spray foam manufacturer houston tx elastomeric coatings cool roof

10-Q: LAPOLLA INDUSTRIES INC (LPAD)

(EDGAR Online via COMTEX) — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview of Presentation

This financial review presents our operating results for the three months ended March 31, 2014 and 2013, and our financial condition at March 31, 2014. The presentation includes our non-GAAP financial measures EBITDA and Adjusted EBITDA 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 different companies, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. 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 conjunction with information presented in Part I, Item 6 – Selected Financial Data relating to non-GAAP financial measures EBITDA and Adjusted EBITDA and the financial statements and related notes for the year ended December 31, 2013 contained in the annual report on Form 10-K for the year ended December 31, 2013. Referto Note 1 – Summary of Significant Accounting Policies for further information regarding significant accounting policies and Note 15 – Business Segment and Geographic Area Information in our financial statements listed under Item 15 of Part IV of this report for further information regarding our business segments and geographic area data. See alsoNote 1 in the notes to the financial statements listed under Item 15 of Part IV of this report for “Critical Accounting Policies”.

Outlook

The Company’s outlook remains aggressive and positive, as we expect sales to continue to grow, especially internationally, to record levels in 2014 and beyond. Our optimism is based on growing global consumer awareness about energy efficient foams and coatings and concomitant reductions in energy costs immediately after application. Lapolla’s business was affected in the first quarter by seasonal factors, specifically unusually persistent cold weather (“Seasonality”). Sales of our products tend to be lowest during the first and fourth fiscal quarters, however, sales during the second and third fiscal quarters are usually comparable and marginally higher. The markets for our products are highly competitive; however, we believe that our competitive advantages are rooted in our product formulations, credentials, approvals, performance, pricing, and technical customer service. In addition, we offer the flexibility, quality of products and responsiveness that a smaller company can offer. This outlook is based on a number of assumptions relating to our business and operations which are subject to change, some of which are outside our control. A variation in our assumptions may result in a change in this outlook.

Performance for the Three Months Ended March 31, 2014 compared to the Three Months Ended March 31, 2013

Overall Results of Operations

The following table presents selected consolidated financial and operating data derived from the unaudited consolidated financial statements of the Company as of the dates and for the periods indicated. In addition, the table presents our unaudited non-GAAP financial measure EBITDA and Adjusted EBITDA, which we use in our business as an important supplemental measure of our performance, and includes our reconciliation to net income or loss, its most directly comparable financial measure calculated and presented in accordance with GAAP.


                                                                         March 31,
                                                                 2014                  2013
        Summary of Overall Results of Operations
          Sales                                             $ 16,102,200          $ 16,995,510
          Operating Loss                                        (503,323 )            (203,710 )
          Other (Income) Expense                                 543,191               376,328
          Net Loss                                            (1,046,514 )            (580,038 )
          EBITDA (Unaudited)                                $   (319,118 )        $    137,628
          Adjusted EBITDA (Unaudited)                       $    (93,833 )        $    447,577
        Reconciliation of EBITDA and Adjusted EBITDA
        to Net Loss:
          Net Loss:                                         $ (1,046,514 )        $   (580,038 )
             Additions / (Deductions):
               Interest Expense                                  280,711               263,730
               Interest Expense - Related Party                  198,991               183,202
               Interest Expense - Amortization of
        Discount                                                  45,108                    -
               Tax Expense (Benefit)                              25,765                24,142
               Depreciation                                      108,391               117,979
               Amortization of Other Intangible
        Assets                                                    68,430               128,613
          EBITDA                                            $   (319,118 )        $    137,628
             Additions / (Deductions):
        Share Based Compensation (1)                             225,285               309,949
          Adjusted EBITDA                                   $    (93,833 )        $    447,577
        


