Attached files

file filename
EX-32 - EXHIBIT 32 - LAPOLLA INDUSTRIES INCex32.htm
EX-23.1 - EXHIBIT 23.1 - LAPOLLA INDUSTRIES INCex23_1.htm
EX-31.2 - EXHIBIT 31.2 - LAPOLLA INDUSTRIES INCex31_2.htm
EX-31.1 - EXHIBIT 31.1 - LAPOLLA INDUSTRIES INCex31_1.htm
EX-10.48 - EXHIBIT 10.48 - LAPOLLA INDUSTRIES INCex10_48.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2009

Commission File No. 001-31354

Logo 1
Lapolla Industries, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
13-3545304
(State of Incorporation)
(I.R.S. Employer Identification No.)
   
Intercontinental Business Park
 
15402 Vantage Parkway East, Suite 322
77032
Houston, Texas
(Zip Code)
(Address of Principal Executive Offices)
 

(281) 219-4700
(Registrant’s Telephone Number)

Securities registered pursuant to Section 12 (b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act:

Common Stock, $.01 par value and Warrants
(Title of Each Class)

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  YES £  NO T

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES £  NO T

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  YES T  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).  YES T  NO £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. T

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. 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 T

 
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  YES £  NO x

As of June 30, 2009, the aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was approximately $10,459,869 based on the closing sales price as quoted on the NASD OTC Bulletin Board.

Common Stock outstanding as of March 15, 2010 — 63,944,803 shares.

DOCUMENTS INCORPORATED BY REFERENCE

None.
 


 
 

 

LAPOLLA INDUSTRIES, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
INDEX

     
Page
PART I
 
 
1
 
3
 
4
 
4
 
4
 
4
       
PART II
 
 
5
 
5
 
6
 
10
 
10
 
10
 
10
 
11
 
11
       
PART III
 
 
12
 
14
 
20
 
21
 
24
       
PART IV
 
 
25
       
26
27
28

 
(i)


FORWARD LOOKING STATEMENTS

Statements made by us in this report and in other reports and statements released by us that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21 of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are necessarily estimates reflecting the best judgment of management and express our opinions about trends and factors which may impact future operating results. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Such statements rely on a number of assumptions concerning future events, many of which are outside of our control, and involve risks and uncertainties that could cause actual results to differ materially from opinions and expectations. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by us about our businesses including, without limitation, the risk factors discussed below. Although we believe our expectations are based on reasonable assumptions, judgments, and estimates, forward-looking statements involve known and unknown risks, uncertainties, contingencies, and other factors that could cause our or our industry's actual results, level of activity, performance or achievement to differ materially from those discussed in or implied by any forward-looking statements made by or on the Company and could cause our financial condition, results of operations, or cash flows to be materially adversely affected. Except as required under the federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, changes in assumptions, or otherwise.

RESTATEMENT OF CERTAIN PRIOR PERIOD INFORMATION

Certain restated information is included herein for the first three calendar quarterly periods and year ended December 31, 2008, as well as the first three calendar quarterly periods in the 2009 year, to: (a) record the accounting aspects of a related party transaction between two directors for the four quarters and year ended December 31, 2008 and the first three quarters of 2009; and (b) disclose a technical default at December 31, 2008 on our credit facility that was not cured effectively until December 31, 2009.

PART I

As used in this report, “Lapolla” and the “Company” or “Us” or “We” refer to Lapolla Industries, Inc., unless the context otherwise requires. Our Internet website address is www.lapollaindustries.com. We make our periodic and current reports, together with amendments to these reports, available on our website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information on our website is not incorporated by reference in this Annual Report on Form 10-K.

Item 1.  Business.
 
General Overview

Lapolla is a leading national manufacturer and distributor of foam, coatings, and equipment, focused on developing and commercializing foam and coatings targeted at commercial and industrial and residential applications in the insulation and construction industries. Being back integrated in both foam and coating systems puts Lapolla in a strong competitive position as both product lines reduce energy consumption and ultimately lead to direct savings for consumers. Our products address growing consumer awareness of the building envelope. The building envelope is the separation between the interior and the exterior environments of a building and serves as the outer shell to protect the indoor environment as well as to facilitate its climate control. We provide superior insulation, an air barrier, and a vapor barrier with our products. We have invested substantial resources to acquire, develop and commercialize a variety of foam and coatings products and related sales and marketing programs to date.

During 2009, we further expanded our growing brand recognition and grew our market share. Lapolla established its first international branch, opening a Canadian headquarters in Toronto, Ontario. In April 2009, we received Canadian Product Approval, CCMC, approval which allows us market access with our Foam-LOK™ spray polyurethane foam insulation systems throughout Canada. In late April 2009, we also received ICC-ES approval for our half pound open celled spray foam insulation for use in wall cavities, floor and ceiling assemblies, as well as attic and crawl space applications, further building our product pipeline and expanding our market share.

In June 2009, we were pleased to accept an offer to contribute our spray foam insulation for the Emmy Award Winning ABC television show Extreme Makeover: Home Edition for Season 7 and be their preferred spray foam insulation supplier and a part of this great, combined effort to improve deserving peoples’ living situations. We contributed to 5 home makeovers since entering into the relationship and look forward to continued participation with the show. The ABC Extreme Makeover: Home Edition and Lapolla partnership is indicative of the growing awareness and need for a healthy living environment, better air quality, reduced air infiltration, and combating rising energy costs, thus further solidifying our position in the green building materials market.

To further increase mainstream awareness of our green building insulation technology, we have committed ourselves to increasing our marketing, advertising and overall communication efforts through a variety of mediums. We have arranged for Lapolla™ and Airtight™ commercials to air on over 55 networks across the country, totaling over 22,000 airtime minutes to create sales pull through and increase our independent contractor/installer network.  The Airtight™ program provides a turn-key approach to helping ensure the start-up success of independent spray foam insulation installers. We are expecting a greater market impact in our foam insulation for construction and retrofitting markets as a result of this effort.

 
1


Operating Segments

We operate our business on the basis of two reportable segments — Foam and Coatings.  The Foam segment involves producing building envelope insulation foam for interior application and roofing systems. The Coatings segment involves producing protective elastomeric coatings and primers. Both segments involve supplying equipment and related ancillary items used for application of our products.  The following table sets forth, for the years indicated, sales for our Foam and Coatings segments:

   
2009
   
2008
 
Foam
  $ 43,080,741     $ 37,746,620  
Coatings
  $ 6,945,729     $ 10,394,562  

Foam

Our foam business involves supplying spray foam insulation and roofing foam to the construction industry. Spray foam insulation applications consist of perimeter wall, crawl space, and attic space commercial and industrial, and residential, applications. Roofing applications consist of new and retrofit commercial and industrial, and residential, applications. The start up of our own Foam Resin Plant in 2007 enabled Lapolla to benefit from the economics of manufacturing spray polyurethane foam systems as we opened up new sales opportunities through previously unavailable channels (e.g. distribution). Lapolla provides open and closed cell spray foam insulation, as well as closed cell technology for roofing, applications.  We have attained certain third party credentials for our in-house manufactured spray foam systems, which is leading to greater acceptance of our proprietary foam products in our target markets. This segment also supplies adhesives and equipment for applications. We use our own distribution facilities, as well as public warehousing in certain local markets nationally to better serve our customers. Performance, availability, product credentials, approvals, technical and customer service, and pricing are major competitive factors in the spray foam business.

Coatings

Our coatings business involves supplying a variety of protective coatings for roofing systems for new and retrofit commercial and industrial applications to the roofing industry. We use our own distribution facilities, as well as public warehousing in certain local markets nationally to better serve our customers. Product credentials, approvals and performance, pricing, technology, technical customer service, and availability are major competitive factors in our coatings business.

See Note 20, “Business Segment Information,” in the notes to the financial statements listed under Item 15 of Part IV of this report.

International Operations

Our international sales, consisting primarily of our Canadian operations, represented approximately 10% of our total product net sales for the year ended December 31, 2009. We opened our first Canadian office in Toronto, Ontario, in 2009, and a resident management team provides leadership and infrastructure for the customer-focused, rapid introduction of our products in the Canadian market. As a result of the rigorous testing and lengthy approval process related to introducing products in the Canadian market, we were only able to participate in the Canadian market for less than half of the 2009 calendar year.  There is an expectation for immediate significant growth in Canada based on full year revenues as well as anticipated growth of market share over the short and long term. We are also experiencing a resurgence of growth in our overseas international business. We expect 2010 to reflect this growth and revenue.

Sales and Marketing

We maintain a growing national and limited international sales and marketing focus. Sales are concentrated on distributors and contractors in the insulation and roofing industries. Lapolla utilizes direct sales, independent representatives, distributors, and public bonded warehouses strategically positioned on a state or regional basis to serve customers. Insulation foam and reflective roof coatings are aggressively growing through enhanced consumer awareness due to nationally promoted programs from federal, state, municipal and other government agencies, energy companies, and private organizations. Some of these programs include the American Recovery and Reinvestment Act of 2009, Cool Roof Rating Council, Energy Star and state and utility company funded rebates to energy conscious building owners for following very specific recommendations, using reflectivity and emmissivity as the general goal in reducing the environmental impact of the “heat island effect”. Lapolla places a high priority on sales trending to create preparedness and processes to better serve our customers. Information is gathered with input from sales, customers, management experience and historical sales trending to predict needed supply for stock and warehousing to meet the needs of our customers on a timely basis. Public warehousing, distribution and direct sales allow us to supply our customers in a timely and efficient fashion. The combined volumes of our products are disbursed throughout a broad customer base. This broad base assures lack of vulnerability to the loss of one key customer. Although sales plans include the addition of new and individually large volume customers, none today represent a significant adverse effect through such a loss.

Raw Materials

We place a high priority on forecasting material demand to meet customer demands in the most expedient and cost effective manner.  The primary materials being used to manufacture our foam and coatings products are polyols, catalysts, resins, and titanium dioxide. The suppliers of the necessary raw materials are industry leaders in both the specific chemistries and basic in the manufacturing of the raw materials for supply.  We maintain strong relationships and have commitments for continuing supply through times of shortage. A lengthy interruption of the supply of one of these materials could adversely affect our ability to manufacture and supply commercial product.  With our volume potential, Lapolla continues to be a potentially lucrative target for vendors to assure their own growth and demand in 2009 and beyond. Our foam resins and acrylic coatings are manufactured in our Houston, Texas facility. We maintain sufficient manufacturing capacity at this facility to support our current forecasted demand as well as a substantial safety margin of additional capacity to meet peaks of demand and sales growth in excess of our current expectations.

 
2


Patents and Trademarks

We rely on our own proprietary technologies in our foam and coatings segments for finished goods formulations.  Additionally, we also rely on trade secrets and proprietary know-how that we seek to protect, in part, through confidentiality agreements with our partners, customers, employees and consultants. We market our products under various trademarks, for which we have registered and unregistered trademark protection in the United States. These trademarks are considered to be valuable because of their contribution to market identification of our products.

Competition

Competition is based on a combination of product credentials and approvals, price structure, technology, availability, warranty availability to building owners, and product performance. Lapolla is expanding through aggressive sales and marketing, competitive pricing, a strong sales force comprised of direct salespersons, independent representatives, and distributors, building owner and contractor brand awareness, and acquisitions (i.e. AirTight). Lapolla differentiates itself from competitors by offering personalized sales support and providing efficient response time on issues ranging from technical service to delivery of products. We are one of the largest suppliers of spray polyurethane foam for insulation and roofing foam nationally. The foam manufacturing industry consists of a few large and medium sized manufacturing companies with global, national and regional presence primarily relying on distributors to service markets. As a manufacturer of foam resins, we are able to access previously unavailable distribution channels and penetrate target markets through direct sales. We supply our products primarily to large, medium and small insulation, roofing, and general contractors. Within the coatings industry, as manufacturers specifically focused on energy efficient acrylic coatings for roofing and construction as their primary line, Lapolla is a major player in a very fragmented market. Product credentials and approvals differentiate product lines and suppliers that are more readily suited to broad use and industry acceptance. We are currently listed with certain credentials and approvals to assure minimal restrictions in markets and uses. Lapolla utilizes advertising campaigns, articles in industry periodicals, trade show exposure, public relations, printed case studies, internet and website exposure, mailers and direct sales, distribution, and marketing to obtain greater product line branding and recognition.

Employees

At December 31, 2009, we employed 59 full time individuals. None of our employees are represented by a union. We believe that our relations with our employees are generally very good.

Environmental Matters

We are subject to federal, state, and local environmental laws and regulations and believe that our operations comply in all material respects where we have a business presence. No significant expenditures are anticipated in order to comply with environmental laws and regulations that would have a material impact on our Company in 2009. We are not aware of any pending litigation or significant financial obligations arising from current or past environmental practices that are likely to have a material adverse effect on our financial position. However, we cannot assure you that environmental problems relating to properties operated by us will not develop in the future, and we cannot predict whether any such problems, if they were to develop, could require significant expenditures on our part. In addition, we are unable to predict what legislation or regulations may be adopted or enacted in the future with respect to environmental protection and waste disposal.

Seasonality

Lapolla’s business, taken as a whole, is materially affected by seasonal factors. Specifically, sales of our products tend to be lowest during the first and fourth fiscal quarters, with sales during the second and third fiscal quarters being comparable and marginally higher. Although our foam resins and acrylic coatings are restricted by cold temperatures, we have developed certain formulations that allow for a broader range of application in colder temperatures. By broadening and diversifying our foam and coatings products to those that are less sensitive to temperature during application, we increase the likelihood of less seasonal downward sales trending during the winter months.  Inclement weather does impede sales, but it also produces a pent up demand that can be realized in the subsequent short term. The acquisition of AirTight and its associated equipment sales, position Lapolla for growth during inclement weather months while seeding the market for future foam sales.

Historical Information

We were incorporated in the state of Delaware on October 20, 1989 and underwent a variety of name changes and operations to date.  For our current operations, we acquired 100% of the capital stock of Infiniti Paint Co., Inc., a Florida corporation, effective September 1, 2001, which was engaged in the business of developing, marketing, selling, and distributing acrylic roof coatings, roof paints, polyurethane foam systems, sealants, and roof adhesives in the Southeastern United States. On December 20, 2004, we changed our name from Urecoats Industries, Inc. to IFT Corporation to keep pace with the activities of our Infiniti subsidiary. During the latter part of 2004, our Infiniti Subsidiary built and began operating a manufacturing plant in the Southeastern United States. On February 11, 2005, we acquired 100% of the capital stock of Lapolla Industries, Inc., an Arizona corporation, which was engaged in the business of manufacturing acrylic roof coatings and sealants, and distributing polyurethane foam systems in the Southwestern United States. On April 1, 2005, our Infiniti subsidiary merged with and into our Lapolla subsidiary whereas the existence of our Infiniti subsidiary ceased. On October 1, 2005, our Lapolla subsidiary merged with and into the Company, under its former name of IFT Corporation, whereas the existence of our Lapolla subsidiary ceased. On November 8, 2005, the Company changed its name to Lapolla Industries, Inc.

Item 1A.  Risk Factors.

As a leading national manufacturer and supplier of foam and coatings, we operate in a business environment that includes certain risks. The risks described in this section could adversely affect our sales, operating results and financial condition. Although the factors listed below are considered to be the most significant factors, they should not be considered a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles which may adversely affect our business.

 
3


·  Global Economic Conditions and Financial Crisis - The current stabilizing global economic crisis described below should also be considered when reviewing each of the subsequent paragraphs setting forth the various aspects of our business, operations, and products. The recent global economic and financial market crisis has caused, among other things, a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and lower consumer and business spending. Although the ultimate outcome of these events cannot be predicted, it may have a material adverse effect on the Company and our ability to borrow money in the credit markets and potentially to draw on our revolving credit facility or otherwise obtain financing.  Similarly, current or potential customers and suppliers may no longer be in business, may be unable to fund purchases or determine to reduce purchases, all of which could lead to reduced demand for our products, reduced gross margins, and increased customer payment delays or defaults. Further, suppliers may not be able to supply us with needed raw materials on a timely basis, may increase prices or go out of business, which could result in our inability to meet customer demand in a timely manner or affect our gross margins. We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs associated with our operations.

·  Cost and Availability of Raw Materials - Our operating results are significantly affected by the cost of raw materials. We may not be able to fully offset the impact of higher raw materials through price increases or productivity improvements. Certain raw materials are critical to our production processes, such as polyols, catalysts, and titanium dioxide. The Company has supply arrangements to meet the planned operating requirements for the future. However, an inability to obtain these critical raw materials at any future date would adversely impact our ability to produce products.

·  Retention of Key Personnel - Our success depends upon our retention of key managerial, technical, selling and marketing personnel. The loss of the services of key personnel might significantly delay or prevent the achievement of our development and strategic objectives.  We must continue to attract, train and retain managerial, technical, selling and marketing personnel. Competition for such highly skilled employees in our industry is high, and we cannot be certain that we will be successful in recruiting or retaining such personnel. We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. If we are unable to identify, hire and integrate new employees in a timely and cost-effective manner, our operating results may suffer.

