UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 
 FORM
10-Q
 
 
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For
The Quarterly Period Ended September 30, 2008
 
 Commission
File No. 001-31354
 
 
 
 
  LaPolla
      Industries, Inc.(Exact
      Name of Registrant as Specified in Its
Charter)
 
 Delaware
                
                13-3545304(State
      of Incorporation)
                
                (I.R.S.
      Employer Identification No.)
 
 Intercontinental
      Business Park15402
      Vantage Parkway East, Suite 322Houston,
      Texas
                
                77032(Address
      of Principal Executive Offices)
                
                (Zip
      Code)
 
 (281)
      219-4700(Registrant’s
      Telephone Number)
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.  YES oNO þ
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definitions of “large
accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule
12b-2 of the Exchange Act (Check one):
 
 Large
      Accelerated Filer   ̈
                    Accelerated
      Filer   ̈
                    Non-Accelerated
      Filer   ̈
                    Smaller
      Reporting Company þ
 
 Indicate
by check mark whether the Registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act).  YES  ̈NO þ
 
 Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
 
 As of
November 3, 2008 there were 63,944,803 shares of Common Stock, par value $.01,
outstanding.
  
 
  LAPOLLA INDUSTRIES, INC.
 FORM
10-Q
 FOR
THE QUARTER ENDED SEPTEMBER 30, 2008
 INDEX
 
 PagePART
      I
                      FINANCIAL
      INFORMATIONItem
      1
                      
                      Financial Statements
                      
                      1Item
      2
                      
                      Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                      
                      9Item
      3
                      
                      Quantitative and Qualitative Disclosures About Market
      Risk
                      
                      13Item
      4
                      
                      Controls and Procedures
                      
                      13PART
      II
                      OTHER
      INFORMATIONItem
      1
                      
                      Legal Proceedings
                      
                      14Item
      1A
                      
                      Risk Factors
                      
                      14Item
      2
                      
                      Unregistered Sales of Equity Securities and Use of
      Proceeds
                      
                      14Item
      3
                      
                      Defaults Upon Senior Securities
                      
                      14Item
      4
                      
                      Submission of Matters to a Vote of Security
      Holders
                      
                      14Item
      5
                      
                      Other Information
                      
                      14Item
      6
                      
                      Exhibits
                      
                      14SIGNATURES
                      
                      15INDEX OF EXHIBITS
                      
                      16
  i
 Index
  FORWARD
LOOKING STATEMENTS
 
 Statements
made by us in this report and in other reports and statements released by us
that are not historical facts constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, Section 21 of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are necessarily estimates reflecting
the best judgment of senior management and express our opinions about trends and
factors which may impact future operating results. You can identify these and
other forward-looking statements by the use of words such as “may,” “will,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “intends,” “potential,” “continue,” or the negative of such terms,
or other comparable terminology. Such statements rely on a number of assumptions
concerning future events, many of which are outside of our control, and involve
risks and uncertainties that could cause actual results to differ materially
from opinions and expectations. Any such forward-looking statements, whether
made in this report or elsewhere, should be considered in context with the
various disclosures made by us about our businesses including, without
limitation, the risk factors discussed below. Although we believe our
expectations are based on reasonable assumptions, judgments, and estimates,
forward-looking statements involve known and unknown risks, uncertainties,
contingencies, and other factors that could cause our or our industry's actual
results, level of activity, performance or achievement to differ materially from
those discussed in or implied by any forward-looking statements made by or on
the Company and could cause our financial condition, results of operations, or
cash flows to be materially adversely affected. Except as required under the
federal securities laws and the rules and regulations of the
U.S. Securities and Exchange Commission (the “SEC”), we do not have any
intention or obligation to update publicly any forward-looking statements,
whether as a result of new information, future events, changes in assumptions,
or otherwise.
 
 PART
I — FINANCIAL INFORMATION
 
 As used
in this report, "LaPolla” and the "Company" or "Us" or "We" or “Our” refer to
the LaPolla Industries, Inc., unless the context otherwise requires. Our
Internet website address is www.lapollaindustries.com.
We make our periodic and current reports, together with amendments to these
reports, available on our website, free of charge, as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the SEC. The information on our Internet website is not incorporated by
reference in this Quarterly Report on Form 10-Q.
 
 Item1.
              Financial
      Statements.
 
 LAPOLLA
INDUSTRIES, INC.
 INDEX
TO UNAUDITED FINANCIAL STATEMENTS AND
 FINANCIAL
STATEMENT SCHEDULES
 
 
 CONDENSED
      CONSOLIDATED BALANCE SHEETS (UNAUDITED)September
      30, 2008 and December 31, 2007
                  2CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)Three
      and Nine Months Ended September 30, 2008 and 2007
                  3CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)Nine
      Months Ended September 30, 2008 and 2007
                  4NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                  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.
  1
 Index
  LAPOLLAINDUSTRIES,
INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 
 September 30,
      2008
                          
                          
                          December 31,
      2007AssetsCurrent
      Assets:Cash
                          
                          $
                          343,386
                          
                          
                          $
                          339,855Trade
      Receivables, Net
                          
                          
                          10,064,638
                          
                          
                          
                          3,350,154Inventories
                          
                          
                          4,319,566
                          
                          
                          
                          2,698,097Prepaid
      Expenses and
      Other Current Assets
                          
                          
                          698,330
                          
                          
                          
                          532,233Total
      Current Assets
                          
                          
                          15,425,920
                          
                          
                          
                          6,920,339Property,
      Plant and Equipment, Net
                          
                          
                          2,651,443
                          
                          
                          
                          2,626,068Other
      Assets:Goodwill
                          
                          
                          5,239,506
                          
                          
                          
                          1,951,000Other
      Intangible Assets
                          
                          
                          1,575,009
                          
                          
                          
                          142,318Deposits
      and Other Non-Current Assets
                          
                          
                          216,514
                          
                          
                          
                          226,320Total
      Other Assets
                          
                          
                          7,031,029
                          
                          
                          
                          2,319,638Total
      Assets
                          
                          $
                          25,108,392
                          
                          
                          $
                          11,866,045Liabilities
      and Stockholders' EquityCurrent
      Liabilities:Accounts
      Payable
                          
                          $
                          7,137,225
                          
                          
                          $
                          2,422,625Accrued
      Expenses and Other Current Liabilities
                          
                          
                          1,507,018
                          
                          
                          
                          1,266,533Loan
      Payable – Related Party
                          
                          
                          856,102
                          
                          
                          
                          —Current
      Portion of Asset Purchase Promissory Note
                          
                          
                          250,000
                          
                          
                          
                          —Current
      Portion of Convertible Term Note
                          
                          
                          —
                          
                          
                          
                          589,761Current
      Portion of Long-Term Debt
                          
                          
                          122,359
                          
                          
                          
                          84,939Total
      Current Liabilities
                          
                          
                          9,872,704
                          
                          
                          
                          4,363,858Other
      Liabilities:Revolving
      Credit Note
                          
                          
                          6,346,629
                          
                          
                          
                          4,879,152Non-Current
      Portion of Asset Purchase Promissory Note
                          
                          
                          1,150,000
                          
                          
                          
                          —Non-Current
      Portion of Convertible Term Note
                          
                          
                          2,286,610
                          
                          
                          
                          775,185Non
      Current Portion of Long-Term Debt
                          
                          
                          185,678
                          
                          
                          
                          107,255Non
      Current Portion of Liabilities from Discontinued
Operations
                          
                          
                          —
                          
                          
                          
                          848Total
      Other Liabilities
                          
                          
                          9,968,917
                          
                          
                          
                          5,762,440Total
      Liabilities
                          
                          
                          19,841,621
                          
                          
                          