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

Sales

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

March 31, 2014 March 31, 2013

Sales decreased $893,310, or 5.3%, for the first quarter of 2014 compared to the first quarter of 2013. Foam sales decreased $880,953, or 5.9% and coatings sales decreased $12,357, or 0.6%, quarter over quarter, due to Seasonality. Our AirTight Division provided additional market penetration, resulting in approximately $1.9 Million and $3.5 Million in sales for the first quarter of 2014 and 2013, respectively. Sales pricing changes added approximately $34,514, or 0.2%, all of which related to coatings sales, while sales volumes decreased approximately $927,824, or 5.5%, of which $880,953, or 5.9% was for foam sales and $46,871, or 2.2%, for coatings sales, for the first quarter of 2014, compared to, sales pricing changes added approximately $616,575, or 3.3%, of which $607,051, or 3.8% was for foam sales and $9,524, or 0.4% was for coatings sales, while sales volumes decreased approximately $2,271,046, or 12.2%, of which $1,810,855, or 11.2% was for foam sales and $460,191, or 18.1%, for coatings sales, for the first quarter of 2013.

Cost of Sales

Cost of sales decreased $328,590, or 2.5%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Cost of sales decreased $396,492, or 3.3%, for our foams, and increased $67,902, or 4.6%, for our coatings, quarter over quarter, due primarily to decreases in sales and higher freight costs. We had an 8.7% increase in freight costs and an approximate 1.5% decrease in material costs, in the first quarter of 2014, compared to a 29.2% decrease in freight costs and an approximate 8.1% increase in material costs, in the first quarter of 2013. Freight costs increased due to higher per trip rates due to increased market demand for transportation from extraordinarily cold weather patterns and material costs decreased due to taking advantage of payment discounts from more effective utilization of cash in the first quarter of 2014 whereas freight costs decreased from more effective management of logistics and material costs increased due to increased pricing from feedstock suppliers in the first quarter of 2013.

Gross Profit

Our gross profit decreased $564,720, or 15.5%, for the first quarter of 2014 compared to the first quarter of 2013, due to the 8.7% increase in freight costs and decrease of 5.3% in our sales, offset by a decrease of approximately 1.5 in material costs. Gross margin percentage decreased 2.3%, for the three months ended March 31, 2014, due to higher freight, offset by lower material costs, compared to an increase of 2.2%, for the three months ended March 31, 2013, due to lower freight, offset by higher material costs.

Operating Expenses

Our total operating expenses are comprised of selling, general and administrative expenses, or SG&A, professional fees, depreciation, amortization of other intangible assets, and consulting fees. These total operating expenses decreased $265,107, or 6.9%, in the first quarter of 2014 compared to the first quarter of 2013, due to decreases of $286,917 for professional fees, $744 for depreciation, and $60,183 for amortization of other intangible assets, offset by increases of $28,243 for SG&A and $54,494 for consulting fees.

SG&A increased $28,243, or 0.9%, due to increases of $15,502 for advertising, $62,608 for bad debts from a slight increase in insolvencies, $32,789 for insurances from higher premiums due to increased loss ratios, $5,708 for investor relations, $69,703 for payroll and related employee benefits from additions to our workforce, $40,665 for sales commissions from the use of more independent sales representatives to penetrate select target markets, and $9,196 for travel and related services, offset by decreases of $33,563 for corporate office expenses, $42,151 for distribution from a more efficient management of inventory being held in and a reduction in outside warehouses, $27,776 for marketing and promotions relating to more streamlined programs, $19,776 for rents, and $84,663 for share based compensation due to completion of vesting of shares originally granted by the Company pursuant to an advisory and consultant agreement in February 2011 during the current period.

Professional fees decreased $286,917, or 93.5%, from the first quarter of 2014 compared to the first quarter of 2013, due primarily to recovery of previously paid legal fees from insurance companies for litigation involving alleged product defects.

Depreciation expense decreased $744, or 1.7%, in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, due to a decrease in depreciable assets primarily vehicles.

Amortization of other intangible assets expense decreased $60,183, or 46.8%, in the quarter ended March 31, 2014 compared to the quarter ended March 31, 2013, due to a decrease in amortizable assets specifically customer lists and trade names.

Consulting fees increased $54,494, or 66.1%, in the first quarter of 2014, compared to the first quarter of 2013, due primarily to a reversal in the prior comparable period for disputed consulting services, absent which consulting fees would be relatively even quarter over quarter.