·  Acquisitions - As part of our business strategy, we regularly consider and, as appropriate, make acquisitions of technologies, products and businesses that we believe are complementary to our business. Our primary acquisition criterion is sales volume in our core foam and coatings competencies. Acquisitions may involve risks and could result in difficulties in integrating the operations, personnel, technologies and products of the companies acquired, some of which may result in significant charges to earnings. If we are unable to successfully integrate our acquisitions with our existing businesses, we may not obtain the advantages that the acquisitions were intended to create, which may materially adversely affect our business, results of operations, financial condition and cash flows, our ability to develop and introduce new products and the market price of our stock. In connection with acquisitions, we could experience disruption in our business or employee base, or key employees of companies that we acquire may seek employment elsewhere, including with our competitors. Furthermore, the products of companies we acquire may overlap with our products or those of our customers, creating conflicts with existing relationships or with other commitments that are detrimental to the integrated businesses.

·  SEC Reviews - The reports of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements and to enhance the overall effectiveness of companies’ public filings, and comprehensive reviews of such reports are now required at least every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports will comply in all material respects with the published rules and regulations of the SEC, we could be required to modify or reformulate information contained in prior filings as a result of an SEC review. Any modification or reformulation of information contained in such reports could be significant and could result in material liability to us and have a material adverse impact on the trading price of our common stock.

Item 1B.  Unresolved Staff Comments

Not Applicable.

Item 2.  Properties

We conduct our operations in leased facilities located in Texas, Georgia, Florida, and Ontario, Canada. Our corporate headquarters and administrative, sales, customer and technical services, manufacturing, distribution, training, and warehousing facility is located in Houston, Texas. We also maintain a leased facility in Georgia for customer service, AirTight™ training, spray rig assembly, distribution, and warehousing; in Florida for sales and technical services; and in Ontario, Canada for sales, customer and technical services, distribution, and warehousing. Our present facilities are adequate for our currently known and projected near term needs.

Item 3.  Legal Proceedings

Legal Proceedings

We are involved in various lawsuits and claims arising in the ordinary course of business. These other matters are, in our opinion, immaterial both individually and in the aggregate with respect to our financial position, liquidity or results of operations.

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

None.

 
4


PART II

Item 5.  Market for the Company’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Market Information

The following table shows the quarterly price range of our common stock during the periods listed.

   
2009
   
2008
 
Calendar Quarter
 
High
   
Low
   
High
   
Low
 
First
  $ 0.55     $ 0.24     $ 0.76     $ 0.41  
Second
  $ 0.55     $ 0.32     $ 0.89     $ 0.46  
Third
  $ 0.65     $ 0.26     $ 0.79     $ 0.43  
Fourth
  $ 0.50     $ 0.30     $ 0.57     $ 0.19  

Our common stock is traded on the NASDAQ O-T-C Bulletin Board under the symbol “LPAD”. As of March 19, 2010, there were approximately 4,000 holders of record of our common stock.  We did not declare any common stock dividends during the past two years and do not anticipate declaring common stock dividends in 2010.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes information about our common stock that may be issued upon the exercise of options, warrants and rights under all equity compensation plans, as of December 31, 2009:

Equity Compensation Plan Information
   
Number of Securities to Be Issued Upon Exercise Of Outstanding Options, Warrants and Rights
   
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
   
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding Securities Reflected in Column (a))
 
Plan Category
 
(a)
   
(b)
   
(c)
 
Equity Compensation Plans
                 
Approved by Security Holders (1)
    7,015,333     $ 0.64       2,984,667  
Equity Compensation Plans Not
                       
Approved by Security Holders (2)
    5,746,753     $ 0.73        
Total
    12,762,086     $ 0.68       2,984,667  
____________________________________
(1) Includes shares of our common stock issuable under our Equity Incentive Plan. For a description of this plan, refer to Note 18 – Share-Based Payment Arrangements, Equity Incentive Plan, of our Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009.
(2) Represents warrants and conversion shares issued by the Company in connection with certain financing agreements with ComVest. Refer to the Footnotes in the Stockholders Holding 5% or More section for more detailed information.

Performance Graph

Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on our common stock with the cumulative total return of the S&P 500 Stock Index and the AMEX Industrial Manufacturing Index for the period beginning December 31, 2004 and ending December 31, 2009. The graph assumes that all dividends have been reinvested. We did not declare any dividends during the past five years.

Graphic 1
Recent Sales of Unregistered Securities.

None.

Item 6.  Selected Financial Data.

Not Applicable.

 
5


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

Management's Discussion and Analysis
of Financial Condition and Results of Operations for the Three-Year Period Ended December 31, 2009

Overview

This financial review presents our operating results for each of the three years in the period ended December 31, 2009, and our financial condition at December 31, 2009. Except for the historical information contained herein, the following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under Item 1A of Part I of this report, “Risk Factors.” In addition, the following review should be read in connection with the information presented in our financial statements and the related notes to our financial statements.  Refer to Item 8 of this Form 10-K, Note 1 – Summary of Significant Accounting Policies for further information regarding significant accounting policies and Note 20 – Business Segment Information in our financial statements listed under Item 15 of Part IV of this report for further information regarding our business segment structure.

Restatement of Certain Prior Period Information

Certain restated information is included herein for the first three calendar quarterly periods and year ended December 31, 2008, as well as the first three calendar quarterly periods in the 2009 year, to record the accounting aspects of a related party transaction between two directors for the four quarters and year ended December 31, 2008 and the first three quarters of 2009, and disclose a technical default at December 31, 2008 on our credit facility that was not cured effectively until December 31, 2009. For 2008: (a) we reclassified the non-current portion of our revolving credit note to the current portion of our revolving credit note on our balance sheets. The reclassification affected our total current liabilities, which increased $7,550,995, and total other liabilities, which decreased $7,550,995; and (b) we restated our loans payable – related party on our balance sheet and selling, general and administrative on our statements of operations. The restatement affected loans payable – related party, which increased $480,000, stockholders’ equity, which decreased $480,000, selling, general and administrative, which increased $480,000, operating loss and net loss, which each increased $480,000, and net loss per share – basic and diluted, which increased $0.01. No income tax effects were related to this restatement. To illustrate:

For 2008:
 
2008 Year
 
Net (Loss) (As Previously Reported)
  $ (3,534,317 )
Adjustments
    (480,000 )
As Adjusted and Restated
  $ (4,014,317 )

We fully updated all affected portions of our management’s discussion and analysis.  Refer to Note 21 – Selected Quarterly Financial Data in our financial statements listed under Item 15 of Part IV of this report for quarterly restatement information and illustrations.

Overall Results of Operations

Sales

The following is a summary of sales for the years ending December 31:

   
2009
   
2008
   
2007
 
Sales
  $ 50,026,470     $ 48,141,182     $ 31,840,799  

Sales increased $1,885,288, or 3.9%, from 2008 to 2009, as compared to an increase of $16,300,383, or 51.2%, from 2007 to 2008. Foam sales increased $5,334,121, or 14.1% over 2008, while coatings sales declined $3,448,833 or 33.2% due to a general slowdown specifically in the roofing construction business from the tightened credit markets and recession. Management expects coatings sales to pick up in 2010 due to pent up demand from 2009. The increase in Foam sales continues to be attributed to cost conscious residential and commercial building owners transitioning from traditional fiberglass insulation to energy efficient SPF. Our acquisition of AirTight, a turn key, equipment, startup, and training company, provided additional market penetration while converting additional existing insulators to foam, resulting in approximately $8.5 Million in sales in 2009 compared to $4.6 Million in sales in 2008 (we acquired the AirTight Assets on July 1, 2008). Highly volatile energy prices throughout 2008 and 2009 heightened the public’s interest for green building materials and sustainable energy solutions. Pricing changes reduced approximately $122,316 in sales, while sales volumes increased approximately $2,007,604, for 2009. Pricing changes added approximately $952,000 in sales, while sales volumes increased approximately $15,348,383, for 2008.

Cost of Sales

Cost of sales decreased $1,449,692, or 3.7%, due primarily to a 33.2% decrease in coatings sales, partially offset by a 14.1% increase in foam sales, from 2008 to 2009. We had a 11.4 decrease in freight costs during 2009, along with a 2.7% decrease in material costs. Cost of sales increased $12,117,932, or 45%, due primarily to an 82% increase in foam sales, partially offset by a 6% decrease in coatings sales, from 2007 to 2008. We had a 109% increase in freight costs during 2008, which was offset by a 4.9% decrease in material costs.  Freight costs escalated in the second and third quarters of 2008 as surging oil prices justified higher trip rates as well as increased fuel surcharges during that time frame.

Gross Profit

Our gross profit increased $3,334,978, or 36.8% from 2008 to 2009, due to our sales growth and reduced material costs, as compared to, an increase of $4,182,451 or 86% from 2007 to 2008, due to our substantial sales growth offset by increased material costs, specifically in our Foam segment.  Gross margin percentage increased 5.8% from 2008 to 2009 due to reductions in material costs and increased manufacturing efficiencies particularly in our Foam segment, as compared to 3.7% from 2007 to 2008 due to a full year of plant utilization manufacturing in-house foam resins, offset by higher material costs.

 
6


Operating Expenses

Our total operating expenses are comprised of selling, general and administrative expenses, or SG&A, professional fees, depreciation, amortization of other intangible assets, consulting fees, interest expense, interest expense – related party, interest expense – amortization of discount, gain or loss on extinguishment of debt, gain or loss on derivative liability, and other income or expense. These total operating expenses increased $2,144,590, or 16.4% from 2008 to 2009, due to increases of $932,902 for SG&A, $80,314 for depreciation, $125,130 for amortization of other intangible assets, $115,713 for consulting fees, $393,226 for interest expense, $178,403 for interest expense – related party, and $419,519 for interest expense – amortization of discount, offset by a decrease of $235,438 for professional fees and an increase of $28,584 in other income and a gain of $318,425 on derivative liability. There was no gain on extinguishment of debt in 2009. Our total operating expenses increased $2,654,153, or 27%, from 2007 to 2008, due to increases of $2,390,054 for SG&A, $11,633 for depreciation, $146,411 for amortization of other intangible assets, $177,439 for interest expense, $47,015 for interest expense - related party, and $397,922 for interest expense - amortization of discount, and a decrease of $109,592 of other income, offset by decreases of $39,312 in professional fees, and $106,334 in consulting fees, and a gain of $481,833 on debt extinguishment.

SG&A increased $932,902, or 8.2%, from 2008 to 2009 due to increases of $868,736 for payroll and benefits, $69,436 for insurances, $163,632 for travel and related services, $538,103 for marketing, promotions and trade shows, $203,071 for rents, $264,885 for bad debts, and $327,790 for corporate office expenses, offset by decreases of $265,033 for commissions, $143,014 for advertising, $78,949 for recruiting fees, $841,784 for share based compensation expense, and $173,971 for investor relations. The increase in bad debts in 2009 includes some customer bankruptcies and defaults primarily from the first half of 2009 due to the tightening of the credit markets and recession. The increase in marketing, promotions and trade shows was due to a broader based marketing program related to AirTight.  Corporate office expenses increased primarily due to an increase in bank and credit card fees. Payroll and benefits increased due to a full year of AirTight personnel (we acquired AirTight on July 1, 2008) and primarily hiring additional sales personnel. The increase in rents is due in part to our expansion into the Canadian market as well as additional distribution channels throughout the United States to better serve our customers. SG&A increased $2,390,054, or 28%, from 2007 to 2008 due to increases in payroll and benefits of $723,237, bad debt expenses of $664,527, commissions of $641,001, advertising of $207,319, rents of $203,392, travel and related of $114,316, insurances of $102,658, investor relations of $80,206, and corporate office expenses of $48,072, which were partially offset by declines in share based compensation of $287,773 and marketing and promotions of $106,902. The increase in bad debts in 2008 includes some customer bankruptcies and defaults primarily due to the downturn of the economy.

Professional fees decreased $235,438 from 2008 to 2009 due to a continuation of cost reduction efforts initiated in 2008 and reductions in legal fees, compared to a decrease of $39,312 from 2007 to 2008 as cost cutting measures on any non-volume related expenses were implemented.

Depreciation expense increased $80,314, or 39% from 2008 to 2009, compared to an increase of $158,044, or 83% from 2007 to 2008, primarily due to an increase in depreciable assets acquired in connection with the AirTight asset acquisition.

Amortization of other intangible assets expense increased $125,130, or 85%, from 2008 to 2009, compared to an increase of $123,333, or 534% from 2007 to 2008, due primarily to an increase in amortizable assets acquired in connection with the AirTight asset acquisition.

Consulting fees increased $115,713, or 172%, from 2008 to 2009, due to retaining outside professionals for advisory services, information technology services, and other required outside professional services, compared to a decrease of $106,334, or 61%, from 2007 to 2008, due to cost cutting measures.

Interest expense increased $393,226, or 50%, from 2008 to 2009, compared to an increase of $177,439, or 29%, from 2007 to 2008, due primarily to an increase in the interest from the capital utilized from our ComVest credit instruments.

Interest expense – related party increased $178,403, or 259%, from 2008 to 2009, compared to an increase of $47,015, or 215%, from 2007 to 2008, due to an increase in the capital utilized from our Chairman of the Board.

Interest expense – amortization of discount increased $419,519, or 85%, from 2008 to 2009, compared to an increase of $397,922, or 420%, from 2007 to 2008, due to the discount associated with our ComVest credit instruments.

We did not have any extinguishment of debt during 2009.  A substantial modification was made to our ComVest credit instruments, which resulted in an extinguishment of debt gain of $481,833 in 2008.

We had a gain on our derivative liability of $318,425 embedded in our ComVest convertible term note during 2009.  We did not have any derivate liability in 2008.

Other income increased $28,584, or 51.6%, from 2008 to 2009, due to an increase in royalties, compared to a decrease of $109,592, or 66%, from 2007 to 2008, due to a decrease in royalties, from the sale of our retail distribution channel in 2007.

Net Loss

Net loss decreased $1,190,390, or 29.7%, from 2008 to 2009, due to sales volume and gross margin percentage increases in our Foam segment, a gain on our derivative liability, and an increase in our other income, offset by a sales volume and gross margin percentage decreases in our Coatings segment and increase in our total operating expenses due to growth of the Company.  Net loss per share decreased $0.02, or 34%, from 2008 to 2009. Net loss decreased $1,048,298, or 21%, from 2007 to 2008, due to a sales volume increase in our Foam segment, gross margin percentage increases in both of our segments, a gain on our extinguishment of debt, offset by a sales volume decrease in our Coatings segment and increase in our total operating expenses due to growth of the Company.  Net loss per share decreased $0.03, or 27%, from 2007 to 2008. Net loss available to common stockholders and related loss per share decreased $1,190,965, or 24.6%, and $0.02, or 29%, from 2008 to 2009, respectively, compared to a decrease in net loss available to common stockholders and related loss per share of $1,048,298, or 18%, and $0.03, or 27%, from 2007 to 2008.

 
7


Results of Business Segments

The following is a summary of sales by segment for the years ending December 31:

Segments
 
2009
   
2008
   
2007
 
Foam
  $ 43,080,741     $ 37,746,620     $ 20,753,052  
Coatings
  $ 6,945,729     $ 10,394,562     $ 11,087,747  

Foam sales increased $5,334,121, or 14.1%, from 2008 to 2009, compared to an increase of $16,993,568, or 82%, from 2007 to 2008, due to energy conscious building owners and consumers continuing to seek relief from highly volatile oil prices, as spray polyurethane foam (SPF) continues to gain market share from traditional insulation systems such as fiberglass. Our AirTight asset purchase furthered our market penetration into the Foam segment through AirTight’s training, startup and rig building operations.  By providing new market entrants as well as existing insulation companies with the equipment and training to successfully market SPF, revenue growth from equipment has escalated and the ongoing sales of Lapolla foam has followed. Foam segment equipment sales were $2,046,688 in 2009 compared to $1,819,994 in 2008 and $622,477 in 2007. Foam cost of sales increased $917,533, or 3%, from 2008 to 2009, due to a substantial increase in sales volumes, offset by reductions in raw material costs, resulting in an increased gross profit and gross margin percentage, compared to an increase of $12,820,509, or 70%, from 2007 to 2008, due to substantial volume increases, but at the same time gross profit margin dollars and percentages increased, from the economies of scale and full year production of in-house manufactured resins, offset by rising raw material costs during the latter part of 2008. Our Foam segment realized a profit of $1,242,543 in 2009, compared to a loss of $127,045 in 2008 and $1,956,928 in 2007, as targeted market share gains were achieved.

Coatings sales decreased $3,448,833, or 33%, from 2008 to 2009, due to the general slowdown in the roofing construction business from the tightened credit markets and recession, although sales are expected to pick up significantly in 2010 from pent up demand in 2009, compared to a decrease of $693,185, or 6%, from 2007 to 2008, due to the 2007 divestiture of our retail coatings business. Coatings segment equipment sales were $203,049 in 2009 compared to $323,350 in 2008 and $188,363 in 2007. Coatings cost of sales decreased $2,367,225, or 30%, from 2008 to 2009, due to lower sales volumes, compared to a decrease of $702,577, or 8%, from 2007 to 2008, but gross margin dollars increased $9,931 as our margin percentage increased from 22% to 24% on a more strategic product line. Coating segment profit decreased $827,016, or 121%, due to lower sales volumes, compared to an increase of $549,425, or 410%, from 2007 to 2008, from the increased margin percentage associated with our strategic product line.

