Consolidated Balance Sheets

   20

Consolidated Statements of Operations

   22

Consolidated Statements of Stockholders’ Equity

   23

Consolidated Statements of Cash Flows

   24

Notes to Consolidated Financial Statements

   25

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

During our two most recent calendar years or any later interim period, there have been no changes in, or disagreements with, our principal independent accountant or a significant subsidiary’s independent accountant.

Item 8A. Controls and Procedures.

As of December 31, 2006, 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-15(b) of the Securities Exchange Act of 1934. 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 in timely alerting them to material information relating to the Company (including our consolidated subsidiaries) required to be included in our periodic SEC filings. There have been no significant changes in our internal controls over financial reporting or in other factors which could significantly affect internal controls over financial reporting that occurred during our most recent fiscal quarter.

Item 8B. Other Information.

None.

 

14


Table of Contents

PART III

Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act.

The information required by this Item with respect to the directors, executive officers, promoters, control persons and compliance with Section 16(a) of the Securities and Exchange Act and our Code of Ethics is incorporated by reference from the information provided under the headings “Election of Directors”, “Executive Compensation” and “Other Matters”, respectively, contained in our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our Annual Meeting of Shareholders to be held on May 7, 2007.

Item 10. Executive Compensation.

The information required by this Item is incorporated by reference from the information provided under the headings “Executive Compensation”, “Compensation of Directors” and “Employment Contracts and Termination of Employment and Change-in-Control Arrangements”, respectively, contained in our Proxy Statement.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .

Information required by this Item is incorporated herein by reference from the information provided under the headings “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” of our Proxy Statement.

Item 12. Certain Relationships, Related Transactions and Director Independence.

The information required by this Item is incorporated herein by reference from the information provided under the heading “Certain Relationships and Related Transactions” of our Proxy Statement.

Item 13. Exhibits.

 

2.1    Asset Purchase Agreement dated January 3, 2006, between the Company and Pet Zone Products Ltd. (5)
3.1    Articles of Incorporation of the Company, dated May 23, 1996.(1)
3.1.1    Articles of Amendment to the Articles of Incorporation of the Company, effective September 1, 1998.(1)
3.1.2    Articles of Amendment to the Articles of Incorporation of the Company, adopted July 20, 1999.(1)
3.2    Bylaws of the Company.(1)
4.1    Common Stock Certificate.(1)
4.2    Preferred Stock Certificate.(1)
4.3    Promissory Note dated September 1, 1999 for $200,000, made by the Company to Joseph T. Aveni.(1)
4.4    Registration Rights Agreement dated January 3, 2006 among the Company, Pet Zone Products Ltd. and certain other stockholders. (5)
4.5    Voting Agreement dated January 3, 2006 among the Company, Steven Tsengas, Evangelia S. Tsengas, Konstantine S. Tsengas, Nicholas S. Tsengas, Senk Properties, Joseph T. Aveni, Carl Fazio, Jr., John G. Murchie, Pet Zone Products Ltd., Capital One Partners, LLC, LJR Limited Partnership, Nottingham Ventures, Ltd. and Spirk Ventures, Ltd. (5)

 

15


Table of Contents
10.1    Asset Purchase Agreement, dated March 31, 2000, between Akon Plastic Enterprises, Inc. and Sanar Manufacturing Company, a wholly-owned subsidiary of OurPet’s Company.(1)
10.2    Lease Agreement dated March 17, 1993, with Addendums, between Senk Properties and GPI Division, NAPRO, Inc.(1)
10.5    1999 Stock Option Plan.(1)
10.6    Standard Option Agreement.(1)
10.7    Standard Common Stock Purchase Warrant.(1)
10.8    Indemnity Agreement, dated March 31, 2000, between Akron Plastic Enterprises, Inc. and its President, David Herman, individually, and OurPet’s Company and Dr. Steven Tsengas, Evangelia Tsengas, Nicholas Tsengas and Konstantine Tsengas.(1)
10.10    Small Business Administration loan agreement dated March 10, 1995 with Napro, Inc.(1)
10.12    Vendor Agreement between the Company and Wal-Mart Stores, Inc.(1)
10.17    PetsMart 2001 Vendor Purchasing Terms (1)
10.18    Credit Agreement, Revolving Note and Security Agreements, dated December 31, 2001, between FirstMerit Bank, N.A., the Company, Virtu Company, Dr. Steven Tsengas and Evangelia S. Tsengas. (2)
10.19    Promissory Note dated February 1, 2004 for $75,000, made by the Company to Beachcraft Limited Partnership. (4)
10.20    Warrant issued to Pet Zone Products Ltd. to purchase 2,729,000 shares of the Company’s Common Stock dated January 4, 2006. (5)
10.21    Warrant issued to Pet Zone Products Ltd. to purchase 125,000 shares of the Company’s Common Stock dated January 4, 2006. (5)
10.22    Subordinated Promissory Note dated January 4, 2006 from the Company to Pet Zone Products Ltd. (5)
10.23    Commercial Security Agreement by and between the Company and FirstMerit Bank, N.A. (6)
10.24    Promissory Note executed by the Company in favor of FirstMerit Bank, N.A. (6)
10.25    LeaseAgreement dated March 1, 2007 between Senk Properties and OurPet’s Company. (7)
10.26    Amended Subordinated Promissory Note dated as of October 18, 2006, executed by OurPet’s Company in favor of Pet Zone Products Ltd. (8)
10.27    Cat Litter Device Development Agreement dated January 15, 2007 by and between Nottingham-Spirk Design Associates, Inc. and OurPet’s Company. (9)
10.28    Form of Indemnification Agreement, by and between OurPet’s Company and each of its Directors. (9)
10.29    Amendment to Loan Agreement dated March 23, 2007 between FirstMerit Bank, N.A. and OurPet’s Company.
10.30    Promissory Note dated March 23, 2007 executed by the Company in favor of FirstMerit Bank, N.A.
10.31    Commercial Security Agreement dated March 23, 2007 by and between the Company and FirstMerit Bank, N.A.
11    Statement of computation of Net Income Per Share.
14    OurPet’s Code of Ethics. (3)
21    Subsidiaries of the Registrant.(1)

 

16


Table of Contents
31.1    Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the exhibits to the Company’s Registration Statement on Form 10SB/A filed on May 31, 2001.

 

(2) Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-KSB filed on March 26, 2002.

 

(3) Incorporated by reference to the exhibits to the Company’s Annual Report of Form 10-KSB filed on March 26, 2004.

 

(4) Incorporated by reference to the exhibits to the Company’s Annual Report of Form 10-KSB filed on March 30, 2005.

 

(5) Incorporated by reference to the exhibits to the Company’s Form 8-K filed on January 6, 2006.

 

(6) Incorporated by reference to the exhibits to the Company’s Form 8-K filed on August 18, 2006.

 

(7) Incorporated by reference to the exhibits to the Company’s Form 8-K filed on August 25, 2006.

 

(8) Incorporated by reference to the exhibits to the Company’s Form 8-K filed on October 23, 2006.

 

(9) Incorporated by reference to the exhibits to the Company’s Form 8-K filed on January 19, 2006.

All other Exhibits filed herewith.

Item 14. Principal Accountant Fees and Services.

The information required by this Item is incorporated by reference from the information provided under the heading “Principal Accountant Fees and Services” contained in our Proxy Statement.

 

17


Table of Contents

SIGNATURES

In accordance with Section 13 or 15(d) 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.

