Ourpets (OPCO) 10-Q 2009 Q1 Quarterly report

United States

Securities and Exchange Commission

Washington, DC 20549

FORM 10-Q

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

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

For the quarterly period ended:	Commission File No:
March 31, 2009	000-31279

OurPet’s Company

(Exact name of Registrant as specified in its charter)

Colorado	34-1480558
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

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

Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

Indicate the number of shares of outstanding of each of the Registrant’s classes of common equity, as of the last practicable date: As of April 20, 2009, the Registrant had outstanding 15,312,984 shares of Common Stock, 66,000 shares of Convertible Preferred Stock, convertible into 660,000 shares of Common Stock, and warrants exercisable for 4,363,817 shares of Common Stock.

CONTENTS

		Page Number
Part 1	Financial Information
Item 1 –	Financial Statements (Unaudited):
	Consolidated Balance Sheets of OurPet’s Company and Subsidiaries as of March 31, 2009 and December  31, 2008	3
	Consolidated Statements of Operations of OurPet’s Company and Subsidiaries for the three month periods ended March 31, 2009 and 2008	5
	Consolidated Statement of Stockholders’ Equity of OurPet’s Company and Subsidiaries for the three month period ended March 31, 2009	6
	Consolidated Statements of Cash Flows of OurPet’s Company and Subsidiaries for the three month periods ended March 31, 2009 and 2008	7
	Notes to Consolidated Financial Statements	8
Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations:
	Overview	11
	Results of Operations	11
	Liquidity and Capital Resources	12
	Critical Accounting Policies/Estimates	14
	Off-Balance Sheet Arrangements	14
	Forward Looking Statements	14
Item 3 –	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4(T) –	Controls and Procedures	15
Part II –	Other Information
Item 1 –	Legal Proceedings	15
Item 2 –	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3 –	Defaults Upon Senior Securities	15
Item 4 –	Submission of Matters to a Vote of Security Holders	15
Item 5 –	Other Information	15
Item 6 –	Exhibits	16
	Signatures	16
	Certifications	18

2

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,		December 31,
	2009		2008
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	306,634	$	363,573
Accounts receivable—trade, less allowance for doubtful accounts of $23,670 and $22,477		1,650,928		1,420,884
Inventories		3,466,557		3,303,617
Prepaid expenses		154,617		73,995
Total current assets		5,578,736		5,162,069
PROPERTY AND EQUIPMENT
Computers and office equipment		309,940		296,298
Warehouse equipment		254,176		254,176
Leasehold improvements		120,705		120,705
Tooling		3,316,709		3,316,059
Construction in progress		204,474		199,386
Total		4,206,004		4,186,624
Less accumulated depreciation		2,221,576		2,110,074
Net property and equipment		1,984,428		2,076,550
OTHER ASSETS
Patents, less amortization of $147,582 and $140,209		263,190		259,506
Goodwill		67,511		67,511
Domain names and other assets		12,350		12,350
Total other assets		343,051		339,367
Total assets	$	7,906,215	$	7,577,986

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

3

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

	March 31, 2009			December 31, 2008
	(Unaudited)
LIABILITIES
CURRENT LIABILITIES
Notes payable	$	1,900,000		$	1,900,000
Current maturities of long-term debt		747,385			144,581
Accounts payable—trade		1,513,981			1,238,367
Accrued expenses		665,886			666,051
Total current liabilities		4,827,252			3,948,999
LONG-TERM DEBT
Long-term debt—less current portion above		836,246			1,474,036
Total liabilities		5,663,498			5,423,035
STOCKHOLDERS’ EQUITY
COMMON STOCK, no par value; authorized 50,000,000 shares, issued and outstanding 15,312,984 shares		4,196,153			4,196,153
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		78,985			69,829
ACCUMULATED DEFICIT		(2,635,100	)		(2,713,710	)
Total stockholders’ equity		2,242,717			2,154,951
Total liabilities and stockholders’ equity	$	7,906,215		$	7,577,986

