Certain Relationships and
Related Transactions, and Director Independence, page 20
Comment 8. On page
22, you indicate that your principal stockholder and Chairman of the Board
transferred 584,000 shares of his restricted common stock to Mr. Nadel in order
to secure Mr. Nadel’s continued attention and hands on participation required
with his role as a Board member. Please discuss this transaction in your interim
financial statements and clarify how you accounted for this
transfer. Refer to SAB Topic 5T.
Response 8. We have
reviewed your comment, as well as SAB Topic 5T, and need to clarify the details
of these two transactions between the Chairman of the Board and Mr. Nadel. To be
clear, the first transaction is what is referenced on page 22 that took place on
February 19, 2008 (500,000 shares transferred with the closing price of the
common stock on said date of $.70 per share) and the second transaction is what
is referenced in the Form 4s for the Chairman of the Board and Mr. Nadel that
took place on February 18, 2009 (584,000 shares transferred with the closing
price of the common stock on said dated of $.34 per share). The Chairman of the
Board entered into these transactions to enhance or maintain the value of his
investment, and the Company implicitly benefited from the plan by retention of,
and possibly improved performance, by the nonemployee director, Mr. Nadel. The
Chairman of the Board transferred said shares to Mr. Nadel with the expectation
that Mr. Nadel would continue his hands on participation with his role as a
Board member of Lapolla as well as Chairman of the Audit Committee with the
restricted shares vesting for each installment after each full year of service
(the Company set up a similar framework for granting and vesting of stock
options to nonemployee directors – i.e. stock options granted with vesting over
a 3 year period). The Company applied an illiquidity discount of 25% based on
the historical volatility of the Company’s common stock as traded on the NASDAQ
OTCBB. This discount was calculated as of the date of each respective
installment (date of grant) on February 19, 2008 and February 18, 2009,
respectively. The weighted-average historical volatility for the Company’s
common stock was 132.61% compared to 138% for the first and second installments,
respectively.
The share
based compensation expense related to these transactions should have been
expensed during each transaction’s requisite service period. For the first
transaction, the Company should have recorded an aggregate of $263,000 in fair
value, of which $227,693 in the 2008 year (February 19, 2008 through December
31, 2008) and $35,307 in the 2009 year (January 1, 2009 through February 18,
2009). For the second transaction, the Company should have recorded
an aggregate of $148,920 in fair value, of which $128,928 should have been
recorded in the 2009 year (February 18, 2009 through December 31, 2009) and
$19,992 in the 2010 year (January 1, 2010 through February 17,
2010). The Company posted these entries on December 31, 2009. As
these adjustments were posted to correct errors in prior periods, the Company
has determined them to be “Out of Period” and will apply the principles of SAB
99 to determine the impact of such. In addition, we considered Accounting
Principles Board (“APB”) Opinion 28, paragraph 29, in determining materiality
for the purpose of reporting the correction of an error, and evaluated the
impact of the 2008 and 2009 year misstatements to our estimated 2009 and actual
2008 year results and determined the impact was not material. Accordingly, we
recorded the correcting entry in December 2009. As a result of these reviews, we
concluded that no prior period restatements were warranted. Below we
summarize our quantitative and qualitative analysis.
Overview
-- Brief History
The
Company historically incurred net losses available to common stockholders of
approximately $4.4 Million for the year ended December 31, 2008 and $5.9 Million
for the year ended December 31, 2007. The Company currently estimates
the net loss available to common stockholders for the year ended December 31,
2009 will be $2.45 Million before any of the above adjustments ($2.6 Million
after adjustments for the 2009 vested amounts). The Company had an
accumulated deficit of approximately $76 Million as of December 31, 2008 and $73
Million as of December 31, 2007. The Company currently estimates the accumulated
deficit at December 31, 2009 will be $78.5 Million.
SAB 99
specifically points to guidance in Statement of Financial Accounting Concepts
No. 2 which states that the concept of materiality is defined as:
“The
omission or misstatement of an item in a financial report is material if, in the
light of surrounding circumstances, the magnitude of the item is such that it is
probable that the judgment of a reasonable person relying upon the report would
have been changed or influenced by the inclusion or correction of the
item.”