Outlook for 2010

The Company’s outlook is very aggressive, as we expect sales to continue to grow to record levels in 2010. Our optimism is based on our market share gains in the construction insulation markets which are driven by growing consumer awareness about energy efficient foams and coatings. Margin increases as a result of vertical integration, sales growth, potential acquisitions, in conjunction with tighter controls on spending are expected to enable Lapolla to achieve profitability in 2010. The markets for our products are highly competitive; however, we believe that our competitive advantages are rooted in our product formulations, product credentials, approvals and performance, price structures, and technical customer service. In addition, we offer the flexibility, quality of products and responsiveness that a smaller company can offer.  This outlook is based on a number of assumptions relating to our business and operations which are subject to change, some of which are outside our control. A variation in our assumptions may result in a change in this outlook.

Liquidity and Capital Resources

Cash on hand at December 31, 2009 was $400,821, reflecting an increase of $357,976 when compared to the $42,485 of cash on hand at December 31, 2008. Cash on hand at December 31, 2008 was $42,845 reflecting a decrease of $297,010 when compared to the $339,855 of cash on hand at December 31, 2007. Cash flow has improved substantially from 2008 to 2009 due to the increased margin associated with our increased sales volumes. From 2007 to 2008, cash flow was negatively impacted by substantial sales growth and the associated increases in accounts receivable and inventory and we relied not only upon our Revolving Credit Note and Convertible Term Loan with ComVest, but also our Chairman and majority stockholder, for financial support. We believe we are past the breakeven point relative to our current sales and expense levels from the second half of 2009 and relying less on our ComVest Credit Facility and Chairman’s financial commitments.

The Company has stockholders equity of $3,763,219 at December 31, 2009. However, there are concerns about the liquidity of the Company at December 31, 2009 based on a working capital deficit of $4,780,743 due primarily to the maturing of the ComVest Credit Facility which matures on August 31, 2010. The outstanding Credit Facility consists of the Convertible Term Note with an outstanding balance of $2.5 Million and Revolving Credit Note with an outstanding balance of $8.37 Million. Management approached ComVest in early March 2010 and they expressed their intent to extend the Convertible Term Note until 2012. Additionally, our Chairman, who has supported the Company for over 11 years and invested approximately $54 Million to date, has provided Management with a financial commitment for up to $11 Million for the 2010 year, if necessary. Since 2004, Lapolla’s revenues have increased from approximately $2.4 Million with a gross margin of 15.8% to $50 Million with a gross margin of 24.8% in 2009. As a result, Management believes that the cash on hand, cash generated from operations, and the 2010 financial commitment from the Chairman, will be sufficient to fund operations through fiscal 2010. Notwithstanding the foregoing, we may seek to raise additional capital through private placements of debt, or common or preferred stock with accredited sophisticated investors, to fund our aggressive strategic growth plans and pay off our maturing Credit Facility. We have budgeted up to $150,000 for capital expenditures for 2009.  If the Company chooses to raise additional capital other than from ComVest, anti-dilution provisions under the Convertible Term Note and Warrants may be triggered if any security sold is convertible into or exchangeable for our common stock based on the price, including conversion price, of the common stock sold, and a 25% of the qualified proceeds raised repayment requirement up to the amount due under the Convertible Term Note will be triggered. The ComVest limitations may adversely impact our ability to raise additional capital.

 
8


Net cash used in our operations was $2,688,144 in 2009, reflecting a decrease of $4,689,326 when compared to the $7,377,470 in 2008. The cash used in operations for 2009 as compared to 2008 was primarily attributable to our net loss for the year, including the effect of adjustments to reconcile net loss to cash provided by or used in operating activities and adjusting for non-cash items, augmented by decreases in trade receivables, prepaid expenses and other current assets, inventories, accounts payable, accrued expenses and other current liabilities, and deposits and other non-current liabilities. In 2008, the Company borrowed $5,076,600 under the ComVest Credit Facility and repaid $400,000 under the Convertible Term Note. In 2009, the Company did not borrow any additional funds from the Credit Facility and repaid $500,000 under the Convertible Term Note. From 2008 to the first half of 2009, the Company borrowed $7.9 Million for working capital purposes and repaid $1 Million from the Chairman. During the second half of 2009, the Company borrowed $200,000 for working capital from the Chairman and paid $500,000 to him for his accrued interest and a small portion of his preferred dividends. These funds were used to fund Lapolla’s broader based operations, including the AirTight asset acquisition, resulting in increased SG&A costs, pay down our accounts payable, which decreased $1,200,182 in 2009, and meet our principle repayment obligations under our ComVest Convertible Term Note. Our inventories, trade receivables, net, and accrued expenses and other current liabilities decreased slightly from 2008 to 2009 primarily due to the general slowdown of the economy from 2008 to the first half of 2009. Net cash used in our operations was $7,377,470 in 2008, reflecting an increase of $1,909,327 when compared to the $5,468,143 in 2007. The cash used in operations for 2008 as compared to 2007 was primarily attributable to our net loss for the year, including the effect of adjustments to reconcile net loss to cash provided by or used in operating activities and adjusting for non-cash items, augmented by increases in trade receivables and inventories, partially offset by increases in accounts payable, accrued expenses and other current liabilities, and other liabilities. From the second half of 2007 to early 2008, Lapolla transformed from a distributor of spray polyurethane foam (SPF) to a manufacturer of SPF.  This transition brought growth in sales along with growth in our balance sheet. Trade receivables, net, grew $5,152,525 during 2008 mainly due to a 51% increase in sales but also due to economic conditions and customers taking longer to pay.  Inventories increased $2,066,840 from 2007 to 2008 due to our move to manufacturing SPF and the need for raw materials on hand to produce our SPF as needed.  Accounts payable increased $4,404,434 as more raw material suppliers are needed and the increase in sales requires an increase in raw materials, as well as from our acquisition of certain liabilities with our AirTight Asset Purchase. Accrued expenses and other current liabilities increased $1,069,525 mainly due to increases in our insurance premium notes payable, commissions payable, accrued inventory, accrued related party interest from short term loans received from the Chairman from 2007 throughout 2008, and accrued dividends, partially offset by decreases from paying down our sales taxes payable.

Contractual Obligations

   
Payments Due By Period
 
   
Less Than
   
1 to 3
   
4 to 5
   
More Than
       
   
1 Year
   
Years
   
Years
   
5 Years
   
Total
 
ComVest Convertible Term Note
  $ 2,500,000     $     $     $     $ 2,500,000  
ComVest Revolving Credit Note
    8,530,191                         8,530,191  
Long-Term Debt Obligations
    73,656       136,034       7,780             217,470  
Estimated Interest Payments on Long-Term Debt and ComVest Obligations
    588,796       14,607       1,630             605,033  
Purchase Order Obligations
    565,560                         565,560  
Operating Lease Obligations
    343,767       189,851                   533,618  
Total
  $ 12,601,970     $ 340,492     $ 9,410     $     $ 12,951,872  
____________________________________
The information provided in the table above relates to credit instruments, vehicle notes, purchase obligations, and facility leases.

We currently have two material debt covenants: (i) the Company is not allowed to make capital expenditures in excess of $500,000 for the years ended December 31, 2009 and 2010, respectively, and (ii) the Company is not allowed to exceed a borrowing base calculation defined as an amount determined by a detailed calculation equal to 85% of eligible accounts receivable, plus 50% of eligible inventory (“Borrowing Base”). We were not in compliance with our Borrowing Base calculation as of December 31, 2009. The calculation determined our maximum allowed outstanding as of December 31, 2009 was $8,366,831 and after subtracting the balance outstanding of $8,530,191 under our Revolving Credit Note, we exceeded the Borrowing Base by $163,360.  In order to cure this default, ComVest agreed to permit us to increase the Convertible Term Note on January 1, 2010 by the $163,360, which brought us back into compliance with our Revolving Credit Note. We were not in compliance with our Borrowing Base calculation as of December 31, 2008. The calculation determined our maximum allowed outstanding as of December 31, 2008 was $7,815,531 and after subtracting the balance outstanding of $8,537,821 under our Revolving Credit Note, we exceeded the Borrowing Base by $722,290. The Company is required to submit its Borrowing Base calculation to ComVest monthly. If, at any time, the Company’s Borrowing Base calculation is less than the amount outstanding under the Revolving Credit Note, and that amount remains unpaid or is not increased from future Borrowing Base calculations to an amount equal to the balance outstanding under the Revolving Credit Note at any given time, ComVest, in its discretion, may accelerate any and all amounts outstanding under the Credit Facility. Based on the fact that the Company was not in compliance with its Borrowing Base calculation at December 31, 2008 and this default was cured on December 31, 2009, despite the fact that ComVest did not call the debt due, the Company restated its balance sheet for December 31, 2008 to reclassify the Revolving Credit Note as short term instead of long term. See financial statements listed under Item 15 of Part IV of this report.

Net cash used in investing activities was $326,353 in 2009, reflecting an increase of $67,561 when compared to $258,792 in 2008. We invested $236,268 in new property, plant and equipment in 2009 compared to $158,792 in 2008, as well as $90,085 towards the purchase of AirTight’s assets. During 2009, property, plant and equipment additions included $110,852 for vehicles (sales personnel), $6,114 for leasehold improvements, $7,278 for office furniture and equipment, $74,077 for computers and software, $24,064 for machinery and equipment, and $17,111 for construction in progress. Net cash used in investing activities was $258,792 in 2008 compared to $1,381,955 in 2007. We invested $158,792 in new property, plant and equipment during 2008 compared to $1,381,955 in 2007, as well as $100,000 towards the purchase of AirTight’s assets. During 2008, property, plant and equipment additions included $222,793 in vehicles, $69,968 for leasehold improvements, $29,267 for office furniture and equipment, $72,077 for computers and software, $15,094 for machinery and equipment, and $18,634 for construction in progress. During 2007, property, plant and equipment additions included $55,510 for leasehold improvements, $28,099 for office furniture and equipment, $1,360,859 for machinery and equipment relating to our new foam resin plant and expansion of our coating and distribution facility in Houston, Texas, and reductions included $105,323 for vehicles and $72,476 for plant construction in progress due to capitalizing the operating portion of our foam resin plant.

 
9


Net cash provided by financing activities was $3,376,066 in 2009, reflecting a decrease of $3,963,188 when compared to $7,339,254 in 2008. Net cash was provided by our Chairman to finance our operations and capital expenditures in 2009. Our Chairman provided $4,300,000 under a financial commitment in the form of short term loans. During 2009, we made principal repayments of $500,000 under the Convertible Term Note and paid the Chairman $183,887 for a portion of his accrued preferred stock dividends. Net cash provided by financing activities was $7,339,254 in 2008, reflecting an increase of $531,417 when compared to $6,807,837 in 2007. Net cash was provided by our Credit Facility and Chairman to finance our operations and capital expenditures. ComVest provided $3,400,000 under the Revolving Credit Note and $1,502,616 under the Convertible Term Note and the Chairman provided $3,800,000 under a financial commitment in the form of short term loans. During 2008, we made principal repayments of $400,000 under the Convertible Term Note and $1,000,000 in reduction of our short term indebtedness to our Chairman prior to modifying the Credit Facility. In connection with the closing of the Credit Facility modification, the Chairman canceled $2,000,000 in short term loans in exchange for common stock. During 2007, net cash was provided by our Credit Facility and short term loans from our Chairman, to finance our operations and capital expenditures. ComVest provided $5,000,000 under a Revolving Credit Note and $2,000,000 under a Convertible Term Note, which we used to payoff certain former financings which were guaranteed by the Chairman, and repaid $400,000 of the short term loans advanced to us by the Chairman prior to entering into the Credit Facility. During 2007, we made principal repayments of $200,000 under the Convertible Term Note and the Chairman canceled $1,550,000 in short term loans in exchange for common stock.

Indemnification

Our Restated Certificate of Incorporation, as amended from time to time, provides that we will indemnify, to the fullest extent permitted by the Delaware General Corporation Law, each person that is involved in or is, or is threatened to be, made a party to any action, suit or proceeding by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Company or was serving at our request as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise. We have purchased insurance policies covering personal injury, property damage and general liability intended to reduce our exposure for indemnification and to enable us to recover a portion of any future amounts paid.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We do not issue or invest in financial instruments or their derivatives for trading or speculative purposes. Although we maintain limited operations in Canada, our operations are primarily conducted in the United States, and, as such, we are not subject to material foreign currency exchange risks. We have outstanding debt and related interest expense, however, market risk in interest rate exposure in the United States and Canada is currently not material to our operations. We utilize letters of credit to mitigate any risk of collection in our business outside of the United States and Canada.

Item 8.  Financial Statements and Supplementary Data

The information required by this Item is incorporated herein by reference to the financial statements set forth in Item 15 of Part IV of this report, “Exhibits and Financial Statement Schedules.”

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

None.

Item 9A.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Principal Executive Officer and our Principal Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision- making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

2009 Year DC&P Evaluation

We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009, the end of the annual period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken.

 
10


Based on the foregoing, our Principal Executive Officer and our Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective and operating at the reasonable assurance level.  Material weaknesses existed. As described elsewhere in this report, certain information included herein for the first three calendar quarterly periods and year ended December 31, 2008, as well as the first three calendar quarterly periods in the 2009 year, was restated to: (a) record the accounting aspects of a related party transaction between two directors for the four quarters and year ended December 31, 2008 and the first three quarters of 2009; (b) disclose a technical default at December 31, 2008 on our credit facility that was not cured effectively until December 31, 2009; and (c) during 2009, insufficient senior level finance and accounting positions contributed to significant year end adjustments. A material weakness in internal control over financial reporting is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects a company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles, such that there is more than a remote likelihood that a misstatement of the company's annual or interim financial statements that is more than inconsequential will not be prevented or detected. Due to the Company’s continued growth, additional and/or realignment of accounting staff is required to more effectively manage the increased volumes of business. The actions that the Company has taken and/or is in the process of taking to correct these material weaknesses include but are not limited to: (a) added a new control objective in its disclosure controls and procedures to detect all aspects of related party transactions; (b) actively searching for a permanent CFO (several candidates have been identified and are being considered); (c) reevaluating all existing accounting personnel; and (d) increasing the number of accounting personnel as deemed required by current and anticipated growth volume requirements. The Company believes the material weakness identified above with respect to detection of all aspects of related party transactions is currently in place and the new control objective added in the fourth quarter of 2009 rectifies this particular material weakness.  The Company’s search for a permanent CFO and assessment of the accounting department’s staffing requirements is ongoing at this particular time and expected to be rectified shortly. There were changes in our internal controls during the fourth quarter of 2009 as described above.  We are currently undertaking significant changes in our internal controls after the end of the fourth quarter of 2009 as described above. See 2008 Year DC&P Evaluation and Item 9A(T) below for additional information.

2008 Year DC&P Evaluation

We previously reported in our Form 10-K for the year ended December 31, 2008, filed with the SEC on April 15, 2009, that our disclosure controls and procedures were effective and operating at a reasonable assurance level and thereafter learned in November 2009 that they were not effective and operating at a reasonable assurance level. As described above, certain information for the first three calendar quarterly periods and year ended December 31, 2008, was restated to: (a) record the accounting aspects of a related party transaction between two directors for the four quarters and year ended December 31, 2008 and the first three quarters of 2009; and (b) disclose a technical default at December 31, 2008 on our credit facility that was not cured effectively until December 31, 2009. Based on the foregoing, our Principal Executive Officer and our Principal Financial Officer concluded that, as of December 31, 2008, our disclosure controls and procedures were not effective nor operating at a reasonable assurance level and a material weakness existed for the above mentioned undetected matters throughout 2008 and until the Company changed its internal controls over financial reporting to detect such matters during the fourth quarter of 2009. See 2009 Year DC&P Evaluation above.

Item 9A(T).  Controls and Procedures

Management’s Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting, as is defined in the Exchange Act, pursuant to the SEC’s rules and regulations. We maintain a system of internal control over financial reporting based on criteria established by COSO. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance, with respect to reporting financial information.

2009 Year ICFR Evaluation

We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established by COSO. As described elsewhere in this report, certain information included herein for the first three calendar quarterly periods and year ended December 31, 2008, as well as the first three calendar quarterly periods in the 2009 year, was restated to: (a) record the accounting aspects of a related party transaction between two directors for the four quarters and year ended December 31, 2008 and the first three quarters of 2009; and (b) disclose a technical default at December 31, 2008 on our credit facility that was not cured effectively until December 31, 2009. Moreover, insufficient senior level finance and accounting positions contributed to significant year end adjustments. Due to the Company’s continued growth, additional and/or realignment of accounting staff is required to more effectively manage the increased volumes of business, specifically we need a permanent CFO and personnel to perform account reconciliations. Based on this evaluation, we concluded that our internal control over financial reporting was, as of the December 31, 2009, the end of the annual period covered by this report, not effective. See 2008 Year ICFR Evaluation below and Item 9A above.