Other (Income) Expense

Our total other (income) expense is comprised of interest expense, interest expense – related party, interest expense – amortization of discount, gain or loss on derivative liability, and other, net. Total other (income) expense increased $166,863, or 44.3% from the first quarter of 2014, compared to the first quarter of 2013, due to increases of $16,981 in interest expense, $15,789 in interest expense – related party, $45,108 in interest expense – amortization of discount, offset by decreases of $45,913 in gain on derivative liability, and $43,072 in other, net.

Interest expense increased $16,981, or 6.4%, for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, due to an increase in indebtedness from financing institutions.

Interest expense – related party increased $15,789, or 8.6%, in the three months ended March 31, 2014, compared to the three months ended March 31, 2013, of which $14,671 was for share based compensation expense classified as interest expense due to shares being issued in connection with a personal guaranty required from the Chairman and principal stockholder to secure the New Enhanced Note and $1,118 was for accrued interest for the Note Payable – Related Party between the Company and the Chairman and principal stockholder.

Interest expense – amortization of discount was $45,108 for the first quarter of 2014 and related to the purchase discount associated with the New Enhanced Note. There was no interest expense – amortization of discount in the prior comparable period.

We had a decrease in the gain on derivative liability of $45,913, or 100%, for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, due to expiration of all outstanding warrants causing the derivative liability in the prior comparable period.

Our other, net decreased $43,072, or 174.4%, for the quarter ended March 31, 2014, compared to the quarter ended March 31, 2013, primarily related to additions and dispositions of assets.

Net (Loss)

Our net loss increased $466,476, or 80.4%, in the first quarter of 2014, compared to the first quarter of 2013, due to decreases of $564,720, or 15.5% in gross profit, $45,913, or 100% in gain on derivative liability, $43,072, or 174.4% in other, net, and increases of $28,243, or 0.9% in SG&A, $16,981, or 6.4%, in interest expense, $15,789, or 8.6% in interest expense – related party, $45,108, or 100%, in interest expense – amortization of discount, $54,494, or 66.1%, in consulting fees, offset by decreases of $286,917, or 93.5%, in professional fees, $744, or 1.7%, in depreciation, and $60,183, or 46.8%, in amortization of other intangible assets. Net loss per share was $0.01 for the quarter ended March 31, 2014 and 2013, respectively.


        Results of Business Segments
        The following is a summary of sales by segment at:
        Segments     March 31, 2014      March 31, 2013
        Foam        $    14,020,272     $    14,901,225
        Coatings    $     2,081,928     $     2,094,285
        


Foam Segment

Foam sales decreased $880,953, or 5.9%, in the first quarter of 2014, compared to the first quarter of 2013, due to Seasonality. Foam equipment sales increased $37,620, or 11.3%, quarter over quarter. Foam cost of sales decreased $396,492, or 3.3%, in the first quarter of 2014, compared to the first quarter of 2013, due to decreases of $880,953, or 5.9%, in sales, and improved manufacturing efficiencies, and a decrease of approximately 1.5% in material costs, offset by an increase of $56,375, or 7.8%, in freight. Foam gross profit decreased $484,461, or 16.1%, primarily from lower sales volumes and gross margin percentage decrease of 2.2%, primarily from increased freight, offset by decreased material costs, from the first quarter of 2014 compared to the first quarter of 2013. Foam segment profit decreased $541,173, or 99.9%, for the first quarter of 2014, compared to the first quarter of 2013, primarily due to a decrease of $484,461, or 16.1%, in segment gross profit and an increase of $56,712, or 2.3%, in segment operating expenses.

