UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 001-31354
Lapolla Industries, Inc. |
(Exact name of registrant as specified in its charter) |
Delaware | 13-3545304 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Intercontinental Business Park | ||
15402 Vantage Parkway East, Suite 322 | ||
Houston, Texas | 77032 | |
(Address of principal executive offices) | (Zip Code) | |
(281) 219-4700 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ (do not check if a smaller reporting company) | |
Smaller reporting company þ | |
Emerging growth company ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES ¨ NO þ
The number of shares outstanding of the issuer's common stock, par value $0.01 per share, as of April 27, 2017, was 123,519,129.
LAPOLLA INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2017
TABLE OF CONTENTS
Page | |||||
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
LAPOLLA INDUSTRIES, INC.
INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
UNAUDITED CONDENSED BALANCE SHEETS | |||
March 31, 2017 and December 31, 2016 | |||
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS | |||
Three Months Ended March 31, 2017 and 2016 | |||
UNADUDITED CONDENSED STATEMENTS OF CASH FLOWS | |||
Three Months Ended March 31, 2017 and 2016 | |||
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS | |||
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
LAPOLLA INDUSTRIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands, except share data)
March 31, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 1,060 | $ | 1,722 | ||||
Trade Receivables, Net | 13,006 | 12,508 | ||||||
Inventories | 5,035 | 6,610 | ||||||
Prepaid Expenses and Other Current Assets | 1,721 | 2,074 | ||||||
Total Current Assets | 20,822 | 22,914 | ||||||
Property, Plant and Equipment | 1,121 | 985 | ||||||
Goodwill | 4,235 | 4,235 | ||||||
Other Intangible Assets, Net | 1,323 | 1,180 | ||||||
Deposits and Other Non-Current Assets, Net | 66 | 81 | ||||||
Total Assets | $ | 27,567 | $ | 29,395 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 6,590 | $ | 6,741 | ||||
Accrued Expenses and Other Current Liabilities | 3,495 | 2,938 | ||||||
Total Current Liabilities | 10,085 | 9,679 | ||||||
Long-Term Debt, Net | 6,200 | 8,945 | ||||||
Deferred Tax Liability | 427 | 414 | ||||||
Total Liabilities | 16,712 | 19,038 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity: | ||||||||
Common Stock, $0.01 Par Value; 140,000,000 Shares Authorized; 123,519,129 and 123,494,129 Issued and Outstanding for March 31, 2017 and December 31, 2016, respectively. | 1,235 | 1,235 | ||||||
Additional Paid-In Capital | 92,689 | 93,600 | ||||||
Accumulated Deficit | (83,069 | ) | (84,478 | ) | ||||
Total Stockholders' Equity | 10,855 | 10,357 | ||||||
Total Liabilities and Stockholders' Equity | $ | 27,567 | $ | 29,395 | ||||
The Accompanying Notes are an Integral Part of the Condensed Financial Statements
2
LAPOLLA INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Sales | $ | 22,544 | $ | 20,639 | ||||
Cost of Sales | 16,241 | 14,965 | ||||||
Gross Profit | 6,303 | 5,674 | ||||||
Operating Expenses: | ||||||||
Selling, General and Administrative | 4,036 | 3,712 | ||||||
Professional Fees | 481 | 310 | ||||||
Depreciation | 21 | 30 | ||||||
Amortization of Other Intangible Assets | 64 | 73 | ||||||
Consulting Fees | 138 | 152 | ||||||
Total Operating Expenses | 4,740 | 4,277 | ||||||
Operating Income | 1,563 | 1,397 | ||||||
Other (Income) Expense: | ||||||||
Interest Expense | 61 | 322 | ||||||
Interest Expense – Related Party | — | 183 | ||||||
Interest Expense – Amortization of Discount | — | 45 | ||||||
Other, Net | 11 | (50 | ) | |||||
Total Other Expense | 72 | 500 | ||||||
Income Before Income Taxes | 1,491 | 897 | ||||||
Income Tax Expense | 82 | 66 | ||||||
Net Income | $ | 1,409 | $ | 831 | ||||
Earnings Per Share: | ||||||||
Basic | $ | 0.01 | $ | 0.01 | ||||
Diluted | $ | 0.01 | $ | 0.01 | ||||
Weighted Average Shares Outstanding: | ||||||||
Basic | 123,494 | 122,256 | ||||||
Diluted | 124,900 | 122,286 | ||||||
The Accompanying Notes are an Integral Part of the Condensed Financial Statements
3
LAPOLLA INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net Income | $ | 1,409 | $ | 831 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||
Depreciation | 71 | 72 | ||||||
Amortization of Other Intangible Assets | 64 | 73 | ||||||
Provision for Losses on Accounts Receivable | 110 | 88 | ||||||
Share Based Compensation Expense | 340 | 217 | ||||||
Interest Expense – Related Party | — | 183 | ||||||
Interest Expense – Amortization of Discount | — | 45 | ||||||
Loss on Foreign Currency Exchange | 5 | (3 | ) | |||||
Deferred Income Tax Provision | 13 | 13 | ||||||
Changes in Assets and Liabilities: | ||||||||
Trade Receivables | (611 | ) | (630 | ) | ||||
Inventories | 1,575 | 2,073 | ||||||
Prepaid Expenses and Other Current Assets | 353 | 185 | ||||||
Other Intangible Assets | (206 | ) | (13 | ) | ||||
Deposits and Other Non-Current Assets | 19 | (7 | ) | |||||
Accounts Payable | (154 | ) | 244 | |||||
Accrued Expenses and Other Current Liabilities | (782 | ) | (94 | ) | ||||
Net Cash Provided by Operating Activities | 2,206 | 3,277 | ||||||
Cash Flows From Investing Activities: | ||||||||
Additions to Property, Plant and Equipment | (118 | ) | (1 | ) | ||||
Net Cash Used in Investing Activities | (118 | ) | (1 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from Line of Credit | 500 | — | ||||||
Principal Repayments to Line of Credit | (3,250 | ) | — | |||||
Proceeds from Revolver Loan | — | 21,707 | ||||||
Principal Repayments to Revolver Loan | — | (24,983 | ) | |||||
Net Cash Used in Financing Activities | (2,750 | ) | (3,276 | ) | ||||
Net Decrease in Cash | (662 | ) | — | |||||
Cash at Beginning of Period | 1,722 | — | ||||||
Cash at End of Period | $ | 1,060 | $ | — | ||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Cash Payments for Income Taxes | $ | — | $ | — | ||||
Cash Payments for Interest | 118 | 203 | ||||||
Supplemental Schedule of Non Cash Investing and Financing Activities: | ||||||||
Issuances of Common Stock for Guaranty by Related Party classified as Interest Expense | $ | — | $ | 183 | ||||
The Accompanying Notes are an Integral Part of the Condensed Financial Statements
4
LAPOLLA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation, Critical Accounting Policies, Estimates, and Assumptions
The condensed financial statements included herein are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the Notes to the condensed financial statements.
