As filed with the Securities and Exchange
Commission on March 30, 2011

United States

Securities and Exchange Commission

Washington, DC 20549





---



Form 10-K



xAnnual Report Pursuant to Section 13 or 15(d)

Of the Securities Exchange Act of 1934

For the fiscal year ended December 31,
2011

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 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)



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





---





Indicate by check mark whether the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   ̈  Yes    x  No

Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   ̈  Yes    x  No

Indicate by check mark if the registrant:
(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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

Indicate by check mark whether the registrant
has submitted electronically and posted on its Corporate web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).  x  Yes     ̈  No

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not 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-K or any amendment to this Form 10-K.  x

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



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

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

Registrant’s revenues for the fiscal
year ended December 31, 2011 were $19,667,134. 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 $2,827,857 as of March 15, 2012. As of
March 15, 2012, the registrant had outstanding 15,809,023 shares of Common Stock.



Documents Incorporated by Reference.



Portions of
the registrant’s definitive proxy statement for the 2012 Annual Meeting of shareholders of OurPets’ Company are incorporated
by reference into Part III of this Form 10-K www.ourpets.com











OURPET’S COMPANY



FORM 10-K



For The Fiscal Year Ended December 31,
2011



INDEX



|         |                                                                                                              | Page
|-------- | ------------------------------------------------------------------------------------------------------------ | ----
|PART I   |                                                                                                              |     
|         |                                                                                                              |     
|Item 1.  | Business                                                                                                     | 3   
|         |                                                                                                              |     
|Item 1A. | Risk Factors                                                                                                 | 4   
|         |                                                                                                              |     
|Item 2.  | Properties                                                                                                   | 6   
|         |                                                                                                              |     
|Item 3.  | Legal Proceedings                                                                                            | 6   
|         |                                                                                                              |     
|PART II  |                                                                                                              |     
|         |                                                                                                              |     
|Item 5.  | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 7   
|         |                                                                                                              |     
|Item 6   | Selected Financial Data                                                                                      | 7   
|         |                                                                                                              |     
|Item 7.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                        | 8   
|         |                                                                                                              |     
|Item 8.  | Financial Statements and Supplementary Data                                                                  | 16  
|         |                                                                                                              |     
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         | 16  
|         |                                                                                                              |     
|Item 9A. | Controls and Procedures                                                                                      | 16  
|         |                                                                                                              |     
|Item 9B. | Other Information                                                                                            | 17  
|         |                                                                                                              |     
|PART III |                                                                                                              |     
|         |                                                                                                              |     
|Item 10. | Directors, Executive Officers and Corporate Governance                                                       | 17  
|         |                                                                                                              |     
|Item 11. | Executive Compensation                                                                                       | 17  
|         |                                                                                                              |     
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 17  
|         |                                                                                                              |     
|Item 13. | Certain Relationships and Related Transactions, and Director Independence                                    | 17  
|         |                                                                                                              |     
|Item 14. | Principal Accountant Fees and Services                                                                       | 17  
|         |                                                                                                              |     
|PART IV  |                                                                                                              |     
|         |                                                                                                              |     
|Item 15. | Exhibits and Financial Statement Schedules                                                                   | 17  
|         |                                                                                                              |     
|         | Signatures                                                                                                   | 21  
|         |                                                                                                              |     
|         | Certifications                                                                                               | 48  



2











Forward-Looking
Statements



This report on the Form 10-K (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 1A. 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. 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 600 products for dogs, cats, domestic and wild birds. Products are marketed under the OurPet’s®,
Flappy®, Pet Zone®, SmartScoop®, Ecopure Naturals ®, Play-N-Squeak®,
Durapet®, Clipnosis® , Go! Cat!Go!®, and Cosmic Pet® labels to customers,
both domestic and foreign. The manufacturing of these products is subcontracted to other entities, both domestic and foreign, based
upon price, delivery and quality.



According to the most recent 2009/2010
APPMA National Pet Owners Survey, published by the American Pet Products Manufacturers Association, Inc®, approximately
71.4 million U.S. households reported owning a pet in 2008, with an estimated pet population of 77.5 million dogs, 93.6 million
cats and 15.9 million birds.



We sell our products in the following market
segments:



Mass retailers—eg. Wal-Mart



Pet superstores—eg.
PetsMart

Regional Pet Chains—eg.
Pet Supplies Plus



Pet catalogues—eg. Drs.
Foster & Smith

Internet—Amazon.com



Clubs—eg. Costco

Military Exchange chains—eg.
AAFES



Grocery chains—eg., Kroger

Pet food manufacturers—eg.,
Ralston Purina



Pet distributors—eg.
Bradley Caldwell

International customers—eg., Pet’s at Home



3







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 400 customers to whom we sell products, with the total number
and identity of our customers changing from time to time. With the exception of Wal-Mart, none of our customers account for 10%
or more of our sales. While we had approximately 460 customers for the year ended December 31, 2011, 18.6% of our revenue
was derived from Walmart. Revenue generated from Walmart amounted to $3,660,513.



We currently market products such as dog,
cat and bird feeders, dog and cat toys, cat and dog waste management products, catnip products, and natural and nutritional pet
supplements and topical products. We conduct our marketing and sales activities through 13 employees and 20 independent sales agents.
Domestic independent sales agents are paid commissions, which range from 2% to 10% of net sales to customers.



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



We are one of many 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 India, Mexico and the Far East.



Most of our products are proprietary and
we have been granted or assigned 72 United States and international patents for dog and cat feeders and have 54 United States and
international 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 68 additional trademark
registrations and applied for 9 trademark registrations, which are still pending.



As of March 15, 2012, we had 51 employees
consisting of 4 officers, 12 employees in sales and marketing, 2 employees in R&D/engineering, 2 employees in quality assurance,
4 employees in finance and administration, 1 employee in IT, 8 employees in operations and 11 employees in warehousing and shipping
and 7 employees at our Hagerstown facility. Most of our manufacturing is subcontracted out to outside vendors. However, we do perform
some light manufacturing at our Hagerstown, Maryland facility for the production of catnip products. 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.



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 $237,094 for the year ended December 31, 2011 and $183,252
for the year ended December 31, 2010.



Item 1A. Risk Factors.



An investment in our common stock involves a substantial degree
of risk. Before making an investment decision, you should give careful consideration to the following risk factors in addition
to the other information contained in this report. The following risk factors, however, may not reflect all of the risks associated
with our business or an investment in our common stock.



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 companies in the pet
product market with no measurable percentage of that market. We are still building our market presence as we compete with domestic
and foreign companies, who also manufacture their products in low cost areas such as Mexico, India 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 affect our sales, if this trend continues or these retailers are unable to emerge from bankruptcy
protection.



Financing may not be available when required by us.



We may need financing for working capital,
new product launches, warehouse equipment, 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 for any reason, such as but not limited to, i)
not available on affordable terms and ii) not available due to our inability to meet financial covenants, then our ability to fund
operations will be hampered.



4







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 and Chief Executive Officer; John M. Silvestri, President and
Chief Operating Officer, Konstantine S. Tsengas, Vice President of Operations and Secretary; and Scott R. Mendes, Chief Financial
Officer. 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 72 U.S. and international patents issued or assigned and 54 U.S. and
international 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 inability to successfully defend alleged patent infringement
actions against us would result in loss of business and expense.



On February 16, 2011 we settled a
litigation filed against us by a competitor that alleged we infringed upon certain patents for self-cleaning litter boxes. Had
we not been successful in defending this litigation and settling it, we would not have been able to sell our SmartScoopTM
self-scooping cat litter box, we could have incurred costs for damages paid to our competitor and for the write-off of our product
development and tooling costs for our product. Furthermore, while we were successful in defending against this litigation, the
cost of our defense has had a negative impact on our profitability. While we are not aware of any other significant patent infringement
allegations, it is possible that future alleged patent infringement actions may have the same impact on our profitability and could
have significant legal expenses associated with them.



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



We currently have 15,809,023 shares of
Common Stock outstanding which could be diluted by the following potential issuances of Common Stock. As of March 15, 2012,
we had outstanding 189,816 shares of Convertible Preferred Stock (“Preferred Stock”) convertible into 1,896,160 shares
of Common Stock at conversion rates of $1.00 per share for 66,000 shares of Preferred Stock and $.70 per share for 123,616 shares
of Preferred Stock. Also as of March 15, 2012, we had outstanding 4,982,678 warrants to purchase an aggregate of 4,982,678
shares of Common Stock at exercise prices ranging from $0.280 to $1.420 per share and options to purchase an aggregate of 1,848,541
shares of Common Stock at exercise prices ranging from $0.20 to $1.55 per share. We have reserved an aggregate of 2,532,167 shares
of Common Stock for issuance under the 1999 Stock Option Plan and the 2008 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.



5









We may experience impairment charges of our goodwill and
other intangible assets.



We are required to evaluate goodwill and
other intangible assets for impairment at least annually, and between annual tests if events or circumstances warrant such a test.
These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of
operating performance or a sale or disposition of a significant area of business. For any of the goodwill or intangible assets,
if we determine that the fair value is less than the carrying value, an impairment loss will be recorded in our statement of operations.
The determination of fair value is a highly subjective exercise and can produce significantly different results based on the assumptions
used and methodologies employed. If our projected long term sales growth rate, profit margins or terminal growth rate are considerably
lower and/or the assumed weighted-average cost of capital is considerably higher, future testing may indicate impairment and we
would have to record a non-cash impairment loss in our statement of operations. See notes to the consolidated financial statements
included in this annual Report on Form 10-K.



Item 2. Properties.



We lease a 64,000 square foot production,
warehouse and office facility in Fairport Harbor, Ohio from a related entity, Senk Properties, at a current monthly rental of $28,417
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, Chairman, 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 ten year lease with SENK Properties
which was effective upon completion of the 36,000 square foot warehouse expansion on June 1, 2007. The monthly rental is $26,667
for the first two years, $28,417 for the next three years, $30,167 for the next two 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 also lease a 20,000 square foot production,
warehouse and office facility in Hagerstown, Maryland from Leon Seidman, the former owner of Cosmic Pet Products, Inc., at a current
monthly rental of $10,018 plus real estate taxes. The lease term is two years from August 1, 2010 through July 31, 2012.



On December 30, 2011 we entered into a
second lease with SENK Properties for a 26,000 square foot production, warehouse and office facility in Mentor, Ohio with payments
due on the 1st day of each month starting on January 1, 2012. This facility is intended to replace the Hagerstown facility
after that lease expires in July 2012. During the first six months of 2012 we will be transitioning all Hagerstown operations to
the Mentor facility. The current monthly rental rate is $8,542 for the first two years, then increases to $9,083 for the next two
years, $9,732 for the next two years, $10,056 for the next year, $10,597 for the next two years and $10,813 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 these facilities 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 these facilities 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.



Item 3. Legal Proceedings.



In 2007, Applica Consumer Products, the
manufacturer of the LitterMaidTM Automatic Cat Litter Box, filed two lawsuits alleging that OurPet’s SmartScoop®
Self-Scooping Litter Box infringed multiple claims of U.S. Patent No. RE 36,847 and U.S. Patent No. 6,082,302. The SmartScoop®
is a patented automated self-cleaning cat litter box that offers a unique modular design for easy cleaning and maintenance using
any type of clumping litter. As previously announced, in October 2010, in one of the lawsuits, the United States Court of Appeals
for the Federal Circuit agreed with OurPet’s legal position that the asserted patent claims were either not violated by the
SmartScoop design and operation or were invalid. The Federal Circuit’s decision was not appealed by Applica and was
therefore finally resolved in OurPet’s favor as of January 4, 2011.



On February 4, 2011, OurPet’s
settled the remaining patent infringement accusations in the second lawsuit related to the SmartScoop® Self Scooping
Litter Box. That lawsuit was dismissed on February 16, 2011.



On January 23, 2012, we received a
Notice of Impending Legal Action by Law Enforcement from the Office of the District Attorney for the County of Solano,
California in connection with our waste management PIK-Up Bags. The notice cites a violation of California Public Resources
Code 42357(b) which prohibits any person from selling any plastic bag in the State of California that claims to be
“biodegradable, ”degradable,” or “decomposable,” if it does not break down, fragment,
biodegrade or decompose in a landfill or other environment. While our “PIK-up bags” packaging stated they were
biodegradable “except as defined by the State of California,” we have been required to cease selling such product
in the State of California. We may also be subject to financial penalties as a result of this violation; however, we are not
able to quantify what the penalties may be at this time. We have promptly responded and cooperated with the State of
California, and do not have any reason to believe that this action will result in any judgments or fines against
OurPet’s that would have a material adverse effect or impact in its financial position, liquidity or results of
operation.



6







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.



PART
II



Item 5. Market For Registrant’s Common Equity,
Related Stockholder Matters, and Issuer Purchases of Equity Securities.



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, 2010                                                         |  |  | 0.85 |  |  |  | 0.45 | 
|June 30, 2010                                                          |  |  | 0.92 |  |  |  | 0.74 | 
|September 30, 2010                                                     |  |  | 0.92 |  |  |  | 0.75 | 
|December 31, 2010                                                      |  |  | 1.06 |  |  |  | 0.83 | 
|March 31, 2011                                                         |  |  | 1.00 |  |  |  | 0.76 | 
|June 30, 2011                                                          |  |  | 0.85 |  |  |  | 0.70 | 
|September 30, 2011                                                     |  |  | 0.80 |  |  |  | 0.60 | 
|December 31, 2011                                                      |  |  | 0.69 |  |  |  | 0.32 | 



As of March 15, 2012, we had approximately
142 holders of record of our Common Stock.



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 the 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 to common stockholders 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.



