PART
II.
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information
Greystone’s
common stock is traded on the OTCQB under the symbol “GLGI.” The following table sets forth the range of high and
low per share bid quotations for Greystone’s common stock during the time periods indicated. The source of the foregoing
quotations was the Financial Industry Regulatory Composite Feed or other qualified inter dealer quotation medium as provided by
OTC Market Group, Inc.:
Quarter Ended
|
|
|
High
|
|
|
Low
|
|
|
Aug.
31, 2014
|
|
|
$
|
0.60
|
|
|
$
|
0.47
|
|
|
Nov.
30, 2014
|
|
|
|
0.50
|
|
|
|
0.29
|
|
|
Feb.
28, 2015
|
|
|
|
0.38
|
|
|
|
0.22
|
|
|
May
31, 2015
|
|
|
|
0.34
|
|
|
|
0.24
|
|
|
Aug.
31, 2015
|
|
|
|
0.32
|
|
|
|
0.24
|
|
|
Nov.
30, 2015
|
|
|
|
0.29
|
|
|
|
0.15
|
|
|
Feb.
29, 2016
|
|
|
|
0.24
|
|
|
|
0.14
|
|
|
May
31, 2016
|
|
|
|
0.32
|
|
|
|
0.21
|
|
Quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.
Holders
As
of approximately July 16, 2016, Greystone had approximately 252 common stockholders of record.
Dividends
Greystone
paid no cash dividends to its common stockholders during the last two fiscal years and does not plan to pay any cash dividends
in the near future. The loan agreement dated January 31, 2014 (the “IBC Loan Agreement”), among Greystone, GSM and
International Bank of Commerce (“IBC”) prohibits Greystone from declaring or paying any dividends in respect to its
common stock without IBC’s prior written consent. See Note 5 to the consolidated financial statements for additional information.
In addition, accrued preferred stock dividends must be paid before a dividend on common stock may be declared or paid, as set
forth in the Certificate of Designation, Preferences, Rights and Limitations relating to the preferred stock. See Note 8 to the
consolidated financial statements and “Liquidity and Capital Resources” in Item 7 of this Form 10-K for additional
information.
Greystone
paid dividends on its 2003 preferred stock in the amounts of $325,885 and $298,288 in fiscal years 2016 and 2015, respectively.
Item
6. Selected Financial Data.
Not
applicable.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary
Statement Regarding Forward-Looking Information
This
Annual Report on Form 10-K includes “forward looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements concern Greystone’s
plans, expectations and objectives for future operations. All statements, other than statements of historical facts, included
in this Form 10-K that address activities, events or developments that Greystone expects, believes or anticipates will or may
occur in the future are forward-looking statements. The words “believe,” “plan,” “intend,”
“anticipate,” “estimate,” “project” and similar expressions are intended to identify forward-looking
statements. These forward-looking statements include, among others, such things as:
●
|
expansion
and growth of Greystone’s business and operations;
|
|
|
●
|
future
financial performance;
|
|
|
●
|
future
acquisitions and developments;
|
|
|
●
|
potential
sales of products;
|
|
|
●
|
future
financing activities; and
|
|
|
●
|
business
strategy.
|
These
forward-looking statements are based on assumptions that Greystone believes are reasonable based on current expectations and projections
about future events and industry conditions and trends affecting Greystone’s business. However, whether actual results and
developments will conform to Greystone’s expectations and predictions is subject to a number of risks and uncertainties
that could cause actual results to differ materially from those contained in the forward-looking statements, including those factors
discussed under the section of this Form 10-K entitled “Risk Factors.” In addition, Greystone’s historical financial
performance is not necessarily indicative of the results that may be expected in the future and Greystone believes that such comparisons
cannot be relied upon as indicators of future performance.
Risk
Factors
Greystone
has attained operating profits and positive cash flow from operating activities but there is no assurance that it will be able
to sustain profitability.
Greystone
was incorporated on February 24, 1969. From April 1993 to December 1997, Greystone was engaged in various businesses, including
the business of exploration, production, and development of oil and gas properties in the continental United States and the operation
of a related service business. In December 1997, Greystone acquired all of the issued and outstanding stock of Plastic Pallet
Production, Inc., and its principal business changed to selling plastic pallets. Greystone incurred losses from operations from
such time through fiscal year 2007. The results of Greystone’s operations for the fiscal years after fiscal year 2007 showed
an operating profit and positive cash flows from operations with the exception of fiscal year 2011 for which Greystone incurred
a loss but had positive operating income and positive cash flows from operations. There is no assurance that Greystone will maintain
a positive operating profit or otherwise obtain funds to finance capital and debt service requirements.
