Attached files

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EX-32 - EXHIBIT 32 - CERTIFICATION OF PEO/PFO - LAPOLLA INDUSTRIES INCa201610kexhibit_32.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION OF PFO - LAPOLLA INDUSTRIES INCa201610kexhibit_31-2.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF PEO - LAPOLLA INDUSTRIES INCa201610kexhibit_31-1.htm
EX-23.1 - EXHIBIT 23.1 - CONSENT - LAPOLLA INDUSTRIES INCa201610kexhibit_23-1.htm
EX-10.95 - EXHIBIT 10.95 - OPTION AGREEMENT - LAPOLLA INDUSTRIES INCa201610kexhibit_1095.htm
EX-10.94 - EXHIBIT 10.94 OPTION AGREEMENT - LAPOLLA INDUSTRIES INCa201610kexhibit_1094.htm
EX-10.93 - EXHIBIT 10.93 - OPTION AGREEMENT - LAPOLLA INDUSTRIES INCa201610kexhibit_1093.htm
EX-10.92 - EXHIBIT 10.92 OPTION AGREEMENT - LAPOLLA INDUSTRIES INCa201610kexhibit_1092.htm
EX-10.91 - EXHIBIT 10.91 - STOCK BONUS AGREEMENT - LAPOLLA INDUSTRIES INCa201610kexhibit_1091.htm
EX-10.90 - EXHIBIT 10.90 - STOCK BONUS AGREEMENT - LAPOLLA INDUSTRIES INCa201610kexhibit_1090.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, 2016
 
Commission File No. 001-31354
 lapollalogoa09.jpg
 
Lapolla Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
 
13-3545304
(I.R.S. Employer Identification No.)
 
 
 
Intercontinental Business Park
15402 Vantage Parkway East, Suite 322
Houston, Texas
(Address of principal executive offices)
 
 
77032
(Zip Code)
(281) 219-4700
(Registrant’s telephone number, including area code)
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
 
 
(Title of 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 þ

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 þ
 
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ  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 þ  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. ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer  ¨
Accelerated Filer  ¨
Non-Accelerated Filer  ¨
Smaller Reporting Company þ
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES ¨  NO þ
 
As of June 30, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $38,678,186 based on the closing sales price as quoted on the OTCQX on such date. For purposes of this computation only, all officers, directors and 10% or greater stockholders of the registrant are deemed to be affiliates.
 
Common Stock outstanding as of February 14, 2017122,366,001 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE

None.




LAPOLLA INDUSTRIES, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
 
 
 
 
Page
PART I
 
 
Item 1.
Business
 
Item 1A.
Risk Factors
 
Item 1B.
Unresolved Staff Comments
 
Item 2.
Properties
 
Item 3.
Legal Proceedings
 
Item 4.
Mine Safety Disclosures
 
 
 
 
PART II
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6.
Selected Financial Data
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 8.
Financial Statements and Supplementary Data
 
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
Item 9A.
Controls and Procedures
 
Item 9B.
Other Information
 
 
 
 
PART III 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
Item 11.
Executive Compensation
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
Item 14.
Principal Accountant Fees and Services
 
 
 
 
PART IV
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
 
 
SIGNATURES
INDEX OF EXHIBITS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(i)


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K contains “forward-looking statements,” which include information relating to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 
General economic conditions and their effect on demand for foams and coatings, particularly in the commercial construction and insulation markets, but also in the energy savings industries.

The effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins and profitability.

The fact that many of our larger competitors are better established and have significantly greater resources, and may subsidize their competitive offerings with other products and services, which may make it difficult for us to attract and retain customers.

Our dependence on a few large suppliers for a large portion of our materials required for production and sales of our products, any change in the availability of which could have a significant impact on our results of operations.

The potential loss or departure of key personnel, including Richard J. Kurtz, our chairman of the board and majority stockholder.

Our ability to generate internal growth, maintain market acceptance of our existing products and gain acceptance for our new products.

Unanticipated increases in raw material prices or disruptions in supply, which could increase production costs and adversely affect our profitability.

Restrictive loan covenants and/or our ability to repay or refinance debt under our credit facilities, which could limit our future financing options and liquidity position and may limit our ability to grow our business.

Operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material, labor or overhead cost increases, interest rate risk and commodity risk.

The impact of geopolitical activity on the economy, changes in government regulations such as income taxes, climate control initiatives, the timing or strength of an economic recovery in our markets and our ability to access capital markets.

The fact that our chairman controls a majority of our combined voting power, and may have, or may develop in the future, interests that may diverge from those of other stockholders.

Future sales of large blocks of our common stock, which may adversely impact our stock price.

The liquidity and trading volume of our common stock.

The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Moreover, new risks regularly emerge and it is not possible for us to predict or articulate all risks we face, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should review carefully the risks and uncertainties described under the heading “Item 1A. Risk Factors” in this Annual Report on Form 10-K for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.

As used in this report, “Lapolla,” the “Company,” “us,” “we” and “our” refer to Lapolla Industries, Inc., unless the context otherwise requires. Our Internet website address is www.lapolla.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 Securities and Exchange Commission (“SEC”). The information on our website is not incorporated by reference in this Annual Report on Form 10-K.


1


PART I
 
Item 1. Business.

General Overview

Lapolla is a leading United States based manufacturer and global distributor of foam, coatings and equipment, focused on developing and commercializing foams and coatings targeted at commercial and industrial and residential applications in the insulation and construction industries. We believe that being vertically 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. Lapolla’s 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. Building envelopes with increased insulation levels are becoming standard practice. Consumers are increasingly involved in the selection of green building products due to rising energy costs and the recent availability of tax credits and energy rebates.

Operating Segments

We manage our business through two business segments - Foam and Coatings. The Foam segment involves producing, and in limited instances applying through subcontractors, building envelope insulation foam for interior application, and roofing systems. The Coatings segment involves producing protective elastomeric coatings and primers. Both segments include supplying equipment and related ancillary items used in the application of our products. Information about our business should be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Foam Segment

Our foam business involves supplying spray polyurethane foam for insulation and roofing to the construction industry. Lapolla provides open and closed cell spray polyurethane foams for insulation, as well as closed cell technology for roofing applications.

Principal Products and Services and Markets

Spray foam insulation applications consist of perimeter wall, crawl space, and attic space for commercial, industrial, and residential applications. Roofing applications consist of new and retrofit commercial, industrial, and residential applications.

Open-cell spray foam technology is a cost-effective solution to improve the energy efficiency of a building. The material expands to 120 times its initial volume and fills cavities of any shape providing a continuous, protective air barrier that helps to minimize air leakage and air intrusion. Open-cell foam insulation is a performance upgrade over conventional insulation that leads to energy efficiency, improved occupant comfort, a cleaner indoor environment and greater noise reduction for building/home owners.

Closed-cell spray foam insulation is one of the most efficient insulating materials commercially available, with aged R-Values above 6.0 per inch. The description “closed-cell” comes from the cell structure of the finished insulation material. One cubic inch of polyurethane foam insulation contains millions of tiny plastic thermal resistant closed cells. The blowing agent is captured within the cells, which contributes to highly efficient insulating properties. In addition, closed-cell foam provides an inherent air barrier with low moisture vapor permeability, and excellent resistance to water. The density for closed-cell spray foam is approximately two pounds per cubic foot. The medium density foam provides sheer and racking strength to wall assemblies in building applications. The solid nature and sealing capability of closed-cell spray foam, inhibits moisture-driven elements.

Lapolla was the first manufacturer to globally offer a third party tested and approved wall foam system that uses the Solstice® Liquid Blowing Agent (“Solstice LBA”). Lapolla achieved this fourth generation (4G) benchmark while working closely with Honeywell to incorporate the Solstice LBA, a next-generation blowing agent from Honeywell. The product not only improves foam performance, but also delivers environmental benefits. Solstice LBA has an ultra-low global warming potential of 1, which is 99.9 percent lower than today’s most commonly-used blowing agent, HFC-245fa, a hydrofluorocarbon, while retaining its insulating performance. Solstice LBA is nonflammable, has received Environmental Protection Agency approval under the Significant New Alternatives Policy (SNAP) Program and is not a volatile organic compound.

We have attained, and continue to attain, third party credentials for our spray polyurethane foam systems, which means our products are tested by independent parties to meet applicable building and construction codes, thereby enabling greater acceptance of our proprietary foam products in our target markets globally. This segment also supplies adhesives and equipment for applications. We use our own distribution facility, as well as public warehousing in strategic local areas in our target markets, to serve customers. Technology, performance, availability, product credentials, approvals, technical and customer service, and pricing are major competitive factors in our foam business.

The Foam segment includes revenue from The AirTight Division. The AirTight Division primarily focuses on marketing, promoting, and selling energy saving products and energy reduction services through subcontractors. The AirTight Multi-Family Energy Savings Program is a turn-key project service that provides energy assessments and analysis with the assistance of independent consultants, project design, regulatory assistance to facilitate potential rebates from state and utility authorities, and project management services. The program is designed to save landlords substantial energy costs while dramatically reducing a property's carbon footprint and increasing the tenant's comfort.

2



Coating Segment

Our coatings business involves supplying protective coatings for roofing and wall systems for new and retrofit commercial and industrial applications to the roofing and construction industries. Lapolla provides an economical and effective roof coating system for application over new and existing roof substrates.

Principal Products and Services and Markets

Spray polyurethane foam roofing consists of two components: (i) a closed-cell polyurethane foam insulation; and (ii) a protective coating. The polyurethane foam adheres to the building substrate and any items that penetrate the roof surface, making it self-flashing and giving it resistance to high winds. Spray polyurethane foams also offer enhanced impact resistance. Roofs featuring spray polyurethane foam can last 20 to 30 years with minimal maintenance requirements. While sprayed foam can be applied to a new roof, the majority of applications involve reroofing as spray polyurethane roofing can be applied over an existing roof without requiring the removal of the old roof. Spray polyurethane foam roofing is particularly suited for roofs with unusual configurations or with multiple penetrations, as the sprayed material is self-flashing. Coatings often wear or need replacement before the foam, resulting in less tear offs and reducing waste. Spray polyurethane foam roofs are also selected by architects and designers because they can be coated with compounds that enhance reflectivity. Thus, spray polyurethane foam roofs can be considered cool roofs. Additionally, spray polyurethane foam is an excellent insulator and increases the energy efficiency of a building.

Thermo-Flex™ products include technologically advanced, high solid, fire retardant, thixotropic, acrylic, elastomeric coatings uniquely formulated for the protection of spray polyurethane foam insulation. Its various formulations are designed to withstand the intense heat and ultra-violet rays of low humidity desert environments and damp heat and ultra-violet rays of humid environments.

Thermo-Prime™ products are single component, water based, acrylic primers that promote adhesion of spray polyurethane foam to a variety of roofing substrates including built-up roof (BUR), modified bitumen, concrete, masonry, galvanized metal and wood, and eliminate odor problems normally associated with solvent borne primers.

Thermo-Caulk™ products are single component, water-based, high performance, elastomeric, knife-grade caulking, that when cured forms a tough, flexible membrane that seals out moisture. The products are used as a waterproof sealer for roof seams, termination points, cracks, flashing, vents, skylights, fasteners, parapets, protrusions and duct work. They can also be used with roof fabric for three coursing weak areas of the roof.

We use our own distribution facility, as well as public warehousing in strategic local areas in our target markets 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.

Industries

The industries in which we operate involve the sale and distribution of spray polyurethane foam, coatings and the equipment used in such application process. We manufacture our spray polyurethane foam and coating products and purchase equipment manufactured by large global manufacturers.  The majority of our products are sold to contractors and distributors that apply the products or sell to local contractors.

We believe the demand for spray polyurethane foam and reflective roof coatings is growing rapidly due to enhanced consumer awareness due to energy efficiency programs promoted by governmental agencies, energy companies, and private organizations and building code changes that call for houses to be better sealed to prevent air leaks. According to the Freedonia Group, U.S. demand for plastic foams is forecast to increase 2.3 percent annually to 8.8 billion pounds in 2020, valued at $25.2 billion. We believe that this growth reflects the advantages of spray polyurethane foam as an insulator and a means of saving energy. Underlying factors driving plastic foams demand include general economic conditions, construction activity, manufacturing output, population growth, and advantages over competitive materials such as fiberglass.  Demand for spray polyurethane foam can be cyclical, however, and can be negatively impacted by depressed construction markets and general economic conditions. Environmental and regulatory issues may additionally influence the market as changing building codes and higher energy efficiency standards can affect demand for plastic foam insulation.

Demand for commercial roofing products is forecast to grow as well. According to the Freedonia Group, US demand for commercial roofing products is forecast to advance 1.6 percent per year to 110 million squares in 2020, valued at $9.2 billion. Reroofing applications have historically accounted for the larger share of demand and we believe will continue to do so going forward. Many commercial structures -- particular those large in size -- feature low-slope roofs susceptible to damage caused by moisture, impacts, and general wear and tear. We believe building owners and managers looking to save money over the long term will increasingly implement regular inspection and maintenance programs to repair and replace damaged roofing materials. In many cases, these newly installed products will feature enhanced performance properties or can serve as cool roofing to lower utility bills. Plastic roofing, including spray polyurethane foam, has overtaken bituminous membranes as the leading commercial roofing material installed in the US, which we believe will see above-average gains in demand through 2020, totaling 34.4 million squares. We believe demand for plastic roofing will be supported by its favorable performance properties, ease of installation, and suitability for use as cool roofing. Demand for roofing depends on patterns in building construction, as the only applications for roofing products are in new structures, additions to existing structures, and repair or reroofing of existing structures. Nonresidential building construction activity is closely related to trends in the business cycle, interest rates, and the effects of previous building activity on the supply of structures within a given area.


3



Sales and Marketing

We maintain a growing global sales force. Sales are concentrated on contractors and distributors in the insulation and roofing industries. Lapolla utilizes direct sales, independent sales representatives and distributors, and stores its products in select public warehouses that it does not own to increase penetration in select target markets and facilitate availability of products for customers. 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 branding and recognition. Lapolla places a high priority on sales trending to create preparedness and processes to better serve customers. Information is gathered from sales, customers, management experience, and historical trending to predict needed supply for stock and warehousing to meet the needs of customers on a timely basis. Public warehousing, distribution and direct sales allow us to supply customers in a timely and efficient manner. The combined volumes of our products are disbursed throughout a broad customer base, which decreases vulnerability from the loss of one key customer. Most of our significant customers are contractors and general distributors that apply and resell our products for insulation and energy efficiency.  They generally do not provide us with data on where they apply our products.  Our sales are affected by our contractors and the level of our distributors’ inventory and their ability to resell such inventory, which in turn is affected by industry trends.  Our marketing and growth strategies are aimed at meeting the needs of our contractors and distributors and providing whatever products they may need at any given time rather than targeting any one particular product or seeking to expand our sales into any particular region of the world.

International

We have a global presence. Our international presence represented approximately 4.53% and 4.47% of our total product sales for the year ended December 31, 2016 and 2015, respectively. We use independent distributors to provide access to our products internationally in select target markets.

Competition

Competition is based on a combination of product credentials, approvals, price, technology, availability, performance, and limited warranties. Lapolla is expanding through aggressive sales and marketing, competitive pricing, a selective sales force comprised of direct salespersons, independent representatives, and distributors, and building owner and contractor brand awareness.

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. Product credentials and approvals differentiate product lines and suppliers that are more readily suited to broad use and industry acceptance. We currently maintain certain credentials and approvals to assure minimal restrictions in markets and uses.

Within the industries for our products, we believe that we are a market leader with prices generally competitive with those of our competitors. More specifically, our customers generally purchase foam and coatings products from a select few sources besides us, and our products generally comprise a large percentage of the foam and coatings products purchased by our customers. In addition, we offer customers technical service and training unlike many of our competitors.  We believe the fact that most of our customers find it important to maintain us as a valued supplier, coupled with our highly credentialed products, competitive prices and a high level of service has shielded us from the potential negative impact of volatility in raw material prices that affects our industry as a whole.

Foam

We are one of the largest suppliers of spray polyurethane foam for insulation and roofing foam in the United States and are expanding globally. The foam manufacturing industry consists of a limited number of large and medium sized manufacturing companies with global, national and regional presence primarily relying on distributors to service markets. We are able to access distribution channels and penetrate target markets through direct sales more effectively as a manufacturer of foam resins (versus being just a distributor). Our products are supplied to large, medium and small insulation, roofing, and general contractors, as well as selective distributors with connections to local markets in target areas.

In large volume insulation areas, foamed plastic intensely competes with fiberglass and, to a lesser extent, mineral wool and cellulose. We believe that the physical characteristics of foamed plastic give us a competitive advantage in this marketplace. The two primary plastic foam insulation materials, polyurethane and polystyrene, generally have higher R-values (the per inch values reflecting the insulating ability of a material) than fiberglass and mineral wool. A material with a high R-value can insulate better and at thinner thicknesses than a material of lower R-value. Foamed plastics are also more versatile and offer a tighter insulation bond by providing a more uniform level of thermal resistance without any material gaps, if properly installed. Building codes that call for houses to be more tightly sealed to prevent air leaks may spur builders and homeowners to use spray foams to fill gaps, while foam boards may see increasing use because of their higher R-values.

Coatings

The market for our coatings products is fragmented and characterized by the preferences of the coatings applicators as manufacturers have specifically focused on energy efficient acrylic coatings for roofing and construction as their primary line. We have experienced and expect to continue to experience intense competition from a number of companies.



4



Materials and Principal Suppliers

We place a high priority on forecasting material demand to meet customer demands in the most expedient and cost effective manner and manage cash flow. The primary materials incorporated in our foams and coatings are isocyanates, polyols, catalysts, resins, titanium dioxide, and blowing agents. On the supply side, suppliers to our industry include large chemical and equipment companies.  In addition, some of our largest competitors are vertically integrated, selling products they manufactured with raw materials they can source from within.  Maintaining and expanding our relationships and access with our raw material suppliers is critical given our high dependence on the raw materials and equipment we purchase.  Since we purchase mainly from domestic suppliers, the main factor influencing our supply is our ability to maintain and expand our existing relationships with suppliers and add new suppliers.

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. The principal suppliers are Wanhua Chemical (America) Co. Ltd., Honeywell International, Inc., DowDuPont, and Evonik Industries AG. Although 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, we believe that we are a potentially lucrative target for vendors to assure their own growth and demand in 2017 and beyond. Our foam resins and acrylic coatings are manufactured in our Houston, Texas facility and we maintain sufficient manufacturing capacity 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.