On January 28, 2010 and February 1,
2010, OurPet’s sold an aggregate of 123,616 shares of its Series 2009 Preferred Stock in a private placement to a total of
15 accredited investors. All shares in the private placement were sold at a price of $7.00 a share for a total of $865,312. Payment
for the shares comprised of $595,000 in cash and $270,312 in converted debt (including accrued interest). All were previously reported
in Form 8-K filed February 2, 2010 except for 6,572 shares totaling $46,004 purchased by two additional accredited investors
on February 1, 2010. All shares are convertible at any time into Common Stock shares at a conversion price of $.70/common
share, subject to adjustment for stock splits, combinations and similar transactions. All shares receive a 6% ($.42) cash dividend
payable on December 1stof each year provided that payment may be deferred if necessary for our compliance with
our loan covenants. We have the limited right to convert the shares into Common Stock at any time after the trading price of our
Common Stock reaches $1.50 per share for twenty (20) consecutive days. In accordance with the above provisions, in December
2011 and 2010 the Company paid $51,919 in cash dividends to holders of this Series 2009 Preferred Stock.



The shares sold were not registered under
the Securities Act of 1933, as amended (the “Act”), in reliance on the private offering exemption from registration
provided by Section 4(2) of the Act and Rule 506 of Regulation D of the rules promulgated under the Act. We did not utilize
an underwriter or placement agent in connection with the private placement.



Item 6. Selected Financial Data.



Not applicable.



7









Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.



This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this Form 10-K. Management’s discussion and analysis contains
forward-looking statements that are provided to assist in the understanding of anticipated future performance. However, future
performance involves risks and uncertainties which may cause actual results to differ materially from those expressed in the forward-looking
statements. See “Forward-Looking Statements.”



Overview



OurPet’s develops, designs, produces
and markets a broad line of consumer brands containing innovative, high-quality accessory and consumable pet products. These
products form our portfolio of brands, including Play-N-Squeak®www.playnsqueak.com, SmartScoop®www.smartscoop.com, ecoPure Naturals®www.ecopurenaturals.com, Flappy® Dog Toys www.flappydogtoys.com,
Go! Cat Go®! cat toys, Cosmic Pet® cat products, Durapet® premium stainless steel
bowls, Pet Zone® dog waste management product, wild bird feeders, and dog houses, and a variety of raised feeders.
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.



On July 29, 2010, the Company entered
into an Asset Purchase Agreement (the “Purchase Agreement”) with Cosmic Pet Products, Inc. (“Cosmic Pet”)
pursuant to which the company purchased certain assets and assumed certain liabilities. The results of Cosmic Pet’s operations
have been included in the consolidated financial statements since that date. Cosmic Pet designed, manufactured and distributed
pet supply products for cats. Its products included catnip toys, containers of catnip, cat scratchers, cat treats and cat toys.
Cosmic Pet marketed its products to pet specialty stores, distributors, mass retailers, grocery chains and independent retailers.
The complementary strength of each company has allowed significant product and distribution synergies to be realized with each
company’s product sales being expanded to the other’s market segments and customers. OurPet’s has gained entry
into such new product categories as catnip toys, catnip products and cat treats utilizing the Cosmic Pet brand name.



As discussed below and in Liquidity and
Capital Resources on Pages 12-14, we funded our operations during 2011 principally from net cash provided by operating activities
and from financing and borrowing activities during 2010.



During 2011, we had a net increase of $557,964
in borrowings from our line of credit facilities with our bank under which we can borrow up to $5,000,000 based on the level of
qualifying accounts receivable and inventories. At December 31, 2011 and December 31, 2010 we had balances of $3,085,964
and $2,528,000, respectively, under the line of credit with our bank at an interest rate of prime plus .5%. Prior to October 2,
2009, the interest rate was prime plus .75%



On October 2, 2009, we obtained a
new $800,000 term loan from our bank. The $800,000 term loan was the second of two credit facilities extended to us by our bank
on September 17, 2009, the other being a renewal of our existing $2,000,000 line of credit through June 30, 2010. The
term loan was used to pay down the line of credit by $800,000 from $1,800,000 to $1,000,000. The term loan has a fixed interest
rate of 4.61% and is payable monthly over a 3 year period in equal installments of $23,859 including interest. Effective October 2,
2009, the line of credit’s interest rate was reduced to prime plus .5% from prime plus .75%. Both loans are secured by accounts
receivable, inventory, equipment, trademarks, patents and the personal guarantee of certain stockholders. At December 31,
2011, this term loan had an outstanding principal balance of $208,895 versus $478,540 at December 31, 2010.



On January 28, 2010 and February 1,
2010, OurPet’s sold an aggregate of 123,616 shares of its Series 2009 Preferred Stock in a private placement to a total of
15 accredited investors. All shares in the private placement were sold at a price of $7.00 a share for a total of $865,312. Payment
for the shares comprised of $595,000 in cash and $270,312 in converted debt (including accrued interest). All were previously reported
in our Form 8-K filed February 2, 2010 except for 6,572 shares totaling $46,004 purchased by two additional accredited investors
on February 1, 2010. All shares are convertible at any time into shares of common stock at a conversion price of $.70/common
share, subject to adjustment for stock splits, combinations and similar transactions. All shares receive a 6% ($0.42) cash dividend
payable on December 1stof each year provided that payment may be deferred if necessary for our compliance with
our loan covenants. We have the limited right to convert the shares into common stock at any time after the trading price of our
common stock reaches $1.50 per share for twenty consecutive days.



The shares sold were not registered under
the Act, in reliance on the private offering exemption from registration provided by Section 4(2) of the Act and Rule 506
of Regulation D of the rules promulgated under the Act. We did not utilize an underwriter or placement agent in connection with
the private placement.



On July 16, 2010, we obtained a new
$500,000 term loan from our bank. $400,000 of that loan was used to pay off a debt obligation of Cosmic Pet with the $100,000 balance
used to purchase certain Cosmic Pet assets included in our July 29, 2010 asset purchase of Cosmic Pet. The Loan is payable
in equal monthly installments of $14,817 over a three year term at a fixed interest rate of 4.18%. This loan was secured by our
accounts receivable, inventory, equipment, trademarks and patents. Steven Tsengas, OurPet’s President and Chief Executive
Officer and his wife provided an unlimited guarantee of the loan and for that guarantee were granted 62,500 warrants exercisable
at $.86/share for the right to purchase OurPet’s Common Stock. Subsequent to their issuance the warrants have been adjusted
to 63,027 warrants exercisable at $.85/share in accordance with the warrant antidilution provisions.



8







On October 18, 2010, we obtained a
$500,000 increase in our line of credit from $2,000,000 to $2,500,000. The increase was used to meet working capital requirements.
This increase was secured by our accounts receivable, inventory, equipment, trademarks and patents. Steven Tsengas, OurPet’s
President and Chief Executive Officer and his wife have provided an unlimited guarantee of the Loan and for that guarantee were
granted 62,500 warrants at $.98/share for the right to purchase OurPet’s Common Stock. Subsequent to their issuance the warrants
have been adjusted to 63,027 warrants exercisable at $.97/share in accordance with the warrant anti-dilution provisions.



On November 30, 2010, we obtained
a $300,000 short term loan from our bank to fund specific working capital requirements for business growth. This loan provided
for interest payments on the principal balance beginning January 1, 2011 with a maturity date of May 1, 2011. This loan was secured
by our accounts receivable, inventory, equipment, trademarks and patents. The interest rate was the same variable rate based on
our bank’s prime rate plus .50% with the initial prime rate set at 3.25%. The principal amount outstanding at December 31,
2010 was $90,000. This loan was subsequently paid off on June 30, 2011 as part of our renegotiated revolving line of credit. (see
June 28, 2011 entry below).



On January 19, 2011, we obtained a
$450,000 short term loan from our bank to fund specific working capital requirements related to business growth. The Note matured
on July 31, 2011 and provided for interest payments on the principal balance beginning March 1, 2011. This loan was also
secured by our accounts receivable, inventory, equipment, trademarks and patents. The interest rate was a variable rate based on
our Bank’s prime rate plus .50% with the initial prime rate set at 3.25%. This loan was subsequently paid off on June 30,
2011 as part of our renegotiated revolving line of credit. (see June 28, 2011 entry below).



On January 24, 2011 we obtained permission
from our bank to use both the $300,000 and $450,000 notes for general working capital requirements bringing the total line of credit
facility up to $3,250,000. Both of these loans were subsequently paid off on June 30, 2011.



On June 28, 2011, we renegotiated our line
of credit facility with our bank whereby we can borrow up to $5,000,000 based on the level of qualifying accounts receivable and
inventories. This represented a $1,750,000 increase in credit availability from the previous $3,250,000 credit facilities which
consisted of a $2,500,000 line of credit and the two short term notes of $300,000 and $450,000 each. The facility was converted
into a two year revolving line of credit which we have classified as a long term liability on our balance sheet. On June 30, 2011,
we paid off the $750,000 outstanding under the short term notes. At December 31, 2011 we had a balance due of $3,085,964 under
our bank line of credit at an interest rate of prime plus .50%. On December 31, 2010, we had a balance due on the combined lines
of credit of $2,528,000.



On September 30, 2011, the Company incurred
$225,000 of long term debt payable to the State of Ohio. Funds were used toward the purchase of new tooling for our raised feeder
product line. The Note matures on October 1, 2016 and provides for monthly installments of interest and principal of $4,043 beginning
November 1, 2011. The interest rate is fixed at 3%. An additional service fee equal to 1⁄4% of 1% of the principal balance
of the Loan is included in the monthly installments.



In February of 2008, we entered into contribution
agreements with six contributors, all of which are affiliated with OurPet’s, pursuant to which each contributor loaned certain
funds to us totaling $600,000. We used these funds for expenses related to litigation on certain of our SmartScoopTM products
(the “SmartScoopTM Litigation”) and for expenses related to new product development. In consideration for these
loans we (a) executed promissory notes due in two years with interest accruing at prime plus 2%, (b) issued warrants
for the purchase of 300,000 shares of our Common Stock at a grant price of $0.825 per share and (c) entered into piggyback
registration rights agreements with the contributors. Subsequent to their issuance the warrants have been adjusted to 305,059 warrants
exercisable at $0.811 per share in accordance with the warrant anti-dilution provisions.



In June and July of 2008, we entered into
additional contribution agreements with the same six contributors pursuant to which each contributor loaned certain funds to us
totaling an additional $292,500. We used the funds for additional expenses related to the SmartScoopTM Litigation. In consideration
for these loans we (a) executed promissory notes due in three years with interest compounding quarterly at prime plus 2%,
(b) issued warrants for the purchase of 146,250 shares of our Common Stock at a grant price of $0.50 per share, (c) issued
warrants for the purchase of 292,500 shares of our Common Stock at a grant price of $0.50 per share, which replaced 292,500 of
the warrants issued in February of 2008 and (d) entered into piggyback registration rights agreements with the contributors.
Subsequent to their issuance the warrants have been adjusted to 453,772 warrants exercisable at $0.492 per share in accordance
with the warrant anti-dilution provisions.



In July and August of 2008, we entered
into additional contribution agreements with two other contributors, neither of which are affiliated with OurPet’s, pursuant
to which each contributor loaned certain funds to us totaling $125,000. We also used these funds for expenses related to the SmartScoopTM
Litigation. In consideration for these loans we (a) executed promissory notes due in three years with interest compounding
quarterly at prime plus 2%, (b) issued warrants for the purchase of 12,500 shares and 50,000 shares of our Common Stock at
grant prices of $0.50 and $0.40 per share respectively, and (c) entered into piggyback registration agreements with the contributors.
Subsequent to their issuance the warrants have been adjusted to 12,710 and 50,893 warrants exercisable at $0.492 and $0.394 per
share respectively, in accordance with the warrant anti-dilution provisions.





9







In October and November of 2008, we entered
into additional contribution agreements with two other contributors, neither of which are affiliated OurPet’s, pursuant to
which each contributor loaned certain funds to us totaling $350,000. We also used these funds for expenses related to the SmartScoopTMLitigation.
In consideration for these loans we (a) executed promissory notes due in three years for $50,000 and due in four years for
$300,000 both with interest compounding quarterly at prime plus 2%, (b) issued warrants for the purchase of 25,000 shares
and 300,000 shares of our Common Stock at option prices of $0.40 and $0.37 per share respectively, and (c) entered into piggyback
registration agreements with the contributors. Subsequent to their issuance the 25,000 warrants exercisable at $0.40 per share
have been adjusted to 25,447 warrants exercisable at $0.394 per share and the 300,000 warrants exercisable at $0.37 per share have
been adjusted to 303,831 warrants exercisable at $0.365 per share in accordance with the warrant anti-dilution provisions.



Results of Operations



Year Ended December 31, 2011 Compared to Year Ended
December 31, 2010



In the following discussion all references
to 2011 are for the year ended December 31, 2011 and all references to 2010 are for the year ended December 31, 2010.
All references to Consolidated include OurPet’s and Cosmic Pets. All references to OurPet’s refer to OurPet’s
excluding Cosmic Pet. All references to Cosmic Pet include Cosmic Pet only.



Consolidated net revenue for 2011 was $19,667,134,
an increase of approximately 15.1% in revenue from $17,091,741 in 2010, consisting of sales of proprietary products for the retail
pet business. Of this $2,575,393 increase approximately $1,291,000 came from increased sales to promotional customers, $1,205,000
increased sales to mass customers, $404,000 in increased sales to E-Commerce customers and $320,000 increased sales to pet distributors.
These increases were offset by decreases in sales to club stores of approximately $460,000, a decrease in sales to major pet chain
store sales of approximately $626,000 and approximately $441,000 in increased sales to all other customer types. Approximately
48% of the sales increase came from Cosmic Pet products which increased by approximately $1,224,000 over 2010 Cosmic Pet product
sales.



Total sales to all customers for new products
in 2011 that were not sold in 2010 including the new Play ‘N Squeak® products, new Durapet Bowl products,
new Go Cat Go products, new Cosmic Pet products, new Flappy products, private label sales, new ecoPure products were approximately
$3,304,000 of which $1,710,000 were promotional products.



Consolidated sales to foreign customers
were $2,204,612, an increase of approximately $575,000, or 35.3%, from foreign sales of $1,629,791 in 2010. This increase was mainly
due to increased sales to customers in Canada, England, Brazil and Australia which were offset by decreases in sales to customers
in Sweden, Finland, the Netherlands and Argentina.



