LaPolla Industries (LPAD) 10-Q 2007 Q3 Quarterly report

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, 2007

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 Park 15402 Vantage Parkway East, Suite 322 Houston, 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 þNo o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ

Indicate by check mark whether the registrant is a shell company (as defined in 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 5, 2007 there were 53,635,699 shares of Common Stock, par value $.01, outstanding.

LAPOLLA INDUSTRIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2007

INDEX

			Page
PART I		FINANCIAL INFORMATION
	Item 1	Financial Statements	3
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	17
	Item 4	Controls and Procedures	18
PART II		OTHER INFORMATION
	Item 1	Legal Proceedings	18
	Item 1A	Risk Factors	18
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	19
	Item 3	Defaults Upon Senior Securities	19
	Item 4	Submission of Matters to a Vote of Security Holders	19
	Item 5	Other Information	19
	Item 6	Exhibits	19
SIGNATURES			20
INDEX OF EXHIBITS			21

2

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, 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 Securities and Exchange Commission. 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 CONSOLIDATED BALANCE SHEETS
	September 30, 2007 (Unaudited) and December 31, 2006	4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
	Three and Nine Months Ended September 30, 2007 and 2006	5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
	Nine Months Ended September 30, 2007 and 2006	6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		7

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

3

LAPOLLA INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2007			2006
	(Unaudited)			(As Restated)
ASSETS
Current Assets:
Cash	$	73,029		$	382,116
Trade Receivables, Net		4,991,221			3,595,431
Inventories		3,437,776			2,882,236
Prepaid Expenses and Other Current Assets		540,512			537,253
Total Current Assets		9,042,538			7,397,036
Property, Plant and Equipment, Net		2,732,993			1,489,639
Other Assets:
Goodwill		1,951,000			1,951,000
Other Intangible Assets, Net		148,087			165,396
Deposits and Other Non-Current Assets		245,968			149,237
Total Other Assets		2,345,056			2,265,633
Total Assets	$	14,120,587		$	11,152,308
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	3,923,826		$	5,069,478
Accrued Expenses and Other Current Liabilities		1,199,689			1,091,947
Line of Credit		—			1,007,120
Loan Payable – Related Party		550,000			—
Current Portion of Convertible Term Note		666,925			—
Current Portion of Long-Term Debt		94,524			97,589
Current Portion of Liabilities from Discontinued Operations		—			232,479
Total Current Liabilities		6,634,706			7,498,613
Other Liabilities
Revolving Credit Note, Net		4,857,732			—
Non Current Portion of Convertible Term Note, Net		763,856			—
Non Current Portion of Long-Term Debt		123,217			202,923
Non Current Portion of Liabilities from Discontinued Operations		848			103,650
Total Other Liabilities		5,545,912			306,573
Total Liabilities		12,180,617			7,805,186
Stockholders’ 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 at September 30, 2007 and December 31, 2006; $62,500 aggregate liquidation preference at September 30, 2007 and December 31, 2006		55,035			55,035
Series D, 25,000 Shares Authorized; 8,176 Issued and Outstanding at September 30,2007 and December 31, 2006; $8,176,000 aggregate liquidation preference at September 30, 2007 and December 31, 2006		8,176			8,176
Common Stock, $.01 Par Value; 70,000,000 Shares Authorized; 53,635,699 and53,574,251 Issued and Outstanding at September 30, 2007 and December 31, 2006 Respectively		536,357			535,743
Additional Paid-In Capital		71,207,998			70,201,151
Accumulated Deficit		(69,867,596	)		(67,452,983	)
Total Stockholders’ Equity		1,939,970			3,347,122
Total Liabilities and Stockholders’ Equity	$	14,120,587		$	11,152,308

See accompanying notes to condensed consolidated financial statements.

4

LAPOLLA INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
				(As Restated)						(As Restated)
Sales	$	8,369,502		$	9,037,490		$	25,158,695		$	22,599,052
Cost of Sales		6,646,741			7,528,351			20,460,092			18,959,122
Gross Profit		1,722,761			1,509,139			4,698,603			3,639,930
Operating Expenses:
Selling, General and Administrative		2,135,274			2,184,581			6,197,023			4,810,740
Professional Fees		157,431			53,212			294,077			167,465
Depreciation and Amortization		55,113			51,023			181,693			135,387
Consulting Fees		58,871			34,458			99,180			94,893
Interest Expense		225,716			53,486			471,517			94,806
Interest Expense – Related Party		2,067			52,849			2,067			143,096
Other (Income) Expense		(134,251	)		—			(138,945	)		—
Total Operating Expenses		2,500,221			2,429,609			7,106,612			5,446,387
Operating Loss		(777,460	)		(920,470	)		(2,408,009	)		(1,806,457	)
Income From Discontinued Operations, Net of Income Tax Benefit-Deferred		—			(5,000	)		—			319,068
Net Loss	$	(777,460	)	$	(925,470	)	$	(2,408,009	)	$	(1,487,389	)
Plus:  Dividends on Preferred Stock		(205,970	)		(1,323	)		(611,520	)		(1,323	)
Net Loss Available to Common Stockholders	$	(983,430	)	$	(926,793	)	$	(3,019,529	)	$	(1,488,712	)
Net Loss Per Share – Basic and Diluted:
Continuing Operations	$	(0.018	)	$	(0.017	)	$	(0.056	)	$	(0.034	)
Discontinued Operations		0.000			(0.000	)		0.000			0.006
Total	$	(0.018	)	$	(0.017	)	$	(0.056	)	$	(0.028	)
Weighted Average Shares Outstanding		53,635,699			53,551,051			53,611,138			53,360,621