Dated: March 29, 2007

 

O UR P ET S C OMPANY
By:   / S /    S TEVEN T SENGAS        
  Steven Tsengas
 

Chairman, President and Chief

Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/ S /    S TEVEN T SENGAS        

Steven Tsengas

  

Chairman, President, Chief Executive Officer and Director

(principal executive officer)

  March 29, 2007

/ S /    J OHN G. M URCHIE        

John G. Murchie

  

Vice President, Treasurer and Controller

(principal accounting officer)

  March 29, 2007

/ S /    J OSEPH T. A VENI        

Joseph T. Aveni

   Director   March 29, 2007

/ S /    W ILLIAM M. F RASER        

William M. Fraser

   Director   March 29, 2007

/ S /    J AMES D. I RELAND III        

James D. Ireland III

   Director   March 29, 2007

/ S /    J OHN S PIRK        

John Spirk

   Director   March 29, 2007

 

18


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

OurPet’s Company and Subsidiaries

We have audited the accompanying consolidated balance sheets of OurPet’s Company and Subsidiaries, a Colorado corporation, as of December 31, 2006 and December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of OurPet’s Company and Subsidiaries as of December 31, 2006 and December 31, 2005, and the consolidated results of their operations and cash flows for the years ended December 31, 2006 and December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

S. R. Snodgrass, A. C.

Certified Public Accountants

Mentor, Ohio

March 13, 2007

 

19


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     December 31,
     2006    2005
ASSETS      

CURRENT ASSETS

     

Cash and cash equivalents

   $ 30,400    $ 6,477

Accounts receivable—trade, less allowance for doubtful accounts of $ 21,322 and $ 18,249

     1,160,832      930,772

Inventories

     2,848,980      2,060,172

Prepaid expenses

     48,231      98,964
             

Total current assets

     4,088,443      3,096,385
             

PROPERTY AND EQUIPMENT

     

Computers and office equipment

     300,326      196,198

Warehouse equipment

     107,453      107,453

Leasehold improvements

     61,381      31,927

Tooling

     2,719,585      1,423,639

Construction in progress

     360,223      263,362
             

Total

     3,548,968      2,022,579

Less accumulated depreciation

     1,490,767      1,159,860
             

Net property and equipment

     2,058,201      862,719
             

OTHER ASSETS

     

Patents, less amortization of $87,003 and $65,857

     250,069      207,589

Goodwill

     67,511      —  

Domain names and other assets

     12,155      11,387
             

Total other assets

     329,735      218,976
             

Total assets

   $ 6,476,379    $ 4,178,080
             

 

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

 

20


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

     December 31,  
     2006     2005  
LIABILITIES     

CURRENT LIABILITIES

    

Notes payable

   $ 1,400,000     $ 1,100,000  

Current maturities of long-term debt

     148,911       119,185  

Accounts payable—trade

     1,020,645       867,612  

Accrued expenses

     164,973       150,687  
                

Total current liabilities

     2,734,529       2,237,484  
                

LONG-TERM DEBT

    

Long-term debt—less current portion above

     211,132       22,843  
                

Total long-term debt

     211,132       22,843  
                

Total liabilities

     2,945,661       2,260,327  
                
STOCKHOLDERS’ EQUITY     

COMMON STOCK,
no par value; authorized 50,000,000 shares, issued and outstanding 15,035,473 and 11,887,473 shares

     4,011,451       2,925,751  

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

     88,986       122,646  

ACCUMULATED DEFICIT

     (1,172,398 )     (1,733,323 )
                

Total stockholders’ equity

     3,530,718       1,917,753  
                

Total liabilities and stockholders’ equity

   $ 6,476,379     $ 4,178,080  
                

 

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

 

21


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the Years
Ended December 31,
 
     2006     2005  

Net revenue

   $ 9,441,697     $ 6,566,407  

Cost of goods sold

     6,874,036       4,745,084  
                

Gross profit on sales

     2,567,661       1,821,323  

Selling, general and administrative expenses

     1,934,482       1,487,351  
                

Income from operations

     633,179       333,972  

Other income and expense, net

     7,643       (1,331 )

Interest expense

     (167,397 )     (78,403 )
                

Income before extraordinary item and income taxes

     473,425       254,238  

Extraordinary item—debt forgiveness

     87,500       —    
                

Income before income taxes

     560,925       254,238  

Income tax expense

     —         —    
                

Net income

   $ 560,925     $ 254,238  
                

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

    

Income before extraordinary item and income taxes

   $ 0.03     $ 0.02  

Extraordinary item

     —         —    
                

Net income

   $ 0.03     $ 0.02  
                

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

     15,520,362       11,927,371  
                

 

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

 

22


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005

 

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

Balance at January 1, 2005

  71,000     $ 648,337     11,771,473   $ 2,853,693   $ 149,046     $ (1,987,561 )   $ 1,663,515

Preferred Stock converted into Common Stock

  (5,000 )     (45,658 )   50,000     45,658     —         —         —  

Common Stock issued in payment of Preferred Stock dividend

  —         —       66,000     26,400     (26,400 )     —         —  

Net income for the year

  —         —       —       —       —         254,238       254,238
                                             

Balance at December 31, 2005

  66,000       602,679     11,887,473     2,925,751     122,646       (1,733,323 )     1,917,753

Common Stock issued for purchase of business

  —         —       3,082,000     1,052,040     —         —         1,052,040

Common Stock issued in payment of Preferred Stock dividend

  —         —       66,000     33,660     (33,660 )     —         —  

Net income for the year

  —         —       —       —       —         560,925       560,925
                                             

Balance at December 31, 2006

  66,000     $ 602,679     15,035,473   $ 4,011,451   $ 88,986     $ (1,172,398 )   $ 3,530,718
                                             

 

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

 

23


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Years
Ended December 31,
 
     2006     2005  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 560,925     $ 254,238  

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

    

Depreciation expense

     330,907       223,949  

Amortization expense

     21,145       19,739  

Debt forgiveness

     (87,500 )     —    

(Increase) decrease in assets:

    

Accounts receivable—trade

     22,954       (229,739 )

Inventories

     (259,909 )     (634,520 )

Prepaid expenses

     62,223       13,788  

Patent costs

     (23,625 )     (15,840 )

Domain name and other assets

     (768 )     (153 )

Increase (decrease) in liabilities:

    

Accounts payable—trade

     (128,002 )     236,078  

Accrued expenses

     1,261       56,784  
                

Net cash provided by (used in) operating activities

     499,611       (75,676 )
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Acquisition of business

     (597,068 )     —    

Acquisition of property and equipment

     (467,813 )     (342,320 )
                

Net cash used in investing activities

     (1,064,881 )     (342,320 )
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Principal payments on long-term debt

     (178,402 )     (36,921 )

Net borrowing on bank line of credit

     300,000       350,000  

Issuance of long-term debt

     467,595       82,405  
                

Net cash provided by financing activities

     589,193       395,484  
                

Net increase (decrease) in cash

     23,923       (22,512 )

CASH AT BEGINNING OF YEAR

     6,477       28,989  
                

CASH AT END OF YEAR

   $ 30,400     $ 6,477  
                

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

    

Interest paid

   $ 174,740     $ 69,475  
                

SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS

    

Common Stock issued in payment of Preferred Stock dividend

   $ 33,660     $ 26,400  
                

Common Stock issued in payment for acquisition of business

   $ 1,052,040     $ —    
                

Preferred Stock converted into Common Stock

   $ —       $ 45,658  
                

Debt forgiveness

   $ 87,500     $ —    
                

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

 

24


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations —OurPet’s Company (the “Company”) management originally founded Napro, Inc. (“Napro”), an Ohio corporation, in 1985 as an enterprise for launching new ventures and acquiring companies in various lines of business. In February 1996 Napro formed a wholly-owned Ohio subsidiary, Virtu Company (“Virtu”), to market proprietary products to the retail pet business under the OurPet’s label. Napro then changed its name to OurPet’s Company effective March 19, 1998. On July 16, 1998, Manticus, Inc. (“Manticus”) obtained all of the outstanding shares of OurPet’s Company in exchange for 8,000,000 shares of common stock of Manticus in a transaction accounted for as a pooling of interests. After the transaction, the holders of the former OurPet’s shares owned approximately 89% of the shares of Manticus, resulting in a reverse takeover. On October 12, 1998, Manticus changed its name to OurPet’s Company.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates —The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.