These unaudited condensed financial statements should be read in conjunction with the risk factors and the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on February 15, 2017, in order to fully understand the basis of presentation. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year. The Company’s critical accounting policies were described in Note 1 to the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in the Company’s accounting policies during the three months ended March 31, 2017. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenue and expenses. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications of prior year amounts have been made to confirm to the current year presentation. The reclassifications had no impact on net income.
Income Taxes
The Company is a corporation subject to federal income tax at a statutory rate of 34% of pretax earnings. The Company estimated an annual effective income tax rate of 5.5% based on projected results for the year and applied this rate to income before taxes to calculate income tax expense. The tax expense was approximately $82,000 and $66,000, resulting in an effective tax rate of approximately 5.5% and 7.4%, for the thee months ended March 31, 2017 and 2016, respectively.
Based on management's analysis, the Company did not have any uncertain tax positions as of March 31, 2017.
Note 2 - Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out ("LIFO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The adoption did not have a material impact on the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for share-based payment awards to employees, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The adoption did not have a material impact on the Company’s financial statements.
5
LAPOLLA INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
Note 2 - Recent Accounting Pronouncements, continued
New Accounting Standards Not Yet Adopted
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." The ASU will supersede most of the existing revenue recognition requirements in U.S. generally accepted accounting principles ("GAAP") and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The pronouncement is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued ASU 2016-02, "Leases: Amendments to the FASB Accounting Standards Codification," which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact of adopting this guidance.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which contains amendments designed to make current GAAP clear or provide specific guidance on eight cash flow classification issues relating to how certain cash receipts and cash payments are presented and classified in the statement of cash flows, thereby reducing the current and potential future diversity in practice. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact of adopting this guidance.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which contains amendments to simplify the subsequent measurement of goodwill. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments of this ASU are effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of adopting this guidance.
Note 3 - Dependence on Few Suppliers
The Company is dependent on a few suppliers for certain raw materials and finished goods. For the three month period ended March 31, 2017 and 2016, raw materials and finished goods purchased from the three largest suppliers accounted for approximately 44% and 42%, of purchases, respectively.
6
LAPOLLA INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
Note 4 - Trade Receivables
Trade receivables are comprised of the following (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Trade Receivables | $ | 13,479 | $ | 12,874 | ||||
Less: Allowance for Doubtful Accounts | (473 | ) | (366 | ) | ||||
Trade Receivables, Net | $ | 13,006 | $ | 12,508 | ||||
Note 5 - Inventories
The following is a summary of inventories (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Raw Materials | $ | 1,696 | $ | 2,157 | ||||
Finished Goods | 3,339 | 4,453 | ||||||
Total Inventories | $ | 5,035 | $ | 6,610 | ||||
Note 6 - Prepaid Expenses and Other Current Assets
The following is a summary of prepaid expenses and other current assets (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Prepaid Insurances | $ | 699 | $ | 735 | ||||
Prepaid Marketing | 128 | 181 | ||||||
Prepaid Consulting | 40 | 94 | ||||||
Prepaid Other | 854 | 1,064 | ||||||
Total Prepaid Expenses and Other Current Assets | $ | 1,721 | $ | 2,074 | ||||
Note 7 - Property, Plant and Equipment
The following is a summary of property, plant and equipment (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Vehicles | $ | 194 | $ | 244 | ||||
Leasehold Improvements | 278 | 269 | ||||||
Office Furniture and Equipment | 190 | 159 | ||||||
Computers and Software | 1,073 | 907 | ||||||
Machinery and Equipment | 2,558 | 2,557 | ||||||
Total Property, Plant and Equipment | $ | 4,293 | $ | 4,136 | ||||
Less: Accumulated Depreciation | (3,172 | ) | (3,151 | ) | ||||
Total Property, Plant and Equipment, Net | $ | 1,121 | $ | 985 | ||||
7
LAPOLLA INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