Greystone
has granted security interests in substantially all of its assets in connection with certain debt financings and other transactions.
In
connection with certain debt financings and other transactions, Greystone has granted third parties security interests in substantially
all of its assets pursuant to agreements entered into with such third parties. Upon the occurrence of an event of default under
such agreements, the secured parties may enforce their rights and Greystone may lose all or a portion of its assets. As a result,
Greystone could be forced to materially reduce its business activities or cease operations.
Greystone’s
business could be affected by changes in availability of raw materials.
Greystone
uses a proprietary mix of raw materials to produce its plastic pallets. Such raw materials are generally readily available and
some may be obtained from a broad range of recycled plastic suppliers and unprocessed waste plastic. At the present time, these
materials are being purchased from local, national and international suppliers. The availability of Greystone’s raw materials
could change at any time for various reasons. For example, the market demand for Greystone’s raw materials could suddenly
increase, or the rate at which plastic materials are recycled could decrease, affecting both availability and price. Additionally,
the laws and regulations governing the production of plastics and the recycling of plastic containers could change and, as a result,
affect the supply of Greystone’s raw materials. Any interruption in the supply of raw materials or components could have
a material adverse effect on Greystone. Furthermore, certain potential alternative suppliers may have pre-existing exclusive relationships
with Greystone’s competitors and others that may preclude Greystone from obtaining raw materials from such suppliers.
Greystone’s
business could be affected by competition and rapid technological change.
Greystone
currently faces competition from many companies that produce wooden pallets at prices that are substantially lower than the prices
Greystone and other companies that manufacture plastic pallets charge for their plastic pallets. It is anticipated that the plastic
pallet industry will be subject to intense competition and rapid technological change. Greystone could potentially face additional
competition from recycling and plastics companies, many of which have substantially greater financial and other resources than
Greystone and, therefore, are able to spend more than Greystone in areas such as product development, manufacturing and marketing.
Competitors may develop products that render Greystone’s products or proposed products uneconomical or result in products
being commercialized that may be superior to Greystone’s products. In addition, alternatives to plastic pallets could be
developed, which would have a material adverse effect on Greystone.
Greystone
is dependent on a few large customers.
Greystone
derives, and expects that in the foreseeable future it will continue to derive, a large portion of its revenue from a few large
customers. A single customer currently accounts for approximately 41% of its total sales in fiscal year 2016 (51% in fiscal year
2015). There is no assurance that Greystone will retain this customer’s business at the same level, or at all. The loss
of a material amount of business from this customer would have a material adverse effect on Greystone.
Greystone
may not be able to effectively protect Greystone’s patents and proprietary rights.
Greystone
relies upon a combination of patents and trade secrets to protect its proprietary technology, rights and know-how. There can be
no assurance that such patent rights will not be infringed upon, that Greystone’s trade secrets will not otherwise become
known to or independently developed by competitors, that non-disclosure agreements will not be breached, or that Greystone would
have adequate remedies for any such infringement or breach. Litigation may be necessary to enforce Greystone’s proprietary
rights or to defend Greystone against third-party claims of infringement. Such litigation could result in substantial cost to,
and a diversion of effort by, Greystone and its management and may have a material adverse effect on Greystone. Greystone’s
success and potential competitive advantage is dependent upon its ability to exploit the technology under these patents. There
can be no assurance that Greystone will be able to exploit the technology covered by these patents or that Greystone will be able
to do so exclusively.
Greystone’s
business could be affected by changing or new legislation regarding environmental matters.
Greystone’s
business is subject to changing federal, state and local environmental laws and regulations pertaining to the discharge of materials
into the environment, the handling and disposition of waste (including solid and hazardous waste) or otherwise relating to the
protection of the environment. As is the case with manufacturers in general, if a release of hazardous substances occurs on or
from Greystone’s properties or any associated off-site disposal location, or if contamination from prior activities is discovered
at any of Greystone’s properties, Greystone may be held liable. No assurances can be given that additional environmental
issues will not require future expenditures. In addition, both the plastics industry and Greystone are subject to existing and
potential federal, state, local and foreign legislation designed to reduce solid wastes by requiring, among other things, plastics
to be degradable in landfills, minimum levels of recycled content, various recycling requirements and disposal fees and limits
on the use of plastic products. In addition, various consumer and special interest groups have lobbied from time to time for the
implementation of these and other such similar measures. Although Greystone believes that the legislation promulgated to date
and such initiatives to date have not had a material adverse effect on it, there can be no assurance that any such future legislative
or regulatory efforts or future initiatives would not have a material adverse effect.