                          10,126,298Stockholders'
      Equity:Preferred
      Stock, $1.00 Par Value; 2,000,000 Shares Authorized, of which
      Designations:Series
      A Convertible, 750,000 Shares Authorized; 62,500 Issued and Outstanding
      (Less Offering Costs of $7,465) and $62,500 aggregate liquidation
      preference at September 30, 2008 and December 31, 2007,
      respectively
                          
                          
                          55,035
                          
                          
                          
                          55,035Series
      D, 25,000 Shares Authorized;  8,176 Issued and Outstanding and
      $8,176,000 aggregate liquidation preference at September 30, 2008 and
      December 31, 2007
                          
                          
                          8,176
                          
                          
                          
                          8,176Common
      Stock, $.01 Par Value; 98,000,000 Shares Authorized; 63,944,803 and
      59,125,700Issued and Outstanding at September 30, 2008 and
      December 31, 2007, respectively
                          
                          
                          639,448
                          
                          
                          
                          591,257Additional
      Paid-In Capital
                          
                          
                          78,104,815
                          
                          
                          
                          73,600,876Accumulated
      (Deficit)
                          
                          
                          (73,540,703
                          )
                          
                          
                          (72,515,597
                          )Total
      Stockholders' Equity
                          
                          
                          5,266,771
                          
                          
                          
                          1,739,747Total
      Liabilities and Stockholders' Equity
                          
                          $
                          25,108,392
                          
                          
                          $
                          11,866,045
 
 The
Accompanying Notes are an Integral Part of the Financial
Statements
  2
 Index
  LAPOLLAINDUSTRIES, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 Three
      Months Ended September 30,
                  
                  
                  Nine
      Months Ended September 30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Sales
                  
                  $
                  13,880,220
                  
                  
                  $
                  8,369,502
                  
                  
                  $
                  34,086,949
                  
                  
                  $
                  25,158,695Cost
      of Sales
                  
                  
                  11,299,494
                  
                  
                  
                  6,646,741
                  
                  
                  
                  27,268,539
                  
                  
                  
                  20,460,092Gross
      Profit
                  
                  
                  2,580,726
                  
                  
                  
                  1,722,761
                  
                  
                  
                  6,818,410
                  
                  
                  
                  4,698,603Operating
      Expenses:Selling,
      General and Administrative
                  
                  
                  1,893,033
                  
                  
                  
                  2,135,274
                  
                  
                  
                  6,730,950
                  
                  
                  
                  6,197,023Professional
      Fees
                  
                  
                  89,768
                  
                  
                  
                  157,431
                  
                  
                  
                  505,056
                  
                  
                  
                  294,077Depreciation
      and Amortization
                  
                  
                  115,556
                  
                  
                  
                  55,113
                  
                  
                  
                  206,525
                  
                  
                  
                  181,693Consulting
      Fees
                  
                  
                  27,411
                  
                  
                  
                  58,871
                  
                  
                  
                  62,957
                  
                  
                  
                  99,180Interest
      Expense
                  
                  
                  225,069
                  
                  
                  
                  180,832
                  
                  
                  
                  531,364
                  
                  
                  
                  363,549Interest
      Expense – Related Party
                  
                  
                  12,754
                  
                  
                  
                  2,067
                  
                  
                  
                  56,102
                  
                  
                  
                  2,067Interest
      Expense – Amortization of Discounts
                  
                  
                  196,508
                  
                  
                  
                  44,884
                  
                  
                  
                  287,770
                  
                  
                  
                  107,968(Gain)
      Loss on Extinguishment of Debt
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (481,833
                  )
                  
                  
                  —Other
      (Income) Expense
                  
                  
                  (4,743
                  )
                  
                  
                  (134,251
                  )
                  
                  
                  (55,375
                  )
                  
                  
                  (138,945
                  )Total
      Operating Expenses
                  
                  
                  2,555,355
                  
                  
                  
                  2,500,221
                  
                  
                  
                  7,843,516
                  
                  
                  
                  7,106,612Net
      Income (Loss)
                  
                  
                  25,371
                  
                  
                  
                  (777,460
                  )
                  
                  
                  (1,025,105
                  )
                  
                  
                  (2,408,009
                  )Plus:  Dividends
      on Preferred Stock
                  
                  
                  (206,080
                  )
                  
                  
                  (205,970
                  )
                  
                  
                  (613,760
                  )
                  
                  
                  (611,520
                  )Net
      (Loss) Available to Common Stockholders
                  
                  
                  (180,709
                  )
                  
                  
                  (983,430
                  )
                  
                  
                  (1,638,865
                  )
                  
                  
                  (3,019,529
                  )Net
      (Loss) Per Share-Basic and Diluted
                  
                  $
                  (0.003
                  )
                  
                  $
                  (0.018
                  )
                  
                  $
                  (0.027
                  )
                  
                  $
                  (0.056
                  )Weighted
      Average Shares Outstanding
                  
                  
                  62,944,803
                  
                  
                  
                  53,635,699
                  
                  
                  
                  59,722,800
                  
                  
                  
                  53,611,138
 
 The
Accompanying Notes are an Integral Part of the Financial
Statements
  3
 Index
  LAPOLLAINDUSTRIES, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 
 Nine
      Months Ended September 30,2008
                      
                      
                      2007Cash
      Flows From Operating ActivitiesNet
      Loss
                      
                      $
                      (1,025,105
                      )
                      
                      $
                      (2,408,009
                      )Adjustments
      to Reconcile Net (Loss) to Net Cash (Used in) Operating
      Activities:Depreciation
      and Amortization
                      
                      
                      356,128
                      
                      
                      
                      253,030Provision
      for Losses on Accounts Receivable
                      
                      
                      181,323
                      
                      
                      
                      (129,314
                      )Amortization
      of Discount on Revolving Credit and Convertible Term Notes
                      
                      
                      287,770
                      
                      
                      
                      107,968Share
      Based Compensation Expense
                      
                      
                      683,750
                      
                      
                      
                      799,636Gain
      on Extinguishment of Debt
                      
                      
                      (481,833
                      )
                      
                      
                      —Changes
      in Assets and Liabilities, Net of Effects from AirTight Asset
      Purchase:Trade
      Receivables
                      
                      
                      (7,554,739
                      )
                      
                      
                      (1,281,454
                      )Inventories
                      
                      
                      (1,149,562
                      )
                      
                      
                      (555,540
                      )Prepaid
      Expenses and Other Current Assets
                      
                      
                      (166,096
                      )
                      
                      
                      (3,258
                      )Deposits
      and Other Non Current Assets
                      
                      
                      9,806
                      
                      
                      
                      (96,732
                      )Accounts
      Payable
                      
                      
                      3,354,892
                      
                      
                      
                      (1,145,652
                      )Accrued
      Expenses and Other Current Liabilities
                      
                      
                      347,167
                      
                      
                      
                      (258,838
                      )Other
      Liabilities
                      
                      
                      (1,121,864
                      )
                      
                      
                      (435
                      )Net
      Operating Activities of Discontinued Operations
                      
                      
                      (848
                      )
                      
                      
                      (9,152
                      )Net
      Cash (Used in) Operating Activities
                      
                      
                      (6,279,211
                      )
                      
                      
                      (4,727,750
                      )Cash
      Flows From Investing ActivitiesAdditions
      to Property, Plant and Equipment
                      
                      
                      (13,520
                      )
                      
                      
                      (1,479,076
                      )Payment
      under AirTight Asset Purchase Promissory Note, Net of Cash
      Acquired
                      
                      
                      (100,000
                      )
                      
                      
                      —Net
      Cash (Used in) Investing Activities
                      
                      $
                      (113,520
                      )
                      
                      $
                      (1,479,076
                      )Cash
      Flows From Financing ActivitiesProceeds
      from Revolving Credit Note
                      