Note 8 - Goodwill and Other Intangible Assets
Goodwill
The following is a summary of Goodwill (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Foam | $ | 2,932 | $ | 2,932 | ||||
Coatings | 1,303 | 1,303 | ||||||
Total Goodwill | $ | 4,235 | $ | 4,235 | ||||
Other Intangible Assets
The following is a summary of Other Intangible Assets (in thousands):
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||
Product Formulation | $ | 138 | $ | (106 | ) | $ | 32 | $ | 138 | $ | (104 | ) | $ | 34 | ||||||||||
Trade Names | 750 | (432 | ) | 318 | 750 | (419 | ) | 331 | ||||||||||||||||
Approvals and Certifications | 3,669 | (2,696 | ) | 973 | 3,462 | (2,647 | ) | 815 | ||||||||||||||||
$ | 4,557 | $ | (3,234 | ) | $ | 1,323 | $ | 4,350 | $ | (3,170 | ) | $ | 1,180 | |||||||||||
Note 9 - Deposits and Other Non-Current Assets
The following is a summary of deposits and other non-current assets (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Prepaid Expenses | $ | 7 | $ | 8 | ||||
Other Receivables | 2 | 9 | ||||||
Deposits | 57 | 64 | ||||||
Total Deposits and Other Non-Current Assets | $ | 66 | $ | 81 | ||||
Note 10 - Accrued Expenses and Other Current Liabilities
The following is a summary of accrued expenses and other current liabilities (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Accrued Payroll | $ | 138 | $ | 3 | ||||
Accrued Commissions | 157 | 172 | ||||||
Accrued Dividends Payable | 1,250 | — | ||||||
Accrued Inventory Purchases | 222 | 249 | ||||||
Accrued Taxes and Other | 1,246 | 2,011 | ||||||
Accrued Insurance | 466 | 490 | ||||||
Deferred Finance Charge Income | 16 | 13 | ||||||
Total Accrued Expenses and Other Current Liabilities | $ | 3,495 | $ | 2,938 | ||||
8
LAPOLLA INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
Note 11 - Long-Term Debt
The following is a summary of long-term debt (in thousands):
Debt Facility | Effective Cash Interest Rate | March 31, 2017 | December 31, 2016 | |||||||
Line of Credit | 2.94% | $ | 6,250 | $ | 9,000 | |||||
Less Debt Issuance Costs | (50 | ) | (55 | ) | ||||||
Long-Term Debt, Net | $ | 6,200 | $ | 8,945 | ||||||
The Company entered into a loan agreement with Bank of America, N.A. (the “Bank”) on September 7, 2016 (the “Loan Agreement”), which amended and restated in its entirety that certain prior Loan and Security Agreement dated August 31, 2010 with the Bank. The Loan Agreement provides an initial line of credit of $15 million for a 3 years term maturing on September 7, 2019 (the “Line of Credit”). The available amount of the Line of Credit will be reduced each quarter by $250,000 starting January 1, 2017, until it reaches $12 million on July 1, 2019, thereby reducing the Company’s unused line fee. The interest rate used by the Company is the daily floating LIBOR rate plus 2.25%. The Loan Agreement requires the Company to comply with two financial covenants, including: (i) an asset coverage ratio of at least (a) 1.10 to 1.00 from September 30, 2016, until September 30, 2017, (b) 1.15 to 1.00 from October 1, 2017, through March 31, 2018, and (c) 1.20 to 1.00 from April 1, 2018, and thereafter, tested quarterly, which in each case will be determined based upon the ratio of (x) 85% of book value of all accounts receivable, plus 55% of book value of all inventory, plus 50% of net book value of plant, property and equipment of the Company (the “Total Margined Value”) to (y) all outstanding liabilities for borrowed money and other interest-bearing liabilities arising under the Line of Credit (the “Total Line of Credit"); and (ii) a fixed charge coverage ratio of at least 1.20 to 1.00, tested quarterly based upon the ratio of (a) Adjusted EBITDA (as defined in the Loan Agreement), to (b) the sum of capital expenditures, cash taxes paid, interest expenses, principal payments made on borrowed money other than the Line of Credit and certain prior refinanced debt agreements, and distributions made, in each case for the immediately preceding four fiscal quarter period and determined on a consolidated basis. Upon closing of the Loan Agreement, an aggregate of $8.5 million was drawn from the Line of Credit and used to pay off certain prior refinanced debt agreements. The Company granted the Bank a continuing security interest in and lien upon substantially all assets of the corporation. If, at any time, the Company’s Total Margined Value is less than the amount outstanding under the Total Line of Credit, and that amount remains unpaid or future Total Margined Value calculations do not increase to an amount equal to the balance outstanding under the Total Line of Credit, the Bank, in its sole discretion, may accelerate any and all amounts outstanding under the Line of Credit. At March 31, 2017, the balance outstanding on the Line of Credit, net of deferred financing costs, was $6.3 million, and the weighted-average interest rate was 2.94%. Cash available under our Line of Credit based on the Asset Coverage Ratio, and after giving effect to outstanding borrowings, at March 31, 2017 was $7.2 million. At March 31, 2017, the Company was in compliance with all of its Loan Agreement debt covenants.