Greystone’s
business could be subject to potential product liability claims.
The
testing, manufacturing and marketing of Greystone’s products and proposed products involve inherent risks related to product
liability claims or similar legal theories that may be asserted against Greystone, some of which may cause Greystone to incur
significant defense costs. Although Greystone currently maintains product liability insurance coverage that it believes is adequate,
there can be no assurance that the coverage limits of its insurance will be adequate under all circumstances or that all such
claims will be covered by insurance. In addition, these policies generally must be renewed every year. While Greystone has been
able to obtain product liability insurance in the past, there can be no assurance it will be able to obtain such insurance in
the future on all of its existing or future products. A successful product liability claim or other judgment against Greystone
in excess of its insurance coverage, or the loss of Greystone’s product liability insurance coverage could have a material
adverse effect upon Greystone.
Greystone
currently depends on certain key personnel.
Greystone
is dependent on the experience, abilities and continued services of its current management. In particular, Warren Kruger, Greystone’s
President and CEO, has played a significant role in the development, management and financing of Greystone. The loss or reduction
of services of Warren Kruger or any other key employee could have a material adverse effect on Greystone. In addition, there is
no assurance that additional managerial assistance will not be required, or that Greystone will be able to attract or retain such
personnel.
Greystone’s
executive officers and directors control a large percentage of Greystone’s outstanding common stock and all of Greystone’s
2003 preferred stock, which entitles them to certain voting rights, including the right to elect a majority of Greystone’s
Board of Directors.
Greystone’s
executive officers and directors (and their affiliates), in the aggregate, own approximately 43% of Greystone’s outstanding
common stock and have approximately 49% of the voting power. Therefore, Greystone’s executive officers and directors can
have significant influence with respect to the outcome of matters submitted to Greystone’s shareholders for approval (including
the election and removal of directors and any merger, consolidation or sale of all or substantially all of Greystone’s assets)
and to control Greystone’s management and affairs. In addition, two of Greystone’s directors (including one who also
serves as one of Greystone’s executive officers) own all of Greystone’s outstanding 2003 preferred stock, with each
owning 50%. The terms and conditions of Greystone’s 2003 preferred stock provide that such holder has the right to elect
a majority of Greystone’s Board of Directors. Such concentration of ownership may have the effect of delaying, deferring
or preventing a change in control, impeding a merger, consolidation, takeover or other business combination or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain control, which in turn could have an adverse effect
on the market price of Greystone’s common stock.
Greystone’s
stock trades in a limited public market and is subject to price volatility. There can be no assurance that an active trading market
will develop or be sustained.
There
has been a limited public trading market for Greystone’s common stock and there can be no assurance that an active trading
market will develop or be sustained. The trading price of Greystone’s common stock could be subject to significant fluctuations
in response to variations in quarterly operating results or even mild expressions of interest on a given day. Accordingly, Greystone’s
common stock should be expected to experience substantial price changes in short periods of time. Even if Greystone is performing
according to its plan and there is no legitimate company-specific financial basis for this volatility, it must still be expected
that substantial percentage price swings will occur in Greystone’s common stock for the foreseeable future. In addition,
the limited market for Greystone’s common stock may restrict Greystone’s shareholders ability to liquidate their shares.
Greystone
does not expect to declare or pay any dividends on its common stock in the foreseeable future.
Greystone
has not declared or paid any dividends on its common stock. Greystone currently intends to retain future earnings to fund the
development and growth of its business, to repay indebtedness and for general corporate purposes, and, therefore, does not anticipate
paying any cash dividends on its common stock in the foreseeable future. Pursuant to the terms and conditions of certain loan
documentation with International Bank of Commerce and the terms and conditions of Greystone’s 2003 preferred stock, Greystone
is restricted in its ability to pay dividends to holders of its common stock.
Greystone’s
common stock may be subject to secondary trading restrictions related to penny stocks.
Certain
transactions involving the purchase or sale of Greystone’s common stock may be affected by a Commission rule for “penny
stocks” that imposes additional sales practice burdens and requirements upon broker-dealers that purchase or sell such securities.
For transactions covered by this penny stock rule, among other things, broker-dealers must make certain disclosures to purchasers
prior to the purchase or sale. Consequently, the penny stock rule may impede the ability of broker-dealers to purchase or sell
Greystone’s common stock for their customers and the ability of persons now owning or subsequently acquiring Greystone’s
common stock to resell such securities.