See accompanying notes to condensed consolidated financial statements

5

LAPOLLA INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2007			2006
				(As Restated)
Cash Flows From Operating Activities
Net Loss
Continuing Operations	$	(2,408,009	)	$	(1,806,457	)
Discontinued Operations		—			319,069
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation and Amortization	$	253,030		$	199,769
Provision for Losses on Trade Receivables		(129,314	)		133,465
Amortization of Discount on Convertible Term and Revolving Credit Notes		107,968			—
Share Based Compensation Expense		799,636			488,558
Changes in Assets and Liabilities:
Trade Receivables		(1,281,454	)		(965,502	)
Inventories		(555,540	)		(2,021,422	)
Prepaid Expenses and Other Current Assets		(3,258	)		(123,562	)
Deposits and Other Non Current Assets		(96,732	)		(127,700	)
Accounts Payable		(1,145,652	)		2,404,731
Accrued Expenses and Other Current Liabilities		(258,838	)		32,146
Other Liabilities		(435	)		(352	)
Net Operating Activities of Discontinued Operations		(9,152	)		(331,569	)
Net Cash Used in Operating Activities		(4,727,750	)		(1,800,149	)
Cash Flows From Investing Activities
Additions to Property, Plant and Equipment	$	(1,479,076	)	$	(365,616	)
Net Cash Used in Investing Activities		(1,479,076	)		(365,616	)
Cash Flows From Financing Activities
Proceeds from Revolving Credit Note		5,000,000			—
Payments on Revolving Credit Note		—			—
Proceeds from Line of Credit		1,398,000			6,361,214
Payments on Line of Credit		(2,405,120	)		(5,894,816	)
Proceeds from Loans Payable – Related Party		950,000			4,360,000
Payments on Loans Payable – Related Party		(400,000	)		(610,000	)
Proceeds from Convertible Term Note		2,000,000			—
Proceeds from Note Payable – Other		—			3,823,339
Payments on Note Payable – Other		(13,336	)		(5,493,211	)
Principal Repayments on Long Term Debt		(305,676	)		(170,734	)
Net Financing Activities of Discontinued Operations		(326,129	)		(118,248	)
Net Cash Provided by Financing Activities		5,897,739			2,257,544
Net Decrease In Cash	$	(309,087	)	$	91,779
Cash at Beginning of Period		382,116			400,621
Cash at End of Period	$	73,029		$	492,400
Supplemental Disclosure of Cash Flow Information:
Cash Payments for Income Taxes	$	—		$	—
Cash Payments for Interest	$	361,912		$	131,763
Supplemental Schedule of Non Cash Investing and Financing Activities
Property, Plant and Equipment acquired via Issuance of Long Term Debt	$	—		$	37,349
Common Stock issued for Director Fees	$	—		$	233,640
Conversion of Loans Payable – Related Party to Note Payable – Related Party	$	—		$	3,000,000

See accompanying notes to condensed consolidated financial statements.

6

LAPOLLA INDUSTRIES, 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 Securities and Exchange Commission. 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 2007 unaudited consolidated financial statement presentation. Reference is made to Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 12. Risk factors that could impact results are discussed in Part II – Other Information, Item 1A – Risk Factors on page 18. Refer also to the Company’s 2006 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 September 30, 2007. Certain amounts in prior periods have been reclassified to conform to the September 30, 2007 unaudited condensed consolidated financial statement presentation. Refer to Note 10 - Reclassifications, Restatements, and Corrections to Previously Issued Financial Statements.

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, 2007 and 2006, raw materials and finished goods purchased from the Company’s three largest suppliers accounted for approximately 34% and 56% of purchases, respectively.

Note 3.  Trade Receivables.

The following is a summary of trade receivables at:

	September 30, 2007			December 31, 2006
Trade Receivables	$	5,086,213		$	3,819,737
Less: Allowance for Doubtful Accounts		(94,992	)		(224,306	)
Trade Receivables, Net	$	4,991,221		$	3,595,431

Note 4.  Inventories.

The following is a summary of inventories at:

	September 30, 2007		December 31, 2006
Raw Materials	$	1,350,195	$	866,859
Finished Goods		2,087,581		2,015,377
Total	$	3,437,776	$	2,882,236

Note 5.  Property, Plant and Equipment.

The following is a summary of property, plant and equipment at:

	September 30, 2007			December 31, 2006
Vehicles	$	414,147		$	487,037
Leasehold Improvements		67,910			12,400
Office Furniture and Equipment		161,733			133,634
Computers and Software		560,777			445,491
Machinery and Equipment		2,213,534			718,210
Construction in Progress		70,902			212,592
Total Property, Plant and Equipment	$	3,489,903		$	2,009,364
Less: Accumulated Depreciation		(756,010	)		(519,725	)
Total Property, Plant and Equipment, Net	$	2,733,893		$	1,489,639

7

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED- CONTINUED)

Note 6.  Revolving Credit Note, Convertible Term Note, Warrants, and Registration Payment Arrangements.

(A)     Revolving Credit and Term Loan Agreement - The Company entered into a Revolving Credit and Term Loan Agreement on February 21, 2007 (“Loan Agreement”) under which ComVest agreed to loan the Company up to $3,500,000 under a revolving credit note (“Revolving Credit Note”) and $2,000,000 under a convertible term note (“Convertible Term Note”), and the Company agreed to issue ComVest three tranches of warrants (“Original Warrants”) and register the conversion shares under the Convertible Term Note and warrant shares underlying the Warrants (“Registration Rights”). The Company received $2,500,000 at closing, of which $373,181 was allocated to the Revolving Credit Note, $1,492,726 was allocated to the Convertible Term Note, and $634,093 was allocated to the Warrants. See (B) below.See also (D) below.

(B)     Amendment to Revolving Credit and Term Loan Agreement – The Company entered into an Amendment on June 12, 2007 (“Amendment No. 1”) to the Loan Agreement under which ComVest agreed to loan up to an additional $1,500,000 under the Revolving Credit Note, which makes up to $5,000,000 available under that note, and the Company agreed to, among certain technical changes under the Revolving Credit and Convertible Term Notes (the “Notes”) and Original Warrants, repricing certain of the Original Warrants, and issue ComVest a new warrant (“New Warrant”) (Original Warrants and New Warrants are collectively referred to as “Warrants”). The Company did not receive any additional cash upon execution of Amendment No. 1. However, based on repricing certain of the Original Warrants and issuance of a New Warrant contemporaneously with executing Amendment No. 1, the Company established an adjusted allocable amount, of which $373,181 was allocated to the Revolving Credit Note, $1,492,726 was allocated to the Convertible Term Note, and $634,093 was allocated to the Warrants. The discount on the Notes is being amortized to interest expense using the effective interest method over the term of the Notes. See (E) and (F) below.  See also (D) below.

(C)     Revolving Credit Note - The Revolving Credit Note, as amended, bears interest equal to the greater of the Prime Rate (defined as interest publicly announced by Citibank, N.A.) plus (a) 1%, or 9.5%, for the original $3,500,000, and (b) 1.5%, or 9.5%, for the additional $1,500,000; and is good until February 28, 2009. At September 30, 2007, the unamortized discount on the Amended Revolving Credit Note was $142,268.

