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 March 31, 2009





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 þ NO £





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 May
2, 2009 there were 63,944,803 shares of Common Stock, par value $.01,
outstanding.










LAPOLLA
INDUSTRIES, INC.


FORM
10-Q


FOR
THE QUARTER ENDED MARCH 31, 2009


INDEX





PagePART
      IFINANCIAL
      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
                      11Item
      4
                      
                      Controls and Procedures
                      11PART
      IIOTHER
      INFORMATIONItem
      1
                      
                      Legal Proceedings
                      12Item
      1A
                      
                      Risk Factors
                      12Item
      2
                      
                      Unregistered Sales of Equity Securities and Use of
      Proceeds
                      12Item
      3
                      
                      Defaults Upon Senior Securities
                      12Item
      4
                      
                      Submission of Matters to a Vote of Security
      Holders
                      12Item
      5
                      
                      Other Information
                      12Item
      6
                      
                      Exhibits
                      12SIGNATURES
                      13INDEX OF EXHIBITS
                      14




(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.





Item
1.       Financial
Statements.





LAPOLLA
INDUSTRIES, INC.


INDEX
TO FINANCIAL STATEMENTS AND


FINANCIAL
STATEMENT SCHEDULES




CONDENSED
      BALANCE SHEETS (UNAUDITED)March
      31, 2009 and December 31, 2008
                          2CONDENSED
      STATEMENTS OF OPERATIONS (UNAUDITED)Three
      Months Ended March 31, 2009 and 2008
                          3CONDENSED
      STATEMENTS OF CASH FLOWS (UNAUDITED)Three
      Months Ended March 31, 2009 and 2008
                          4NOTES
      TO CONDENSED 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





LAPOLLA
INDUSTRIES, INC.


CONDENSED
BALANCE SHEETS


(UNAUDITED)





March
      31, 2009
                                                
                                                
                                                December
      31, 2008AssetsCurrent
      Assets:Cash
                                                
                                                $
                                                77,408
                                                
                                                
                                                $
                                                42,845Trade
      Receivables, Net
                                                
                                                
                                                7,774,879
                                                
                                                
                                                
                                                8,502,679Inventories
                                                
                                                
                                                4,304,507
                                                
                                                
                                                
                                                4,764,937Prepaid
      Expenses and Other Current Assets
                                                
                                                
                                                422,856
                                                
                                                
                                                
                                                1,425,551Total
      Current Assets
                                                
                                                
                                                12,579,650
                                                
                                                
                                                
                                                14,736,012Property,
      Plant and Equipment, Net
                                                
                                                
                                                2,526,534
                                                
                                                
                                                
                                                2,623,388Other
      Assets:Goodwill
                                                
                                                
                                                3,741,167
                                                
                                                
                                                
                                                3,741,167Other
      Intangible Assets, Net
                                                
                                                
                                                1,628,471
                                                
                                                
                                                
                                                1,695,907Deposits
      and Other Non-Current Assets
                                                
                                                
                                                817,660
                                                
                                                
                                                
                                                133,252Total
      Other Assets
                                                
                                                
                                                6,187,298
                                                
                                                
                                                
                                                5,570,326Total
      Assets
                                                
                                                $
                                                21,293,482
                                                
                                                
                                                $
                                                22,929,726Liabilities
      and Stockholders' EquityCurrent
      Liabilities:Accounts
      Payable
                                                
                                                $
                                                4,482,417
                                                
                                                
                                                $
                                                6,827,059Accrued
      Expenses and Other Current Liabilities
                                                
                                                
                                                2,476,181
                                                
                                                
                                                
                                                2,336,058Loan
      Payable – Related Party
                                                
                                                
                                                2,550,000
                                                
                                                
                                                
                                                800,000Current
      Portion of Convertible Term Note, Net
                                                
                                                
                                                750,000
                                                
                                                
                                                
                                                500,000Current
      Portion of Long-Term Debt
                                                
                                                
                                                104,837
                                                
                                                
                                                
                                                104,001Total
      Current Liabilities
                                                
                                                
                                                10,363,435
                                                
                                                
                                                
                                                10,567,118Other
      Liabilities:Revolving
      Credit Note, Net
                                                
                                                
                                                7,676,957
                                                
                                                
                                                
                                                7,550,995Non-Current
      Portion of Convertible Term Note, Net
                                                
                                                
                                                1,709,823
                                                
                                                
                                                
                                                1,872,222Non-Current
      Portion of Derivative Liability – Warrants
                                                
                                                
                                                764,807
                                                
                                                
                                                