Greystone
may issue additional equity securities, which would lead to further dilution of Greystone’s issued and outstanding stock.
The
issuance of additional common stock or securities convertible into common stock would result in further dilution of the ownership
interest in Greystone held by existing shareholders. Greystone is authorized to issue, without shareholder approval, 20,700,000
shares of preferred stock, $0.0001 par value per share, in one or more series, which may give other shareholders dividend, conversion,
voting and liquidation rights, among other rights, which may be superior to the rights of holders of Greystone’s common
stock. In addition, Greystone is authorized to issue, without shareholder approval, over 4,971,400,000 additional shares of its
common stock and securities convertible into common stock.
Results
of Operations
General
The
consolidated financial statements include Greystone and its two wholly-owned subsidiaries, Greystone Manufacturing, L.L.C. (“GSM”),
and Plastic Pallet Production, Inc. (“PPP”), and one variable interest entity, Greystone Real Estate, L.L.C. (“GRE”).
Greystone’s
primary business is the manufacturing of plastic pallets utilizing recycled plastic and selling the pallets through one of its
wholly owned subsidiaries, GSM. In addition, GSM provides tolling services, consisting of grinding and pelletizing recycled resin,
on materials belonging to third parties and on GSM’s materials which are sold in pellet form.
As
of May 31, 2016, Greystone had 183 full-time employees and used temporary personnel as needed. Greystone’s in-house production
capacity for its molding machines capable of producing medium and heavy-duty pallets is about 85,000 plastic pallets per month,
or 1,020,000 per year and a smaller molding machine capable of producing its lightweight nestable pallets is about 20,000 per
month, or 240,000 per year. Production levels generally will vary proportionately with sales.
Year
Ended May 31, 2016 Compared to Year Ended May 31, 2015
Sales
Sales
were $26,340,405 for fiscal year 2016 compared to $22,293,922 for fiscal year 2015 for an increase of $4,046,483. Pallet sales
were $25,824,148 in fiscal year 2016 compared to $21,064,335 in fiscal year 2015 for an increase of $4,759,813. Other sales decreased
$713,330 from $1,229,587 in fiscal year 2015 to $516,257 in fiscal year 2016.
The
increase in pallet sales from fiscal year 2015 to 2016 is principally due to sales to a new customer which accounted for approximately
15% of total sales in 2016. Pallet sales to Greystone’s other major customer were approximately 41% of total sales in fiscal
year 2016 compared to 51% in fiscal year 2015.
Other
sales consist of sales of pelletized-recycled plastic and tolling services for third parties. The decline in other sales from
fiscal year 2015 to 2016 is primarily due to a decrease approximately $1,024,000 in sales of Greystone’s pelletized material
offset by an increase of approximately $294,000 in tolling service revenue. Sales of pelletized-recycled plastic is dependent
on market conditions which will allow Greystone to realize an acceptable profit margin in the relationship of sales to the cost
of purchasing and pelletizing raw materials. Increases in tolling services and production of pallets by Greystone have limited
the amount of pelletized plastic which can be produced for resale.
Cost
of Sales
Cost
of sales was $21,591,039 (82% of sales) and $18,269,192 (82% of sales) in fiscal years 2016 and 2015, respectively. The ratio
of cost of pallet sales to pallet sales had an increase of approximately 2% from 81% in fiscal year 2015 to 83% in fiscal year
2016 due primarily to start-up costs to meet requirements for new customers.
The
cost of sales for other sales was approximately 36% of other sales for fiscal year 2016 compared to approximately 99% of other
sales for fiscal year 2015. Profit margins on tolling services are greater than sales of pelletized recycled resin which accounts
for the decrease from fiscal year 2015 to fiscal year 2016.
General,
Selling and Administrative Expenses
General,
selling and administrative expense was $2,555,249 for fiscal year 2016 compared to $2,168,762 for fiscal year 2015 for an increase
of $386,487 or approximately 18%. The increase in general, selling & administrative expenses from fiscal year 2015 to fiscal
year 2016 is primarily due to the additional support necessary to maintain the increased activity in production and sales that
occurred in the current period and are expected for future periods.
Interest
Expense
Interest
expense was $862,428 in fiscal year 2016 compared to $818,136 in fiscal year 2015 for an increase of $44,292. This increase is
primarily attributable an increase in debt related to the acquisition of production equipment.