Note 12 - Related Party Transactions
(a) On January 1, 2017, the Company granted a stock bonus to the chairman of the board, Richard J. Kurtz, for the right to acquire 100,000 shares of the Company's common stock, par value $.01. No monetary payment is required as a condition of receiving the shares of common stock, as the consideration is continued satisfactory chairman of the board services with the Company during the vesting period. The shares of common stock vest in four equal 25,000 share increments on March 31, 2017, June 30, 2017, September 30, 2017, and December 31, 2017, respectively, subject to continued chairman of the board services to the Company. Once vested, the shares of common stock are freely transferable. The transaction was valued at $53,000 (calculated by multiplying the 100,000 shares by the $.53 closing price of the Company's common stock on the date of grant) and is being expensed over the requisite service period on the respective vesting dates. On March 31, 2017, the first tranche of 25,000 shares of common stock vested, which transaction was valued and recorded at $13,000.
(b) On January 5, 2017, the Company granted eight-year stock options to non-employee directors, Richard J. Kurtz, Jay C. Nadel, Arthur J. Gregg, and Augustus J. Larson, each for the right to acquire 100,000 shares of the Company's common stock, par value $.01, at an exercise price per share equal to the fair market value of a share of the Company’s common stock on the date of grant, determined based on the per share closing price on such date, or $0.50 per share, which options vest 33,333, 33,333, and 33,334 on December 31, 2017, December 31, 2018, and December 31, 2019, respectively, subject to continued satisfactory board services. The transactions were valued in the aggregate at $191,000 which was estimated using the Black-Scholes option pricing model and will be expensed over the requisite vesting period.
9
LAPOLLA INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
Note 13 - Net Income (Loss) Per Common Share – Basic and Diluted
Basic income (loss) per share is based upon the net income (loss) applicable to common shares and upon the weighted average number of common shares outstanding during the period. Diluted income (loss) per share reflects the effect of the assumed exercise of stock options only in periods in which such effect would have been dilutive. The computation of the Company’s basic and diluted earnings per share (in thousands, except per share data):
For The Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Income available to common shareholders (A) | $ | 1,409 | $ | 831 | ||||
Weighted average common shares outstanding (B) | 123,494 | 122,256 | ||||||
Dilutive effect of equity incentive plans | 1,406 | 30 | ||||||
Weighted average common shares outstanding, assuming dilution (C) | 124,900 | 122,286 | ||||||
Basic earnings per common share (A)/(B) | $ | 0.01 | $ | 0.01 | ||||
Diluted earnings per common share (A)/(C) | $ | 0.01 | $ | 0.01 | ||||
For the three months ended March 31, 2017, a total of 600,000 shares of common stock underlying vested and exercisable stock options were excluded from the calculation of diluted earnings per common share as the exercise prices of the stock options were greater than the market value of the common shares (out-of-the-money).
For the three months ended March 31, 2016, a total of 600,000 shares of common stock underlying vested and exercisable stock options were excluded from the calculation of diluted earnings per common share as the exercise prices of the stock options were out-of-the-money.
Out-of-the money options could be included in the calculation in the future if the market value of the Company’s common shares increases and is greater than their exercise price.
Note 14 - Securities Transactions
On March 31, 2017, the Company vested 25,000 shares of common stock, par value $.01, valued and recorded at $13,250 for a stock bonus.
Note 15 - Business Segment and Geographic Area Information
Business Segments
Summarized financial information for the reportable segments is as follows (in thousands):
Three Months Ended March 31, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Foam | Coatings | Totals | Foam | Coatings | Totals | |||||||||||||||||||
Sales | $ | 19,593 | $ | 2,951 | $ | 22,544 | $ | 17,745 | $ | 2,894 | $ | 20,639 | ||||||||||||
Depreciation | 16 | 2 | 18 | 23 | 4 | 27 | ||||||||||||||||||
Amortization of Other Intangible Assets | 60 | 8 | 68 | 57 | 9 | 66 | ||||||||||||||||||
Interest Expense | 27 | 4 | 31 | 236 | 39 | 275 | ||||||||||||||||||
Segment Profit | 2,646 | 512 | 3,158 | 2,022 | 434 | 2,456 | ||||||||||||||||||
Segment Assets (1) | 21,720 | 4,114 | 25,834 | 19,939 | 4,045 | 23,984 | ||||||||||||||||||
Expenditures for Segment Assets | $ | 1 | $ | — | $ | 1 | $ | 1 | $ | — | $ | 1 | ||||||||||||
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LAPOLLA INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
Note 15. Business Segment and Geographic Area Information - continued.
The following are reconciliations of reportable segment profit or loss, and assets, to the Company’s consolidated totals (in thousands):
For The Three Months Ended March 31, | ||||||||
Profit or Loss | 2017 | 2016 | ||||||
Total Profit or Loss for Reportable Segments | $ | 3,158 | $ | 2,456 | ||||
Unallocated Amounts: | ||||||||
Corporate Expenses | (1,667 | ) | (1,559 | ) | ||||
Income (Loss) Before Income Taxes | $ | 1,491 | $ | 897 | ||||
Assets | At March 31, 2017 | At December 31, 2016 | ||||||
Total Assets for Reportable Segments (1) | $ | 25,834 | $ | 27,104 | ||||
Other Unallocated Amounts (2) | 1,733 | 2,291 | ||||||
Consolidated Total | $ | 27,567 | $ | 29,395 | ||||
(1) | Segment assets are the total assets used in the operation of each segment. |
(2) | Includes corporate assets which are principally cash and cash equivalents and deposits. |
Geographic Area Information
The Company does not operate any manufacturing sites nor maintain a permanent establishment in any particular country outside of the United States at this time. The Company’s products are sold to independent distributors globally for select target markets. Sales are attributed to geographic areas based on customer location. Long-lived assets are attributable to geographic areas based on asset location.