                      
                      2,520,140
                      
                      
                      
                      5,000,000Principal
      Repayments on Revolving Credit Note
                      
                      
                      (67,500
                      )
                      
                      
                      —Proceeds
      from Convertible Term Note
                      
                      
                      1,637,616
                      
                      
                      
                      2,000,000Principal
      Repayments on Convertible Term Note
                      
                      
                      (400,000
                      )
                      
                      
                      —Proceeds
      from Line of Credit
                      
                      
                      —
                      
                      
                      
                      1,398,000Payments
      to Line of Credit
                      
                      
                      —
                      
                      
                      
                      (2,405,120
                      )Proceeds
      from Loans Payable – Related Party
                      
                      
                      3,800,000
                      
                      
                      
                      950,000Payments
      to Loans Payable – Related Party
                      
                      
                      (1,000,000
                      )
                      
                      
                      (400,000
                      )Payments
      to Note Payable – Other
                      
                      
                      —
                      
                      
                      
                      (13,336
                      )Principal
      Repayments on Long Term Debt
                      
                      
                      (78,994
                      )
                      
                      
                      (305,676
                      )Payment
      of Preferred Stock Dividends
                      
                      
                      (15,000
                      )
                      
                      
                      —Net
      Financing Activities of Discontinued Operations
                      
                      
                      —
                      
                      
                      
                      (326,129
                      )Net
      Cash Provided by Financing Activities
                      
                      
                      6,396,262
                      
                      
                      
                      5,897,739Net
      Increase (Decrease) In Cash
                      
                      $
                      3,531
                      
                      
                      $
                      (309,087
                      )Cash
      at Beginning of Period
                      
                      
                      339,855
                      
                      
                      
                      382,116Cash
      at End of Period
                      
                      $
                      343,386
                      
                      
                      $
                      73,029Supplemental
      Disclosure of Cash Flow Information:Cash
      Payments for Income Taxes
                      
                      $
                      —
                      
                      
                      $
                      —Cash
      Payments for Interest
                      
                      $
                      531,364
                      
                      
                      $
                      361,912Supplemental
      Schedule of Non Cash Investing and Financing Activities:Property,
      Plant and Equipment acquired from Issuance/Acquisition of Long Term
      Debt
                      
                      $
                      267,953
                      
                      
                      $
                      —Promissory
      Note entered into in connection with AirTight Asset Purchase
      Agreement
                      
                      
                      1,400,000
                      
                      
                      
                      —Common
      Stock Issued-AirTight Asset Purchase Agreement
                      
                      
                      1,480,000
                      
                      
                      
                      —Common
      Stock Issued-Exercise of Warrants for Principal Repayments to Revolving
      Credit Note
                      
                      
                      67,500
                      
                      
                      
                      —Common
      Stock Issued-Exercise of Warrants for Principal Repayments to Convertible
      Term Note
                      
                      
                      33,766
                      
                      
                      
                      —Common
      Stock Issued-Exercise of Warrants for Interest on Convertible Term
      Note
                      
                      
                      33,734
                      
                      
                      
                      —Common
      Stock Issued-Partial Conversion of Convertible Term Note as Principal
      Repayment
                      
                      
                      3,850
                      
                      
                      
                      —Common
      Stock Issued-Cancellation of Indebtedness for Principal Repayments to Loan
      Payable-Related Party
                      
                      
                      2,000,000
                      
                      
                      
                      —
 
 The
Accompanying Notes are an Integral Part of the Financial
Statements
  4
 Index
  LAPOLLAINDUSTRIES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Note
      1.
              Basis
      of Presentation.
 
 The
consolidated financial statements included herein are unaudited. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the SEC. In
the opinion of the 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
consolidated financial statements. The consolidated financial statements
included herein should be read in conjunction with the financial statements and
Notes thereto included in LaPolla’s latest annual report on Form 10-K, including
any amendments thereto, 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. Certain amounts in the prior years have
been reclassified to conform to the 2008 unaudited consolidated financial
statement presentation. Reference is made to Management’s Discussion and
Analysis of Financial Condition and Results of Operations on page 9. Risk
factors that could impact results are discussed in Part II – Other Information,
Item 1A – Risk Factors
on page 13. Refer also to the Company’s 2007 Annual Report on Form 10-K,
including any amendments thereto, for a description of major accounting
policies. There have been no material changes to these accounting policies
during the nine months ended September 30, 2008.
 
 Note
      2.
              Dependence
      on Few Suppliers.
 
 The
Company is dependent on a few suppliers for certain of its raw materials and
finished goods. For the quarters ended September 30, 2008 and 2007, raw
materials and finished goods purchased from the Company’s three largest
suppliers accounted for approximately 41% and 34% of purchases,
respectively.
 
 Note
      3.
              Trade
      Receivables.
 
 Trade
receivables are comprised of the following at:
 
 September
      30, 2008
                    
                    
                    December
      31, 2007Trade
      Receivables
                    
                    $
                    10,424,401
                    
                    
                    $
                    3,528,594Less:
      Allowance for Doubtful Accounts
                    
                    
                    (359,763
                    )
                    
                    
                    (178,440
                    )Trade
      Receivables, Net
                    
                    $
                    10,064,638
                    
                    
                    $
                    3,350,154
  Although the Company believes the current allowance for doubtful accounts reserve
is reasonable at this time, the weakening economy and tighter credit markets may
require an increase in future periods.
  Note
      4.
              Inventories.
 
 The
following is a summary of inventories at:
 
 September
      30, 2008
                    
                    
                    December
      31, 2007Raw
      Materials
                    
                    $
                    1,435,211
                    
                    
                    $
                    880,616Finished
      Goods
                    
                    
                    2,884,355
                    
                    
                    
                    1,817,481Total
                    
                    $
                    4,319,566
                    
                    
                    $
                    2,698,097
 
 Note
      5.
              Asset
      Purchase Agreement.
 
 On July
1, 2008, LaPolla entered into and closed an Amended and Restated Asset Purchase
Agreement (“Asset Purchase Agreement”) with AirTight Marketing and Distribution,
Inc., a Georgia corporation (“AirTight”) and its stockholders, Larry P. Medford
and Ted J. Medford (“Shareholders”), wherein the Company agreed to pay
$1,500,000 in cash, issue 2,000,000 shares of restricted common stock, par value
$.01, and forgive an outstanding trade receivable balance of $1,419,496 due from
AirTight on the date of the closing, in exchange for certain assets and
liabilities of AirTight. The Company paid $100,000 in cash at closing and issued
a promissory note totaling $1,400,000 to AirTight and AirTight Shareholders,
payable in installments on the last day of each calendar year until paid in full
by December 31, 2012. Prior to the purchase, AirTight was a leading regional
spray foam insulation distributor located in Rutledge, Georgia that provided
turn-key start-ups and training programs for potential spray foam insulators.
LaPolla purchased AirTight’s customer base which includes commercial and
residential spray foam insulation contractors. The basic assets purchased from
AirTight include, but are not limited to, trademarks, customer list, Shareholder
non-competes, inventories, equipment, accounts receivable, and goodwill. The
results of AirTight’s operations have been included in LaPolla’s consolidated
financial statements since that date.  As a result of the purchase,
LaPolla/AirTight has become a leading national provider of turn-key start-up and
training for spray foam insulators.  Cost reductions are anticipated
through synergies recognized from the purchase.
  5
 Index
  LAPOLLA
INDUSTRIES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED-CONTINUED)
 
 Note
      5.
              Asset
      Purchase Agreement - continued.
 
 The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of purchase. LaPolla is in the process of
verifying valuations of certain intangible assets; thus, the allocation of the
purchase price is subject to refinement.
 