Policy of Cash Equivalents —For purposes of the financial statements, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Accounts Receivable —Accounts receivable have been adjusted for all known uncollectible accounts. An allowance for possible bad debts was established at December 31, 2006 and 2005 in the amount of $21,322 and $18,249, respectively.

Inventory —Inventories are carried at the lower of cost, first-in, first-out method or market. Inventories at December 31, 2006 and December 31, 2005 consist of:

 

     2006    2005

Finished goods

   $ 2,203,227    $ 1,620,421

Components and packaging

     645,753      439,751
             

Total

   $ 2,848,980    $ 2,060,172
             

All inventories are pledged as collateral for bank and small business administration loans.

Impairments —Assets are evaluated for impairment when events change or change in circumstances indicates that the carrying amounts of the assets may not be recoverable. When any such impairment exists, the related assets are written down to fair value.

 

25


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Property and Equipment —Property and equipment are reported at cost. Depreciation and amortization are provided by using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is provided on a straight-line basis over the lesser of the useful lives of the related assets or the terms of the leases. The estimated useful lives of the assets are as follows:

 

Computers and office equipment

   3 to 7 years

Leasehold improvements

   20 to 39 years

Tooling

   3 to 7 years

Warehouse equipment

   5 to 7 years

All property and equipment is pledged as collateral for bank and small business administration loans. Total depreciation for the years ended December 31, 2006 and December 31, 2005 was $330,907 and $223,949, respectively.

Intangible Assets —The Company adopted the provisions of FASB Statement 142 “Goodwill and Other Intangible Assets” which states that goodwill and other intangible assets that are subject to amortization are required to be tested for impairment at least annually.

The Company has filed for patents and trademarks for its proprietary products. The costs incurred of $23,625 in the year ended December 31, 2006 and $15,840 in the year ended December 31, 2005 have been capitalized and are being amortized over 15 years on a straight-line basis. In 2002 and 2006 the Company purchased domain names for its website for $11,000 which is not subject to amortization. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense. All intangible assets are pledged as collateral for the bank loans.

Revenue Recognition and Major Customers —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 and Pet Zone’s brand names. Net revenue is comprised of gross sales less discounts given to distributors and returns and allowances.

For the year ended December 31, 2006, 54.6% of the Company’s revenue was derived from two major customers. Revenue generated from each of these customers amounted to $2,738,092 and $2,415,186, which represents 29.0% and 25.6% of total revenue, respectively.

For the year ended December 31, 2005, 46.7% of the Company’s revenue was derived from two major customers. Revenue generated from each of these customers amounted to $1,537,852 and $1,530,629, which represents 23.4% and 23.3% of total revenue, respectively.

Research and Development Costs —Research and development costs are charged to operations when incurred and are included in cost of goods sold. The amount charged for the years ended December 31, 2006 and December 31, 2005 was $113,622 and $66,746, respectively.

Advertising Costs —Advertising costs are charged to operations when the advertising first takes place. Advertising expense for the years ended December 31, 2006 and December 31, 2005 was $30,671 and $20,040, respectively.

Shipping and Handling Costs —Shipping and handling costs for products sold are included in cost of goods sold when incurred.

 

26


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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” (“APB 25”) and related interpretations. FAS 123R requires the grant-date fair 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 2006 as a result of stock options is not material.

Prior to adopting FAS 123R, the Company accounted for share-based payment awards using the intrinsic value method of ABP 25 and related interpretations. Under APB 25, the Company did not record compensation expense for employee share options, unless the awards were modified, because the share options were granted with exercise prices equal to or greater than the fair value of our stock on the date of grant. The following table illustrates the effect on reported net income and earnings per share applicable to common shareholders for the years ended December 31, 2005 and 2004, had we accounted for share-based compensation plans using the fair value method of FAS 123:

 

     Year Ended
December 31,
 
     2005    2004  

Net income (loss) applicable to Common Stock:

     

As reported

   $ 227,838    $ (8,360 )

Less pro-forma expense related to options

     16,203      10,768  
               

Pro-forma

   $ 211,635    $ (19,128 )
               

Basic net income (loss) per Common Share:

     

As reported

     0.02      (0.00 )

Pro-forma

     0.02      (0.00 )

Diluted net income (loss) per Common Share:

     

As reported

     0.02      (0.00 )

Pro-forma

     0.02      (0.00 )

For purposes of computing pro-forma results, the Company estimated fair values of stock options using the Black-Scholes option-pricing model. The model requires use of subjective assumptions that can materially affect fair value estimates. Therefore, the pro-forma results are estimates of results of operations as if compensation expense had been recognized for the stock option plans. The fair value of each stock option granted was estimated using the following weighted-average assumptions for grants in 2005, and 2004, respectively: (1) no expected dividend; (2) risk-free interest rates of 5.0% and 3.5%; (3) expected volatility of 50% and 25%; and (4) expected life of options of 5 years.

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 year, divided by the weighted average number of common and equivalent dilutive shares outstanding during the year. Potential common shares whose effect would be antidilutive have not been included. As of December 31, 2006, common shares that are or could be potentially dilutive include 994,500 stock options at exercise prices from $0.210 to $0.650 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 $1.000 per share. As of December 31,

 

27


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

2005, common shares that are or could be potentially dilutive include 888,000 stock options at exercise prices from $0.210 to $0.625 a share, 932,754 warrants to purchase Common Stock at exercise prices from $0.286 to $1.220 a share and 660,000 shares underlying the Preferred Stock at a conversion rate of $1.000 per share.

Fair Value of Financial Instruments —Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2006. The respective carrying value of certain on balance sheet financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. The fair value of the Company’s long-term debt is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying value approximates the fair value of the debt.

Income Taxes —Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Recently Issued Accounting Pronouncements —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. Early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes . FIN 48 is an interpretation of FAS No. 109, Accounting for Income Taxes , and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN No. 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

 

28


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTES PAYABLE AND LONG-TERM DEBT

 

     December 31,
     2006    2005

Revolving note payable—Bank, under line of credit facility of up to $2,000,000 with interest at prime plus .75% and 1% (9.00% at December 31, 2006 and 8.25% at December 31, 2005). The note is secured by accounts receivable, equipment, inventory, trademarks, patents and the personal guarantee of certain stockholders.

   $ 1,300,000    $ 1,000,000

Note payable—Bank, loan of $300,000, due in 34 monthly installments of $ 9,870 including interest at 7.75% beginning February 1, 2006 and a payment of interest only on the principal balance on January 1, 2006. This note is secured by all inventory, chattel paper, accounts, equipment, general intangibles and the personal guarantee of certain directors.

     196,603      82,405

Note payable—Pet Zone Products Ltd, due in quarterly installments of $9,878 through December 31, 2010 including interest at 7.75%. This note is subordinated to the bank loans.

     134,789      —  

Note payable—former director and shareholder, due on February 1, 2008. Interest at prime plus 3% (11.25% at December 31, 2006 and 10.25% at December 31, 2005) payable quarterly. This note is subordinated to the bank loans.

