LAPOLLA INDUSTRIES INC - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 CERTIFICATIONS OF PEO AND PFO AND PAO SECTION 1350 - LAPOLLA INDUSTRIES INC	a20170930exhibit321-a.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF PFO-PAO - LAPOLLA INDUSTRIES INC	a20170930exhibit312.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF PEO - LAPOLLA INDUSTRIES INC	a20170930exhibit311.htm
EX-3.2 - EXHIBIT 3.2 BYLAWS, AS AMENDED AND CURRENTLY IN EFFECT - LAPOLLA INDUSTRIES INC	a2017930exhibit32-byxlawsa.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

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

For the transition period from _____ to _____

Commission File No. 001-31354

Lapolla Industries, Inc.

(Exact name of registrant as specified in its charter)



Delaware		13-3545304
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



Intercontinental Business Park
15402 Vantage Parkway East, Suite 322
Houston, Texas		77032
(Address of principal executive offices)		(Zip Code)

(281) 219-4700

(Registrant’s telephone number, including area code)

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 whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (do not check if a smaller reporting company)
	Smaller reporting company þ
	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

The number of shares outstanding of the issuer's common stock, par value $0.01 per share, as of October 31, 2017, was 127,816,247.

LAPOLLA INDUSTRIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS



			Page

PART I	FINANCIAL INFORMATION

	Item 1	Financial Statements	1

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	22

	Item 4	Controls and Procedures	22

PART II	OTHER INFORMATION

	Item 1	Legal Proceedings	23

	Item 1A	Risk Factors	23

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	23

	Item 3	Defaults Upon Senior Securities	23

	Item 4	Mine Safety Disclosures	23

	Item 5	Other Information	23

	Item 6	Exhibits	23

SIGNATURES			24

INDEX OF EXHIBITS			25

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LAPOLLA INDUSTRIES, INC.

INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS



UNAUDITED CONDENSED BALANCE SHEETS

	September 30, 2017 and December 31, 2016	2

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

	Three and Nine Months Ended September 30, 2017 and 2016	3

UNADUDITED CONDENSED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30, 2017 and 2016	4

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS		5

All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable, and therefore have been omitted.

LAPOLLA INDUSTRIES, INC.

UNAUDITED CONDENSED BALANCE SHEETS

(in thousands, except share data)



	September 30, 2017			December 31, 2016
ASSETS
Current Assets:
Cash	$	1,251		$	1,722
Trade Receivables, Net	16,990			12,508
Inventories, Net	7,149			6,610
Prepaid Expenses and Other Current Assets	1,621			2,074
Total Current Assets	27,011			22,914

Property, Plant and Equipment, Net	1,089			985
Goodwill	4,235			4,235
Other Intangible Assets, Net	1,443			1,180
Deposits and Other Non-Current Assets, Net	63			81
Total Assets	$	33,841		$	29,395

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable	$	8,857		$	6,741
Accrued Expenses and Other Current Liabilities	2,598			2,938
Total Current Liabilities	11,455			9,679

Long-Term Debt, Net	5,960			8,945
Deferred Tax Liability	447			414
Total Liabilities	17,862			19,038
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $0.01 Par Value; 140,000,000 Shares Authorized; 123,569,129 and 123,494,129 Issued and Outstanding for September 30, 2017 and December 31, 2016, respectively.	1,236			1,235
Additional Paid-In Capital	93,067			93,600
Accumulated Deficit	(78,324		)	(84,478		)
Total Stockholders' Equity	15,979			10,357
Total Liabilities and Stockholders' Equity	$	33,841		$	29,395

The Accompanying Notes are an Integral Part of the Condensed Financial Statements

LAPOLLA INDUSTRIES, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Sales	$	28,828		$	20,917		$	77,627		$	61,647

Cost of Sales	21,535			14,773			57,163			43,719

Gross Profit	7,293			6,144			20,464			17,928

Operating Expenses:
Selling, General and Administrative	3,566			3,525			11,227			11,100
Professional Fees	458			339			1,299			969
Depreciation	30			20			73			79
Amortization of Other Intangible Assets	79			67			200			210
Consulting Fees	380			123			916			421
Total Operating Expenses	4,513			4,074			13,715			12,779

Operating Income	2,780			2,070			6,749			5,149

Other (Income) Expense:
Interest Expense	50			192			167			818
Interest Expense – Related Party	—			125			—			491
Interest Expense – Amortization of Discount	—			30			—			120
Loss on Extinguishment of Debt	—			306			—			306
Other Income	(9		)	(90		)	(57		)	(701		)
Total Other Expense	41			563			110			1,034

Income Before Income Taxes	2,739			1,507			6,639			4,115
Provision for Income Taxes	149			39			485			151

Net Income	$	2,590		$	1,468		$	6,154		$	3,964

Earnings Per Share:
Basic	$	0.02		$	0.01		$	0.05		$	0.03
Diluted	$	0.02		$	0.01		$	0.05		$	0.03
Weighted Average Shares Outstanding:
Basic	123,544			123,016			123,519			122,654
Diluted	125,979			123,050			123,031			122,655

The Accompanying Notes are an Integral Part of the Condensed Financial Statements

LAPOLLA INDUSTRIES, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)