 At July
1, 2008
  
 Current
      Assets
                  
                  $
                  1,051,148Property,
      Plant, and Equipment, Net
                  
                  
                  267,953Other
      Intangible Assets
                  
                  
                  1,500,000Goodwill
                  
                  
                  3,288,506Total
      Assets Acquired
                  
                  $
                  6,107,608Current
      Liabilities
                  
                  $
                  1,466,390Long-Term
      Debt
                  
                  
                  195,534Total
      Liabilities Assumed
                  
                  $
                  1,661,924Net
      Assets Purchased
                  
                  $
                  4,445,684
 
 In
connection with the allocation of the purchase price by LaPolla and the AirTight
Shareholders, $1,500,000 was attributed to Other Intangible Assets, of which
$750,000 was assigned to trademarks (15 year useful life), $650,000 was assigned
to the customer list (5 year useful life), and $100,000 was assigned to the
Shareholder non-competes (5 year useful life). The $3,288,506 of goodwill was
assigned to the Foam segment. The Company is in the process of completing with
its registered public accounting firm the Audit of AirTight’s
financial statements. The Company will file the appropriate Form 8-K to include
these financial statements as soon as reasonably practical
hereafter.
 
 Note
      6.
              Loans
      Payable – Related Party.
 
 The
Company received advances of $3,800,000 from the Chairman of the Board for
working capital purposes pursuant to his 2008 commitment, of which $3,000,000
repaid from cash and cancellation of indebtedness at September 30, 2008. The
advances were recorded as short term demand loans bearing interest at 6% per
annum. Accrued interest was $56,102 at September 30, 2008.
 
 Note
      7.
              Revolving
      Credit and Term Loan Agreement and Related
  Agreements.
 
 Background
 
 The
Company entered into a Revolving Credit and Term Loan Agreement on February 21,
2007 with ComVest Capital LLC (“ComVest”), which was amended on June 12, 2007
(“Loan Agreement”), under which ComVest agreed to: (i) loan up to $5,000,000
under a revolving credit note (“Revolving Credit Note”); (ii) execute a
$2,000,000 convertible term note (“Convertible Term Note”); (iii) issue certain
warrants (“Warrants”) to ComVest; and (iv) register the underlying shares
issuable under the Convertible Term Note and the Warrants. On June 30, 2008, the
Company and ComVest amended and restated the Loan Agreement, Revolving Credit
Note, and Convertible Term Note, amended the existing Warrants, and issued a new
warrant (“New Warrant”).  Per applicable rules, the amended and
restated agreements constituted a substantial modification, which caused an
extinguishment of debt resulting in a gain of $481,833.  The modified
debt instruments were recorded at fair value on June 30, 2008 resulting in a
gain of $2,015,909, which was partially offset by a charge of $1,534,076
relating to the write off of the old warrant discount amortization of $464,639,
deferred finance charges of $217,520, and fair value difference between the old
warrants and the old repriced warrants, together with the fair value of the New
Warrant of $851,917.  The modified debt will have a new effective
interest rate of approximately 30%.  The resulting discounts, as noted
below, will be amortized to interest expense using the effective interest method
over the term of the agreements. A brief summary of certain terms and conditions
of the agreements related to the Loan Agreement as described above are provided
below.
 
 A.  Revolving Credit Note -The Revolving Credit Note, as amended and restated, was increased to make
up to $9,500,000 available, and bears interest according to a coverage ratio
formula with a coverage ratio ranging from 1.0 to 2.0 and Prime rate ranging
from Prime plus 1% to Prime plus 0%. The coverage ratio formula is defined as
the ratio of (i) Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) minus capital expenditures paid in cash, to (ii) Debt
Service (as such terms are defined in the Loan Agreement), in each case for the
fiscal quarter ending on the date of the subject financial statements and
calculation, and (b) the term “Prime Rate” shall mean the “prime rate” or “base
rate” of interest publicly announced by Citibank, N.A. The term of the Revolving
Credit Note was extended to August 31, 2010. The balance outstanding was
$7,452,640 and unamortized discount was $1,106,011 at September 30,
2008.
  6
 Index
  LAPOLLA
INDUSTRIES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED-CONTINUED)
 
 Note
      7.
              Revolving
      Credit and Term Loan Agreement and Related Agreements -
      continued.
 
 B.  Convertible Term Note -The Convertible Term Note, as amended and restated, was increased to
$3,000,000, bears interest at 10% per annum, the principal is payable (i) in
thirteen (13) equal monthly installments of $83,333.33 each, due and payable on
the first day of each calendar month commencing July 1, 2009 and continuing
through and including August 1, 2010, and (ii) in a final installment due and
payable on August 31, 2010 in an amount equal to the entire remaining principal
balance, and is convertible optionally by ComVest at any time or mandatorily by
LaPolla subject to satisfaction of certain conditions to common stock at the
rate of $.77 per share. The Convertible Term Note was personally guaranteed by
the Chairman of the Board. The balance outstanding was $3,000,000 and
unamortized discount was $713,390 at September 30, 2008.
 
 C.  Warrants - The
existing Warrants, as amended, are for the purchase of an aggregate of 1,500,000
shares of common stock, exercisable at an adjusted price of $.60 per share,
expire on a date extended to June 30, 2013, and have a fair value of $1,241,360.
The New Warrant was issued for the purchase of 1,000,000 shares of common stock,
is exercisable at a price of $.78 per share, expires June 30, 2013, and has a
fair value of $824,526.  The fair value of the existing Warrants was
recalculated on the date of the amendment and restatement of the Loan Agreement,
Revolving Credit Note, and Convertible Term Note, and the New Warrant on the
date of grant or June 30, 2008. The fair value was calculated using a
lattice-based valuation model using the following assumptions: (a) expected
volatility of 220.67%, (b) $-0- expected dividends, (c) expected term of 5
years, and risk-free rate of 3.382%. Expected volatilities are based on the
historical volatility of the Company’s common stock. The expected term of
warrants is derived from the output of the valuation model and represents the
periods of time that warrants granted are expected to be outstanding. The
risk-free rate for periods within the contractual life of the warrants is based
on the U.S. Treasury yield curve in effect at the time of grant.
 
 D.  Conversion of Principal
Indebtedness to Equity – Pursuant to the Loan Agreement, the Chairman of
the Board and majority stockholder converted $2,000,000 in principal of the
short term loans he advanced to the Company during the second quarter of 2008
into 2,564,103 shares of restricted common stock at the rate of $.78 per share
on June 30, 2008.
 
 E.  Registration
Rights – The Company determined that no liability is recognizable at
September 30, 2008 for registration payment arrangements based on the fact that
the Registration Statement was effective at September 30, 2008.
 
 Note
      8.
              Net
      Income (Loss) Per Common Share – Basic and
  Diluted.
 