2008 Year ICFR Evaluation

We previously reported in our Form 10-K for the year ended December 31, 2008, filed with the SEC on April 15, 2009, that our internal control over financial reporting based on the framework and criteria established by COSO was, as of December 31, 2008, the end of the annual period covered by that report, effective, and thereafter learned in November 2009 that it was not effective. As described above, certain information for the first three calendar quarterly periods and year ended December 31, 2008, was restated to: (a) record the accounting aspects of a related party transaction between two directors for the four quarters and year ended December 31, 2008 and the first three quarters of 2009; and (b) disclose a technical default at December 31, 2008 on our credit facility that was not cured effectively until December 31, 2009. Based on the foregoing, we concluded that our internal control over financial reporting was, as of the December 31, 2008, the end of the annual period covered by this report, not effective until such time that the Company changed its internal controls over financial reporting to detect such matters in November 2009. See 2009 Year ICFR Evaluation above.

Item 9B.  Other Information

None.

 
11


PART III

Item 10.  Directors, Executive Officers and Corporate Governance

Directors

Set forth below are descriptions of the backgrounds of each incumbent nominee, their ages, and their principal occupations for at least the past five years and their public-company directorships as of the record date. There are no familial relationships among any of our directors or among any of our directors and executive officers.

graphic 2  
Richard J. Kurtz
69
             Director since November 23, 1998
       
 
Chairman of the Board
 
 
Mr. Kurtz has been chief executive officer of the Kamson Corporation, a privately held corporation, in business for the past 31 years. The Kamson Corporation has its principal executive offices located in Englewood Cliffs, New Jersey and currently owns and operates eighty one (81) investment properties in the Northeastern U.S. Mr. Kurtz is a graduate of the University of Miami and a member of its President's Club. Most notably, the Chamber of Commerce in Englewood Cliffs and the Boy Scouts of America chose him Man of the Year. Mr. Kurtz resides in Alpine, New Jersey and is currently vice president and a member of the Board of Directors for the Jewish Community Center on the Palisades in Tenafly, New Jersey. He is also an elected member of the Board of Trustees and Foundation Board for the Englewood Hospital and Medical Center of New Jersey and the Board of Governors for the Jewish Home and Rehabilitation Center.

graphic 3  
Lt. Gen. Arthur J. Gregg (US Army) (Ret.)
81
             Director since February 21, 2000
 
 
Lt. Gen. Gregg has more than fifty seven years of distinguished military and business experience. His record of performance repeatedly demonstrates the ability to lead organizations to success. As a result of his extensive military and executive experience, he has considerable contacts and respect within federal government agencies and private industry. Lt. Gen. Gregg has retired from active management but continues an active schedule as a member of several corporate and nonprofit boards. He chairs four of these boards. His education includes Harvard University, John F. Kennedy School of Government Concentrated Executive Program in National Security; Saint Benedict College Atchison, Kansas, Bachelor of Science in Business Administration (Summa cum Laude); Army War College, Carlisle Barracks, Pennsylvania, One-year graduate level college; Command and General Staff College, Fort Leavenworth, Kansas, One-year graduate level college.

graphic 4  
Jay C. Nadel
51
             Director since January 16, 2007
 
 
Mr. Nadel is chairman of the board of Englewood Hospital and Medical Center since September 2006. In addition to being an independent consultant since 2004, Mr. Nadel is an employee of Sloan Securities since January 2006. As a CPA and senior financial services executive, Mr. Nadel has extensive business management and operations experience. From 2002 to 2004, he was executive vice president of Bank of New York’s Clearing Services where he oversaw strategic planning; 1986 to 2001, a partner in the investment firm of Weiss, Peck & Greer/Robeco, where he was chairman of the operations committee and managing director of the firm’s Clearing Services Division; and 1980 to 1986, he was a manager at KPMG Peat Marwick, New York, where he provided audit services. Mr. Nadel is a Certified Public Accountant since 1980 and has a Bachelor of Science degree from the University of Maryland.

graphic 5  
Augustus J. Larson
52
             Director since January 16, 2007
 
 
Mr. Larson is president of Larson Capital, LLC, a commercial real estate finance and investment company in Far Hills, New Jersey. He founded Larson Capital, LLC in 2004. From 2001 to 2003, Mr. Larson was managing director of PW Funding and directed its commercial and multi-family real estate loan production in the metro New Jersey and New York markets. He is currently a presiding director of the newly formed Somerset County region Team Capital Bank in Somerville, New Jersey, and as such is also a member of the of the Management Board of Team Capital Bank, which is a federally chartered savings bank providing commercial banking services in eastern Pennsylvania and New Jersey.  Mr. Larson is a councilman in the Borough of Far Hills, New Jersey. He has a Bachelor of Arts from Colgate University in New York. He is also a certified mortgage banker and an active member in numerous professional and charitable organizations.

graphic 6  
Howard L. Brown
64
             Director since May 22, 2007
       
 
Mr. Brown has over 36 years experience in sales, distribution, financial forecasting and planning, mergers and acquisitions and quality assurance. He was chairman and chief executive officer of Allied Office Products, headquartered in Clifton, New Jersey, the country's largest independent dealer of office products and services, which was sold to Office Depot in 2006. Allied, prior to the sale, had grown annual sales to more than $350 Million from over 30 acquisitions beginning in 1998. Mr. Brown is a graduate of Syracuse University.  He is a member of the board of directors of Holy Name Hospital in Teaneck, New Jersey, Potomac Ridge Behavioral Health Foundation in Rockville, Maryland, and Direct Supply Warehouse in New Jersey. Mr. Brown is a philanthropist.

 
12

 
graphic 7  
Douglas J. Kramer
46
             Director, CEO and President
       
 
Mr. Kramer joined the Company in February 2005 as president and chief operating officer and was named Chief Executive Officer and President in July 2006. He was appointed to the Board on January 16, 2007. Mr. Kramer has 22 years Industry Experience. Prior to joining Lapolla, he was vice president of the Construction Products Division for Foam Enterprises, LLC, a wholly-owned subsidiary of the BASF Corporation, where he was employed from 1997 to 2004. Mr. Kramer has a background in Liberal Arts from Penn State University and the University of Texas.


graphic 8  
Michael T. Adams
44
             Director, CGO, EVP and Secretary
       
 
Mr. Adams has more than thirteen years experience with Lapolla. He was appointed to the Board on December 20, 2004.  Mr. Adams was appointed Interim Chief Financial Officer on November 11, 2009, named Chief Governance Officer in July 2006, and has been Executive Vice President and Secretary since January 1999. During his term with Lapolla, Mr. Adams also served as president and interim chief executive officer from 2003 to 2005, and held various officer positions in the Company’s former subsidiaries since he first joined Lapolla in 1997. He is also actively involved and a member of his local community association’s board of directors in New Caney, Texas. Mr. Adams earned his Bachelor of Science and Master of Science in business administration, and Juris Doctor degrees from Nova Southeastern University, Fort Lauderdale, Florida.
____________________________________
-      Officers are appointed by and hold office at the pleasure of the Board of Directors.
-      Paul Smiertka, the Company’s former CFO and Treasurer, passed away on August 30, 2009.  Michael T. Adams acted as Interim CFO and Treasurer until Neil S. Burns, his successor, was hired on October 28, 2009. Neil S. Burns resigned as CFO and Treasurer on November 11, 2009.  Michael T. Adams is currently the Interim CFO and Treasurer while the search continues for a successor.

Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), requires our executive officers, directors and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater than ten-percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms furnished to us or the written representations from certain of the reporting persons that no other reports were required, we do not believe that during the fiscal year ended December 31, 2009, all executive officers, directors and greater than ten-percent beneficial owners complied with the reporting requirements of Section 16(a).

Code of Business Ethics and Conduct

We have adopted a Code of Business Ethics and Conduct, which contains general guidelines for conducting our business and is designed to help directors, employees and independent consultants resolve ethical issues in an increasingly complex business environment. The Code of Business Ethics and Conduct applies to all directors, consultants and employees, including our principal executive officer and our principal financial officer and any other employee with any responsibility for the preparation and filing of documents with the SEC. The Code of Business Ethics and Conduct covers topics including, but not limited to, conflicts of interest, confidentiality of information and compliance with laws and regulations. A copy of the Code of Business Ethics and Conduct is available in the Corporate Governance section of our website at www.lapollaindustries.com. The information on our website is not incorporated by reference in this annual report. We may post amendments to or waivers of the provisions of the Code of Business Ethics and Conduct, if any, made with respect to any directors and employees on that website. Our stockholders may request a copy of our Code of Business Ethics and Conduct by writing to Lapolla Industries, Inc., Attn: Corporate Secretary, Intercontinental Business Park, 15402 Vantage Parkway East, Suite 322, Houston, Texas 77032.
 
Nominating Function

The Corporate Governance Committee handles the nominating function for Board of Directors, including but not limited to, evaluating candidates for membership on the Board and making recommendations to the Board regarding candidates and composition of the Board.  There have been no changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the last disclosure of such procedures in the Company Proxy Statement filed with the SEC on April 30, 2007. Our Director Selection Process criterion is available on our website at http://www.lapollaindustries.com/pdf/directorselection.pdf.

Audit Committee

The Board of Directors has a standing Audit Committee, which is comprised of Jay C. Nadel, Lt. Gen. Arthur J. Gregg, US Army (Ret), and Augustus J. Larson. Each member of our Audit Committee meets the independence criteria by applicable SEC rules for audit committee membership and is an “independent director”. In addition, Mr. Nadel is our “audit committee financial expert” as such term is described in applicable SEC regulations.  Refer to Directors above for information on Mr. Nadel’s qualifications, as well as, Lt. Gen. Gregg and Mr. Larson.

 
13


Item 11.  Executive and Director Compensation

Executive Compensation Discussion and Analysis

This Executive Compensation Discussion and Analysis section discusses the compensation policies and programs for our named executive officers consisting of our CEO and President (Mr. Kramer), current Interim CFO and Treasurer, CGO, EVP, and Secretary (Mr. Adams), as well as former CFOs and Treasurers (Mr. Smiertka and Mr. Burns). The Compensation Committee administers the compensation policies and programs for our named executive officers, as well as the equity-based incentive compensation plans in which those persons participate.

Compensation Objectives

The Compensation Committee’s philosophy is to provide a compensation package that attracts, motivates and retains executive talent, and delivers rewards for superior performance as well as consequences for underperformance. The objectives of the Compensation Committee’s compensation practices are to (a) provide a total compensation program that is competitive in the industries in which we compete for executive talent; (b) place a significant portion of executive compensation at risk by linking such compensation to the achievement of corporate financial performance objectives and individual objectives; (c) provide long-term incentive compensation that focuses executives’ efforts on building stockholder value by aligning their interests with our stockholders; and (d) provide incentives that promote executive retention. In designing and administering our executive compensation programs, we attempt to strike an appropriate balance among these elements, as discussed below.

The major compensation elements for our named executive officers are base salary, annual bonuses, equity awards, insurance benefits and perquisites. Each of these elements is an integral part of and supports our overall compensation objectives. Base salaries (other than increases), insurance benefits and perquisites form stable parts of our named executive officers’ compensation packages that are not necessarily dependent on our performance during a particular year. We set these compensation elements at competitive levels so that we are able to attract, motivate and retain highly qualified executive officers. Consistent with our performance-based philosophy, we reserve the largest potential compensation for performance- and incentive-based awards. These awards include annual and long-term awards that are based on our financial performance and provide compensation in the form of stock options and stock bonuses to provide incentives that are tied to both our short-term and long-term performance. Our performance-based annual bonuses reward short-term and long-term performance, while our stock options reward long-term performance and align the interests of management with our stockholders. We additionally provide for retention of certain named executive officers through transaction bonuses in the case of a change in control.

Compensation Committee Determination of Compensation Awards

The Compensation Committee has primary authority for determining the compensation awards to be made to our executive officers. The Compensation Committee annually determines the total compensation levels for our executive officers by considering several factors, including each executive officer’s role and responsibilities, how the executive officer is performing against those responsibilities, and the Company’s performance.

Components of Compensation

Base Salary

Base salaries provide our executive officers with a degree of financial certainty and stability. In order to attract and retain highly qualified executives, we provide base salaries based on individual negotiations and general competitive hiring practices. Salaries are usually set by agreement with the named executive officers but also periodically reviewed in the case of executive promotions or other significant changes in responsibilities. The named executive officers received an average salary increase of 13% from 2008 to 2009. No formulaic base salary increases are provided to the named executive officers. Mr. Kramer and Mr. Adams each received a 12.5% and 10.2% increase in their base salaries, respectively, at the beginning of 2009 based on prior individual negotiations in 2008.

Annual Bonus

The primary purpose of our annual bonus, payable in cash or stock bonuses, is to motivate our named executive officers to meet or exceed our company-wide short-term performance objectives. The named executive officers are each eligible for annual bonus consideration designed to reward the named executive officers for their contributions to individual and corporate objectives. Annual bonuses are generally paid in March of the year following the performance period. For 2009, the Compensation Committee set profitability as the threshold. The Company did not achieve profitability as expected in 2009 and no annual bonuses were paid to any named executive officers based on such criteria. Mr. Adams received a $10,000 bonus for accepting additional responsibilities as Interim CFO during 2009.

Long-Term Incentive Awards — Stock Options

Our named executive officers are eligible to participate in our Equity Incentive Plan (“Equity Plan”). In addition to our named executive officers, our key employees are eligible to receive stock option grants (each option to purchase one share of common stock) under our Equity Plan throughout the fiscal year in connection with certain events, such as a new hire, retention of an employee, integration of acquisitions or the achievement of certain individual performance objectives. Such grants provide an incentive for our executive officers and key employees to increase our market value, as represented by our market price, as well as serving as a method for motivating and retaining them. The Compensation Committee believes that an award of stock options more closely aligns the interests of the recipient with those of our stockholders because the recipient will only realize a return on the option if our stock price increases over the term of the option. The exercise price of our option grants under the Equity Plan is equal to 100% of the closing price of our stock on the grant date.

 
14


During 2009, we granted to Mr. Adams 300,000 stock options in connection with his renewed executive employment agreement, which options have term of 6 years, and vest only upon a change in control, and Mr. Burns 20,000 stock options in connection with his executive employment agreement, which options had a term of 5 years and were to vest at the end of 2010 based on the Company achieving profitability (Mr. Burns resigned and his stock options automatically forfeited). No other stock options were granted in 2009.

Perquisites and Other Benefits

We also provide other benefits to our named executive officers that are not tied to any formal individual or company performance criteria and are intended to be part of a competitive overall compensation program. For 2009, these benefits included payment of health, dental, life, and long term disability insurance, and a leased automobile for Mr. Kramer; health, dental, life, and long term disability insurance, and an automobile allowance for Mr. Adams; and health, dental, life, and long term disability insurances for Mr. Smiertka (deceased) and Mr. Burns (resigned).

Transaction Bonus

We have provided a transaction bonus for Mr. Kramer and Mr. Adams in their employment agreements which only activates upon consummation of a change in control. See Severance and Change in Control Arrangements below for more information.

Severance and Change of Control Arrangements

We ordinarily enter into employment agreements with our named executive officers and occasionally key employees providing for specific terms of employment. Accordingly, employment of any employee without an employment agreement may be terminated at any time. We provide certain benefits to our named executive officers upon certain qualifying terminations and with terminations under certain circumstances following a change of control, which benefits are designed to retain our named executive officers, provide continuity of management in the event of an actual or threatened change of control, and to ensure that our named executive officers’ compensation and benefits expectations would be met in such event. A description of the material terms of our change of control agreements is on page 17 of this report under “Potential Payments Upon Termination or Change-in-Control.”

Policy on Deductibility of Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended (“Code”), limits the tax deductibility by a company of annual compensation in excess of $1,000,000 paid to our CEO and any of our four other most highly compensated executive officers. However, performance-based compensation that has been approved by stockholders is excluded from the $1,000,000 limit if, among other requirements, the compensation is payable only upon attainment of pre-established, objective performance goals and our board of directors committee that establishes such goals consists only of “outside directors.” Additionally, stock options will qualify for the performance-based exception where, among other requirements, the exercise price of the option is not less than the fair market value of the stock on grant date, and the plan includes a per-executive limitation on the number of shares for which options may be granted during a specified period. Our stock option grants under our Equity Plan are intended to meet the criteria of Section 162(m) of the Code.  We believe all of the members of our Compensation Committee qualify as outside directors pursuant to Section 162(m) of the Code. The Compensation Committee considers the anticipated tax treatment to our Company and our executive officers when reviewing executive compensation and our compensation programs. The deductibility of some types of compensation payments can depend upon the timing of an executive’s vesting or exercise of previously granted rights. Sections 280G and 4999 of the Code impose certain adverse tax consequences on compensation treated as excess parachute payments. An executive is treated as having received excess parachute payments for purposes of Sections 280G and 4999 of the Code if he or she receives compensatory payments or benefits that are contingent on a change in the ownership or control of a corporation, and the aggregate amount of such contingent compensatory payments and benefits equal or exceeds three times the executive’s base amount. If the executive’s aggregate contingent compensatory payments and benefits equal or exceed three times the executive’s base amount, the portion of the payments and benefits in excess of one times the base amount are treated as excess parachute payments. An executive’s base amount generally is determined by averaging the executive’s Form W-2 taxable compensation from the corporation for the five calendar years preceding the calendar year in which the change in ownership or control occurs. An executive’s excess parachute payments are subject to a 20% excise tax under Section 4999 of the Code, in addition to any applicable federal income and employment taxes. Also, the corporation’s compensation deduction in respect of the executive’s excess parachute payments is disallowed under Section 280G of the Code. If we were to be subject to a change of control, certain amounts received by our executives (e.g. amounts attributable to accelerated vesting of options) could be excess parachute payments under Sections 280G and 4999 of the Code.