Sales and Long-Lived Assets by geographic area are as follows (in thousands):
Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||||||||||||||||||
United States | Europe | Canada | Rest of World | Total | United States | Europe | Canada | Rest of World | Total | |||||||||||||||||||||||||||||||
Sales | $ | 21,899 | $ | 328 | $ | 86 | $ | 231 | $ | 22,544 | $ | 19,287 | $ | 629 | $ | 304 | $ | 419 | $ | 20,639 | ||||||||||||||||||||
Long-Lived Assets | 6,502 | — | — | — | 6,502 | 6,838 | — | — | — | 6,838 | ||||||||||||||||||||||||||||||
Note 16 - Subsequent Events
(a) On April 6, 2017, and effective January 1, 2017, the Company entered into an Executive Employment Agreement with Jomarc C. Marukot, chief financial officer and treasurer (the “Marukot Employment Agreement”), which superseded and replaced all prior employment agreements between the Company and Mr. Marukot. The Marukot Employment Agreement provides, among other things, that Mr. Marukot will receive base compensation of $210,000 per annum and shall be entitled to a bonus equal to 25% of his base salary for each fiscal year if the Company's earnings before interest, taxes, depreciation, amortization, and share based compensation (“Adjusted EBITDA”) for such fiscal year exceeds a target established by the Company's Board of Directors (which bonus shall be increased to: (a) 30% of Mr. Marukot’s annual base compensation if the Company achieves 110% of the Adjusted EBITDA target for such fiscal year and (b) 35% of Mr. Marukot’s annual base compensation if the Company achieves 120% of the Adjusted EBITDA target for such fiscal year). In addition, if the Company achieves Adjusted EBITDA greater than 120% of the target in any fiscal year, the Company's CEO, in his discretion, may pay Mr. Marukot a bonus greater than 35% of his annual base compensation, subject to review and approval by the Compensation Committee and Board of Directors. The Marukot Employment Agreement also provides for a transaction bonus equal to 0.25% of the consideration received by the Company's shareholders (the amount of such bonus being subject to the restrictions and further calculations set forth in the Marukot Employment Agreement) upon consummation of a change in control if Mr. Marukot is still employed at such time or in the event Mr. Marukot’s employment is terminated within one year immediately preceding the consummation of a change in control.
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Note 16 - Subsequent Events - continued
(b) On April 6, 2017, the Company entered into an Executive Employment Agreement with Michael T. Adams, chief governance officer, vice president and corporate secretary (the “Adams Employment Agreement”), which superseded and replaced all prior employment agreements between the Company and Mr. Adams. The Adams Employment Agreement provides, among other things, that Mr. Adams will receive base compensation of $200,000 per annum and shall be entitled to a bonus equal to 25% of his base salary for each fiscal year if the Company's Adjusted EBITDA for such fiscal year exceeds a target established by the Company's Board of Directors (which bonus shall be increased to: (a) 30% of Mr. Adam’s annual base compensation if the Company achieves 110% of the Adjusted EBITDA target for such fiscal year and (b) 35% of Mr. Adam’s annual base compensation if the Company achieves 120% of the Adjusted EBITDA target for such fiscal year). In addition, if the Company achieves Adjusted EBITDA greater than 120% of the target in any fiscal year, the Company's CEO, in his discretion, may pay Mr. Adams a bonus greater than 35% of his annual base compensation, subject to review and approval by the Compensation Committee and Board of Directors. Also, the Adams Employment Agreement provides for a transaction bonus equal to 0.50% of the consideration received by the Company's shareholders (the amount of such bonus being subject to the restrictions and further calculations set forth in the Adams Employment Agreement) upon consummation of a change in control if Mr. Adams is still employed at such time or in the event Mr. Adams’ employment is terminated within one year immediately preceding the consummation of a change in control.
(c) The Company has evaluated subsequent events through the date of filing this report.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying condensed interim financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on February 15, 2017.
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “Lapolla,” “we,” “our” and “us” refer to Lapolla Industries, Inc.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
• | General economic conditions and their effect on demand for foams and coatings, particularly in the commercial construction and insulation markets, but also in the energy savings industries. |
• | The effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins and profitability. |
• | The fact that many of our competitors are better established and have significantly greater resources, and may subsidize their competitive offerings with other products and services, which may make it difficult for us to attract and retain customers. |
• | Our dependence on a few large suppliers for a large portion of our materials required for production and sales of our products, any change in the availability of which could have a significant impact on our results of operations. |
• | The potential loss or departure of key personnel, including Richard J. Kurtz, our chairman of the board and majority stockholder. |
• | Our ability to generate internal growth, maintain market acceptance of our existing products and gain acceptance for our new products. |
• | Unanticipated increases in raw material prices or disruptions in supply, which could increase production costs and adversely affect our profitability. |
• | Restrictive loan covenants and/or our ability to repay or refinance debt under our credit facilities, which could limit our future financing options and liquidity position and may limit our ability to grow our business. |
• | Operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material, labor or overhead cost increases, interest rate risk and commodity risk. |
• | The impact of geopolitical activity on the economy, changes in government regulations such as income taxes, climate control initiatives, the timing or strength of an economic recovery in our markets and our ability to access capital markets. |
• | The fact that our chairman controls a majority of our combined voting power, and may have, or may develop in the future, interests that may diverge from those of other stockholders. |
• | Future sales of large blocks of our common stock, which may adversely impact our stock price. |
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• | The liquidity and trading volume of our common stock. |
The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Moreover, new risks regularly emerge and it is not possible for us to predict or articulate all risks we face, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should review carefully the risks and uncertainties described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.