 The
following table reflects the computation of the basic and diluted net income
(loss) per common share at September 30:
 Three
      Months Ended
                        
                        
                        Nine
      Months Ended2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Amount
                        
                        
                        Amount
                        
                        
                        Amount
                        
                        
                        AmountNet
      Income (Loss)
                        
                        $
                        25,371
                        
                        
                        $
                        (777,460
                        )
                        
                        $
                        (1,025,105
                        )
                        
                        $
                        (2,408,009
                        )Net
      Income Per Share – Basic
                        
                        $
                        0.000
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —Weighted
      Average Common Shares Outstanding
                        
                        
                        62,944,803
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Net
      (Loss) Per Share – Diluted
                        
                        $
                        0.000
                        
                        
                        $
                        (0.014
                        )
                        
                        $
                        (0.017
                        )
                        
                        $
                        (0.045
                        )Weighted
      Average Common Shares Outstanding
                        
                        
                        67,043,657
                        
                        
                        
                        53,635,699
                        
                        
                        
                        59,722,800
                        
                        
                        
                        53,611,138Plus:  Dividends
      on Preferred Stock
                        
                        
                        (203,840
                        )
                        
                        
                        (203,840
                        )
                        
                        
                        (407,123
                        )
                        
                        
                        (405,550
                        )Net
      (Loss) Available to Common Stockholders
                        
                        
                        (135,151
                        )
                        
                        
                        (824,756
                        )
                        
                        
                        (1,457,600
                        )
                        
                        
                        (2,036,099
                        )Net
      (Loss) Per Share – Basic and Diluted
                        
                        $
                        (0.002
                        )
                        
                        $
                        (0.015
                        )
                        
                        $
                        (0.024
                        )
                        
                        $
                        (0.038
                        )Weighted
      Average Common Shares Outstanding
                        
                        
                        62,944,803
                        
                        
                        
                        53,635,699
                        
                        
                        
                        59,722,800
                        
                        
                        
                        53,611,138
 
 For the
three month period ended September 30, 2008, the securities that could
potentially dilute net income per share in the future that were included in the
computation of diluted net income per common share – diluted were (i) 3,896,104
shares issuable upon conversion of the Convertible Term Note, (ii) 2,500,000
shares issuable upon exercise of warrants, (iii) 499,164 shares issuable upon
exercise of vested and exercisable stock options, and (iv) 2,250 shares issuable
upon conversion of Series A Preferred Stock.  For all other periods,
basic and diluted net (loss) per share are the same since (a) the Company has
reflected net losses for all periods presented and (b) the potential issuance of
shares of the Company would be antidilutive. The securities that could
potentially dilute (loss) per common share in the future that were not included
in the computation of diluted (loss) per share were (i) 3,896,104 and 2,500,000
shares issuable upon conversion of the Convertible Term Note, (ii) 2,500,000 and
1,750,000 shares issuable upon exercise of warrants, (iii) 499,164 and 73,000
shares issuable upon exercise of vested and exercisable stock options, and (iv)
2,250 and 2,250 shares issuable upon conversion of Series A Preferred Stock, for
the nine month period ended September 30, 2008 and three and nine month period
ended September 30, 2007, respectively.
  7
 Index
  LAPOLLA
INDUSTRIES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED-CONTINUED)
 
 Note
      9.
              Business
      Segment Information.
 
 The
Company is a national manufacturer and supplier operating two segments based on
manufacturing competencies: Foam and Coatings. The Company consolidated and
restructured its segments at December 31, 2007 and prior periods have been
reclassified to reflect the change. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies.
The Company allocates resources to segments and evaluates the performance of
segments based upon reported segment sales. Administrative expenses are
allocated to both segments. Unallocated costs reflect certain corporate expenses
(including a certain portion of non-cash items such as share based compensation
and the amortization of discounts related to certain debt instruments),
insurance, investor relations, and gains and losses related to the disposal of
corporate assets or extinguishments of liabilities and are included in Unallocated Amounts. There
are no intersegment sales or transfers.
 
 Reportable
Segments
 
 The
following table includes information about our reportable segments
at:
 
 Three
      Months Ended September 30,2008
                  
                  
                  2007Foam
                  
                  
                  Coatings
                  
                  
                  Totals
                  
                  
                  Foam
                  
                  
                  Coatings
                  
                  
                  TotalsSales
                  
                  $
                  10,983,173
                  
                  
                  $
                  2,897,047
                  
                  
                  $
                  13,880,220
                  
                  
                  $
                  5,599,787
                  
                  
                  $
                  2,769,715
                  
                  
                  $
                  8,369,502Cost
      of Sales
                  
                  
                  8,889,817
                  
                  
                  
                  2,409,677
                  
                  
                  
                  11,299,494
                  
                  
                  
                  4,690,991
                  
                  
                  
                  1,955,750
                  
                  
                  
                  6,646,741Gross
      Profit
                  
                  
                  2,093,356
                  
                  
                  
                  487,370
                  
                  
                  
                  2,580,726
                  
                  
                  
                  908,796
                  
                  
                  
                  813,965
                  
                  
                  
                  1,722,761Depreciation
      and Amortization
                  
                  
                  82,294
                  
                  
                  
                  21,707
                  
                  
                  
                  104,000
                  
                  
                  
                  10,274
                  
                  
                  
                  44,839
                  
                  
                  
                  55,113Interest
      Expense
                  
                  
                  257,759
                  
                  
                  
                  67,989
                  
                  
                  
                  325,748
                  
                  
                  
                  152,403
                  
                  
                  
                  75,380
                  
                  
                  
                  227,783Segment
      Profit (Loss)
                  
                  
                  624,745
                  
                  
                  
                  104,735
                  
                  
                  
                  729,480
                  
                  
                  
                  (306,513
                  )
                  
                  
                  173,103
                  
                  
                  
                  (133,410
                  )Segment
      Assets (1)
                  
                  
                  18,816,427
                  
                  
                  
                  5,599,413
                  
                  
                  
                  24,415,840
                  
                  
                  
                  8,380,544
                  
                  
                  
                  5,126,502
                  
                  
                  
                  13,507,046Expenditures
      for Segment Assets
                  
                  $
                  274,713
                  
                  
                  $
                  6,760
                  
                  
                  $
                  281,473
                  
                  
                  $
                  97,858
                  
                  
                  $
                  10,873
                  
                  
                  $
                  108,731
 
 Nine
      Months Ended September 30,2008
                  
                  
                  2007Foam
                  
                  
                  Coatings
                  
                  
                  Totals
                  
                  
                  Foam
                  
                  
                  Coatings
                  
                  
                  TotalsSales
                  
                  $
                  26,147,692
                  
                  
                  $
                  7,939,257
                  
                  
                  $
                  34,086,949
                  
                  
                  $
                  15,714,694
                  
                  
                  $
                  9,444,001
                  
                  
                  $
                  25,158,695Cost
      of Sales
                  
                  
                  21,254,628
                  
                  
                  
                  6,013,911
                  
                  
                  
                  27,268,539
                  
                  
                  
                  13,399,144
                  
                  
                  
                  7,060,948
                  
                  
                  
                  20,460,092Gross
      Profit
                  
                  
                  4,893,064
                  
                  
                  
                  1,925,346
                  
                  
                  
                  6,818,410
                  
                  
                  
                  2,315,550
                  
                  
                  
                  2,383,053
                  
                  
                  
                  4,698,603Depreciation
      and Amortization
                  
                  
                  142,581
                  
                  
                  
                  43,292
                  
                  
                  
                  185,873
                  
                  
                  
                  32,663
                  
                  
                  
                  149,030
                  
                  
                  
                  181,693Interest
      Expense
                  
                  
                  503,537
                  
                  
                  
                  152,890
                  
                  
                  
                  656,427
                  
                  
                  
                  295,811
                  
                  
                  
                  177,773
                  
                  
                  
                  473,584Segment
      Profit (Loss)
                  
                  
                  470,075
                  
                  
                  
                  637,764
                  
                  
                  
                  1,107,839
                  
                  
                  
                  (1,073,888
                  )
                  
                  
                  216,715
                  
                  
                  
                  (857,173
                  )Segment
      Assets (1)
                  
                  
                  18,390,577
                  
                  
                  
                  6,025,264
                  
                  
                  
                  24,415,840
                  
                  
                  
                  7,866,362
                  
                  
                  
                  5,640,683
                  
                  
                  
                  13,507,045Expenditures
      for Segment Assets
                  
                  $
                  325,831
                  
                  
                  $
                  15,694
                  
                  
                  $
                  341,525
                  
                  
                  $
                  1,338,261
                  
                  
                  $
                  256,167
                  
                  
                  $
                  1,594,428
 
 The
following are reconciliations of reportable segment profit or loss, and assets,
to the Company’s consolidated totals at:
 