Provision
for Income Taxes
The
provision for income taxes was $495,555 in fiscal year 2016 compared to $430,763 in fiscal year 2015. As of May 31, 2016, as well
as May 31, 2015, Greystone’s management determined that no valuation allowance was considered necessary. The effective tax
rate differs from federal statutory rates due to net income from GRE which, as a limited liability company, is not taxed at the
corporate level and certain expiring NOLs which are limited by the Internal Revenue Code due to a change in control of the ownership
of Greystone.
Until
the NOLs are fully realized for income tax purposes, management will continue to evaluate the extent that a valuation allowance
is needed. Factors that management will consider, among others, are continued diversity in Greystone’s customer base and
stability in its sales volumes.
Based
upon a review of its income tax filing positions, Greystone believes that its positions would be sustained upon an audit by the
Internal Revenue Service and does not anticipate any adjustments that would result in a material change to its financial position.
Therefore, no reserves for uncertain income tax positions have been recorded.
Net
Income
Net
income was $836,134 in fiscal year 2016 compared to $609,569 in fiscal year 2015 for an increase of $226,565 for the reasons discussed
above.
Net
Income Attributable to Common Stockholders
After
deducting preferred dividends and income attributable to non-controlling interests, the net income attributable to common stockholders
was $271,726, or $0.01 per share, in fiscal year 2016 compared to $57,565, or $0.00 per share, in fiscal year 2015 for the reasons
discussed above.
Liquidity
and Capital Resources
General
A
summary of Greystone’s cash flows for the year ended May 31, 2016 is as follows:
Cash provided by operating activities
|
|
$
|
2,915,065
|
|
|
|
|
|
|
Cash used in investing activities
|
|
$
|
(4,323,131
|
)
|
|
|
|
|
|
Cash provided by financing activities
|
|
$
|
1,706,556
|
|
Long-term
debt obligations of Greystone as of May 31, 2016 are as follows:
Total
|
|
|
1
year
|
|
|
2-3 years
|
|
|
4-5
years
|
|
|
Over 5 years
|
|
$
|
15,446,748
|
|
|
$
|
2,088,327
|
|
|
$
|
13,346,756
|
|
|
$
|
11,665
|
|
|
$
|
—
|
|
Greystone
had a working capital deficit of $(1,307,517) at May 31, 2016. The exclusion of accrued interest payable to Robert B. Rosene,
Jr., a member of Greystone’s board of directors, in the amount of $2,475,690 as of May 31, 2016 results in working capital
of $1,168,173.
Greystone’s
principal long-term debt obligations include term notes with International Bank of Commerce which mature on January 31, 2019 and
a note payable and accrued interest payable to Mr. Rosene maturing on January 15, 2018. To provide for the funding to meet Greystone’s
operating activities and contractual obligations as of May 31, 2016, Greystone will have to continue to produce positive operating
results or explore various options including long-term debt and equity financing. However, there is no guarantee that Greystone
will continue to create positive operating results or be able to raise sufficient capital to meet these obligations.
As
described below, substantially all of the financing that Greystone has received through May 31, 2016 has been provided by loans
or through bank loan guarantees from the officers and directors of Greystone, the offerings of preferred stock to current and
former officers and directors of Greystone in 2001 and 2003 and through a private placement of common stock completed in March
2005. Greystone continues to be dependent upon its officers and directors to provide and/or secure additional financing and there
is no assurance that either will do so.
Greystone
has 50,000 outstanding shares of cumulative 2003 Preferred Stock for a total of $5,000,000 with a preferred dividend rate at the
prime rate of interest plus 3.25%. Greystone paid the accumulated dividends to its preferred stockholders during fiscal years
2016 and 2015 and plans to continue to make preferred stock dividend payments to the holders of its preferred stock as allowed
under the terms of the IBC Loan Agreement as discussed herein under the caption “Loans from International Bank of Commerce”
which allows for such payments not to exceed $500,000 per year. Greystone does not anticipate that it will make cash dividend
payments to any holders of its common stock unless and until the financial position of Greystone improves through increased revenues,
additional financing or otherwise. Further, pursuant to the terms and conditions of certain loan documentation with International
Bank of Commerce, as discussed herein under the caption “Loans from International Bank of Commerce,” and the terms
and conditions of Greystone’s 2003 preferred stock, Greystone is restricted in its ability to pay dividends to holders of
its common stock.
Transactions
with Warren Kruger and Related Entities
Yorktown
Management & Financial Services, LLC (“Yorktown”), an entity wholly owned by Greystone’s CEO and President,
owns and rents to Greystone (1) grinding equipment used to grind raw materials for Greystone’s pallet production and (2)
extruders for pelletizing recycled plastic into pellets for resale and for use as raw material in the manufacture of pallets.