(D)     Convertible Term Note - The Convertible Term Note, as amended, bears interest at the rate of 10% per annum, principle payments of $66,666.67 commence on September 30, 2007 and end on February 28, 2010, 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 $.80 per share (“Conversion Shares”). The Company retired its line of credit with Wachovia Bank, N.A. at the closing.  The fees charged to the Company relating to the ComVest transaction are being amortized over the term of the Convertible Term Note. At September 30, 2007, the unamortized discount on the Convertible Term Note was $569,219.

(E)      Original Warrants - The Original Warrants are for the purchase of three tranches of 500,000 shares of common stock, immediately exercisable, and expire February 29, 2012, at exercise prices of $.68, $.77 and $.93 per share, respectively (“Warrant Shares”). The fair value of the Original Warrants of $634,093 at the time of issuance, which was determined using a lattice-based option-pricing model, was recorded as additional paid-in capital and reduced the carrying value of the Notes. The discount on the Notes is being amortized to interest expense over the term of the Notes. See (A) above. In connection with Amendment No. 1, the Company adjusted the exercise price of the Original Warrants to $.63 for 750,000 shares and $.77 for 750,000 shares. The incremental change in fair value of the Original Warrants of $674,793 at the time of the repricing, which was determined using a lattice-based option-pricing model, was recorded as additional paid-in capital and reduced the carrying value of the Notes. The discount on the Notes is being amortized to interest expense using the effective interest method over the term of the Notes. See (B), (C), and (D) above and (F) below.

(F)      New Warrant - The New Warrant is for the purchase of 250,000 shares of common stock, immediately exercisable, and expires February 29, 2012, at an exercise price of $.55 per share. The fair value of the New Warrant of $153,547 at the time of issuance, which was determined using a lattice-based option-pricing model, was recorded as additional paid-in capital and reduced the carrying value of the Notes. The discount on the Notes is being amortized to interest expense using the effective interest method over the term of the Notes. See (B), (C), (D), and (E) above.

(G)     Collateral Agreement – The Company entered into a Collateral Agreement on February 21, 2007 under which the Company granted a security interest to ComVest under the Loan Agreement for substantially all of its assets.

8

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED- CONTINUED)

Note 6.  Revolving Credit Note, Convertible Term Note, Warrants, and Registration Payment Arrangements - continued.

(H)     Registration Rights– The Registration Rights Agreement entered into on February 21, 2007 requires the Company to file with the SEC not later than 90 days after the date of this agreement (“Original Filing Period”), a shelf registration (“Registration Statement”) to cover the resale of the Conversion Shares, Warrant Shares, and additional shares of common stock issuable pursuant to the anti-dilution provisions of the Convertible Term Note and Warrants (“Registrable Shares”). The Company is required to use its best efforts to cause the Registration Statement to be declared effective as promptly as possible after filing it with the SEC but in no event later than 150 days after the date of the agreement. If the Registration Statement is not declared effective within 150 days after the date of the agreement, or shall cease to be available for use by the Holders as selling stockholders (A) where such unavailability continues for a period in excess of 5 days beyond certain allowed time periods for circumstances such as when a distribution would require the public disclosure of material non-public information concerning any transaction or negotiations involving the Company or any of its affiliates, the Company proposes to file a Registration Statement for the offering and sale of securities for its own account in an underwritten offering, and after the filing of the Company’s annual report on Form 10-K or other event that requires the filing of a post-effective amendment to any Registration Statement, or (B) for any other reason such as a stop order, a material misstatement or omission in such Registration Statement or the information contained in such Registration Statement having become outdated and continues to be unavailable for a period in excess of 30 days, then the Company is required to pay to the Holders, ratably in proportion to the number of Registrable Shares held by each respective Holder, a cash fee equal to the product of $1,000 multiplied by the number of calendar days during which any of the events described above occurs and is continuing up to a maximum of $500,000. The approximate term of the registration payment arrangement is the period of time from the effective date of such Registration Statement until such date as is the earlier of the date on which all of the Registrable Shares covered by the Registration Statement are sold to the public, or the date on which the Conversion Shares and the Warrant Shares issued or issuable upon cashless exercise of the Warrants may be immediately sold without restriction by each Holder thereof without registration. In connection with Amendment No. 1 described in (B) above, ComVest agreed to amend the Original Filing Period from 90 days to June 22, 2007. The Company filed the required Registration Statement with the SEC on June 20, 2007, which was declared effective on June 29, 2007 by the SEC. See also (B), (C), (D), and (E) above. The Company determined that no liability is recognizable at September 30, 2007 for registration payment arrangements.

Note 7.   Loans Payable – Related Party.

The Company received advances of $550,000, net, from the Chairman during the third quarter of 2007 for cash flow fluctuations and working capital purposes which were recorded as short term demand loans bearing interest at 8% per annum. Accrued interest was $2,067 at September 30, 2007.

Note 8.  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:

	Three Months Ended September 30,												Nine Months Ended September 30,
	2007						2006						2007						2006
	Amount			Per Share Amount			Amount			Per Share Amount			Amount			Per Share Amount			Amount			Per Share Amount
Operating (Loss)	$	(777,460	)	$	(0.015	)	$	(920,470	)	$	(0.017	)	$	(2,408,009	)	$	(0.045	)	$	(1,806,457	)	$	(0.034	)
Income (Loss) from Discontinued Operations, Net of Income Tax Benefit-Deferred		—			—			(5,000	)		(0.000	)		—			—			319,068			0.006
Net (Loss)	$	(777,460	)	$	(0.015	)	$	(925,470	)	$	(0.017	)	$	(2,408,009	)	$	(0.045	)	$	(1,487,389	)	$	(0.028	)
Plus: Dividends on Preferred Stock		(205,970	)		(0.004	)		(1,323	)		(0.000	)		(611,520	)		(0.011	)		(1,323	)		(0.000	)
Net (Loss) Available to Common Stockholders	$	(983,430	)	$	(0.018	)	$	(926,793	)	$	(0.017	)	$	(3,019,529	)	$	(0.056	)	$	(1,488,712	)	$	(0.028	)
Weighted Average Common Shares Outstanding		53,635,699						53,551,051						53,611,138						53,360,621

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) -0- and 69,447 shares, of nonvested restricted common stock issued to eligible directors but held by the Company pursuant to vesting restrictions under the former Director Compensation Plan, (ii) 73,000 and 171,368 shares upon exercise of vested and exercisable stock options, (iii) 876,300 and 576,300 shares upon exercise of vested and unexercisable stock options, (iv) 2,416,667 and -0- shares upon conversion of the Convertible Term Note, and (v) 1,750,000 and -0- shares upon exercise of outstanding warrants, for the three and nine months ended September 30, 2007 and 2006, respectively.