 
15


Executive Compensation

The following table shows the compensation earned by, or awarded or paid to, each of our named executive officers for services rendered in all capacities to us for the year ended December 31, 2009.

SUMMARY COMPENSATION TABLE

                   
Stock
   
Options
   
All Other
       
Name and
 
Year
 
Salary
   
Bonus
   
Awards
   
Awards
   
Compensation
   
Total
 
Principal Position
 
($)
 
($)
   
($)
   
($)
   
($) (1)
   
($) (2)
   
($)
 
(a)
 
(b)
 
(c)
   
(d)
   
(e)
   
(f)
   
(i)
   
(j)
 
Douglas J. Kramer
 
2009
    400,000                   162,834       26,956       589,790  
CEO and President
 
2008
    350,000                   662,816       19,545       1,032,361  
   
2007
    350,000                   342,617       19,361       711,978  
                                                     
Michael T. Adams
 
2009
    175,000       10,000                   24,774       209,774  
CGO, EVP and Secretary
 
2008
    158,750                         24,064       182,814  
   
2007
    158,611                   68,977       18,691       246,279  
                                                     
Paul Smiertka
 
2009
    134,615                         7,582       142,197  
CFO and Treasurer (3)
 
2008
    155,962                   36,782       5,581       198,325  
(Deceased 8/30/09)
 
2007
                                   
                                                     
Neil S. Burns
 
2009
    6,769                               6,769  
Former CFO and Treasurer (4)
 
2008
                                   
(Resigned 11/11/09)
 
2007
                                   
Notes:
(1) The amounts shown in this column represent the amounts of compensation cost recognized by us in each fiscal year related to grants of stock options, as prescribed under GAAP. For a discussion of valuation assumptions, see 18 – Share-Based Payment Arrangements, Equity Incentive Plan, of our Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009. The information provided hereinbelow shows how much of the overall amount of the compensation cost recognized by us in 2009 is attributable to each award:

Name of Executive Officer
 
Grant Date
 
Exercise Price ($)
   
Number of Shares of Stock Underlying Options Granted
   
2008 Fiscal Year Compensation Cost ($)
 
Douglas J. Kramer
 
5/5/2008
    .74       2,000,000       162,834  
Michael T. Adams
 
5/18/2009
    .35       300,000        
Paul Smiertka
 
3/3/2008
    .68       200,000        
Neil S. Burns
 
10/28/2009
    .37       20,000        
(2) For 2009, the amounts disclosed in this column consist of perquisites valued at an aggregate of $59,312, of which approximately $3,000 was attributed to personal use of a Company provided leased vehicle to Mr. Kramer; $9,000 was for a car allowance for Mr. Adams; $23,956, $15,774, and $7,582, was for health, dental, life, and long term disability insurances for Mr. Kramer, Mr. Adams, and Mr. Smiertka, respectively.
(3) Mr. Smiertka joined the Company as CFO and Treasurer on March 3, 2008 and passed away on August 30, 2009.
(4) Mr. Burns joined the Company as CFO and Treasurer on October 28, 2009 and resigned on November 11, 2009.

GRANTS OF PLAN-BASED AWARDS TABLE

The following table sets forth summary information regarding all grants of plan-based awards made to our named executive officers for the year ended December 31, 2009.

Name
 
Grant Date
 
All Other Option Awards: Number of Securities Underlying Options (#)
   
Exercise or Base Price Option Awards ($/Sh)
   
Grant Date Fair of Stock and Option Awards (3)
 
(a)
 
(b)
 
(j)
   
(k)
   
(l)
 
Michael T. Adams
 
5/18/2009
    300,000 (1)     0.35     $ 104,536  
Neil S. Burns
 
10/28/2009
    20,000 (2)     0.37     $ 7,400  
Notes:
(1) Amount represents the number of shares that may be purchased pursuant to options that were granted the Equity Plan, and have an exercise price per share equal to 100% of the closing price of our common stock on the NASDAQ OTCBB on May 18, 2009, the grant date, in accordance with the terms of the Equity Plan. The options have a term of approximately 5.7 years, vest, and are exercisable, upon a change in control.
(2) Amount represents the number of options that were granted pursuant to the Equity Plan, and have an exercise price per share equal to 100% of the closing price of our common stock on the NASDAQ OTCBB on October 28, 2009, the grant date, in accordance with the terms of the plan. The options have a term of five years, vest, and are exercisable, upon the Company achieving profitability for the 2010 calendar year.  These options were automatically forfeited upon Mr. Burns’ resignation on November 11, 2009.
(3) The dollar value of the options shown represents the grant date fair value based on a lattice-based valuation model of option valuation to determine grant date fair value, as prescribed under GAAP. The actual value, if any, an executive may realize will depend on the excess of the market price over the option exercise price on the date the option is exercised. There is no assurance that the value realized by an executive will be at or near the value estimated by the lattice-based valuation model. For a discussion of valuation assumptions, see Note 18 – Share-Based Payment Arrangements, Equity Incentive Plan, of our Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009.

 
16


Outstanding Equity Awards

The following table sets forth summary information regarding the outstanding equity awards held by each of our named executive officers at December 31, 2009.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Option Awards

   
Number of Securities Underlying Unexercised Options (#) (1)
   
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned
   
Option Exercise
 
Option Expiration
 
Name
 
Exercisable
   
Unexercisable
   
Options (#)
   
Price ($)
 
Date
 
(a)
 
(b)
   
(c)
   
(d)
   
(e)
 
(f)
 
Douglas J. Kramer (1)
    500,000       1,500,000             0.67  
12/31/2012
 
Douglas J. Kramer
    62,500       437,500       1,500,000       0.74  
12/31/2013
 
Michael T. Adams
    80,000                   0.67  
7/11/2011
 
Michael T. Adams
                300,000       0.35  
12/31/2015
 
Paul Smiertka
    33,333                   0.68  
3/2/2013
 
Notes:
(1) Mr. Kramer has 2,500,000 vested stock options, of which 562,500 are exercisable at December 31, 2009.

We did not have any outstanding stock awards held by our named executive officers at December 31, 2009.  Nor did any of our named executive officers exercise any stock options during the year ended December 31, 2009.

Potential Payments Upon Termination or Change-in-Control

We entered into long term employment and stock option agreements with our currently employed named executive officers that provide certain benefits in the event of termination due to dismissal for other than cause, disability and death, or change in control.

Termination

Under Mr. Kramer’s agreement, the entitlements upon termination vary depending upon: (1) termination by us without cause or by Mr. Kramer with good reason, (A) severance amount equal to the lesser of (i) 24 months Base Salary; or (ii) Base Salary for remainder of term; (B) product of (i) value of any equity or equity based awards granted which he can show he reasonably would have received had he remained employed by us through the end of the calendar year of termination date, or 4 months after termination date, whichever is greater, multiplied by (ii) a fraction, numerator of which is number of days in calendar year in which date of termination occurs through termination date and denominator of which is 365, but only to extent not previously vested, exercised and/or paid; (C) to extent not paid, any other amounts or benefits which he is entitled to receive through termination date under any other program maintained by us for his benefit; and (D) for 12 months from termination date, continued participation in any plan for medical, hospitalization and dental coverage for him as of termination date, subject to same terms and conditions as were applicable to him immediately prior to his termination date; (2) termination by us for cause or by him without good reason, in which case, Mr. Kramer shall have no right to any bonuses, salaries, benefits or other compensation other than those accrued through termination date; and (3) termination on account of death or disability, (A) we shall treat termination of his employment on account of his death or disability as a termination without cause, (B) in the event of his death, termination date shall be his date of death, (C) in the event of his disability, termination date shall be date that is 5 days after the date on which we give him written notice of termination of employment on account of his disability, and (D) our determination that he is incapable of fulfilling his obligations under his agreement is final and binding in the absence of fraud. As used in Mr. Kramer’s agreement, “cause” means: (i) willful malfeasance or willful misconduct in connection with his employment, (ii) continuing refusal to perform his duties hereunder or follow any lawful direction of the Board, (iii) any material breach of the nonsolicitation, noncompetition, and confidential information provisions of his agreement, (iv) engaging in conduct detrimental to the interest or reputation of the Company, without regard to whether such conduct was in connection with the his employment, or (v) his  conviction of, or plea of nolo contendere to, a felony (other than a traffic violation), which, in each event in (i), (ii) or (iii), actually has a material effect on the Company and its business; and “good reason” means: (i) a reduction in Mr. Kramer’s base salary, (ii) a substantial diminution of his duties and responsibilities, or (iii) a relocation of his primary workplace that is not agreed to by him and is to a location that is greater than 50 miles from his primary workplace as of the date of this agreement.

Under Mr. Adams’ agreement, the entitlements upon termination vary depending upon: (a) dismissal for other than cause, (i) an amount equal to 6 months annual base salary paid in equal monthly installments, (ii) the product of (I) any awards (stock options) which he can show that he reasonably would have received had he remained in such executive capacity with us through the end of the calendar year or 6 months after the date of termination, whichever is greater, in which occurs his date of termination, multiplied by (II) a fraction, the numerator of which is the number of days in the calendar year in which the date of termination occurs through the date of termination and the denominator of which is 365, but only to the extent not previously vested, exercised and/or paid, (iii) for 6 months following the date of termination, we will continue to provide medical and dental benefits to the him only on the same basis as such benefits are provided during such period to our other senior executive officers; provided, however, that if our welfare plans do not permit such coverage, we will provide him the medical benefits outside of such plans, and (iv) to the extent not paid, we will timely pay or provide to him any other amounts or benefits which he is entitled to receive through the date of termination under any plan, including accrued vacation to the extent unpaid; or (b) disability or death, (i) an amount equal to 6 months annual base salary.  As used in Mr. Adams’ agreement, “cause” means: (i) the commission of any act of fraud, embezzlement or dishonesty, (ii) unauthorized use or disclosure of any confidential information or trade secrets of the Company, (iii) any intentional misconduct or violation of the Company’s Code of Business Ethics and Conduct by him which has a materially adverse effect upon the Company’s business or reputation, (iv) his continued failure to perform the major duties, functions and responsibilities of his position after written notice from the Company identifying the deficiencies in his performance and a reasonable cure period of not less than thirty (30) days or (v) a material breach of executive’s fiduciary duties as an officer of the Company.

 
17


Change in Control

If Lapolla or any successor terminates any of the current named executive officers’ employment agreements at any time during their respective employment periods following a Change in Control: each of them: (i) will be entitled to an amount equal to the salary which would otherwise be payable over the remaining term of each of their agreements in one lump sum; and (ii) any outstanding awards held by them or other benefits under any Company plan or program, which have not vested in accordance with their terms, will become fully vested and exercisable at the time of such termination.  In the case of Mr. Kramer and Mr. Adams, we have also provided a transaction bonus equal to 6 % or 1½ % which is activated upon consummation of a change in control. A “Change in Control” is defined as an Ownership Change Event or series of related Ownership Change Events (collectively, a "Transaction") in which the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, direct or indirect beneficial ownership of more than 50% of the total combined voting power of the outstanding voting securities of the Company or, in the case of an Ownership Change Event, the entity to which the assets of the Company were transferred.  An "Ownership Change Event" will be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange by the stockholders of the Company of all or substantially all of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company); or (iv) a liquidation or dissolution of the Company. The sole exception to Change in Control and Ownership Change Event is any Change in Control that may result from the death or incapacity of Richard J. Kurtz wherein his interest is transferred to his heirs only.  In such event, no Change in Control or Ownership Change Event will be deemed to have occurred.

Acceleration of Benefits Under Certain Other Plans

Our Equity Plan also contains provisions for the accelerated vesting of stock options to participating named executive officers in the event of a change in control (using the same definition of “Change in Control” described above). Under our Equity Plan, in the event of a Change in Control, the surviving, continuing, successor, or purchasing entity or parent thereof, as the case may be (the "Acquiror"), may, without the consent of any participant, either assume the Company's rights and obligations under outstanding options or substitute for outstanding options substantially equivalent options to purchase the Acquiror's stock. In the event the Acquiror elects not to assume or substitute for outstanding options in connection with a Change in Control, the Compensation Committee shall provide that any unexercised and/or unvested portions of outstanding options shall be immediately vested and exercisable in full as of the date thirty (30) days prior to the date of the Change in Control. The vesting and/or exercise of any option shall be conditioned upon the consummation of the Change in Control. Any Options which are not assumed by the Acquiror in connection with the Change in Control nor exercised as of the time of consummation of the Change in Control shall terminate and cease to be outstanding effective as of the time of consummation of the Change in Control.  In accordance with the requirements of the SEC, the following table presents our reasonable estimate of the benefits payable to our named executive officers (1) under our employment agreements assuming that dismissal for other than cause, disability or death, or change in control occurred on December 31, 2009; and (2) under our Equity Plan assuming that a change of control occurred on December 31, 2009. Excluded from this table are any values relating to the transaction bonuses under the employment agreements (as described above) as such values are incalculable based on the highly speculative nature of this particular benefit. Although we believe we have made reasonable estimates regarding the amounts payable, there can be no assurance that in the event of a dismissal for other than cause, disability or death, or change in control, our named executive officers will receive the amounts reflected below.

       
Salary
   
Value of Option Acceleration
   
Continuation of Employee Benefits
   
Total Value
 
Name
 
Trigger
 
($)
   
($) (3)
   
($) (4)
   
($)
 
Douglas J. Kramer
 
Dismissal Other Than for Cause
    400,000 (1)           31,475       431,475  
CEO and President
 
Disability or Death
    400,000 (1)           31,475       431,475  
   
Change in Control
    400,000 (1)                 400,000  
                                     
Michael T. Adams
 
Dismissal Other Than for Cause
    87,500 (2)           24,872       112,372  
CGO, EVP and Secretary
 
Disability or Death
    87,500 (2)           24,872       112,372  
   
Change in Control
    350,000 (2)     40,500             390,500  
Notes:
(1) Represents annual base salary payable over the remaining term of his employment agreement.  Mr. Kramer’s employment agreement expires on December 31, 2010.
(2) Represents 6 months or the remaining annual base salary payable over the remaining term of his employment agreements payable in one lump sum, whichever is lesser for dismissal other than for cause and disability or death, and annual base salary payable over the remaining term of his agreement, for a change in control.  Mr. Adams’ employment agreement expires on December 31, 2011.
(3) This column represents the aggregate value of accelerated vesting of unvested stock options based on the spread between the closing price of our common stock on December 31, 2009 and the exercise prices of the stock options. Based on the closing price of our common stock on December 31, 2009 of $.485, only Mr. Adams has in-the-money unvested stock options, which, after subtracting the closing price of $.485 from the $.35 exercise price on the 300,000 stock options granted on May 18, 2009 (which vest only upon a change in control), has a spread value of $40,500 at December 31, 2009. Refer to Part III, Outstanding Equity Awards at Fiscal Year-End table, Option Awards, for more information on the unvested stock options outstanding.
(4) Represents the aggregate value of (a) 12 months, or $16,090, for Mr. Kramer, and 6 months, or $8,045, for Mr. Adams, for health and dental insurance, payable monthly; and (b) 2 weeks for Mr. Kramer, or $15,385, and 5 weeks for Mr. Adams, or $16,827, for unused accrued vacation.

 
18


Non-Employee Director Compensation

Standard Compensation Arrangements

All directors are required to attend any annual meeting of stockholders. Each director who is not an employee is reimbursed for actual expenses incurred in attending annual stockholder, board and committee meetings.

Director Compensation under Equity Incentive Plan

The following table summarizes compensation for non-employee directors for the year ended December 31, 2009, including costs incurred during 2009 for stock awards and stock options granted that vested in 2009. Please note that ownership of vested and exercisable stock awards and stock options by our non-employee directors is set forth under “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this report.

DIRECTOR COMPENSATION TABLE

Name
 
Fees Earned or Paid in Cash ($)
   
Stock Awards ($)
   
Option Awards ($)
   
All Other Compensation ($)
   
Total ($)
 
(a)
 
(b)
   
(c) (1)
   
(d) (2)
   
(g)
   
(h)
 
Richard J. Kurtz
                      1,044,859 (3)     1,044,859  
Arthur J. Gregg
                22,169             22,169  
Jay C. Nadel
          260,000       44,333             304,333  
Augustus J. Larson
                13,301             13,301  
Howard L. Brown
                47,024       19,425 (4)     66,449  
Notes:
(1) Represents the amounts of compensation cost recognized by us in fiscal year 2009 related to the stock award transferred to Mr. Nadel by the Chairman pursuant to a private agreement entered into on February 19, 2008, as prescribed under GAAP. For a discussion of this particular transaction and valuation assumptions, see Note 18 – Share-Based Payment Arrangements, Related Party Director Plan, of our Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009. The information below shows how much of the overall amount of the compensation cost is attributable to each award for the year ended December 31, 2009.  We have also disclosed the year ended December 31, 2008 since these amounts were not previously disclosed (See also Note 13 - Related Party Transactions, Item (g) and Note 22 - Restatements and Corrections to Previously Issued Financial Statements, Item (b)):

Director
 
Date
 
Closing Price ($)
   
Number of Stock Award Shares Granted
   
Number of Stock Award Shares Vested at 12/31/2009
   
Number of Stock Award Shares Unvested at 12/31/2009
   
2009 Fiscal Year Compensation Cost ($)
   
2008 Fiscal Year Compensation Cost ($)
 
Jay C. Nadel
 
2/19/2008
    .70       1,084,000       1,011,238       72,762       450,000       469,238  
(2)  The amounts shown are the amounts of compensation cost recognized by us in fiscal year 2009 related to grants of stock options in fiscal year 2007, as prescribed under GAAP. For a discussion of the Equity Incentive Plan and valuation assumptions, see Note 18 – Share-Based Payment Arrangements, Equity Incentive Plan, of our Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009. The information below shows how much of the overall amount of the compensation cost is attributable to each award for the year ended December 31, 2009.