Proprietary Information, Trade Secrets and Trademarks

We rely on our proprietary technologies and trade secrets in our foam and coating segments for finished goods formulations.  Additionally, we rely on trade secrets and proprietary know-how that we seek to protect, in part, through confidentiality agreements with our vendors, customers, employees and consultants. We market our products under various trademarks, for which we have registered and unregistered trademark protection. We consider these valuable because of their contribution to market identification of our products. Our principal registered trademarks are:
 
 
Trademark
Registration Number
Registration Date
 
l
LAPOLLA
U.S. Registration No. 4,104,321
February 28, 2012
 
l
LAPOLLA
U.S. Registration No. 4,104,322
February 28, 2012
 
l
AIRTIGHT SPRAY FOAM INSULATION
U.S. Registration No. 4,139,386
May 8, 2012
 
l
AIRTIGHT
U.S. Registration No. 3,888,457
December 14, 2010
 
l
AIRTIGHT SPRAYFOAM
U.S. Registration No. 3,888,458
December 14, 2010
 
l
AIRTIGHT SPRAYFOAM
U.S. Registration No. 3,888,459
December 14, 2010
 
l
AIRTIGHT SPRAY FOAM INSULATION
U.S. Registration No. 4,374,681
July 30, 2013
 
l
THERM-O-FLEX
U.S. Registration No. 4,482,902
February 18, 2014
 
l
THERMO-FLEX
U.S. Registration No. 4,605,677
September 16, 2014
 
l
FOAM-LOK
U.S. Registration No. 5,031,323
August 30, 2016
 
l
FOAM-LOK
EUIPO Registration No. 014877071
November 5, 2016
 
Lapolla’s federal and European Union trademark registrations expire ten years after the registration date, unless renewed within one year prior to the expiration. It is the Company’s intent to renew all registered trademarks still in use within the one year period prior to their expiration.

Research and Development

We incurred costs of $378,000 and $269,000 for research and development in the years ended December 31, 2016 and 2015, respectively, none of which costs were borne by customers.

Employees

As of December 31, 2016, we employed 77 full time individuals, none of whom are represented by a union. We believe that our relations with our employees are generally good.

Environmental Matters

We are subject to various national, federal, state, and local environmental laws and regulations and believe that our operations comply in all material respects where we have a business operation. No significant expenditures are anticipated in order to comply with environmental laws and regulations that would have a material impact on our Company in 2017.





5



Historical Information

We were incorporated in the state of Delaware on October 20, 1989 initially under the name of Natural Child Collection, Inc. and have undergone a variety of name changes and discontinued operations. For our current operations, the Company 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 (the "Infiniti Subsidiary"). On December 20, 2004, we changed our Company name from Urecoats Industries, Inc. to IFT Corporation. During the latter part of 2004, our Infiniti Subsidiary built and began operating an acrylic coatings manufacturing plant in the Southeastern United States. On February 11, 2005, the Company 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 (the "Lapolla Subsidiary"). 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 whereas the existence of our Lapolla Subsidiary ceased. On November 8, 2005, we changed our Company name from IFT Corporation to Lapolla Industries, Inc.

Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below, together with the financial and other information contained in this Annual Report on Form 10-K for the year ended December 31, 2016 and other periodic filings with the Securities and Exchange Commission. We operate in a changing environment that involves a number of risks. 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. These known and unknown risks could materially and adversely affect our business, financial condition, operating results or liquidity, which could cause the trading price of our common stock to decline.

Risks Relating to Our Business and Industry

Our operating results may vary significantly from quarter to quarter, which makes our operating results difficult to predict and can cause our operating results in any particular period to be less than comparable quarters and expectations from time to time.

Our quarterly results may fluctuate significantly from quarter to quarter due to a variety of factors, many of which are outside our control and have the potential to materially and adversely affect our results. Factors that affect our operating results include the following:
 
a change in demand or production of our products caused by severe weather conditions. Sales of our products tend to be lowest during the first fiscal quarter, with sales during the second, third, and fourth fiscal quarters being comparable and marginally higher;
the size, timing and terms of sales and orders, especially large customer orders;
variations caused by customers delaying, deferring or canceling purchase orders or making smaller purchases than expected;
the spending patterns of customers;
a change in the mix of our products having different margins;
a change in the mix of our customers and business;
changes in pricing by us or our competitors, or the need to provide discounts to win business;
our ability to control costs, including operating expenses;
losses experienced in our operations not otherwise covered by insurance;
the ability and willingness of customers to pay amounts owed to us;
the timing of significant investments in the growth of our business, as the revenue and profit we hope to generate from those expenses may lag behind the timing of expenditures;
costs related to the acquisition and integration of companies or assets;
general economic trends, including changes in construction and retrofitting spending or national or geopolitical events such as economic crises, wars or incidents of terrorism; and
future accounting pronouncements and changes in accounting policies.

Accordingly, our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter or for an entire year.
 
Our industries are highly competitive.
 
The spray polyurethane foam and coatings industries are highly competitive. Although we are one of the largest suppliers of spray polyurethane foam, many of our competitors are significantly larger and have substantially greater resources than we do and are able to achieve greater economies of scale than us and may, therefore, be able to provide their products and services to customers at lower prices than we are able to. Moreover, our competitors could develop the expertise, experience and resources to offer products that are superior in both price and quality to our products. While we seek to compete by providing more state-of-the-art products, there are few technical or other barriers to prevent much larger companies in our industry from putting more emphasis on this same strategy. Similarly, we cannot be certain that we will be able to market our business effectively in the face of competition or to maintain or enhance our competitive position within our industry, maintain our customer base at current levels or increase our customer base. Our inability to manage our business in light of the competitive forces we face could have a material adverse effect on our results of operations.
 

6




Because we currently purchase a significant portion of our materials from a few suppliers, any decrease in availability of these materials could have an adverse effect on our business, financial condition and operating results.
 
We depend on Wanhua Chemical (America) Co. Ltd., DowDuPont, and Evonik Industries AG for a large portion of our spray polyurethane foam and acrylic coatings material purchases, and require blowing agents from Honeywell International, Inc. Any change in the availability of such materials and blowing agents, when needed to meet our manufacturing requirements, will have a significant impact on our results of operations. If any of these suppliers were to cancel, delay or reduce the amount of business we do with them for any reason, there would be a material adverse effect on our business, financial condition and operating results.

The departure or loss of key personnel could disrupt our business.
 
We depend on the continued efforts of Richard J. Kurtz, our chairman of the board and majority stockholder, and on executive officers who are responsible for the day-to-day management of our business. In addition, we rely on our current directors, all of whom are important to our operations and would be difficult to replace. We cannot be certain that any of these individuals will continue in their respective capacities for any particular period of time. The departure or loss of key personnel, or the inability to hire and retain qualified employees, could negatively impact our ability to manage our business.
 
General global economic, credit and capital market conditions have had and could continue to have an adverse impact on our business, operating results and financial condition.
 
We are susceptible to macroeconomic downturns in the U.S. and abroad which have had, and in the future may continue to have, an adverse effect on demand for our products and consequently our operating results, financial condition and cash flows. Future negative economic conditions could lead to reduced demand for our products, increased price competition, reduced gross margins, increased risk of obsolete inventories and higher operating costs as a percentage of revenue. Disruption of the capital and credit markets may negatively impact our business, including our ability to access additional financing at a time when we would like, or need, to access those markets to run or expand our business. These events may also make it more costly for us to raise capital through the issuance of our equity securities and could reduce our net income by increasing our interest expense and other costs of capital. The diminished availability of credit and other capital could also affect the industries we serve and could result in reduction in sales volumes and increased credit and collection risks.
 
Any acquisitions that we complete may not perform as planned and could disrupt our business and harm our financial condition and operations.
 
A key element of our long term business strategy is to pursue strategic acquisitions in order to increase revenue and earnings. In the event of any future acquisitions, we could:
 
issue additional securities that would dilute our current stockholders’ percentage ownership or provide the purchasers of the additional securities with certain preferences over those of common stockholders, such as dividend or liquidation preferences;
incur debt and assume liabilities; and
incur large and immediate write-offs of intangible assets, accounts receivable or other assets.

These events could result in significant expenses and decreased revenue, which could adversely affect the market price of our common stock. In addition, integrating product acquisitions and completing any future acquisitions involve numerous operational and financial risks. These risks include difficulty in assimilating acquired operations, diversion of management’s attention, and the potential loss of key employees or customers of acquired operations. Furthermore, companies acquired by us may not generate financial results consistent with our management’s plans at the time of acquisition. Moreover, we will need to conduct a due diligence investigation of one or more target businesses. Intensive due diligence is time consuming and expensive due to the operations, accounting, finance and legal professionals who must be involved in the due diligence process. We may have limited time to conduct such due diligence. Even if we conduct extensive due diligence on a target business that we acquire, we cannot assure you that this diligence will uncover all material issues relating to a particular target business, or that factors outside of the target business and outside of our control will not later arise. If our diligence fails to identify issues specific to a target business or the environment in which the target business operates, we may be forced to write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in us reporting losses. Even though these charges may be non-cash items and may not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our common stock. In addition, charges of this nature may cause us to violate net worth or other covenants that we may be subject to as a result of assuming pre-existing debt held by a target business or by virtue of our obtaining post-combination debt financing.
 
Our revenue and demand for our products may be adversely affected by fluctuations in currency exchange rates against the U.S. dollar.
 
We are seeking to expand globally and fluctuations between the U.S. dollar and other currencies, such as Canadian dollars, Euro currency, Czech Koruna, British Pound Sterling, and Swedish Krona, could negatively impact the amount of our revenues and earnings and demand for our products in the future. Demand also could differ materially from the Company’s expectations since the Company’s prices on goods sold outside the United States are typically quoted in U.S. dollars. For example, if the Canadian dollar or Euro currency appreciates relative to the U.S. dollar, the fluctuation could result in a positive impact on revenues and demand for our products in those markets. However, if the Canadian dollar or Euro currency depreciates relative to the U.S. dollar, there could be a negative impact on the revenues and demand for our products, and such depreciation relative to the U.S. dollar could stall revenue generation due to non-competitive product pricing in such target markets. The exchange rate from the U.S. dollar to other currencies has fluctuated substantially in the past and may continue to do so in the future.

7




Fluctuations in the price and supply of materials used to manufacture our products may reduce our profits.
 
Our material costs represented approximately 65% and 69% of our revenues for the years ended December 31, 2016 and 2015, respectively. The principal materials purchased by us are isocyanates, polyols, catalysts, resins, titanium dioxide, and blowing agents. These materials and components are available from, and supplied by, a few sources at competitive prices. Unanticipated increases in material prices or disruptions in supply could increase production costs and adversely affect our profitability. We cannot provide any assurances that we will not experience difficulties sourcing our materials in the future.

We have, and expect to continue to have, credit facilities with restrictive loan covenants that may impact our ability to operate our business and to pursue our business strategies, and our failure to remain in compliance with these covenants could result in an acceleration of our indebtedness.

We will continue to rely on our credit facilities with Bank of America, N.A. for a significant portion of the working capital to operate our business and execute our strategy. These credit facilities contain certain covenants that restrict our ability to, among other things:

undergo a change in control;
incur new indebtedness or other obligations, subject to certain exceptions;
pay cash dividends, subject to permitted distribution guidelines;
create or incur new liens, subject to certain exceptions;
make new acquisitions or investments in other entities, subject to certain exceptions;
wind up, liquidate or dissolve our affairs;
change the nature of our core business;
alter our capital structure in a manner that would be materially adverse to our lenders; and
make investments or advancements to affiliated or related companies.

The majority of the liquidity derived from our credit facilities is based on availability determined by a borrowing base formula. Specifically, the availability of credit is dependent upon receivables, inventory, and fixed assets. We may not be able to maintain adequate levels of assets to support our required liquidity. In addition, our credit facilities require us to meet asset and fixed charge coverage ratio tests. Our ability to meet these financial provisions may be affected by events beyond our control. If, as or when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our credit facilities, our lenders could institute foreclosure proceedings against the assets securing borrowings under those facilities, which would harm our business, financial condition and results of operations.

The indebtedness under our credit facility with Bank of America, N.A. is secured by substantially all of our assets. As a result of these security interests, such assets would only be available to satisfy claims of our general creditors or to holders of our equity securities if we were to become insolvent to the extent the value of such assets exceeded the amount of our indebtedness and other obligations. In addition, the existence of these security interests may adversely affect our financial flexibility.

Indebtedness under our credit facility with Bank of America, N.A. is secured by a lien on substantially all of our assets. Accordingly, if an event of default were to occur under our credit facilities, Bank of America, N.A. would have a priority right to our assets, to the exclusion of our general creditors in the event of our bankruptcy, insolvency, liquidation, or reorganization. In that event, our assets would first be used to repay in full all indebtedness and other obligations secured by them (including all amounts outstanding under our senior secured credit agreement), resulting in all or a portion of our assets being unavailable to satisfy the claims of our unsecured indebtedness. Only after satisfying the claims of our unsecured creditors and our subsidiaries’ unsecured creditors would any amount be available for our equity holders. The pledge of these assets and other restrictions may limit our flexibility in raising capital for other purposes. Because substantially all of our assets are pledged under these financing arrangements, our ability to incur additional secured indebtedness or to sell or dispose of assets to raise capital may be impaired, which could have an adverse effect on our financial flexibility.

We rely on third parties for key elements of our business whose operations are outside our control.

We rely on arrangements with third party shippers and carriers such as independent shipping companies for timely delivery of our products to our customers. As a result, we may be subject to carrier disruptions and increased costs due to factors that are beyond our control, including labor strikes, inclement weather, natural disasters and rapidly increasing fuel costs. If the services of any of these third parties become unsatisfactory, we may experience delays in meeting our customers’ product demands and we may not be able to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver products to our customers in a timely and accurate manner may damage our reputation and could cause us to lose customers. We also utilize third party distributors and manufacturers’ representatives to sell our products. While we are selective in whom we choose to represent us, it is difficult for us to ensure that our distributors and manufacturers’ representatives consistently act in accordance with the standards we set for them. To the extent any of our end-customers have negative experiences with any of our distributors or manufacturers’ representatives, it could reflect poorly on us and damage our reputation, thereby negatively impacting our financial results.

Our risk management activities may leave us exposed to unidentified or unanticipated risks.

Although we maintain insurance policies for our business, these policies contain deductibles and limits of coverage. Insurance liabilities are difficult to estimate due to various factors and we may be unable to effectively anticipate or measure potential risks to our company. If we suffer unexpected or uncovered losses, or if any of our insurance policies or programs are terminated for any reason or are not effective in mitigating our risks, we may incur losses that are not covered or that exceed our coverage limits and could adversely impact our results of operations, cash flows and financial position.

8




We may face impairment charges if economic environments in which our business operates and key economic and business assumptions substantially change.

Assessment of the potential impairment of property, plant and equipment, goodwill and other identifiable intangible assets is an integral part of our normal ongoing review of operations. Testing for potential impairment of long-lived assets is dependent on numerous assumptions and reflects our best estimates at a particular point in time, which may vary from testing date to testing date. The economic environments in which our businesses operate and key economic and business assumptions with respect to projected product selling prices and materials costs, market growth and inflation rates, can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on both the existence and magnitude of impairments, as well as the time at which such impairments are recognized. Future changes in the economic environment and the economic outlook for the assets being evaluated could also result in additional impairment charges. Any significant asset impairments would adversely impact our financial results.

Existing and future litigation could impact our financial results and condition.

Our business, results of operations and financial condition could be affected by significant existing and future litigation or claims adverse to us. Types of potential litigation cases include product liability, contract, employment-related, personal injury or property damage, intellectual property, stockholder claims and claims arising from any injury or damage to persons, property or the environment from hazardous substances used, generated or disposed of in the conduct of our business. We have been in the past, and continue to be, subject to various product liability lawsuits and claims related to our products due to alleged personal injuries. Although we continue to challenge various court opinions on the subject matter, we are largely self-insured for some existing and possibly future product liability losses that may arise related to alleged personal injuries due to total pollution exclusions in some of our insurance policies for certain periods of time. None of the existing allegations against us for alleged personal injuries have been proved in court. Due to the uncertainties of litigation, we can give no assurance that we will prevail on any claims made against us in any such lawsuit. While it is not feasible to predict the outcome of any pending lawsuits and claims, we do not believe that the disposition of any such pending matters is likely to have an adverse effect on our financial condition or liquidity, although the resolution in any reporting period of one of more of these matters could have an adverse effect on our operating results for that period. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results.
 
Market disruptions caused by domestic or international financial crises could affect our ability to meet our liquidity needs at a reasonable cost and our ability to meet long-term commitments, which could adversely affect our financial condition and results of operations.

We rely on credit facilities with our lenders, amongst other avenues, to satisfy our liquidity needs. Disruptions in the domestic or international credit markets or deterioration of the banking industry’s financial condition, may discourage or prevent our lenders and other lenders from meeting their existing lending commitments, extending the terms of such commitments or agreeing to new commitments, such as for acquisitions or to refinance existing credit facilities. Market disruptions may also limit our ability to issue debt securities in the capital markets. We can provide no assurances that our lenders or any other lenders we may have will meet their existing commitments or that we will be able to access the credit markets in the future on terms acceptable to us or at all. Longer term disruptions in the domestic or international capital and credit markets as a result of uncertainty, reduced financing alternatives or failures of significant financial institutions could adversely affect our access to the liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the market stabilizes or until alternative financing can be arranged. Such measures could include deferring capital expenditures and reducing other discretionary expenditures. Market disruptions could cause a broad economic downturn that may lead to increased incidence of customers’ failure to pay for services delivered, which could adversely affect our financial condition, results of operations and cash flow.
 
The failure of our key computer-based systems for our administrative activities and manufacturing operations could have a material adverse effect on our business.

We currently maintain computer-based systems in the operation of our business and we depend on these systems to a significant degree for all areas of business operations. These systems are vulnerable to, among other things, damage or interruption from fire, flood, tornado, and other natural disasters, power loss, computer system and network failures, operator negligence, physical and electronic loss of data or security breaches and computer viruses. The destruction or failure of any one of our computer-based systems for any significant period of time could materially adversely affect our business, financial condition, results of operations and cash flows.
 
A shut down of our production could adversely affect our financial results and condition.

We maintain a foam resin blending and acrylic coatings production facility and are subject to various national, federal, state, and local environmental laws and regulations. Although we believe that our operations comply in all material respects with the various rules and regulations, we cannot ensure that environmental problems relating to our facility’s operations will not develop in the future or, if they were to develop, would not require significant expenditures on our part. If any environmental problems should occur in the future, our operating results may be adversely affected. Further, if our production facility’s processing equipment breaks down or malfunctions for a prolonged period of time, we will have to rely on third party toll blenders to produce our products for us. Such alternate production methods are more costly and start up times may lead to cancellation of orders and adversely affect our business.