9

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED- CONTINUED)

Note 9.   Business Segment Information.

The Company is a national manufacturer and distributor with seven segments: Coatings, Foam, Paints, Sealants, Adhesives, Equipment, and All Other. The Company’s segments are organized based on differences in products. The Company primarily manufactures coatings and foam and distributes paints, sealants, adhesives, equipment, and all other products. Production facilities are located in Texas and Arizona. 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 income before income taxes. A substantial amount of administrative expenses are allocated to the segments. The portion not allocated to the segments represents the unallocated cost of certain corporate expenses, insurance, investor relations, and gains and losses related to the disposal of corporate assets 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, 2007
	Coatings		Foam			Paints		Sealants		Adhesives		Equipment			All Other			Totals
Sales	$	2,361,431	$	5,316,909		$	87,853	$	180,517	$	—	$	349,788		$	73,004		$	8,369,502
Depreciation and Amortization		44,090		9,755			161		331		—		642			134			55,113
Interest Expense		64,268		144,704			2,391		4,913		—		9,520			1,987			227,783
Segment Profit (Loss)		195,826		(203,896	)		5,820		22,212		—		(14,122	)		(139,251	)		(133,410	)
Segment Assets (1)		4,309,963		7,981,807			244,394		374,753		173		495,158			100,799			13,507,046
Expenditures for Segment Assets	$	10,873	$	97,858		$	—	$	—	$	—	$	—		$	—		$	108,731

	Three Months Ended September 30, 2006
	Coatings		Foam			Paints		Sealants		Adhesives			Equipment		All Other			Totals
Sales	$	2,578,964	$	5,833,154		$	249,769	$	210,268	$	882		$	110,231	$	54,222		$	9,037,490
Depreciation and Amortization		40,818		9,216			395		332		1			174		86			51,023
Interest Expense		27,328		61,811			2,647		2,228		9			1,168		575			95,765
Segment Profit (Loss)		127,111		(479,522	)		21,503		11,557		(13	)		42,499		(9,484	)		(286,349	)
Segment Assets (1)		3,851,492		6,978,275			394,465		353,962		1,130			131,960		58,912			11,770,196
Expenditures for Segment Assets	$	70,181	$	47,757		$	2,045	$	7,173	$	7		$	902	$	445		$	128,510

Reportable Segments - continued

	Nine Months Ended September 30, 2007
	Coatings		Foam			Paints		Sealants		Adhesives		Equipment			All Other			Totals
Sales	$	7,675,527	$	15,201,748		$	628,080	$	832,130	$	—	$	675,058		$	146,154		$	25,158,697
Depreciation and Amortization		145,354		31,597			1,305		1,730		—		1,403			304			181,693
Interest Expense		144,483		286,156			11,823		15,664		—		12,707			2,751			473,584
Segment Profit (Loss)		182,839		(985,280	)		58,807		28,319		—		(22,817	)		(119,040	)		(857,173	)
Segment Assets (1)		4,575,028		7,623,136			411,586		507,726		172		322,266			67,132			13,507,045
Expenditures for Segment Assets	$	225,118	$	1,334,880		$	4,140	$	24,877	$	—	$	4,450		$	963		$	1,594,428

	Nine Months Ended September 30, 2006
	Coatings		Foam			Paints		Sealants		Adhesives			Equipment		All Other			Totals
Sales	$	7,361,998	$	12,937,956		$	872,327	$	729,322	$	31,147		$	455,530	$	210,774		$	22,599,054
Depreciation and Amortization		108,310		22,922			1,550		1,296		55			810		375			135,387
Interest Expense		68,177		119,814			8,078		6,754		288			4,219		1,952			209,282
Segment Profit (Loss)		174,027		(672,306	)		49,330		3,671		(241	)		49,648		(11,710	)		(407,582	)
Segment Assets (1)		4,248,217		6,262,066			502,114		442,394		13,705			210,120		91,580			11,770,197
Expenditures for Segment Assets	$	155,460	$	186,975		$	12,606	$	15,992	$	450		$	6,583	$	3,046		$	381,112

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

10

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED- CONTINUED)

Note 9.   Business Segment Information - continued.

The following are reconciliations of reportable segment profit or loss, and assets, to the Company’s consolidated totals for the periods indicated:

Segment Profit or Loss

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,
	2007			2006			2007			2006
Total Profit or Loss for Reportable Segments	$	(133,410	)	$	(286,349	)	$	(857,173	)	$	(407,582	)
Unallocated Amounts:
Corporate Expenses		(644,050	)		(634,122	)		(1,550,835	)		(1,398,875	)
(Loss) Before Income Taxes	$	(777,460	)	$	(920,471	)	$	(2,408,008	)	$	(1,806,458	)

Assets
	September 30, 2007		December 31, 2006
Total Assets for Reportable Segments (1)	$	13,507,046	$	10,232,938
Other Unallocated Amounts (2)		613,541		919,370
Consolidated Total	$	14,120,587	$	11,152,308

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

⁽²⁾      Includes corporate assets which are principally cash and cash equivalents and prepaid expenses and other current assets.

Note 10.  Reclassifications, Restatements, and Corrections to Previously Issued Financial Statements.

(A)      Reclassification of Prepaid Expenses to Trade Receivables– The Company recorded the amount of claims filed under its credit insurance policies as Other Current Assets whenever it was determined that those trade receivables covered under its credit insurance policy were uncollectible on the face of the condensed consolidated balance sheet when these amounts should have maintained their classification as Trade Receivables. The Company reclassified the credit insurance receivables and included this amount in the Trade Receivables, Net for the quarter ended March 31, 2007. This information was previously disclosed in the Company’s Form 10-Q/A for the quarter ended March 31, 2007 filed with the SEC on August 20, 2007.

(B)      Reclassification of Prepaid Expenses to Other Non-Current Assets– The Company recorded the transaction fees related to the Credit Facility as a Prepaid Expense on the face of the condensed consolidated balance sheet when the amount should have been classified as an Other Non-Current Asset. The Company reclassified the fees charged in connection with the Credit Facility established with ComVest originally included in the Prepaid Expenses line item on the Condensed Consolidated Balance Sheet and included this amount in the Other Non-Current Assets line item for the quarter ended March 31, 2007. This information was previously disclosed in the Company’s Form 10-Q/A for the quarter ended March 31, 2007 filed with the SEC on August 20, 2007.