     75,000      75,000

Note payable—shareholder and investor, due on July 31, 2007. Interest is payable quarterly at 10%. This note is subordinated to the bank loan.

     25,000      25,000

Installment notes payable—due in monthly payments decreasing from $3,554 to $1,374 including interest through June 1, 2008. Interest rates range from 7% to 7.5%.

     28,651      59,623
             
     1,760,043      1,242,028

Less current portion of long-term debt

     1,548,911      1,219,185
             
   $ 211,132    $ 22,843
             

Future maturities of long-term debt are as follows:

 

Year Ending December 31,

   Amount

2007

   $ 1,548,911

2008

     138,572

2009

     34,886

2010

     37,674
      
   $ 1,760,043
      

The bank loan agreements contain various restrictive and customary covenants and default provisions under which the Company must obtain permission from its lender to (i) purchase or retire any of its capital stock; (ii) pay dividends in cash on any of its capital stock; (iii) exceed $ 300,000 annually for capital expenditures; and (iv) pay principal on subordinated notes due to officers and directors. In addition, the Company must follow certain other requirements as to maintaining a minimum debt service coverage ratio of at least 1.15 to 1.00 and an adjusted tangible net worth of at least $ 1,500,000.

In July and August of 2000, the Company borrowed a total of $ 275,000 from an officer, directors, stockholders and investor for working capital purposes at an annual interest rate of 10%. A note for $25,000 is

 

29


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTES PAYABLE AND LONG-TERM DEBT (continued)

due on July 31, 2007 with interest payable quarterly. Three of the notes for $100,000 were repaid in 2001 and 2003 by $31,250 in cash and conversion into 172,526 shares of Common Stock. Another of the notes for $150,000 was reduced to $75,000 by a $75,000 cash payment on December 30, 2003. On February 1, 2004 the reduced note of $75,000 was extended (now due February 1, 2008) at an interest rate of prime plus 3% payable quarterly. In addition the lender received 57,204 warrants for the purchase of Common Stock at $0.295 per share as adjusted for the Common Stock issued in payment of the Preferred Stock dividends in 2006, 2005 and 2004.

INTANGIBLE ASSETS

 

     As of December 31, 2006    As of December 31, 2005
     Cost    Amortization    Cost    Amortization

Amortized intangible assets:

           

Patents and trademarks

   $ 337,072    $ 87,003    $ 273,446    $ 65,857

Unamortized intangible assets:

           

Domain names

   $ 11,000    $ —      $ 10,000    $ —  

Amortization expense for year ended 12/31

   $ 21,145       $ 19,739   

Estimated amortization expense:

           

For year ending 12/31/07

   $ 21,847         

For year ending 12/31/08

   $ 21,847         

For year ending 12/31/09

   $ 21.847         

For year ending 12/31/10

   $ 21,847         

For year ending 12/31/11

   $ 21,847         

RELATED PARTY TRANSACTIONS

The Company leases warehouse and office facilities from a related entity, Senk Properties at a current monthly rental of $12,867. The Company has entered into a new ten year lease with Senk Properties which will be effective upon completion of the 36,000 square foot warehouse expansion in 2007. The monthly rental will be $26,667 for the first two years, $28,417 for the next two years, $30,167 for the next three years, $32,000 for the next two years, and $33,750 for the last year. The Company has the option to extend the lease for an additional ten years at a rental to be mutually agreed upon. Lease expense for the year ended December 31, 2006 and the year ended December 31, 2005 was $178,926 and $169,829, respectively.

CONCENTRATION OF CREDIT RISK

The Company maintains cash balances at a bank. Accounts at the institution are insured by the Federal Deposit Insurance Corporation up to $100,000. Bank balances, including outstanding checks, at December 31, 2006 and December 31, 2005 were $217,134 and $85,793, respectively, which results in an uninsured balance of $117,134 at December 31, 2006.

At December 31, 2006, 50.5% of the Company’s accounts receivable was due from two major customers. Amounts due from each of these customers were $401,164 and $196,466, which represents 33.9% and 16.6% of total accounts receivable, respectively.

At December 31, 2005, 49.0% of the Company’s accounts receivable was due from three major customers. Amounts due from each of these customers were $220,530, $133,056, and $111,432, which represents 23.2%, 14.0%, and 11.8% of total accounts receivable, respectively.

 

30


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

CAPITAL STOCK

From July through November 1999, the Company sold in a Private Placement 100,000 shares of no par value non-voting Convertible Preferred Stock. Each share of the Preferred Stock is convertible into ten shares of Common Stock at a conversion rate of $ 1.00 per share. The Company may redeem the preferred shares at $ 10 per share or convert each preferred share into ten common shares, at the option of the shareholder, at such time as the common shares are trading on a public exchange at a closing price of $ 4.00 or above for a period of ten consecutive business days. The holders of the Preferred are entitled to a 10% stock dividend paid annually in common shares beginning twelve months from the final close of the Private Placement. Under certain conditions, each Preferred shareholder may elect to receive a cash dividend in lieu of the Common Stock dividend.

WARRANTS

At December 31, 2006, the Company had the following Common Stock purchase warrants outstanding, all of which were exercisable:

 

     Number of
Shares
   Exercise
Price
   Expiration Date

1999 Issuance to related parties

   523,560    0.955    December 14, 2008

2001 Directors for fees

   14,548    1.203    October 1, 2009

2002 Payment for services

   25,719    1.215    August 3, 2009

2003 Note payable to director

   12,780    0.401    September 4, 2009

2004 Note payable to stockholder

   57,204    0.295    February 1, 2010

2004 Directors for fees

   71,228    0.285    October 1, 2012

2005 Directors for guarantees

   150,701    0.428    November 14, 2012

2006 Acquisition of business

   2,742,714    0.597    January 2, 2013

2006 Note payable to stockholder

   125,374    0.334    January 3, 2013

2006 Payment for services

   20,080    0.498    April 20, 2013

2006 Director for guarantee

   251,076    0.697    August 2, 2013
          

Total

   3,994,984      
          

The exercise price for the common shares issuable under the warrants to purchase 2,742,714 shares is $0.597 per share if exercised on or before January 2, 2011 or $0.672 per share if exercised on or after January 3, 2011 and on or before January 2, 2012 or $0.747 per share if exercised on or after January 3, 2012 and on or before the expiration of the warrants on January 2, 2013.

The exercise price and number of warrant shares are subject to adjustment in the event of a Common Stock dividend or distribution, a stock split or reverse stock split, or reorganization of the Company. The financial statements reflect the adjustments for the Common Stock issued in payment of the Preferred Stock dividends.

 

31


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

STOCK OPTION PLAN

On December 4, 1999, the Board of Directors approved the 1999 Stock Option Plan, which was approved by the shareholders on August 5, 2000. Stock options may be granted at the discretion of the Board of Directors for which the Company has reserved 1,350,000 shares of its Common Stock for issuance upon the exercise of options granted under the Plan. The options vest one-third on each of the second, third and fourth anniversaries of the date of grant and expire on the fifth anniversary of the date of grant. The Company grants stock options at exercise prices equal to or greater than the fair market value of the Company’s Common Stock on the date of grant. On May 8, 2003, the Board of Directors approved the adjustment of the exercise price of unexercised stock options to the higher of 50% of the existing exercise price or the current market price on May 8, 2003. The following table summarizes activity in options under the Plan:

 

     Number of
Shares
   Weighted Average
Exercise Price

Outstanding at January 1, 2005

   874,750    $ .34

Granted

   81,500      .29

Exercised

   —        —  

Forfeited

   17,250      .30

Expired

   51,000      .50
       

Outstanding at December 31, 2005

   888,000      .33

Granted

   167,500      .50

Exercised

   —        —  

Forfeited

   11,000      .48

Expired

   50,000      .625
       

Outstanding at December 31, 2006

   994,500      .34
       

The following table summarizes options outstanding at December 31, 2006:

 

          Options Outstanding    Options Exercisable

Range

   Number
Outstanding
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual Life
   Number
Exercisable
   Weighted
Average
Exercise
Price

$0.44-$0.65

   160,500    $ 0.50    4.6 Years    1,333    $ 0.45

$0.35-$0.36

   301,500    $ 0.35    2.3 Years    100,000    $ 0.35

$0.21-$0.31

   532,500    $ 0.29    2.7 Years    167,666    $ 0.28

There were 268,999 and 63,499 options exercisable at December 31, 2006 and December 31, 2005, respectively. The weighted average exercise price of options granted in 2006 and 2005 was $0.50 and $0.29, respectively.