	Nine Months Ended September 30,
	2017			2016
Cash Flows From Operating Activities:
Net Income	$	6,154		$	3,964
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation	187			202
Amortization of Other Intangible Assets	200			210
Provision for Losses on Accounts Receivable	261			169
Share Based Compensation Expense	708			711
Interest Expense – Related Party	—			491
Interest Expense – Amortization of Discount	—			120
(Gain) Loss on Foreign Currency Exchange	(2		)	8
Gain on Disposal of Assets	—			(9		)
Loss on Extinguishment of Debt	—			306
Deferred Income Tax Provision	33			39
Changes in Assets and Liabilities:
Trade Receivables	(4,749		)	(1,580		)
Inventories	(486		)	1,022
Prepaid Expenses and Other Current Assets	453			84
Other Intangible Assets	(463		)	(190		)
Deposits and Other Non-Current Assets	33			41
Accounts Payable	2,123			973
Accrued Expenses and Other Current Liabilities	(407		)	(490		)
Net Cash Provided by Operating Activities	4,045			6,071

Cash Flows From Investing Activities:
Additions to Property, Plant and Equipment	(276		)	(133		)
Net Cash Used in Investing Activities	(276		)	(133		)

Cash Flows From Financing Activities:
Proceeds from Line of Credit	4,250			9,953
Principal Repayments to Line of Credit	(7,250		)	(250		)
Cash Dividends Paid	(1,240		)	—
Proceeds from Revolver Loan	—			54,996
Principal Repayments to Revolver Loan	—			(61,732		)
Principal Repayments on Enhanced Notes	—			(7,688		)
Net Cash Used in Financing Activities	(4,240		)	(4,721		)

Net (Decrease) Increase in Cash	(471		)	1,217
Cash at Beginning of Period	1,722			—
Cash at End of Period	$	1,251		$	1,217

Supplemental Disclosure of Cash Flow Information:
Cash Payments for Income Taxes	$	202		$	27
Cash Payments for Interest	176			735

Supplemental Schedule of Non Cash Investing and Financing Activities:
Capital Additions in Accrued Expenses	$	67		$	—
Issuances of Common Stock for Guaranty by Related Party classified as Interest Expense	$	—		$	695

The Accompanying Notes are an Integral Part of the Condensed Financial Statements

LAPOLLA INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation, Critical Accounting Policies, Estimates, and Assumptions

The condensed financial statements included herein are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the Notes to the condensed financial statements.

These unaudited condensed financial statements should be read in conjunction with the risk factors and the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on February 15, 2017, in order to fully understand the basis of presentation. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year. The Company’s critical accounting policies were described in Note 1 to the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in the Company’s accounting policies during the three and nine months ended September 30, 2017. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenue and expenses. Actual results could differ from these estimates.

Reclassifications

Certain reclassifications of prior year amounts have been made to confirm to the current year presentation. The reclassifications had no impact on net income.

Note 2 - Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out ("LIFO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The adoption did not have a material impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for share-based payment awards to employees, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The adoption did not have a material impact on the Company’s financial statements.

New Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." The ASU will supersede most of the existing revenue recognition requirements in U.S. generally accepted accounting principles ("GAAP") and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The pronouncement is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the impact of adopting this guidance.

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED-CONTINUED)

Note 2 - Recent Accounting Pronouncements, continued

In February 2016, the FASB issued ASU 2016-02, "Leases: Amendments to the FASB Accounting Standards Codification," which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact of adopting this guidance.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which contains amendments designed to make current GAAP clear or provide specific guidance on eight cash flow classification issues relating to how certain cash receipts and cash payments are presented and classified in the statement of cash flows, thereby reducing the current and potential future diversity in practice. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact of adopting this guidance.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which contains amendments to simplify the subsequent measurement of goodwill. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments of this ASU are effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of adopting this guidance.

In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718)," which provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this guidance.

In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815)," which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of adopting this guidance.

Note 3 - Dependence on Few Suppliers

The Company is dependent on a few suppliers for certain raw materials and finished goods. For the three and nine month period ended September 30, 2017 and 2016, raw materials and finished goods purchased from the three largest suppliers accounted for approximately 43% and 43%, and 43% and 41% of purchases, respectively.

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED-CONTINUED)

Note 4 - Trade Receivables

Trade receivables are comprised of the following (in thousands):



	September 30, 2017			December 31, 2016
Trade Receivables	$	17,337		$	12,874
Less: Allowance for Doubtful Accounts	(347		)	(366		)
Trade Receivables, Net	$	16,990		$	12,508

Note 5 - Inventories

The following is a summary of inventories (in thousands):



	September 30, 2017		December 31, 2016
Raw Materials	$	2,356	$	2,157
Finished Goods	4,793		4,453
Inventories, Net	$	7,149	$	6,610

Note 6 - Prepaid Expenses and Other Current Assets

The following is a summary of prepaid expenses and other current assets (in thousands):



	September 30, 2017		December 31, 2016
Prepaid Insurances	$	245	$	735
Prepaid Marketing	71		181
Prepaid Consulting	68		94
Prepaid Other	1,237		1,064
Total Prepaid Expenses and Other Current Assets	$	1,621	$	2,074