(C)      Restatement of Deferred Income Tax Asset and Income Tax Benefit-Deferred– The Company believed that an appropriate set of circumstances existed based on various management assumptions and projections in the fourth quarter and year ended December 31, 2005 that would make a certain portion of its eligible cumulative losses from continuing operations recoverable for income tax purposes and established a deferred income tax asset for an amount equal to the amount it deemed more likely than not would be realized during 2006. The carrying amount of the deferred income tax asset was evaluated on a quarterly basis and adjusted in light of changing circumstances for each of the four quarters and year ended December 31, 2006 and the quarter ended March 31, 2007. Notwithstanding the foregoing, the Company reevaluated its recognition of a portion of its deferred income tax asset from continuing operations and reversing the amounts previously recognized until such time that the Company exceeds break-even or marginal cumulative profitability. The Company increased the valuation allowance related to its deferred income tax asset to fully reserve the carrying value of its deferred income tax asset and restated its results for the affected periods covered in this report to reflect the adjustments. This information was previously disclosed in the Company’s Form 10-K for the year ended December 31, 2006 filed originally with the SEC on March 30, 2007, Form 10-K/A for the year ended December 31, 2006 filed with the SEC on August 20, 2007, and Form 10-Q/A for the quarter ended March 31, 2007 filed with the SEC on August 20, 2007.

11

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED- CONTINUED)

Note 10.  Reclassifications, Restatements, and Corrections to Previously Issued Financial Statements - continued.

(D)      Reclassification of Revolving Credit Note– The Company classified the Revolving Credit Note liability (originally reflected as “Line of Credit”) as a Current Liability on the condensed consolidated balance sheets when it should have been classified as an Other Liability based on its February 28, 2009 maturity date. The Company reclassified the Revolving Credit Note liability originally included in the Current Liability section of the condensed consolidated balance sheet and included this amount in the Other Liabilities section for the quarter ended March 31, 2007. This information was previously disclosed in the Company’s Form 10-Q/A for the quarter ended March 31, 2007 filed with the SEC on August 20, 2007.

(E)       Restatement of Convertible Term Note and Revolving Credit Note Liabilities and Interest Expense– The Company did not account for the fair value of the warrants issued in connection with the Credit Facility entered into with ComVest. The Company accounted for the fair value of warrants as additional paid-in capital, reduced the carrying values of the convertible term note and revolving credit note by the fair value of the warrants, and recorded interest expense using the effective interest method for the quarter ended March 31, 2007. This information was previously disclosed in the Company’s Form 10-Q/A for the quarter ended March 31, 2007 filed with the SEC on August 20, 2007.

(F)       Disclosure of Accounting for Registration Payment Arrangements– The Company entered into a Registration Rights Agreement contemporaneously with the establishment of a Credit Facility with ComVest on February 21, 2007, which agreement contains certain provisions that may require the Company to pay ComVest certain fees upon the happening of certain events, and did not disclose the particular details of the registration payment arrangement in the quarter ended March 31, 2007. The Company amended its Form 10-Q for the quarter ended to disclose the registration payment arrangement as required. This information was previously disclosed in the Company’s Form 10-Q/A for the quarter ended March 31, 2007 filed with the SEC on August 20, 2007.

(G)      Restatement of Accrued Expenses and Other Current Liabilities, Cost of Sales, and Sales – The Company restated the accrued expenses and other current liabilities on the Consolidated Balance Sheets and Sales and Cost of Sales on the Consolidated Statements of Operations for the first three quarters of 2006. This information was previously disclosed in the Company’s Form 10-K for the year ended December 31, 2006 filed originally with the SEC on March 30, 2007, Form 10-K/A for the year ended December 31, 2006 filed with the SEC on August 20, 2007, and Form 10-Q/A for the quarter ended March 31, 2007 filed with the SEC on August 20, 2007.

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

Overview

This financial review presents our operating results for the quarter, and nine months, ended September 30, 2007 and 2006, and our financial condition at September 30, 2007. 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, 2006, including any amendments thereto.

Performance for the Three Months Ended September 30, 2007 compared to the Three Months Ended September 30, 2006

Overall Results of Operations

The following is a summary of sales for the three months ended September 30:

	2007		2006
Sales	$	8,369,502	$	9,037,490

Our sales decreased $667,988, or 7.4%, for the third quarter of 2007 compared to the third quarter of 2006, largely due to a general downturn in the building products market which negatively affected all of our segments, and sale of our retail distribution channel, which affected our Paints, Sealants, and All Other segments sales volumes, slightly offset by increased volumes in our Equipment segment.

Our gross profit increased $213,622, or 14.2%, for the three months ended September 30, 2007 compared to the three months ended September 30, 2006, due primarily to cost savings realized in our Foam segment through the addition of our foam resin manufacturing facility at the end of the second quarter of 2007, improvements in manufacturing efficiencies and favorable raw material pricing in our Coatings and Foam segments, and higher selling prices in our Sealants segment, offset by a decrease in our Paints and All Other segments sales volumes related to the strategic shift towards coatings and foam, and an unfavorable pricing mix in the Equipment and All Other segments. Gross margin increased 3.9 percentage points, to 20.6%, for the third quarter of 2007 compared to the third quarter of 2006.

Our total costs and expenses are comprised of cost of sales, selling, general and administrative expenses, professional fees, depreciation, amortization, consulting fees, interest expense, and other expense. These total costs and expenses decreased $810,998, or 8.1%, for the third quarter of 2007 compared to the third quarter of 2006, due to a decrease of $881,610 for cost of sales, $49,307 for SG&A, and $50,782 for interest expense – related party, offset by an increase of $104,219 for professional fees, $4,090 for depreciation and amortization, $24,413 for consulting fees, $172,230 for interest expense, and a gain of $134,251 in other income.

Cost of sales decreased $881,610, or 11.7%, for the three months ended September 30, 2007 compared to the three months ended September 30, 2006, due to cost cutting measures undertaken during the quarter, vertical integration in our Foam segment, and improved manufacturing efficiencies and favorable raw material pricing in our Coatings and Foam segments, partially offset by lower sales volumes across all of our segments except for Equipment, and an unfavorable pricing mix in our Equipment and All Other segments.