 

9




We may be unable to generate internal growth.

Our ability to generate internal growth will be affected by, among other factors, our ability to attract new customers, increases or decreases in the number or size of orders received from existing customers, hiring and retaining skilled employees and increasing volume utilizing our existing facilities. Many of the factors affecting our ability to generate internal growth may be beyond our control, and we cannot be certain our strategies will be implemented with positive results or that we will be able to generate cash flow sufficient to fund our operations and to support internal growth. If we do not achieve internal growth, our results of operations will suffer and we will likely not be able to expand our operations or grow our business.

Risks Relating to Our Common Stock
 
Our common stock is quoted on the OTCQX, and we are a “controlled company.” As a controlled Company, our common stock may be less attractive to some investors or otherwise harm our stock price.
 
Because we are quoted on the OTCQX and, even if we were to be listed on a securities exchange, we believe we would qualify as a “controlled company,” we are not required to have a majority of our board of directors be independent. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded by independent directors to stockholders of companies that are not controlled companies. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.
 
Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.
 
Our board of directors is authorized to issue shares of preferred stock in one or more series and to fix the voting powers, preferences and other rights and limitations of the preferred stock. Accordingly, we may issue shares of preferred stock with a preference over our common stock with respect to dividends or distributions on liquidation or dissolution, or that may otherwise adversely affect the voting or other rights of the holders of common stock. Issuances of preferred stock, depending upon the rights, preferences and designations of the preferred stock, may have the effect of delaying, deterring or preventing a change of control, even if that change of control might benefit our stockholders. In addition, we are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Section 203 could delay or prohibit mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
 
Your ability to influence corporate decisions may be limited because Richard J. Kurtz owns a controlling percentage of our common stock and our lenders have final authority to approve or reject certain transactions.
 
Our company is controlled by Richard J. Kurtz, our chairman of the board, who beneficially owns approximately 55.23% of our outstanding common stock. As a result of this stock ownership, Mr. Kurtz can control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire. In addition, as the interests of Mr. Kurtz and our minority stockholders may not always be the same, this large concentration of voting power may lead to stockholder votes that are inconsistent with the best interests of our minority stockholders or the best interest of us as a whole. Furthermore, pursuant to the terms of our credit agreement with Bank of America, N.A., we are restricted from, among other things, entering into merger agreements or agreements for the sale of any or all of our assets outside the course of ordinary business without consent. As such, even if certain corporate transactions may be approved by our stockholders, Bank of America, N.A., as the lender under our credit agreement, have final authority to approve or reject certain of our transactions. This could lead to us not being able to effect certain transactions that may be in the best interests of our stockholders or our business.
 
There has been a limited market for our common stock and we cannot ensure investors that an active market for our common stock will be sustained.
 
There has been limited trading in our common stock and there can be no assurance that an active trading market in our common stock will be maintained. Due to the illiquidity of our common stock, the market price may not accurately reflect our relative value. There can be no assurance that an active market for our shares of common stock will develop in the future. Because our common stock is so thinly traded, even limited trading in our shares has in the past, and might in the future, lead to dramatic fluctuations in share price and investors may not be able to liquidate their investment in us at all or at a price that reflects the value of the business.



10




Our stock price may be volatile, which could result in substantial losses for investors.
 
The market price of our common stock is highly volatile and could fluctuate widely in response to various factors, many of which are beyond our control, including the following:
 
additions or departures of key personnel, including Richard J. Kurtz, our chairman and majority stockholder;
sales of our common stock, including management shares;
our ability to execute our business plan;
operating results that fall below expectations;
loss of any strategic relationship;
industry developments;
economic and other external factors;
our ability to manage the costs of maintaining adequate internal financial controls and procedures in connection with the acquisition of additional businesses;
period-to-period fluctuations in our financial results; and
announcements of acquisitions.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also significantly affect the market price of our common stock.
 
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
 
Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock and make it more difficult for us to raise funds through future offerings of common stock. Our stockholders and the holders of our options may sell substantial amounts of our common stock in the public market. The availability of these shares of our common stock for resale in the public market has the potential to cause the supply of our common stock to exceed investor demand, thereby decreasing the price of our common stock. In addition, the fact that our stockholders and option holders can sell substantial amounts of our common stock in the public market, whether or not sales have occurred or are occurring, could make it more difficult for us to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
 
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
 
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have research coverage by securities and industry analysts and you should not invest in our common stock in anticipation that we will obtain such coverage. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
 
We are subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared.
 
We are subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended, including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires us to conduct management assessments of the effectiveness of our internal controls over financial reporting. These reporting and other obligations place significant demands on our management, administrative, operational, internal audit and accounting resources. Any failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price. In addition, our internal controls will also include those of any company or business that we may acquire in the future. Acquired companies or businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, information and other systems. As a result, our internal controls may become more complex and we may require significantly more resources to ensure they remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation, either in our existing business or in businesses that we may acquire, could harm our operating results or cause us to fail to meet our reporting obligations.

The requirements of being a public company may strain our resources and divert management’s attention.
 
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act, the Dodd-Frank Act, and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. We may need to hire more employees in the future, which will increase our costs and expenses.

11



 
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Item 1B. Unresolved Staff Comments
 
Not applicable.
 
Item 2. Properties
 
Our operations are conducted in leased facilities located in Houston, Texas and Englewood Cliffs, New Jersey. Our corporate headquarters and primary administrative facility is located in Houston, Texas. We manufacture our foam resins and acrylic coatings, build spray rigs, perform research and development, provide warehousing, and distribute our products from our Houston, Texas facility. We lease an additional facility in Englewood Cliffs, New Jersey, primarily for inside sales. The Company has leases as follows:
 
Location
 
Square Footage
 
Term
Houston, Texas
 
56,375
 
06-01-2016 to 05-31-2023
Englewood Cliffs, New Jersey
 
4,500
 
Month-to-Month
 
We believe our present facilities are well maintained, in proper condition to operate at higher than current levels and are adequately insured. We do not anticipate significant difficulty in renewing or extending existing leases as they expire, or in replacing them with equivalent facilities or office locations.
 
Item 3. Legal Proceedings

Legal Proceedings
 
(a)Neil and Kristine Markey, et al., Plaintiffs v. Lapolla Industries, Inc., Delfino Insulation, et al, Defendants.

A complaint initially entitled Neil and Kristine Markey, individually, and on behalf of all others similarly situated, Plaintiffs, vs. Lapolla industries, Inc., a Delaware corporation; Lapolla International, Inc., a Delaware corporation; and Delfino Insulation Company, Inc., a New York Corporation, Defendants, was filed in the United States District Court for the Eastern District of New York and served on or about October 10, 2012 and amended last on November 11, 2013.  Plaintiffs brought this lawsuit only individually, having amended out any request for a class action. The complaint alleged, among other things, that Lapolla designed, labeled, distributed, and manufactured spray polyurethane foam insulation, which created a highly toxic compound when applied as insulation resulting in exposure to harmful gases. Plaintiffs sought: actual, compensatory, and punitive damages; injunctive relief; and attorney fees. Lapolla considered the allegations to be without merit and vigorously defended the allegations. On February 4, 2015, the Court dismissed the litigation with prejudice, per the voluntary request of Plaintiffs upon the advice of their new counsel and after their original litigation counsel withdrew citing irreconcilable differences with the Plaintiffs.  The Court retained jurisdiction to address a pending motion for sanctions filed by Lapolla.  The primary basis for Lapolla’s motion for sanctions is the Plaintiffs’ and their original attorney’s filing of the lawsuit without sufficient factual basis for the claims of personal injury and for failing to comply with discovery obligations to produce numerous potentially dispositive documents that Plaintiffs knew existed and their original counsel either knew or should have known existed.  Lapolla seeks to recover over $800,000 in legal fees for the defense of the lawsuit. All motions have been filed with the Court and Lapolla is awaiting a final ruling. The final outcome of this litigation cannot be determined at this time.

(b)Michael Commaroto, Kimberly S. Commaroto, and Gretchen Schlegel, Plaintiffs v. Pasquale Guzzo a/k/a Pasqualino Guzzo PDB Home Improvements, Perfect Wall, LLC, and Jozsef Finta, Defendants.

Pasquale Guzzo a/k/a Pasqualino Guzzo PDB Home Improvements filed a third-party complaint against Lapolla in the Superior Court, Judicial District of Stamford/Norwalk, in Connecticut on January 3, 2013.  Guzzo is alleging Lapolla’s spray polyurethane foam product is a defective product under Connecticut law and seeking indemnification and attorney’s fees.  On August 28, 2013, Michael Commaroto, Kimberly S. Commaroto, and Gretchen Schlegel filed an amended complaint against Lapolla also asserting the spray polyurethane foam is a defective product.  Plaintiffs seek monetary damages, punitive damages, and attorney’s fees, among other relief. Lapolla considers the allegations to be without merit and is vigorously defending the allegations. The outcome of this litigation cannot be determined at this time.




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(c)Various Lawsuits and Claims Arising in the Ordinary Course of Business
 
We are involved in various lawsuits and claims arising in the ordinary course of business, which are, in our opinion, immaterial both individually and in the aggregate with respect to our consolidated financial position, liquidity or results of operations.

Item 4. Mine Safety Disclosures
 
Not applicable.

13


PART II
 
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
The following table shows the range of high and low bid information for our common stock for each full quarterly period within the two most recent fiscal years. Our common stock is quoted on the OTCQX under the symbol “LPAD” and such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
 
 
2016
 
2015
Calendar Quarter
 
High
 
Low
 
High
 
Low
First
 
$
0.500

 
$
0.125

 
$
0.450

 
$
0.350

Second
 
$
0.570

 
$
0.324

 
$
0.440

 
$
0.350

Third
 
$
0.510

 
$
0.311

 
$
0.380

 
$
0.180

Fourth
 
$
0.540

 
$
0.350

 
$
0.350

 
$
0.151

 
Holders

As of February 14, 2017, there were 336 registered holders of record of our common stock.
 
Dividends

We have not declared or paid cash dividends on our common stock during the two most recent fiscal years. On February 15, 2017, the Company announced a cash dividend of one cent per share, payable to shareholders of record as of March 30, 2017.

Our Credit Agreement with Bank of America, N.A., effective September 7, 2016 (the “Credit Agreement”), limits our ability to pay cash dividends due to the limitation on the amount of distributions we are able to pay in order to be in compliance with our fixed charge coverage ratio (“FCCR”) debt covenant of at least 1.20 to 1.00. The FCCR is tested quarterly based upon the ratio of (a) Adjusted EBITDA (as defined in the Credit Agreement), to (b) the sum of capital expenditures, cash taxes paid, interest expenses, principal payments made on borrowed money other than the Line of Credit, and distributions made, in each case for the immediately preceding four fiscal quarter period and determined on a consolidated basis. See Part II, Item 7 “Management Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources” for more information.
 
Recent Sales of Unregistered Securities.

None.

Issuer Purchases of Equity Securities.

We did not repurchase any of our securities during the fourth quarter of the fiscal year ended December 31, 2016.
 
Item 6. Selected Financial Data.
 
Not applicable.


14


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk factors” included under Part I, Item 1A and elsewhere in this report. See “Special note regarding forward-looking statements.” In addition, the following review should be read in conjunction with information presented in Part I, Item 1 - Business relating to non-GAAP financial measures EBITDA and Adjusted EBITDA, as well as the information presented in our financial statements and the related notes to our financial statements.

Overview
 
Lapolla is a leading United States based manufacturer and global distributor of foam, coatings, and equipment, focused on developing and commercializing foams and coatings targeted at commercial and industrial and residential applications in the insulation and construction industries. We manage our business through two business segments - Foam and Coatings. The Foam segment involves producing, and in limited instances applying through subcontractors, building envelope insulation foam for interior application, and roofing systems. The Coatings segment involves producing protective elastomeric coatings and primers. Both segments include supplying equipment and related ancillary items used in the application of our products.

This financial review presents our operating results for each of the two years in the period ended December 31, 2016, and our financial condition at December 31, 2016.

Non-GAAP Financial Measures

To supplement our financial statements presented on a generally accepted accounting principles ("GAAP") basis, we disclose non-GAAP measures as EBITDA and Adjusted EBITDA because management uses these supplemental non-GAAP financial measures to evaluate performance period over period, to analyze the underlying trends in its business, and to establish operational goals and forecasts that are used in allocating resources. In addition, we believe many investors use these non-GAAP measures to monitor the Company’s performance. Our presentation includes these non-GAAP financial measures, and a reconciliation of EBITDA and Adjusted EBITDA to the GAAP measures most directly comparable thereto. The GAAP measure most directly comparable to EBITDA and Adjusted EBITDA is net income or loss. The non-GAAP financial measures of EBITDA and Adjusted EBITDA should not be considered as an alternative to net income or loss or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and Adjusted EBITDA are not presentations made in accordance with GAAP and have important limitations as analytical tools. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income and is defined differently by different companies, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

EBITDA
 
We define EBITDA as earnings or loss before interest, income taxes, depreciation and amortization.
 
Adjusted EBITDA
 
Adjusted EBITDA is defined as EBITDA increased by total share based compensation, property taxes, and loss on debt extinguishment.
 
We believe that presenting EBITDA and Adjusted EBITDA, in addition to the corresponding GAAP financial measures, provides investors greater transparency to the information used by management for financial and operational decision-making and allows investors to see the Company’s results “through the eyes” of management. We further believe that providing this information assists investors in understanding the Company’s operating performance and the methodology used by management to evaluate and measure such performance.
 
We recognize that the usefulness of EBITDA and Adjusted EBITDA as an evaluative tool may have certain limitations, including:
 
EBITDA and Adjusted EBITDA do not include interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and impacts our ability to generate profits and cash flows. Therefore, any measure that excludes interest expense may have material limitations;
EBITDA and Adjusted EBITDA do not include depreciation and amortization of other intangible assets expense. Because we use capital assets, depreciation and amortization of other intangible assets expense is a necessary element of our costs and ability to generate profits. Therefore, any measure that excludes depreciation and amortization of other intangible assets expense may have material limitations;
EBITDA and Adjusted EBITDA do not include provision for income taxes. Because the payment of income taxes is a necessary element of our costs, any measure that excludes income tax expense may have material limitations;
EBITDA and Adjusted EBITDA do not reflect capital expenditures or future requirements for capital expenditures or contractual commitments;
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs.

15



Results of Operations

Summary

The following table presents selected financial and operating data derived from the audited financial statements of the Company as of the dates and for the periods indicated. In addition, the table presents our unaudited non-GAAP financial measures, EBITDA and Adjusted EBITDA, and includes our reconciliation to net income or loss, its most directly comparable financial measure calculated and presented in accordance with GAAP. The table is presented in thousands.
 
 
Year Ended December 31,
 
 
2016
 
2015
Summary of Overall Results of Operations
 
 

 
 

Sales
 
$
86,386

 
$
78,649

Operating Income
 
7,797

 
2,055

Other Expense
 
1,108

 
2,240

Net Income (Loss)
 
6,378

 
(577
)
EBITDA (Unaudited)
 
$
8,727

 
$
2,732

Adjusted EBITDA (Unaudited)
 
$
10,180

 
$
4,088

 
 
 
 
 
Reconciliation of EBITDA and Adjusted EBITDA to Net Income (Loss):
 
 

 
 

Net Income (Loss):
 
$
6,378

 
$
(577
)
Additions:
 
 

 
 

Interest Expense
 
885

 
1,319

Interest Expense – Related Party
 
491

 
775

Interest Expense – Amortization of Discount
 
120

 
181

Income Tax Expense
 
311

 
392

Depreciation
 
265

 
358

Amortization of Other Intangible Assets
 
277

 
284

EBITDA
 
$
8,727

 
$
2,732

Additions:
 
 

 
 

Share Based Compensation (1)
 
$
988

 
$
1,229

Property Tax Expense
 
159

 
127

Loss on Debt Extinguishment
 
306

 

Adjusted EBITDA
 
$
10,180

 
$
4,088

(1) Represents non-cash share-based compensation expense for the periods then ended.
 

Sales
 
The following is a summary of sales for the years ending December 31 (in thousands):
 
 
2016
 
2015
 
% Change
Foam
 
$
73,919

 
$
66,030

 
11.9
 %
Coatings
 
12,467

 
12,619

 
(1.2
)%
Total Sales
 
$
86,386

 
$
78,649

 
9.8
 %
 
For the year ended December 31, 2016, our total sales increased by $7.7 million, or an increase of 9.8% from the same period in 2015. Foam sales increased $7.9 million primarily due to an increase in market share, which we believe is attributable to our focus on advancement of technology and marketing effort. The increase in foam sales was slightly offset by a decrease in coatings sales of $152,000, primarily due to heightened competition.










16



Gross Profit

The following is a summary of gross profit for the years ending December 31 (in thousands):
 
 
2016
 
2015
 
% Change
Cost of Sales
 
$
61,345

 
$
60,264

 
1.8
%
Gross Profit
 
25,041

 
18,385

 
36.2
%
Gross Margin Percentage:
 
 

 
 

 
 

Foam
 
28.7
%
 
22.2
%
 
29.3
%
Coatings
 
30.8
%
 
29.7
%
 
3.7
%
Total
 
29.0
%
 
23.4
%
 
23.9
%
 
For the year ended December 31, 2016, our gross profit increased by $6.7 million, or an increase of 36.2% from the same period in 2015. The increase in gross profit was driven by operational and manufacturing efficiencies, including a decrease of $4.3 million in purchased feedstock, freight, and other manufacturing costs. The Company's increase in sales contributed an additional $2.3 million of gross profit year over year. The remaining increase in gross profit is attributable to minor fluctuations in manufacturing depreciation and absorption.

 Operating Expenses

Selling, general and administrative expenses increased $1.2 million or 8.3%, to $15.1 million in 2016, compared to $13.9 million in 2015. The increase was primarily due to increases of $466,000 in selling expenses, including the hiring of additional sales personnel and travel expenses related to the solicitation of sales and maintenance of customer relationships, $145,000 in costs related to marketing and promotions, $132,000 in costs related to an increase in headcount for research and development, and $234,000 in costs related to our technical service department, including the hiring of additional technical service representatives to support our customers.
 
Professional fees increased $28,000 or 2.4% to $1.2 million. Professional fees consist of costs related to legal defense and required auditing fees.

Depreciation expense decreased $49,000 or 33.6%, to $97,000 in 2016, compared to $146,000 in 2015, due to reductions in depreciable assets.
 
Amortization of other intangible assets expense decreased $7,000 or 2.5%, to $277,000 in 2016, compared to $284,000 in 2015.
 