Note 7 - Property, Plant and Equipment

The following is a summary of property, plant and equipment (in thousands):



	September 30, 2017			December 31, 2016
Vehicles	$	194		$	244
Leasehold Improvements	303			269
Office Furniture and Equipment	199			159
Computers and Software	1,108			907
Machinery and Equipment	2,572			2,557
Total Property, Plant and Equipment	$	4,376		$	4,136
Less: Accumulated Depreciation	(3,287		)	(3,151		)
Total Property, Plant and Equipment, Net	$	1,089		$	985

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED-CONTINUED)

Note 8 - Goodwill and Other Intangible Assets

Goodwill

The following is a summary of Goodwill (in thousands):



	September 30, 2017		December 31, 2016
Foam	$	2,932	$	2,932
Coatings	1,303		1,303
Total Goodwill	$	4,235	$	4,235

Other Intangible Assets

The following is a summary of Other Intangible Assets (in thousands):



	September 30, 2017							December 31, 2016
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Product Formulation	$	138	$	(111	)	$	27	$	138	$	(104	)	$	34
Trade Names	750		(457		)	293		750		(419		)	331
Approvals and Certifications	3,926		(2,803		)	1,123		3,462		(2,647		)	815
	$	4,814	$	(3,371	)	$	1,443	$	4,350	$	(3,170	)	$	1,180

Note 9 - Deposits and Other Non-Current Assets

The following is a summary of deposits and other non-current assets (in thousands):



	September 30, 2017		December 31, 2016
Prepaid Expenses	$	6	$	8
Other Receivables	—		9
Deposits	57		64
Total Deposits and Other Non-Current Assets	$	63	$	81

Note 10 - Accrued Expenses and Other Current Liabilities

The following is a summary of accrued expenses and other current liabilities (in thousands):



	September 30, 2017		December 31, 2016
Accrued Payroll	$	107	$	3
Accrued Commissions	176		172
Accrued Inventory Purchases	172		249
Accrued Taxes and Other	2,082		2,011
Accrued Insurance	35		490
Deferred Finance Charge Income	26		13
Total Accrued Expenses and Other Current Liabilities	$	2,598	$	2,938

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED-CONTINUED)

Note 11 - Long-Term Debt

The following is a summary of long-term debt (in thousands):



Debt Facility	Effective Cash Interest Rate	September 30, 2017			December 31, 2016
Line of Credit	3.46%	$	6,000		$	9,000
Less Debt Issuance Costs		(40		)	(55		)
Long-Term Debt, Net		$	5,960		$	8,945

The Company entered into a loan agreement with Bank of America, N.A. (the “Bank”) on September 7, 2016 (the “Loan Agreement”), which amended and restated in its entirety that certain prior Loan and Security Agreement dated August 31, 2010 with the Bank. The Loan Agreement provides an initial line of credit of $15 million for a 3 years term maturing on September 7, 2019 (the “Line of Credit”). The available amount of the Line of Credit will be reduced each quarter by $250,000 starting January 1, 2017, until it reaches $12 million on July 1, 2019, thereby reducing the Company’s unused line fee. The interest rate used by the Company is the daily floating LIBOR rate plus 2.25%. The Loan Agreement requires the Company to comply with two financial covenants, including: (i) an asset coverage ratio of at least (a) 1.10 to 1.00 from September 30, 2016, until September 30, 2017, (b) 1.15 to 1.00 from October 1, 2017, through March 31, 2018, and (c) 1.20 to 1.00 from April 1, 2018, and thereafter, 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% of 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 Loan 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 certain prior refinanced debt agreements, and distributions made, in each case for the immediately preceding four fiscal quarter period and determined on a consolidated basis. Upon closing of the Loan Agreement, an aggregate of $8.5 million was drawn from the Line of Credit and used to pay off certain prior refinanced debt agreements. 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 September 30, 2017, the balance outstanding on the Line of Credit, net of deferred financing costs, was $6.0 million, and the weighted-average interest rate was 2.46%. Cash available under our Line of Credit based on the Asset Coverage Ratio, and after giving effect to outstanding borrowings, at September 30, 2017 was $8.3 million. At September 30, 2017, the Company was in compliance with all of its Loan Agreement debt covenants.

Note 12 - Related Party Transactions

(a) On January 1, 2017, the Company granted a stock bonus to the chairman of the board, Richard J. Kurtz, for the right to acquire 100,000 shares of the Company's common stock, par value $0.01. No monetary payment is required as a condition of receiving the shares of common stock, as the consideration is continued satisfactory chairman of the board services with the Company during the vesting period. The shares of common stock vest in four equal 25,000 share increments on March 31, 2017, June 30, 2017, September 30, 2017, and December 31, 2017, respectively, subject to continued chairman of the board services to the Company. Once vested, the shares of common stock are freely transferable. The transaction was valued at $53,000 (calculated by multiplying the 100,000 shares by the $0.53 closing price of the Company's common stock on the date of grant) and is being expensed over the requisite service period on the respective vesting dates. On March 31, 2017, the first tranche of 25,000 shares of common stock vested, which transaction was valued and recorded at $13,000.