While net revenue increased by
15.1% in 2011, cost of goods sold increased by $2,734,979 or 22.3%, from $12,292,259 in 2010 to $15,027,238 in 2011.
Approximately $588,000 of this increase came from inventory reserve adjustments with $450,000 of write downs in the third
quarter of 2011 and $138,000 of write downs in the fourth quarter of 2011. Approximately $488,000 of the total inventory
write downs were for a change in business model with another $100,000 reserved for slow moving and excess inventory.
Approximately $122,000 of the inventory write downs were attributed to the Cosmic Pet product line being overhauled with new
packaging and 150 new SKU’s. Approximately $97,000 of the write downs related to a prior generation of SmartScoop®
product that management determined to no longer market due to technical obsolescence. Approximately $269,000 related to
decisions made by the sales/marketing department in the third and fourth quarters of 2011 to cease marketing the products
related to this inventory.



The remaining cost of goods sold increase
of approximately $2,147,000 was the result of (i) the cost of purchased products sold increasing 15.0%, or approximately $1,502,000,
due mainly to the increased amount of purchased products and increased freight costs needed for the higher volume of sales in 2011,as
well as approximately $53,000 in year end book to physical inventory adjustments; (ii) approximately $412,000 in increased salaries,
wages, payroll taxes, bonus/profit sharing and benefits due to additional staffing and associated benefits costs (approximately
$138,000 for the Cosmic Pet Hagerstown, Maryland production facility, and approximately $274,000 from OurPet’s staffing and
associated benefits for our operations group due to additional personnel added in supply chain management and warehouse);(iii)
approximately $118,000 in increase in general operations expenses of which approximately $77,000 is attributable to rent expense
for the Cosmic Pet facility; (iv) approximately $65,000 came from increased depreciation expense most of which is attributable
to our new ERP software system; and (v) approximately $39,000 increased customer chargebacks;



Our variable and fixed warehouse and overhead
costs increased by approximately $627,000, or 21.5%, from the comparable twelve months in 2010 due to the above noted increased
costs. Approximately $271,000, or 43%, of this increase is a result of overhead costs for our Cosmic Pet production facility with
the remaining approximately $356,000 of costs being attributable to our Fairport Harbor, Ohio facility.







10







Gross profit margin declined to 23.6% in
2011 from 28.1% in 2010. Approximately 3% of the 4.5% margin decrease was due to the inventory write downs. Another 1.0% can be
attributed to increases in OurPet’s operations indirect labor due to increased staffing in supply chain activities. The remaining
..5% is the result of increased warehouse labor costs at the Cosmic Pet facility over the prior year.



Selling, general and administrative (“S,
G & A”) expenses in 2011 were $4,269,699, an increase of 11.8%, or $451,844, from $3,817,855 in 2010. This increase was
primarily a result of (i) an increase in salaries and wages, payroll taxes and employee benefits of approximately $133,000
due to additional employees in sales, marketing and accounting, (ii) an increase in sales and marketing expenses of approximately
$334,000 mainly due to increased commissions, social media and promotional expenses, (iii) an increase in bad debt expense
of approximately $25,000, (iv) an increase in professional expenses of approximately $20,000 mainly related to increased audit
fees, costs for Sarbanes Oxley compliance and intangible asset valuation, (v.) an increase in IT, expenses of approximately $25,000
most of which were attributable to software support for the new ERP system and EDI initiatives and (vi) an increase in depreciation
charged to S, G & A of approximately $18,000. These increases were offset by decreases in legal expenses of approximately $140,000.
The remaining approximately $36,000 variance is comprised of numerous other selling, general and administrative line items.



In 2010 the Company recognized a onetime
$240,623 gain on the purchase of certain intangible assets from Cosmic Pet. This gain was comprised of the net excess in asset
value OurPet’s received from the Cosmic Pet asset purchase over the consideration OurPet’s paid and assumed in obligations.
The Company had an independent third party perform a valuation of such assets which concluded their value to be $461,000 with most
of the value attributed to the Cosmic Pet brand name. The asset purchase and gain are discussed further in the Notes to Consolidated
Financial statements.



Our income from operations decreased by
$852,053, from $1,222,250 in 2010 to $370,197 in 2011, as a result of our gross profit on sales decreasing by $159,586, or 3.3%,
an 11.8% increase in selling, general and administrative expenses of $451,844 and the 2010 onetime $240,623 gain on purchase of
Cosmic Pet assets. Additionally, approximately $588,000 of the decrease came from the inventory reserve adjustments taken in the
third and fourth quarters of 2011.



Other income for 2011 was $22,840, compared
to $1 in 2010. This increase was primarily from our receipt of approximately $23,000 in settlements from two competitors in connection
with patent infringement lawsuits we had filed against them.



Interest expense for 2011 was $177,029,
an increase of $40,867,or 30.0%, from $136,162 in 2010. This increase was mainly due to additional interest expense for our bank
line of credit of approximately $54,100, resulting from the increase in our average balance to approximately $2,654,000 in 2011
from $1,9247000 in 2010 (interest rate remained the same at 3.75%). The increase in our line of credit balances was needed for
working capital. Net interest expense in 2011 for term loans decreased by approximately $6,100 due to principal reductions. Interest
expense from notes payable to contributors decreased by approximately $7,400 from the comparable period in 2010 as a result of
our pay downs of $600,000 in February 2010 and $417,500 in the third quarter of 2011.



Income tax expense in 2011 decreased to
$95,334 from $99,555 in 2010. The $4,221 decrease was due to (i) a decrease in the estimate for federal income tax expense of approximately
$3,100, (ii) an increase in the estimate of Maryland state income tax expense of approximately $11,000, and (iii) a decrease in
the estimate for local income tax of approximately $12,100.



The Company’s deferred tax assets
increased by approximately $100,200 to $155,279 at December 31, 2011 from $55,116 at December 31, 2010. This was the result of
the Company electing to recognize income tax deductions for Section 179 property instead of utilizing its tax loss carry forwards
which are approximately $575,000 at December 31, 2011. The Section 179 property deductions resulted in the Company recognizing
deferred tax liabilities of approximately $199,600 as of December 31, 2011.



11









Net income for 2011 was $120,674 as compared
to net income in 2010 of $986,534, which is a decrease in profitability of $865,860. This decrease was as a result of the following
changes from 2010 to 2011:





|Net revenue increase of 15.1%                                   |  | $ | 2,575,393  |  
|--------------------------------------------------------------- |  | - | ---------- | -
|Cost of goods sold increase of 22.3%                            |  |   | (2,734,979 | )
|Gross profit decrease of 3.3%                                   |  |   | (159,586   | )
|Selling, general and administrative expenses increase of 11.8 % |  |   | (451,844   | )
|Gain on Asset Purchase in 2010                                  |  |   | (240,623   | )
|Interest expense increase of 30.0%                              |  |   | (40,867    | )
|Other Income increase                                           |  |   | 22,839     |  
|Income tax expense decrease                                     |  |   | 4,221      |  
|Decrease in Profitability                                       |  | $ | (865,860   | )



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 lines of credit
with our bank that had approximately $343,000 in available funds at December 31, 2011 based upon the balance of accounts receivable
and inventories at that date.



As of December 31, 2011, we had $4,201,649 in principal
amount of indebtedness consisting of:



|Bank line of credit - $5,000,000           | Prime plus .5% | $ 3,085,964
|------------------------------------------ | -------------- | -----------
|Bank term note ($800,000 original balance) | 4.61%          | 208,895    
|Bank term note ($500,000 original balance) | 4.18%          | 271,802    
|Ohio 166 note ( $225,000 original balance) | 3.25%          | 218,048    
|Contributor notes payable                  | Prime plus 2%  | 300,000    
|Capitalized Leases                         | Various        | 15,280     



|Installment note payable | 7.3%                | 1,660  
|------------------------ | ------------------- | -------
|Other notes payable      | Prime plus 3% & 10% | 100,000



The bank line of credit indebtedness
is $3,085,964 which is comprised of a single line of credit under which we can borrow up to a total of $5,000,000 based on
the level of qualifying accounts receivable and inventories. Total eligible collateral at December 31, 2011 was $3,429,337.
The $5,000,000 line of credit is a two year revolver and therefore is classified as a long term liability on our balance
sheet. Prior to the quarter ending June 30, 2011, the line of credit had always been a one year agreement and therefore
classified as a current liability. On June 30, 2011 we paid off two short term working capital lines of credit totaling
$750,000. Currently the $5,000,000 line of credit has been renewed by the bank through June 30, 2013. Under our
agreement with the bank we are required to: (i) maintain a debt service coverage ratio of at least 1.15;
(ii) maintain a tangible net worth of no less than $3,000,000 through the quarter ending September 30, 2011, thereafter
increasing to $4,500,000 starting with the quarter ending December 31, 2011; and (iii) obtain the bank’s
permission to incur additional indebtedness, make any expenditures for property and equipment in excess of $500,000 in any
fiscal year, redeem any of our capital stock, or pay cash dividends other than dividends on our preferred stock (subject to
meeting the debt service coverage ratio). At December 31, 2011, we were in compliance with the bank’s tangible net
worth covenant as we reported a tangible net worth of $4,731,192. However, at December 31, 2011, we were not in compliance
with the bank’s debt service coverage ratio as our ratio calculated at .55 versus the required 1.15. Factors
contributing to the low debt service coverage ratio were the $588,000 inventory write down, the addition of approximately
$345,000 in unfunded capital expenditures to the covenant calculation, lower than anticipated net income and repayment of
$473,500 of subordinated indebtedness. We were also in violation of the bank’s $500,000 maximum capital expenditure
covenant as our capital expenditures were approximately $539,000. We received a waiver from our bank for both covenant violations.





Our bank has also amended the debt service coverage ratio covenant for
reporting periods ending March 31, 2012, June 30, 2012 and September 30, 2012 pursuant to an Amendment to Loan Agreement dated
March 26, 2012 between OurPet’s and the Bank (the ‘Loan Amendment”). A copy of the “Loan Amendment”
is attached hereto as Exhibit 10.66. Based on Company projections for 2012, the Company believes it will maintain compliance
with the amended Bank loan covenants.





On October 18, 2010, the Company and
its bank, First Merit N.A., entered into an agreement to increase the Company’s line of credit facility to $2,500,000 from
$2,000,000. At December 31, 2010, that bank line of credit had indebtedness of $2,438,000. On November 30, 2010, we obtained
a $300,000 short term loan from our bank that provided for interest payments on the principal balance beginning January 1,
2011. The purpose of the loan was to fund specific working capital requirements for business growth. This loan was secured by our
accounts receivable, inventory, equipment, trademarks and patents. The interest rate was the same variable rate based on our bank’s
prime rate plus .50% with the initial prime rate set at 3.25%. This note was paid off on June 30, 2011. The principal amount outstanding
at December 31, 2010 was $90,000.





12







On October 2, 2009, we obtained an
$800,000 term loan from our bank. The term loan has a fixed interest rate of 4.61% and is payable monthly over a three year period
in equal installments of $23,859 that include interest. The loan is secured by our accounts receivable, inventory, equipment, trademarks,
patents and the personal guarantee of certain stockholders. At December 31, 2011, this loan had a principal balance outstanding
of $208,895 and at December 31, 2010, the principal balance outstanding was $478,540.



On July 16, 2010, we obtained a new
$500,000 term loan from our bank. $400,000 of that loan was used to pay off a debt obligation of Cosmic Pet with the $100,000 balance
used to purchase certain Cosmic Pet assets included in our July 29, 2010 asset purchase of Cosmic Pet. The loan is payable
in equal monthly installments of $14,817 over a three year term at a fixed interest rate of 4.18%. This loan was secured by accounts
receivable, inventory, equipment, trademarks, patents and the personal guarantee of certain stockholders. At December 31,
2011, this loan had a principal balance outstanding of $271,802 and at December 31, 2010, the principal balance outstanding
was $434,334.



On September 30, 2011, the Company incurred
$225,000 of long term debt payable to the State of Ohio under its 166 Program. Funds were used to purchase new tooling for our
raised feeder product line. The Loan is payable in equal monthly installments of $4,043 over a five year term at a fixed interest
rate of 3.00% plus an additional .25% servicing fee. Payments begin on November 1, 2011 with a maturity date of October 1, 2016.
On December 31, 2011, this loan had a principal balance outstanding of $218,048.



Contributor notes totaling $1,367,500 were
issued in 2008 to fund patent litigation expenses related to a lawsuit filed against us by a competitor. In February 2010, $600,000
of the notes were retired through a cash payment of $329,988 and conversion of $270,012 of the notes to Preferred Stock. Of the
remaining $767,500 in outstanding contributor notes, $317,500 was paid off in July, 2011, $100,000 was paid off in August 
2011 and $50,000 was paid off in October , 2011. There remains $300,000 due on October 31, 2012.



On July 29, 2010 the Company assumed
two capital leases for equipment purchased from Cosmic Pet. The capital leases are payable in monthly payments of $2,424 through
September 2011 and $1,527 through October 2012. At December 31, 2011, the remaining balances on these capital leases totaled
$ 15,280. At December 31, 2010, the remaining balances on the capital leases totaled $55,433.



The installment notes payable are for warehouse
equipment and due in monthly payments of $560 including interest, through March 2012. At December 31, 2011, this note had
a principal balance outstanding of $1,660, as opposed to a principal balance outstanding of $8,013 at December 31, 2010.



The other notes payable are due in the
amount of $75,000 on December 1, 2012, to Beachcraft L.P. and $25,000 on November 1, 2012 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 December, 2012 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 continue to depend on our ability to achieve cash-flow break even on our operations and to increase sales of our products.
In 2010, despite operating income of approximately $982,000 (excluding the $240,623 gain from intangible asset valuation) we relied
on our financing activities to fund operations as inventories increased by approximately $2,592,000 due to increased sales, increased
safety stock and the Cosmic Pet asset purchase. In 2011, although inventories increased by another approximately $535,000, we relied
primarily on funds from operating activities to fund operations.



In 2012 we should be able to fund our operating
cash requirements primarily through inventory reductions and net income. Based on our bank’s amended loan covenants we do
expect to meet the debt service coverage ratio and tangible net worth required by our bank to maintain our line of credit by the
end of 2012. We have no material commitments for capital expenditures.