Greystone compensates Yorktown for the use of equipment as discussed below.
Yorktown
previously owned a plastic grinding and wash line plastic recycling facility located in Sand Springs, Oklahoma, which sold recycled
plastic to Greystone at market prices. Effective June 1, 2015, Greystone assumed operations of the Sand Springs facility and made
rental payments totaling $105,000 to Yorktown for use of this equipment through February 29, 2016. On and effective February 29,
2016, GSM and Yorktown entered into an Asset Purchase Agreement and Bill of Sale (the “Bill of Sale”) providing for
GSM’s acquisition of the equipment located at the facility for $1,137,865. Payment consisted of an offset against the purchase
price of $449,569 which was an amount that Yorktown owed to GSM as of the date of the acquisition and a note payable in the amount
of $688,296 which Greystone issued to Yorktown payable over 36 months at 5% interest. GSM continued to operate within the facility
by assuming the month-to-month rental of the facility with an unrelated party.
In
fiscal year 2015, Greystone paid the labor on behalf of Yorktown’s Sand Springs, Oklahoma grinding operation and invoiced
Yorktown for the cost. This procedure terminated June 1, 2015 when Greystone assumed operation of the Sand Springs plant as discussed
herein.
Rental
fees.
GSM pays a weekly rental fees of $22,500 and $5,000 to Yorktown for grinding equipment and pelletizing equipment, respectively.
Total rental fees of approximately $1,430,000 were paid in both fiscal years 2016 and 2015.
In
addition, Yorktown provides office space for Greystone in Tulsa, Oklahoma at a monthly rental of $2,200 ($2,000 prior to April
1, 2015).
Loans
from International Bank of Commerce (“IBC”)
On
January 31, 2014, Greystone and GSM (the “Borrowers”) and IBC entered into a Loan Agreement (the “IBC Loan Agreement”).
The IBC Loan Agreement provides for a revolving loan in an aggregate principal amount of up to $2,500,000 (the “Revolving
Loan”) and a term loan in the aggregate principal amount of $9,200,000 (the “Term Loan”). The exact amount which
can be borrowed under the Revolving Loan from time to time is dependent upon the amount of the borrowing base, but can in no event
exceed $2,500,000. On January 7, 2016, the Borrowers and IBC entered into the First Amendment to the IBC Loan Agreement (the “First
Amendment”) whereby IBC made an additional term loan to Borrowers in the original principal amount of $2,530,072 (the “New
Equipment Loan”). The New Equipment Loan and $2,917,422 of the principal amount outstanding on the Term Loan were consolidated
into a new loan in the combined principal amount of $5,447,504 (the “Term Loan A”). The Term Loan’s remaining
principal balance of $3,000,000 was deemed to be a separate term loan (the “Term Loan B”). The additional proceeds
of $2,530,072 that were provided by the First Amendment were principally used to acquire new production equipment.
The
Term Loans A and B bear interest at the New York Prime Rate plus 0.5% but not less than 4.0% and mature January 31, 2019. The
Borrowers are required to make equal monthly payments of principal and interest in such amounts sufficient to amortize the principal
balance of (i) the Note A Term Loan over a seven year period beginning January 31, 2016 with the balance due at maturity and (ii)
the Note B Term Loan over the three-year life of the loan.
The
Revolving Loan bears interest at the New York Prime Rate plus 0.5% but not less than 4.0%. The First Amendment extended the maturity
date of the Revolving Loan to January 31, 2018. The Borrowers are required to pay all interest accrued on the outstanding principal
balance of the Revolving Loan on a monthly basis. Any principal on the Revolving Loan that is prepaid by the Borrowers does not
reduce the original amount available to the Borrowers. The proceeds from the Revolving Loan are used for general working capital
purposes.
Advances
and Loans from Robert Rosene
Effective
December 15, 2005, Greystone entered into an agreement with Mr. Rosene to convert $2,066,000 of advances into a note payable at
7.5% interest. Mr. Rosene has waived payment of principal until January 15, 2018. Greystone accrued interest on the loans in the
amounts of $332,415 and $307,276 in fiscal years 2016 and 2015, respectively. Accrued interest due to Mr. Rosene at May 31, 2016
is $2,475,690.
Off-Balance
Sheet Arrangements
Greystone
does not have any off-balance sheet arrangements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
Item
8. Financial Statements and Supplementary Data.
The
consolidated financial statements of Greystone are set forth on pages F-1 through F-16 inclusive, found at the end of this report.