 Three
      Months Ended September 30,
                  
                  
                  Nine
      Months Ended September 30,Profit
      or Loss
                  
                  2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Total
      Profit or Loss for Reportable Segments
                  
                  $
                  729,480
                  
                  
                  $
                  (133,410
                  )
                  
                  $
                  1,107,839
                  
                  
                  $
                  (857,173
                  )Unallocated
      Amounts:Corporate
      Expenses (2)
                  
                  
                  (704,109
                  )
                  
                  
                  (644,050
                  )
                  
                  
                  (2,132,944
                  )
                  
                  
                  (1,550,835
                  )Income
      (Loss) Before Income Taxes
                  
                  $
                  25,371
                  
                  
                  $
                  (777,460
                  )
                  
                  $
                  (1,025,105
                  )
                  
                  $
                  (2,408,008
                  )
 
 Assets
                  
                  September
      30, 2008
                  
                  
                  December
      31, 2007Total
      Assets for Reportable Segments (1)
                  
                  $
                  24,415,840
                  
                  
                  $
                  11,260,074Other
      Unallocated Amounts (3)
                  
                  
                  692,551
                  
                  
                  
                  605,972Consolidated
      Total
                  
                  $
                  25,108,391
                  
                  
                  $
                  11,866,045
  (1)
              Segment
      assets are the total assets used in the operation of each
      segment.
 (2)
              Includes
      significant portions of non-cash items such as share based compensation
      and amortization of debt discounts.
 (3)
              Includes
      corporate assets which are principally cash and cash
      equivalents.
  8
 Index
  Item2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
 
 Overview
 
 This
financial review presents our operating results for the three and nine months
ended September 30, 2008 and 2007, and our financial condition at September 30,
2008. Except for the historical information contained herein, the following
discussion contains forward-looking statements that are subject to known and
unknown risks, uncertainties and other factors that may cause our actual results
to differ materially from those expressed or implied by such forward-looking
statements. We discuss some of these risks, uncertainties and other factors
throughout this report and provide a reference to additional risks under the
caption “Risk Factors” in Item 1A of Part II below. In addition, the following
review should be read in connection with the information presented in our
consolidated financial statements and the related notes for the year ended
December 31, 2007, including any amendments thereto.
 
 Performance
for the Three Months Ended September 30, 2008 compared to the Three Months Ended
September 30, 2007
 
 Overall
Results of Operations
 
 Sales
 
 The
following is a summary of sales for the three months
ended September 30:
 
 2008
                  
                  
                  2007Sales
                  
                  $
                  13,880,220
                  
                  
                  $
                  8,369,502
 
 Our sales
increased $5,510,718, or 65.8%, compared to the same period in 2007, due to
increases recognized in both our Foam and Coatings segments. Foam sales were
96.1% above last year’s third quarter as consumers continue to seek relief from
volatile energy costs through improved insulation.  Market share gains
from distributors and contractors historically tied to conventional insulation
markets, such as fiberglass, has fueled LaPolla’s growth despite a sluggish
new-housing market environment. LaPolla’s purchase of certain AirTight Marketing
& Distribution, Inc.’s (“AirTight”) assets and liabilities, a turn-key
equipment, training and startup company, has enhanced LaPolla’s position as a
leader in the conversion of traditional insulators to our spray foam product
lines. In addition, we have developed a dedicated, retrofit strategy providing
existing residential and commercial building owners energy cost savings by
foaming attics, crawl spaces, additions, etc.  As the building
industry recovers, LaPolla is positioned to further capitalize on the public’s
need forcost
savings related to energy.
 
 Cost
of Sales
 
 Cost of
sales increased $ 4,652,753, or 70%, compared to the same period in 2007, due to
higher sales in the Foam and Coatings segments, increases in raw material costs
tied to oil, and higher freight costs also associated with rising oil prices
during the period.
 
 Gross
Profit
 
 Our gross
profit increased $ 857,965, or 49.8%, compared to the same period in 2007, due
to higher sales volumes partially offset by lower margins associated with
raw material cost increases. Gross margin percentage declined 2.0% compared to
same period in 2007 due primarily to higher raw material costs, exacerbated by
severe weather conditions impacting the petrochemical industry. Improvement in
margins is expected as prices subside from hurricane season and falling oil
prices.
 
 Operating
Expenses
 
 Our total
operating expenses are comprised of selling, general and administrative
expenses, or SG&A, professional fees, depreciation and amortization,
consulting fees, interest expense, interest expense – related party, interest
expense – amortization of discounts, (gain) loss on extinguishment of debt, and
other (income) expense. These total operating expenses increased $55,134, or
2.2%, compared to the same period in 2007, due to an increase of $60,443 in
Depreciation and Amortization, $52,170 for interest expense, $12,754 for
interest expense – related party, $141,624 for interest expense – amortization
of discount, and a reduction of other income of $129,508; partially offset by
declines of $242,241 for SG&A, $67,663 for professional fees, and $31,460
for consulting fees.
 
 SG&A
decreased $242,241, or 11.3%, compared to the same period in 2007, due to a
reduction in share based compensation of $434,093 primarily from a reversal of
non-vested, performance-based options expensed in previous periods that will
never meet the vesting criteria, sales commission of $47,354, corporate office
expenses of $37,064, and marketing and trade shows of $8,074, partially offset
by higher payroll and related costs of $198,300, insurances of $30,591, travel
and related services of $37,949, and advertising of $18,567.  Cost
control remains a priority as we continue to monitor expenses with increases in
expected areas as payroll and travel as we continue to grow our revenue and
sales force.
 
 Professional
fees decreased $67,663, or 43.0%, compared to the same period in 2007, due
primarily to lower legal fees.
  9
 Index
  Depreciation
and amortization expense increased $60,443, or 109.7%, compared to the same
period in 2007, primarily from assets associated with the AirTight asset
purchase.
 
 Consulting
fees decreased $31,460, or 53.4%, compared to the same period in 2007, due to
tighter cost controls.
 
 Interest
expense increased $52,170, or 30.2%, compared to the same period in 2007, due
primarily to interest from the capital utilized from our ComVest credit
instruments.
 
 Interest
expense – related party was $12,754 compared to $-0- in the same period in 2007,
due to utilizing capital from the Chairman of the Board’s financial commitment
to the Company.
 
 Interest
expense – amortization of discount increased $141,624, or 258%, compared to the
same period in 2007, due primarily to the restructuring of our Convertible Term
Note and Revolving Credit Note.
 
 Other
income decreased $129,508, or 96.5%, compared to the same period in 2007, due to
lower royalty payments associated with the divestiture of our retail coatings
business in 2007.
 
 Net
Loss
 
 Net
income was $25,371 compared to net loss of $777,460 for the same period in 2007,
due to substantial gains in Foam sales and margins associated with a product mix
tailored to green building materials and energy solutions. Increases in payroll
and travel related expenses were more than offset by reductions in share based
compensation. Net income per share was $.001 compared to net loss of $.01 per
share for the same period in 2007.
 
 Net loss
available to common stockholders decreased $689,604, or 83.6%, and related loss
per share decreased $.013, or 86.6%, compared to the same period in 2007. The
decrease in net loss available to common stockholders and related loss per share
are attributable to the decrease in the net loss and increase in the number of
shares of common stock issued and outstanding for the current period in 2008
compared to the prior period in 2007. Dividends accrued on our outstanding
Series D Preferred Stock were $203,840 for both of the 2008 and 2007
periods.
 