Consulting fees decreased $212,000 or 26.2% to $597,000 in 2016, compared to $809,000 in 2015, primarily due to a decrease in the need for recruiting services.

 Other (Income) Expense
 
Interest expense decreased $434,000 or 32.9%, to $885,000 in 2016, compared to $1.3 million in 2015, due to a lower average balance and lower interest rate on our Revolver Loan, augmented by the refinancing of the Enhanced Notes and the Revolver Loan into a new Line of Credit with Bank of America, N.A. on September 7, 2016. The effective interest rates on the Revolver Loan and Enhanced Notes were 4.6% and 11.7%, respectively, while the effective interest rate on our current Line of Credit is 2.8%.
 
Interest expense – related party decreased $284,000 or 36.6%, to $491,000 in 2016, compared to $775,000 in 2015, due to a decrease in accrued interest for the promissory notes between the Company and the chairman and principal stockholder that were paid in full at the end of 2015, augmented by the termination of the Enhanced Notes and related Guaranty Agreement on September 7, 2016.
 
Interest expense – amortization of discount decreased $61,000 or 33.7%, to $120,000 in 2016, compared to $181,000 in 2015. The amortization relates to the purchase discount associated with the Enhanced Notes, which was terminated on September 7, 2016.
 
Other income, net increased $659,000 or 1,882.9%, to $694,000 in 2016, compared to $35,000 in 2015. The increase was primarily due to the receipt of a settlement check related to a class action lawsuit.

Outlook for 2017
 
Based on our belief that there is growing global consumer awareness about energy efficient foams and coatings and reductions in energy cost, our outlook remains aggressive and positive, and we expect sales to grow globally in 2017. The markets for our products will continue to be highly competitive, but we believe, however, that our competitive advantages are rooted in our management, product formulations, credentials, approvals, performance, pricing, and technical customer service. In addition, we offer the flexibility, quality of products and responsiveness that only a smaller more dynamic 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. Any variation in our assumptions may result in a change in this outlook.



17



Liquidity and Capital Resources

We entered into a loan agreement with Bank of America, N.A. (the “Bank”) on September 7, 2016 (the “Credit Agreement”), under which we maintain a line of credit up to $15 million (the “Line of Credit”). The Company, in connection with the closing of the Credit Agreement, used the Line of Credit to pay off the outstanding balances under: (i) the a note purchase agreement with Enhanced Jobs for Texas Fund, LLC and Enhanced Credit Supported Loan Fund, LP (collectively “Enhanced”) on December 10, 2013 (the “Note Purchase Agreement”) for promissory notes aggregating $5.8 million (collectively referred to as the “Enhanced Notes”); and (ii) the Loan and Security Agreement with the Bank dated August 31, 2010 (the “Loan Agreement”) aggregating $2.7 million (the “Revolver Loan”). Refer to Credit Agreement and Other Debt below for more information.

The following is a summary of operating, investing, and financing activities as reflected in the statement of cash flows for the years ending December 31 (in thousands):
 
2016
 
2015
 
% Change
Cash provided by (used in):
 
 
 
 
 
     Operating activities
$
7,289

 
$
(825
)
 
983.5
%
     Investing activities
(143
)
 
(76
)
 
88.2
%
     Financing activities
(5,424
)
 
901

 
702.0
%
Net change in cash
$
1,722

 
$

 
 

Net cash provided by operating activities increased by $8.1 million, to $7.3 million in 2016, compared to net cash used in operating activities of $825,000 in 2015. The increase was primarily attributable to net income of $6.4 million driven by increases in sales of $7.7 million and gross profit of $6.7 million. The increase in net income included significant decreases in interest expense of $434,000 and interest expense - related party of 284,000.
Net Working Capital
2016
 
2015
 
% Change
Current assets
$
22,914

 
$
19,396

 
18.1
%
Current liabilities
9,679

 
9,208

 
5.1
%
Net working capital
13,235

 
10,188

 
29.9
%
Current ratio
2.37:1

 
2.11:1

 
 

Net working capital increased by $3.0 million, or 29.9%, in 2016 compared to 2015. The increase is primarily due to increases in cash of $1.7 million and accounts receivable of $2.5 million, which were offset by a combination of minimal fluctuations.

Net cash used in investing activities was $143,000 in 2016 and $76,000 in 2015. The investments in 2016 were for capital expenditures of $34,000 for vehicles, $83,000 for machinery and equipment, $10,000 for office furniture and equipment, and $16,000 for computers and software. The investments for 2015 were for capital expenditures of $4,000 for vehicles, $14,000 for machinery and equipment, $4,000 for office furniture and equipment, and $54,000 for computers and software.

Net cash used in financing activities was $5.4 million in 2016, compared to net cash provided by financing activities of $901,000 in 2015. Net cash used in 2016, consisted of proceeds of $9 million from our line of credit, net of repayments, repayments of $6.7 million on our former Revolver Loan, net of borrowings, and a repayment of $7.7 million on the Enhanced Notes payable. Net cash provided in 2015 consisted of proceeds of $1.3 million on our former Revolver Loan, net of repayments, borrowings of $250,000 from the Chairman of the Board in January 2015, which the Company paid in December 2015 including an additional $250,000 owed from November 2014. The Chairman of the Board paid $150,000 towards the Enhanced Notes on behalf of the Company in December 2015 which was repaid to the Chairman of the Board by the Company in December 2016.
 
Management believes that, based on budgeted sales and expenses and implemented minimum sales margin and cost controls, any cash generated from operations and the Line of Credit availability, subject to borrowing base limitations which may adversely impact our ability to raise capital, are sufficient to fund operations, including capital expenditures, for the next 12 months. Additionally, we evaluate capital raising opportunities for private placements of debt or common or preferred stock from accredited sophisticated investors from time to time to not only gauge market conditions but also to ensure additional capital is readily available to fund aggressive growth developments.









18



Credit Agreement and Other Debt

Credit Agreement

On September 7, 2016, we entered into the Credit Agreement with the Bank, which amended and restated the Loan Agreement in its entirety. The Credit Agreement provides an initial line of credit of $15 million for a 3 year term maturing on September 7, 2019. The amount available under the Line of Credit will be reduced by $250,000 at the beginning of each fiscal quarter starting on January 1, 2017 and ending on July 1, 2019, thereby reducing the Company’s unused line fee. The Company's interest rate is the daily floating LIBOR rate plus 2.25%. The Credit Agreement requires the Company to comply with two material financial covenants, including: (i) an asset coverage ratio of at least (a) 1.10 to 1.00 from September 30, 2016 through September 30, 2017, (b) 1.15 to 1.00 from October 1, 2017 through March 31, 2018, and (c) 1.20 to 1.00 after April 1, 2018, tested quarterly, which in each case will be determined based upon the ratio of (x) 85% of book value of all accounts receivable, plus 55% of book value of all inventory, plus 50% net book value of plant, property and equipment of the Company (the “Total Margined Value”) to (y) all outstanding liabilities for borrowed money and other interest-bearing liabilities arising under the Line of Credit (the “Total Line of Credit”); and (ii) a fixed charge coverage ratio of at least 1.20 to 1.00, tested quarterly based upon the ratio of (a) Adjusted EBITDA (as defined in the Credit Agreement), to (b) the sum of capital expenditures, cash taxes paid, interest expenses, principal payments made on borrowed money other than the Line of Credit and the Enhanced Notes, and distributions made, in each case for the immediately preceding four fiscal quarter period and determined on a consolidated basis. Upon closing of the Credit Agreement, an aggregate of $8.5 million was drawn from the Line of Credit and used to pay off the Enhanced Notes and the Loan Agreement. The Company granted the Bank a continuing security interest in and lien upon substantially all assets of the corporation. If, at any time, the Company’s Total Margined Value is less than the amount outstanding under the Total Line of Credit and that amount remains unpaid or future Total Margined Value calculations do not increase to an amount equal to the balance outstanding under the Total Line of Credit, the Bank, in its sole discretion, may accelerate any and all amounts outstanding under the Line of Credit. At December 31, 2016, the cash available under our Line of Credit was $4.7 million based on the Asset Coverage Ratio and after giving effect to outstanding borrowings. At December 31, 2016, we were in compliance with all debt covenants under our Credit Agreement.

Future Minimum Payments on Long-Term Debt

At December 31, 2016, future minimum principal payments of long-term debt are as follows (in thousands):
 
 
Payments Due By Period
 
 
Less Than
1 Year
 
1 to 3
Years
 
4 to 5
Years
 
More Than
5 Years
 
Total
Line of Credit
 
$

 
$
9,000

 
$

 
$

 
$
9,000


Off Balance Sheet Arrangements

As of December 31, 2016, we had no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail below in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Goodwill
 
Goodwill represents the excess of the aggregate purchase price over the fair value of net tangible and identifiable intangible assets of an acquired business. Goodwill was $4.2 million at December 31, 2016 and 2015. The Company operates two reporting units, Foam and Coatings. Disclosures related to goodwill are included in Note 8 to the financial statements. The Company evaluates goodwill for impairment on an annual basis or more frequently if Management believes indicators of impairment exist. Under GAAP, the Company has the option to perform a qualitative assessment to test for impairment of goodwill. If it is determined that it is more likely than not that the fair value of each reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if the Company concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of each reporting unit and comparing the carrying value of each reporting unit to its estimated fair value. If the fair value of a reporting unit is greater than its carrying value then goodwill is not impaired; otherwise, the second step of the impairment test shall be performed to measure the amount of impairment loss. Based on the qualitative assessment performed as of December 31, 2016, the Company concluded that it was more likely than not that the fair value of its reporting units was greater than their carrying amount. Accordingly, no further testing was required. There were no goodwill impairment charges recorded during the years ended December 31, 2016 or 2015.


19



Other Intangible Assets
 
The Company's other intangible assets, net of $1.2 million at December 31, 2016 and 2015, consist of product formulations and trade names that were acquired as part of business combinations, and trademarks and approvals and certifications obtained as part of entering into new markets. Amortization of other intangible assets totaled $277,000 and $284,000 for the years ended December 31, 2016 and 2015, respectively. Other intangible assets are tested for impairment as part of the long-lived asset grouping impairment tests. We test impairment of the asset group whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. See impairment discussion above under Property, Plant and Equipment for a description of how impairment losses are determined. Disclosures related to other intangible assets are included in Note 8 to the financial statements. Significant management judgment is required in the forecasts of future operating results that are used in the Company’s impairment evaluations. The estimates used are consistent with the plans and estimates that Management uses to manage its business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If the Company’s actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, then the Company could incur future impairment charges, which would adversely affect financial performance. The Company concluded that there were no material events or significant changes in circumstances that led to impairment during fiscal 2016 and 2015. There were no long-lived asset impairment charges recorded during the years ended December 31, 2016 or 2015.

Allowance for Doubtful Accounts
 
The Company presents trade receivables, net of allowances for doubtful accounts, to ensure trade receivables are not overstated due to uncollectible accounts. Allowances, when required, are calculated based on a detailed review of certain individual customer accounts, including credit insurance and other security when applicable, and an estimation of the overall economic conditions affecting our customer base. The Company reviews a customer’s credit history before extending credit. The allowance for doubtful accounts was approximately $366,000 and $545,000 at December 31, 2016 and 2015, respectively. If the financial condition of customers were to deteriorate based on worsening overall economic conditions, resulting in an impairment of their ability to make payments to the Company, then additional allowances may be required in future periods.
 
See also generally Note 1 – Summary of Organization, Basis of Presentation, and Critical Accounting Policies, Estimates, and Assumptions in our financial statements listed under Item 15 of Part IV of this report.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk
 
Not applicable.
 
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
 
(a)    Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and our chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016, the end of the period covered by this Annual Report on Form 10-K. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of December 31, 2016, our disclosure controls and procedures were effective at the reasonable assurance level.








20


 
(b)    Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, we used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013).

Based on this evaluation under the framework in Internal Control - Integrated Framework (2013) issued by the COSO, management concluded the Company’s internal control over financial reporting was effective as of December 31, 2016.
 
(c)    Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information
 
None.

21


PART III
 
Item 10. Directors, Executive Officers and Corporate Governance

Directors and Executive Officers
 
Set forth below is the biographical information and the qualifications and skills for each director and named executive officer, their ages, and their principal occupations for at least the past five years and their public-company directorships. All directors hold office for one-year terms or until the election and qualification of their successors. Officers are elected by the board of directors and serve at the discretion of the board.
Richard J. Kurtz
 
76
 
Chairman of the Board
Mr. Kurtz was appointed to our board of directors on November 23, 1998 and chairman of the board on February 8, 1999. He has been chief executive officer of the Kamson Corporation, a privately held corporation, in business for the past 40 years. The Kamson Corporation owns and operates 87 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 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. We believe that Mr. Kurtz’ leadership, drive and determination, as well as his background in the real estate and property management industries, make him a valuable resource on our board of directors.
Jay C. Nadel
 
58
 
Vice Chairman of the Board
Mr. Nadel was appointed to our board of directors on January 16, 2007 and, in connection with an advisory agreement, became vice chairman of the board on February 22, 2011. He has been chairman of the board of Englewood Hospital and Medical Center Foundation since October 1, 2013 and was previously chairman of Englewood Hospital and Medical Center and Englewood Healthcare System. In addition to being an independent consultant since 2004, Mr. Nadel currently serves on the Boards of two mutual fund groups, The City National Rochdale Family of Funds and The Advisors' Inner Circle III and related funds. As a 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.  From 1986 to 2001, he was 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.  From 1980 to 1986, he worked at KPMG Peat Marwick, New York, where he provided audit services attaining the position of manager. Mr. Nadel has been a Certified Public Accountant since 1980 and has a Bachelor of Science degree from the University of Maryland. We believe that Mr. Nadel's leadership and management experiences, as well as his financial background and qualifications, makes him a valuable resource on our board of directors.
Lt. Gen. Arthur J. Gregg (US Army) (Ret.)
 
86
 
Director
Lt. Gen. Gregg was appointed to our board of directors on February 21, 2000 and is the chairperson of the compensation committee.  He enlisted in the United States Army in January 1946, and was commissioned through Officer’s Candidate School in May 1950. He served for more than 35 years and retired in August 1981 in the grade of Lieutenant General. His most significant assignments included Commander, Army and Air Force Exchange System, Europe; Deputy Chief of Staff for Logistics, United States Army, Europe; Director for Logistics in the Organization of the Joint Chiefs of Staff; and the Army’s Deputy Chief of Staff for Logistics. Following retirement in 1981, Lt. Gen. Gregg held several corporate assignments at the vice president, president, and chief executive officer levels. He retired from active management in 1998, but continues to serve on several corporate boards. He chairs three of these boards. A graduate of Saint Benedict College, Atchison, Kansas, with a Bachelor of Science degree in Business Administration [summa cum laude], the Army War College and the Command and General Staff College. Lt. Gen. Gregg also attended the Executive Program in National Security at the Harvard University’s John F. Kennedy School of Government. We believe that Lt. Gen. Gregg’s extensive business experience, as well as his executive leadership experience, make him a valuable resource on our board of directors.
Augustus J. Larson
 
62
 
Director
Mr. Larson was appointed to our board of directors on January 16, 2007 and is the chairperson of the audit committee. He is a principal of Larson Capital, LLC, a commercial real estate finance and investment company in Bernardsville, New Jersey. He founded Larson Capital, LLC in 2004. From 1985 to 2001, Mr. Larson was a principal of Larson Financial Resources, a New Jersey based commercial mortgage banking firm. In 2001, Larson Financial Resources was sold to PW Funding; and Mr. Larson served as a 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 until 2004. Mr. Larson is a former councilman in the Borough of Far Hills, New Jersey. He has a Bachelor of Arts degree from Colgate University. He is also a Certified Mortgage Banker and an active member in numerous professional and charitable organizations. We believe that Mr. Larson’s extensive background in finance makes him a valuable member of our board of directors.
Douglas J. Kramer
 
52
 
Director, CEO and President
Mr. Kramer joined the Company in January 2005 as president and chief operating officer and was named chief executive officer and president on July 12, 2006. He was appointed to the board of directors on January 16, 2007. Mr. Kramer has 26 years’ experience in the spray polyurethane foam and acrylic coatings business. 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. We believe that Mr. Kramer’s extensive background in the building and construction products industries, as well as his familiarity with our day-to-day operations, make him a valuable member of our board of directors.

22



Michael T. Adams
 
51
 
Director, CGO, EVP and Secretary
Mr. Adams is one of the founders of the Company starting on January 1, 1997.  He was appointed to the board of directors on December 20, 2004 and is chairperson of the corporate governance committee pursuant to an exception. Mr. Adams was appointed chief governance officer on July 12, 2006, and has been executive vice president and secretary since March 1, 1999. During his term with Lapolla, Mr. Adams also served as president and interim chief executive officer, treasurer and interim chief financial officer (including from December 18, 2014 until December 31, 2014), to facilitate management successions, and held various officer positions in the Company’s former subsidiaries starting on January 1, 1997. 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. We believe that Mr. Adams’ extensive background in business administration, as well as corporate governance, and his long experience with our Company make him a valuable member of our board of directors.
Harvey L. Schnitzer
 
58
 
Director and COO
Mr. Schnitzer was appointed to our board of directors on February 15, 2017. He joined Lapolla on April 5, 2012 as chief operating officer. Before joining Lapolla, Mr. Schnitzer held positions as chief operating officer, chief financial officer, and executive vice president at Energy Maintenance Services Group I, LLC (EMS), a private equity-backed oil and gas services company, from 2003 to 2011, where he was responsible for raising over $210 million in equity and debt and completed 25 acquisitions. He earned his Bachelor of Science degree in Accounting from Fairleigh Dickenson University in Madison, New Jersey, and Executive MBA from Loyola College in Baltimore, Maryland. Mr. Schnitzer has completed MIT Executive Education in Negotiation and Managing Change in a Complex Organization. He is a certified public accountant. We believe that Mr. Schnitzer’s extensive background in finance, operations and management, and his knowledge of the Company’s day-to-day operations and his past board experience make him a valuable member of our board of directors.

Jomarc C. Marukot
 
40
 
CFO and Treasurer
Mr. Marukot joined Lapolla on January 1, 2015 as chief financial officer and treasurer. Mr. Marukot was previously the Company’s corporate controller, from January 2012 to October 2014, and senior accountant, from May 2009 to December 2011. Prior to rejoining the Company, he worked for KLX Energy Services, a division of KLX, Inc., as assistant controller from November 2014 to December 2014. Prior to May 2009, Mr. Marukot served in various accounting roles with Key Energy Services, Inc. and Continental Airlines, Inc. He earned his Bachelor of Science degree in Business Administration with a specialization in Accounting from the University of Houston, Texas.