SG&A decreased $49,307, or 2.3%, for the quarter ended September 30, 2007 compared to the quarter ended September 30, 2006, primarily due to decreases of $339,077 in bad debt expense and $29,000 in travel and related services, partially offset by increases of $128,422 in share based compensation, $73,040 in sales commissions, $45,885 in investor relations and American Stock Exchange fees, $41,396 in corporate office expenses, and $33,470 in payroll and related benefits. The decreases were largely as a result of realigning our base infrastructure towards our core foam and coatings businesses and to adapt to current market conditions.

Professional fees increased $104,219, or 195.9%, for the third quarter of 2007 compared to the third quarter of 2006, due to an increase of $85,249 for outside accountants, auditing and auditing related services and $18,970 for legal fees.

Depreciation and amortization expense increased $4,090, or 8%, for the three months ended September 30, 2007 compared to the three months ended September 30, 2006 due to an increase in depreciable property, plant and equipment.

Consulting fees increased $24,413, or 70.8%, for the third quarter of 2007 compared to the third quarter of 2006 due to an increase in outside professional services for investor relations and information technology.

13

Interest expense increased $172,230, or 322%, for the three months ended September 30, 2007 compared to the three months ended September 30, 2006, due to an increase in the capital utilized from our credit instruments and amortization of the discount on the Convertible Term Note and Revolving Credit Note.

Interest expense – related party decreased $50,782, or 96.1%, for the third quarter of 2007 compared to the third quarter of 2006 due to the establishment of a credit facility with ComVest which minimized reliance on our Chairman for operating capital.

Other income was $134,251 for the three months ended September 30, 2007 and primarily related to a gain on the sale of certain assets. We did not have any other income or expense for the comparable period in 2006.

We did not have any income or loss from discontinued operations for the third quarter of 2007 compared to a loss of $5,000 for the third quarter of 2006 due to an increase in reserve for litigation.

Net loss for the three months ended September 30, 2007 was $777,460 compared to $920,470 for the same period in 2006 due to a decrease in cost of sales, SG&A, and interest expense – related party, offset by an increase in gross profit, professional fees, depreciation and amortization, consulting fees, interest expense, and other income, and a decrease in sales.

Net loss per share for the third quarter of 2007 was $0.015 compared to $0.017 for the third quarter of 2006.

Dividends accrued on our outstanding Series D Preferred Stock were $205,970 for the quarter ended September 30, 2007 compared to $1,323 for the quarter ended September 30, 2006.

Net loss available to common stockholders and related loss per share for the three months ended September 30, 2007 was $983,430 and $0.018 compared to $926,793 and $0.017 for the three months ended September 30, 2006. The increase in net loss available to common stockholders and related loss per share are attributable to the net loss plus an increase in dividends accrued for the outstanding Series D Preferred Stock.

Results of Business Segments

The following is a summary of sales by segment for the three months ended September 30:

Segments	2007		2006
Coatings	$	2,361,431	$	2,578,964
Foam		5,316,909		5,833,154
Paints		87,853		249,769
Sealants		180,517		210,268
Adhesives		—		882
Equipment		349,788		110,231
All Other	$	73,004	$	54,222

Coatings sales decreased $217,533, or 8.4%, for the third quarter of 2007 compared to the third quarter of 2006, due to a general downturn in the building products market. Segment profit increased $68,715, or 54.1%, for the quarter ended September 30, 2007 compared to the same period in 2006. The increase in our Coatings segment profit for the quarter ended September 30, 2007 was primarily attributable to improved manufacturing efficiencies and favorable raw material pricing.

Foam sales decreased $516,245, or 8.9%, for the quarter ended September 30, 2007 compared to the quarter ended September 30, 2006, due to the reasons enumerated in our Coatings segment above. Segment loss decreased $275,626, or 57.5%, for the three months ended September 30, 2007 compared to the same period in 2006. The decrease in our Foam segment loss for the third quarter of 2007 was primarily attributable to cost savings realized through the addition of our foam resin manufacturing facility at the end of the second quarter of 2007, improved manufacturing efficiencies, and favorable raw material pricing.

Paints sales decreased $161,916, or 64.8%, for the three months ended September 30, 2007 compared to the three months ended September 30, 2006, due to the sale of our retail distribution channel during the quarter. Segment profit decreased $15,683, or 72.9%, for the quarter ended September 30, 2007 compared to the same period in 2006. The decrease in our Paints segment profit for the three months ended September 30, 2007 was primarily attributable to the strategic shift towards our core Coatings and Foam and Coatings segments.

Sealants sales decreased $30,111, or 14.1%, for the third quarter of 2007 compared to the third quarter of 2006, due to the reasons enumerated in our Coatings and Paints segment above. Segment profit increased $10,655, or 92.2%, for the quarter ended September 30, 2007 compared to the same period in 2006. The increase in our Sealants segment profit for the quarter ended September 30, 2007 was primarily attributable to higher sales prices.

14

Adhesives sales were $ -0- for the quarter ended September 30, 2007 compared to $882 for the quarter ended September 30, 2006, as a result of a decrease in demand. There was no segment profit or loss for the third quarter of 2007 compared to a segment loss of $13 for the same period in 2006. The decrease in our Adhesives segment profit for the quarter ended September 30, 2007 was due to a decrease in sales.

Equipment sales increased $239,557, or 217.3%, for the three months ended September 30, 2007 compared to the three months ended September 30, 2006, due to a focused sales effort during the quarter. Segment loss was $139,251 for the quarter ended September 30, 2007 compared to a segment profit of $42,499 in the same period in 2006. The segment loss for the three months ended September 30, 2007 was primarily attributable to an unfavorable pricing mix.

All Other sales increased $18,782, or 34.6%, for the third quarter of 2007 compared to the third quarter of 2006, due to the reasons enumerated in our Coatings and Paint segments. Segment loss was $139,251 for the quarter ended September 30, 2007 compared to a segment loss of $9,484 for the same period in 2006. The All Other segment loss was primarily attributable to an unfavorable pricing mix.

Performance for the Nine Months Ended September 30, 2007 compared to the Nine Months Ended September 30, 2006

Overall Results of Operations

The following is a summary of sales for the nine months ended September 30:

	2007		2006
Sales	$	25,158,695	$	22,599,052

Our sales increased $2,559,643, or 11.3%, for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, due to increased sales volumes in our Coatings, Foam, and Equipment segments, partially offset by the sale of our retail distribution channel which decreased our Paints, Sealants, and All Other segments sales volumes.