13









A schedule of our contractual obligations
as of December 31, 2011 is as follows:



|                                   |  | Payments Due By Period |          
|---------------------------------- |  | ---------------------- | ---------
|Contractual Obligation             |  | Total                  |          
|Short and Long Term Debt           |  | $                      | 4,201,649
|Capital Lease Obligations          |  |                        | 16,940   
|Purchase Obligations               |  |                        | -0-      
|Other Long Term Liabilities        |  |                        | -0-      
|Operating Leases                   |  |                        | 3,798,129
|Total Contractual Cash Obligations |  | $                      | 8,016,718



Net cash provided by operating activities
for the year ended December 31, 2011 was $1,046,923. Cash was provided by the net operating income for year of $120,674, as well
as the non-cash charges for depreciation of $534,864, amortization of $37,780, stock option expense of $24,000 and warrant expense
of $24,000. Cash was also increased by $305,605 due to the following changes in our operating assets and liabilities:



|Accounts receivable decrease    |  | $ | 287,843  |  
|------------------------------- |  | - | -------- | -
|Inventories increase            |  |   | (535,189 | )
|Prepaid expenses increase       |  |   | (20,185  | )
|Patent cost increase            |  |   | (27,964  | )
|Deferred Tax Benefit increase   |  |   | (100,163 | )
|Accounts payable increase       |  |   | 570,392  |  
|Accrued expenses decrease       |  |   | (219,601 | )
|Deferred Tax liability increase |  |   | 199,577  |  
|Net change                      |  | $ | 305,605  |  





The decrease in accounts receivable from December 31, 2010
to December 31, 2011 was caused principally by the increase in cash collections from October 2011 to December 2011 of approximately
$867,000 over the same period a year ago versus the sales increase from October 2011 to December 2011 of approximately $486,000
over the same period a year ago. Our inventory increase from December 31, 2010 to December 31, 2011 was the result of
increased sales overall, increased stock for customers’ initial stocking orders to be shipped in January 2012, increased
stock for new product introductions and lower sales than forecasted for certain products, all which were partially offset by our
inventory write down of approximately $588,000. The decrease in other assets of approximately $151,000 from December 31, 2010
to December 31, 2011 was due to reclassification of inventory deposits to accounts payable. Our increase in accounts payable
of approximately $570,000 from December 31, 2010 to December 31, 2011 was primarily due to the increase in inventories.
Our accrued expenses decreased from December 31, 2010 to December 31, 2011 by approximately $220,000 primarily as a result
of decreased bonus/profit sharing expenses and accrued interest expenses.



Net cash used in investing activities for the year ended December 31,
2011 was $538,853 was used primarily for the acquisition of tooling/molds, equipment and ERP software.



Net cash used in financing activities for the year was $221,765.
Approximately $953,000 was used for principal payments of debt of which $467,500 was paid to subordinated note holders with the
balance of approximately $485,500 used to pay down term loan principal and capital leases. Borrowings on the bank line of credit
provided $557,964. On September 30, 2011 the Company received $225,000 in term loan proceeds from the State of Ohio 166 program
to finance the purchase of tooling/molds for our bone feeder line. Stock options exercised provided $325. The Company also paid
approximately $52,000 in cash dividends to holders of its Series 2009 Preferred Stock.



14







Net cash used in operating activities for the year ended December 31,
2010 was $824,985. Cash was provided by the net operating income for the year of $986,534, as well as the non-cash charges for
depreciation of $451,671, amortization of $35,014, stock option expense of $24,000, warrant expense of $25,004 less the gain from
Comic Pet asset purchase of $240,623. Cash was reduced by $2,106,585 due to an increase in accounts receivable of $776,686, increased
inventory of $2,155,225, increases in prepaid expenses of $117,210, increases in patent costs of $44,736, increases in domain names
and other assets of $50,685, all of which wereoffset by decreases in Deferred tax benefits of $50,685, accounts payable
increases of $880,398 and accrued expenses increases of $87,305.



Net cash used in investing activities for the year ended December 31,
2010 was $1,136,569 of which $600,000 was used for the asset purchase of Cosmic Pet and $536,569 was used for the acquisition of
property and equipment.



Net cash provided by financing activities for the year was $1,955,672.
The Company’s $865,000 issuance of its Series 2009 Preferred Stock provided $595,000 in cash and converted approximately
$270,000 of debt. Net borrowings on the bank lines of credit provided $1,679,000 comprised of $1,589,000 against the line of credit
and $90,000 against the new $300,000 note obtained in November 2010. Stock options exercised provided $10,401. Approximately $777,000
was used for principal payments of debt which were offset by the new $500,000 loan obtained in July 2010 used to finance the Cosmic
Pet asset purchase. The Company also paid approximately $52,000 in cash dividends to holders of its Series 2009 Preferred Stock.



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-K. 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 and inventory reserves.
-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 aging 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.



Intangible Assets. The Company adopted
the provisions of ASC Topic 350 “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.







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.



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.



15







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 8. Financial Statements and Supplementary Data.



The financial statements of OurPet’s
Company as of December 31, 2011 and 2010, and for the years then ended together with the Report of Independent Registered
Public Accounting Firm are included in this Form 10-K on the pages indicated below.





|                                                        |  | Page No. |      
|------------------------------------------------------- |  | -------- | -----
|Report of Independent Registered Public Accounting Firm |  |          | 24   
|Consolidated Balance Sheets                             |  |          | 25-26
|Consolidated Statements of Operations                   |  |          | 27   
|Consolidated Statements of Stockholders’ Equity         |  |          | 28   
|Consolidated Statements of Cash Flows                   |  |          | 29   
|Notes to Consolidated Financial Statements              |  |          | 30-47



Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.



None



Item 9A. Controls and Procedures.



Evaluation of Controls and Procedures



As of December 31, 2011, 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 as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act”). Based upon that evaluation,
our President and Chief Executive Officer and our Chief Financial Officer each concluded that our disclosure controls and procedures
were effective as of December 31, 2011.



Management’s Report on Internal Control Over Financial
Reporting



OurPet’s management is responsible
for establishing and maintaining an adequate system of internal control over financial reporting as such term is defined in Rule
13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance
with U.S. generally accepted accounting principles defined in the Exchange Act.



Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide
reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.



We carried out an evaluation under the
supervision and with the participation of our management, including our chief executive officer and chief financial officer, of
the effectiveness of our internal control over financial reporting. In making this evaluation, management used the criteria set
forth in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway
Commission. Based on this evaluation, management has concluded that the internal control over financial reporting was effective
as of December 31, 2011.



Changes in Internal Control over Financial Reporting



There were no changes in our internal control
over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.



Attestation Report of Independent Registered Public Accounting
Firm



This annual report does not include an
attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the
Securities and Exchange Commission rules that permit the Company to provide only management’s report in this annual report.



16







Item  9B. Other Information.



None.



PART
III



Item 10. Directors, Executive Officers and Corporate
Governance.



The information required by this Item is
incorporated by reference from the information provided under the headings “Board of Directors,” and “Executive
Officers,” contained in our Proxy Statement for our 2012 Annual Meeting of Shareholders to be held on May 25, 2012.



Item 11. Executive Compensation.



The information required by this Item is
incorporated by reference from the information provided under the headings “Executive Compensation and Other Information”
and “Board of Directors—Director Compensation” contained in our Proxy Statement for the 2012 Annual Meeting.





Item 12. 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 “Executive Compensation and Other Information—Equity
Compensation Plan Information” and “Principal Stockholders” of our Proxy Statement for the 2012 Annual Meeting.



Item 13. Certain Relationships and 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,
and Board of Directors—Director Independence” of our Proxy Statement for the 2012 Annual Meeting.



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 Firm Fees” contained
in our Proxy Statement for the 2012 Annual Meeting.



PART
IV



Item 15. Exhibits and Financial Statement Schedules.



(a) Financial Statement Schedules



The following consolidated financial statements
of the Company and its subsidiary are incorporated by reference from Item 8 in Part II of this Form 10-K (see pages 22-47).



Report of Independent Registered Public
Accounting Firm



Consolidated Balance Sheets

Consolidated Statements of Operations



Consolidated Statements of Stockholders’
Equity

Consolidated Statements of Cash Flows



Notes to Consolidated Financial Statements



All other schedules for which provision
is made in the applicable accounting regulation of the SEC are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated financial statements and related notes thereto.



(b) 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)      



17







|3.1.3 | Articles of Amendment to the Articles of Incorporation of the Company effective January 21, 2010(16)                                                                                                                                                                                                                                              
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                   
|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)
|      |                                                                                                                                                                                                                                                                                                                                                   
|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 Akon 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 | Lease Agreement 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)                                                                                                                                     
|      |                                                                                                                                                                                                                                              
|10.30 | Promissory Note dated March 23, 2007 executed by the Company in favor of FirstMerit Bank, N.A.(10)                                                                                                                                           

18







|10.31 | Commercial Security Agreement dated March 23, 2007 by and between the Company and FirstMerit Bank, N.A.(10)                                                                   
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                               
|10.32 | Contribution Agreement dated February 7, 2008 among OurPet’s Company, Capital One Partners LLC, Nottingham Ventures Ltd., Spirk Ventures Ltd. and LJR Limited Partnership.(11)
|      |                                                                                                                                                                               
|10.33 | Contribution Agreement dated February 7, 2008 among OurPet’s Company, Senk Properties and Dr. William M. Fraser.(11)                                                          
|      |                                                                                                                                                                               
|10.34 | Form of Promissory Note issued by OurPet’s to each Contributor.(11)                                                                                                           
|      |                                                                                                                                                                               
|10.35 | Form of Warrant issued by OurPet’s to each Contributor.(11)                                                                                                                   
|      |                                                                                                                                                                               
|10.36 | Form of Registration Rights Agreement among OurPet’s and the Contributors.(11)                                                                                                
|      |                                                                                                                                                                               
|10.37 | Contribution Agreement dated June 20, 2008 among OurPet’s Company, Capital One Partners LLC, Nottingham Ventures Ltd., Spirk Ventures Ltd. and LJR Limited Partnership.(12)   
|      |                                                                                                                                                                               
|10.38 | Contribution Agreement dated June 20, 2008 among OurPet’s Company, Senk Properties and Dr. William M. Fraser.(12)                                                             
|      |                                                                                                                                                                               
|10.39 | Form of Promissory Note issued by OurPet’s to each Contributor.(12)                                                                                                           
|      |                                                                                                                                                                               
|10.40 | Form of Warrant issued by OurPet’s to each Contributor.(12)                                                                                                                   
|      |                                                                                                                                                                               
|10.41 | Form of Registration Rights Agreement among OurPet’s and the Contributors.(12)                                                                                                
|10.42 | Fee Agreement dated November 25, 2008 between OurPet’s and Nottingham-Spirk Design Associates, Inc.(13)                                                                       
|      |                                                                                                                                                                               
|10.43 | 2008 Stock Option Plan(14)                                                                                                                                                    
|      |                                                                                                                                                                               
|10.44 | First Amendment to the 2008 Stock Option Plan(15)                                                                                                                             
|      |                                                                                                                                                                               
|10.45 | Business Loan Agreement (Asset Based), dated September 17, 2009, between OurPet’s Company and FirstMerit Bank, N.A.(17)                                                       
|      |                                                                                                                                                                               
|10.46 | Amendment to Note, dated September 17, 2009, between OurPet’s Company and FirstMerit Bank, N.A.(17)                                                                           
|      |                                                                                                                                                                               
|10.47 | Promissory Note, dated September 17, 2009, executed by OurPet’s Company in favor of FirstMerit Bank, N.A.(17)                                                                 
|      |                                                                                                                                                                               
|10.48 | Form of Warrant(17)                                                                                                                                                           
|      |                                                                                                                                                                               
|10.49 | Asset Purchase Agreement among Cosmic Pet Products, Inc., Confusion, Inc., Leon Seidman and OurPet’s Company dated June 28, 2010(18)                                          
|      |                                                                                                                                                                               
|10.50 | Commercial Security Agreement, dated July 16, 2010, between OurPet’s Company and FirstMerit Bank, N.A. (19)                                                                   
|      |                                                                                                                                                                               
|10.51 | Promissory Note, dated July 16, 2010, executed by OurPet’s Company in favor of FirstMerit Bank, N.A. (19)                                                                     
|      |                                                                                                                                                                               
|10.52 | Amendment to Note executed by OurPet’s Company, and Steven and Evangelia Tsengas as Guarantors, on October 18, 2010(20)                                                       
|      |                                                                                                                                                                               
|10.53 | Form of Warrant(20)                                                                                                                                                           
|      |                                                                                                                                                                               
|10.54 | Promissory Note, dated November 30, 2010, executed by OurPet’s Company in favor of FirstMerit Bank, N.A. (21)                                                                 
|      |                                                                                                                                                                               
|10.55 | Commercial Security Agreement, dated November 30, 2010, between OurPet’s Company and FirstMerit Bank, N.A. (21)                                                               
|      |                                                                                                                                                                               
|10.56 | Promissory Note, dated January 19, 2011, executed by OurPet’s Company in favor of FirstMerit Bank, N.A. (22)                                                                  
|      |                                                                                                                                                                               
|10.57 | Commercial Security Agreement, dated January 19, 2011, between OurPet’s Company and FirstMerit Bank, N.A. (22)                                                                
|      |                                                                                                                                                                               
|10.58 | Amended and Restated Promissory Note dated June 28, 2011, executed by OurPets (23)                                                                                            
|      |                                                                                                                                                                               
|10.59 | Business Loan Agreement (Asset Based) dated June 28 2011, executed by OurPet’s and FirstMerit Bank, N.A. (23)                                                                 
|      |                                                                                                                                                                               
|10.60 | Loan Agreement dated May 19, 2011, executed by Ourpet’s and the Director of Development of the State of Ohio (24)                                                             
|      |                                                                                                                                                                               
|10.61 | Cognovity Promissory Note dated May 19, 2011, executed by Ourpet’s in favor of the Director of Development of the State of Ohio (24)                                          
|      |                                                                                                                                                                               
|10.62 | Security Agreement dated May 19, 2011, executed by OurPet’s and the Director of Development of the State of Ohio (24)                                                         
|      |                                                                                                                                                                               
|10.63 | Form of Warrant issued to Steven and Evangelia Tsengas (24)                                                                                                                   