                                                1,872,222Non
      Current Portion of Long-Term Debt
                                                
                                                
                                                153,668
                                                
                                                
                                                
                                                180,175Total
      Other Liabilities
                                                
                                                
                                                10,305,255
                                                
                                                
                                                
                                                9,603,392Total
      Liabilities
                                                
                                                
                                                20,668,690
                                                
                                                
                                                
                                                20,170,510Stockholders'
      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 March 31, 2009 and December 31, 2008,
      respectively
                                                
                                                
                                                55,035
                                                
                                                
                                                
                                                55,035Series
      D, 25,000 Shares Authorized;  8,176 Issued and Outstanding and
      $8,176,000 aggregate liquidation preference at March 31, 2009 and December
      31, 2008, respectively
                                                
                                                
                                                8,176
                                                
                                                
                                                
                                                8,176Common
      Stock, $.01 Par Value; 98,000,000 Shares Authorized; 63,944,803 Issued and
      Outstanding at March 31, 2009 and December 31, 2008,
      respectively
                                                
                                                
                                                639,448
                                                
                                                
                                                
                                                639,448Additional
      Paid-In Capital
                                                
                                                
                                                76,388,449
                                                
                                                
                                                
                                                78,106,472Accumulated
      (Deficit)
                                                
                                                
                                                (76,466,316
                                                )
                                                
                                                
                                                (76,049,915
                                                )Total
      Stockholders' Equity
                                                
                                                
                                                624,792
                                                
                                                
                                                
                                                2,759,216Total
      Liabilities and Stockholders' Equity
                                                
                                                $
                                                21,293,482
                                                
                                                
                                                $
                                                22,929,726


The
Accompanying Notes are an Integral Part of the Financial Statements





2
 Index




LAPOLLA
INDUSTRIES, INC.


CONDENSED
STATEMENTS OF OPERATIONS


(UNAUDITED)





March
      31, 2009
                                      
                                      
                                      March
      31, 2008Sales
                                      
                                      $
                                      9,740,080
                                      
                                      
                                      $
                                      8,173,243Cost
      of Sales
                                      
                                      
                                      7,434,327
                                      
                                      
                                      
                                      6,666,677Gross
      Profit
                                      
                                      
                                      2,305,753
                                      
                                      
                                      
                                      1,506,566Operating
      Expenses:Selling,
      General and Administrative
                                      
                                      
                                      2,688,593
                                      
                                      
                                      
                                      2,144,445Professional
      Fees
                                      
                                      
                                      135,220
                                      
                                      
                                      
                                      216,782Depreciation
      and Amortization
                                      
                                      
                                      131,625
                                      
                                      
                                      
                                      45,484Consulting
      Fees
                                      
                                      
                                      61,725
                                      
                                      
                                      
                                      12,335Interest
      Expense
                                      
                                      
                                      259,684
                                      
                                      
                                      
                                      159,130Interest
      Expense – Related Party
                                      
                                      
                                      22,356
                                      
                                      
                                      
                                      4,077Interest
      Expense – Amortization of Discount
                                      
                                      
                                      213,564
                                      
                                      
                                      
                                      44,327Gain
      on Derivative Liability – Warrants
                                      
                                      
                                      (125,482
                                      )
                                      
                                      
                                      —Total
      Operating Expenses
                                      
                                      
                                      3,387,285
                                      
                                      
                                      
                                      2,626,580Net
      (Loss)
                                      
                                      
                                      (1,081,532
                                      )
                                      
                                      
                                      (1,120,014
                                      )Dividends
      on Preferred Stock
                                      
                                      
                                      (201,600
                                      )
                                      
                                      
                                      (203,283
                                      )Net
      (Loss) Available to Common Stockholders
                                      
                                      
                                      (1,283,132
                                      )
                                      
                                      
                                      (1,323,297
                                      )Net
      Income (Loss) Per Share-Basic and Diluted
                                      
                                      $
                                      (0.020
                                      )
                                      
                                      $
                                      (0.022
                                      )Weighted
      Average Shares Outstanding
                                      
                                      
                                      63,944,803
                                      
                                      
                                      
                                      59,125,700





The
Accompanying Notes are an Integral Part of the Financial Statements




3
 Index





LAPOLLA
INDUSTRIES, INC.