 Results
of Business Segments
 
 The
following is a summary of sales by segment for the three months
ended September 30:
 
 Segments
                  
                  2008
                  
                  
                  2007Foam
                  
                  $
                  10,983,173
                  
                  
                  $
                  5,599,787Coatings
                  
                  
                  2,897,047
                  
                  
                  
                  2,769,715
 
 Foam
sales increased $5,383,386, or 96.1%, compared to the same period in 2007, as
residential and commercial landlords continue to recognize the significant
advantage foam provides versus traditional fiberglass insulation. Construction
industry professionals such as contractors, builders, and architects have
generally accepted spray polyurethane foam as a mainstream product line, further
solidifying LaPolla’s market penetration. Additionally, critical third party
approvals and credentials for our foam formulations continue to differentiate
our product lines from competition, allowing us to penetrate markets previously
unavailable. Cost of sales increased $4,198,826, or 89.5%, compared to the same
period in 2007, due to higher sales volumes and higher raw material costs
associated with higher oil prices and severe weather conditions. Gross profit
increased $1,184,560, or 130.3%, compared to the same period in 2007, due to
higher sales volumes, partially offset by increasing raw material and freight
costs. Segment profit was $624,745 compared to a segment loss of $306,513 for
the same period for 2007, primarily due to sales and margin increases in a
product line offering sought after energy cost savings.
 
 Coatings
sales increased $127,332, or 4.6%, compared to the same period in 2007, as foam
roofing products provide a pull through advantage for our energy efficient
coatings. In addition, our coatings product line offers an economic alternative
for roof maintenance as opposed to replacement in difficult economic times.
Continued momentum is expected as new legislation and energy company incentives
promote additional uses and awareness of our products. Cost of sales increased
$453,927, or 23.2%, compared to the same period in 2007, due to higher sales
volumes, as well as rising raw material and transportation costs. Gross profit
decreased $326,595, or 40.1%, compared to the same period in 2007, due primarily
to increasing raw material costs. Segment profit decreased $68,368, or 39.5%,
compared to the same period in 2007, due to higher material and freight
costs.
  10
 Index
  Performance
for the Nine Months Ended September 30, 2008 compared to the Nine Months Ended
September 30, 2007
 
 Overall
Results of Operations
 
 Sales
 
 The
following is a summary of sales for the nine months ended
September 30:
 
 2008
                  
                  
                  2007Sales
                  
                  $
                  34,086,948
                  
                  
                  $
                  25,158,695
 
 Sales
increased $8,928,253, or 35.5%, compared to the same period in 2007, due
primarily to an increase in wall and roofing foam insulation sales in our Foam
segment, partially offset by a decline in retail coatings sales volumes as a
result of the divestiture of our retail distribution channel in 2007 in our
Coatings segment. Market share gains from less energy-efficient conventional
insulation products, such as fiberglass, continue to propel Foam sales as
homeowners and commercial landlords recognize the immediate and ongoing value of
foam insulation. In spite of the significant decline in new housing starts,
general acceptance of spray polyurethane foam by construction professionals and
growing consumer demand continue to bolster our aggressive growth in market
share. Volatile oil prices, and the associated impact on utilities such as
electricity and natural gas, position us for further market share gains in the
future.  Public awareness of green building materials and sustainable
energy solutions has escalated, and our foam and coatings product lines will
provide millions of people the opportunity to realize sought after,
environmentally conscious, energy cost savings.
 
 Cost
of Sales
 
 Cost of
sales increased $6,808,446 or 33.3% compared to the same period in 2007, due to
higher sales volumes in our Foam segment and higher freight costs associated
with higher oil prices.
 
 Gross
Profit
 
 Our gross
profit increased $2,119,807, or  45.1%, compared to the same period in
2007, due to an increase in sales in our Foam segment, partially offset by a
decrease in retail coatings sales as a result of the divestiture of our retail
distribution channel in 2007 in our Coatings segment. Gross margin percentage
increased 1.3% compared to same period in 2007 due primarily to efficiencies
recognized from our new foam resin plant, partially offset by higher raw
material costs in the 3rd Quarter
associated with higher oil prices and Hurricane Ike.
 
 Operating
Expenses
 
 Our total
operating expenses are comprised of SG&A, professional fees, depreciation
and amortization, consulting fees, interest expense, interest expense – related
party, interest expense – amortization of discounts, (gain) loss on
extinguishment of debt, and other (income) expense. These total operating
expenses increased $736,904, or 10.4%, compared to the same period in 2007, due
to an increase of $533,927 for SG&A, $210,979 for professional fees, $24,832
for depreciation and amortization, $129,313 for interest expense, $56,102 for
interest expense – related party, and $216,237 for interest expense –
amortization of discount, and a decrease in other income of $83,570 (royalties)
partially offset by a $481,833  gain on extinguishment of
debt,  and $36,223 of lower consulting fees.
 
 SG&A
increased $533,927, or 8.6%, compared to the same period in 2007, due to
increases in sales commission of $196,747, corporate office expenses of
$142,761, payroll and related benefits of $106,421, investor relations of
$69,361, insurances of $52,453, marketing ad trade shows of $33,423, travel and
related services of $25,402, and advertising of $23,244, partially offset by a
decrease in share based compensation of $115,886 primarily from a reversal of
nonvested performance-based options expensed in previous periods that will never
meet the vesting criteria. The increase in commissions was anticipated, as we
continue to grow sales, market share and margins. Cost control remains a
priority as we continue to monitor expenses and look to improve cash
flow.
 
 Professional
fees increased $210,9799, or 71.7%, compared to the same period in 2007, due to
an increases for auditing and auditing related services as well as higher than
expected legal fees.
 
 Depreciation
and amortization expense increased $24,832, or 13.7%, compared to the same
period in 2007.
 
 Consulting
fees decreased $36,223, or 36.5%, compared to the same period in 2007, due to a
decrease in outside professional services.
 
 Interest
expense increased $129,313, or 32.2%, compared to the same period in 2007, due
primarily to an increase in the interest from the capital utilized from our
ComVest credit instruments.
  11
 Index
  Interest
expense – related party was $56,102 compared to $-0- in the same period in 2007,
due to us utilizing capital from the Chairman of the Board’s financial
commitment to the Company.
 
 Interest
expense – amortization of discount increased $216,237, or 302.3%, compared to
the same period in 2007, due primarily to the restructuring of our Convertible
Term Note and Revolving Credit Note.
 
 Gain on
extinguishment of debt was $481,833 compared to $-0- in the same period in 2007,
due to the modification of our ComVest credit instruments.
 
 Other
income decreased $83,570, or 60.1%, compared to the same period in 2007, due to
lower royalty payments associated with the divestiture of our retail coatings
business in 2007.
 
 Net
Loss
 
 A net
loss of $1,025,106 reflects a decrease of  $1,382,,903, or 57.4%,
compared to the same period in 2007, due primarily to increases in Foam sales
and margins, partially offset by cost increases associated with additional
headcount and a growing sales force. Net loss per share decreased $.017, or less
than 1%, compared to the same period in 2007.
 
 Net loss
available to common stockholders decreased $580,628, or 28.5%, and related loss
per share decreased $.013, or 34.2%, compared to the same period in 2007. The
decrease in net loss available to common stockholders and related loss per share
are attributable to the decrease in the net loss and increase in the number of
shares of common stock issued and outstanding for the current period in 2008
compared to the prior period in 2007. Dividends accrued on our outstanding
Series D Preferred Stock were $407,123 for the current period in 2008 compared
to $405,550 in the prior period in 2007.
 