The board of directors of the Company regards all of our directors as competent professionals with many years of experience in the business community. Additionally, the board of directors believes that the overall experience and knowledge of such directors will contribute to the overall success of our business.
 
Family Relationships
 
There are no family relationships among any of the directors or executive officers of the Company.
 
Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and officers, and persons who own more than ten percent of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Directors, officers and persons who own more than ten percent of our common stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on review of the copies of such reports furnished to us, during the fiscal year ended December 31, 2016, each of our directors, officers and greater than ten percent stockholders complied with all Section 16(a) filing requirements applicable to our directors, officers and greater than ten percent stockholders.

Code of Business Ethics and Conduct
 
We have adopted a Code of Business Ethics and Conduct, as amended (the “Code”), 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 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 covers topics including, but not limited to, conflicts of interest, confidentiality of information and compliance with laws and regulations. A copy of the Code, as amended from time to time, is available in the Corporate Governance section of our website at https://www.lapolla.com/corporate-governance/. The information on our website is not incorporated by reference in this Annual Report. We intend to disclose future amendments to provisions of the Code, or waivers of such provisions, as applicable, on this website within four business days following the date of such amendment or waiver.

Board Committees
 
Our board of directors has an established audit committee, corporate governance committee, and compensation committee, each of which has the composition described below.






23



Audit Committee
 
Our audit committee is currently comprised of Augustus J. Larson and Lt. Gen. Arthur J. Gregg, US Army (Ret), each of whom our board has determined to be financially literate and qualify as an independent director. Mr. Larson is the chairperson of our audit committee. In addition, Mr. Larson qualifies as our financial expert, as defined in Item 407(d)(5)(ii) of Regulation S-K. Our audit committee operates under a written charter that satisfies the applicable rules and regulations of the SEC. A copy of our audit committee charter is available on our website at https://www.lapolla.com/corporate-governance/.

Corporate Governance Committee
 
Our corporate governance committee is currently comprised of Michael T. Adams, Arthur J. Gregg, and Augustus J. Larson. Our board has determined that Lt. Gen. Gregg and Mr. Larson qualify as independent directors. Mr. Adams is the chairperson of our corporate governance committee pursuant to an exception. Our director selection process criterion and corporate governance committee charter are available on our website at https://www.lapolla.com/corporate-governance/.
 
Compensation Committee
 
Our compensation committee is currently comprised of Arthur J. Gregg and Augustus J. Larson, each of whom our board has determined to qualify as an independent director, an “outside director” for purposes of Section 162(m) of the Internal Revenue Code, and a “non-employee director” for purposes of Section 16b-3 under the Exchange, and does not have a relationship to us which is material to his ability to be independent from management in connection with the duties of a compensation committee member. Lt. Gen. Gregg is the chairperson of our compensation committee. Our compensation committee operates under a written charter that satisfies the applicable rules and regulations of the SEC. A copy of our compensation committee charter is available on our website at https://www.lapolla.com/corporate-governance/.

Item 11. Executive Compensation
 
Overview
 
The compensation committee administers the compensation policies and programs for our named executive officers, as well as the cash-and equity-based incentive compensation plans in which those persons may participate. The compensation committee has not retained the services of any compensation consultants in connection with the compensation of our executive officers.

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:
 
provide a total compensation program that is competitive in the industry in which we compete for executive talent;
place a significant portion of executive compensation at risk by linking such compensation to the achievement of corporate financial performance objectives and individual objectives;
provide long-term incentive compensation that focuses executives’ efforts on building stockholder value by aligning their interests with our stockholders; and
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 and other bonuses, equity awards, insurance benefits, and company provided vehicle or vehicle allowances. 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 bonuses and long-term awards that are primarily based on our financial performance and consisting of compensation in the form of cash, stock bonuses, and stock options 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 bonuses in the case of a change in control.

2016 and 2015 Summary Compensation Table
 
The table below sets forth, for the fiscal years ended December 31, 2016 and 2015, the compensation paid to our named executive officers: (i) Douglas J. Kramer, our chief executive officer and president and a member of our board; (ii) Jomarc C. Marukot, our chief financial officer and treasurer; and (iii) Michael T. Adams, our chief governance officer, executive vice president and corporate secretary and a member of our board; and (iv) Harvey L. Schnitzer, our chief operating officer and a member of our board.



24



SUMMARY COMPENSATION TABLE
 
 
 
 
 
 
 
 
Stock
 
Options
 
All Other
 
 
 
 
Name and
 
Year
 
Salary
 
Bonus
 
Awards
 
Awards
 
Compensation
 
 
 
Total
Principal Position
 
($)
 
($)
 
($)
 
($) (1)
 
($) (1)
 
($)
 
 
 
($)
Douglas J. Kramer
 
2016
 
400,000

 
120,000

(2)

 
369,155

 
43,133

 
(4)
 
932,288

  CEO and President
 
2015
 
350,000

 
200,000

 

 
224,784

 
46,451

 
 
 
821,235

Jomarc C. Marukot
 
2016
 
190,000

 
47,500

(2)

 

 
24,459

 
(5)
 
261,959

  CFO and Treasurer
 
2015
 
184,154

 
66,500

 

 

 
22,214

 
 
 
272,868

Michael T. Adams
 
2016
 
200,000

 
55,000

(3)

 
51,047

 
18,920

 
(6)
 
324,967

  CGO, EVP and Secretary
 
2015
 
180,000

 
68,000

 

 
49,663

 
16,930

 
 
 
314,593

Harvey L. Schnitzer
 
2016
 
275,000

 
68,750

(2)
16,250

 
82,506

 
20,471

 
(7)
 
462,977

  COO
 
2015
 
250,000

 
87,500

 
16,250

 
72,906

 
24,025

 
 
 
450,681

(1)
The amounts reported represent the aggregate grant date fair value of the awards, calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 718—Compensation—Stock Compensation (“ASC 718”), recognized by us in 2016. The actual value, if any, an executive may realize will depend for options on the excess of the market price over the option exercise price on the date the option is exercised and for stock on the excess of the market price over the cost basis of the stock. There is no assurance that the value realized by an executive will be at or near the value estimated. Assumptions used in the calculation of these amounts are included in Note 1 – Summary of Organization, Basis of Presentation, and Critical Accounting Policies, Estimates, and Assumptions—Share-Based Compensation and Note 17 – Share-Based Payment Arrangements, Equity Incentive Plan, of our Notes to Financial Statements included in this Annual Report on Form 10-K.
(2)
Represents an annual performance bonus based on the Company achieving 100% of its budgeted Adjusted EBITDA for the 2016 year.
(3)
Represents an annual non-discretionary bonus for $5,000 and an annual performance bonus based on the Company achieving at least 100% of its budgeted Adjusted EBITDA for the 2016 year for the remainder.
(4)
Comprised of $22,432 for personal use of a Company automobile and $20,701 for medical, dental, vision, life, and disability insurances.
(5)
Comprised of $8,400 for a car allowance and $16,059 for medical, dental, vision, life, and disability insurances.
(6)
Comprised of $9,000 for a car allowance and $9,920 for medical, dental, vision, life, and disability insurances.
(7)
Comprised of $9,000 for a car allowance and $11,471 for medical, dental, vision, life, and disability insurances.

Agreements with Executive Officers
 
We are party to executive employment and stock option agreements with the named executive officers employed by us at December 31, 2016. The information provided below is supplemented by the Summary Compensation and Grants of Plan-Based Awards tables above and Outstanding Equity Awards at Fiscal Year-End (Option and Stock Awards) and Stock Vested at Fiscal Year-End (Stock Awards) tables below.
 
Douglas J. Kramer
 
The Company entered into an executive employment agreement with its chief executive officer and president, Mr. Kramer, effective from January 1, 2014 to, as amended, December 31, 2017, pursuant to which he is entitled to:
 
annual base salary for the 2016 calendar year of $400,000;
annual performance bonus of $120,000, $160,000, or $200,000 if Company achieves 100%, 120%, or 140%, respectively, of its budgeted Adjusted EBITDA for a particular fiscal year, payable in a single lump sum within thirty days after the issuance of the Company's audited financial statements for such fiscal year, and, in all events, by December 31 of the fiscal year following the fiscal year to which the bonus applies;
sales bonus of 1% for all new and ½% for certain existing international accounts, subject to such sales meeting certain gross profit margin criteria and credit and payment terms;
a transaction bonus, subject to certain limitations, upon consummation of a change in control if he is still employed at the time or in the event his employment is terminated within one year immediately preceding the consummation of a change in control, and including upon consummation of the change in control, the transfer to Mr. Kramer of ownership of the Company-provided automobile then being used by him. A transaction bonus is payable as soon as practicable after the closing of such transaction but in no event later than March 15 of the year following the year in which the closing of such transaction occurs. Any transaction bonus payable on account of the occurrence of a transaction that constitutes a change in the ownership of the Company or a change in the ownership of a substantial portion of the assets of the Company within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations promulgated pursuant thereto (“Section 409A”), shall be paid on the same schedule, under the same terms and conditions and in the same form of consideration (e.g., cash, stock in the acquiring company, promissory note or a combination thereof) as is the consideration received by the holders of the majority of the outstanding voting securities of the Company who participate in the transaction; provided, however, that in no event shall any portion of the transaction bonus be paid to executive on a date that is later than five years after such transaction. In the Company’s sole and absolute discretion, it may pay in cash all or any portion of the transaction bonus that would otherwise be paid in a form of consideration other than cash;






25



Douglas J. Kramer - continued

upon termination by the Company without cause or by Mr. Kramer for good reason, which the agreement defines as: (i) a reduction in his base salary; (ii) a substantial diminution of his duties and responsibilities (the Company’s employment of another officer in a newly created position or otherwise, at a position beneath that of Mr. Kramer, shall not be deemed to constitute, or result in, a substantial diminution of his duties or 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, provided, however, that any required travel related to the business of the Company, including but not limited to its planned expansion in the international market, shall not be deemed to constitute, or result in, the relocation of the his primary workplace:
severance equal to the lesser of 24 months base salary, or base salary for the remainder of the term, reduced by any earned income during the severance period;
the product of the value, as of the last day of the calendar year of termination, of any Company equity or equity-based awards, which he can show that he reasonably would have received had he remained employed through the end of the 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 of termination through the termination date and the denominator of which is 365, but only to extent not previously vested, exercised and/or paid;
for 12 months from termination, continued participation in any plans providing medical, hospitalization and dental coverage; and
all bonuses and stock options previously earned, or which may be earned in the event of a consummation of a change of control within one year immediately following termination;
upon termination by the Company for cause or by Mr. Kramer without good reason, which the agreement defines as: (i) willful malfeasance or willful misconduct by Mr. Kramer in connection with his employment, (ii) continuing refusal by him to perform his duties hereunder or follow any lawful direction of the Board, (iii) any material breach of the nonsolicitation, noncompetition, or confidentiality provisions of his agreement by him, (iv) engaging in conduct detrimental to the interest or reputation of the Company, without regard to whether such conduct was in connection with 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:
any bonuses, salaries, benefits or other compensation accrued through the date of employment termination or required by law to be provided;
upon termination on account of Mr. Kramer’s death or disability, the Company shall treat his termination as a termination without cause;
upon termination following a change of control,
an amount equal to the base salary which would otherwise be payable over the remaining term of his agreement, payable in a lump sum within 30 days after the date of such termination,
any outstanding awards 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; and
all bonuses and stock options previously earned, or which may be earned in the event of the consummation of a change of control within one year immediately following the termination of his employment.

Mr. Kramer is also entitled to earn awards under equity or other plans or programs that the Company, in its discretion, determines to put into effect and to participate in compensation and benefit programs offered by the Company to its executive officers. Mr. Kramer's employment agreement also provides for a non-competition provision during employment and for a period of twenty-four months after the termination of his employment.

On March 14, 2016, the Company granted an eight-year -year option to Douglas J. Kramer, CEO and president, for the right to acquire 2,000,000 shares of the Company's common stock, par value $.01, at an exercise price per share equal to the fair market value of a share of the Company’s common stock on the date of grant, determined based on the per share closing price on such date, or $0.40 per share, which options vest monthly on a pro rata basis over 3 years, subject to continued satisfactory employment. The transaction was valued at $766,217, which was estimated using the Black-Scholes option pricing model and will be expensed over the requisite vesting period.

Jomarc C. Marukot

The Company entered into an executive employment agreement with its chief financial officer and corporate treasurer, Mr. Marukot, effective from January 1, 2015 to, as amended, December 31, 2017, pursuant to which he is entitled to:

an annual base salary of $190,000, increased to $210,000 as of January 1, 2017;
annual bonus equal to 25% of his annual base salary if the Company achieves its budgeted Adjusted EBITDA per calendar year, which annual bonus may be increased to 30%, 35%, or more than 35% in the chief executive officer’s discretion, of his annual base salary if the Company achieves 110%, 120%, or more than 120%, respectively, of its budgeted Adjusted EBITDA, payable in a single lump sum within thirty days after the issuance of the Company's audited financial statements for such fiscal year, and, in all events, by December 31 of the fiscal year following the fiscal year to which the bonus applies;
change in control bonus of 25% of his annual base salary upon consummation of a change in control if he is still employed at the time;
medical, dental, life insurance, and disability benefits;
auto allowance of $700.00 per month;
four months of his annual base salary for termination due to death or disability;
four months of his annual base salary, awards and medical and dental benefits and the change in control bonus in the event of a termination without cause by the Company;


26



Jomarc C. Marukot - continued

upon termination by the Company for cause as defined in the agreement as Mr. Marukot's: (i) 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 by him which has a materially adverse effect upon the Company's business or reputation, (iv) 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 ten (10) days, or (v) a material breach of his fiduciary duties as an officer of the Company:
any bonuses, salaries, benefits or other compensation accrued through the date of employment termination or required by law to be provided;
upon termination following a change of control:
an amount equal to one times the annual base salary if such termination occurs within the first twelve months of his agreement, or the annual base salary which would otherwise be payable over the remaining term of the agreement if such termination occurs after the first twelve months of the agreement, payable in a lump sum within 90 days after the date of such termination of employment;
any outstanding awards 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.

Mr. Marukot is also entitled to earn awards under equity or other plans or programs that the Company, in its discretion, determines to put into effect and to participate in compensation and benefit programs offered by the Company to its executive officers. Mr. Marukot's employment agreement also provides for a non-competition provision for the Employment Term and for a period of twelve months after the termination of his employment.

Michael T. Adams

The Company entered into an executive employment agreement with its chief governance officer, executive vice president and corporate secretary, Mr. Adams, effective from December 31, 2014 to December 31, 2017, pursuant to which he is entitled to:
 
an annual base salary of $200,000 (Mr. Adams' annual base salary was increased, effective January 1, 2016, to $200,000);
annual bonus equal to 25% of his annual base salary if the Company achieves its budgeted Adjusted EBITDA per calendar year, which annual bonus may be increased to 30%, 35%, or more than 35% in the chief executive officer’s discretion, of his annual base salary if the Company achieves 110%, 120%, or more than 120%, respectively, of its budgeted Adjusted EBITDA, payable in a single lump sum within thirty days after the issuance of the Company's audited financial statements for such fiscal year, and, in all events, by December 31 of the fiscal year following the fiscal year to which the bonus applies;
annual non-discretionary bonus of $5,000;
a transaction bonus, subject to certain limitations, upon consummation of a change in control if he is still employed at the time or in the event his employment is terminated within one year immediately preceding the consummation of a change in control. A transaction bonus is payable as soon as practicable after the closing of such transaction but in no event later than March 15 of the year following the year in which the closing of such transaction occurs. Any transaction bonus payable on account of the occurrence of a transaction that constitutes a change in the ownership of the Company or a change in the ownership of a substantial portion of the assets of the Company within the meaning of Section 409A, shall be paid on the same schedule, under the same terms and conditions and in the same form of consideration (e.g., cash, stock in the acquiring company, promissory note or a combination thereof) as is the consideration received by the holders of the majority of the outstanding voting securities of the Company who participate in the transaction; provided, however, that in no event shall any portion of the transaction bonus be paid to executive on a date that is later than five years after such transaction. In the Company’s sole and absolute discretion, it may pay in cash all or any portion of the transaction bonus that would otherwise be paid in a form of consideration other than cash;
medical, dental, life insurance, and disability benefits;
auto allowance of $750.00 per month;
twelve months of his annual base salary for termination due to death or disability;
twelve months of his annual base salary, awards and medical and dental benefits and the transaction bonus in the event of a termination without cause by the Company or by him for good reason, which the agreements defines as: (i) a reduction in his base salary; (ii) a substantial diminution of his duties and responsibilities (the Company’s employment of another officer in a newly created position or otherwise, at a position beneath that of Mr. Adams, shall not be deemed to constitute, or result in, a substantial diminution of his duties or 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, provided, however, that any required travel related to the business of the Company, including but not limited to its planned expansion in the international market, shall not be deemed to constitute, or result in, the relocation of the his primary workplace; and
upon termination by the Company for cause or by Mr. Adams without good reason, which the agreements defines as: (i) willful malfeasance or willful misconduct by Mr. Adams in connection with his employment, (ii) continuing refusal by him to perform his duties hereunder or follow any lawful direction of the Board, (iii) any material breach of the nonsolicitation, noncompetition, or confidentiality provisions of his agreement by him, (iv) engaging in conduct detrimental to the interest or reputation of the Company, without regard to whether such conduct was in connection with 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:
any bonuses, salaries, benefits or other compensation accrued through the date of employment termination or required by law to be provided;


27



Michael T. Adams - continued

upon termination following a change of control:
an amount equal to the base salary which would otherwise be payable over the remaining term of the agreement, payable in a lump sum within 90 days after the date of such termination of employment;
any outstanding awards 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; and
all bonuses and stock options previously earned, or which may be earned in the event of the consummation of a change of control within one year immediately following the termination of his employment.

Mr. Adams is also entitled to earn awards under equity or other plans or programs that the Company, in its discretion, determines to put into effect and to participate in compensation and benefit programs offered by the Company to its executive officers. Mr. Adams' employment agreement also provides for a non-competition provision during employment and for a period of twelve months after the termination of his employment.

On January 16, 2015, the Company granted Mr. Adams 300,000 options, each for shares of the Company’s common stock, at an exercise price per share equal to the fair market value of a share of the Company’s common stock on date of grant, determined based on the per share closing price on such date, or $0.325 per share, for a term of eight years, which vest in three equal end of calendar year increments, subject to Mr. Adams meeting certain performance criteria, commencing on December 31, 2015 and ending December 31, 2017, or upon consummation of a change in control. Once vested, the stock options are immediately exercisable.