Overview
Lapolla is a leading United States based manufacturer and global distributor of foam, coatings, and equipment, focused on developing and commercializing foams and coatings targeted at commercial and industrial and residential applications in the insulation and construction industries. We operate out of our corporate headquarters located in Houston, Texas.
We operate our business on the basis of two reportable segments — Foam and Coatings. The Foam segment involves producing, and in limited instances applying through subcontractors, building envelope insulation foam for interior application, and roofing systems. The Coatings segment involves producing protective elastomeric coatings and primers. Both segments include supplying equipment and related ancillary items used in application of our products.
This financial review presents our operating results for the three months ended March 31, 2017 and 2016, and our financial condition at March 31, 2017.
Non-GAAP Financial Measures
To supplement our financial statements presented on a generally accepted accounting principles ("GAAP") basis, we disclose non-GAAP measures as EBITDA and Adjusted EBITDA because management uses these supplemental non-GAAP financial measures to evaluate performance period over period, to analyze the underlying trends in its business, and to establish operational goals and forecasts that are used in allocating resources. In addition, we believe many investors use these non-GAAP measures to monitor the Company’s performance. Our presentation includes these non-GAAP financial measures, and a reconciliation of EBITDA and Adjusted EBITDA to the GAAP measures most directly comparable thereto. The GAAP measure most directly comparable to EBITDA and Adjusted EBITDA is net income or loss. The non-GAAP financial measures of EBITDA and Adjusted EBITDA should not be considered as an alternative to net income or loss or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and Adjusted EBITDA are not presentations made in accordance with GAAP and have important limitations as analytical tools. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income and is defined differently by other companies, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
EBITDA
EBITDA is defined as earnings or loss before interest, income taxes, depreciation and amortization.
Adjusted EBITDA
Adjusted EBITDA is defined as EBITDA increased by total share based compensation and property taxes.
We believe that presenting EBITDA and Adjusted EBITDA, in addition to the corresponding GAAP financial measures, provides investors greater transparency to the information used by management for financial and operational decision-making and allows investors to see the Company’s results “through the eyes” of management. We further believe that providing this information assists investors in understanding the Company’s operating performance and the methodology used by management to evaluate and measure such performance.
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We recognize that the usefulness of EBITDA and Adjusted EBITDA as an evaluative tool may have certain limitations, including:
• | EBITDA and Adjusted EBITDA do not include interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and impacts our ability to generate profits and cash flows. Therefore, any measure that excludes interest expense may have material limitations; |
• | EBITDA and Adjusted EBITDA do not include depreciation and amortization of other intangible assets expense. Because we use capital assets, depreciation and amortization of other intangible assets expense is a necessary element of our costs and ability to generate profits. Therefore, any measure that excludes depreciation and amortization of other intangible assets expense may have material limitations; |
• | EBITDA and Adjusted EBITDA do not include provision for income taxes. Because the payment of income taxes is a necessary element of our costs, any measure that excludes income tax expense may have material limitations; |
• | EBITDA and Adjusted EBITDA do not reflect capital expenditures or future requirements for capital expenditures or contractual commitments; |
• | EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs. |
Critical Accounting Policies
There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
Performance for the Three Months Ended March 31, 2017 compared to the Three Months Ended March 31, 2016
Results of Operations
The following table presents selected financial and operating data derived from the unaudited financial statements of the Company as of the dates and for the periods indicated. In addition, the table presents our unaudited non-GAAP financial measures, EBITDA and Adjusted EBITDA, and includes our reconciliation to net income or loss, its most directly comparable financial measure calculated and presented in accordance with GAAP. The table is presented in thousands.
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Summary of Overall Results of Operations: | ||||||||
Sales | $ | 22,544 | $ | 20,639 | ||||
Operating Income | 1,563 | 1,397 | ||||||
Other Expense | 72 | 500 | ||||||
Net Income | 1,409 | 831 | ||||||
EBITDA | $ | 1,687 | $ | 1,592 | ||||
Adjusted EBITDA | $ | 2,078 | $ | 1,855 | ||||
Reconciliation of EBITDA and Adjusted EBITDA to Net Income: | ||||||||
Net Income | $ | 1,409 | $ | 831 | ||||
Additions: | ||||||||
Interest Expense | 61 | 322 | ||||||
Interest Expense – Related Party | — | 183 | ||||||
Interest Expense – Amortization of Discount | — | 45 | ||||||
Income Tax Expense | 82 | 66 | ||||||
Depreciation | 71 | 72 | ||||||
Amortization of Other Intangible Assets | 64 | 73 | ||||||
EBITDA | $ | 1,687 | $ | 1,592 | ||||
Additions: | ||||||||
Share Based Compensation (1) | 340 | 217 | ||||||
Property Tax Expense | 51 | 46 | ||||||
Adjusted EBITDA | $ | 2,078 | $ | 1,855 | ||||
(1) Represents non-cash share-based compensation expense for the periods then ended.