Director
 
Grant Date
 
Exercise Price ($)
   
Number of Shares of Stock Underlying Vested Option Awards Granted
   
Number of Shares of Stock Underlying Unvested Option Awards Granted
   
Number of Shares of Stock Underlying Vested and Unvested Option Awards Granted
   
2009 Fiscal Year Compensation Cost ($)
 
Arthur J. Gregg
 
1/16/2007
    .60       150,000 (i)     75,000       225,000       22,169  
Jay C. Nadel
 
1/16/2007
    .60    
300,000
(ii)     150,000       450,000       44,333  
Augustus J. Larson
 
1/16/2007
    .60    
90,000
(iii)     45,000       135,000       13,301  
Howard L. Brown
 
5/22/2007
    .60    
362,100
(iv)     137,900       500,000       47,024  
The grant date fair value of the options to purchase the shares above of our common stock on January 16, 2007, was approximately $.59 per share, based on a lattice-based model of option valuation to determine grant date fair value, as prescribed under GAAP.  The actual value, if any, a director may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised. There is no assurance that the value realized by a director will be at or near the value estimated by the lattice-based valuation model. The following assumptions were used in the lattice-based valuation model: market price of stock, $.60; exercise price of option, $.60; expected stock volatility, 269.54%; risk-free interest rate, 4.193% (based on 5-year treasury bond rate); and expected life, 3 years (Lt. Gen. Gregg (Ret), Mr. Nadel, and Mr. Larson), and 2.8 years (Mr. Brown); and dividend yield, 0%. The vesting conditions and exercise restrictions of these options are as follows:
(i) For Mr. Gregg, 75,000 options (of a total 225,000 granted) are eligible to vest at the end of each year of his continuous service as a member of the Board, Chairperson of the Compensation Committee, and a member of certain Standing Committees for the next 3 years and exercisable at the rate of 33⅓% each year after vested. At December 31, 2009, 150,000 of Mr. Gregg’s stock options are vested.
(ii) For Mr. Nadel, 150,000 options (of a total 450,000 granted) are eligible to vest at the end of each year of his continuous service as a member of the Board, Chairperson of the Audit Committee, and a member of certain Standing Committees for the next 3 years and exercisable at the rate of 33⅓% each year after vested.  At December 31, 2009, 300,000 of Mr. Nadel’s stock options are vested.
(iii) For Mr. Larson, 45,000 options (of a total 135,000 granted) are eligible to vest at the end of each year of his continuous service as a member of the Board and certain Standing Committees for the next 3 years and exercisable at the rate of 33⅓% each year after vested.  At December 31, 2009, 90,000 of Mr. Larson’s stock options are vested.
(iv) Mr. Brown, who was at the time the stock options were originally granted on January 16, 2007 an advisor/consultant to the Board, 250,000 options (of a total 500,000 granted) were eligible to vest at the end of each year of service subject meeting certain performance criteria and exercisable at the rate of 50% each year only after all 500,000 Options vest. However, upon being elected to the Board at the Annual Meeting of Stockholders held on May 22, 2007, his advisor/consultant role automatically terminated and his original vesting and exercise criteria changed to: 86,300 Options automatically vested but are only exercisable after the end of two years, while 137,900 Options are eligible to vest each on January 15, 2008, 2009, and 2010, respectively, based on his continuous service as a member of the Board and Chairperson of the Executive Committee 2.67 years and exercisable at the rate of 33⅓% each year after vested.  At December 31, 2009, 362,100 of Mr. Brown stock options are vested.
(3) The amount shown consists of: (a) $247,259 in accrued interest; and (b) $797,600 in accrued preferred stock dividends, for 2009. See also Note 13 - Related Party Transactions, Item (d), of our Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009.
(4) The amount shown consists of $19,425 in accrued preferred stock dividends paid to Mr. Brown during 2009.

 
19


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee is a current or former officer or employee of us or any of our former subsidiaries. None of our executive officers served on the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board of Directors or on the Compensation Committee.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management, and based on the review and discussions, the Compensation Committee recommended to our board of directors that the Compensation Discussion and Analysis be included in our annual report on Form 10-K for the year ended December 31, 2009.

COMPENSATION COMMITTEE,

Lt. Gen. Arthur J. Gregg, US Army (Ret), Chairperson
Jay C. Nadel
Augustus J. Larson
Howard L. Brown

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Directors and Executive Officers

The following table sets forth information as of March 25, 2010, regarding the beneficial ownership of common stock by (i) each director, (ii) CEO, CFO, and other executive officers, and (iii) all of our directors, named executive officers and executive officers as a group.  Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to the table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Shares of common stock subject to vesting or options that are currently exercisable or exercisable within 60 days of March 25, 2010 are considered outstanding and beneficially owned by the person granted the shares or holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

SECURITY OWNERSHIP OF MANAGEMENT TABLE

Beneficial Owner
 
Shares of Common Stock Owned
   
Rights to Acquire Shares of Common Stock (1) (2) (3)
   
Total Shares of Common Stock Beneficially Owned
   
Percent of Class (4)
 
Directors:
                       
Richard J. Kurtz, Chairman of the Board (5)
    40,564,149       200,000       40,764,149       56.87 %
Nine Duck Pond Road, Alpine, NJ 07620
                               
Lt. Gen. Arthur J. Gregg, US Army (Ret)
          99,900       199,900       0.14 %
Jay C. Nadel (1)
    1,011,238       272,562       1,283,800       1.79 %
Augustus J. Larson
          59,940       59,940       0.08 %
Howard L. Brown
          269,983       269,983       0.38 %
Douglas J. Kramer (6)
          562,500       562,500       0.78 %
Michael T. Adams (7)
    20,000       80,000       100,000       0.14 %
                                 
Executive Officers:
                               
Paul Smiertka (Deceased 8/30/09) (8)
          33,333       33,333       0.05 %
Neil S. Burns (Resigned 11/11/09) (9)
                       
                                 
All directors and executive officers listed above as a group
    41,595,387       1,578,218       43,173,605       60.23 %
Notes:
(1) On February 18, 2010, the remaining 72,762 stock award shares transferred to Mr. Nadel by the Chairman vested. Refer to Director Compensation Table above for more information.
(2) On January 15, 2010, an aggregate of 407,900 stock options vested for non-employee directors, of which 75,000, 150,000, 45,000, and 137,900 options were for Mr. Gregg, Mr. Nadel, Mr. Larson, and Mr. Brown, respectively. Refer to Director Compensation Table above for more information.
(3) Represents common stock which the person has the right to acquire within 60 days after March 25, 2010. For current and former executive officers - Mr. Kramer, Mr. Adams, and Mr. Smiertka, each have 2,500,000, 80,000, and 33,333 vested stock options, of which 562,500, 80,000, and 33,333 are exercisable, respectively; and directors – Mr. Kurtz, Mr. Gregg, Mr. Nadel, Mr. Larson, and Mr. Brown have 200,000, 225,000, 450,000, 135,000, and 500,000 vested stock options, of which 200,000, 99,900, 199,800, 59,940, and 269,983 are exercisable, respectively. Refer to Item 11 – Executive and Director Compensation for more information.
(4) Based on 71,679,512 shares of our common stock outstanding at March 25, 2010 (Includes those shares in the “Rights to Acquire Shares of Common Stock” column in this table and the Security Ownership of Certain Beneficial Owners Table below).
(5) In addition to shares held in the individual’s sole name, this amount owned includes 1,000,000 shares held by the spouse of the named person.
(6) Mr. Kramer is also our CEO and President.
(7) Mr. Adams is also our Interim CFO, CGO, EVP and Secretary.
(8) Mr. Smiertka started as CFO and Treasurer on March 3, 2008 and passed away on August 30, 2009.
(9) Mr. Burns started as CFO on October 28, 2009 and resigned on November 11, 2009.

 
20


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS TABLE

Except as set forth in the above and below tables, our management knows of no person who is the beneficial owner of more than 5% of our issued and outstanding common stock.

Name and Address of Beneficial Owners (1)
 
Shares of Common Stock Owned
   
Rights to Acquire Shares of Common Stock (1) (2)
   
Total Shares of Common Stock Beneficially Owned
   
Percent of Class (3)
 
ComVest Capital LLC
          5,746,753       5,746,753       8.02 %
ComVest Capital Management LLC
                               
ComVest Group Holdings, LLC
                               
Michael S. Falk
                               
One North Clematis, Suite 300
                               
West Palm Beach, Florida  33401
                               
Notes:
(1) Based on the information provided pursuant to a joint statement on a Schedule 13G filed with SEC on February 26, 2007, the name of the Reporting Person is ComVest Capital LLC, a Delaware limited liability company ("ComVest"), as adjusted by the Company for principal repayments on the Convertible Term Note, Conversion Price Adjustments, and subsequent modifications (See (2) below). ComVest is a private investment company. The managing member of ComVest is ComVest Capital Management LLC, a Delaware limited liability company ("Management"), the managing member of which is ComVest Group Holdings, LLC, a Delaware limited liability company ("CGH"). Michael Falk ("Falk") is the Chairman and principal member of CGH. Falk is a citizen of the United States of America. The group of beneficial owners share the same principal business address provided in this table.
(2) Based on 71,679,387 shares of our common stock outstanding at March 25, 2010 (Includes those shares in the “Rights to Acquire Shares of Common Stock” column in this table and the Security Ownership of Management Table above).
(3) The Company entered into a Revolving Credit and Term Loan Agreement on February 21, 2007 with ComVest Capital LLC (“ComVest”), which was amended on June 12, 2007 (“Loan Agreement”), under which ComVest agreed to: (i) loan up to $5,000,000 under a revolving credit note (“Revolving Credit Note”); (ii) execute a $2,000,000 convertible term note (“Convertible Term Note”); (iii) issue certain warrants (“Warrants”) to ComVest; and (iv) register the underlying shares issuable under the Convertible Term Note and the Warrants. On June 30, 2008, the Company and ComVest amended and restated the Loan Agreement, Revolving Credit Note, and Convertible Term Note, amended the existing Warrants, and issued a new warrant (“New Warrant”).  The Revolving Credit Note, as amended and restated, was increased to make up to $9,500,000 available, and bears interest according to a coverage ratio formula with a coverage ratio ranging from 1.0 to 2.0 and Prime rate ranging from Prime plus 1% to Prime plus 0%. The coverage ratio formula is defined as the ratio of (i) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) minus capital expenditures paid in cash, to (ii) Debt Service (as such terms are defined in the Loan Agreement), in each case for the fiscal quarter ending on the date of the subject financial statements and calculation, and (b) the term “Prime Rate” shall mean the “prime rate” or “base rate” of interest publicly announced by Citibank, N.A. The term of the Revolving Credit Note was extended to August 31, 2010. The Convertible Term Note, as amended and restated, was increased to $3,000,000, bears interest at 10% per annum, the principal is payable (i) in thirteen (13) equal monthly installments of $83,333.33 each, due and payable on the first day of each calendar month commencing July 1, 2009 and continuing through and including August 1, 2010, and (ii) in a final installment due and payable on August 31, 2010 in an amount equal to the entire remaining principal balance, and is convertible optionally by ComVest at any time or mandatorily by Lapolla subject to satisfaction of certain conditions to common stock at the rate of $.77 per share. The Convertible Term Note was personally guaranteed by the Chairman of the Board. The existing Warrants, as amended, are for the purchase of an aggregate of 1,500,000 shares of common stock, exercisable at an adjusted price of $.60 per share and expire on a date extended to June 30, 2013. The New Warrant was issued for the purchase of 1,000,000 shares of common stock, is exercisable at a price of $.78 per share, and expires June 30, 2013.

See also Part II, Item 5, Securities Authorized for Issuance Under equity Compensation Plans, in this report for information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans, as of December 31, 2009.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Persons

(a)   On March 23, 2010, we received a commitment letter from our principal stockholder and Chairman of the Board, Mr. Kurtz, wherein he agreed to provide funding of up to $11,000,000 to be used as working capital to facilitate our growth and expansion for the 2010 year.  The funding, if required, will be in the form of a demand loan bearing 8% interest per annum.
 
(b)   On December 31, 2009, Mr. Kurtz, Chairman of the Board and majority stockholder, converted $5,840,000 of indebtedness owed by the Company to him, of which $5,100,000 was for a Note Payable – Related Party and $740,000 was for a Loan Payable – Related Party, into 5,840 shares of Series D Preferred Stock, par value $1.00, at the stated value of $1,000 per share.

(c)   On December 4, 2009, the Company accepted the voluntary redemption of 50 shares of Series D Preferred Stock, par value $1.00, at the stated value of $1,000 per share, from Mr. Brown, a director, for $50,000 in cash.

(d)   On November 20, 2009, the Company accepted the voluntary redemption of 50 shares of Series D Preferred Stock, par value $1.00, at the stated value of $1,000 per share, from Mr. Brown, a director, for $50,000 in cash.

(e)   On November 20, 2009, the Company paid Mr. Kurtz, Chairman and majority stockholder, $500,000 in cash, of which $316,113 was for accrued interest on his Note Payable – Related Party and $183,887 was for accrued Series D Preferred Stock dividends.

 
21


(f)     On May 18, 2009, the Company entered into a new Executive Employment Agreement (“Adams Agreement”) and Stock Option Agreement (“Adams Option”) with Mr. Adams, CGO, EVP and Secretary, both of which are summarized below.

(i)  Executive Employment Agreement.  The Adams Agreement commenced on May 18, 2009 and ends December 31, 2011 (“Term”). Mr. Adams’ base salary is $175,000 per year.  He is entitled, upon consummation of a change in control, to a transaction bonus of 1.5% of the transaction value. If Mr. Adams’ employment is terminated by the Company without cause during the Term, he is entitled to: (a) severance equal to six (6) months annual base salary, (b) the product of any Awards which Mr. Adams can show that he reasonably would have received had he remained in such executive capacity with the Company through the end of the period covered by the Award, or six (6) months after the Date of Termination, whichever period is greater, multiplied by a fraction, the numerator of which is the number of days during the Award Period up to the Date of Termination occurs through the Date of Termination and the denominator of which is the total number of days in the Award Period, but only to the extent not previously vested, exercised and/or paid, and (c) for six (6) months following the Date of Termination, Company shall continue to provide medical and dental benefits only to Mr. Adams on the same basis as such benefits are provided during such period to the senior executive officers of Company. If Mr. Adams’ employment is terminated following a change in control, he is entitled to: (a) an amount equal to the annual base salary which would otherwise be payable over the remaining term of his agreement; and any outstanding Awards (including substituted shares of the acquiring or surviving Company in the case of a merger or acquisition) held by him or other benefits under any Company plan or program, which have not vested in accordance with their terms will become fully vested and exercisable at the time of such termination.

(ii)  Stock Option Agreement.  The Adams Option commenced on May 18, 2009 (“Grant Date”) and ends December 31, 2015. Mr. Adams was granted 300,000 stock options (“Options”) under the Company’s Equity Incentive Plan, as amended (“Equity Plan”), for the purchase of common stock, at an exercise price of $.35 per share (equal to 100% of closing price of Company’s common stock as traded on the NASDAQ OTCBB on the Grant Date) which vests only upon a change in control. The Options granted automatically vest thirty (30) days prior to consummation of a Change in Control.  The determination of whether or not a Change in Control will take place will be made by the full Board of Directors.  Once vested, the Options are immediately exercisable.