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures are designed to ensure that information required to be disclosed by Greystone in reports filed or submitted
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated
and communicated to management, including the principal executive and financial officers, as appropriate, to allow timely decisions
regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
As
of May 31, 2016, an evaluation was performed under the supervision and with the participation of Greystone’s principal executive
officer (CEO) and principal financial officer (CFO) of the effectiveness of the design and operation of Greystone’s disclosure
controls and procedures pursuant to the Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, Greystone’s
CEO and CFO have concluded that Greystone’s disclosure controls and procedures were not effective as of May 31, 2016 as
a result of the two material weaknesses identified below.
Management’s
Report on Internal Control Over Financial Reporting
Greystone’s
CEO and CFO are responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Greystone’s internal controls were designed to provide reasonable
assurance as to the reliability of Greystone’s financial reporting and the preparation of the consolidated financial statements
for external purposes in accordance with generally accepted accounting principles in the United States, as well as to safeguard
assets from unauthorized use or disposition.
Due
to inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of control effectiveness to future periods are subject to the risk that the controls may become inadequate because
of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Greystone’s
CEO and CFO made an assessment of the effectiveness of Greystone’s internal control over financial reporting as of May 31,
2016. In making this assessment, Greystone’s CEO and CFO used the criteria established in Internal Control—Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). During this evaluation,
Greystone’s CEO and CFO identified two material weaknesses. As a result of these two material weaknesses, Greystone’s
CEO and CFO concluded that Greystone did not maintain effective internal control over financial reporting as of May 31, 2016.
The material weaknesses are as follows:
(i)
Greystone lacks the necessary corporate accounting resources to maintain adequate segregation of duties. Reliance on these limited
resources impairs Greystone’s ability to provide for proper segregation of duties and the ability to ensure consistently
complete and accurate financial reporting, as well as disclosure controls and procedures.
(ii)
Greystone, at the parent entity level, has limited resources to ensure that necessary internal controls are implemented and followed
throughout the company, including its subsidiaries. Because of this limitation with respect to the ability to allocate sufficient
resources to internal controls, material misstatements could occur and remain undetected, implementation of new accounting standards
could be hindered and risk assessment and monitoring may not be addressed in a timely manner.
Changes
in Internal Control over Financial Reporting
During
the period covered by this report, there was no change in Greystone’s internal controls over financial reporting that has
materially affected or that is reasonably likely to materially affect Greystone’s internal control over financial reporting.
Item
9B. Other Information.
None.
PART
III.
Item
10.
Directors, Executive
Officers and Corporate Governance.
Directors,
Executive Officers, Promoters and Control Persons
The
following lists the directors and executive officers of Greystone and a significant employee of Greystone. Directors of Greystone
are elected at annual meetings of shareholders unless appointed by the Board of Directors to fill a vacancy upon the resignation
or removal of a member or an increase in the number of members of the Board of Directors. Executive officers serve at the pleasure
of the Board of Directors.
Name
|
|
Position
|
|
Term
as Director Expires
|
Warren
F. Kruger
|
|
President,
Chief Executive Officer and Director
|
|
2016
|
Larry
LeBarre
|
|
Director
|
|
2016
|
Robert
B. Rosene, Jr.
|
|
Director
|
|
2016
|
William
W. Rahhal
|
|
Chief
Financial Officer
|
|
N/A
|
Warren
F. Kruger, President, Chief Executive Officer and Director
Mr.
Warren F. Kruger, Manager/CEO of privately held Yorktown Management & Financial Services, L.L.C., is 60 years old. Yorktown
is involved in investment banking, real estate, manufacturing and energy endeavors. Mr. Kruger is the non-executive chairman of
the board of directors of TriEnda Holdings, LLC. TriEnda Holdings manufactures plastic pallets utilizing a thermoform process.
Because of the different qualities between the pallets manufactured by Greystone and TriEnda, there is no direct competition between
the two companies. Mr. Kruger earned a Bachelor of Business Administration degree from the University of Oklahoma, and an Executive
M.B.A. from Southern Methodist University. Mr. Kruger has over thirty years of experience in the financial services industry.
In 1980, Mr. Kruger co-founded MCM Group, Ltd., which owned and controlled United Bank Club Association, Inc. until 1996 when
the firm was sold to a subsidiary of Cendant Corp. (a former NYSE company). He also owned and operated Century Ice, a manufacturer
and distributor of ice products from 1996 to 1997, when Packaged Ice, Inc., acquired Century Ice in an industry rollup. Mr. Kruger
is a partner with William W. Pritchard in privately held WCC, with investments in oil and gas, real estate and investment banking.