(b) On January 5, 2017, the Company granted eight-year stock options to non-employee directors, Richard J. Kurtz, Jay C. Nadel, Arthur J. Gregg, and Augustus J. Larson, each for the right to acquire 100,000 shares of the Company's common stock, par value $0.01, 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 $0.50 per share, which options vest 33,333, 33,333, and 33,334 on December 31, 2017, December 31, 2018, and December 31, 2019, respectively, subject to continued satisfactory board services. 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 period.

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED-CONTINUED)

Note 12 - Related Party Transactions, continued

(c) On April 6, 2017, and effective January 1, 2017, the Company entered into an Executive Employment Agreement with Jomarc C. Marukot, chief financial officer and treasurer (the “Marukot Employment Agreement”), which superseded and replaced all prior employment agreements between the Company and Mr. Marukot. The Marukot Employment Agreement provides, among other things, that Mr. Marukot will receive base compensation of $210,000 per annum and shall be entitled to a bonus equal to 25% of his base salary for each fiscal year if the Company's earnings before interest, taxes, depreciation, amortization, and share based compensation (“Adjusted EBITDA”) for such fiscal year exceeds a target established by the Company's Board of Directors (which bonus shall be increased to: (a) 30% of Mr. Marukot’s annual base compensation if the Company achieves 110% of the Adjusted EBITDA target for such fiscal year and (b) 35% of Mr. Marukot’s annual base compensation if the Company achieves 120% of the Adjusted EBITDA target for such fiscal year). In addition, if the Company achieves Adjusted EBITDA greater than 120% of the target in any fiscal year, the Company's CEO, in his discretion, may pay Mr. Marukot a bonus greater than 35% of his annual base compensation, subject to review and approval by the Compensation Committee and Board of Directors. The Marukot Employment Agreement also provides for a transaction bonus equal to 0.25% of the consideration received by the Company's shareholders (the amount of such bonus being subject to the restrictions and further calculations set forth in the Marukot Employment Agreement) upon consummation of a change in control if Mr. Marukot is still employed at such time or in the event Mr. Marukot’s employment is terminated within one year immediately preceding the consummation of a change in control.

(d) On April 6, 2017, the Company entered into an Executive Employment Agreement with Michael T. Adams, chief governance officer, vice president and corporate secretary (the “Adams Employment Agreement”), which superseded and replaced all prior employment agreements between the Company and Mr. Adams. The Adams Employment Agreement provides, among other things, that Mr. Adams will receive base compensation of $200,000 per annum and shall be entitled to a bonus equal to 25% of his base salary for each fiscal year if the Company's Adjusted EBITDA for such fiscal year exceeds a target established by the Company's Board of Directors (which bonus shall be increased to: (a) 30% of Mr. Adams' annual base compensation if the Company achieves 110% of the Adjusted EBITDA target for such fiscal year and (b) 35% of Mr. Adams' annual base compensation if the Company achieves 120% of the Adjusted EBITDA target for such fiscal year). In addition, if the Company achieves Adjusted EBITDA greater than 120% of the target in any fiscal year, the Company's CEO, in his discretion, may pay Mr. Adams a bonus greater than 35% of his annual base compensation, subject to review and approval by the Compensation Committee and Board of Directors. Also, the Adams Employment Agreement provides for a transaction bonus equal to 0.50% of the consideration received by the Company's shareholders (the amount of such bonus being subject to the restrictions and further calculations set forth in the Adams Employment Agreement) upon consummation of a change in control if Mr. Adams is still employed at such time or in the event Mr. Adams’ employment is terminated within one year immediately preceding the consummation of a change in control.

(e) During the nine months ended September 30, 2017, Richard J. Kurtz, Chairman of the Board and majority stockholder of the Company, indirectly purchased the Company’s products in a series of arm’s length transactions at or above the prevailing selling prices for the products at the time of each transaction, which transactions were valued in the aggregate at $825,000, through entities in which he holds at least a 10% interest.

Note 13 - Net Income Per Common Share – Basic and Diluted

Basic income per share is based upon the net income applicable to common shares and upon the weighted average number of common shares outstanding during the period. Diluted income per share reflects the effect of the assumed exercise of stock options only in periods in which such effect would have been dilutive. The computation of the Company’s basic and diluted earnings per share (in thousands, except per share data):



	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2017		2016		2017			2016
Income available to common shareholders (A)	$	2,590	$	1,468	$	6,154		$	3,964

Weighted average common shares outstanding (B)	123,544		123,016		123,519			122,654
Dilutive effect of equity incentive plans	1,935		34		(488		)	1
Weighted average common shares outstanding, assuming dilution (C)	125,479		123,050		123,031			122,655

Basic earnings per common share (A)/(B)	$	0.02	$	0.01	$	0.05		$	0.03
Diluted earnings per common share (A)/(C)	$	0.02	$	0.01	$	0.05		$	0.03

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED-CONTINUED)

Note 13 - Net Income Per Common Share – Basic and Diluted, continued

For the three and nine months ended September 30, 2017, a total of 1,415,000 shares of common stock underlying vested and exercisable stock options were excluded from the calculation of diluted earnings per common share as the exercise prices of the stock options were greater than the market value of the common shares (out-of-the-money).

For the three and nine months ended September 30, 2016, a total of 1,008,000 shares of common stock underlying vested and exercisable stock options were excluded from the calculation of diluted earnings per common share as the exercise prices of the stock options were out-of-the-money.