19







|10.64 | Lease dated December 30, 2011, executed by OurPet’s and SENK Properties LLC (25)                   
|----- | ---------------------------------------------------------------------------------------------------
|      |                                                                                                    
|10.65 | Separation Severance Agreement dated February 13, 2012, between OurPet’s and John M. Silvestri (26)
|      |                                                                                                    
|10.66 | Amendment to Loan Agreement dated March 26, 2012 between Ourpets and FirstMerit Bank.              
|      |                                                                                                    
|11    | Statement of computation of Net Income Per Share.                                                  
|      |                                                                                                    
|14    | OurPet’s Code of Ethics.(3)                                                                        



|21   | Subsidiaries of the Registrant.(1)                                                                                                                                                                         
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                            
|31.1 | Certification of the Chief Executive Officer pursuant to 17 CFR Section 240.13a-14(a) of the Sarbanes-Oxley Act of 2002.                                                                                   
|     |                                                                                                                                                                                                            
|31.2 | Certification of the Principal Financial Officer pursuant to 17 CFR Section 240.13a-14(a) 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.                                                 
|     |                                                                                                                                                                                                            
|101  | In Accordance with the Temporary Hardship Exemption provided
by Rule 201 of Regulation S-T, the date by which the interactive data file is required to be submitted has been extended by six
business days.

| | (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 on Form 10-KSB filed on March 26, 2004.
| | --- | ----------------------------------------------------------------------------------------------------------------



| | (4) | Incorporated by reference to the exhibits to the Company’s Annual Report on 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.
| | --- | ----------------------------------------------------------------------------------------------



| | (10) | Incorporated by reference to the exhibits to the Company’s Annual Report of Form 10-KSB filed on March 28, 2007.
| | ---- | ----------------------------------------------------------------------------------------------------------------



| | (11) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on February 12, 2008.
| | ---- | -----------------------------------------------------------------------------------------------



| | (12) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on June 25, 2008.
| | ---- | -------------------------------------------------------------------------------------------



| | (13) | Incorporated by reference to the Exhibits to the Company’s Form 8-K filed on December 2, 2008.
| | ---- | ----------------------------------------------------------------------------------------------



| | (14) | Incorporated by reference to Annex A to the Company’s Proxy Statement filed on May 7, 2008.
| | ---- | -------------------------------------------------------------------------------------------



| | (15) | Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K filed on March 31, 2009
| | ---- | -------------------------------------------------------------------------------------------------------------



| | (16) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on January 27, 2010
| | ---- | ---------------------------------------------------------------------------------------------



| | (17) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on September 23, 2009
| | ---- | -----------------------------------------------------------------------------------------------



| | (18) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on July 1, 2010
| | ---- | -----------------------------------------------------------------------------------------



| | (19) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on July 22, 2010
| | ---- | ------------------------------------------------------------------------------------------



| | (20) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on October 22, 2010
| | ---- | ---------------------------------------------------------------------------------------------



| | (21) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on December 2, 2010
| | ---- | ---------------------------------------------------------------------------------------------



| | (22) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on January 24, 2011
| | ---- | ---------------------------------------------------------------------------------------------



| | (23) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on July 5, 2011
| | ---- | -----------------------------------------------------------------------------------------



| | (24) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on October 6, 2011
| | ---- | --------------------------------------------------------------------------------------------



| | (25) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on January 5, 2012
| | ---- | --------------------------------------------------------------------------------------------



| | (26) | Incorporated by reference to the exhibits to the Company’s Form 8-K filed on February 17, 2012
| | ---- | ----------------------------------------------------------------------------------------------



All other Exhibits filed herewith.

20







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 30, 2012



| | OURPET’S COMPANY                                       
| | -------------------------------------------------------
| |                                                        
| | By:                                                    
| | 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/    STEVEN TSENGAS               | Chairman, President, Chief Executive Officer and Director (principal executive officer) | March 30, 2012
|Steven Tsengas                      |                                                                                        
|                                    |                                                                                         |               
|/S/    SCOTT R. MENDES              | Chief Financial Officer (principal accounting officer)                                  | March 30, 2012
|Scott R. Mendes                     |                                                                                        
|                                    |                                                                                         |               
|/S/    JOSEPH T. AVENI              | Director                                                                                | March 30, 2012
|Joseph T. Aveni                     |                                                                                         |               
|                                    |                                                                                         |               
|/S/    WILLIAM M. FRASER            | Director                                                                                | March 30, 2012
|William M. Fraser                   |                                                                                         |               
|                                    |                                                                                         |               
|/S/    JAMES D. IRELAND
        III | Director                                                                                | March 30, 2012
|James D. Ireland III                |                                                                                         |               
|                                    |                                                                                         |               
|/S/    JOHN SPIRK                   | Director                                                                                | March 30, 2012
|John Spirk                          |                                                                                         |               



21













OURPET’S COMPANY AND SUBSIDIARIES



FAIRPORT HARBOR, OHIO





















FINANCIAL STATEMENTS



DECEMBER 31, 2011

and

DECEMBER 31, 2010







22









OURPET’S COMPANY AND SUBSIDIARIES

FINANCIAL STATEMENTS





|                                                                                 | Page   
|-------------------------------------------------------------------------------- | -------
|                                                                                 | Number 
|                                                                                 |        
|Report of Independent Registered Public Accounting Firm                          | 24     
|                                                                                 |        
|Consolidated Balance Sheets as of December 31, 2011 and December 31, 2010        | 25 – 26
|                                                                                 |        
|Consolidated Statements of Operations for the years ended December 31, 2011 and  |        
|December 31, 2010                                                                | 27     
|                                                                                 |        
|Consolidated Statements of Stockholders’ Equity for the years ended December 31, |        
|2011 and December 31, 2010                                                       | 28     
|                                                                                 |        
|Consolidated Statements of Cash Flows for the years ended December 31, 2011 and  |        
|December 31, 2010                                                                | 29     
|                                                                                 |        
|Notes to Consolidated Financial Statements                                       | 30 - 47







23









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, 2011 and December 31, 2010,
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 audit.



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.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of OurPet’s Company
and Subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations, stockholders equity and cash
flows for each of the two years in the period ended December 31, 2011 in conformity with accounting principles generally accepted
in the United States of America.







/s/
Neece, Malec, Seifert & Vitaz, Inc.

Certified Public Accountants





Mentor, Ohio

March 30, 2012







24









|OURPET'S COMPANY AND SUBSIDIARIES                  
|---------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|ASSETS                                             
|                                                   
|CURRENT ASSETS                                     
|Cash and cash equivalents                          
|Accounts receivable - trade, less allowance for    
|doubtful accounts of $39,866 and $ 47,475          
|Inventories net of reserve                         
|Prepaid expenses                                   
|Deferred Tax Asset less Valuation Allowance        
|of $ -0- and $-0-                                  
|Total current assets                               
|                                                   
|PROPERTY AND EQUIPMENT                             
|Computers and office equipment                     
|Warehouse equipment                                
|Leasehold improvements                             
|Tooling                                            
|Construction in progress                           
|Total                                              
|Less accumulated depreciation                      
|Net property and equipment                         
|                                                   
|OTHER ASSETS                                       
|Patents, less amortization of $243,657 and $205,877
|Intangible Assets                                  
|Goodwill                                           
|Deposits and other assets                          
|Total other assets                                 
|                                                   
|Total assets                                       





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





25











|OURPET'S COMPANY AND SUBSIDIARIES                                       
|------------------------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS (CONTINUED)                                 
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|LIABILITIES                                                             
|                                                                        
|CURRENT LIABILITIES                                                     
|Notes payable                                                           
|Lines of Credit                                                         
|Current maturities of long-term debt                                    
|Accounts payable - trade                                                
|Accrued expenses                                                        
|Total current liabilities                                               
|                                                                        
|LONG-TERM LIABILITIES                                                   
|Long-term debt - less current portion above                             
|Revolving Line of Credit                                                
|Deferred Income Taxes                                                   
|Total long term liabilities                                             
|                                                                        
|Total liabilities                                                       
|                                                                        
|STOCKHOLDERS' EQUITY                                                    
|                                                                        
|COMMON STOCK,                                                           
|no par value; 50,000,000 shares authorized, 15,809,023 and 15,726,196   
|shares issued and outstanding at December 31, 2011 and December 31, 2010
|respectively                                                            
|                                                                        
|CONVERTIBLE PREFERRED STOCK,                                            
|no par value; convertible into Common Stock at the rate of 10 common    
|shares for each preferred share; 66,000 shares authorized,              
|66,000 shares issued and outstanding                                    
|                                                                        
|Series 2009 no par value; convertible into Common Stock at the rate of  
|10 common shares for each preferred share; 175,000 shares authorized,   
|123,616 shares issued and outstanding at December 31, 2011              
|                                                                        
|PAID-IN CAPITAL                                                         
|                                                                        
|ACCUMULATED DEFICIT                                                     
|Total stockholders' equity                                              
|                                                                        
|Total liabilities and stockholders' equity                              



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



26















|OURPETS COMPANY AND SUBSIDIARIES      | 
|------------------------------------- | 
|CONSOLIDATED STATEMENTS OF OPERATIONS
|                                      | 



|                                               |  | For the Three Months Ended Dec. 31, |            |   | For the Year Ended Dec. 31, |  
|---------------------------------------------- |  | ----------------------------------- | ---------- | - | --------------------------- | -
|                                               |  | 2011                                |            |   | 2010                        |  
|                                               |  |                                     |            |   |                             |  
|Net revenue                                    |  | $                                   | 5,176,292  |   |                             | $
|                                               |  |                                     |            |   |                             |  
|Cost of goods sold                             |  |                                     | 4,133,251  |   |                             |  
|                                               |  |                                     |            |   |                             |  
|Gross profit on sales                          |  |                                     | 1,043,041  |   |                             |  
|                                               |  |                                     |            |   |                             |  
|Selling, general and administrative expenses   |  |                                     | 1,225,000  |   |                             |  
|                                               |  |                                     |            |   |                             |  
|Gain on Asset Purchase                         |  |                                     | -          |   |                             |  
|                                               |  |                                     |            |   |                             |  
|Income (loss) from operations                  |  |                                     | (181,959   | ) |                             |  
|                                               |  |                                     |            |   |                             |  
|Other (income) and expense                     |  |                                     | 29         |   |                             |  
|Interest expense                               |  |                                     | 41,394     |   |                             |  
|                                               |  |                                     |            |   |                             |  
|Income before income taxes                     |  |                                     | (223,382   | ) |                             |  
|                                               |  |                                     |            |   |                             |  
|Income tax benefit (expense)                   |  |                                     | 70,726     |   |                             |  
|                                               |  |                                     |            |   |                             |  
|Net income                                     |  | $                                   | (152,656   | ) |                             | $
|                                               |  |                                     |            |   |                             |  
|                                               |  |                                     |            |   |                             |  
|Basic and Diluted Earnings Per Common Share    |  |                                     |            |   |                             |  
|After Dividend Requirements For Preferred      |  |                                     |            |   |                             |  
|Stock:                                         |  |                                     |            |   |                             |  
|Net Income                                     |  | $                                   | (0.01      | ) |                             | $
|                                               |  |                                     |            |   |                             |  
|                                               |  |                                     |            |   |                             |  
|Weighted average number of common and          |  |                                     |            |   |                             |  
|equivalent shares outstanding used to          |  |                                     | 15,785,616 |   |                             |  
|calculate basic and diluted earnings per share |  |                                     |            |   |                             |  



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





27









|OURPET'S COMPANY AND SUBSIDIARIES                          
|-----------------------------------------------------------
|                                                           
|CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY             
|                                                           
|FOR THE YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010
|                                                           
|                                                           



|                                       |  | Preferred
    Stock |        |  | Series
    2009 Preferred Stock |   |         | Common
    Stock |  |  |         |  |  |           |         |  | Total  | 
|-------------------------------------- |  | ------------------- | ------ |  | ------------------------------- | - | ------- | ---------------- |  |  | ------- |  |  | --------- | ------- |  | ------ | 
|                                       |  | Number of           |        |  |                                 |   |         | Number of        |  |  |         |  |  | Number of |         |  |        | 
|                                       |  | Shares              |        |  | Amount                          |   |         | Shares           |  |  | Amount  |  |  | Shares    |         |  | Amount | 
|                                       |  |                     |        |  |                                 |   |         |                  |  |  |         |  |  |           |         |  |        | 
|                                       |  |                     |        |  |                                 |   |         |                  |  |  |         |  |  |           |         |  |        | 
|Balance at January 1, 2010             |  |                     | 66,000 |  |                                 | $ | 602,679 |                  |  |  | -       |  |  | $         | -       |  |        | 
|Common Stock issued upon exercise of   |  |                     | -      |  |                                 |   | -       |                  |  |  |         |  |  |           |         |  |        | 
|stock options                          |  |                     |        |  |                                 |   |         |                  |  |  |         |  |  |           |         |  |        | 
|Common Stock issued for asset purchase |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|Common Stock issued in payment of      |  |                     |        |  |                                 |   |         |                  |  |  |         |  |  |           |         |  |        | 
|Preferred Stock dividend               |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|Preferred Stock issued                 |  |                     | -      |  |                                 |   | -       |                  |  |  | 123,616 |  |  | $         | 865,312 |  |        | 
|Cash Dividend paid on Preferred Stock  |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|Net income                             |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|Stock-Based compensation expense       |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|                                       |  |                     |        |  |                                 |   |         |                  |  |  |         |  |  |           |         |  |        | 
|Balance at December 31, 2010           |  |                     | 66,000 |  |                                 | $ | 602,679 |                  |  |  | 123,616 |  |  | $         | 865,312 |  |        | 
|                                       |  |                     |        |  |                                 |   |         |                  |  |  |         |  |  |           |         |  |        | 
|Common Stock issued upon exercise of   |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|stock options                          |  |                     |        |  |                                 |   |         |                  |  |  |         |  |  |           |         |  |        | 
|Common Stock issued in payment of      |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|Preferred Stock dividend               |  |                     |        |  |                                 |   |         |                  |  |  |         |  |  |           |         |  |        | 
|Cash Dividend paid on Preferred Stock  |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|Net income                             |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|Stock-Based compensation expense       |  |                     | -      |  |                                 |   | -       |                  |  |  | -       |  |  |           | -       |  |        | 
|                                       |  |                     |        |  |                                 |   |         |                  |  |  |         |  |  |           |         |  |        | 
|Balance at December 31, 2011           |  |                     | 66,000 |  |                                 | $ | 602,679 |                  |  |  | 123,616 |  |  | $         | 865,312 |  |        | 