Our gross profit increased $1,058,673, or 29.1%, for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, primarily due to sales volume growth in our Coatings and Foam segments, due primarily to cost savings realized in our Foam segment through the addition of our foam resin manufacturing facility at the end of the second quarter of 2007, improvements in manufacturing efficiencies and favorable raw material pricing in our Coatings and Foam segments, and higher selling prices in our Sealants segment, partially offset by a decrease in our Paints and All Other segments due to lower sales volumes related to the strategic shift towards our core Coatings and Foam segments, and an unfavorable pricing mix in the Equipment and All Other segments. Gross margin increased 2.6 percentage points, to 18.7%, for the nine months ended September 30, 2007 compared to same period in 2006.

Our total costs and expenses are comprised of cost of sales, SG&A, professional fees, depreciation, amortization, consulting fees, interest expense, and other expense. These total costs and expenses increased $3,161,195, or 13%, for the nine months ended September 30, 2007 compared to the same period in 2006, due to an increase of $1,500,970 for cost of sales, $1,386,283 for SG&A, $126,612 for professional fees, $46,306 for depreciation and amortization, $4,287 for consulting fees, and $376,711 for interest expense, offset by a decrease of $141,029 in interest expenses – related party, and a gain of $138,945 in other income.

Cost of sales increased $1,500,970, or 7.9%, for the nine months ended September 30, 2007 compared to the same period in 2006, due to the increase in sales volumes enumerated above, partially offset by cost cutting measures undertaken during the third quarter of 2007, vertical integration in our Foam segment, and improved manufacturing efficiencies and favorable raw material pricing in our Coatings and Foam segments.

SG&A increased $1,386,283, or 29%, for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, due to an increase of $366,894 for payroll and related employee benefits, $183,070 for sales commissions, $84,260 for insurances, $34,205 for travel and related services, $12,179 for advertising, $4,883 for marketing, promotions and trade shows, $311,078 for share based compensation, $59,371 for investor relations, $42,898 for rents, and $687,528 for corporate office expenses, offset by a decrease of $15,871 for recruiting fees, $8,875 for American Stock Exchange Fees, and $375,334 for bad debts. The increases were largely a result of expanding the Company’s base infrastructure to promote and support additional sales volumes during the first half of 2007, partially offset by cost cutting efforts during the third quarter of 2007 to realign our base infrastructure towards our core foam and coatings businesses and to adapt to a current general economic downturn.

Professional fees increased $126,612, or 76%, for the nine months ended September 30, 2007 compared to the same period in 2006, due to an increase of $91,556 for outside accountants, auditing and auditing related services and $35,056 for legal fees.

Depreciation and amortization expense increased $46,306, or 34%, for the nine months ended September 30, 2007 compared to the same period in 2006 due to an increase in depreciable property, plant and equipment.

15

Consulting fees increased $4,287, or 5%, for the nine months ended September 30, 2007 compared to the same period in 2006 due to an increase in outside professional services for information technology, offset by a decrease in outside professional services for investor relations.

Interest expense increased $376,711, or 397%, for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, due to an increase in the capital utilized from our credit instruments and amortization of the discount on the Convertible Term Note and Revolving Credit Note.

Interest expense – related party decreased $141,029 for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 due to the establishment of a credit facility with ComVest which minimized reliance on our Chairman for operating capital.

Other income was $138,945 for the nine months ended September 30, 2007 and primarily related to a gain on the sale of certain assets. We did not have any other income or expense for the comparable period in 2006.

We did not have any income or loss from discontinued operations for the nine months ended September 30, 2007 compared to income of $319,068 for the comparable period in 2006 which resulted from gains related to writes offs of aged accounts payables partially offset by a decrease in the reserve for litigation.

Net loss for the nine months ended September 30, 2007 was $2,408,009 compared to $1,806,457 for the same period in 2006 due to an increase in SG&A, professional fees, depreciation and amortization, consulting fees, and interest expense, offset by a decrease in interest expense - related party, and an increase in sales, cost of sales, gross profit, and other income.

Net loss per share for the nine months ended September 30, 2007 was $0.045 compared to $0.034 for the same period in 2006.

Dividends accrued on our outstanding Series D Preferred Stock were $611,520 for the nine months ended September 30, 2007 compared to $1,323 for the nine months ended September 30, 2006.

Net loss available to common stockholders and related loss per share for the three months ended September 30, 2007 were $3,019,529 and $0.056 compared to $1,488,712 and $0.028 for the three months ended September 30, 2006. The increase in net loss available to common stockholders and related loss per share are attributable to the net loss plus an increase in dividends accrued for the outstanding Series D Preferred Stock for the nine months ended September 30, 2007.

Results of Business Segments

The following is a summary of sales by segment for the nine months ended September 30:

Segments	2007		2006
Coatings	$	7,675,527	$	7,361,998
Foam		15,201,748		12,937,956
Paints		628,080		872,327
Sealants		832,130		729,322
Adhesives		—		31,147
Equipment		675,058		455,530
All Other	$	146,154	$	210,774

Coatings sales increased $313,529, or 4.3%, for the nine months ended September 30, 2007 compared to the same period in 2006, due to an increase in our sales force, advertising, marketing, and promotion programs, partially offset by a general downturn in the building products market. Segment profit increased by $8,813, or 5.1%, for the nine months ended September 30, 2007 compared to the same period in 2006. The increase in our Coatings segment profit for the nine months ended September 30, 2007 was primarily attributable to improved manufacturing efficiencies and favorable raw material pricing.

Foam sales increased $2,263,792, or 17.5%, for the nine months ended September 30, 2007 compared to the same period in 2006, due to the reasons enumerated in our Coatings segment above. Segment loss increased $312,974, or 46.6%, for the nine months ended September 30, 2007 compared to the same period in 2006. The increase in our Foam segment loss in 2007 was primarily attributable to cost increases related to resale foam purchases during the first six months of the year, partially offset by cost savings realized through the addition of our  foam resin manufacturing facility at the end of the second quarter of 2007, improved manufacturing efficiencies, and favorable raw material pricing.

16

Paints sales decreased $244,247, or 28%, for the nine months ended September 30, 2007 compared to the same period in 2006, due to the sale of our retail distribution channel during the third quarter of 2007. Segment profit increased by $9,477, or 19.2%, for the nine months ended September 30, 2007 compared to the same period in 2006. The increase in our Paints segment profit for the nine months ended September 30, 2007 was primarily attributable to a decrease in the cost of resale paints, partially offset by the strategic shift towards our core Coatings and Foam segments associated with the sale of our retail distribution channel.