Out-of-the money options could be included in the calculation in the future if the market value of the Company’s common shares increases and is greater than their exercise price.

Note 14 - Federal and State Income Taxes

The Company is a corporation subject to federal income tax at a statutory rate of 34% of pretax earnings. The Company estimated an annual effective income tax rate of 7.3% based on projected results for the year and applied this rate to income before taxes to calculate income tax expense. For the three months ended September 30, 2017 and 2016 the tax expense was approximately $149,000 and $39,000, resulting in an effective tax rate of approximately 5.4% and 2.6%, respectively. For the nine months ended September 30, 2017 and 2016 the tax expense was approximately $485,000 and $151,000, resulting in an effective tax rate of approximately 7.3% and 3.7%, respectively. The difference in the statutory and effective tax rates is primarily due to the company utilizing an available net operating loss carry-forward.

Based on management's analysis, the Company did not have any uncertain tax positions as of September 30, 2017.

Note 15 - Securities Transactions

(a) On March 31, 2017, the Company vested 25,000 shares of common stock, par value $0.01, valued and recorded at $13,250 for a stock bonus.

(b) On June 30, 2017, the Company vested 25,000 shares of common stock, par value $0.01, valued and recorded at $13,250 for a stock bonus.

(c) On September 30, 2017, the Company vested 25,000 shares of common stock, par value $0.01, valued and recorded at $13,250 for a stock bonus.

Note 16 - Business Segment and Geographic Area Information

Business Segments

Summarized financial information for the reportable segments is as follows (in thousands):



	Three Months Ended September 30,
	2017						2016
	Foam		Coatings		Totals		Foam			Coatings			Totals
Sales	$	24,642	$	4,186	$	28,828	$	17,719		$	3,198		$	20,917
Depreciation	23		4		27		15			3			18
Amortization of Other Intangible Assets	61		10		71		51			9			60
Interest Expense	21		4		25		147			27			174
Segment Profit	3,502		886		4,388		2,713			541			3,254
Segment Assets (1)	26,830		5,299		32,129		21,315			4,564			25,879
Expenditures for Segment Assets	$	199	$	34	$	233	$	(38	)	$	(7	)	$	(45	)

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED-CONTINUED)

Note 16. Business Segment and Geographic Area Information, continued.



	Nine Months Ended September 30,
	2017						2016
	Foam		Coatings		Totals		Foam		Coatings		Totals
Sales	$	66,383	$	11,244	$	77,627	$	52,088	$	9,559	$	61,647
Depreciation	55		9		64		59		11		70
Amortization of Other Intangible Assets	165		26		191		160		29		189
Interest Expense	72		12		84		603		112		715
Segment Profit	9,399		2,120		11,519		7,517		1,580		9,097
Segment Assets (1)	26,830		5,299		32,129		21,315		4,564		25,879
Expenditures for Segment Assets	$	395	$	70	$	465	$	112	$	21	$	133

The following are reconciliations of reportable segment profit or loss, and assets, to the Company’s consolidated totals (in thousands):



	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
Profit or Loss	2017			2016			2017			2016
Total Profit or Loss for Reportable Segments	$	4,388		$	3,254		$	11,519		$	9,097
Unallocated Amounts:
Corporate Expenses	(1,649		)	(1,747		)	(4,880		)	(4,982		)
Income Before Income Taxes	$	2,739		$	1,507		$	6,639		$	4,115



Assets	At September 30, 2017		At December 31, 2016
Total Assets for Reportable Segments (1)	$	32,129	$	27,104
Other Unallocated Amounts (2)	1,712		2,291
Consolidated Total	$	33,841	$	29,395


(1)	Segment assets are the total assets used in the operation of each segment.


(2)	Includes corporate assets which are principally cash and cash equivalents and deposits.

Geographic Area Information

The Company does not operate any manufacturing sites nor maintain a permanent establishment in any particular country outside of the United States at this time. The Company’s products are sold to independent distributors globally for select target markets. Sales are attributed to geographic areas based on customer location. Long-lived assets are attributable to geographic areas based on asset location.

Sales and Long-Lived Assets by geographic area are as follows (in thousands):



	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
Sales	2017		2016		2017		2016
United States	$	27,353	$	19,564	$	75,051	$	57,507
Canada	503		247		729		878
Europe	765		921		1,443		1,870
Middle East	—		—		—		3
Rest of World	207		185		404		1,389
Total	$	28,828	$	20,917	$	77,627	$	61,647

Long Lived Assets (1)	6,774		6,464		6,774		6,464


(1)	All segment assets are located in the United States.

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED-CONTINUED)

Note 17 - Subsequent Events

(a) On October 2, 2017, in recognition of Jay C. Nadel's contribution and dedication in building the Company towards $200 million in value pursuant to his Advisory Agreement dated February 22, 2011 (the "Nadel Agreement"), the Compensation Committee of the Company's Board of Directors (the "Committee"), comprised of independent directors, deemed it in the best interest of the Company and its stockholders and upon recommendation of Richard J. Kurtz, Chairman of the Board and majority stockholder of the Company, granted a stock award to Mr. Nadel, of 3,747,118 shares of Common Stock (the “Nadel Stock Award”), which was approved by the Company’s Board of Directors. The Nadel Stock Award was fully vested as of the date of grant. The transaction was valued and recorded as $2,960,223 (calculated by multiplying the 3,747,118 shares by the $0.79 closing price of the Company's common stock on the date of grant).