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







28











|OURPET'S COMPANY AND SUBSIDIARIES    
|-------------------------------------
|                                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     



|                                                           |  | For the Years Ended |          
|---------------------------------------------------------- |  | ------------------- | ---------
|                                                           |  | December 31,        |          
|                                                           |  | 2011                |          
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |                     |          
|Net income                                                 |  | $                   | 120,674  
|Adjustments to reconcile net income to net cash            |  |                     |          
|provided by (used in) operating activities:                |  |                     |          
|Depreciation expense                                       |  |                     | 534,864  
|Amortization expense                                       |  |                     | 37,780   
|Stock option expense                                       |  |                     | 24,000   
|Warrant expense                                            |  |                     | 24,000   
|Gain on asset purchase                                     |  |                     | -        
|(Increase) decrease in assets:                             |  |                     |          
|Accounts receivable - trade                                |  |                     | 287,843  
|Inventories                                                |  |                     | (535,189 
|Prepaid expenses                                           |  |                     | (20,185  
|Deferred Tax Asset less Valuation Allowance                |  |                     | (100,163 
|Patent cost additions (net)                                |  |                     | (27,964  
|Domain names and other assets                              |  |                     | 150,895  
|Increase (decrease) in liabilities:                        |  |                     |          
|Accounts payable - trade                                   |  |                     | 570,392  
|Accrued expenses                                           |  |                     | (219,601 
|Deferred tax liabilities                                   |  |                     | 199,577  
|Net cash provided by (used in) operating activities        |  |                     | 1,046,923
|                                                           |  |                     |          
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |                     |          
|Acquisition of property and equipment                      |  |                     | (538,853 
|Acquisition of business                                    |  |                     | -        
|Net cash used in investing activities                      |  |                     | (538,853 
|                                                           |  |                     |          
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |                     |          
|Principal payments on long-term debt                       |  |                     | (953,135 
|Gross borrowing on bank line of credit                     |  |                     | 557,964  
|Issuances of long-term debt                                |  |                     | 225,000  
|Issuances of Common Stock                                  |  |                     | 325      
|Issuances of Preferred Stock                               |  |                     | -        
|Dividends paid on Preferred Stock                          |  |                     | (51,919  
|Net cash used in (provided by) financing activities        |  |                     | (221,765 
|Net increase (decrease) in cash                            |  |                     | 286,305  
|                                                           |  |                     |          
|CASH AT BEGINNING OF PERIOD                                |  |                     | 78,673   
|CASH AT END OF PERIOD                                      |  | $                   | 364,978  
|                                                           |  |                     |          
|                                                           |  |                     |          
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION           |  |                     |          
|Interest paid                                              |  | $                   | 228,693  
|Income taxes paid                                          |  | $                   | 27,328   
|                                                           |  |                     |          
|SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS           |  |                     |          
|Non cash exercise of stock option                          |  | $                   | 12,445   
|Common Stock issued in payment of Preferred Stock Dividend |  | $                   | 39,600   
|Common Stock issued in payment for acquisition of business |  | $                   | -        



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





29









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.



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, 2011 and 2010 in the amount of $39,866 and $47,475, respectively. Management reviews accounts receivable on a regular
basis, based on contracted terms and how recently payments have been received, to determine if any such amounts will potentially
be uncollected. After all attempts to collect a receivable have failed, the receivable is written off.



Inventory - Inventories
are carried at the lower of cost, first-in, first-out method or market. Inventories at December 31, 2011 and December 31, 2010
consist of:



|                                          |  | 2011 |           |   | 2010 |  
|----------------------------------------- |  | ---- | --------- | - | ---- | -
|Finished goods                            |  | $    | 4,462,724 |   |      | $
|Components, packaging and work in process |  |      | 1,799,091 |   |      |  
|Inventory reserve                         |  |      | (150,497  | ) |      |  
|Total                                     |  | $    | 6,111,318 |   |      | $



All inventories are pledged as
collateral for bank loans.





30









OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)



During the year 2011, the Company recorded inventory
reserve charges of approximately $588,000. Approximately $488,000 of these charges were reserved as a result of a change in our
business model. During September and October 2011, management reviewed its business model and decided to refocus sales and marketing
resources to the Company’s most marketable and profitable products. The remaining $100,000 was established as a reserve for
slow moving and excess inventory. Changes to the inventory reserve during 2011 are shown below:



|                           |  |   | 2011     |   |  |   | 2010 | 
|-------------------------- |  | - | -------- | - |  | - | ---- | 
|Beginning balance          |  | $ | 0        |   |  | $ | 0    | 
|Increases to Reserve       |  |   | 588,226  |   |  |   | 0    | 
|Write offs against reserve |  |   | (437,729 | ) |  |   | 0    | 
|Ending balance             |  | $ | 150,497  |   |  | $ | 0    | 



For the quarter ending September 30, 2011, three major
charges against inventory were identified due to management’s change in its business model.



| | 1. | $122,000, or 27%, relates to the overhaul of the Cosmic Pet product line which was implemented at the end of July 2011;
| | -- | -----------------------------------------------------------------------------------------------------------------------

| | 2. | $97,000, or 22%, relates to a prior generation of SmartScoop® product that management determined during its review to no
longer market due to technical obsolescence; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | $231,000, or 51%, relates to decisions made by the sales/marketing department in the third quarter 2011 to cease marketing
the products related to this inventory.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



During our fourth quarter 2011 inventory analysis,
approximately $38,000 of additional inventory was identified and has been reserved. Also during that review, approximately
$100,000 of inventory was identified as slow moving and excess inventory, defined as exceeding two years of historical usage and
has accordingly been reserved.



The Company will continue its policy of regularly
reviewing inventory quantities on hand based on related service levels and functionality. Carrying cost will be reduced to net
realizable value for inventories in which their cost exceeds their utility due to changes in marketing and sales strategies, obsolescence,
changes in price levels or other causes. Furthermore, if future demand or market conditions for the Company’s products are
less favorable than forecasted or if unforeseen technological changes negatively impact the utility of certain products or component
inventory the Company may be required to record additional inventory reserves, which would negatively affect its results of operations
in the period when the inventory reserve adjustments are recorded.





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.





31







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 and units
sold for certain tooling methods 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 10 years 
|Warehouse equipment            | 5 to 7 years  





All property and equipment is
pledged as collateral for bank loans. Total amounts under capital lease were $130,000 for the year ended December 31, 2011 and
$130,000 for the year ended December 31, 2010. Total depreciation for the years ended December 31, 2011 and December 31, 2010 was
$534,864 and $451,671, respectively.



Intangible Assets –
The Company adopted the provisions of ASC Topic 350 “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 $27,964 in the year ended December 31, 2011 and $44,736 in the
year ended December 31, 2010 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.





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®, PetZone®, SmartScoop®,
EcoPure Naturals®, Play-N-Squeak®, Durapet®, Flappy®Go! Cat! Go®!, Eat® , Smarter Toys®, Clipnosis®
and Cosmic Pet® brand names. Net revenue is comprised of gross sales less discounts given to distributors and returns and allowances.



For the year ended December 31,
2011, 18.6% of the Company’s revenue was derived from one major customer. Revenue generated from this customer amounted to
$3,660,513.



For the year ended December 31,
2010, 31.0% of the Company’s revenue was derived from two major customers. Revenue generated from each of these customers
amounted to $2,713,663 and $2,574,402, which represents 15.9% and 15.1% of total revenue, respectively.



32







OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)



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, 2011 and December 31, 2010 was $237,094 and $183,252, respectively.



Advertising Costs–
Advertising costs are charged to operations when the advertising first takes place. Advertising expense for the years ended December
31, 2011 and December 31, 2010 was $28,249 and $64,310, respectively.



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



Stock Options –Accounting
Standardsrequires 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 is applying 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 pro-forma disclosures. The amount of compensation expense recognized in 2011 and 2010 as a result of stock
options was $24,000 and $24,000, respectively.



Net Income Per Common Share– Basic and diluted net income per share of Common Stock 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, 2011, common
shares that are or could be potentially dilutive include 1,695,208 stock options at exercise prices from $0.200 to $1.550 a share,
4,982,678 warrants to purchase Common Stock at exercise prices from $0.280 to $1.420 a share, 660,000 shares underlying Preferred
Stock at a conversion rate of $1.000 per share and 1,236,160 shares underlying a second series of Preferred Stock (2009) at a conversion
rate of $.70/share.



As of December 31, 2010, common
shares that are or could be potentially dilutive include 1,655,516 stock options at exercise prices from $0.200 to $1.550 a share,
4,961,876 warrants to purchase Common Stock at exercise prices from $0.281 to $1.426 a share, 660,000 shares underlying Preferred
Stock at a conversion rate of $1.000 per share and 1,236,160 shares underlying a second series of Preferred Stock (2009) at a conversion
rate of $.70/share.





33









OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)





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, 2011. The respective carrying value of certain balance sheet financial instruments approximated
their fair values and are all classified within level one of the fair value hierarchy. 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.



In June 2006, the Financial
Accounting Standards Board (“FASB”) issued FASB ASC 740-10 (prior authoritative literature: Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, (“FIN 48”) an interpretation of SFAS No. 109). FASB ASC 740-10
clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet
before being recognized in the financial statements. FASB ASC 740-10 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods and disclosure.



The Company adopted FASB ASC
740-10 on January 1, 2007. Under FASB ASC 740-10, tax benefits are recognized only for tax positions that are more likely than
not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that
is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed
or to be claimed in tax returns that do not meet these measurement standards. The Company’s adoption of FASB ASC 740-10
did not have a material effect on the Company’s financial statements as the Company believes they have no uncertain tax
positions.



As permitted by FASB ASC 740-10,
the Company also adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized
tax benefits in its income tax provision. Previously, the Company’s policy was to classify interest and penalties as an operating
expense in arriving at pre-tax income. At December 31, 2011 and 2010, the Company does not have accrued interest and penalties
related to any unrecognized tax benefits. The years subject to potential audit vary depending on the tax jurisdiction. Generally,
the Company’s statutes of limitation for tax liabilities are open for tax years ended December 31, 2008 and forward. The
Company’s major taxing jurisdiction is the United States. Within the United States, only Ohio and Maryland could give rise
to significant tax liabilities.



34









OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)





Subsequent Events -The
Company has performed an evaluation of subsequent events.

On January 23, 2012, we
received a Notice of Impending Legal Action by Law Enforcement from the Office of the District Attorney for the County of
Solano, California in connection with our waste management PIK-Up Bags. The notice cites a violation of California Public
Resources Code 42357(b) which prohibits any person from selling any plastic bag in the State of California that claims to be
“biodegradable, ”degradable,” or “decomposable,” if it does not break down, fragment,
biodegrade or decompose in a landfill or other environment. While our “PIK-up bags” packaging stated they were
biodegradable “except as defined by the State of California,” we have been required to cease selling all such
product from the State of California. We may also be subject to financial penalties as a result of this violation; however,
we are not able to quantify what the penalties may be at this time. We have promptly responded and cooperated with the State
of California, and do not have any reason to believe that this action will result in any judgments or fines against
OurPet’s that would have a material adverse effect or impact in its financial position, liquidity or results of
operation.





On February 13, 2012, the Board
of Directors, by unanimous written consent, approved a second amendment to the 2008 Stock Option Plan whereby the maximum number
of Shares reserved and available for issuance under the Plan was increased by 750,000 to 1,750,000 from 1,000,000 shares. The Company
will submit the Option Plan to the shareholders of the company for approval at the 2012 Annual Meeting of Shareholders.



Recently Issued Accounting
Pronouncements –In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2011-05 (ASU 2011-05), "Presentation of Comprehensive Income," which requires an entity to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a single continuous statement
of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components
of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for periods beginning after December 15,
2011. The Company does not believe that the adoption of ASU 2011-05 will have a material effect on its operating results or financial
position.



In September 2011, the FASB issued
Accounting Standards Update No. 2011-08 (ASU 2011-08), "Testing Goodwill for Impairment." ASU 2011-08 updates guidance
on the periodic testing of goodwill for impairment. This updated guidance will allow companies to assess qualitative factors to
determine if it is more likely than not that goodwill will be impaired and whether it is necessary to perform the two-step goodwill
impairment test required under current accounting standards. This new guidance is effective for the Company for fiscal years beginning
after December 15, 2011, with early adoption permitted. The Company does not believe that the adoption of ASU 2011-08 will have
a material effect on its operating results or financial position.



In December 2011, the FASB issued
Accounting Standards Update No. 2011-11 (ASU 2011-11), “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and
Liabilities.” ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are
required to provide both net information and gross information for these assets and liabilities in order to enhance comparability
between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their
financial statements on the basis of IFRS. This new guidance is to be applied retrospectively. The Company does not believe that
the adoption of ASU 2011-11 will have a material effect on its operating results or financial position.