Sealants sales increased $102,808, or 14.1%, for the nine months ended September 30, 2007 compared to the same period in 2006, due to the reasons enumerated in our coatings and paints segment above. Segment profit increased $24,648, or 671.5%, for the nine months ended September 30, 2007 compared to the same period in 2006. The increase in our Sealants segment profit for the nine months ended September 30, 2007 was primarily attributable to increased sales volumes, purchasing power, and higher selling prices.

Adhesives sales were $ -0- for the nine months ended September 30, 2007 compared to $31,147 for the same period in 2006, as a result of a decrease in sales.  There was no segment profit or loss for the nine months ended September 30, 2007 compared to a segment loss of $241 for the prior comparable period in 2006.

Equipment sales increased $219,528, or 48.2%, for the nine months ended September 30, 2007 compared to the same period in 2006, due to a focused sales effort during the third quarter of 2007. Segment loss was $22,817 for the nine months ended September 30, 2007 compared to a segment profit of $49,648 in the prior comparable period in 2006. The Equipment segment loss for the nine months ended September 30, 2007 was primarily attributable to an unfavorable pricing mix.

All Other sales decreased $64,620, or 30.7%, for the nine months ended 2007 compared to the same period in 2006, due to the reasons enumerated in our Coatings and Paint segments. Segment loss increased $107,331, or 916.6%, for the nine months ended September 30, 2007 compared to the same period in 2006. The increase in our All Other segment loss was primarily attributable to lower sales volumes, partially offset by a favorable pricing mix.

Liquidity and Capital Resources

Net cash used in our operations was $4,727,750 for the nine months ended September 30, 2007 compared to $1,800,149 for the same period in 2006. The cash used in operations for the nine months ended September 30, 2007 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 increases in trade receivables, inventories, prepaid expenses and other current assets, deposits and other non current assets, and decreases in accounts payable, accrued expenses and other current liabilities, and other liabilities. We had a marked improvement in our gross profit in the third quarter of 2007 largely as a result of our strategic shift towards in house foam resin manufacturing, which allowed significant cost savings over the resale of third party manufactured products.  We also undertook certain cost cutting measures during the third quarter of 2007, including but not limited to, closing our manufacturing operations in Florida and selling off our retail distribution channel, all of which were designed to focus all available resources on our core foam and coatings businesses and to increase our available cash generated from operations to fund our working capital requirements. The downturn in the building products market directly affected our business. We continue to have access to capital through related parties to meet our working capital requirements. We may seek to raise additional funds through private placements of common and preferred stock to accredited sophisticated investors to further fund our operations, increase our distribution channels, pursue acquisitions as part of our strategy for accelerating sales growth, or pay down our short and long term debts, including but not limited to, our Convertible Term Note and Revolving Credit Note, depending on market conditions.

Net cash used in investing activities was $1,479,076 for the nine months ended September 30, 2007 compared to $365,616 for the same period in 2006. We invested $72,890 in vehicles, $28,099 in office furniture and equipment, $113,590 for computers and software, $231,224 in machinery and equipment, and $1,218,704 for construction of manufacturing plants in the nine months ended September 30, 2007.

Net cash provided by financing activities was $5,897,739 for the nine months ended September 30, 2007 compared to $2,257,544 for the same period in 2006. We retired our former lines of credit, repaid certain short term loans received by us from our Chairman of the Board, satisfied certain closing fees and transactional expenses, continued construction of our manufacturing plants, and met certain of our working capital requirements with the $2,000,000 received under our Convertible Term Note and $5,000,000 drawn against our Revolving Credit Note, as amended, during the nine month period ended September 30, 2007. We made principal repayments of $245,787 on our long term debt during the nine month period ended September 30, 2007.

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 and are not subject to material foreign currency exchange risks at this time. Our outstanding debt and related interest expense, as it relates to interest rate exposure, in the United States is currently not material to our operations.

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Item 4.    Controls and Procedures.

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

We carried out an evaluation, under the supervision and with participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2007, the end of the quarterly period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. There were no changes in our internal controls over financial reporting during the third quarter of 2007 that affected our internal controls over financial reporting.

Based on the foregoing, our Principal Executive Officer and our Principal Financial Officer concluded that, as of the period covered by this report, our disclosure controls and procedures were effective and operating at a level appropriate to provide reasonable assurance.  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

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, 2006 and Part II, Item 1 in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, 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 risk factors presented below update, and should be considered in addition to, the risk factors previously disclosed by us in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, Part II, Item 1A in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, and Risk factors in our Registration Statement on Form S-3 filed with the SEC on June 20, 2007.

·  Availability and Cost of Raw Materials — Certain raw materials are critical to our production processes and sales growth and our operating results are significantly affected by the cost of these raw materials. These include not only titanium dioxide and resins in our coatings and paints segments, but also polyols for our foam segment. Although we do not manufacture the isocyanates sold as part of our polyurethane foam systems, the isocyanates are a component of the finished goods sold to our customers and a raw material for our purposes. We have made, and plan to continue to make, supply arrangements to meet planned operating requirements for the future. However, volatility in raw material costs, interruption in ordinary sources of supply and an inability to recover unanticipated increases in raw material costs from customers could result in lost sales or significantly increase the cost of doing business and profitability. We may not be able to fully offset the impact of higher raw materials through price increases or productivity improvements.

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

· Overall Economic Conditions and Demand for Products — General economic conditions in markets in which we do business can impact the demand for our goods. Decreased demand for our products can have a negative impact on our financial performance and cash flow. Demand for our products depends on the general economic conditions affecting the industries in which we do business. A downturn in economic conditions in an industry served by us may negatively impact demand for our products, in turn negatively impacting our operations and financial results. Further, changes in demand for our products can magnify the impact of economic cycles on our businesses.

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

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 21.

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SIGNATURES

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

		LAPOLLA INDUSTRIES, INC.
Date:	November 14, 2007	By:	/s/  Douglas J. Kramer, CEO
		Name:	Douglas J. Kramer
		Title:	CEO and President
		LAPOLLA INDUSTRIES, INC.
Date:	November 14, 2007	By:	/s/  Timothy J. Novak, CFO
		Name:	Timothy J. Novak
		Title:	CFO and Treasurer

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INDEX OF EXHIBITS

Exhibit Number	Description
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.

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