 Results
of Business Segments
 
 The
following is a summary of sales by segment for the nine months ended
September 30:
 
 Segments
                  
                  2008
                  
                  
                  2007Foam
                  
                  $
                  26,147,692
                  
                  
                  $
                  15,714,694Coatings
                  
                  
                  7,939,257
                  
                  
                  
                  9,444,001
 
 Foam
sales increased $10,432,998, or 66.4%, compared to the same period in 2007, as
cost conscious residential and commercial building owners’ transition from
fiberglass insulation to spray polyurethane foam insulation.  Trends
established earlier in the year have strengthened and our product lines continue
to gain acceptance in conventional construction. Cost of sales increased
$7,855,484, or 58.6%, compared to the same period in 2007, due to higher sales
volumes, as well as material cost increases. Gross profit increased $2,577,514,
or 111.3%, compared to the same period in 2007, as higher sales volumes more
than offset higher raw material and freight costs. Segment profit was $470,075
compared to segment loss of $1,073,888 in the same period in 2007, primarily
from increased volumes and margins associated with the aggressive growth
realized in our energy saving product line. Builders and owners alike are opting
for sustainable, energy efficient, and green building materials, such as
LaPolla’s spray polyurethane foam, which is providing substantial volume
increases despite sluggish economic conditions.
 
 Coatings
sales decreased $1,504,744, or 15.9%, with a corresponding decrease in our cost
of sales of $1,047,037, or 14.8%.  Gross profit decreased $457,707, or
19.2%, compared to the same period in 2007, due to the divestiture of our retail
distribution channel in 2007, partially offset by an improved product
mix.  Segment profit increased $421,049, or 194.3%, compared to the
same period in 2007, as the 2007 divestiture of our retail coatings business
allowed us to focus on higher margin coatings used in conjunction with our
insulating roofing foam.
 
 Liquidity
and Capital Resources
 
 Net cash
used in our operations was $6,279,211 for the nine months ended September 30,
2008 compared to $4,727,750 for the same period in 2007. The cash used in
operations for the nine months ended September 30, 2008 was primarily due to our
growth as well as the effect of adjustments to reconcile net loss to cash
provided by or used in operating activities and adjusting for non-cash items,
offset by increases in cash, trade receivables, inventories, prepaid expenses
and other current assets, accounts payable, and accrued expenses and other
current liabilities, and decreases in deposits and other non current assets,
other liabilities, and net operating activities of discontinued operations, net
of effects from our AirTight asset purchase. The marked improvement in our gross
profit in the three and nine months ended September 30, 2008 was a result of
increased sales in our foam business as consumers recognize the value of our
energy efficient polyurethane spray foam. We may seek to raise capital
through private placements of common or preferred stock from accredited
sophisticated investors to not only fund our aggressive strategic growth plans,
including acquisitions, but also to reduce our interest
expense.
  12
 Index
  Net cash
used in investing activities was $113,520 for the nine months ended September
30, 2008 compared to $1,479,076 for the same period in 2007.  We paid
$100,000 to the AirTight Shareholders at closing of the AirTight transaction and
$13,520 to acquire property, plant and equipment.
 
 Net cash
provided by financing activities was $6,396,262 for the nine months ended
September 30, 2008 compared to $5,897,739 for the same period in 2007. We made
principal repayments of $67,500 on our Revolving Credit Note, $400,000 on our
Convertible Term Note, $78,994 on our long term debt, received proceeds of
$3,800,000 from our Chairman of the Board for working capital, made repayments
of $1,000,000 to our Chairman of the Board, borrowed $4,157,616 under our
ComVest Revolving Credit and Convertible Term notes working capital purposes,
and paid $15,000 in dividends on our Series D Preferred Stock in the nine months
ended September 30, 2008.
 
 Item3.
              Quantitative
      and Qualitative Disclosures About Market
Risk.
 
 We do not
issue or invest in financial instruments or their derivatives for trading or
speculative purposes. Our operations are conducted presently in the United
States, and, as such, we are not subject to foreign currency exchange risks.
Although we have outstanding debt and related interest expense, market risk in
interest rate exposure in the United States is currently not material to our
operations.  However, we are experiencing an increase in international
business and are utilizing letters of credit to mitigate any risk of
collection.
 
 Item4.
              Controls
      and Procedures.
 
 Quarterly
Evaluation
 
 We
carried out an evaluation, under the supervision and with the participation of
our management, including our Principal Executive Officer and our Principal
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of September 30, 2008, the end of the quarterly period covered by
this report. Based on the foregoing, our Principal Executive Officer and our
Principal Financial Officer concluded that, as of September 30, 2008, our
disclosure controls and procedures were effective. Notwithstanding the fact that
this report was filed one day late, management is of the opinion that the
circumstances surrounding the reason for the delay were not occasioned by a
weakness in our internal controls but was due to factors beyond our control
involving the AirTight Asset Purchase which led to the one day late
filing.
 
 Changes
in Internal Controls
 
 There
were no changes in our internal controls over financial reporting during the
second quarter of 2008 that materially affected, or were reasonably likely to
materially affect, our internal control over financial reporting. There has
been no change in our internal controls over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting subsequent to the date of this
report.
 
 PART
II — OTHER INFORMATION
 
 
 Item1.
              Legal
      Proceedings.
 
 The
disclosures set forth under Part I, Item 3, “Legal Proceedings” in our Annual
Report on Form 10-K for the year ended December 31, 2007, including any
amendments thereto, are hereby incorporated in their entirety herein by this
reference.
 
 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.
 
 Item1A.
              Risk
      Factors.
 
 The
disclosures set forth under Part I, Item 1A, “Risk Factors” in our Annual Report
on Form 10-K for the year ended December 31, 2007, including any amendments
thereto, are hereby incorporated in their entirety herein by this
reference.
  Item2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds.
  Recent
Sales of Unregistered Securities
 
 On July
1, 2008, the Company issued, in a private transaction in reliance on Section
4(2) of the Securities Exchange Act of 1933, as amended, 2,000,000 shares of
restricted common stock, par value $.01, at a price per share of $.74, pursuant
to an Asset Purchase Agreement with AirTight and its Shareholders. The price per
share reflects the closing price of LaPolla’s common stock on the closing date
as traded on the NASDAQ OTC Bulletin Board.
  13
 Index
  Item3.
              Defaults
      Upon Senior Securities.
  None.
 
 Item4.
              Submission
      of Matters to a Vote of Security
Holders.
  None.
 
 Item5.
              Other
      Information.
 
 None.
 
 Item6.
              Exhibits.
  See Index
of Exhibits on Page 16.
  14
 Index
  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:
                        November
      20, 2008
                        
                        By:
                        /s/  Douglas J. Kramer,
      CEOName:
                        Douglas
      J. KramerTitle:
                        CEO
      and PresidentLAPOLLA
      INDUSTRIES, INC.Date:
                        November
      20, 2008
                        
                        By:
                        /s/  Paul Smiertka,
      CFOName:
                        Paul
      SmiertkaTitle:
                        CFO
      and
Treasurer
  15
 Index
  INDEXOF EXHIBITS
 
 Exhibit
      Number
                  
                  Description10.1
                  
                  Amended
      and Restated Asset Purchase Agreement between LaPolla Industries, Inc.,
      AirTight Marketing and Distribution, Inc., Larry P. Medford, and Ted J.
      Medford dated July 1, 2008 (incorporated by reference to Exhibit 10.1 to
      Form 8-K dated July 1, 2008, filed July 8, 2008).10.2
                  
                  Executive
      Employment Agreement between LaPolla Industries, Inc. and Ted J. Medford
      dated July 1, 2008 (incorporated by reference to Exhibit 10.2 to Form 8-K
      dated July 1, 2008, filed July 8, 2008).10.3
                  
                  Stock
      Option Agreement between LaPolla Industries, Inc. and Ted J. Medford dated
      July 1, 2008 (incorporated by reference to Exhibit 10.3 to Form 8-K dated
      July 1, 2008, filed July 8, 2008).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
                  
                  Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      § 906 of Sarbanes-Oxley Act of
2002.


16