(b) On October 4, 2017, in recognition of Douglas Kramer’s many years of service and dedication to the Company, together with excellent service in creating value for stockholders, the Committee, comprised of independent directors, deemed it in the best interest of the Company and its stockholders to grant a stock award to Mr. Kramer of 500,000 shares of Common Stock (the “Kramer Stock Award”), which was approved by the Company’s Board of Directors. The Kramer Stock Award was fully vested as of the date of grant. The transaction was valued and recorded as $380,000 (calculated by multiplying the 500,000 shares by the $0.76 closing price of the Company's common stock on the date of grant).

(c) On October 4, 2017, the Company entered into a definitive merger agreement with Icynene U.S. Holding Corp. ("Icynene") and Blaze Merger Sub Inc. ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Company, with the Company as the surviving corporation and wholly-owned subsidiary of Icynene. The transaction is valued at approximately $160 million, including net debt.

(d) The Company has evaluated subsequent events through the date of filing this report.

Item 2. 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 the accompanying condensed interim financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on February 15, 2017.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “Lapolla,” “we,” “our” and “us” refer to Lapolla Industries, Inc.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 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 our Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.

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 operate out of our corporate headquarters located in Houston, Texas.

We operate our business on the basis of two reportable 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 application of our products.

This financial review presents our operating results for the three and nine months ended September 30, 2017 and 2016, and our financial condition at September 30, 2017.

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 other companies, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

EBITDA

EBITDA is defined 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 and property taxes.

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.

Critical Accounting Policies

There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Performance for the Three Months Ended September 30, 2017 compared to the Three Months Ended September 30, 2016

Results of Operations

The following table presents selected financial and operating data derived from the unaudited 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.



	Three Months Ended September 30,
	2017		2016
Summary of Overall Results of Operations:
Sales	$	28,828	$	20,917
Operating Income	2,780		2,070
Other Expense	41		563
Net Income	2,590		1,468
EBITDA	$	2,936	$	2,287
Adjusted EBITDA	$	3,186	$	2,562

Reconciliation of EBITDA and Adjusted EBITDA to Net Income:
Net Income	$	2,590	$	1,468
Additions:
Interest Expense	50		192
Interest Expense – Related Party	—		125
Interest Expense – Amortization of Discount	—		30
Loss on Extinguishment of Debt	—		306
Income Tax Expense	149		39
Depreciation	68		60
Amortization of Other Intangible Assets	79		67
EBITDA	$	2,936	$	2,287
Additions:
Share Based Compensation (1)	201		247
Other Tax Related Expenses	49		28
Adjusted EBITDA	$	3,186	$	2,562

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

Sales

The following is a summary of sales for the three months ended September 30, 2017 and 2016 (in thousands):



	2017		2016		% Change
Foam	$	24,642	$	17,719	39.1	%
Coatings	4,186		3,198		30.9	%
Total Sales	$	28,828	$	20,917	37.8	%

For the three months ended September 30, 2017, our total sales increased by $7.9 million, or an increase of 37.8% from the same period in 2016. Foam sales increased $6.9 million while coatings sales increased $988,000. Both segment increases are primarily due to an increase in market share, which we believe is attributable to our focus on advancement of technology and marketing effort.

Gross Profit

The following is a summary of gross profit for the three months ended September 30, 2017 and 2016 (in thousands):



	2017			2016			% Change
Cost of Sales	$	21,535		$	14,773		45.8	%
Gross Profit	$	7,293		$	6,144		18.7	%
Gross Margin Percentage:
Foam	24.3		%	29.1		%	(16.5	)%
Coatings	31.2		%	30.8		%	1.3	%
Total	25.3		%	29.4		%	(13.9	)%

For the three months ended September 30, 2017, our gross profit increased by $1.1 million, or an increase of 18.7% from the same period in 2016. The increase in gross profit was driven by the increase in sales, which was partially offset by increases in raw material and freight costs.

Operating Expenses

Selling, general, and administrative expenses increased $41,000 or 1.2%, to $3.6 million for the three months ended September 30, 2017, compared to $3.5 million for the same period in 2016. The increase was primarily due to increases of $122,000 in sales commissions related to the overall increase in sales, offset by decreases in share based compensation and investor relations expenses of $33,000 and $36,000, respectively.

Professional fees increased $119,000 or 35.1%, to $458,000 for the three months ended September 30, 2017, compared to $339,000 for the same period in 2016. The increase in professional fees was primarily due to higher legal fees.

Depreciation expense increased $10,000 or 50.0%, to $30,000 for the three months ended September 30, 2017, compared to $20,000 for the same period in 2016, due to additions in depreciable assets.

Amortization of other intangible assets expense increased $12,000 or 17.9%, to $79,000 for the three months ended September 30, 2017, compared to $67,000 for the same period in 2016. The increase is mainly due to additions to the Company's product approvals and certifications.