Harvey L. Schnitzer
 
The Company entered into an executive employment agreement with its chief operating officer, Mr. Schnitzer, effective from December 31, 2014 to December 31, 2017, pursuant to which he is entitled to:

an annual base salary of $275,000 (Mr. Schnitzer's annual base salary was automatically increased, effective January 1, 2016, from $250,000 to $275,000);
annual bonus equal to 25% of his annual base salary if the Company achieves its budgeted Adjusted EBITDA per calendar year, which annual bonus may be increased to 30%, 35%, or more than 35% in the chief executive officer’s discretion, of his annual base salary if the Company achieves 110%, 120%, or more than 120%, respectively, of its budgeted Adjusted EBITDA, payable in a single lump sum within thirty days after the issuance of the Company's audited financial statements for such fiscal year, and, in all events, by December 31 of the fiscal year following the fiscal year to which the bonus applies;
transaction bonus, subject to certain limitations, upon consummation of a change in control if he is still employed at the time or in the event his employment is terminated within one year immediately preceding the consummation of a change in control. A transaction bonus is payable as soon as practicable after the closing of such transaction but in no event later than March 15 of the year following the year in which the closing of such transaction occurs. Notwithstanding, any transaction bonus payable on account of the occurrence of a transaction that constitutes a change in the ownership of the Company or a change in the ownership of a substantial portion of the assets of the Company within the meaning of Section 409A, shall be paid on the same schedule, under the same terms and conditions and in the same form of consideration (e.g., cash, stock in the acquiring company, promissory note or a combination thereof) as is the consideration received by the holders of the majority of the outstanding voting securities of the Company who participate in the transaction; provided, however, that in no event shall any portion of the transaction bonus be paid to executive on a date that is later than five years after such transaction. In the Company’s sole and absolute discretion, it may pay in cash all or any portion of the transaction bonus that would otherwise be paid in a form of consideration other than cash;
medical, dental, life insurance, and disability benefits;
auto allowance of $800 per month;
eight months of his annual base salary for termination due to death or disability;
eight months of his annual base salary, awards and medical and dental benefits and the transaction bonus in the event of voluntary termination by the Company or by him for good reason, which the agreement defines as: (i) a reduction in his base salary; (ii) a substantial diminution of his duties and responsibilities (the Company’s employment of another officer in a newly created position or otherwise, at a position beneath that of Mr. Schnitzer, shall not be deemed to constitute, or result in, a substantial diminution of his duties or 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, provided, however, that any required travel related to the business of the Company, including but not limited to its planned expansion in the international market, shall not be deemed to constitute, or result in, the relocation of the his primary workplace; and
upon termination by the Company for cause or by Mr. Schnitzer without good reason, which the agreement defines as: (i) willful malfeasance or willful misconduct by Mr. Schnitzer in connection with his employment, (ii) continuing refusal by him to perform his duties hereunder or follow any lawful direction of the Board, (iii) any material breach of the nonsolicitation, noncompetition, or confidentiality provisions of his agreement by him, (iv) engaging in conduct detrimental to the interest or reputation of the Company, without regard to whether such conduct was in connection with 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:
any bonuses, salaries, benefits or other compensation accrued through the date of employment termination or required by law to be provided;


  

28



Harvey L. Schnitzer - continued

upon termination following a change of control:
an amount equal to the base salary which would otherwise be payable over the remaining term of the agreement, payable in a lump sum within 90 days after the date of such termination of employment;
any outstanding bonus or other benefits under any Company plan or program which have been earned will be paid as provided under the terms of such Company plan or program; and
all bonuses and stock options previously earned, or which may be earned in the event of the consummation of a change of control within one year immediately following the termination of his employment.

Mr. Schnitzer is also entitled to earn awards under equity or other plans or programs that the Company, in its discretion, determines to put into effect and to participate in compensation and benefit programs offered by the Company to its executive officers. Mr. Schnitzer's employment agreement also provides for a non-competition provision during employment and for a period of twelve months after the termination of his employment.
 
On March 23, 2015, the Company granted Mr. Schnitzer 300,000 options, each for shares of the Company’s common stock, at an exercise price per share equal to the fair market value of a share of the Company’s common stock on date of grant, determined based on the per share closing price on such date, or $0.41 per share, for a term of eight years, which vests in three equal end of calendar year increments, subject to Mr. Schnitzer meeting certain performance criteria, commencing on December 31, 2015 and ending December 31, 2017, or upon consummation of a change in control. Once vested, the stock options are immediately exercisable.

Outstanding Equity Awards
 
The following table sets forth summary information for outstanding equity awards held by our named executive officers at December 31, 2016.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Option Awards
 
 
Number of Securities
Underlying Unexercised
Options (#)
 
Option
Exercise
 
Option
Expiration
Name
 
Exercisable
 
Unexercisable
 
Price ($)
 
Date
Douglas J. Kramer
 
333,334

 
166,666

(1)
 
0.72

 
1/21/2019
Douglas J. Kramer
 
350,000

 

 
 
0.42

 
4/28/2019
Douglas J. Kramer
 
531,366

 
1,468,634

(2)
 
0.40

 
3/14/2024
Michael T. Adams
 
150,000

 

 
 
0.42

 
4/28/2019
Michael T. Adams
 
80,000

 

 
 
0.38

 
7/12/2017
Michael T. Adams
 
200,000

 
100,000

(3)
 
0.325

 
1/16/2023
Harvey L. Schnitzer
 
66,666

 
33,334

(4)
 
0.65

 
1/21/2019
Harvey L. Schnitzer
 
150,000

 

 
 
0.42

 
4/28/2019
Harvey L. Schnitzer
 
200,000

 
100,000

(3)
 
0.41

 
3/23/2023
(1)
Vests on January 22, 2017.
(2)
Vests on pro-rata monthly basis over 26 months (total grant vests on a pro-rata monthly basis over 36 month period).
(3)
Vests on December 31, 2017.
(4)
Vests on February 6, 2017.

There were no outstanding stock awards at December 31, 2016.

Potential Payments Upon Termination or Change of Control
 
The employment agreements with our named executive officers provide for transaction bonuses based on a percentage of a transaction value subject to certain limitations (Mr. Kramer, Mr. Adams, and Mr. Schnitzer) or a change in control bonus based on a percentage of annual base salary (Mr. Marukot).

A transaction bonus is calculated as follows: (a) no transaction bonus shall be paid to the extent the transaction value (defined as the consideration realized, or assumed to be realized, by the Company’s shareholders in connection with the transaction, minus any Company debt that remains with the Company upon the consummation of a change-in-control or any debt or personal guarantee of Company debt which a selling shareholder is relieved of in connection with a change-in-control), does not exceed the sum of $25,940,000, (b) to the extent the transaction value does not exceed $90,000,000, an amount equal to each respective executive’s agreed to percentage of the transaction value less $25,940,000, multiplied by the percentage of the Company sold, to the extent the transaction value exceeds $90,000,000, an amount equal to respective executive’s agreed to percentage (see above) of the transaction value multiplied by the percentage of the Company sold. Notwithstanding the foregoing, no transaction bonus shall be payable on any portion of the transaction value in excess of $200,000,000.

29



In the event of a transaction, which does not constitute a change-in-control as the stockholders of the Company immediately before the transaction do not relinquish 50% or more of the total combined voting power of the outstanding voting securities of the Company, but do relinquish 20% or more of the total combined voting power of the outstanding securities of the Company, the transaction bonus shall be calculated in the manner as set forth above upon a change in control. However, such amount shall then be reduced by the percentage of the sales proceeds of the transaction allocable to the Company’s then majority shareholder that is not currently distributed to such shareholder as a result of the transaction. If a transaction bonus is payable to the executive upon a change in control, he shall not be entitled to any additional transaction bonus upon the occurrence of a subsequent transaction unless: (i) the subsequent transaction is related to the change in control; and (ii) the executive is still employed with the Company upon the consummation of the subsequent transaction or is no longer so employed as a result of having been terminated without cause or having resigned for good reason. In the event a series of related transactions occurs subsequent to a change-in-control, the executive shall be entitled to a transaction bonus on each transaction in the series, provided the requirements of (i) and (ii) above are satisfied with respect to each such transaction. As provided for in the employment agreements, for purposes of this provision, a subsequent transaction shall be “related” to a change in control if it was agreed upon at the time of, and is consummated within 2 years of the consummation of, the change in control.

A change in control bonus is based on an amount equal to one times the annual base salary if such termination occurs within the first twelve months of his agreement, or the annual base salary which would otherwise be payable over the remaining term of the agreement if such termination occurs after the first twelve months of the agreement, payable in a lump sum within 90 days after the date of such termination of employment.

We define change of control in all of our named executive office executive employment agreements as ownership change events 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 fifty percent (50%) or more of the total combined voting power of the outstanding voting securities of the Company, or the entity to which the assets of the Company were transferred. The following would be ownership change events: (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. Notwithstanding the foregoing, no change of control, ownership change event or Transaction shall be deemed to have occurred as a result or on account of: (i) a transfer or other disposition, by sale, gift or otherwise, of an interest in the Company by Richard J. Kurtz to his spouse, children or grandchildren, or the spouses of his children, either directly or indirectly for their benefit, in trust or otherwise; or (ii) the death or incapacity of Kurtz wherein his interest is transferred to his heirs only. Our named executive officers shall not be entitled to any payment under their respective executive employment agreements upon the occurrence of, or calculated with reference to, any such transfer or disposition.
 
Acceleration of Benefits Under Certain Other Plans
 
Our Equity Plan contains provisions for the accelerated vesting of stock options to participating named executive officers in the event of a change of control, where the surviving, continuing, successor, or purchasing entity or parent thereof, as the case may be ("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. If the Acquiror elects not to assume or substitute for outstanding options, the compensation committee shall provide that any unexercised and/or unvested portions of outstanding options shall immediately vest and become exercisable in full as of the date 30 days prior to the date of the change-in-control. Vesting and/or exercise of any option shall be conditioned upon the consummation of the change of control. Any options which are not assumed by the Acquiror nor exercised by optionee terminate and cease to be outstanding effective as of the consummation of the change of control.
 
Equity Incentive Plan (“Equity Plan”)
 
Our board of directors adopted the Equity Incentive Plan on July 12, 2005, which was approved by our stockholders effective August 31, 2005. The purpose of our Equity Plan is to advance the interests of the Company and its stockholders by providing an incentive to attract, retain and reward employees, directors and consultants performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company. The Equity Plan provides financial performance measures upon which specific performance goals would be based and limits on the numbers of shares or compensation that could be made. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock awards may provide for accelerated vesting if there is a change in control. In addition, our Equity Plan is expected to provide flexibility to our compensation methods in order to adapt the compensation of employees, directors, and consultants to a changing business environment, after giving due consideration to competitive conditions and the impact of federal tax laws. Our Equity Plan is administered by our compensation committee. A total of 9,800,000 shares of common stock are reserved for awards under the Equity Plan, of which 1,982,500 shares were available for future awards as of December 31, 2016.










30



Director Compensation

Directors receive cash, option, and stock compensation. Each director who is not an employee is reimbursed for actual expenses incurred in attending annual stockholder, board and committee meetings. Non-employee outside directors receive cash compensation at the rate of $12,500 per year, payable quarterly. The Chairman of the Board, who is also a non-employee director and did not receive any cash compensation in years prior to 2016, received a one-time cash payment of $75,500 for his service for the 2016 year. Effective January 1, 2017, all non-employee directors, including the Chairman of the Board, will receive $20,000 in cash compensation per year, payable quarterly. The following table summarizes compensation for non-employee directors for the year ended December 31, 2016, including costs incurred during 2016 for awards in 2016.
 
DIRECTOR COMPENSATION TABLE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All Other
 
 
 
 
Name
 
Fees Earned or
Paid in Cash ($)
 
 
 
Stock Awards ($)(3)
 
 
 
Option Awards ($)(3)
 
 
 
Compensation ($)(3)
 
 
 
Total ($)
Richard J. Kurtz
 
75,500

 
 
 
53,000

 
(4)
 
120,840

 
(6)
 
698,480

 
(7)(8)
 
947,820

Arthur J. Gregg
 
12,500

 
(1)
 

 
 
 
56,863

 
(6)
 

 
 
 
69,363

Jay C. Nadel
 
212,500

 
(1)(2)
 
38,064

 
(5)
 
56,815

 
(6)
 

 
 
 
307,379

Augustus J. Larson
 
12,500

 
(1)
 

 
 
 
56,863

 
(6)
 

 
 
 
69,363

(1)
Represents cash payments paid for director services.
(2)
Includes cash payments paid to Mr. Nadel pursuant to his February 22, 2011 advisory agreement, as amended, pursuant to which, the Company agreed to pay him $200,000 per year in cash and granted 5,000,000 shares of restricted common stock, which originally vested monthly on a pro-rata basis over a 3 year period ended February 22, 2014, with anti-dilution rights, in exchange for providing consulting and advisory services, including business development and planning, and assisting management on strategic initiatives (“Nadel Agreement”). Anti-dilution rights continue as long as the Nadel Agreement is in force.
(3)
The amounts reported represent the aggregate grant date fair value of the awards recognized by us in fiscal year 2016, calculated in accordance with FASB ASC 718. The actual value, if any, a director may realize will depend, in the case of stock options, on the excess of the market price over the option exercise price on the date the option is exercised, and, in the case of stock, on the excess of the market price over the cost basis of the stock. There is no assurance that the value realized by a director will be at or near the value estimated. Assumptions used in the calculation of these amounts are included in Note 1 - Summary of Organization, Basis of Presentation, and Critical Accounting Policies, Estimates, and Assumptions-Share-Based Compensation and Note 17 - Share-Based Payment Arrangements, Equity Incentive Plan, Advisor Plan, and Guaranty Plan of our Notes to Financial Statements included in this Annual Report on Form 10-K.
(4)
Represents the compensation cost recognized by us for a stock award.
(5)
Represents the compensation cost recognized by us related to the Nadel Agreement. For 2016, an aggregate of 86,404 shares of restricted common stock were issued and valued and recorded at $38,064. See also Note 17 – Share-Based Payment Arrangements, Advisor Plan, of Notes to Financial Statements included in this Annual Report on Form 10-K for more discussion.
(6)
Represents the compensation cost recognized by us for options activity under the Equity Plan for director services during 2016:
 
 
 
 
 
 
Number of Shares
 
Number of Shares
 
Option
 
 
 
 
 
 
 
 
of Stock Underlying
 
of Stock Underlying
 
Expiration
 
2016 Fiscal Year
Director
 
Grant Date
 
Exercise Price ($)
 
Options Granted
 
Options Expired
 
Date
 
Compensation Cost ($)
Jay C. Nadel
 
4/28/2014
 
0.42
 
100,000

 

 
4/28/2019
 
6,389

Arthur J. Gregg
 
4/28/2014
 
0.42
 
100,000

 

 
4/28/2019
 
6,437

Augustus J. Larson
 
4/28/2014
 
0.42
 
100,000

 

 
4/28/2019
 
6,437

Richard J. Kurtz
 
5/14/2014
 
0.54
 
400,000

 

 
5/14/2019
 
36,757

Jay C. Nadel
 
12/22/2014
 
0.35
 
450,000

 

 
12/22/2022
 
50,426

Arthur J. Gregg
 
12/22/2014
 
0.35
 
450,000

 

 
12/22/2022
 
50,426

Augustus J. Larson
 
12/22/2014
 
0.35
 
450,000

 

 
12/22/2022
 
50,426

Richard J. Kurtz
 
3/14/2016
 
0.40
 
800,000

 

 
3/14/2024
 
84,083

(7)
Includes amount of interest expense – related party of $3,888 paid by the Company in 2016 related to the 11/14/14 Kurtz Note and 1/21/15 Kurtz Note, the principal of which was repaid by the Company on December 21, 2015. Refer to Item 13 – Certain Relationships and Related Transactions, Items (a), (b) and (d) for more information.
(8)
Includes the amount of share based compensation expense recognized and classified by us as interest expense – related party for the vested portion of the 3,681,000 Guaranty Shares granted to the chairman of the board for his personal guaranty of the obligations under the Enhanced Note. For 2016, an aggregate of 1,157,653 Guaranty Shares vested and were valued and recorded in the aggregate at $694,592. See also Note 17 – Share-Based Payment Arrangements, Guaranty Plan, of Notes to Financial Statements included in annual report on Form 10-K for year ended December 31, 2016 for more discussion.

See also Certain Relationships and Related Transactions for more information.

31


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table sets forth information with respect to the beneficial ownership of our common stock as of February 14, 2017 by:
 
each person known by us to beneficially own more than 5.0% of our common stock;
each of our directors;
each of the named executive officers; and
all of our directors and executive officers as a group.

Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, or has the right to acquire beneficial ownership of that security within 60 days. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons named in the table below have or will have sole voting and investment power with respect to all shares of common stock shown that they beneficially own, subject to community property laws where applicable. The information does not necessarily indicate beneficial ownership for any other purpose, including for purposes of Sections 13(d) and 13(g) of the Securities Act. Except as indicated in the footnotes to this table, each beneficial owner named in the table below has sole voting and sole investment power with respect to all shares beneficially owned and each person’s address is c/o Lapolla Industries, Inc., 15402 Vantage Parkway East, Suite 322, Houston, Texas 77032. As of February 14, 2017, we had 123,494,129 shares of common stock outstanding.
 