 

32


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

OPERATING LEASES

Minimum future lease payments under operating leases as of December 31, 2006 are as follows:

 

2007

   $ 309,389

2008

     350,226

2009

     382,583

2010

     389,706

2011

     407,404

Thereafter

     2,425,258
      

Total minimum lease payments

   $ 4,264,566
      

Total rent expense of the Company for the years ended December 31, 2006 and December 31, 2005 was $255,801 and $172,842, respectively.

EXTRAORDINARY ITEM

On October 18, 2006, the Company executed an amended subordinated promissory note with Pet Zone Products Ltd. which reduced the subsequent payments due under the agreement. As a result of this extinguishment of debt the Company recognized an extraordinary gain of $87,500 during 2006.

INCOME TAXES

There were income tax benefits of $192,461 and $87,815 from use of operating loss carryforwards by the Company for the years ended December 31, 2006 and December 31, 2005, respectively.

Following is a reconciliation of the expected income tax expense/benefit to the amount based on the U.S. statutory rate of 34% for the years ended December 31, 2006 and December 31, 2005:

 

     2006     2005  

Income tax expense/benefit based on US statutory rate

   $ 192,461     $ 87,815  

Current period change in the valuation allowance

     (192,461 )     (87,815 )
                

Provision for income taxes

   $ —       $ —    
                

The significant components of the Company’s deferred tax assets and liabilities are as follows:

 

     December 31,  
     2006     2005  

Deferred tax assets:

    

Net operating loss carryforward

   $ 242,972     $ 435,443  

Valuation allowances

     (242,972 )     (435,443 )
                

Net deferred tax assets

   $ —       $ —    
                

The Company’s valuation allowance decreased by approximately $192,500 and $87,800 for the years ended December 31, 2006 and December 31, 2005, respectively, which represents the effect of net income. The Company has recorded a valuation allowance to record its deferred tax assets at estimated net realizable value due to the uncertainty of realization of these assets through future taxable income.

 

33


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

INCOME TAXES (continued)

The Company has available at December 31, 2006, unused operating loss carryforwards that may be applied against future taxable income and that expire as follows:

 

Year Of Loss

   Amount of Unused
Operating Loss
Carryforwards
   Expiration
During Year
Ending

1999

   $ 306,192    2019

2000

     141,177    2020

2002

     267,255    2022
         
   $ 714,624   
         

LITIGATION

On March 31, 2000, SMP Company, Incorporated (formerly known as Sanar Manufacturing, Inc.) (“SMP”), a wholly-owned subsidiary of the Company, entered into an asset purchase agreement with Akon Plastic Enterprises, Inc. (“Akon”) whereby Akon agreed to purchase substantially all of the assets used by SMP in molding plastics. Further, as part of the sale, Akon and its President, David F. Harman (“Harman”), entered into an Indemnity Agreement whereby Akon and Harman, jointly and severally, agreed to indemnify us and the individual guarantors of the Small Business Administration loans to SMP against any liability for such loans, which were assumed as a part of the asset purchase by Akon. On June 5, 2003, we filed an action against Akon, the directors of Akon, and Harman in the Court of Common Pleas of Lake County, Ohio for damages, including non-payment of loans, due to Akon’s breach of the asset purchase agreement. Discovery has been completed and the parties to the litigation have each filed motions for summary judgment. The action remains pending as the court has not ruled yet on the summary judgment motions. While we believe that our case against Akon, its directors, and Harman is strong, we cannot predict the likely outcome of this action.

In addition to the above matters and in the normal course of conducting its business, the Company may become involved in various other litigation, including, but not limited to, preference claims by debtors in bankruptcy proceedings. The Company is not a party to any litigation or governmental proceeding which its management believes could result in any judgments or fines against it that would have a material adverse affect or impact in the Company’s financial position, liquidity or results of operations.

PURCHASE OF BUSINESS

On January 3, 2006, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Pet Zone Products Ltd. (“Pet Zone”) pursuant to which the Company purchased substantially all the assets and assumed certain liabilities of Pet Zone. The results of Pet Zone’s operations have been included in the consolidated financial statements since that date. Pet Zone manufactures and distributes pet supply products including cat, dog and bird feeders, storage bins, and cat and dog toys to pet specialty distributors and retailers, mass retailers and grocery chains, among others. The complementary strength of each company should allow significant product and distribution synergies to be realized with each company’s product sales being expanded to the other’s market segments and customers. The Company will gain potential entry into such new product categories as bird feeders, waste management products, and cat and dog furniture.

The purchase price for Pet Zone consisted of $455,928 in cash, subsequently adjusted to $494,505, 3,082,000 shares of the Company’s Common Stock valued at $1,052,040, and a warrant to purchase 2,729,000 additional shares of the Company’s Common Stock, subsequently adjusted to 2,742,714 shares in accordance with the warrant anti-dilution provisions.

 

34


Table of Contents

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

PURCHASE OF BUSINESS (continued)

The Purchase Agreement required Pet Zone to invest $250.000 in the Company in the form of a loan, evidenced by a subordinated note due in 20 quarterly payments of $15,197 including interest at 7.75% beginning March 31, 2006, with the proceeds to be used in the development of new products. In connection with this loan, the Company also issued Pet Zone a warrant to purchase 125,000 shares of Common Stock, subsequently adjusted to 125,374 shares in accordance with the warrant anti-dilution provisions. On October 18, 2006 the subordinated note was amended to require the remaining 17 quarterly payments be reduce to $9,878 including interest.

Also on January 3, 2006, the Company entered into a Registration Rights Agreement with Pet Zone and certain other stockholders holding the Company’s common shares and/or common shares issuable upon exercise of the warrants issued pursuant to the Purchase Agreement, which provides, among other things, certain piggyback registration rights to these stockholders and that the Company will file a registration statement with the Securities and Exchange Commission upon the demand of a majority of the stockholders holding registrable shares.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition.

At January 3, 2006:

 

Accounts receivable – trade

   $ 249,000  

Inventories

     502,000  

Equipment

     984,000  

Intangible assets

     40,000  

Goodwill

     68,000  
        

Total assets acquired

     1,843,000  
        

Accounts payable – trade

     (297,000 )
        

Total liabilities assumed

     (297,000 )
        

Net assets acquired

   $ 1,546,000  
        

The unaudited pro-forma consolidated statement of operations of OurPet’s and Pet Zone for the year ended December 31, 2005 is as follows:

 

Net revenue

   $ 9,380,754  

Cost of goods sold

     6,946,959  
        

Gross profit on sales

     2,433,795  

Selling, general and administrative expenses

     2,537,128  
        

Income (loss) from operations

     (103,333 )

Other expense

     1,331  

Interest expense

     107,975  
        

Net income (loss)

   $ (212,639 )
        

Weighted average shares outstanding

     15,012,298  
        

Earnings per common share

   $ (0.01 )
        

 

35

EXHIBIT 10.29

Customer No. 2920

AMENDMENT TO LOAN AGREEMENT

THIS AMENDMENT TO BUSINESS LOAN AGREEMENT made at Mentor, Ohio as of March 23, 2007, between FIRSTMERIT BANK, N.A. , (the “Lender”) and OurPet’s Co. (the “Borrower”).