Consulting increased $257,000 or 208.9%, to $380,000 for the three months ended September 30, 2017, compared to $123,000 for the same period in 2016, due to merger transaction costs related to diligence, marketing, and other expenses.

Other (Income) Expense

Interest expense decreased $142,000 or 74.0%, to $50,000 for the three months ended September 30, 2017, compared to $192,000 for the same period in 2016, due to the refinancing of the Enhanced Notes (as hereinafter defined) and former revolver loan into a new line of credit with Bank of America, N.A. in September of 2016.

Interest expense – related party decreased $125,000 or 100.0%, to $0 for the three months ended September 30, 2017, compared to $125,000 for the same period in 2016, due to the refinancing of the Enhanced Notes which eliminated the personal guaranty from the chairman.

Interest expense – amortization of discount decreased $30,000 or 100.0%, to $0 for the three months ended September 30, 2017, compared to $30,000 for the same period in 2016, due to the refinancing of the Enhanced Notes and former revolver loan into a new line of credit with Bank of America, N.A. in September of 2016 which eliminated the discount on the note.

Loss on extinguishment of debt decreased $306,000 or 100.0%, to $0 for the three months ended September 30, 2017 compared to $0 for the same period in 2016. The loss was related to the termination of the Enhanced Note and consists of the unamortized note discount, deferred financing fees, and unvested shares of common stock related to the guaranty of the debt.

Other income, net decreased $81,000 or 90.0%, to $9,000 for the three months ended September 30, 2017, compared to other income, net of $90,000 for the same period in 2016. The income in 2016 was primarily due to the receipt of a one-time insurance settlement check for an automobile that had been previously disposed.

Performance for the Nine Months Ended September 30, 2017 compared to the Nine Months Ended September 30, 2016

Results of Operations



	Nine Months Ended September 30,
	2017		2016
Summary of Overall Results of Operations:
Sales	$	77,627	$	61,647
Operating Income	6,749		5,149
Other Expense	110		1,034
Net Income	6,154		3,964
EBITDA	$	7,193	$	6,262
Adjusted EBITDA	$	8,023	$	7,099

Reconciliation of EBITDA and Adjusted EBITDA to Net Income:
Net Income	$	6,154	$	3,964
Additions:
Interest Expense	167		818
Interest Expense – Related Party	—		491
Interest Expense – Amortization of Discount	—		120
Income Tax Expense	485		151
Loss on Extinguishment of Debt	—		306
Depreciation	187		202
Amortization of Other Intangible Assets	200		210
EBITDA	$	7,193	$	6,262
Additions:
Share Based Compensation (1)	708		711
Other Tax Related Expenses	122		126
Adjusted EBITDA	$	8,023	$	7,099

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

Sales

The following is a summary of sales for the nine months ended September 30, 2017 and 2016 (in thousands):



	2017		2016		% Change
Foam	$	66,383	$	52,088	27.4	%
Coatings	11,244		9,559		17.6	%
Total Sales	$	77,627	$	61,647	25.9	%

For the nine months ended September 30, 2017, our total sales increased by $16.0 million, or an increase of 25.9% from the same period in 2016. Foam sales increased $14.3 million while coatings sales increased $1.7 million. Both segment increases are primarily due to an increase in market share, which we believe is attributable to our focus on advancement of technology and marketing effort.

Gross Profit

The following is a summary of gross profit for the nine months ended September 30, 2017 and 2016 (in thousands):



	2017			2016			% Change
Cost of Sales	$	57,163		$	43,719		30.8	%
Gross Profit	$	20,464		$	17,928		14.1	%
Gross Margin Percentage:
Foam	25.7		%	28.8		%	(10.8	)%
Coatings	30.3		%	30.9		%	(1.9	)%
Total	26.4		%	29.1		%	(9.3	)%

For the nine months ended September 30, 2017, our gross profit increased by $2.5 million, or an increase of 14.1% from the same period in 2016. The increase in gross profit was primarily driven by the increase in sales, which was partially offset by increases in raw material and freight costs.

Operating Expenses

Selling, general, and administrative expenses increased $127,000 or 1.1%, to $11.2 million for the nine months ended September 30, 2017, compared to $11.1 million for the same period in 2016. The increase was primarily due to an increase of $230,000 in sales commissions related to the overall increase in sales, offset by a decrease in payroll and related employee benefit expenses of $92,000.

Professional fees increased $330,000 or 34.1%, to $1.3 million for the nine months ended September 30, 2017, compared to $969,000 for the same period in 2016. The increase in professional fees was primarily due to higher legal fees.

Depreciation expense decreased $6,000 or 27.1%, to $73,000 for the nine months ended September 30, 2017, compared to $79,000 for the same period in 2016, due to reductions in depreciable assets during the first part of the year.

Amortization of other intangible assets expense decreased $10,000 or 4.8%, to $200,000 for the nine months ended September 30, 2017, compared to $210,000 for the same period in 2016, due to certain approvals and certifications becoming fully amortized during 2016.

Consulting increased $495,000 or 117.6%, to $916,000 for the nine months ended September 30, 2017, compared to $421,000 for the same period in 2016, due to merger transaction costs related to diligence, marketing, and other expenses.