 
Total Shares
of Common Stock
 
 
Percent
Beneficial Owner
 
Beneficially Owned (1)
 
 
of Class
  Directors:
 
 

 
 
 
     Richard J. Kurtz, Chairman of the Board
 
70,975,322

(2)
 
55.23
%
     Jay C. Nadel, Vice Chairman
 
9,197,472

(3)
 
7.15
%
     Lt. Gen. Arthur J. Gregg, US Army (Ret)
 
600,000

(4)
 
0.47
%
     Augustus J. Larson
 
600,000

(5)
 
0.47
%
     Douglas J. Kramer (9)
 
1,381,366

(6)
 
1.2
%
     Michael T. Adams (9)
 
430,000

(7)
 
0.33
%
     Harvey L. Schnitzer (9)
 
550,000

(8)
 
0.43
%
  Executive Officers:
 
 

 
 
 

     Jomarc C. Marukot, CFO and Treasurer
 

 
 

  All Directors and Executive Officers as a Group (8 persons)
 
83,734,160

 
 
65.28
%
(1)
Shares of common stock beneficially owned and the respective percentages of beneficial ownership of common stock assumes the exercise of all options and unvested stock granted beneficially owned by such person or entity currently exercisable or exercisable or subject to vesting within 60 days of February 14, 2017. Shares issuable pursuant to the exercise of options exercisable and unvested stock granted that is subject to vesting within 60 days are deemed outstanding and held by the holder of such options or stock for computing the percentage of outstanding common stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.
(2)
Comprised of: (i) 69,837,601 shares of our common stock owned directly by Mr. Kurtz; (ii) 1,112,721 shares of our common stock issuable upon the exercise of vested and exercisable options; and (iii) 25,000 shares of our common stock upon vesting of a stock award.
(3)
Comprised of: (i) 8,697,472 shares of our common stock owned directly by Mr. Nadel; and (ii) 500,000 shares of our common stock issuable upon the exercise of vested and exercisable options.
(4)
Comprised of: (i) 100,000 shares of our common stock owned directly by Mr. Gregg; and (ii) 500,000 shares of our common stock issuable upon the exercise of vested and exercisable options.
(5)
Comprised of: (i) 100,000 shares of our common stock owned directly by Mr. Larson; and (ii) 500,000 shares of our common stock issuable upon the exercise of vested and exercisable options.
(6)
Comprised of 1,381,366 shares of our common stock issuable upon the exercise of vested and exercisable options.
(7)
Comprised of 430,000 shares of our common stock issuable upon the exercise of vested and exercisable options.
(8)
Comprised of: (i) 100,000 shares of our common stock owned directly by Mr. Schnitzer; and (ii) 450,000 shares of our common stock issuable upon the exercise of vested and exercisable options.
(9)
Mr. Kramer is also our CEO and President; Mr. Adams is also our CGO, EVP, and Secretary; and Mr. Schnitzer is also our COO.











32



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, 2016
Equity Compensation Plan Information
 
 
 
 
 
 
Number of Securities
 
 
 
 
 
 
 
Remaining Available for
 
 
 
Number of Securities to
 
Weighted-Average
 
Future Issuance Under
 
 
 
Be Issued Upon Exercise
 
Exercise Price of
 
Equity Compensation Plans
 
 
 
of Outstanding Options,
 
Outstanding Options,
 
(excluding Securities
 
 
 
Warrants and Rights
 
Warrants and Rights
 
Reflected in Column (a))
 
Plan Category
 
(a)
 
(b)
 
(c)
 
Equity Compensation Plans
 
 
 
 
 
 
 
Approved by Security Holders
 
7,817,500

 
$
0.42

 
1,982,500

 
Equity Compensation Plans Not
 
 

 
 

 
 

 
Approved by Security Holders
 

 

 

(1)
Total
 
7,817,500

 
$
0.42

 
1,982,500

 
(1)
We entered into the Nadel Agreement dated February 22, 2011 with Mr. Nadel, a director, for advisory services (the “Advisor Plan”). The Advisor Plan, which is not stockholder-approved, includes the issuance of anti-dilution shares when the anti-dilution provision in the Nadel Agreement is triggered. The anti-dilution shares issuable are incalculable until such time that the anti-dilution provision is triggered. See also Note 18 – Share-Based Payment Arrangements, Advisor Plan, of our Notes to Financial Statements included in this Annual Report on Form 10-K for the year ended December 31, 2016 for more discussion.

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

(a)    On January 21, 2015, the Company borrowed $250,000 from Richard J. Kurtz, chairman of the board and majority stockholder, as a condition precedent to the Company entering into the twelfth amendment dated January 23, 2015 (the “Twelfth Amendment”) to that certain Loan Agreement with the Bank and entered into a promissory note (the “1/21/15 Kurtz Note”). Pursuant the 1/21/15 Kurtz Note, the Company agreed to pay 8% per annum on the principal balance of $250,000 and repay the principle balance on June 10, 2017. The 1/21/15 Kurtz Note was subordinated to the Loan Agreement and Note Purchase Agreement. See also Items (b) and (d) below for more information.

(b)    On January 23, 2015, the Company and the Bank entered into the Twelfth Amendment pursuant to which certain definitions were changed and a new definition was added in the Loan Agreement as follows: (1) Fixed Charge Coverage Ratio was changed to the ratio, determined for any period on a consolidated basis for the Company, of (a) the sum of (i) EBITDA, (ii) Subordinated Debt incurred during such period on or after August 31, 2014 (other than the Twelfth Amendment Subordinated Debt), and (iii) up to $267,000 in Accounts charged off by the Company in August, 2014, to (b) the sum of Capital Expenditures (except those financed with Borrowed Money other than Revolver Loans), cash taxes paid, interest expense (other than payment-in-kind), principal payments made on Borrowed Money other than Revolver Loans, excluding (solely) principal payments made on the Subordinated Term Debt due December 10, 2013, in an amount not exceeding $150,000, and Distributions made, in each case determined for such period; (2) Revolver Termination Date was changed (extended) to March 31, 2016; and (3) Subordinated Debt was added defining Subordinated Debt loaned to the Company by Richard Kurtz in an amount at least equal to $250,000, required as a condition to the effectiveness of the Twelfth Amendment. Refer to Item (a) above and Item (d) below for more information on the Subordinated Debt.

(c)    On November 12, 2015 (effective as of October 31, 2016), Richard J. Kurtz, chairman of the board and majority stockholder, provided a commitment letter assuring funding to the Company (the “Commitment”) on or before August 31, 2016 to pay off: (i) the Enhanced Notes (consisting of aggregate amount of $7.2 million, plus any accrued and unpaid interest (including, but not limited to, PIK interest)); and (ii) the Company, which was owed a $2 million payment on or before April 30, 2016. The Commitment could either be satisfied from personal funds or an appropriate lending or other institution directed by Mr. Kurtz, and would be superseded and become null and void in the event and to the extent that, at or before the time the Commitment is due, the obligations are repaid in full in immediately available cash on or prior to the required due dates by the Company. As consideration for the Commitment, the Company granted Mr. Kurtz a fully vested and exercisable stock option to purchase 500,000 shares of the Company’s common stock, with an exercise price per share equal to the fair market value of a share of the Company’s common stock on November 12, 2015, determined based on the per share closing price of the Company's common stock as quoted on the OTC Markets on such date ($0.294 per share), for a term of eight (8) years. The transaction was valued at approximately $47,000, which was estimated using the Black-Scholes option pricing model and fully expensed on the date of grant. On August 25, 2016, Enhanced agreed to extend the August 31, 2016 pay off date to on or prior to September 16, 2016. Refer to Items (d), (j) and (k) below for more information on the repayment of the Enhanced Notes.




33



(d)    On December 21, 2015, the Company, with the consent of the Bank and Enhanced, repaid an aggregate of $500,000 in principal to Richard J. Kurtz, chairman of the board and majority stockholder, of which $250,000 was for the principal amount of the 1/21/15 Kurtz Note (See Item (a) above) and $250,000 was for the principal amount of the promissory note issued by the Company to Mr. Kurtz for cash he provided to the Company on November 14, 2014 (the "11/14/14 Kurtz Note"). The Company entered into the 11/14/14 Kurtz Note in connection with borrowing $250,000 from Mr. Kurtz as a condition precedent to the Company entering into that certain second amendment dated as of November 14, 2014 to the Note Purchase Agreement with Enhanced and that certain eleventh amendment dated November 14, 2014 to the Loan Agreement with the Bank. As a result of the $500,000 principal payment to Mr. Kurtz by the Company, Mr. Kurtz was required by Enhanced to pay down the Enhanced Notes by $150,000. The Company initially offset the $150,000 that Mr. Kurtz paid on its behalf direct to Enhanced against certain arms' length sales transactions made to entities controlled by him for the Company's products; subsequently those amounts were paid by those entities and as a result, the Company repaid Mr. Kurtz the $150,000 paid to Enhanced on December 21, 2016. See also Items (a) and (c) above for more information.

(e)    During the year ended December 31, 2015, the Company vested an aggregate of 1,224,763 shares of restricted common stock, par value $.01, issued to Richard J. Kurtz, chairman of the board and majority stockholder, for a personal guaranty, which transactions were valued and recorded in the aggregate at $735,000 and classified as interest expense – related party. In connection with the Company's entry into the Note Purchase Agreement entered into with Enhanced by the Company, Mr. Kurtz was required to enter into a guaranty agreement with Enhanced to secure the Company’s performance under the Enhanced Notes. The Company, in exchange for Mr. Kurtz’ personal guaranty of the obligations under the Enhanced Notes, granted him 3,681,000 shares of common stock, par value $.01 per share, which shares vest monthly on a pro rata basis over the term of the Enhanced Notes (the “Guaranty Shares”). The Guaranty Shares were valued at $0.60 per share, the closing price of the Company’s common stock as quoted on OTC Markets on the day preceding the closing date of the Note Purchase Agreement on December 10, 2013, for an aggregate amount of $2.2 million. See also Item (k) below for more information on the repayment of the Enhanced Notes.

(f)    During the year ended December 31, 2015, the Company issued an aggregate of 1,035,743 shares of restricted common stock to its vice chairman, Jay C. Nadel, pursuant to the anti-dilution provisions in the Nadel Agreement, which transactions were valued and recorded in the aggregate at $418,000. Under the Nadel Agreement, the Company agreed to an initial grant of 5,000,000 shares of restricted common stock, which originally vested monthly on a pro-rata basis over a 3 year period ended February 22, 2014, with anti-dilution rights, in exchange for Mr. Nadel providing consulting and advisory services, including business development and planning, and assisting management on strategic initiatives. Anti-dilution rights continue as long as the Nadel Agreement is in force.
 
(g)    On March 14, 2016, the Company granted an eight-year option to Richard J. Kurtz, chairman of the board and majority stockholder, for the right to acquire 800,000 shares of the Company's common stock, par value $.01, at an exercise price per share equal to the fair market value of a share of the Company’s common stock on the date of grant, determined based on the per share closing price on such date, or $0.40 per share, which options vest monthly on a pro rata basis over three (3) years, subject to Mr. Kurtz' continued satisfactory board service. The transaction was valued at $306,000, which was estimated using the Black-Scholes option pricing model and will be expensed over the requisite vesting period.

(h)    On March 14, 2016, the Company granted an eight-year option to Douglas J. Kramer, chief executive officer and president, for the right to acquire 2 million shares of the Company's common stock, par value $.01, at an exercise price per share equal to the fair market value of a share of the Company’s common stock on the date of grant, determined based on the per share closing price of the Company's common stock as quoted on the OTC Markets on such date, or $0.40 per share, which options vest monthly on a pro rata basis over three (3) years, subject to Mr. Kramer's continued satisfactory employment. The transaction was valued at $766,000, which was estimated using the Black-Scholes option pricing model and will be expensed over the requisite vesting period.

(i)    On March 18, 2016, the Company and the Bank entered into a fourteenth amendment to the Loan Agreement, which: (i) established a new tiered level for the applicable margin providing for varying interest rates based on the fixed charge coverage ratio, effective March 31, 2016; (ii) reduced the basic reserve to zero; (iii) established a new inventory formula amount allowing, if the Company elects to have an inventory appraisal performed, the lesser of, 65% of the value of eligible inventory or 85% of the net orderly liquidation value of eligible inventory and up to $6 million; (iv) reduced the amount of the Revolver Loan to provide for an aggregate amount of $12 million (to save on unused revolver loan fees); (v) adjusted the Revolver Loan termination date to the earlier to occur of March 31, 2019 or 90 days prior to the maturity date of subordinated secured Enhanced Notes, which mature on December 10, 2017; (vi) adjusted the formula for determining the unused line fee, which provides for a new varying percentage unused line fee based on the amount by which the revolver commitment exceeds the average daily balance of the revolver loans and stated amount of letters of credit; (vii) changed the borrowing base reporting frequency from daily to weekly, subject to certain availability requirements; and (viii) added a new section to allow for repayments of principal amounts by the Company on the Enhanced Notes, subject to meeting certain borrowing base limitations. Refer to Items (c) and (d) above and Items (j) and (k) below for more information on repayment of the Enhanced Notes.

(j)    On April 21, 2016, the Company made a payment of $1.9 million on the outstanding principal of the Enhanced Notes to Enhanced. Refer to Items (c) and (d) above and (k) below for more information on repayment of the Enhanced Notes.







34


(k)    On September 7, 2016, the Company entered into the Credit Agreement with the Bank, which amended and restated the Loan Agreement in its entirety. The Credit Agreement provides for the Line of Credit which will be reduced each quarter by $250,000 beginning January 1, 2017and ending on July 1, 2019. In connection with the closing of the Credit Agreement, an aggregate amount of $8.5 million was drawn from the Line of Credit, of which $5.8 million was used to pay off and satisfy in full the outstanding debt obligations under the Enhanced Notes and $2.7 million was used to pay off and satisfy in full the outstanding debt obligations under the Loan Agreement. Refer to Items (c), (d) and (j) above for more information on repayment of the Enhanced Notes.

(l)    During the year ended December 31, 2016, the Company vested the remaining 1,157,653 Guaranty Shares, issued to Richard J. Kurtz, chairman of the board and majority stockholder, which transactions were valued and recorded in the aggregate at $696,000 and classified as interest expense – related party. Refer to Item (e) above for more information on the Guaranty Shares. See also Item (k) above for more information on the repayment of the Enhanced Notes.

(m)    On January 5, 2017, the Company granted an aggregate of 400,000 eight-year options to non-employee directors, including Messrs Kurtz, Nadel, Gregg, and Larson, for the right to each acquire 100,000 shares of the Company's common stock, par value $.01, at an exercise price per share equal to the fair market value of a share of the Company’s common stock on the date of grant, determined based on the per share closing price of the Company's common stock as quoted on the OTC Markets on such date, or $0.50 per share, which options vest over a 3 year period in the amount of 33,333; 33,333; and 33,334 on December 31, 2017, December 31, 2018, and December 31, 2019, respectively, subject to their continued satisfactory board service. The transactions were valued in the aggregate at $191,000, which was estimated using the Black-Scholes option pricing model and will be expensed over the requisite vesting periods.

Director Independence
 
Lapolla uses its own definition for determining whether its directors and members of specific committees of the board of directors, are independent. 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. Although we are a “controlled company” because more than 50% of our voting power is held by Mr. Kurtz, our chairman of the board, our board of directors has reviewed the relationships between the Company, including any affiliates, and each board member (and each such director’s immediate family members) and has affirmatively determined that Lt. Gen. Gregg (Ret) and Mr. Larson are, independent directors. No information other than what has been disclosed in this report was considered by our board of directors in determining that Lt. Gen. Gregg (Ret) and Mr. Larson were “independent” within the Company’s independence standards.

Item 14. Principal Accountant Fees and Services
 
Independent Registered Public Accounting Firm Fees
 
The audit committee has appointed Hein & Associates LLP (“Hein”) as our independent registered public accounting firm. Hein audited our financial statements for the years ended December 31, 2016 and 2015. The table below shows the aggregate fees billed to us by our independent registered public accounting firm for the fiscal years ended December 31:
Fee Category
 
2016
 
 
2015
 
Audit Fees
 
$
110,000

(1)
 
$
107,250

(1)
Audit-Related Fees
 

 
 

 
Tax Fees
 

 
 
16,675

(2)
All Other Fees
 

 
 

 
Total
 
$
110,000

 
 
$
123,925

 
(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)
Represents the aggregate fees billed to us by Hein for professional services rendered for the preparation of Federal income tax reports. The audit committee and board of directors determined in advance of retaining Hein that the rendering of such services does not impair the independence of Hein as an auditor of the financial statements of Lapolla.

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 2016 were pre-approved in accordance with the audit committee’s pre-approval requirements. 

35



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
 
 
Report of Independent Registered Public Accounting Firm
 
 
Balance Sheets at December 31, 2016 and 2015
 
 
Statements of Operations for Each of the Years in the Two Year Period Ended December 31, 2016
 
 
Statements of Stockholders’ Equity for Each of the Years in the Two Year Period Ended December 31, 2016
 
 
Statements of Cash Flows for Each of the Years in the Two Year Period Ended December 31, 2016
 
 
Notes to Financial Statements
 
 
2. Financial Statement Schedules:

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.
 
(b) Exhibits:
 
See Index of Exhibits below.

36


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.
 
 
LAPOLLA INDUSTRIES, INC.
 
 
 
 
 
By:  /s/ Douglas J. Kramer
 
 
Douglas J. Kramer
 
 
Chief Executive Officer and President
 
 
February 15, 2017
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.
 
 
LAPOLLA INDUSTRIES, INC.
 
 
 
 
 
By:  /s/ Richard J. Kurtz
 
 
Richard J. Kurtz
 
 
Chairman of the Board
 
 
February 15, 2017
 
 
 
 
 
By:  /s/ Jay C. Nadel
 
 
Jay C. Nadel
 
 
Vice Chairman of the Board
 
 
February 15, 2017
 
 
 
 
 
By:  /s/ Arthur J. Gregg
 
 
Arthur J. Gregg
 
 
Director
 
 
February 15, 2017
 
 
 
 
 
By:  /s/ Augustus J. Larson
 
 
Augustus J. Larson
 
 
Director
 
 
February 15, 2017
 
 
 
 
 
By:  /s/ Douglas J. Kramer
 
 
Douglas J. Kramer
 
 
Director
 
 
February 15, 2017
 
 
 
 
 
By:  /s/ Michael T. Adams
 
 
Michael T. Adams
 
 
Director
 
 
February 15, 2017
 
 
 
 
 
By:  /s/ Harvey L. Schnitzer
 
 
Harvey L. Schnitzer
 
 
Director
 
 
February 15, 2017
 
 
 
 
 
By:  /s/ Jomarc C. Marukot
 
 
Jomarc C. Marukot
 
 
Chief Financial Officer and Treasurer
 
 
(Principal Financial and Accounting Officer)
 
 
February 15, 2017

37


INDEX OF EXHIBITS
 
Exhibit No.
 