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Sales
The following is a summary of sales for the three months ended March 31, 2017 and 2016 (in thousands):
2017 | 2016 | % Change | |||||||||
Foam | $ | 19,593 | $ | 17,745 | 10.4 | % | |||||
Coatings | 2,951 | 2,894 | 2.0 | % | |||||||
Total Sales | $ | 22,544 | $ | 20,639 | 9.2 | % | |||||
For the three months ended March 31, 2017, our total sales increased by $1.9 million, or an increase of 9.2% from the same period in 2016. Foam sales increased $1.8 million while coatings sales increased $57,000. Both segment increases are primarily due to an increase in market share, which we believe is attributable to our focus on advancement of technology and marketing effort.
Gross Profit
The following is a summary of gross profit for the three months ended March 31, 2017 and 2016 (in thousands):
2017 | 2016 | % Change | |||||||||
Cost of Sales | $ | 16,241 | $ | 14,965 | 8.5 | % | |||||
Gross Profit | $ | 6,303 | $ | 5,674 | 11.1 | % | |||||
Gross Margin Percentage: | |||||||||||
Foam | 27.5 | % | 27.0 | % | 1.9 | % | |||||
Coatings | 31.3 | % | 30.6 | % | 2.3 | % | |||||
Total | 28.0 | % | 27.5 | % | 1.8 | % | |||||
For the three months ended March 31, 2017, our gross profit increased by $629,000, or an increase of 11.1% from the same period in 2016. The increase in sales accounted for approximately $524,000 of the gross profit increase, while operational and manufacturing efficiencies accounted for approximately $105,000.
Operating Expenses
Selling, general, and administrative expenses increased $324,000 or 8.7%, to $4.0 million for the three months ended March 31, 2017, compared to $3.7 million for the same period in 2016. The increase was primarily due to increases of $137,000 in payroll and related employee benefit expenses and $123,000 in share based compensation expenses. The remainder of the increase was a combination of minimal fluctuations.
Professional fees increased $171,000 or 55.1%, to $481,000 for the three months ended March 31, 2017, compared to $310,000 for the same period in 2016. The increase in professional fees was primarily due to higher legal fees.
Depreciation expense decreased $9,000 or 30.0%, to $21,000 for the three months ended March 31, 2017, compared to $30,000 for the same period in 2016, due to reductions in depreciable assets.
Amortization of other intangible assets expense decreased $9,000 or 12.3%, to $64,000 for the three months ended March 31, 2017, compared to $73,000 for the same period in 2016, due to certain approvals and certifications becoming fully amortized during 2016.
Consulting decreased $14,000 or 9.2%, to $138,000 for the three months ended March 31, 2017, compared to $152,000 for the same period in 2016, primarily due to a decrease in the need for consulting services related to state income and sales taxes.
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Other (Income) Expense
Interest expense decreased $261,000 or 81.1%, to $61,000 for the three months ended March 31, 2017, compared to $322,000 for the same period in 2016, due to the refinancing of the Enhanced Notes and former revolver loan into a new line of credit with Bank of America, N.A. in September of 2016.
Interest expense – related party decreased $183,000 or 100.0%, to $0 for the three months ended March 31, 2017, compared to $183,000 for the same period in 2016, primarily due to the refinancing of the Enhanced Notes which eliminated the personal guaranty from the chairman.
Interest expense – amortization of discount decreased $45,000 or 100.0%, to $0 for the three months ended March 31, 2017, compared to $45,000 for the same period in 2016, due to the refinancing of the Enhanced Notes and former revolver loan into a new line of credit with Bank of America, N.A. in September of 2016 which eliminated
Other expense, net increased $61,000 or 122.0%, to $11,000 for the three months ended March 31, 2017, compared to net income of $50,000 for the same period in 2016. The income in 2016 was due to a recovery of payments related to accounts receivable balances that had been written off in 2015.
Liquidity and Capital Resources
We entered into a loan agreement with Bank of America, N.A. (the “Bank”) on September 7, 2016 (the “Credit Agreement”), under which we maintain a line of credit up to $15 million (the “Line of Credit”). The Company, in connection with the closing of the Credit Agreement, used the Line of Credit to pay off the outstanding balances under: (i) a note purchase agreement with Enhanced Jobs for Texas Fund, LLC and Enhanced Credit Supported Loan Fund, LP (collectively “Enhanced”) on December 10, 2013 (the “Note Purchase Agreement”) for promissory notes aggregating $5.8 million (collectively referred to as the “Enhanced Notes”); and (ii) the Loan and Security Agreement with the Bank dated August 31, 2010 (the “Loan Agreement”) aggregating $2.7 million (the “Revolver Loan”). Refer to Credit Agreement below for more information.
The following is a summary of operating, investing, and financing activities as reflected in the statement of cash flows for the three months ending March 31, 2017 and 2016 (in thousands):
Cash Flow Activity | 2017 | 2016 | % Change | |||||||
Cash Provided by (Used in): | ||||||||||
Operating Activities | $ | 2,206 | $ | 3,277 | (32.7 | )% | ||||
Investing Activities | (118 | ) | (1 | ) | 11,700.0 | % | ||||
Financing Activities | (2,750 | ) | (3,276 | ) | (16.1 | )% | ||||
Net Decrease in Cash | $ | (662 | ) | $ | — | |||||
Net cash provided by operating activities decreased by $1.1 million, to $2.2 million for the three months ended March 31, 2017, compared to $3.3 million for the same period in 2016. The decrease was primarily due to the reduction in net working capital offset by an increase in net income.