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

4

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended March 31,
	2009			2008
Net revenue	$	3,390,379		$	2,905,264
Cost of goods sold		2,390,311			2,038,401
Gross profit on sales		1,000,068			866,863
Selling, general and administrative expenses		(714,754	)		(654,203	)
Litigation expense		(164,313	)		(559,122	)
Income (loss) from operations		121,001			(346,462	)
Other income and expense, net		(32	)		(217	)
Interest expense		(42,359	)		(44,793	)
Income (loss) before income taxes		78,610			(391,472	)
Income tax expense		—			—
Net income (loss)	$	78,610		$	(391,472	)
Basic and Diluted Earnings Per Common Share After Dividend Requirements For Preferred Stock: Net Income (loss)	$	—		$	(0.02	)
Weighted average number of common and equivalent shares outstanding used to calculate basic and diluted earnings per share		15,313,600			16,361,732

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

5

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2009

(Unaudited)

	Preferred Stock			Common Stock			Paid-In Capital		Accumulated Deficit			Total Stockholders’ Equity
	Number of Shares	Amount		Number of Shares	Amount
Balance at December 31, 2008	66,000	$	602,679	15,312,984	$	4,196,153	$	69,829	$	(2,713,710	)	$	2,154,951
Net income	—		—	—		—		—		78,610			78,610
Stock-based compensation expense	—		—	—		—		9,156		—			9,156
Balance at March 31, 2009	66,000	$	602,679	15,312,984	$	4,196,153	$	78,985	$	(2,635,100	)	$	2,242,717

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

6

OURPET’S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Three Months Ended March 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	78,610		$	(391,472	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense		111,502			112,719
Amortization expense		7,373			6,738
Stock option expense		5,256			4,161
Warrant expense		3,900			—
(Increase) decrease in assets:
Accounts receivable - trade		(230,044	)		(138,360	)
Inventories		(162,940	)		(370,501	)
Prepaid expenses		(80,622	)		(82,085	)
Patent costs		(11,057	)		(11,890	)
Domain names and other assets		—			(58	)
Increase (decrease) in liabilities:
Accounts payable - trade		275,614			567,247
Accrued expenses		(165	)		122,605
Net cash used in operating activities		(2,573	)		(180,896	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		(19,380	)		(103,846	)
Net cash used in investing activities		(19,380	)		(103,846	)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt		(34,986	)		(64,337	)
Net repayment on bank line of credit		—			(200,000	)
Issuance of long-term debt		—			600,000
Net cash provided by (used in) financing activities		(34,986	)		335,663
Net increase (decrease) in cash		(56,939	)		50,921
CASH AT BEGINNING OF PERIOD		363,573			28,843
CASH AT END OF PERIOD	$	306,634		$	79,764
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	22,668		$	37,901

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

7

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

(Unaudited)

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements and include the accounts of OurPet’s Company and its wholly-owned subsidiaries (the “Company”), Virtu Company (“Virtu”) and SMP Company, Incorporated (“SMP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been included. All intercompany transactions have been eliminated. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended December 31, 2008 included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2009.

INVENTORIES

Inventories are carried at the lower of cost, first-in, first-out method or market. Inventories at March 31, 2009 and December 31, 2008 consist of:.

	2009		2008
Finished goods	$	2,600,913	$	2,425,396
Components and packaging		865,644		878,221
Total	$	3,466,557	$	3,303,617

All inventories are pledged as collateral for bank loans.

REVENUE RECOGNITION

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

For the three months ended March 31, 2009, 50.9% of the Company’s net revenue was derived from two major customers. Revenue generated from each of these customers amounted to $885,906 and $841,153, which represents 26.1% and 24.8% of total revenue, respectively.