W I T N E S S E T H

WHEREAS, the Lender and the Borrower made and entered into a Business Loan Agreement dated December 31, 2001, and as amended; and

WHEREAS, the Lender and the Borrower desire to revise certain language;

NOW THEREFORE, in consideration of the mutual premises herein contained and other valuable considerations, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree to amend the Business Loan Agreement in the following respect and in such respect only:

 

  1. Revise Subsection “(A)” under subsection “(ii)” under section “2.1 Revolving Credit Loans” as follows:

 

  (A) Eighty Percent (80%) of the net amount of Corporations’ Eligible Accounts

 

  2. Revise Subsection “(a)” under subsection “5.7 Capital Stock; Dividends” under section “5 Negative Covenants”

 

  (a) declare or pay any dividend or distributions (except stock dividends or stock distributions) on capitol stock (other than preferred stock subject to meeting the debt service coverage calculation in section 5.13 of the Credit Agreement)

 

  3. Revise Subsection “5.12 Minimum Adjusted Tangible Net Worth” under section “5 Negative Covenants” as follows:

Borrower shall not permit Corporations’ Adjusted Tangible Net Worth, on a consolidated basis, to be less than $3,000,000 as of September 30, 2007 and thereafter, measured quarterly commencing on September 30, 2007 and on each December 31, March 31, June 30 and September 30 thereafter.

It is expressly understood and agreed that all other terms and conditions of the aforesaid Loan Agreement shall remain unchanged and in full force and effect and are fully applicable to the amendment made hereby.


IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective authorized officers as of this date first above written.

 

FIRSTMERIT BANK, N.A.     OurPet’s Co.
By:   / S /    T IMOTHY A. C AHILL             By:   / S /    S TEVEN T SENGAS        
        Steven Tsengas, Chairman, President, CEO
    Guarantors:
       
       
       
    Virtu Company
      By:   / S /    S TEVEN T SENGAS        
        Steven Tsengas, Chairman, President, CEO
   
   
   
    Individually
   
      By:   / S /    S TEVEN T SENGAS        
        Steven Tsengas, Individually
      By:   / S /    E VANGELIA S. T SENGAS        
        Evangelia S. Tsengas, Individually

EXHIBIT 10.30

PROMISSORY NOTE

 

Principal

$300,000.00

 

Loan Date

03-23-2007

 

Maturity

06-23-2010

  Loan No.  

Call / Cell

04AO/5/B10

 

Account

2920

 

Officer

SMB

  Initials

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length limitations.

 

Borrower:   

OURPET’S COMPANY

1300 EAST STREET

FAIRPORT HARBOR, OH 44077

      Lender:   

FIRSTMERIT BANK, N.A.

COMMERCIAL BANKING #36300

7800 REYNOLDS ROAD

MENTOR, OH 44060

(440) 953-2173

 


 

Principal Amount: $300,000.00   Date of Note: March 23, 2007

PROMISE TO PAY. OURPET’S COMPANY (“Borrower”) promises to pay to FIRSTMERIT BANK, N.A. (“Lender”), or order, in lawful money of the United States of America, the principal amount of Three Hundred Thousand & 00/100 Dollars ($300,000.00), together with interest on the unpaid principal balance from March 23, 2007, until paid in full.

PAYMENT. Borrower will pay this loan in accordance with the following payment schedule: 3 monthly consecutive interest payments, beginning April 23, 2007, with interest calculated on the unpaid principal balances at an interest rate of 7.600% per annum; 35 monthly consecutive principal and interest payments of $9,362.28 each, beginning July 23, 2007, with interest calculated on the unpaid principal balances at an interest rate of 7.600% per annum; and one principal and interest payment of $9,362.14 on June 23, 2010, with interest calculated on the unpaid principal balances at an interest rate of 7.600% per annum. This estimated final payment is based on the assumption that all payments will be made exactly as scheduled; the actual final payment will be for all principal and accrued interest not yet paid, together with any other unpaid amounts under this Note. Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; and then to any late charges. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender’s address shown above or at such other place as Lender may designate in writing.

PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower’s making fewer payments. Borrower agrees not to send Lender payments marked “paid in full”, “without recourse”, or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender’s rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: FIRSTMERIT BANK, N.A.: COMMERCIAL BANKING #36300; 7800 REYNOLDS ROAD; MENTOR, OH 44060.

LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 7.000% of the regularly scheduled payment or $35.00, whichever is greater.

INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, the interest rate on this Note shall be increased by adding a 6.000 percentage point margin (“Default Rate Margin”). The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied had there been no default. After maturity, or after this Note would have matured had there been no default, the Default Rate Margin will continue to apply to the final interest rate described in this Note. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.

DEFAULT. Each of the following shall constitute an event of default (“Event of Default”) under this Note:

Payment Default. Borrower fails to make any payment when due under this Note.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s property or Borrower’s ability to repay this Note or perform Borrower’s obligations under this Note or any of the related documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor’s estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.

Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.


PROMISSORY NOTE

(Continued)

Page 2

 


Adverse Change.     A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.

Insecurity.     Lender in good faith believes itself insecure.

Cure Provisions.     If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

LENDER’S RIGHTS.     Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.

ATTORNEYS’ FEES; EXPENSES.     Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender’s attorneys’ fees and Lender’s legal expenses, whether or not there is a lawsuit, including attorneys’ fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.

JURY WAIVER.    Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other.

GOVERNING LAW.    This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Ohio without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of Ohio.

CHOICE OF VENUE.     If there is a lawsuit, Borrower agrees upon Lender’s request to submit to the jurisdiction of the courts of LAKE County, State of Ohio.

CONFESSION OF JUDGMENT.     Borrower hereby irrevocably authorizes and empowers any attorney-at-law, including an attorney hired by Lender, to appear in any court of record and to confess judgment against Borrower for the unpaid amount of this Note as evidenced by an affidavit signed by an officer of Lender setting forth the amount then due, attorneys’ fees plus costs of suit, and to release all errors, and waive all rights of appeal. If a copy of this Note, verified by an affidavit, shall have been filed in the proceeding, it will not be necessary to file the original as a warrant of attorney. Borrower waives the right to any stay of execution and the benefit of all exemption laws now or hereafter in effect. No single exercise of the foregoing warrant and power to confess judgment will be deemed to exhaust the power, whether or not any such exercise shall be held by any court to be invalid, voidable, or void; but the power will continue undiminished and may be exercised from time to time as Lender may elect until all amounts owing on this Note have been paid in full. Borrower waives any conflict of interest that an attorney hired by Lender may have in acting on behalf of Borrower in confessing judgment against Borrower while such attorney is retained by Lender. Borrower expressly consents to such attorney acting for Borrower in confessing judgment.

DISHONORED ITEM FEE.     Borrower will pay a fee to Lender of $33.00 if Borrower makes a payment on Borrower’s loan and the check or preauthorized charge with which Borrower pays is later dishonored.

RIGHT OF SETOFF.     To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

FEE PROVISION.     UPON RECEIPT OF BILLING FROM LENDER, I AGREE TO PAY A LOAN FEE OF $500.00.