CONDENSED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





March
      31, 2009
                                    
                                    
                                    March
      31, 2008Cash
      Flows From Operating ActivitiesNet
      Loss
                                    
                                    $
                                    (1,081,532
                                    )
                                    
                                    $
                                    (1,120,014
                                    )Adjustments
      to Reconcile Net (Loss) to Net Cash (Used in) Operating
      Activities:Depreciation
      and Amortization
                                    
                                    
                                    189,423
                                    
                                    
                                    
                                    98,627Provision
      for Losses on Accounts Receivable
                                    
                                    
                                    249,743
                                    
                                    
                                    
                                    —Amortization
      of Discount on Convertible Term and Revolving Credit Notes
                                    
                                    
                                    213,564
                                    
                                    
                                    
                                    44,327Gain
      on Change in Derivative Liability – Warrants
                                    
                                    
                                    (125,482
                                    )
                                    
                                    
                                    —Share
      Based Compensation Expense
                                    
                                    
                                    38,997
                                    
                                    
                                    
                                    232,272Changes
      in Assets and Liabilities:Trade
      Receivables
                                    
                                    
                                    323,921
                                    
                                    
                                    
                                    (1,254,679
                                    )Inventories
                                    
                                    
                                    460,430
                                    
                                    
                                    
                                    (479,512
                                    )Prepaid
      Expenses and Other Current Assets
                                    
                                    
                                    328,862
                                    
                                    
                                    
                                    156,960Deposits
      and Other Non Current Assets
                                    
                                    
                                    143,562
                                    
                                    
                                    
                                    (59,763
                                    )Accounts
      Payable
                                    
                                    
                                    (2,344,642
                                    )
                                    
                                    
                                    1,528,352Accrued
      Expenses and Other Current Liabilities
                                    
                                    
                                    (56,477
                                    )
                                    
                                    
                                    (16,177
                                    )Other
      Liabilities
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (196,711
                                    )Net
      Cash (Used in) Operating Activities
                                    
                                    
                                    (1,659,632
                                    )
                                    
                                    
                                    (1,064,622
                                    )Cash
      Flows From Investing ActivitiesAdditions
      to Property, Plant and Equipment
                                    
                                    
                                    (25,133
                                    )
                                    
                                    
                                    (42,184
                                    )Net
      Cash (Used in) Investing Activities
                                    
                                    $
                                    (25,133
                                    )
                                    
                                    $
                                    (42,184
                                    )Cash
      Flows From Financing ActivitiesPrincipal
      Repayments to Convertible Term Note
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (200,000
                                    )Proceeds
      from Loans Payable – Related Party
                                    
                                    
                                    1,750,000
                                    
                                    
                                    
                                    1,050,000Principal
      Repayments on Long Term Debt
                                    
                                    
                                    (25,672
                                    )
                                    
                                    
                                    (21,576
                                    )Payment
      of Preferred Stock Dividends
                                    
                                    
                                    (5,000
                                    )
                                    
                                    
                                    (5,000
                                    )Net
      Cash Provided by Financing Activities
                                    
                                    
                                    1,719,328
                                    
                                    
                                    
                                    823,424Net
      Increase In Cash
                                    
                                    $
                                    34,563
                                    
                                    
                                    $
                                    (283,382
                                    )Cash
      at Beginning of Period
                                    
                                    
                                    42,845
                                    
                                    
                                    
                                    339,855Cash
      at End of Period
                                    
                                    $
                                    77,408
                                    
                                    
                                    $
                                    56,473Supplemental
      Disclosure of Cash Flow Information:Cash
      Payments for Income Taxes
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-Cash
      Payments for Interest
                                    
                                    $
                                    158,967
                                    
                                    
                                    $
                                    194,569




4
 Index





LAPOLLA
INDUSTRIES, INC.


NOTES
TO CONDENSED FINANCIAL STATEMENTS


(UNAUDITED)





Note
1.      Basis of Presentation.





The
condensed 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
condensed financial statements. The condensed 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 2009 unaudited condensed 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 12. Refer also to the Company’s 2008 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 quarter
ended March 31, 2009.





Note
2.      Recent Accounting Pronouncements.





Pronouncements
Adopted During the Current Reporting Period





In May
2008, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff
Position (“FSP”) APB 14-1 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain
convertible debt instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the issuer's
non-convertible debt borrowing rate. FSP APB 14-1 was adopted by Lapolla on
January 1, 2009 and had no impact on the financial position, cash flows and
results of operations as of or for the three months ended March 31,
2009.