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

STOCK OPTIONS

In December 2004, the FASB issued FAS No.123R, “Share-Based Payment”, which revised FAS 123, “Accounting for Stock-Based Compensation”, and superseded ABP Opinion No. 25, “Accounting for Stock Issued to Employees” (“ABP 25”) and related interpretations. FAS 123R requires the grant-date value of all share-based payment awards that are expected to vest, including employee share options, to be recognized as employee compensation expense over the requisite service period. The Company adopted FAS 123R on January 1, 2006 and applied the modified prospective transition method. Under this transition method, the Company (1) did not restate any prior periods and (2) is recognizing compensation expense for all share-based payment awards that were outstanding, but not yet vested, as of January 1, 2006, based upon the same estimated grant-date fair values and service periods used to prepare the FAS 123 pro-forma disclosures. The amount of compensation expense recognized in 2009 and 2008 as a result of stock options is not material.

8

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

(Unaudited)

NET INCOME PER COMMON SHARE

Basic and diluted net income per Common Share is based on the net income attributable to common stockholders after preferred stock dividend requirements for the period, divided by the weighted average number of common and equivalent dilutive shares outstanding during the period. Potential common shares whose effect would be antidilutive have not been included. As of March 31, 2009, common shares that are or could be potentially dilutive include 1,520,000 stock options at exercise prices from $0.20 to $1.55 a share, 4,363,817 warrants to purchase Common Stock at exercise prices from $0.283 to $1.438 a share and 660,000 shares underlying the Preferred Stock at a conversion rate of $1.00 per share. As of March 31, 2008, common shares that are or could be potentially dilutive include 1,035,500 stock options at exercise prices from $0.21 to $1.55 a share, 4,336,509 warrants to purchase Common Stock at exercise prices from $0.284 to $1.444 a share and 660,000 shares underlying the Preferred Stock at a conversion rate of $1.00 per share.

RECENT ACCOUNTING PRONOUNCEMENTS

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

In September 2006, the FASB issued FAS No. 157,Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The Standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued Staff Position No. 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which removed leasing transactions accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. Also in February 2008, the FASB issued Staff Position No. 157-2,Partial Deferral of the Effective Date of Statement 157,which deferred the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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

9

OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

(Unaudited)

In April 2008, the FASB issued FSP No. 142-3,Determination of the Useful Life of Intangible Assets(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under FAS No. 142,Goodwill and Other Intangible Assets. This standard is intended to improve the consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141R and other GAAP. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 31, 2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired after the effective date. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2008, the FASB issued FSP No. EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic principle of the FSP is that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS pursuant to the two-class method. The provisions of this FSP are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with the provisions of the FSP. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In April 2009, the FASB issued FSP No. 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments, which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this ESP, fair values for these assets and liabilities were only disclosed once a year. The ESP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance at fair value. FSP No. 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

10

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

Overview

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

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

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

As discussed below and in Liquidity and Capital Resources on Pages 12, 13, and 14 we have funded our operations principally from net cash provided by borrowings during the year ended December 31, 2008 and from operating activities in the three months ended March 31, 2009.

Under our line of credit facility with our bank we can borrow up to $2,000,000 based on the level of qualifying accounts receivable and inventories. At March 31, 2009 we had a balance of $1,800,000 under the line of credit with the bank at an interest rate of prime plus .75%.

RESULTS OF OPERATIONS

In the following discussion all references to 2009 are for the three months ended March 31, 2009 and all references to 2008 are for the three months ended March 31, 2008.

Net revenue for 2009 was $3,390,379, an increase of 16.7% in revenue from $2,905,264 in 2008, consisting of net sales of proprietary products for the retail pet business. This increase of $485,115 was the result of an increase in sales of approximately $509,000 to our two major customers due to sales of new products and increased sales of existing products. This sales increase more than offset a decrease of approximately $23,000 in sales to our other customers due to soft retail sales and inventory adjustments. Total sales to all customers of new products in 2009 that were not sold in 2008, including the new Play-N-Squeak products, Flappy dog toys, and new Durapet bowl product items, were approximately $539,000. Our sales to foreign customers increased by approximately $29,000, or 23%, from 2008 mainly due to increased sales to customers in England.