Other (Income) Expense

Interest expense decreased $651,000 or 79.6%, to $167,000 for the nine months ended September 30, 2017, compared to $818,000 for the same period in 2016, due to the refinancing of the Enhanced Notes and former revolver loan into a new line of credit with Bank of America, N.A. in September of 2016.

Interest expense – related party decreased $491,000 or 100.0%, to $0 for the nine months ended September 30, 2017, compared to $491,000 for the same period in 2016, due to the refinancing of the Enhanced Notes which eliminated the personal guaranty from the chairman.

Interest expense – amortization of discount decreased $120,000 or 100.0%, to $0 for the nine months ended September 30, 2017, compared to $120,000 for the same period in 2016, due to the refinancing of the Enhanced Notes and former revolver loan into a new line of credit with Bank of America, N.A. in September of 2016 which eliminated the discount on the note.

Loss on extinguishment of debt decreased $306,000 or 100.0%, to $0 for the nine months ended September 30, 2017 compared to $0 for the same period in 2016. The loss was related to the termination of the Enhanced Note and consists of the unamortized note discount, deferred financing fees, and unvested shares of common stock related to the guaranty of the debt.

Other income, net decreased $644,000 or 91.9%, to $57,000 for the nine months ended September 30, 2017, compared to other income, net of $701,000 for the same period in 2016. The income in 2016 was due to the receipt of a one time settlement check related to a class action lawsuit.

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) 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 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 nine months ending September 30, 2017 and 2016 (in thousands):



Cash Flow Activity	2017			2016			% Change
Cash Provided by (Used in):
Operating Activities	$	4,045		$	6,071		(33.4	)%
Investing Activities	(276		)	(133		)	107.5	%
Financing Activities	(4,240		)	(4,721		)	(10.2	)%
Net Decrease in Cash	$	(471	)	$	1,217

Net cash provided by operating activities decreased by $2.0 million, to $4.0 million for the nine months ended September 30, 2017, compared to $6.1 million for the same period in 2016. Net non-cash contributions to net income decreased $860,000, to $1.4 million for the nine months ended September 30, 2017 compared to $2.2 million for the same period in 2016, primarily due to interest expense-related party of $491,000 and a loss on debt extinguishment of $306,000 incurred in 2016, but not in 2017.

The following is a summary of Net Working Capital at September 30, 2017 and December 31, 2016 (in thousands):



Net Working Capital	2017		2016		% Change
Current Assets	$	27,011	$	22,914	17.9	%
Current Liabilities	11,455		9,679		18.3	%
Net Working Capital	15,556		13,235		17.5	%
Current Ratio	2.36:1		2.37:1

Net working capital increased by $2.3 million during the nine months ended September 30, 2017, from December 31, 2016. The increase in net working capital was primarily driven by increases in accounts receivable of $4.2 million, inventory of $539,000, and a decrease in accrued expenses of $389,000 offset by decreases in cash of $471,000, prepaid expenses of $453,000 and an increase in accounts payable of $2.1 million.

Net cash used in investing activities for the nine months ended September 30, 2017 was $276,000, compared to $133,000 during the same period in 2016. All investments were fully related to capital expenditures.

Net cash used in financing activities was $4.2 million for the nine months ended September 30, 2017, and related to repayments to our Line of Credit of $7.3 million, net of borrowings of $4.3 million, and cash dividends paid of $1.3 million. Net cash used in financing activities was $4.7 million for the nine months ended September 30, 2016, and consisted of proceeds of $9.7 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.

Management believes that any cash generated from operations and the Line of Credit availability, subject to borrowing base limitations, based on budgeted sales and expenses and implemented minimum sales margin and cost controls, are sufficient to fund operations, including capital expenditures, for the next 12 months. Notwithstanding the foregoing, 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.

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 September 30, 2017, the cash available under our Line of Credit was $8.3 million based on the Asset Coverage Ratio and after giving effect to outstanding borrowings. At September 30, 2017, we were in compliance with all debt covenants under our Credit Agreement.

Off Balance Sheet Arrangements

As of September 30, 2017, we had no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

As of September 30, 2017, we conducted an evaluation, under the supervision and participation of management including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2017.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We are 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 and results of operations.

During the fiscal quarter ended September 30, 2017, there were no material changes or developments in the Company’s legal proceedings disclosed in Part I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 1A. Risk Factors.

During the fiscal quarter ended September 30, 2017 there were no material changes from the risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

See Index of Exhibits.

SIGNATURES

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



		LAPOLLA INDUSTRIES, INC.

Date:	October 31, 2017	By:	/s/ Douglas J. Kramer
		Name:	Douglas J. Kramer
		Title:	CEO and President



		LAPOLLA INDUSTRIES, INC.

Date:	October 31, 2017	By:	/s/ Jomarc C. Marukot
		Name:	Jomarc C. Marukot
		Title:	CFO, Treasurer, and Principal Accounting Officer

INDEX OF EXHIBITS



Exhibit Number		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 for the quarterly period ended June 30, 2011, filed August 19, 2011).
3.2*		Bylaws, as amended, and currently in effect.
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).
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
101*		The following materials from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language), (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Cash Flows, and (iv) Notes to Financial Statements.

* Filed herewith

LAPOLLA INDUSTRIES INC - FORM 10-Q - October 31, 2017

Attached files

LAPOLLA INDUSTRIES INC Reports