In June
2008, the FASB ratified the Emerging Issues Task Force (“EITF”) Issue 07-05,
Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock(“EITF 07-05”), which is effective for fiscal years ending after December
15, 2008, with earlier application not permitted by entities that have
previously adopted an alternative accounting policy. The adoption of EITF
07-05’s requirements affects accounting for convertible instruments and warrants
with provisions that protect holders from declines in the stock price
(“down-round” provisions). Warrants with such provisions will no longer be
recorded in equity. EITF 07-05 guidance is to be applied to outstanding
instruments as of the beginning of the fiscal year in which the EITF 07-05 is
applied. The cumulative effect of the change in accounting principle is
recognized as an adjustment to the opening balance of accumulated deficit for
the year of adoption, presented separately. The cumulative effect adjustment is
the difference between the amounts recognized in the statement of financial
position before initial application of EITF 07-05 and the amounts recognized in
the statement of financial position its initial application. The amounts
recognized in the statement of financial position as a result of the initial
application are determined based on the amounts that would have been recognized
if the guidance in EITF 07-05 had been applied from the issuance date of the
instrument. Effective January 1, 2009, the Company adopted EITF 07-05. (See Note 8
for the impact of the adoption of EITF 07-05 on the financial position, cash
flows and results of operations as of or for the three months ended March 31,
2009.)





Note
3.      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 March 31, 2009 and 2008, raw
materials and finished goods purchased from the Company’s three largest
suppliers accounted for approximately 54% and 43% of purchases,
respectively.





Note
4.      Trade Receivables.





Trade
receivables are comprised of the following at:





March
      31, 2009
                        
                        
                        December
      31, 2008Trade
      Receivables
                        
                        $
                        8,428,897
                        
                        
                        $
                        8,995,130Less:
      Allowance for Doubtful Accounts
                        
                        
                        (654,018
                        )
                        
                        
                        (492,451
                        )Trade
      Receivables, Net
                        
                        $
                        7,774,879
                        
                        
                        $
                        8,502,679




5
 Index




LAPOLLA
INDUSTRIES, INC.


NOTES
TO CONDENSED FINANCIAL STATEMENTS


(UNAUDITED-CONTINUED)





Note
5.       Inventories.





The
following is a summary of inventories at:





March
      31, 2009
                  
                  
                  December
      31, 2008Raw
      Materials
                  
                  $
                  1,110,855
                  
                  
                  $
                  1,850,850Finished
      Goods
                  
                  
                  3,193,652
                  
                  
                  
                  2,914,087Total
                  
                  $
                  4,304,507
                  
                  
                  $
                  4,764,937





Note
6.      Loans Payable – Related Party.





The
Company received advances of $1,750,000 from the Chairman of the Board during
the first quarter of 2009 for cash flow fluctuations and working capital
purposes which were recorded as short term demand loans bearing interest at 6%
per annum. Accrued interest was $22,356 at March 31, 2009.





Note
7.      Revolving Credit and Term Loan Agreement and
Related Agreements.





The
Company entered into a Revolving Credit and Term Loan Agreement on February 21,
2007 with ComVest Capital LLC (“ComVest”), which was substantially modified on
June 30, 2008 (“Loan Agreement”), under which ComVest agreed to loan up to
$9,500,000 under a revolving credit note (“Revolving Credit Note”) and
$3,000,000 under a convertible term note (“Convertible Term Note”) and Lapolla
agreed to issue certain warrants (“Warrants”) to ComVest and register the
underlying shares issuable under the Convertible Term Note and the Warrants
(“Registration Rights”). Per applicable rules, the modified debt instruments
were recorded at a discount. The resulting discounts are being amortized to
interest expense using the effective interest method over the term of the
agreements. The balance outstanding under the Revolving Credit Note was
$8,537,821 and unamortized discount was $860,864 at March 31, 2009. The balance
outstanding under the Convertible Term Note was $3,000,000 and unamortized
discount was $540,177 at March 31, 2009.





Note
8.      Derivatives and Fair Value.





The
Company has evaluated the application of SFAS No. 133 and EITF 07-05 to the
embedded conversion feature associated with the June 30, 2008 Convertible Term
Note and associated Warrants to purchase common stock.  Based on the
guidance in SFAS 133 and EITF 07-05, the Company concluded these instruments
were required to be accounted for as derivatives as of January 1, 2009 due to
the down round protection feature on the conversion price and the exercise
price.  The Company records the fair value of these derivatives on its
balance sheet at fair value with changes in the values of these derivatives
reflected in the statements of operations as “Gain (loss) on derivative
liabilities.”  These derivative instruments are not designated as
hedging instruments under SFAS 133 and are disclosed on the balance sheet under
Derivative Liabilities.





SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
SFAS 157 describes three levels of inputs that may be used to measure fair
value: Level1 – Quoted prices in active
markets for identical assets or liabilities; Level2 – Observable inputs other
than Level 1 prices, such as quoted prices for similar assets or
liabilities; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities; and Level3 – Unobservable inputs that
are supported by little or no market activity and that are financial instruments
whose values are determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant judgment or estimation. The
Company’s Level 3 liabilities consist of the derivative liabilities
associated with the June 30, 2008 convertible debt and warrants.  At
March 31, 2009, all $764,807 of the Company’s derivative liabilities
were categorized as Level 3 fair value assets. If the inputs used to measure the
financial assets and liabilities fall within more than one level described
above, the categorization is based on the lowest level input that is significant
to the fair value measurement of the instrument.




6
 Index




LAPOLLA
INDUSTRIES, INC.


NOTES
TO CONDENSED FINANCIAL STATEMENTS


(UNAUDITED-CONTINUED)





Note
8.      Derivatives and Fair Value -
continued.





Level 3
Valuation Techniques





Financial
assets are considered Level 3 when their fair values are determined using
pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is
unobservable.  Level 3 financial liabilities consist of the
embedded conversion feature in the June 30, 2008 Convertible Term Note and
associated warrants for which there is no current market for these securities
such that the determination of fair value requires significant judgment or
estimation.  We have valued the embedded conversion feature and the
freestanding warrants that contain down round provisions using a lattice model,
with the assistance of a valuation consultant, for which management understands
the methodologies. This model incorporates transaction details such as the
Company’s stock price, contractual terms, maturity, risk free rates, as well as
assumptions about future financings, volatility, and holder behavior as of
January 1, 2009 and March 31, 2009.  The primary assumptions
include projected annual volatility of 133% and holder exercise targets at 135%
of the conversion price for the Convertible Term Note and 150% of exercise price
for the warrants, decreasing as the warrants approach maturity. The fair value
of the derivatives as of January1, 2009 upon implementation of EITF 07-05 was
estimated by management to be $890,289. Amounts previously recorded to paid in
capital associated with these derivatives of $1,555,420 were reversed and the
remaining $665,131 was recorded as a cumulative adjustment to accumulated
deficit. The fair value of the derivatives as of March 31, 2009 was estimated by
management to be $764,807.





The
foregoing assumptions will be reviewed quarterly and are subject to change based
primarily on management’s assessment of the probability of the events described
occurring. Accordingly, changes to these assessments could materially
affect the valuation.





Financial
Assets and Liabilities Measured at Fair Value on a Recurring Basis





Financial
assets and liabilities measured at fair value on a recurring basis are
summarized below and disclosed on the balance sheet under Derivative
Liabilities:





As
      of March 31, 2009Fair
      Value Measurements UsingCarrying
      Value
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalDerivative
      Liabilities
                  
                  $
                  764,807
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  764,807
                  
                  
                  $
                  764,807Total
      Derivative Liabilities
                  
                  $
                  764,807
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  764,807
                  
                  
                  $
                  764,807





The table
below provides a summary of the changes in fair value, including net transfers
in and/or out, of all financial assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) during the first
quarter of 2009:





Fair
      Value Measurements Using Level 3 InputsDerivative
      Liabilities
                  
                  
                  TotalsBeginning
      Balance as of January 1, 2009
                  
                  $
                  890,289
                  
                  
                  $
                  890,289Total
      Gains or Losses (realized/unrealized) Included in Net Loss
                  
                  
                  (125,482
                  )
                  
                  
                  (125,482
                  )Purchases,
      Issuances and Settlements
                  
                  
                  —
                  
                  
                  
                  —Transfers
      in and/or out of Level 3
                  
                  
                  —
                  
                  
                  
                  —Ending
      Balance at March 31, 2009
                  
                  $
                  764,807
                  
                  
                  $
                  764,807




7
 Index




LAPOLLA
INDUSTRIES, INC.


NOTES
TO CONDENSED FINANCIAL STATEMENTS


(UNAUDITED-CONTINUED)





Note
9.      Net (Loss) Per Common Share – Basic and
Diluted.





The
following table reflects the computation of the basic and diluted net loss per
common share at:





March
      31, 2009
                                          
                                          
                                          March
      31, 2008Per
      Share
                                          
                                          
                                          
                                          
                                          
                                          Per
      ShareAmount
                                          
                                          
                                          Amount
                                          
                                          
                                          Amount
                                          
                                          
                                          AmountNet
      (Loss)
                                          
                                          $
                                          (1,081,532
                                          )
                                          
                                          $
                                          (0.017
                                          )
                                          
                                          $
                                          (1,120,014
                                          )
                                          
                                          $
                                          (0.019
                                          )Dividends
      on Preferred Stock
                                          
                                          
                                          (201,600
                                          )
                                          
                                          
                                          (0.003
                                          )
                                          
                                          
                                          (203,283
                                          )
                                          