(g)    On June 30, 2008, we entered into an Amended and Restated Revolving Credit and Term Loan Agreement (“Loan Agreement”) with ComVest Capital, LLC (“New Credit Facility”) which replaced the prior credit facility. The New Credit Facility provides up to $9,500,000 under an amended and restated revolving credit note (“Revolver”) and $3,000,000 under an amended and restated convertible term note (“Convertible Note”) for a total of $12,500,000.  The prior credit facility entered into between LaPolla and ComVest on February 21, 2007, as amended on June 12, 2007, provided for $5,000,000 under a revolving credit note and $2,000,000 under a convertible term note (“Prior Credit Facility”). In connection with the establishment of the New Credit Facility, the Company agreed to reprice certain warrants originally issued as part of the Prior Credit Facility and issue a new warrant contemporaneously with entering into the New Credit Facility. The Revolver bears interest according to a coverage ratio formula with a coverage ratio ranging from 1.0 to 2.0 and Prime rate ranging from Prime plus 1% to Prime plus 0%. The coverage ration formula is defined as the ratio of (i) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) minus capital expenditures paid in cash, to (ii) Debt Service (as such terms are defined in the Loan Agreement), in each case for the fiscal quarter ending on the date of the subject financial statements and calculation, and (b) the term “Prime Rate” shall mean the “prime rate” or “base rate” of interest publicly announced by Citibank, N.A. The Convertible Note: (a) bears interest at 10% per annum, (b) the principal is payable (i) in thirteen (13) equal monthly installments of $83,333.33 each, due and payable on the first day of each calendar month commencing July 1, 2009 and continuing through and including August 1, 2010, and (ii) in a final installment due and payable on August 31, 2010 in an amount equal to the entire remaining principal balance, (c) and is convertible optionally by ComVest at any time or mandatorily by LaPolla subject to satisfaction of certain conditions to common stock at the rate of $.77 per share.  The Convertible Note is personally guaranteed by the Chairman of the Board.  The Company issued to ComVest a warrant to acquire up to 1,000,000 shares of LaPolla's common stock at an exercise price of $.78 per share (“New Warrant”) and also agreed to modify the exercise price with respect to all of the previously issued and remaining 1,500,000 warrants (“Prior Warrants”). The Prior Warrants were previously priced at $.74 for 750,000 and $.61 for 750,000.  The Prior Warrants were repriced at $.60.

(h)    On June 30, 2008, contemporaneously with entering into the New Credit Facility described above, the Chairman of the Board and principal stockholder of Lapolla, Mr. Kurtz, in a private transaction in reliance on Section 4(2) of the Securities Exchange Act of 1933, as amended, converted $2,000,000 of the total indebtedness owed to him by Lapolla into shares of restricted common stock, par value $.01 of Lapolla, at the rate of $.78 per share, yielding a total issuance of 2,564,103 shares. The price per share reflects the ten (10) day volume weighted average price (VWAP) of the Company’s common stock as traded on the NASDAQ OTC Bulletin Board prior to June 30, 2008.

(i)     On May 5, 2008, the Company entered into a new Executive Employment Agreement (“Kramer Agreement”) and Stock Option Agreement (“Kramer Option”) with Mr. Kramer, CEO and President, both of which are summarized below.

(i)  Executive Employment Agreement.  The Kramer Agreement commenced on May 5, 2008 and ends December 31, 2010 (“Term”). Mr. Kramer’s base salary is $350,000 per year.  He is entitled, upon consummation of a change in control, to a transaction bonus of 6% of the transaction value. If Mr. Kramer is terminated by the Company without cause or Mr. Kramer terminates his employment with good reason during the Term, he is entitled to: (a) severance equal to the lesser of 24 months base salary or base salary for the remainder of the Term, (b) the product of the value of any equity based awards which he can show he reasonably would have received had he remained employed by the Company through the end of that calendar year, or 4 months after the termination date, whichever is greater, multiplied by a fraction, the numerator of which is the number of days in the calendar year in which the date of termination occurs through the termination date and the denominator is 365, but only to the extent not previously vested, exercised and/or paid, and (c) 12 months of continuous health and dental benefits. If Mr. Kramer is terminated following a change in control, he is entitled to: (a) his base salary for the remainder of the Term, and (b) any outstanding awards, including stock options, which have not vested will become fully vested and exercisable at the time of such termination. The Kramer Agreement also includes nonsolicitation, noncompetition, and ownership of developments and other rights provisions. This Kramer Agreement supersedes the previously entered into executive employment agreement entered into between the Company and Mr. Kramer effective as of July 25, 2005 and ending on January 31, 2009.

 
22


(ii)  Stock Option Agreement.  This Kramer Option commenced on May 5, 2008 (“Grant Date”) and ends December 31, 2013. Mr. Kramer was granted an additional 2,000,000 stock options under the Company’s Equity Plan, for the purchase of common stock, at an exercise price of $.74 per share (equal to 100% of closing price of Company’s common stock as traded on the NASDAQ OTCBB on Grant Date) which vests in 250,000 option increments, with the first increment vesting on the earlier of June 30, 2008, provided the Company has net pre-tax income for the fiscal quarter ending on that date, or the last day of the Company’s first fiscal quarter ending after June 30, 2008 for which the Company has a quarterly profit, and each of the remaining increments on the last day of each the next seven fiscal quarters for which the Company has a quarterly profit, and once vested, is exercisable on an inclining cumulative basis over a four year period, subject in all cases to continued satisfactory employment through the last day of each such quarter, and expiring December 31, 2013 (“New Option”). The New Option amended existing stock options previously granted on July 12, 2005 also for 2,000,000 shares, at an exercise price of $.67 per share (100% of closing price), and expiring December 31, 2012 (“Existing Option”). There were 480,000 options vested and 1,520,000 options remaining unvested under the Existing Option, and the unvested portion automatically vested when the New Option was granted on May 5, 2008. Although the 2,000,000 options under the Existing Option are now fully vested, the exercise restrictions were amended to be the same as those described above for the New Option. As a result, the Company recorded the remaining fair value of the Existing Option prior to the modification of $258,371, including the incremental increase in fair value due to the modification of the Existing Option as of the modification date of $6,242, for a total of $264,613 on said date.

(j)     On February 19, 2008, Mr. Kurtz, Chairman of the Board and majority stockholders, and Mr. Nadel, a director, entered into a private agreement whereby Mr. Kurtz agreed to transfer approximately 1,084,000 shares, in two installments, of his restricted common stock to Mr. Nadel in order to secure his continued attention and hands on participation required with his role as a Board member for a two year period. The first installment of 500,000 shares was transferred to Mr. Nadel on February 19, 2008 and second installment of 584,000 shares was transferred to Mr. Nadel on February 18, 2009 by Mr. Kurtz. The installments vest one year after the date of each installment. The closing price of the Company’s common stock as traded on the NASDAQ OTCBB on the date of the private agreement was $.70 per share. The grant-date fair value related to this transaction is $758,800.

Review, Approval or Ratification of Transactions with Related Persons.

The Company does not maintain a formal policy or procedure for review, approval or ratification of transactions with related persons. The Company does regularly communicate through Board and Standing Committee meetings and Unanimous Resolutions, wherein transactions with related persons are reviewed and approved or ratified. In addition, transactions involving our directors are disclosed and reviewed by our Corporate Governance Committee in its assessment of our directors’ independence. To the extent such transactions are related to ongoing business relationships, the transactions are disclosed and, as applicable, reviewed annually. The Board of Directors intends to approve only those related party transactions that are in the best interests of our stockholders.

Director Independence

Lapolla is a “controlled company” because more than 50% of the voting power of Lapolla is held by Mr. Kurtz, our Chairman of the Board. Although we are not required to have a majority of independent directors due to being a controlled company, we are also not required due to not being listed on a national stock exchange or an inter-dealer quotation system with such requirements. However, the members of our Audit Committee are required to meet applicable SEC independence standards. Lapolla uses its own definition for determining whether its directors and members of specific committees of the board of directors, are independent. In short, in order to be considered to be independent, a member of the board of directors or any board committee may not, other than in his or her capacity as a member of the board of directors or any board committee: (i) accept any consulting, advisory, or other compensatory fee from the Company; or (ii) be an affiliated person of the Company or any subsidiary thereof. Independent directors are not officers of the Company and are in view of the Company’s Board of Directors, free of any relationship that would interfere with the exercise of independent judgment. Our board has reviewed the relationships between us, including our affiliates, and each board member (and each such director’s immediate family members). Based on its review, the Board has affirmatively determined that Mr. Kurtz, Mr. Brown, Mr. Kramer, and Mr. Adams are not, and Lt. Gen. Gregg (Ret), Mr. Nadel, and Mr. Larson are independent directors at this time. Mr. Kurtz was determined to not be independent based on his majority stockholder and Chairman of the Board status. Mr. Brown was not independent based on his initially being retained as an advisor to the Board of Directors on January 16, 2007 even though his advisory role terminated upon his becoming elected to the Board of Directors on May 22, 2007 and the stock option compensation he received was de minimis. Mr. Kramer and Mr. Adams are both not independent based on being executive officers of Lapolla. There was no information considered by our Board of Directors, other than what has been disclosed in this amended report, in determining that Lt. Gen. Gregg (Ret), Mr. Nadel, and Mr. Larson were “independent” within the Company’s independence standards.

 
23


Item 14.  Principal Accountant Fees and Services

Independent Registered Public Accounting Firm Fees

Hein & Associates, LLP (“Hein”), our independent registered public accounting firm, audited our financial statements for the year ended December 31, 2009 and 2008. The Audit Committee of the Board of Directors selects the independent registered public accounting firm.  Aggregate fees billed to us by independent registered public accounting firms for the fiscal years ended December 31,

Fee Category
 
2009
   
2008
 
Audit Fees
  $ 144,000 (1)   $ 191,128 (1)
Audit-Related Fees
          63,146 (2)
Tax Fees
           
All Other Fees
    33,000 (3)      
Total
  $ 177,000     $ 254,274  
Notes:
(1)
Represents the aggregate fees billed to us by Hein for professional services rendered for the audit of our annual financial statements, and for the reviews of our financial statements included in our Form 10-Q filings for the second, third and fourth fiscal quarters.
(2)
For 2008, represents the aggregate fees billed to us by Hein for the start of the audit of Air-Tight Marketing and Distribution, Inc. for the year ended December 31, 2007 and review of the interim period from January 1, 2008 through June 30, 2008, which audit was subsequently deemed inapplicable based on the purchase price reduction recorded by Lapolla at December 31, 2008. These services include accounting consultations that are not required by statute.
(3)
Represents the aggregate fees billed to us by Hein for professional services rendered for non-audit services related to Federal tax research and Internal Revenue Code, as amended, Section 382 analysis, which services were pre-approved by the Audit Committee.

Policy on Audit Committee Pre-Approval

As part of its required duties, the Audit Committee pre-approves audit and non-audit services performed by our independent registered public accounting firm to assure that the provision of such services does not impair the independent registered public accounting firm’s independence. The policy generally provides that services in the defined categories of audit services, audit-related services, tax services and all other services, are deemed pre-approved up to specified amounts, and sets requirements for specific case-by-case pre-approval of discrete projects that are not otherwise pre-approved or for services over the pre-approved amounts. Pre-approval may be given as part of the Audit Committee’s approval of the scope of the engagement of the independent registered public accounting firm or on an individual basis. The pre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision must be presented to the full Audit Committee at its next scheduled meeting. The policy prohibits retention of the independent registered public accounting firm to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether proposed services are compatible with the independence of the independent registered public accounting firm. All services provided by our independent registered public accounting firm in 2008 were pre-approved in accordance with the Audit Committee’s pre-approval requirements.

 
24


PART IV

Item 15.  Exhibits and Financial Statement Schedules

 
(a)
1.
Financial Statements and Supplementary Data:

The following financial statements are included herein under Item 8 of Part II of this report, “Financial Statements and Supplementary Data”:

Index to Financial Statements
 
(i)
Report of Independent Registered Public Accounting Firm
 
F-1
Balance Sheets at December 31, 2009 and December 31, 2008
 
F-2
Statements of Operations for Each of the Years in the Two Year Period Ended December 31, 2009
 
F-3
Statements of Stockholders’ Equity for Each of the Years in the Two Year Period Ended December 31, 2009
 
F-4
Statements of Cash Flows for Each of the Years in the Two Year Period Ended December 31, 2009
 
F-5
Notes to Financial Statements
 
F-6

 
(a)
2.
Financial Statement Schedules:

The following additional information should be read with the financial statements under Item 15(a)1 of Part IV of this report:

Schedule for the Years Ended December 31, 2009 and 2008:
 
   
Schedule Number
 
Valuation and Qualifying Accounts
27

All other schedules have been omitted for the reason that the required information is presented in the financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable.

 
(a)
3.
Exhibits:

See Index of Exhibits below.

(b)           Item 601 Exhibits:

Reference is hereby made to the Index of Exhibits under Item 15(a)3 of Part IV of this report.

 
25


SIGNATURES

Pursuant to the requirements of 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.

Date:
March 31, 2010
LAPOLLA INDUSTRIES, INC.
       
   
By:
/s/  Douglas J. Kramer, CEO
     
Douglas J. Kramer
     
CEO and President
       
Date:
March 31, 2010
LAPOLLA INDUSTRIES, INC.
       
   
By:
/s/ Michael T. Adams, CFO
     
Michael T. Adams
     
Interim CFO and Treasurer

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 date indicated.

Date:
March 31, 2010
LAPOLLA INDUSTRIES, INC.
       
   
By:
/s/  Richard J. Kurtz, Chairman
     
Richard J. Kurtz
     
Chairman of the Board
       
Date:
March 31, 2010
LAPOLLA INDUSTRIES, INC.
       
   
By:
/s/  Arthur J. Gregg, Director
     
Arthur J. Gregg
     
Director
       
Date:
March 31, 2010
LAPOLLA INDUSTRIES, INC.
       
   
By:
/s/ Jay C. Nadel, Director
     
Jay C. Nadel
     
Director
       
Date:
March 31, 2010
LAPOLLA INDUSTRIES, INC.
       
   
By:
/s/  Augustus J. Larson, Director
     
Augustus J. Larson
     
Director
       
Date:
March 31, 2010
LAPOLLA INDUSTRIES, INC.
       
   
By:
/s/  Howard L. Brown, Director
     
Howard L. Brown
     
Director
       
Date:
March 31, 2010
LAPOLLA INDUSTRIES, INC.
       
   
By:
/s/  Douglas J. Kramer, Director
     
Douglas J. Kramer
     
Director
       
Date:
March 31, 2010
LAPOLLA INDUSTRIES, INC.
       
   
By:
/s/  Michael T. Adams, Director
     
Michael T. Adams
     
Director, CGO, EVP, and Secretary

 
26


SCHEDULE II


LAPOLLA INDUSTRIES, INC.

SCHEDULE II–VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2009 and 2008

         
Additions
             
Classification
 
Balance at Beginning of Period
   
Charged to Costs and Expenses
   
Charged to Other Accounts
   
Deductions
   
Balance at End of Period
 
Year Ended December 31, 2009
                             
Allowance for Doubtful Accounts (1)
  $ 492,451     $ 1,144,235     $     $ (901,724 )   $ 734,962  
Deferred Tax Assets Valuation Allowance (2)
    20,809,165             960,135             21,769,300  
Year Ended December 31, 2008
                                       
Allowance for Doubtful Accounts (1)
  $ 178,440     $ 897,360     $     $ (565,349 )   $ 492,451  
Deferred Tax Assets Valuation Allowance (2)
    19,444,297             1,364,868             20,809,165  

Notes:
(1) Write-offs of uncollectible accounts are included in Deductions column.

 
27


INDEX OF EXHIBITS

Exhibit No.
 
Description
3.1
 
Restated Certificate of Incorporation dated June 28, 1994 as filed with the State of Delaware on June 16, 1994 (incorporated by reference to Exhibit 3.1 to Form 10-KSB dated December 31, 1998, filed April 16, 1999).
3.2
 
Certificate of Amendment of Restated Certificate of Incorporation dated February 12, 1999 as filed with State of Delaware February 12, 1999 (incorporated by reference to Exhibit 3.2 to Form 10-KSB dated December 31, 1998, filed April 16, 1999).
3.3
 
Certificate of Amendment of Restated Certificate of Incorporation dated June 21, 2000 as filed with the State of Delaware on June 26, 2000 (incorporated by reference to Exhibit 3(i) to Form 10-KSB dated December 31, 2000, filed March 30, 2001).
3.4
 
Certificate of Amendment of Restated Certificate of Incorporation dated May 28, 2002 as filed with the State of Delaware on May 28, 2002 (incorporated by reference to Exhibit 3.1 to Form 10-Q dated June 30, 2002, filed August 19, 2002).
3.5
 
Certificate of Amendment of Restated Certificate of Incorporation dated December 30, 2004 as filed with the State of Delaware on December 30, 2004 (incorporated by reference to Exhibit 3.5 to Form 10-K dated December 31, 2004, filed March 30, 2005).
3.6
 
Certificate of Amendment of Restated Certificate of Incorporation dated November 8, 2005 as filed with the State of Delaware on November 8, 2005 (incorporated by reference to Exhibit 3.6 to Form 10-K dated December 31, 2005, filed March 31, 2006).
3.7
 
Certificate of Amendment of Restated Certificate of Incorporation dated May 22, 2007 as filed with the State of Delaware on June 18, 2007 (incorporated by reference to Exhibit 4.1 to Form 10-Q dated June 30, 2007, filed August 20, 2007).
3.8
 
Certificate of Amendment of Restated Certificate of Incorporation dated June 10, 2008 as filed with the State of Delaware on June 10, 2008 (incorporated by reference to Exhibit 4.1 to Form 10-Q dated June 30, 2008, filed August 19, 2008).
3.8
 
Proforma Restated Certificate of Incorporation, as amended, and currently in effect (incorporated by reference to Exhibit 4.2 to Form 10-Q dated June 30, 2008, filed August 19, 2008).
3.9
 
Bylaws, as amended, and currently in effect, of the Company (incorporated by reference to Exhibit 3.11 to Form 10-KSB dated December 31, 2005, filed March 31, 2006).
4.1
 
Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated September 30, 2001 filed with the State of Delaware November 2, 2001 (incorporated by reference to Exhibit 3.1 to Form 8-K dated September 30, 2001, filed October 25, 2001).
4.2
 