CROSS DEFAULT.     IT SHALL ALSO BE AN EVENT OF DEFAULT HEREUNDER IF BORROWER FAILS TO PERFORM OR COMPLY WITH ANY TERM, PROVISION OR CONDITION OF ANY OTHER AGREEMENT, DOCUMENT OR INSTRUMENT EVIDENCING, SECURING OR SUPPORTING ANY INDEBTEDNESS OWING FROM BORROWER TO LENDER.

LINE OF CREDIT.     THIS NOTE EVIDENCES A STRAIGHT LINE OF CREDIT. ONCE THE TOTAL AMOUNT OF PRINCIPAL HAS BEEN ADVANCED, BORROWER IS NOT ENTITLED TO FURTHER LOAN ADVANCES. ADVANCES UNDER THIS NOTE, AS WELL AS DIRECTIONS FOR PAYMENT FROM BORROWER’S ACCOUNTS, MAY BE REQUESTED ORALLY OR IN WRITING BY BORROWER OR BY AN AUTHORIZED PERSON. LENDER MAY, BUT NEED NOT, REQUIRE THAT ALL ORAL REQUESTS BE CONFIRMED IN WRITING. BORROWER AGREES TO BE LIABLE FOR ALL SUMS EITHER: (A) ADVANCED IN ACCORDANCE WITH THE INSTRUCTIONS OF AN AUTHORIZED PERSON OR (B) CREDITED TO ANY OF BORROWER’S ACCOUNTS WITH LENDER. THE UNPAID PRINCIPAL BALANCE OWING ON THIS NOTE AT ANY TIME MAY BE EVIDENCED BY ENDORSEMENTS ON THIS NOTE OR BY LENDER’S INTERNAL RECORDS, INCLUDING DAILY COMPUTER PRINT-OUTS. LENDER WILL HAVE NO OBLIGATION TO ADVANCE FUNDS UNDER THIS NOTE IF: (A) BORROWER OR ANY GUARANTOR IS IN DEFAULT UNDER THE TERMS OF THIS NOTE OR ANY AGREEMENT THAT BORROWER OR ANY GUARANTOR HAS WITH LENDER, INCLUDING ANY AGREEMENT MADE IN CONNECTION WITH THE SIGNING OF THIS NOTE; (B) BORROWER OR ANY GUARANTOR CEASES DOING BUSINESS OR IS INSOLVENT; (C) ANY GUARANTOR SEEKS, CLAIMS OR OTHERWISE ATTEMPTS TO LIMIT, MODIFY OR REVOKE SUCH GUARANTOR’S GUARANTEE OF THIS NOTE OR ANY OTHER LOAN WITH LENDER; (D) BORROWER HAS APPLIED FUNDS PROVIDED PURSUANT TO THIS NOTE FOR PURPOSES OTHER THAN THOSE AUTHORIZED BY LENDER; OR (E) LENDER IN GOOD FAITH BELIEVES ITSELF INSECURE.

SUCCESSOR INTERESTS.     The terms of this Note shall be binding upon Borrower, and upon Borrower’s heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.

NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES .    Please notify us if we report any inaccurate information about your account(s) to a consumer reporting agency. Your written notice describing the specific inaccuracy(ies) should be sent to us at the following address: FIRSTMERIT BANK, N.A., COMMERCIAL BANKING #36300; 7800 REYNOLDS ROAD, MENTOR, OH 44060.

GENERAL PROVISIONS.     If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Borrower does not agree or intend to pay, and Lender does not agree or Intend to contract for, charge, collect, take, reserve or receive (collectively referred to herein as “charge or collect”), any amount in the nature of interest or in the nature of a fee for this loan, which would in any way or event (including demand, prepayment, or acceleration) cause Lender to charge or collect more for this loan than the maximum Lender would be permitted to charge or collect by federal law or the law of the State of Ohio (as applicable). Any such excess interest or unauthorized fee shall, instead of anything stated to the contrary, be applied first to reduce the principal balance of this loan, and when the principal has been paid in full, be refunded to Borrower. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether


PROMISSORY NOTE

(Continued)

Page 3

 


as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender’s security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

 

NOTICE: FOR THIS NOTICE “YOU” MEANS THE BORROWER AND “CREDITOR” AND “HIS” MEANS LENDER.

 

WARNING – BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.

 

 

BORROWER:

 

 

OURPET’S COMPANY
By:   / S /    S TEVEN T SENGAS        
  STEVEN TSENGAS, President of OURPET’S COMPANY

 

 


EXHIBIT 10.31

COMMERCIAL SECURITY AGREEMENT

 

Principal

$300,000.00

 

Loan Date

03-23-2007

 

Maturity

06-23-2010

  Loan No.  

Call / Cell

04AO/5/B10

 

Account

2920

 

Officer

SMB

  Initials

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length limitations.

 

Grantor:

    

OURPET’S COMPANY

1300 EAST STREET

FAIRPORT HARBOR, OH 44077

   Lender:     

FIRSTMERIT BANK, N.A.

COMMERCIAL BANKING #36300

7600 REYNOLDS ROAD

MENTOR, OH 44060

(440) 953-2173

 


THIS COMMERCIAL SECURITY AGREEMENT dated March 23, 2007, is made and executed between OURPET’S COMPANY (“Grantor”) and FIRSTMERIT BANK, N.A. (“Lender”).

GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law.

COLLATERAL DESCRIPTION. The word “Collateral” as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement:

All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles

In addition, the word “Collateral” also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located:

(A) All accessories, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether added now or later.

(B) All products and produce of any of the property described in this Collateral section.

(C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other disposition of any of the property described in this Collateral section.

(D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party’s insurer, whether due to judgment, settlement or other process.

(E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor’s right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media.

CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Grantor’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

GRANTOR’S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that:

Perfection of Security Interest. Grantor agrees to take whatever actions are requested by Lender to perfect and continue Lender’s security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender.

Notices to Lender. Grantor will promptly notify Lender in writing at Lender’s address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor’s name; (2) change in Grantor’s assumed business name(s); (3) change in the management of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor’s principal office address; (6) change in Grantor’s state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor’s name or state of organization will take effect until after Lender has received notice.

No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement.

Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement


COMMERCIAL SECURITY AGREEMENT

(Continued) Page 2

 


remains in effect, Grantor shall not, without Lender’s prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing.

Location of the Collateral . Except in the ordinary course of Grantor’s business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor’s address shown above or at such other locations as are acceptable to Lender. Upon Lender’s request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor’s operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located.

Removal of the Collateral . Except in the ordinary course of Grantor’s business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender’s prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Ohio, without Lender’s prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral.

Transactions Involving Collateral . Except for inventory sold or accounts collected in the ordinary course of Grantor’s business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor’s business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender.

Title . Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender’s rights in the Collateral against the claims and demands of all other persons.

Repairs and Maintenance . Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral.

Inspection of Collateral . Lender and Lender’s designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located.

Taxes, Assessments and Liens . Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized in Lender’s sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys’ fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized.

Compliance with Governmental Requirements . Grantor shall comply promptly with all laws ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender’s interest in the Collateral, in Lender’s opinion, is not jeopardized.

Hazardous Substances . Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor’s due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify and defend shall survive the payment of the indebtedness and the satisfaction of this Agreement.

Maintenance of Casualty Insurance . Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days’ prior written notice to Lender and not including any disclaimer of the insurer’s liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses “single interest insurance,” which will cover only Lender’s interest in the Collateral.

Application of Insurance Proceeds . Grantor shall promptly notify Lender of any loss or damage to the Collateral, whether or not such casualty or loss is covered by insurance. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If


COMMERCIAL SECURITY AGREEMENT

(Continued)

Page 3

 


Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not comitted to the repair or restoration of the Collateral shall be used to prepay the Indebtedness.

Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of Insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the Insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the Insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the Insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor’s sole responsibility.

Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the Insurer; (2) the risks Insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral.

Financing Statements. Grantor authorizes Lender to file a UCC financing statement, or alternatively, a copy of this Agreement to perfect Lender’s security interest. At Lender’s request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue Lender’s security Interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute documents necessary to transfer title if there is a default. Lender may file a copy of this Agreements as a financing statement. If Grantor changes Grantor’s name or address, or the name or address of any person granting a security interest under this Agreement changes, Grantor will promptly notify the Lender of such change.

GRANTOR’S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor’s right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender’s security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender’s sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness.

LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lenders’s interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor’s failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interest, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy or (2) the remaining term of the Note: or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement.

Payment Default. Grantor fails to make any payment when due under the Indebtedness.

Other Defaults. Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Grantor.

Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor’s property or Grantor’s or any Grantor’s ability to repay the Indebtedness or perform their respective obligations under the Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Defective Collateralization. This Agreement or any of the related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Insolvency. The dissolution or termination of Grantor’s existence as a going business, the Insolvency of Grantor, the appointment of a receiver for any part of Grantor’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the indebtedness. This includes a garnishment of any of Grantor’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender


COMMERCIAL SECURITY AGREEMENT

(Continued)

Page 4

 


monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or guarantor, endorser, surety, or accommodation party dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the indebtedness.

Adverse Change. A material adverse change occurs in Grantor’s financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired.

Insecurity. Lender in good faith believes itself insecure.

Cure Provisions. If any default, other than a default in payment is curable and if Grantor has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured if Grantor, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Ohio Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies:

Accelerate Indebtedness. Lender may declare the entire indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor.

Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession.

Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender’s own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person’s right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid.

Appoint Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the indebtedness. The receiver may serve without bond if permitted by law. Lender’s right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver.

Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender’s discretion transfer any Collateral into Lender’s own name or that of Lender’s nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the indebtedness or apply it to payment of the indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender.

Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper.

Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise.

Election of Remedies. Except as may be prohibited by applicable law, all of Lender’s rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor’s failure to perform, shall not affect Lender’s right to declare a default and exercise its remedies.

ADDITIONAL DEFINITIONS. THE WORD ‘NOTE’ ALSO INCLUDES ALL OTHER PROMISSORY NOTES OR OTHER INSTRUMENTS, DOCUMENTS OR AGREEMENTS EVIDENCING THE INDEBTEDNESS.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses. Grantor agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection


COMMERCIAL SECURITY AGREEMENT

(Continued)

Page 5

 


services. Grantor also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Governing Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Ohio without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in the State of Ohio.

Choice of Venue. If there is a lawsuit, Grantor agrees upon Lender’s request to submit to the jurisdiction of the courts of LAKE County, State of Ohio.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender’s rights or of any of Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor’s current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors.

Power of Attorney. Grantor hereby appoints Lender as Grantor’s irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender’s security interest in the Collateral.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Successors and Assigns. Subject to any limitations stated in this Agreement on transfer of Grantor’s interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor’s successors with reference to this Agreement and the indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the indebtedness.

Survival of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor’s indebtedness shall be paid in full.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

Waive Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code:

Agreement. The word “Agreement” means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time.

Borrower. The word “Borrower” means OURPET’S COMPANY and includes all co-signers and co-makers signing the Note and all their successors and assigns.

Collateral. The word “Collateral” means all of Grantor’s right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement.

Default. The word “Default” means the Default set forth in this Agreement in the section titled “Default”.

Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

Grantor. The word “Grantor” means OURPET’S COMPANY.

Guaranty. The word “Guaranty” means the guaranty from guarantor, endorser, surety, or accommodation party to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when


COMMERCIAL SECURITY AGREEMENT

(Continued)

Page 6

 


Improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Specifically, without limitation, indebtedness includes all amounts that may be indirectly secured by the Cross-Collateralization provision of this Agreement.

Lender. The word “Lender” means FIRSTMERIT BANK, N.A., its successors and assigns.

Note. The word “Note” means the Note executed by OURPET’S COMPANY in the principal amount of $300,000.00 dated March 23, 2007, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Property. The word “Property” means all of Grantor’s right, title and interest in and to all the Property as described in the “Collateral Description” section of this Agreement.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness.

GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED MARCH 23, 2007 .

GRANTOR:

 

 

OURPET’S COMPANY
By:   / S /    S TEVEN T SENGAS        
 

STEVEN TSENGAS,

President of OURPET’S COMPANY

LENDER:

 

 

FIRSTMERIT BANK, N.A.
X:   / S /    T IMOTHY A. C AHILL        
  Authorized Signature

 


Exhibit 11

OURPET'S COMPANY AND SUBSIDIARIES

STATEMENT OF COMPUTATION OF NET INCOME PER SHARE

For the years ended December 31, 2006 and December 31, 2005

 

     2006     2005  

Income before extraordinary item

   $ 473,425     $ 254,238  

Preferred Stock dividend requirements

     (33,660 )     (26,400 )

Stock options expense

     (22,500 )     (16,203 )
                

Income before extraordinary item attributable to common stockholders

   $ 417,265     $ 211,635  
                

Weighted average number of common and dilutive common equivalent shares outstanding

     15,520,362       11,927,371  
                

Income before extraordinary item per common share

   $ 0.03     $ 0.02  
                

Extraordinary item

   $ 87,500     $ —    
                

Extraordinary item per common share

   $ —       $ —    
                

Net income

   $ 560,925     $ 254,238  

Preferred Stock dividend requirements

     (33,660 )     (26,400 )

Stock options expense

     (22,500 )     (16,203 )
                

Net income attributable to common stockholders

   $ 504,765     $ 211,635  
                

Net income per common share

   $ 0.03     $ 0.02  
                

Exhibit 31.1

Certification of the Chief Executive Officer Pursuant to 17 CFR Section 240.13a-14(a)

I, Steven Tsengas, Chairman, President and Chief Executive Officer of OurPet’s Company, certify that:

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

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-15e) 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 annual report is being prepared;

 

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

 

  c) disclosed in this annual 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.

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: March 29, 2007

/ S /    S TEVEN T SENGAS        

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

 

Exhibit 31.2

Certification of the Principal Financial Officer Pursuant to 17 CFR Section 240.13a-14(a)

I, John G. Murchie, Vice President, Treasurer and Controller of OurPet’s Company, certify that:

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

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-15e) 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 annual report is being prepared;

 

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

 

  c) disclosed in this annual 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.

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: March 29, 2007

/ S /     J OHN G. M URCHIE        

Vice President, Treasurer and Controller

(Principal Financial Officer)

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of OurPet’s Company (the Company) on Form 10-KSB for the year ended December 31, 2006 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) I have reviewed this Report on Form 10-KSB for the year ended December 31, 2006 of OurPet’s Company.

 

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

 

  (3) 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 /    S TEVEN T SENGAS        

BY STEVEN TSENGAS

Chairman of the Board, President and

Chief Executive Officer

Dated: March 29, 2007

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.

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of OurPet’s Company (the Company) on Form 10-KSB for the year ended December 31, 2006 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) I have reviewed this Report on Form 10-KSB for the year ended December 31, 2006 of OurPet’s Company.

 

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

 

  (3) 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 /    J OHN G. M URCHIE        

BY JOHN G. MURCHIE

Vice President, Treasurer and Controller

Dated: March 29, 2007

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.