                                          
                                          (0.003
                                          )Net
      (Loss) Available to Common Stockholders
                                          
                                          $
                                          (1,283,132
                                          )
                                          
                                          $
                                          (0.020
                                          )
                                          
                                          $
                                          (1,323,297
                                          )
                                          
                                          $
                                          (0.022
                                          )Weighted
      Average Common Shares Outstanding
                                          
                                          
                                          63,944,803
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          59,125,700





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 share in the future, that were not included in the computation of
diluted (loss) per share, were (i) 3,896,104 and 2,077,922 shares issuable upon
conversion of the Convertible Term Note, (ii) 2,500,000 and 1,750,000 shares
issuable upon exercise of the Warrants, (iii) 908,640 and 556,275 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, of common
stock for the quarters ended March 31, 2009 and 2008, respectively.





Note
10.    Business Segment Information.





The
Company is a national manufacturer and supplier operating two segments, Foam and
Coatings, based on manufacturing competencies. 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, insurance, investor relations, and gains and losses related
to the disposal of corporate assets and derivative 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 for the three
months ended:





March
      31, 2009
                
                
                March
      31, 2008Foam
                
                
                Coatings
                
                
                Totals
                
                
                Foam
                
                
                Coatings
                
                
                TotalsSales
                
                $
                8,459,784
                
                
                $
                1,280,296
                
                
                $
                9,740,080
                
                
                $
                6,063,420
                
                
                $
                2,109,823
                
                
                $
                8,173,243Cost
      of Sales
                
                
                6,409,555
                
                
                
                1,024,773
                
                
                
                7,434,328
                
                
                
                5,055,124
                
                
                
                1,611,553
                
                
                
                6,666,677Gross
      Profit
                
                
                2,050,229
                
                
                
                255,523
                
                
                
                2,305,752
                
                
                
                1,008,296
                
                
                
                498,269
                
                
                
                1,506,566Depreciation
      and Amortization
                
                
                102,891
                
                
                
                15,571
                
                
                
                118,462
                
                
                
                30,369
                
                
                
                10,567
                
                
                
                40,936Interest
      Expense
                
                
                215,229
                
                
                
                32,573
                
                
                
                247,802
                
                
                
                115,471
                
                
                
                40,179
                
                
                
                155,650Segment
      Profit (Loss)
                
                
                (164,214
                )
                
                
                (79,609
                )
                
                
                (243,822
                )
                
                
                (313,733
                )
                
                
                38,257
                
                
                
                (275,476
                )Segment
      Assets (1)
                
                
                17,039,740
                
                
                
                3,964,906
                
                
                
                21,004,646
                
                
                
                9,584,194
                
                
                
                3,334,908
                
                
                
                12,919,102Expenditures
      for Segment Assets
                
                $
                16,591
                
                
                $
                8,542
                
                
                $
                25,133
                
                
                $
                42,183
                
                
                $
                —
                
                
                $
                42,183





The
following are reconciliations of reportable segment profit or loss, and assets,
to the Company’s condensed totals at:





Profit
      or Loss
                    
                    March
      31, 2009
                    
                    
                    March
      31, 2008Total
      Profit or Loss for Reportable Segments
                    
                    $
                    (243,822
                    )
                    
                    $
                    (275,476
                    )Unallocated
      Amounts:Corporate
      Expenses
                    
                    
                    (837,710
                    )
                    
                    
                    (844,538
                    )Income
      (Loss) Before Income Taxes
                    
                    $
                    (1,081,532
                    )
                    
                    $
                    (1,120,014
                    )Assets
                    
                    March
      31, 2009
                    
                    
                    March
      31, 2008Total
      Assets for Reportable Segments (1)
                    
                    $
                    21,004,646
                    
                    
                    $
                    12,919,102Other
      Unallocated Amounts (2)
                    
                    
                    288,836
                    
                    
                    
                    244,110Condensed
      Total
                    
                    $
                    21,293,482
                    
                    
                    $
                    13,163,212




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


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





8
 Index





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





Overview





This
financial review presents our operating results for the three months ended March
31, 2009 and 2008, and our financial condition at March 31, 2009. 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 financial statements
and the related notes for the year ended December 31, 2008, including any
amendments thereto.