11

While net revenue increased by 16.7% in 2009, cost of goods sold increased by 17.3%, from $2,038,401 in 2008 to $2,390,311 in 2009. This increase was the result of the cost of purchased products sold and freight increasing by 20.8% (due mainly to the increased amount of purchased products needed for the higher volume sales in 2009) and lower gross margins on certain of our products. Our variable and fixed warehouse and overhead costs increased by 3.2% from the comparable quarter in 2008 due to increased costs for salaries, wages, and payroll taxes as a result increased accruals for employee profit sharing and the payroll increases given to our employees in the past year.

The net revenue increased by 16.7% and the cost of goods sold increased by 17.3%, which resulted in our gross profit on sales increasing by 15.4%, or $133,205 from $866,863 in 2008 to $1,000,068 in 2009.

Selling, general and administrative expenses in 2009 were $714,754, an increase of 9.3% or $60,551 from $654,203 in 2008. This increase was primarily as a result of (i) increased salaries and wages, payroll taxes and employee benefits of approximately $54,000 due to two additional employees in sales, marketing, and administration and the increased accruals for managers’ bonus and employee profit sharing, and (ii) increased sales and marketing expenses of approximately $8,000 mainly due to promotional expenses by our customers.

Litigation expenses were $164,313 for 2009, a decrease of $394,809 from $559,122 for 2008. These expenses were for legal fees and expenses related to our defense of patent infringement actions filed against us in late 2007 by a competitor alleging that our SmartScoop™ self-scooping cat litter box infringes on their patents.

The income (loss) from operations improved by $467,463 from a loss of ($346,462) in 2008 to an income of $121,001 in 2009 as a result of our gross profit on sales increasing by $133,205, or 15.4%, and the decrease in litigation expenses of $394,809, which was partially offset by a 9.3% increase in selling, general and administrative expenses of $60,551.

Interest expense for 2009 was $42,359, a decrease of $2,434, from $44,793 in 2008. This decrease was primarily due to the decrease in interest expense for the bank line of credit of approximately $8,000 due to the decrease in our average rate paid from 6.82% in 2008 to 4.00% in 2009 which more than offset the increase in average principal balance outstanding from $1,525,000 in 2008 to $1,800,000 in 2009. Also, the interest expense for the bank term notes decreased by approximately $4,000 due to the reduced principal balances from the monthly payments. These decreases were partially offset by the increased interest accrued for the promissory notes payable to the ten contributors of approximately $11,000 due to the increase in principal balances outstanding of $767,500.

Net income for 2009 was $78,610 as compared to net loss of $(391,472) for 2008 or an increase in profit of $470,082. This increase was as a result of the following changes from 2008 to 2009:

Net revenue increase of 16.7%	$	485,115
Cost of goods sold increase of 17.3%		(351,910	)
Gross profit on sales increase of 15.4%		133,205
Selling, general and administrative expenses increase of 9.3%		(60,551	)
Litigation expense decrease		394,809
Income (loss) from operations		467,463
Other income and expense, net increase		185
Interest expense decrease of 5.4%		2,434
Increase in Profitability	$	470,082

LIQUIDITY AND CAPITAL RESOURCES

Our operating activities provide cash from 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 $200,000 in available funds at March 31, 2009 based upon the balance of accounts receivable and inventories at that date.

12

As of March 31, 2009, we had $3,483,631 in principal amount of indebtedness consisting of:

Bank line of credit	Prime plus .75%	$	1,800,000
Bank term note	7.60%		133,938
Contributor notes payable	Prime plus 2%		1,367,500
Pet Zone Products Ltd (“Pet Zone”) term loan	7.75%		64,088
Installment notes payable	7.30%		18,105
Other notes payable	Prime plus 3% & 10%		100,000

The bank line of credit borrowing of $1,800,000 is under our line of credit agreement with our bank which allows us to borrow up to $2,000,000 based on the level of qualifying accounts receivable and inventories. The line of credit agreement is renewable annually by the bank and therefore is classified as a current liability on our balance sheet. Currently the agreement has been renewed by the bank through June 30, 2009. Under our agreements with the bank we are currently required to maintain a debt service coverage ratio of 1.15, a tangible net worth of $3,000,000, and obtain permission from the bank for any of the following: (a) to incur additional indebtedness, (b) enter additional leases if it would require total lease payments exceeding $190,280 in any fiscal year, (c) make any expenditures for property and equipment in excess of $300,000 in any fiscal year, and (d) pay cash dividends or redeem any of our capital stock other than dividends on our preferred stock subject to meeting the debt service coverage ratio or redeem any of our capital stock. At March 31, 2009 we were in compliance with the covenants and default provisions under our agreement with the bank and had a debt service coverage ratio of 1.20 and a tangible net worth of $3,431,254.