35











OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)



NOTES PAYABLE AND LONG-TERM DEBT



|                                                                                                                                                                                                                                                                                                                                                                                                                      |  | December 31, |          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------
|                                                                                                                                                                                                                                                                                                                                                                                                                      |  | 2011         |          
|Revolving note payable - Bank, under line of credit facility of up to $5,000,000 at December 31, 2011 with interest at prime plus .50% (3.75% at December 31, 2011) and up to $2,500,000 at December 31, 2010 with interest at prime plus .50% (3.75% at December 31, 2010). The note is secured by accounts receivable, equipment, inventory, trademarks, patents and the personal guarantee of certain stockholders |  | $            | 3,085,964
|                                                                                                                                                                                                                                                                                                                                                                                                                      |  |              |          
|Note payable – Bank, additional $300,000 line of credit facility due and paid on May 1, 2011 with interest at Prime plus .50% (3.75% at December 31, 2010).  The note was secured by accounts receivable, equipment, inventory, trademarks, patents and the personal guarantee of certain stockholders                                                                                                                |  |              | 0        
|                                                                                                                                                                                                                                                                                                                                                                                                                      |  |              |          
|Note payable – Bank, loan of $800,000, due in 36 monthly principal and interest installments of $23,859 at an interest rate of 4.61% beginning September 17, 2009.  This note is secured by all inventory, chattel paper, accounts, equipment, general intangibles and the personal guarantee of certain directors                                                                                                    |  |              | 208,895  
|                                                                                                                                                                                                                                                                                                                                                                                                                      |  |              |          
|Note payable – Bank, loan of $500,000, due in 36 monthly principal and interest installments of $14,817 at an interest rate of 4.18% beginning July 16, 2010.  This note is secured by all inventory, chattel paper, accounts, equipment, general intangibles and the personal guarantee of certain directors                                                                                                         |  |              | 271,802  
|                                                                                                                                                                                                                                                                                                                                                                                                                      |  |              |          
|Note payable – Ohio 166 Program due in 60 monthly principal and interest installments of $4,043 beginning November 1, 2011 through October 1, 2016 at an interest rate of 3.00% plus an annual servicing fee of .25%.  This note is secured by certain tooling                                                                                                                                                        |  |              | 218,048  









36











OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)







NOTES PAYABLE AND LONG-TERM DEBT (Continued)





|                                                                                                                                                                                                                                             |  | December 31, |          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------
|                                                                                                                                                                                                                                             |  | 2011         |          
|Note payable – former director and shareholder, due on December 1, 2012.  Interest at prime plus 3% (6.25% at December 31, 2011 and 6.25% at December 31, 2010) payable quarterly. This note is subordinated to the bank loans               |  |              | 75,000   
|                                                                                                                                                                                                                                             |  |              |          
|Note payable – shareholder and investor, due on November 30, 2012. Interest is payable quarterly at 10%. This note is subordinated to the bank loans                                                                                         |  |              | 25,000   
|                                                                                                                                                                                                                                             |  |              |          
|Notes payable – directors, shareholders, and investors due beginning in 2010 through 2012. Interest calculated quarterly at prime plus 2% (5.25% at December 31, 2011 and December 31, 2010). These notes are subordinated to the bank loans |  |              | 300,000  
|                                                                                                                                                                                                                                             |  |              |          
|Installment notes payable – due in monthly payments decreasing from $3,554 to $560 including interest through march 27, 2012.  Interest rates range from 7% to 7.5%                                                                          |  |              | 1,660    
|                                                                                                                                                                                                                                             |  |              |          
|Capitalized Lease – due in monthly payments of $1,527 including taxes and interest of 8.18% through October 5, 2012.  Lease is secured by equipment                                                                                          |  |              | 15,280   
|                                                                                                                                                                                                                                             |  |              |          
|Capitalized Lease – due in monthly payments of $2,424 including interest of 5.29% through September 5, 2011.  Lease was secured by equipment                                                                                                 |  |              | 0        
|                                                                                                                                                                                                                                             |  |              |          
|                                                                                                                                                                                                                                             |  |              | 4,201,649
|Less current portion of long-term debt                                                                                                                                                                                                       |  |              | 837,923  
|                                                                                                                                                                                                                                             |  | $            | 3,363,726







37











OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)





NOTES PAYABLE AND LONG-TERM DEBT (Continued)



Future maturities of notes payable
and long-term debt are as follows:



|Year ending December 31, |  |   | Amount    | 
|------------------------ |  | - | --------- | 
|2012                     |  | $ | 837,923   | 
|2013                     |  |   | 3,232,092 | 
|2014                     |  |   | 45,188    | 
|2015                     |  |   | 46,563    | 
|2016                     |  |   | 39,883    | 
|                         |  | $ | 4,201,649 | 



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 other than dividends
on our Preferred Stock subject to meeting the debt service coverage ratio; (iii) exceed $500,000 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 $4,500,000.



At December 31, 2011,
the Company was not in compliance with the bank’s debt service coverage ratio as our ratio calculated at .55 versus
the required 1.15. Factors contributing to the low debt service coverage ratio were the $588,000 inventory write down,
the addition of approximately $345,000 in unfunded capital expenditures to the covenant calculation, lower than anticipated
net income and repayment of $473,500 of subordinated indebtedness. We were also in violation of the bank’s $500,000
maximum capital expenditure covenant as our capital expenditures were approximately $539,000. We received a waiver from our
bank for both covenant violations. Our bank has also amended the debt service coverage ratio covenant for reporting periods ending
March 31, 2012, June 30, 2012 and September 30, 2012 pursuant to an Amendment to Loan Agreement dated March 26, 2012 between
OurPet’s and the Bank (the ‘Loan Amendment”). A copy of the “Loan Amendment” is attached hereto
as Exhibit 10.66.



In July and August of 2000, the
Company borrowed a total of $275,000 from an officer, directors, and stockholders for working capital purposes at an annual interest
rate of 10%. A note for $25,000 is due on November 30, 2012 with interest payable quarterly. Three of the notes totaling $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 December 31, 2012) 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. These warrants were exercised in 2007.



In February, June, July, August,
October and November of 2008, the Company entered into contribution agreements with ten contributors pursuant to which each contributor
loaned certain funds to the Company totaling $1,367,500. These funds were used for expenses related to litigation on certain of
our SmartScoopTM products. In consideration for these loans the Company (a) executed promissory notes for $600,000 due and
paid/retired in 2010, $467,500 due and paid/retired in 2011, and $300,000 due in 2012 all with interest calculated quarterly at
prime plus 2%, (b) issued warrants for the purchase of 833,750 shares of the Company’s Common Stock at option prices from
$0.370 to $0.825 per share and (c) entered into piggyback registration agreements with the contributors. Subsequent to their issuance
the warrants were adjusted to 846,653 warrants exercisable at $0.365 to $0.811 per share in accordance with the warrant anti-dilution
provisions.



38









OURPET’S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)





|INTANGIBLE ASSETS               |  | As of December 31, 2011 |         |  | As of December 31, 2010 |  
|------------------------------- |  | ----------------------- | ------- |  | ----------------------- | -
|                                |  |                         | Cost    |  |                         |  
|Amortized intangible assets:    |  |                         |         |  |                         |  
|Patents and trademarks          |  | $                       | 523,282 |  |                         | $
|                                |  |                         |         |  |                         |  
|Unamortized intangible assets:  |  |                         |         |  |                         |  
|Domain names                    |  | $                       | 11,000  |  |                         | $
|Cosmic Pet assets               |  | $                       | 461,000 |  |                         | $
|Goodwill-PetZone                |  | $                       | 67,511  |  |                         | $
|                                |  |                         |         |  |                         |  
|Amortization expense for year   |  |                         |         |  |                         |  
|ended 12/31                     |  | $                       | 37,780  |  |                         |  
|                                |  |                         |         |  |                         |  
|Estimated amortization expense: |  |                         |         |  |                         |  
|For year ending 12/31/12        |  | $                       | 38,373  |  |                         |  
|For year ending 12/31/13        |  | $                       | 38,373  |  |                         |  
|For year ending 12/31/14        |  | $                       | 38,373  |  |                         |  
|For year ending 12/31/15        |  | $                       | 38,373  |  |                         |  
|For year ending 12/31/16        |  | $                       | 38,373  |  |                         |  





RELATED PARTY TRANSACTIONS



The
Company leases warehouse and office facilities located in Fairport Harbor, Ohio from a related entity, SENK Properties at a current
monthly rental of $28,417 plus real estate taxes. The Company entered into a new ten year lease with Senk Properties which was
effective upon completion of the 36,000 square foot warehouse expansion on June 1, 2007. The monthly rental is $26,667 for the
first two years, $28,417 for the next three years, $30,167 for the next two years, $32,000 for the next two years, and $33,750
for the last year, all plus real estate taxes. The Company has the option to extend the lease for an additional ten years at a
rental to be mutually agreed upon.



On
December 30, 2011 the Company entered into a second lease with SENK Properties for a 26,000 square foot production, warehouse
and office facility in Mentor, Ohio with payments due on the 1st day of each month starting on January 1, 2012. This
facility is intended to replace the Hagerstown facility which houses Cosmic Pet operations after that lease expires in July 2012.
During the six months of 2012 we will be transitioning all Hagerstown operations to the Mentor facility. The current monthly rental
rate is $8,542 for the first two years, then increases to $9,083 for the next two years, $9,732 for the next two years, $10,056
for the next year, $10,597 for the next two years and $10,813 for the last year, all plus real estate taxes. The Company has the
option to extend the lease for an additional ten years at a rent amount to be mutually agreed upon.



Total lease expense for the year
ended December 31, 2011 and the year ended December 31, 2010 was $550,203 and $447,799, respectively. Related party lease expense
for the same periods was $380,069 in 2011 and $374,206 in 2010.





39









OURPET’S
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)





On January 15, 2007 and November
25, 2008, the Company entered into agreements with Nottingham-Spirk Design Associates, Inc. (“NSDA”), one of the principals
of NSDA is John Spirk, a member of the Company’s Board of Directors and a shareholder.  Also, NSDA indirectly owns shares
of the Company through its ownership in Pet Zone Products, Ltd., a significant shareholder of the Company.  The agreements
address the invoicing and payment of NSDA’s fees and expenses related to the development of certain products on behalf of
the Company.



Through December 31, 2011, the
Company has been invoiced $781,061 by NSDA of which $415,496 has been paid in cash, $50,000 paid with 50,454 shares of the Company’s
Common Stock and the remaining balance of $315,565 deferred. The balance of the deferred payments is payable as a fee based upon
sales of certain products beginning January 1, 2009.  As of December 31, 2011, the fee accrued to date was $21,361.



CONCENTRATION OF CREDIT RISK



Bank balances as of December 31,
2011, consist of $465,134 in depository institutions. FDIC insurance is limited to $250,000 at each institution and covered $250,070
of the cash balance at depository institutions. The uninsured balance as of December 31, 2011 was $215,064.



At December 31, 2011, 31% of
the Company’s accounts receivable was due from four major customers. Amounts due from each of these customers were $294,641,
$184,040, $145,878, and $138,234, which represents 12.0%, 7.5%, 5.9%, and 5.6% of total accounts receivable, respectively.



At December 31, 2010, 27.9% of
the Company’s accounts receivable was due from four major customers. Amounts due from each of these customers were $249,905,
$217,853, $150,505, and $121,892, which represents 9.4%, 8.2%, 5.7%, and 4.6% of total accounts receivable, respectively.



CAPITAL
STOCK



From July through November 1999,
the Company sold through 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 stock at $10 per share or convert each share of Preferred Stock into ten shares of Common Stock, at the option
of the shareholder, at such time as the common stock is 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 Stock are entitled to a 10% dividend paid annually in Common
Stock 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.





40









OURPET’S
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)



On January 28, 2010 and February 1, 2010,
the Company sold an aggregate of 123,616 shares of its Series 2009 Preferred Stock in a private placement to a total of 15 accredited
investors. All shares in the private placement were sold at a price of $7.00 a share for a total of $865,312. Payment for the shares
comprised of $595,000 in cash and $270,312 in converted debt (including accrued interest). All were previously reported in our
Form 8-K filed February 2, 2010 except for 6,572 shares totaling $46,004 purchased by two additional accredited investors
on February 1, 2010. All shares are convertible at any time into shares of common stock at a conversion price of $.70/common
share, subject to adjustment for stock splits, combinations and similar transactions. All shares receive a 6% ($0.42) cash dividend
payable on December  1st of each year provided that payment may be deferred if necessary for our compliance with
our loan covenants. The Company has the limited right to convert the shares into common stock at any time after the trading price
of our common stock reaches $1.50 per share for twenty consecutive days.

The shares sold were not registered
under the Securities Act of 1933, as amended (the “Act”), in reliance on the private offering exemption from registration
provided by Section 4(2) of the Act and Rule 506 of Regulation D of the rules promulgated under the Act. The Company did not
utilize an underwriter or placement agent in connection with the private placement.





WARRANTS



At December 31, 2011, the Company
had the following Common Stock purchase warrants outstanding, all of which were exercisable:



|                                   |  |  | Number of Shares |  |  | Exercise Price |  | Expiration Date  
|---------------------------------- |  |  | ---------------- |  |  | -------------- |  | -----------------
|2004 Directors for fees            |  |  | 58,116           |  |  | 0.280          |  | October 1, 2012  
|2005 Directors for guarantees      |  |  | 154,065          |  |  | 0.418          |  | November 14, 2012
|2006 Acquisition of  business      |  |  | 2,805,941        |  |  | 0.657          |  | January 2, 2013  
|2006 Note payable to stockholder   |  |  | 127,739          |  |  | 0.327          |  | January 3, 2013  
|2006 Payment for services          |  |  | 20,501           |  |  | 0.488          |  | April 20, 2013   
|2006 Director for guarantee        |  |  | 256,490          |  |  | 0.682          |  | August 2, 2013   
|2007 Directors for fees            |  |  | 52,421           |  |  | 1.420          |  | August 17, 2012  
|2008 Payment for services          |  |  | 50,853           |  |  | 0.934          |  | January 11, 2013 
|2008 Note payable to contributor   |  |  | 7,633            |  |  | 0.811          |  | February 8, 2013 
|2008 Notes payable to contributors |  |  | 134,731          |  |  | 0.492          |  | June 20, 2013    
|2008 Note payable to contributor   |  |  | 12,710           |  |  | 0.492          |  | July 24, 2013    
|2008 Note payable to contributor   |  |  | 13,982           |  |  | 0.492          |  | July 30, 2013    
|2008 Note payable to contributor   |  |  | 50,893           |  |  | 0.394          |  | August 13, 2013  
|2008 Note payable to contributor   |  |  | 25,447           |  |  | 0.394          |  | October 7, 2013  
|2008 Note payable to contributor   |  |  | 303,831          |  |  | 0.365          |  | November 7, 2013 
|2009 Payment for services          |  |  | 30,383           |  |  | 0.478          |  | October 15, 2014 
|2010 Director for guarantee        |  |  | 63,027           |  |  | 0.848          |  | July 16, 2015    
|2010 Acquisition of  business      |  |  | 55,504           |  |  | 0.859          |  | July 30, 2015    
|2010 Payment for services          |  |  | 15,126           |  |  | 0.992          |  | October 15, 2015 
|2010 Director for guarantee        |  |  | 63,027           |  |  | 0.972          |  | October 18, 2015 
|Total                              |  |  | 4,982,678        |  |  |                |  |                  





41









OURPET’S
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





The exercise price for the common
shares issuable under the warrants to purchase 2,782,500 shares was $0.587 per share if exercised on or before January 2, 2011
or $0.660 per share if exercised on or after January 3, 2011 and on or before January 2, 2012 or $0.735 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.