Performance
for the Three Months Ended March 31, 2009 compared to the Three Months Ended
March 31, 2008





Overall
Results of Operations





Sales





The
following is a summary of sales for the three months ended:





March
      31, 2009
                  
                  
                  March
      31, 2008Sales
                  
                  $
                  9,740,080
                  
                  
                  $
                  8,173,243





Our sales
increased $1,566,837, or 19.2%, for the first quarter of 2009 compared to the
first quarter of 2008, due primarily to a 40% increase in foam segment sales,
partially offset by a decline in coating segment sales. Despite some of the
worst economic conditions in decades, including a severely depressed new housing
market, our foam business increased market share as consumers continue to search
for energy cost savings.  Home builders are looking to differentiate
their products lines at all levels by offering high performance home models to
meet growing consumer demand for overall energy
efficiency.  Heightened consumer awareness of “green building
materials” has promoted the use of spray polyurethane foam in new homes as
increases in the cost of insulation are more than offset by savings in HVAC
system costs, lower ongoing energy bills, and additional consumer
comfort.





Cost
of Sales





Cost of
sales increased $767,651, or 11.5%, for the three months ended March 31, 2009
compared to the three months ended March 31, 2008, due to higher sales volumes
in our Foam segment.





Gross
Profit





Our gross
profit increased $799,186, or 53%, for the quarter ended March 31, 2009 compared
to the quarter ended March 31, 2008, due to an increase in sales in our foam
segment, augmented by raw material price declines, partially offset by a
decrease in sales in our coatings segment. Gross margin percentage increased
5.3% for the first quarter of 2009 compared to the first quarter of 2008 due to
raw material price declines and manufacturing efficiencies in our foam
segment.





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, and gain on derivative liabilities. These
total operating expenses increased $760,705, or 29%, for the first quarter of
2009 compared to the first quarter of 2008, due to an increase of $544,148 for
SG&A, $86,146 for depreciation and amortization (non-cash), $49,390 for
consulting fees, and $100,554 for interest expense, $18,279 for interest expense
– related party, $169,237 interest expense – amortization of discount
(non-cash), and a gain of $125,482 in derivative liabilities (non-cash), offset
by a decrease of $81,562 in professional fees.





SG&A
increased $544,148, or 25.4%, for the quarter ended March 31, 2009 compared to
the quarter ended March 31, 2008, due primarily to additional costs associated
with AirTight (acquired July 1, 2008), as well as costs related to increased
foam segment volumes (payroll, commissions, travel, advertising, and marketing).
These SG&A expenses included increases of $477,636 for payroll and related
employee benefits, $23,246 for sales commissions, $27,689 for insurances,
$55,865 for travel and related services, $25,256 for advertising, $80,054 for
marketing and promotions, $124,203 for rents, and $249,743 for bad debts, offset
by decreases of $40,349 in recruiting fees, $193,275 for share based
compensation expenses, $40,180 for investor relations, and $245,731 for
corporate expenses.





9
 Index




Professional
fees decreased $81,562, or 37.6%, for the first quarter of 2009 compared to the
first quarter of 2008, due to disproportionately higher than expected audit,
audit related services, and compliance costs in the first quarter of
2008.





Depreciation
and amortization expense increased $86,140, or 189.4%, for the three months
ended March 31, 2009 compared to the three months ended March 31, 2008, due
primarily to the acquired assets of AirTight.





Consulting
fees were $61,725 for the first quarter of 2009 compared to $12,335 for the
first quarter of 2008 due to an increase in outside professional
services.





Interest
expense increased $100,554, or 63.2%, for the three months ended March 31, 2009
compared to the three months ended March 31, 2008, due to an increase in the
interest from the capital utilized related to our ComVest credit
instruments.





Interest
expense – related party increased $18,279, or 448.3%, for the first quarter of
2009 compared to the first quarter of 2008 due to utilizing capital from the
Chairman of the Board’s financial commitment to the Company.





Interest
expense – amortization of discount increased $169,237, or 381.8%, for the three
months ended March 31, 2009 compared to the three month period ended March 31,
2008, due to an increase in the discount being amortized from the restructuring
of our Convertible Term Note and Revolving Credit Note with ComVest on June 30,
2008.





Gain on
derivative liabilities was $125,482 for the first quarter of 2009 compared to
$-0- in the first quarter of 2008 due to the implementation of the accounting
pronouncement EITF 07-05 during the first quarter of 2009.





Net
Loss





Net loss
for the three months ended March 31, 2009 was $1,081,533 compared to $1,120,014
for the three months ended March 31, 2008 as increases in sales and gross profit
were offset by higher operating expenses. Net loss per share for the first
quarter of 2009 was $0.017 compared to $0.019 for the first quarter of
2008.





Net loss
available to common stockholders and related loss per share for the three months
ended March 31, 2009 was $1,283,133 and $0.020 compared to $1,323,297 and $0.022
for the three months ended March 31, 2008. Dividends accrued on our outstanding
Series D Preferred Stock were $201,600 for the quarter ended March 31, 2009
compared to $203,283 for the quarter ended March 31, 2008.