The installment notes payable are due in monthly payments of $560 including interest through March 2012. The other notes payable are due in the amount of $75,000 on February 1, 2010, to Beachcraft L.P. and $25,000 on August 1, 2009 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, 2010 with interest payable quarterly at prime plus 3%. In consideration for this refinancing we issued warrants for the purchase of 56,250 shares of Common Stock to Beachcraft L.P. at an exercise price of $0.30 per share with an expiration date of February 1, 2010. Subsequent to their issuance the warrants were adjusted to 57,204 warrants exercisable at $0.295 per share in accordance with the anti-dilution provisions of the warrants. These warrants were exercised in 2007.

Our short-term and long-term liquidity will depend on our ability to achieve cash-flow break even on our operations and to increase sales of our products. We recorded a profit of approximately $187,000 for the year ended 2007 but recorded a loss of approximately $1,728,000 for the year ended 2008 and therefore relied on cash from our financing activities to fund our operations. The loss for 2008 included approximately $2,323,000 of litigation expenses which adversely affected our liquidity and financial covenants. We had significantly lower litigation expenses in the first quarter of 2009 and expect them to remain lower for the balance of 2009. 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 2009. We have no material commitments for capital expenditures.

Net cash used in operating activities for the three months ended March 31, 2009 was $2,573. Cash was provided by the net income for the three months of $206,641, including the non-cash charges for depreciation of $111,502, amortization of $7,373, stock option expense of $5,256, and warrant expense of $3,900. Cash was used by the net change of $(209,214) in our operating assets and liabilities as follows:

Accounts receivable increase	$	(230,044	)
Inventories increase		(162,940	)
Prepaid expenses increase		(80,622	)
Patent costs increase		(11,057	)
Accounts payable increase		275,614
Accrued expenses decrease		(165	)
Net change	$	(209,214	)

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Net cash used in investing activities for the three months ended March 31, 2009 was $19,380, which was used for the acquisition of property and equipment. Cash used in financing activities for the three months was $(34,986) 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 unaudited consolidated financial statements included elsewhere in this quarterly report on Form 10-Q. The application of these policies may require management to make judgments and estimates that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

FORWARD LOOKING STATEMENTS

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, OurPet’s is not required to provide the information required by this item.

ITEM 4(T). CONTROLS AND PROCEDURES

As of March 31, 2009, our management carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, our President and Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. There have been no changes in our internal control over financial reporting in the first quarter of 2009 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are party to certain material legal proceedings which are described in our Annual Report on Form 10-K under the caption “Item 3 – Legal Proceedings” filed on March 31, 2009. Except as discussed herein, we have not been named in any new material legal proceedings and there have been no material developments in the previously reported legal proceedings.

On March 3, 2009, the parties agreed to settle and dismiss an action that we had previously filed against Akon Plastic Enterprises, Inc. and certain parties related to it. The settlement agreement and mutual release were executed as of March 27, 2009.

On April 7, 2009 the International Trade Commission (“ITC”) issued a ruling upholding the Initial Determination by the ITC Administrative Law Judge which found in our favor on all but one claim with respect to claims filed against us by a competitor, Applica Consumer Products, Inc. We plan to appeal the ITC decision regarding the claim to the Court of Appeals for the Federal Circuit. We also are going to certify to the U.S. Customs that our new revised products are non-infringing so that we can continue to import the products.

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

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

* Filed herewith

SIGNATURES

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

OURPET’S COMPANY

Dated: May 4, 2009	/s/    Steven Tsengas
	Steven Tsengas
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)

Dated: May 4, 2009	/s/    Scott R. Mendes
	Scott R. Mendes
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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