Coatings Segment

Coatings sales decreased $12,357, or 0.6%, in the first quarter of 2014, compared to the first quarter of 2013, due to Seasonality. Coatings cost of sales increased $67,902, or 4.6%, in the first quarter of 2014, compared to the first quarter of 2013, due to increases of $14,935, or 16.6%, in freight and an approximate 0.1% in material costs. Coatings gross profit decreased $80,259, or 12.8%, and gross margin percentage decreased 3.6%, primarily from higher freight costs, from the first quarter of 2014, compared to the first quarter of 2013. Coatings segment profit decreased $108,297, or 38.9%, for the first quarter of 2014, compared to the first quarter of 2013, primarily due to an increase of $28,038, or 8.1%, in segment operating expenses, an approximate 1.7% increase in sales prices, and a decrease of $80,259, or 12.8%, in gross profit.

Total Segments

Total segment sales decreased $893,310, or 5.3%, cost of sales decreased $328,590, or 2.5%, and gross profit decreased $564,720, or 15.5%, in the first quarter of 2014, compared to the first quarter of 2013. Total segment profits decreased $649,470, or 79.2%, due primarily to a decrease of $564,720, or 15.5%, in gross profit from a decrease of $893,310, or 5.3%, in sales volumes, and an increase of $71,310, or 8.7%, in freight costs, in the first quarter of 2014 compared to the first quarter of 2013.

Liquidity and Capital Resources

We do not maintain any cash on hand by design. Instead, we maintain a $13 Million asset based bank financed Revolver Loan that includes an automatic cash sweep feature that identifies any cash available in our bank accounts at the end of a banking business day and then applies that cash to reduce our outstanding Revolver Loan balance for that day to fund our continuing operations. The reduction serves to decrease our daily interest expense to the extent cash is identified and swept over to reduce the Revolver Loan. Disbursements are paid daily by our bank from cash being made available under our Revolver Loan based on a borrowing base calculation prepared daily for funding. Cash available under our Revolver Loan based on the borrowing base calculation at March 31, 2014 and 2013, was $2,217,907 and $376,026, respectively. On December 10, 2013, we borrowed $7.2 Million from two Enhanced Capital entities to refinance the remaining $3,346,762 balance outstanding on the Prior Enhanced Note and increase our working capital with the difference for the New Enhanced Note. Stockholders’ Equity decreased $640,030, or 50.9%, from the period ended December 31, 2013 to March 31, 2014, due to the comprehensive loss of $1,046,514, offset by additions to common stock par value of $5,849 ad additional paid in capital of $400,635 from issuances of restricted common stock for share based compensation and interest expense – related party, compared to, a decrease of $95,766, or 8.0%, from the period ended December 31, 2012 to the period ended March 31, 2013, due to the comprehensive loss of $582,242, offset by additions to common stock par value of $11,149 and additional paid in capital of $475,327 from issuances of restricted common stock for share-based compensation and interest expense – related party.

Management believes that the cash generated from operations and the Revolver Loan availability, subject to borrowing base limitations which may adversely impact our ability to raise capital, 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 gage market conditions but also to ensure additional capital is readily available to fund aggressive growth developments. If we raise additional capital from the sale of capital stock (except for permitted issuances) or debt (other than permitted indebtedness), we are required under the New Enhanced Note to prepay, including any prepayment penalty, the amount raised up to the amount outstanding under the New Enhanced Note as of the date of the closing of the transaction out of the net proceeds of the capital raised.

Net cash provided by operating activities was $604,889 for the three months ended March 31, 2014, compared to net cash used in operations of $1,100,384 for the three months ended March 31, 2013. The cash provided by operations for the first quarter of 2014 compared to the cash used in the first quarter of 2013 was attributable to the net loss of $1,046,514 for the period, including the effect of adjustments to reconcile net loss to cash provided by operating activities and adjusting for non-cash items, primarily decreases of $9,588 in depreciation due to a decrease in depreciable assets for vehicles, $60,183 in amortization of other intangible assets due to a decrease in amortizable assets for customer lists and non-competes from previous acquisitions, and $84,664 in share based compensation expense due to completion of vesting of shares originally granted by the Company pursuant to an advisory and consultant agreement in February 2011, offset by increases of $62,608 in provision for losses due to a slight increase in customer insolvencies, $15,789 in interest expense – related party due to the New Guaranty Shares being issued in connection with the New Enhanced Note being classified as interest expense, and $45,108 in interest expense – amortization of discount due to the purchase discount being amortized over the life of the New Enhanced Note, which matures December 2016. The foregoing was augmented by decreases of $597,006 in inventories, $305,249 in prepaid in prepaid expenses and other current assets, $24,008 in deposits and other non-current assets, and $224,773 in accrued expenses and other current liabilities, and increases of $627,571 in trade receivables, $79,260 in other intangible assets, and $812,973 in accounts payable, due primarily to operating activities during the period ended March 31, 2014.