STOCK
OPTION PLANS



On December 4, 1999, the Board
of Directors approved the 1999 Stock Option Plan, which was approved by the shareholders on August 5, 2000. On May 2, 2008, the
Board of Directors approved the 2008 Stock Option Plan, which was approved by the shareholders on May 30, 2008. The 2008 Plan supersedes
the 1999 Plan and no further options will be granted under the 1999 Plan. Stock options may be granted at the discretion of the
Board of Directors for which the Company has reserved 1,000,000 shares of its Common Stock for issuance upon the exercise of options
granted under the 2008 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. On February 11, 2009, the Board of Directors approved the adjustment of the expiration date for all
options expiring in 2009 for an additional five years from the original expiration date. The following table summarizes activity
in options under the Plans:



|                                 |  |  | Number of Shares |  |  |  | Weighted Average Exercise
                                                                                                                                                                                                                                                                                                                                                                Price | 
|-------------------------------- |  |  | ---------------- |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Outstanding at January 1, 2010   |  |  | 1,593,000        |  |  |  | .40                                                                                                                                                                                                                                                                                                                                                                                             | 
|Granted                          |  |  | 153,016          |  |  |  | .81                                                                                                                                                                                                                                                                                                                                                                                             | 
|Exercised                        |  |  | 83,333           |  |  |  | .33                                                                                                                                                                                                                                                                                                                                                                                             | 
|Forfeited                        |  |  | 7,167            |  |  |  | .57                                                                                                                                                                                                                                                                                                                                                                                             | 
|Expired                          |  |  | 0                |  |  |  | 0                                                                                                                                                                                                                                                                                                                                                                                               | 
|Outstanding at December 31, 2010 |  |  | 1,655,516        |  |  |  | .44                                                                                                                                                                                                                                                                                                                                                                                             | 
|Granted                          |  |  | 290,692          |  |  |  | .74                                                                                                                                                                                                                                                                                                                                                                                             | 
|Exercised                        |  |  | 19,605           |  |  |  | .39                                                                                                                                                                                                                                                                                                                                                                                             | 
|Forfeited                        |  |  | 181,395          |  |  |  | .51                                                                                                                                                                                                                                                                                                                                                                                             | 
|Expired                          |  |  | 50,000           |  |  |  | .53                                                                                                                                                                                                                                                                                                                                                                                             | 
|Outstanding at December 31, 2011 |  |  | 1,695,208        |  |  |  | .48                                                                                                                                                                                                                                                                                                                                                                                             | 





42











OURPET’S
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)



STOCK
OPTION PLANS (CONTINUED)





The following table summarizes options outstanding
at December 31, 2011:



|            |             | Options Outstanding | Options Exercisable
|----------- | ----------- | ------------------- | -------------------
|            |             | Weighted            | Weighted           
|            |             | Average             | Average            
|            | Number      | Exercise            | Remaining          
|Range       | Outstanding | Price               | Contractual Life   
|$0.65-$1.55 | 397,208     | $0.83               | 3.4 Years          
|$0.45-$0.60 | 449,500     | $0.50               | 2.0 Years          
|$0.20-$0.35 | 848,500     | $0.30               | 2.5 Years          



There were 1,090,167 and 1,060,500
options exercisable at December 31, 2011 and December 31, 2010, respectively. The weighted average exercise price of options granted
in 2011 and 2010 was $0.74 and $0.81, respectively. The weighted average exercise price of options exercised in 2011 and 2010 was
$.39 and $.33 respectively.





OPERATING
LEASES





Minimum future lease payments
under operating leases as of December 31, 2011 are as follows:



|2012                         |  | $ | 597,966   | 
|---------------------------- |  | - | --------- | 
|2013                         |  |   | 547,160   | 
|2014                         |  |   | 567,027   | 
|2015                         |  |   | 573,046   | 
|2016                         |  |   | 592,653   | 
|Thereafter                   |  |   | 920,277   | 
|Total minimum lease payments |  | $ | 3,798,129 | 



Total rent expense including
real estate taxes for the Company for the years ended December 31, 2011 and December 31, 2010 was $550,203 and $447,799, respectively.





INCOME
TAXES



| |  | At December 31, 2011, the Company did
                                                        not have any unrecognized tax benefits. The year subject to potential
                                                        audit varies depending on the tax jurisdiction. Generally, the Company’s
                                                        statutes are open for tax years ended December 31, 2008 and forward. The
                                                        Company’s major taxing jurisdictions include the United States,
                                                        Ohio and Maryland.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the year ended December 31, 2011 there was a
provision for income tax expense of $95,334 which came from i) an increase of approximately $100,200 in Deferred Tax Assets, ii)
an increase of approximately $199,600 in deferred tax liabilities, and iii) approximately $3,700 of state and local income tax
expense.







43









OURPET’S
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)



INCOME TAXES (Continued)



For the year ended December 31, 2010 there was a
provision for income tax expense of $99,555 which came from i) utilization of approximately $70,000 of Deferred Tax Assets, ii)
approximately $24,500 of federal alternative minimum income tax expense and iii) approximately $4,800 of state and local income
tax expense.



Following is a reconciliation of the expected income
tax expense/benefit to the amount based on the U.S. statutory rate of 31% for the year ended December 31, 2011 and 34% for the
year ended December 31, 2010.



|                                                      |  | 2011 |          |   | 2010 |  
|----------------------------------------------------- |  | ---- | -------- | - | ---- | -
|Income tax expense/benefit based on US statutory rate |  | $    | 67,493   |   |      | $
|Current period change in the valuation allowance      |  |      | 0        |   |      |  
|Deferred Tax asset change                             |  |      | (100,163 | ) |      |  
|Deferred Tax liability change                         |  |      | 199,577  |   |      |  
|Utilization of net operating loss                     |  |      | 0        |   |      |  
|State/Local income tax                                |  |      | 3,685    |   |      |  
|Alternative Minimum Tax for two years in 2010         |  |      | 0        |   |      |  
|Other                                                 |  |      | (75,258  | ) |      |  
|Provision for Income Taxes                            |  | $    | 95,334   |   |      | $





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



|                                 |  | December 31, |        
|-------------------------------- |  | ------------ | -------
|                                 |  | 2011         |        
|Deferred tax assets:             |  |              |        
|Net operating loss carry forward |  | $            | 155,279
|Valuation allowances             |  |              | 0      
|Net deferred tax assets          |  | $            | 155,270
|                                 |  |              |        
|Deferred tax liabilities:        |  |              |        
|Section 179 Property 2010        |  | $            | 86,829 
|Section 179 Property 2011        |  |              | 112,748
|Net deferred tax liabilities     |  | $            | 199,577





The Company’s valuation allowance for the year ended
December 31, 2011 remained at a $ -0- balance

In order to record its deferred tax assets at estimated net
realizable value based on its assessment of the realization of these assets through future taxable income being “more likely
than not.”



The Company’s valuation allowance decreased by approximately
$377,700 for the year ended December 31, 2010, which represents the effect of the current year’s net income and the current
year’s calculation of the net deferred tax asset. The Company adjusted its valuation allowance in 2010 to record its deferred
tax assets at estimated net realizable value based on its assessment of the realization of these assets through future taxable
income being “more likely than not.”





44











OURPET’S
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)



INCOME TAXES (Continued)







The Company has available at December 31,
2011, unused operating loss carryforwards that may be applied against future taxable income and that expire as follows:





|Year | Amount of Unused | Expiration 
|---- | ---------------- | -----------
|Of   | Operating Loss   | During Year
|Loss | Carryforwards    | Ending     
|     |                  |            
|2008 | $ 575,108        | 2028       





LITIGATION





In 2007, Applica Consumer Products,
the manufacturer of the LitterMaidTM Automatic Cat Litter Box, filed two lawsuits alleging that the SmartScoop®
infringed multiple claims of U.S. Patent No. RE 36,847 and U.S. Patent No. 6,082,302.  The SmartScoop® is a
patented automated self-cleaning cat litter box that offers a unique modular design for easy cleaning and maintenance using any
type of clumping litter.  As previously announced, in October 2010, in one of the lawsuits, the United States Court of Appeals
for the Federal Circuit (“Court”) agreed with OurPet’s legal position that the asserted patent claims were either
not violated by the SmartScoop design and operation or were invalid.  The Federal Circuit’s decision was not appealed
by Applica and was therefore final resolved in OurPet’s favor as of January 4, 2011.  On February 4, 2011, the Company
settled the remaining patent infringement accusations in the second lawsuit related to the SmartScoop® Self Scooping Litter
Box.  That lawsuit was dismissed on February 16, 2011.



On January 23, 2012, we received a Notice
of Impending Legal Action by Law Enforcement from the Office of the District Attorney for the County of Solano, California in connection
with our waste management PIK-Up Bags. The notice cites a violation of California Public Resources Code 42357(b) which prohibits
any person from selling any plastic bag in the State of California that claims to be “biodegradable, ”degradable,”
or “decomposable,” if it does not break down, fragment, biodegrade or decompose in a landfill or other environment.
While our “PIK-up bags” packaging stated they were biodegradable “except as defined by the State of California,”
we have been required to cease selling all such product from the State of California. We may also subject to financial penalties
as a result of this violation; however, we are not able to quantify what the penalties may be at this time. We have promptly responded
and cooperated with the State of California, and do not have any reason to believe that this action will result in any judgments
or fines against OurPet’s that would have a material adverse effect or impact in its financial position, liquidity or results
of operation.







45









OURPET’S
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)





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 management
or legal representatives believe could result in any judgments or fines against the Company that would have a material adverse
effect or impact in the Company’s financial position, liquidity or results of operation.





PURCHASE OF BUSINESS



On July 29, 2010, the Company entered into an Asset Purchase
Agreement (the “Purchase Agreement”) with Cosmic Pet Products, Inc. (“Cosmic”) pursuant to which the company
purchased certain assets and assumed certain liabilities. The results of Cosmic operations have been included in the consolidated
financial statements since that date. Cosmic Pet Products designs, manufactures and distributes pet supply products for cats. Their
products include catnip toys, containers of catnip, cat scratchers, cat treats and cat toys. Cosmic markets their products to pet
specialty stores, distributors, mass retailers, grocery chains, independent retailers. 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. OurPet’s will gain entry into such new product categories as catnip toys,
catnip products and cat treats utilizing the Cosmic Pet brand name.



The purchase price for Cosmic consisted of i) $600,000 in cash
(of which $400,000 was used to retire Cosmic’s secured line of credit), ii) $198,143 provided through the issuance of approximately
220,000 shares of OurPet’s common stock at an issuance price of $.8665/share and iii) and a warrant to purchase approximately
55,000 shares of common stock(1 warrant for every 4 shares of common stock), subsequently adjusted to 55,272 shares in accordance
with the warrant anti-dilutions provisions.



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



At July 29, 2010:



|                               |  |   |           |  
|------------------------------ |  | - | --------- | -
|ASSET ACQUIRED                 |  |   |           |  
|Inventories                    |  | $ | 436,869   |  
|Equipment                      |  |   | 201,950   |  
|Office Furniture and computers |  |   | 19,220    |  
|Intangible Assets              |  |   | 461,000   |  
|Total assets acquired          |  |   | 1,119,039 |  
|                               |  |   |           |  
|                               |  |   |           |  
|LIABILITIES ASSUMED            |  |   |           |  
|Capital Leases assumed         |  |   | (80,273   | )
|                               |  |   |           |  
|Total Liabilities assumed      |  |   | (80,273   | )
|                               |  |   |           |  
|Net assets acquired            |  | $ | 1,038,766 |  







46











OURPET’S
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)





PURCHASE OF BUSINESS (CONTINUED)





On July 29, 2010, the Company purchased
certain assets of Cosmic Pet Products. During the fourth quarter of 2010, the Company had an independent third party Certified
Appraiser perform a valuation of Cosmic Pet’s intangible assets. The appraisal was performed in accordance with general accepted
accounting principles including but not limited to FASB ASC 820, Fair Value Measurements and Disclosures and FASB ASC 805 Business
Combinations. As a result of that appraisal, the Company recognized $461,000 in intangible assets mostly related to the brand/trade
names “Cosmic Cat” and “Cosmic Pet.”



In accordance with general accepted accounting
principles including but not limited to FASB ASC 820, Fair Value Measurements and Disclosures and FASB ASC 805 Business Combinations,
the Company had an independent third party Certified Appraiser perform an annual valuation of Cosmic Pet’s intangible assets
as of September 30, 2011. The appraisal concluded that as of September 30, 2011, there has been no impairment. 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.



For the year ended December 31, 2011,
Cosmic Pet’s revenues and earnings were $2,345,054 and $114,595 respectively.





For the year ended December 31, 2010 since
the July 29, 2010 acquisition date Cosmic’s revenues of $738,144 and $122,789 in earnings have been included in the Company’s
consolidated financial statements.



The Company has determined we are unable
to supply supplemental pro forma information for either the quarterly or the year to date reporting periods ending December 31,
2010 as financial statements for Cosmic Pet Products have not been prepared for any reporting period after December 31, 2009. We
believe that after making every reasonable effort to do so, we have deemed it impracticable to apply the requirements of ASC 805-10-50
which requires the revenues and earnings of the combined entity for the current year to date reporting be reported as though the
asset purchase had been completed as of the beginning of the annual reporting period and the prior period.









47