Description
3.1
 
Proforma Restated Certificate of Incorporation, as amended, and currently in effect (incorporated by reference to Exhibit 3.2 to Form 10-Q dated June 30, 2011, filed August 19, 2011).
3.2
 
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).
10.1
 
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).
10.2+
 
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).
10.3+
 
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).
10.4+
 
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).
10.5+
 
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).
10.6+
 
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).
10.7+
 
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).
10.8+
 
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).
10.9+
 
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).
10.10+
 
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).
10.11+
 
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).
10.12+
 
First Amendment, effective January 1, 2010, to Employment Agreement dated May 5, 2008 between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated May 5, 2010, filed May 11, 2010).
10.13+
 
First Amendment, effective January 1, 2010, to Employment Agreement dated May 18, 2008 between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated June 11, 2010, filed June 16, 2010).
10.14
 
Bank of American Loan and Security Agreement dated August 31, 2010 and effective September 1, 2010 (incorporated by reference to Exhibit 10.1 to Form 8-K dated September 1, 2010, filed September 7, 2011).
10.15
 
Guaranty Agreement between Richard J. Kurtz as Guarantor of Term Loan and Bank of America (incorporated by reference to Exhibit 10.2 to Form 8-K dated September 1, 2010, filed September 7, 2011).
10.16
 
First Amendment dated November 10, 2010 and effective August 31, 2010, to Bank of America Loan Agreement dated August 31, 2010 (incorporated by reference to Exhibit 10.1 to Form 8-K dated November 10, 2010, filed November 18, 2010).
10.17+
 
Agreement dated February 22, 2011 between Jay C. Nadel and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 22, 2011, filed February 28, 2011).
10.18
 
Third Amendment dated May 11, 2011 to that certain Loan and Security Agreement between Lapolla and Bank of America dated August 31, 2010 (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarterly period ended March 31, 2011, filed May 16, 2011).
10.19+
 
Second Amendment, effective January 1, 2011, to Employment Agreement dated May 5, 2008, between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.2 to Form 10-Q dated June 30, 2011, filed August 19, 2011).
10.20+
 
Second Amendment, effective January 1, 2011, to Employment Agreement dated May 18, 2009, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.3 to Form 10-Q dated June 30, 2011, filed August 19, 2011).
10.21
 
Fourth Amendment dated August 17, 2011 to that certain Loan and Security Agreement between Lapolla and Bank of America dated August 31, 2010 (incorporated by reference to Exhibit 10.5 to Form 10-Q dated June 30, 2011, filed August 19, 2011).
10.22+
 
Third Amendment, effective December 31, 2011, to Employment Agreement dated May 18, 2009, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.49 to Form 10-K for the year ended December 31, 2011, filed April 16, 2012).
10.23+
 
Executive Employment Agreement dated April 9, 2012 and effective April 5, 2012 between Harvey L. Schnitzer and the Company (incorporated by reference to Exhibit 10.47 to Form 10-K for the year ended December 31, 2011, filed April 16, 2012).
10.24
 
Sixth Amendment dated April 16, 2012 to that certain Loan and Security Agreement between Lapolla and Bank of America dated August 31, 2010 (incorporated by reference to Exhibit 10.48 to Form 10-K for the year ended December 31, 2011, filed April 16, 2012)

38


10.25
 
Note Purchase Agreement between Lapolla and Enhanced Jobs for Texas Funds, LLC and Enhanced Capital Texas Fund, LP dated June 29, 2012 (incorporated by reference to Exhibit 10.1 to Form 8-K dated June 29, 2012, filed July 6, 2012)
10.26
 
Promissory Note between Lapolla and Enhanced Jobs for Texas Fund, LLC dated June 29, 2012 (incorporated by reference to Exhibit 10.2 to Form 8-K dated June 29, 2012, filed July 6, 2012)
10.27
 
Promissory Note between Lapolla and Enhanced Capital Texas Fund, LP dated June 29, 2012 (incorporated by reference to Exhibit 10.3 to Form 8-K dated June 29, 2012, filed July 6, 2012)
10.28
 
Security Agreement between Lapolla and Enhanced Capital Texas Fund, LP, dated June 29, 2012 (incorporated by reference to Exhibit 10.4 to Form 8-K dated June 29, 2012, filed July 6, 2012)
10.29
 
Guaranty Agreement between Richard J. Kurtz and Enhanced Capital Texas Fund, LP dated June 29, 2012 (incorporated by reference to Exhibit 10.5 to Form 8-K dated June 29, 2012, filed July 6, 2012)
10.30
 
Seventh Amendment dated June 29, 2012 to that certain Loan and Security Agreement dated August 31, 2010 between Lapolla and Bank of America, N.A. (incorporated by reference to Exhibit 10.6 to Form 8-K dated June 29, 2012, filed July 6, 2012)
10.31+
 
Third Amendment, effective July 1, 2012, to Employment Agreement dated May 5, 2008, between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.7 to Form 10-Q dated June 30, 2012, filed August 20, 2012).
10.32+
 
Fourth Amendment, effective July 1, 2012, to Employment Agreement dated May 18, 2009, between Michael T. Adams and the Company  (incorporated by reference to Exhibit 10.8 to Form 10-Q dated June 30, 2012, filed August 20, 2012).
10.33+
 
First Amendment, effective July 1, 2012, to Advisory/Consultant Agreement, effective February 22, 2011, between Jay C. Nadel and the Company  (incorporated by reference to Exhibit 10.10 to Form 10-Q dated June 30, 2012, filed August 20, 2012).
10.34
 
Eighth Amendment dated November 15, 2012 to that certain Loan and Security Agreement dated August 31, 2010 between Lapolla and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to Form 10-Q dated September 30, 2012, filed November 19, 2012).
10.35
 
First Amendment dated November 15, 2012 to that certain Note Purchase Agreement dated June 29, 2012 between Lapolla and Enhanced Jobs for Texas Fund, LLC and Enhanced Capital Texas Fund, LP (incorporated by reference to Exhibit 10.2 to Form 10-Q dated September 30, 2012, filed November 19, 2012).
10.36
 
Ninth Amendment dated May 3, 2013 to that certain Loan and Security Agreement dated August 31, 2010 between Lapolla and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to Form 10-Q dated March 31, 2013, filed May 13, 2013).
10.37
 
Note Purchase Agreement between Lapolla and Enhanced dated December 10, 2013 (incorporated by reference to Exhibit 10.1 to Form 8-K dated December 10, 2013, filed December 16, 2013).
10.38
 
Promissory Note between Lapolla and Enhanced Jobs for Texas Fund, LLC dated December 10, 2013 (incorporated by reference to Exhibit 10.2 to Form 8-K dated December 10, 2013, filed December 16, 2013).
10.39
 
Promissory Note between Lapolla and Enhanced Capital Texas Fund, LP dated December 10, 2013 (incorporated by reference to Exhibit 10.3 to Form 8-K dated December 10, 2013, filed December 16, 2013).
10.40
 
Security Agreement between Lapolla and Enhanced Capital Texas Fund, LP dated December 10, 2013 (incorporated by reference to Exhibit 10.4 to Form 8-K dated December 10, 2013, filed December 16, 2013).
10.41
 
Guaranty Agreement b/w Richard J. Kurtz and Enhanced Capital Texas Fund, LP dated December 10, 2013 (incorporated by reference to Exhibit 10.5 to Form 8-K dated December 10, 2013, filed December 16, 2013).
10.42
 
Tenth Amendment dated December 10, 2013 to that certain Loan and Security Agreement dated August 31, 2010 between Lapolla and Bank of America, N.A. (incorporated by reference to Exhibit 10.6 to Form 8-K dated December 10, 2013, filed December 16, 2013).
10.43+
 
Executive Employment Agreement, effective January 1, 2014, between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated January 22, 2013, filed January 28, 2013).
10.44+
 
Option Agreement dated January 22, 2014, between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.2 to Form 8-K dated January 22, 2013, filed January 28, 2013).
10.45+
 
Option Agreement dated February 7, 2014, between Harvey L. Schnitzer and the Company (incorporated by reference to Exhibit 10.72 to Form 10-K dated December 31, 2013, filed April 10, 2014).
10.46+
 
Stock Bonus Agreement dated February 7, 2014, between Harvey L. Schnitzer and the Company (incorporated by reference to Exhibit 10.73 to Form 10-K dated December 31, 2013, filed April 10, 2014).
10.47
 
First Amendment dated April 8, 2014 to that certain Note Purchase Agreement between Lapolla and Enhanced dated December 10, 2013 (incorporated by reference to Exhibit 10.74 to Form 10-K dated December 31, 2013, filed April 10, 2014).
10.48+
 
Option Agreement dated April 28, 2014, between Jay C. Nadel and the Company (incorporated by reference to Exhibit 10.62 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.49+
 
Option Agreement dated April 28, 2014, between Arthur J. Gregg and the Company (incorporated by reference to Exhibit 10.63 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.50+
 
Option Agreement dated April 28, 2014, between Augustus J. Larson and the Company (incorporated by reference to Exhibit 10.64 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.51+
 
Option Agreement dated April 28, 2014, between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.65 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.52+
 
Option Agreement dated April 28, 2014, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.66 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.53+
 
Option Agreement dated April 28, 2014, between Harvey L. Schnitzer and the Company (incorporated by reference to Exhibit 10.67 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.54+
 
Option Agreement dated May 14, 2014, between Richard J. Kurtz and the Company (incorporated by reference to Exhibit 10.68 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.55+
 
Option Agreement dated October 14, 2014, between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.69 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.56+
 
Option Agreement dated November 26, 2014, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.70 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.57+
 
Option Agreement dated December 22, 2014, between Jay C. Nadel and the Company (incorporated by reference to Exhibit 10.71 to Form 10-K dated December 31, 2014, filed March 31, 2015).

39


10.58+
 
Option Agreement dated December 22, 2014, between Arthur J. Gregg and the Company (incorporated by reference to Exhibit 10.72 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.59+
 
Option Agreement dated December 22, 2014, between Augustus J. Larson and the Company (incorporated by reference to Exhibit 10.73 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.60
 
Eleventh Amendment dated November 14, 2014 to that certain Loan and Security Agreement dated August 31, 2010 between Lapolla and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to Form 10-Q dated September 30, 2014, filed November 17, 2014).
10.61
 
Financial Commitment from Richard J. Kurtz dated November 14, 2014 (incorporated by reference to Exhibit 10.2 to Form 10-Q dated September 30, 2014, filed November 17, 2014).
10.62
 
Second Amendment dated November 14, 2014 to that certain Note Purchase Agreement between Lapolla and Enhanced dated December 10, 2013 (incorporated by reference to Exhibit 10.3 to Form 10-Q dated September 30, 2014, filed November 17, 2014).
10.63+
 
Executive Employment Agreement effective December 31, 2014, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated January 16, 2015, filed January 23, 2015).
10.64+
 
Executive Employment Agreement effective December 31, 2014, between Harvey L. Schnitzer and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 23, 2015, filed February 27, 2015).
10.65+
 
Executive Employment Agreement dated and effective January 1, 2015, between Jomarc C. Marukot and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated January 1, 2015, filed January 6, 2015).
10.66+
 
Option Agreement dated January 16, 2015, between Douglas J. Kramer and the Company  (incorporated by reference to Exhibit 10.3 to Form 8-K dated January 16, 2013, filed January 23, 2015).
10.67+
 
Option Agreement dated January 16, 2015, between Michael T. Adams and the Company  (incorporated by reference to Exhibit 10.2 to Form 8-K dated January 16, 2013, filed January 23, 2015).
10.68
 
Promissory Note between Lapolla and Richard J. Kurtz dated January 21, 2015 (incorporated by reference to Exhibit 10.15 to Form 8-K dated January 21, 2015, filed January 27, 2015).
10.69
 
Twelfth Amendment dated January 23, 2015 to that certain Loan and Security Agreement dated August 31, 2010 between Lapolla and Bank of America, N.A. (incorporated by reference to Exhibit 10.11 to Form 8-K dated January 21, 2015, filed January 27, 2015).
10.70+
 
Executive Employment Agreement effective January 1, 2015, between Jomarc C. Marukot and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated January 1, 2015, filed January 6, 2015).
10.71+
 
Option Agreement dated March 23, 2015, between Harvey L. Schnitzer and the Company (incorporated by reference to Exhibit 10.63 to Form 10-K dated December 31, 2014, filed March 31, 2015).
10.72
 
Thirteenth Amendment dated May 29, 2015 to that certain Loan and Security Agreement dated August 31, 2010 between Lapolla and Bank of America, N.A. (incorporated by reference to Exhibit 10.12 to Form 8-K dated May 29, 2015, filed June 10, 2015).
10.73
 
Subordination Agreement dated April 16, 2012 by and among Lapolla Industries, Inc., Richard J. Kurtz, and Bank of America (incorporated by reference to Exhibit 10.18 to Form 8-K dated May 29, 2015, filed June 10, 2015).
10.74
 
First Amendment dated November 13, 2014 to that certain Subordination Agreement dated April 16, 2012 by and among Lapolla Industries, Inc., Richard J. Kurtz, and Bank of America (incorporated by reference to Exhibit 10.19 to Form 8-K dated May 29, 2015, filed June 10, 2015).
10.75
 
Promissory Note dated November 14, 2014 between Lapolla Industries, Inc. and Richard J. Kurtz (incorporated by reference to Exhibit 10.20 to Form 8-K dated May 29, 2015, filed June 10, 2015).
10.76
 
Promissory Note dated January 21, 2015 between Lapolla Industries, Inc. and Richard J. Kurtz (incorporated by reference to Exhibit 10.15 to Form 8-K dated January 21, 2015, filed January 27, 2015).
10.77
 
Second Amendment dated May 29, 2015 to that certain Subordination Agreement dated April 16, 2012 by and among Lapolla Industries, Inc., Richard J. Kurtz, and Bank of America (incorporated by reference to Exhibit 10.22 to Form 8-K dated May 29, 2015, filed June 10, 2015).
10.78+
 
First Amendment, effective January 1, 2014, to Employment Agreement dated January 1, 2014, between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.1 to Form 10-Q dated September 30, 2015, filed November 12, 2015).
10.79
 
Third Amendment dated December 15, 2015 to that certain Note Purchase Agreement between Lapolla and Enhanced dated December 10, 2013 (incorporated by reference to Exhibit 10.6 to Form 8-K dated December 15, 2015, filed December 18, 2015).
10.80
 
Amended and Restated Guaranty Agreement dated December 15, 2015 by and among Richard J. Kurtz and Enhanced Credit Supported Loan Fund, LP, as Agent for Enhanced Jobs for Texas Fund, LLC, and Enhanced Capital Texas Fund, LP (incorporated by reference to Exhibit 10.7 to Form 8-K dated December 15, 2015, filed December 18, 2015).
10.81
 
Fourteenth Amendment dated March 18, 2016 to that certain Loan and Security Agreement dated August 31, 2010 between Lapolla and Bank of America, N.A. (incorporated by reference to Exhibit 10.13 to Form 8-K dated March 18, 2016, filed March 24, 2016).
10.82
 
Commitment Letter dated November 12, 2015 from Richard J. Kurtz (incorporated by reference to Exhibit 10.2 to Form 10-Q dated September 30, 2015, filed November 12, 2015).
10.83+
 
Option Agreement dated November 12, 2015, between Richard J. Kurtz and the Company.
10.84+
 
Option Agreement dated March 14, 2016, between Richard J. Kurtz and the Company.
10.85+
 
Option Agreement dated March 14, 2016, between Douglas J. Kramer and the Company.
10.86
 
Loan Agreement between Lapolla Industries, Inc. and Bank of America, N.A., dated September 7, 2016 (incorporated by reference to to Exhibit 10.1 to Form 8-K dated September 7, 2016, filed September 12, 2016).
10.87
 
Security Agreement between Lapolla Industries, Inc., Bank of America Corporation, and Bank of America, N.A., dated September 7, 2016 (incorporated by reference to Exhibit 10.2 to Form 8-K dated September 7, 2016, filed September 12, 2016).
10.88+
 
Second Amendment to Executive Employment Agreement dated December 30, 2016, between Douglas J. Kramer and Lapolla Industries, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K dated December 31, 2016, filed January 9, 2017).
10.89+
 
First Amendment to Executive Employment Agreement dated December 30, 2016, between Jomarc C. Marukot and Lapolla Industries, Inc. (incorporated by reference to Exhibit 10.2 to Form 8-K dated December 31, 2016, filed January 9, 2017).
10.90*+
 
Stock Bonus Agreement dated December 31, 2016, between Richard J. Kurtz and the Company.
10.91*+
 
Stock Bonus Agreement dated January 1, 2017, between Richard J. Kurtz and the Company.

40


10.92*+
 
Option Agreement dated January 5, 2017, between Richard J. Kurtz and the Company.
10.93*+
 
Option Agreement dated January 5, 2017, between Jay C. Nadel and the Company.
10.94*+
 
Option Agreement dated January 5, 2017, between Arthur J. Gregg and the Company.
10.95*+
 
Option Agreement dated January 5, 2017, between Augustus J. Larson and the Company.
23.1*
 
Consent of Hein & Associates LLP incorporated by reference in Registration Statement (Form S-8 No. 333-174272) of February 15, 2017 report.
31.1*
 
Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*
 
Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32*
 
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.
101*
 
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language), (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Stockholders’ Equity, (iv) Statements of Cash Flows, and (v) Notes to Financial Statements
 
* Filed herewith
+ Management contract or compensation plan or arrangement

41







lapollalogoa08.jpg







2016 Annual Audit



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



www.lapolla.com











  




(i)



 LAPOLLA INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
 
 
Page
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
BALANCE SHEETS
 
 
 
As of December 31, 2016 and 2015
 
 
STATEMENTS OF OPERATIONS
 
 
 
Years Ended December 31, 2016 and 2015
 
 
STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
 
Years Ended December 31, 2016 and 2015
 
 
STATEMENTS OF CASH FLOWS
 
 
 
Years Ended December 31, 2016 and 2015
 
 
NOTES TO FINANCIAL STATEMENTS

(ii)


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
Board of Directors and Stockholders
Lapolla Industries, Inc.
Houston, Texas

We have audited the accompanying balance sheets of Lapolla Industries, Inc. as of December 31, 2016 and 2015 and the related statements of operations, change in stockholders’ equity and cash flows for the years then ended. 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 audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lapolla Industries, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.


/s/ Hein & Associates LLP
 
Hein & Associates LLP
Houston, Texas
February 15, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-1


LAPOLLA INDUSTRIES, INC.
BALANCE SHEETS
(in thousands, except share data)
 
 
 
December 31,
 
 
2016
 
2015
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash
 
$
1,722

 
$

Trade Receivables, Net
 
12,508

 
10,006

Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
 

 
42

Inventories, Net
 
6,610

 
8,174

Prepaid Expenses and Other Current Assets
 
2,074

 
1,174

Total Current Assets
 
22,914

 
19,396

 
 
 
 
 
Property, Plant and Equipment
 
985

 
1,087

Goodwill
 
4,235

 
4,235

Other Intangible Assets, Net
 
1,180

 
1,197

Deposits and Other Non-Current Assets, Net
 
81

 
94

Total Assets
 
$
29,395

 
$
26,009

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts Payable
 
$
6,741

 
$
6,384

Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
 
21

 
51

Accrued Expenses and Other Current Liabilities
 
2,917

 
2,773

Total Current Liabilities
 
9,679

 
9,208

 
 
 
 
 
Long-Term Debt, Net
 
8,945

 
14,137

Accrued Interest – Note Payable – Related Party