Results
of Business Segments





The
following is a summary of sales by segment for the three months
ended:





Segments
                  
                  March
      31, 2009
                  
                  
                  March
      31, 2008Foam
                  
                  $
                  8,459,784
                  
                  
                  $
                  6,063,420Coatings
                  
                  
                  1,280,296
                  
                  
                  
                  2,109,823Total
                  
                  $
                  9,740,080
                  
                  
                  $
                  8,173,243





Foam
sales increased $2,396,364, or 39.5%, for the quarter ended March 31, 2009
compared to the quarter ended March 31, 2008, due to increased volumes from
market share gains, as spray polyurethane foam continues to replace conventional
insulation such as fiberglass.  Consumers and building owners alike
continue to seek “green building solutions” that provide energy costs savings.
Cost of sales increased $1,354,431, or 26.8%, for the three months ended March
31, 2009 compared to the three months ended March 31, 2008, due to higher sales
volumes. Gross profit increased $1,041,933, or 103.3%, for the first quarter of
2009 compared to the first quarter of 2008, due to higher sales volumes,
reductions in raw material pricing, and improved manufacturing efficiencies.
Segment loss decreased $149,519, or 47.6%, primarily from increased volumes and
margin improvements.





Coatings
sales decreased $829,527, or 39.3%, with a corresponding decrease in our cost of
sales of $586,780, or 36.4%, and gross profit of $242,746, or 48.7%, for the
three months ended March 31, 2009 compared to the three months ended March 31,
2008, due to a reduction in sales volume.  We had a segment loss of
$79,609 for the quarter ended March 31, 2009 compared to a segment profit of
$38,257 for the quarter ended March 31, 2008, due to lower sales and
margin.




10
 Index




Liquidity
and Capital Resources





Net cash
used in our operations was $1,659,632 for the three months ended March 31, 2009
compared to $1,064,622 for three months ended March 31, 2008. The cash used in
operations for the three months March 31, 2009 was attributable to our net loss
for the period, including 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 decreases in trade receivables, inventories, prepaid expenses
and other current assets, deposits and other non-current assets, while the
declines in accounts payable, accrued expenses and other current liabilities,
and other liabilities contributed to an increase in the cash used in our
operations. Although a marked improvement in our gross profit in the first
quarter of 2009 led to an increase in our operating cash flow, we continue to
rely on our ComVest Credit Facility and financial commitment from the Chairman
of the Board to fund our operations and believe such facilities to be sufficient
to meet our working capital requirements.  We are also seeking to
raise additional capital from private placements of debt or common or preferred
stock from accredited sophisticated investors to further accelerate our sales
growth.





Net cash
used in investing activities was $25,133 for the quarter ended March 31, 2009
compared to $42,184 for the quarter ended March 31, 2008, for minor capital
additions.





Net cash
provided by financing activities was $1,719,328 for first quarter of 2009
compared to $823,424 for the first quarter of 2008. We made principal repayments
of $25,672 on our long term debt, received proceeds of $1,750,000 from our
Chairman of the Board for working capital, and paid $5,000 for Series D
Preferred Stock dividends, in the first quarter of 2009.





Item
3.       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 primarily conducted in the United
States, and, as such, we are not subject to material 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, where appropriate,
to mitigate any risk of collection.





Item
4.       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 March 31, 2009, 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 March 31, 2009, our disclosure
controls and procedures were effective.





Changes
in Internal Controls





There
were no changes in our internal controls over financial reporting during the
first quarter of 2009 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.




11
 Index





PART
II — OTHER INFORMATION




Item
1.       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, 2008, 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.





Item
1A.   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, 2008, including any amendments
thereto, are hereby incorporated in their entirety herein by this
reference.





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




Recent
Sales of Unregistered Securities





None.





Item
3.       Defaults Upon Senior
Securities.




None.





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





None.





Item
5.       Other
Information.





None.





Item
6.       Exhibits.




See Index
of Exhibits on Page 14.




12
 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:
      May 15, 2009
                      By:
                      /s/ Douglas J. Smiertka,
CEOName:
                      Douglas
      J. KramerTitle:
                      CEO
      and PresidentLAPOLLA
      INDUSTRIES, INC.Date:
      May 15, 2009
                      By:
                      /s/ Paul Smiertka, CFOName:
                      Paul
      SmiertkaTitle:
                      CFO
      and Treasurer





13
 Index




INDEX
OF EXHIBITS




Exhibit
      Number
                
                Description31.1
                
                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.






14