        Contractual Obligations
                                                                   Payments Due By Period
                                         Less Than         1 to 3          4 to 5         More Than
                                          1 Year           Years            Years          5 Years          Total
        Revolving Credit Note          $        -      $  4,074,529     $        -      $        -      $  4,074,529
        Note Payable - Related Party            -                -        1,300,000              -         1,300,000
        Notes Payable - Enhanced
        Capital                                 -         6,796,528              -               -         6,796,528
        Long-Term Debt Obligations              -                -               -               -                -
        Estimated Interest Payments
        on Long-Term Debt and Loan
        Obligations                        862,785        1,292,177         385,793              -         2,540,755
        Purchase Order Obligations          39,740               -               -               -            39,740
        Operating Lease Obligations        407,350          490,464              -               -           897,814
              Total                    $ 1,309,875     $ 12,653,698     $ 1,685,793     $        -      $ 15,649,366
        


*The information provided in the table above relates to bank and other credit instruments, and purchase and operating lease obligations.

The Company has four material debt covenants to comply with relating to its Loan Agreement: (i) Capital expenditures are limited to $625,000 on an annual basis,

The Company has four material debt covenants to comply with relating to its New Enhanced Note: (i) Capital expenditures are limited to $625,000 on an annual basis, (ii) A minimum Adjusted EBITDA which cannot for the three (3) months ending on the last day of each month set forth in a schedule be less than the corresponding amount set forth in the schedule for such period, (iii) Maintain an FCCR, tested monthly as of the last day of each calendar month, in each case for the most recently completed twelve calendar months, equal to a minimum ratio of 0.90 to 1.0 from December 2013 to February 2014, 0.80 to 1.0 from March 2014 to April 2014, 0.90 to 1.0 from May 2014 to June 2014, 1.0 to 1.0 for July 2014, and 1.25 to 1.0 from August 2014 and thereafter, and (iv) Maintain minimum liquidity equal to or greater than $500,000. At March 31, 2014, we were in compliance with all of our New Enhanced Note debt covenants.

Net cash used in investing activities was $135,658 for the first quarter of 2014, reflecting an increase of $125,045 when compared to $10,613 for the first quarter of 2013. We invested $188,658 in property, plant and equipment in the first quarter of 2014, of which $5,693 was for computers and software for the sales force, $27,862 was for machinery and equipment related to our manufacturing facilities, $118,048 was for a new vehicle, and $37,055 was for construction in progress for improvements to our manufacturing facilities. We recaptured an aggregate of $53,000 from dispositions of property, plant and equipment, for vehicles trade in or sold. We invested $10,613 in property, plant and equipment in the first quarter of 2013, of which $1,835 was for office furniture and equipment, $5,637 was for computers and software for the sales force, $288 was for machinery and equipment related to our manufacturing facilities, and $2,853 was for construction in progress.

Net cash used in financing activities was $469,231 for the three months ended March 31, 2014, compared to net cash provided of $1,113,201 for the three months ended March 31, 2013. We borrowed a cumulative aggregate of $16,164,029 and made principal repayments for a cumulative aggregate of $16,628,662 under our Bank Revolver Loan, and $4,598 on our long term debt primarily related to financed vehicles, in the first quarter of 2014. We borrowed a cumulative aggregate of $17,299,423 and made principal repayments for a cumulative aggregate of $16,019,562 under our Bank Revolver Loan, an aggregate of $159,999 under our Prior Enhanced Note, and $6,661 on our long term debt primarily related to financed vehicles, in the first quarter of 2013.

May 15, 2014