Amendment to Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated December 31, 2001 (incorporated by reference to Exhibit 3.1.1 to Form 8-K dated December 31, 2001, filed January 31, 2002).
4.3
 
Certificate of Designation of Preferences of Series C Convertible Preferred Stock dated January 8, 2002 filed with the State of Delaware on February 28, 2002 (incorporated by reference to Exhibit 3.2 to Form 8-K dated January 8, 2002, filed January 31, 2002).
4.4
 
Amendment to Certificate of Designation of Preferences of Series C Convertible Preferred Stock dated September 27, 2006 filed with the State of Delaware on November 1, 2006 (incorporated by reference to Exhibit 4.1 to Form 10-Q dated September 30, 2006, filed November 1, 2006).
4.5
 
Certificate of Designation of Preferences of Series D Preferred Stock dated September 28, 2006 as filed with the State of Delaware on November 1, 2006 (incorporated by reference to Exhibit 4.2 to Form 10-Q dated September 30, 2006, filed November 1, 2006).
10.3
 
Securities Purchase Agreement dated December 31, 2001 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.2 to Form 8-K dated December 31, 2001, filed January 31, 2002).
10.6
 
Securities Purchase Agreement dated September 29, 2006 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.1 to Form 10-Q dated September 30, 2006, filed January 31, 2002).
10.7
 
Securities Purchase Agreement dated December 31, 2006 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.7 to Form 10-K dated December 31, 2006, filed March 30, 2007).
10.8
 
Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K dated July 12, 2005, filed July 18, 2005).
10.9
 
Amendment to Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K dated July 12, 2005, filed July 18, 2005).
10.10
 
Second Amendment to Equity Incentive Plan dated May 5, 2008 (incorporated by reference to Appendix B to DEF 14C dated and filed on May 19, 2008).
10.11
 
Equity Incentive Plan, as amended, and currently in effect (incorporated by reference to Exhibit 10.2 to Form 10-Q dated June 30, 2008, filed August 20, 2008).
10.12
 
Director Compensation Plan (incorporated by reference to Exhibit 10.9 to Form 10-K for December 31, 2004, filed March 30, 2005).
10.13
 
Amendment to Director Compensation Plan (incorporated by reference Exhibit 10.10 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.14
 
Director Compensation Plan, as amended (incorporated by reference Exhibit 10.11 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.15
 
Option Agreement dated July 12, 2005 between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.3 to Form 8-K dated July 12, 2005, filed July 18, 2005).
10.16
 
Amendment to Option Agreement dated July 28, 2005 between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.2 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.17
 
Option Agreement dated May 5, 2008 between Douglas J. Kramer and the Company (incorporated by reference to Appendix C to DEF 14C dated and filed on May 19, 2008).
10.18
 
Option Agreement dated July 12, 2005 between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.2 to Form 8-K dated July 12, 2005, filed July 18, 2005).
10.19
 
Amendment to Option Agreement dated July 28, 2005 between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.20
 
Option Agreement dated March 3 2008 between Paul Smiertka and the Company (incorporated by reference to Exhibit 10.2 to Form 8-K dated March 3, 2008, filed May 4, 2008).
10.21
 
Executive Employment Agreement dated July 25, 2005 between Douglas J. Kramer and the Company (incorporated by to reference Exhibit 10.8 to Form 8-K dated July 25, 2005, filed July 29, 2005).
   
Executive Employment Agreement dated May 5, 2008 between Douglas J. Kramer and the Company (incorporated by to reference Exhibit 10.8 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.22
 
Executive Employment Agreement dated July 25, 2005 between Michael T. Adams and the Company (incorporated by to reference Exhibit 10.7 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.23
 
Executive Employment Agreement dated March 3, 2008 between Paul Smiertka and the Company (incorporated by to reference Exhibit 10.1 to Form 8-K dated March 3, 2008, filed May 4, 2008).
10.24
 
Revolving Credit and Term Loan Agreement between Lapolla and ComVest dated February 21, 2007 (incorporated by reference to Exhibit 10.1 to Form 8-K dated and filed February 23, 2007, filed February 2, 2007).
10.25
 
Convertible Term Note between Lapolla and ComVest dated February 21, 2007 (incorporated by reference to Exhibit 10.2 to Form 8-K dated and filed February 23, 2007, filed February 2, 2007).
10.26
 
Revolving Credit Note between Lapolla and ComVest dated February 21, 2007 (incorporated by reference to Exhibit 10.3 to Form 8-K dated and filed February 23, 2007, filed February 2, 2007).

 
28


INDEX OF EXHIBITS
(continued)

Exhibit No.
 
Description
10.27
 
Warrant No. CV-1 To Purchase Shares of Common Stock to ComVest dated February 21, 2007 (incorporated by reference to Exhibit 10.4 to Form 8-K dated and filed February 23, 2007, filed February 2, 2007).
10.28
 
Warrant No. CV-2 To Purchase Shares of Common Stock to ComVest dated February 21, 2007 (incorporated by reference to Exhibit 10.5 to Form 8-K dated and filed February 23, 2007, filed February 2, 2007).
10.29
 
Warrant No. CV-3 To Purchase Shares of Common Stock to ComVest dated February 21, 2007 (incorporated by reference to Exhibit 10.6 to Form 8-K dated and filed February 23, 2007, filed February 2, 2007).
10.30
 
Collateral Agreement between Lapolla and ComVest dated February 21, 2007 (incorporated by reference to Exhibit 99.1 to Form 8-K dated and filed February 23, 2007, filed February 2, 2007).
10.31
 
Registration Rights Agreement between Lapolla and ComVest dated February 21, 2007 (incorporated by reference to Exhibit 99.2 to Form 8-K dated and filed February 23, 2007, filed February 2, 2007).
10.32
 
Amendment No. 1 to Revolving Credit and Term Loan Agreement between Lapolla and ComVest dated June 12, 2007 (incorporated by reference to Exhibit 10.7 to Form 8-K dated June 12, 2007, filed June 14, 2007).
10.33
 
Amended and Restated Convertible Term Note between Lapolla and ComVest dated June 12, 2007 (incorporated by reference to Exhibit 10.8 to Form 8-K dated June 12, 2007, filed June 14, 2007).
10.34
 
Amended and Restated Revolving Credit Note between Lapolla and ComVest dated June 12, 2007 (incorporated by reference to Exhibit 10.9 to Form 8-K dated June 12, 2007, filed June 14, 2007).
10.35
 
Warrant No. CV-4 To Purchase Shares of Common Stock to ComVest dated June 12, 2007 (incorporated by reference to Exhibit 10.10 to Form 8-K dated June 12, 2007, filed June 14, 2007).
10.36
 
Extension Under Registration Rights Agreement dated June 12, 2007 (incorporated by reference to Exhibit 99.3 to Form 8-K dated June 12, 2007, filed June 14, 2007).
10.37
 
Amended and Restated Revolving Credit and Term Loan Agreement between Lapolla and ComVest dated June 30, 2008 (incorporated by reference to Exhibit 10.1 to Form 8-K dated June 30, 2008, filed July 7, 2008).
10.38
 
Amended and Restated Convertible Term Note between Lapolla and ComVest dated June 30, 2008 (incorporated by reference to Exhibit 10.2 to Form 8-K dated June 30, 2008, filed July 7, 2008).
10.39
 
Amended and Restated Revolving Credit Note between Lapolla and ComVest dated June 30, 2008 (incorporated by reference to Exhibit 10.4 to Form 8-K dated June 30, 2008, filed July 7, 2008).
10.40
 
Guaranty between Richard J. Kurtz and ComVest dated June 30, 2008 (incorporated by reference to Exhibit 10.3 to Form 8-K dated June 30, 2008, filed July 7, 2008).
10.41
 
Debt-to-Equity Conversion Confirmation between Richard J. Kurtz and the Company dated June 30, 2008 (incorporated by reference to Exhibit 10.5 to Form 8-K dated June 30, 2008, filed July 7, 2008).
   
Warrant No. CV-5 To Purchase Shares of Common Stock to ComVest dated June 30, 2008 (incorporated by reference to Exhibit 10.9 to Form 8-K dated June 30, 2008, filed July 7, 2008).
10.42
 
Warrants Amendment Letter for Warrants CV-1 through CV-3 To Purchase Shares of Common Stock between ComVest and the Company dated June 30, 2008 (incorporated by reference to Exhibit 10.10 to Form 8-K dated June 30, 2008, filed July 7, 2008).
10.43
 
Amended and Restated Asset Purchase Agreement dated July 1, 2008 between the Company, Air-Tight Marketing and Distribution, Inc., and Larry P. Medford and Ted J. Medford (incorporated by reference to Exhibit 10.1 to Form 8-K dated July 1, 2008, filed July 8, 2008).
10.44
 
Employment Agreement dated July 1, 2008 between Ted J. Medford and the Company (incorporated by reference to Exhibit 10.2 to Form 8-K dated July 1, 2008, filed July 8, 2008).
10.45
 
Option Agreement dated July 1, 2008 between Ted J. Medford and the Company (incorporated by reference to Exhibit 10.3 to Form 8-K dated July 1, 2008, filed July 8, 2008).
10.46
 
Employment Agreement dated May 18, 2009 between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated May 18, 2009, filed May 20, 2009).
10.47
 
Option Agreement dated May 18, 2009 between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.2 to Form 8-K dated May 18, 2009, filed May 20, 2009).
 
2010 Year Financial Commitment from Richard J. Kurtz dated March 23, 2010.
14.1
 
Code of Business Ethics and Conduct, as amended, and currently in effect (incorporated by reference to Exhibit 14.1 to Form 10-K dated December 31, 2005 filed March 31, 2006).
 
Consent of Hein & Associates LLP for incorporation by reference in Registration Statement (Form S-3 No. 333-143922) of March 31, 2010 report.
 
Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

 
29


Logo 1

2009 Annual Audit


Lapolla Industries, Inc.
Intercontinental Business Park
15402 Vantage Parkway East, Suite 322
Houston, Texas  77032


www.lapollaindustries.com

 
 


LAPOLLA INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS

 
Page
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-1
   
BALANCE SHEETS
 
   
Years Ended December 31, 2009 and 2008
F-2
   
STATEMENTS OF OPERATIONS
 
   
Years Ended December 31, 2009 and 2008
F-3
   
STATEMENTS OF STOCKHOLDERS’ EQUITY
 
   
Years Ended December 31, 2009 and 2008
F-4
   
STATEMENTS OF CASH FLOWS
 
   
Years Ended December 31, 2009 and 2008
F-5
   
NOTES TO FINANCIAL STATEMENTS
F-6

 
(i)


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
Lapolla Industries, Inc.
Houston, Texas

We have audited the accompanying balance sheets of Lapolla Industries, Inc. as of December 31, 2009 and 2008 and the related statements of operations, change in stockholders’ equity and cash flows for each of the years ended December 31, 2009 and 2008 (restated).  We have also audited the Schedule II listed in the accompanying Item 15(a)2. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit 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 financial statements are free of material misstatement.  An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lapolla Industries, Inc. as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years ended December 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the Schedule II presents fairly, in all material respects, the information set forth therein in relation to the financial statements taken as a whole.

We were not engaged to examine management’s assertion about the effectiveness of Lapolla Industries, Inc.’s internal control over financial reporting as of December 31, 2009 included in Item 9A(T) of Part II in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and, accordingly, we do not express an opinion thereon.

As discussed in Note 22 to the financial statements, the 2008 financial statements have been restated to correct a misstatement.

As discussed in Note 11 to the financial statements, the Company changed its method of determining whether equity-linked financial instruments are indexed to the Company’s own stock, with the adoption of the amendments to the FASB Accounting Standards Codification Topic 815-40, Contracts in Entity’s Own Equity, effective January 1, 2009.

HEIN & ASSOCIATES LLP

/s/  Hein & Associates LLP

Houston, Texas
March 31, 2010

 
F - 1


LAPOLLA INDUSTRIES, INC.
BALANCE SHEETS

   
As of December 31,
 
   
2009
   
2008
 
         
(Restated)
 
Assets
 
 
       
Current Assets:
           
Cash
  $ 400,821     $ 42,845  
Trade Receivables, Net
    8,262,477       8,502,679  
Inventories
    4,474,163       4,764,937  
Prepaid Expenses and Other Current Assets
    960,090       1,042,906  
Total Current Assets
    14,097,551       14,353,367  
                 
Property, Plant and Equipment
    2,422,499       2,623,388  
                 
Other Assets:
               
Goodwill
    4,234,828       3,741,167  
Other Intangible Assets, Net
    1,464,694       1,695,907  
Deposits and Other Non-Current Assets, Net
    565,755       515,897  
Total Other Assets
    6,265,277       5,952,971  
                 
Total Assets
  $ 22,785,327     $ 22,929,726  
                 
Liabilities and Stockholders' Equity
               
Current Liabilities:
               
Accounts Payable
  $ 5,626,877     $ 6,827,059  
Accrued Expenses and Other Current Liabilities
    2,098,053       2,336,058  
Loans Payable – Related Party
          1,280,000  
Current Portion of Convertible Term Note
    2,235,837       500,000  
Current Portion of Revolving Credit Note
    8,091,835       7,550,995  
Current Portion of Asset Purchase Promissory Note
    180,172        
Current Portion of Derivate Liability
    571,864        
Current Portion of Long-Term Debt
    73,656       104,001  
Total Current Liabilities
    18,878,294       18,598,113  
                 
Other Liabilities:
               
Non-Current Portion of Convertible Term Note
          1,872,222  
Non Current Portion of Long-Term Debt
    143,814       180,175  
Total Other Liabilities
    143,814       2,052,397  
                 
Total Liabilities
    19,022,108       20,650,510  
                 
Commitments and Contingencies (Note 15)
               
                 
Stockholders' Equity:
               
Preferred Stock, $1.00 Par Value; 2,000,000 Shares Authorized, of which Designation:
               
Series A Convertible, 750,000 Shares Authorized; -0- and 62,500 Issued and Outstanding (Less Offering Costs $7,465) for 2009 and 2008, respectively; $-0- and $62,500 aggregate liquidation preference for 2009 and 2008, respectively.
          55,035  
Series D, 25,000 Shares Authorized;  13,916 and 8,176 Issued and Outstanding for 2009 and 2008, respectively; $13,916,000 and $8,176,000 aggregate liquidation preference for 2009 and 2008, respectively.
    13,916       8,176  
Common Stock, $.01 Par Value; 98,000,000 Shares Authorized; 63,944,799 Issued and Outstanding for 2009 and 2008, respectively.
    639,448       639,448  
Additional Paid-In Capital
    81,802,159       78,106,472  
Accumulated (Deficit)
    (78,692,304 )     (76,529,915 )
Total Stockholders' Equity
    3,763,219       2,279,216  
                 
Total Liabilities and Stockholders' Equity
  $ 22,785,327     $ 22,929,726  

The Accompanying Notes are an Integral Part of the Financial Statements

 
F - 2


LAPOLLA INDUSTRIES, INC.
STATEMENTS OF OPERATIONS

   
Year Ended December 31,
 
   
2009
   
2008
 
         
(Restated)
 
             
Sales
  $ 50,026,470     $ 48,141,182  
                 
Cost of Sales
    37,635,961       39,085,653  
                 
Gross Profit
    12,390,509       9,055,529  
                 
Operating Expenses:
               
Selling, General and Administrative
    12,250,993       11,318,091  
Professional Fees
    281,536       516,974  
Depreciation
    283,920       203,606  
Amortization of Intangible Assets
    271,540       146,410  
Consulting Fees
    183,097       67,384  
Interest Expense
    1,186,390       793,164  
Interest Expense – Related Party
    247,259       68,856  
Interest Expense – Amortization of Discount
    912,085       492,566  
(Gain) Loss on Extinguishment of Debt
          (481,833 )
(Gain) Loss on Derivative Liability
    (318,425 )      
Other (Income) Expense, Net
    (83,959 )     (55,375 )
Total Operating Expenses
    15,214,436       13,069,846  
                 
Operating (Loss)
  $ (2,823,927 )   $ (4,014,317 )
                 
Net (Loss)
  $ (2,823,927 )   $ (4,014,317 )
Plus:  Dividends on Preferred Stock
    (817,025 )     (817,600 )
Net (Loss) Available to Common Stockholders
  $ (3,640,952 )   $ (4,831,917 )
                 
Net (Loss) Per Share-Basic and Diluted
  $ (0.06 )   $ (0.08 )
                 
Weighted Average Shares Outstanding
    63,944,799       59,834,396  

The Accompanying Notes are an Integral Part of the Financial Statements

 
F - 3


LAPOLLA INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY

   
Preferred Stock
   
Common Stock
   
Additional
         
Total
 
   
Series
   
Series
   
Par
         
Par
   
Paid-In
   
Accumulated
   
Stockholders'
 
As of the Year Ended
  A     D     $1.00    
Shares
    $0.01    
Capital
   
(Deficit)
   
Equity
 
                                                         
December 31, 2007
    62,500       8,176     $ 63,211       59,125,696     $ 591,257     $ 73,600,879     $ (72,515,598 )   $ 1,739,749  
                                                                 
Issuance of Common Stock
                      4,819,103       48,191       3,570,659             3,618,850  
Share-Based Compensation Expense
                                  900,620