The following is a summary of Net Working Capital at March 31, 2017 and December 31, 2016 (in thousands):
Net Working Capital | 2017 | 2016 | % Change | |||||||
Current Assets | $ | 20,822 | $ | 22,914 | (9.1 | )% | ||||
Current Liabilities | 10,085 | 9,679 | 4.2 | % | ||||||
Net Working Capital | 10,737 | 13,235 | (18.9 | )% | ||||||
Current Ratio | 2.06:1 | 2.37:1 | ||||||||
Net working capital decreased by $2.5 million during the three months ended March 31, 2017, from December 31, 2016. The decrease in net working capital was primarily driven by a decrease in inventory of $1.6 million and an increase in accrued expenses related to declared dividends of $1.3 million, both of which were offset by a combination of other minimal fluctuations.
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Net cash used in investing activities for the three months ended March 31, 2017 was $118,000, compared to $1,000 during the same period in 2016. All investments were fully related to capital expenditures.
Net cash used in financing activities was $2.8 million for the three months ended March 31, 2017, and related to repayments to our Line of Credit of $3.3 million, net of borrowings of $500,000. Net cash used in financing activities was $3.3 million for the three months ended March 31, 2016, and consisted of payments to our former Revolver Loan, net of repayments.
Management believes that any cash generated from operations and the Line of Credit availability, subject to borrowing base limitations, based on budgeted sales and expenses and implemented minimum sales margin and cost controls, are sufficient to fund operations, including capital expenditures, for the next 12 months. Notwithstanding the foregoing, we evaluate capital raising opportunities for private placements of debt or common or preferred stock from accredited sophisticated investors from time to time to not only gauge market conditions but also to ensure additional capital is readily available to fund aggressive growth developments.
Credit Agreement
On September 7, 2016, we entered into the Credit Agreement with the Bank, which amended and restated the Loan Agreement in its entirety. The Credit Agreement provides an initial line of credit of $15 million for a 3 year term maturing on September 7, 2019. The amount available under the Line of Credit will be reduced by $250,000 at the beginning of each fiscal quarter starting on January 1, 2017 and ending on July 1, 2019, thereby reducing the Company’s unused line fee. The Company's interest rate is the daily floating LIBOR rate plus 2.25%. The Credit Agreement requires the Company to comply with two material financial covenants, including: (i) an asset coverage ratio of at least (a) 1.10 to 1.00 from September 30, 2016 through September 30, 2017, (b) 1.15 to 1.00 from October 1, 2017 through March 31, 2018, and (c) 1.20 to 1.00 after April 1, 2018, tested quarterly, which in each case will be determined based upon the ratio of (x) 85% of book value of all accounts receivable, plus 55% of book value of all inventory, plus 50% net book value of plant, property and equipment of the Company (the “Total Margined Value”) to (y) all outstanding liabilities for borrowed money and other interest-bearing liabilities arising under the Line of Credit (the “Total Line of Credit”); and (ii) a fixed charge coverage ratio of at least 1.20 to 1.00, tested quarterly based upon the ratio of (a) Adjusted EBITDA (as defined in the Credit Agreement), to (b) the sum of capital expenditures, cash taxes paid, interest expenses, principal payments made on borrowed money other than the Line of Credit and the Enhanced Notes, and distributions made, in each case for the immediately preceding four fiscal quarter period and determined on a consolidated basis. Upon closing of the Credit Agreement, an aggregate of $8.5 million was drawn from the Line of Credit and used to pay off the Enhanced Notes and the Loan Agreement. The Company granted the Bank a continuing security interest in and lien upon substantially all assets of the corporation. If, at any time, the Company’s Total Margined Value is less than the amount outstanding under the Total Line of Credit and that amount remains unpaid or future Total Margined Value calculations do not increase to an amount equal to the balance outstanding under the Total Line of Credit, the Bank, in its sole discretion, may accelerate any and all amounts outstanding under the Line of Credit. At March 31, 2017, the cash available under our Line of Credit was $7.2 million based on the Asset Coverage Ratio and after giving effect to outstanding borrowings. At March 31, 2017, we were in compliance with all debt covenants under our Credit Agreement.
Off Balance Sheet Arrangements
As of March 31, 2017, we had no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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Item 4. Controls and Procedures.
Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
As of March 31, 2017, we conducted an evaluation, under the supervision and participation of management including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2017.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in various lawsuits and claims arising in the ordinary course of business, which are, in our opinion, immaterial both individually and in the aggregate with respect to our consolidated financial position, liquidity and results of operations.
During the fiscal quarter ended March 31, 2017, there were no material changes or developments in the Company’s legal proceedings disclosed in Part I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2016.
Item 1A. Risk Factors.
During the fiscal quarter ended March 31, 2017, there were no material changes from the risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
See Index of Exhibits.
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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: | April 27, 2017 | By: | /s/ Douglas J. Kramer |
Name: | Douglas J. Kramer | ||
Title: | CEO and President | ||
LAPOLLA INDUSTRIES, INC. | |||
Date: | April 27, 2017 | By: | /s/ Jomarc C. Marukot |
Name: | Jomarc C. Marukot | ||
Title: | CFO, Treasurer, and Principal Accounting Officer | ||
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INDEX OF EXHIBITS
Exhibit Number | Description | |
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | ||
31.1* | ||
31.2* | ||
32.1* | ||
101* | The following materials from the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2017, formatted in XBRL (eXtensible Business Reporting Language), (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Cash Flows, and (iv) Notes to Financial Statements. | |
* Filed herewith
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