Mr.
Kruger became a director of Greystone on January 4, 2002, served as President and Chief Executive Officer from January 10, 2003
to August 15, 2005 and, most recently, has served as President and Chief Executive Officer from November 18, 2006 to the present.
Mr.
Kruger’s business experience and knowledge of the day to day operations of Greystone make him well suited to serve on Greystone’s
board of directors.
Mr.
Larry J. LeBarre, Director
Mr.
LeBarre, age 60, was President and CEO of privately-held Native American Marketing (“Native American”) until 2014
when the company was sold to Seminole Energy. Native American was founded by Mr. LeBarre in 2004 as an oil transportation, storage,
and marketing business. Mr. LeBarre earned a Bachelor of Business Administration degree from the University of Oklahoma, became
a Certified Public Accountant while working for Price Waterhouse & Co. (now PriceWaterhouseCoopers, LLP) and continued his
career in the hazardous waste industry and later with Plains Resources. Mr. LeBarre is also actively involved in investment banking,
real estate, and oil and gas investments. Mr. LeBarre became a director of Greystone effective May 5, 2012.
Mr.
LeBarre’s business experience makes him qualified to serve as a member of Greystone’s board of directors.
Mr.
Robert B. Rosene, Jr., Director
Mr.
Rosene, age 62, is Chairman of Seminole Energy Services, L.L.C., a natural gas marketing and gathering company that he co-founded
in 1998. Also in 1998, Mr. Rosene co-founded Summit Exploration, L.L.C., an oil and gas production company that holds oil and
gas production in several states. Mr. Rosene has served as a director of publicly traded Sooner Holdings, Inc. since 1985. Mr.
Rosene has a B.A. with an emphasis in accounting from Oklahoma Baptist University.
Mr.
Rosene’s business experience and longstanding relationship with Greystone make him a good fit as a member of Greystone’s
board of directors.
Mr.
Rosene became a director of Greystone effective June 14, 2004.
William
W. Rahhal, Chief Financial Officer
Mr.
Rahhal, age 75, served as managing partner of Rahhal Henderson Johnson, PLLC, Certified Public Accountants, in Ardmore, Oklahoma,
from 1988 to 2010 and retired from the firm effective December 31, 2013. Mr. Rahhal previously served as Greystone’s Chief
Financial Officer from October 1, 2002 to October 1, 2004 and subsequently served Greystone as an accounting and financial consultant
until his appointment as its Chief Financial Officer. Mr. Rahhal earned his B.B.A. from the University of Oklahoma and is a Certified
Public Accountant licensed in Oklahoma and Texas. Mr. Rahhal has also previously served as a Senior Manager with Price Waterhouse
& Co. (now PriceWaterhouseCoopers, LLP) and as financial manager of a privately-held oil and gas production company and contract
drilling company.
Identification
of the Audit Committee; Audit Committee Financial Expert
As
of May 31, 2016, Greystone had not established an audit committee and the entire Board of Directors essentially serves as Greystone’s
audit committee.
Code
of Ethics
Effective
April 8, 2008, Greystone adopted a Code of Ethics applicable to Greystone’s officers and directors, including Greystone’s
principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions.
Greystone undertakes to provide any person without charge, upon request, a copy of such Code of Ethics. Requests may be directed
to Greystone Logistics, Inc., 1613 East 15th Street, Tulsa, Oklahoma 74120, or by calling (918) 583-7441.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires Greystone’s directors, officers and persons who beneficially own more
than 10% of any class of Greystone’s equity securities registered under Section 12 to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of such registered securities of Greystone. Officers,
directors and greater than 10% beneficial owners are required by regulation to furnish to Greystone copies of all Section 16(a)
reports they file.
Based
solely on review of the copies of such reports furnished to Greystone and any written representations that no other reports were
required during fiscal year 2016, to Greystone’s knowledge, all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners during fiscal year 2016 were complied with on a timely basis.
Item
11. Executive Compensation.
The
following table sets forth the compensation paid to named executive officers during the fiscal years ended May 31, 2016, 2014
and 2013:
Summary
Compensation Table
Name
and
Principal
Position
|
|
Fiscal
Year
Ending
May 31,
|
|
|
Salary
|
|
|
Bonus
|
|
|
Option
Awards
|
|
|
Nonqualified Deferred Compensation
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren F. Kruger,
|
|
|
2016
|
|
|
$
|
240,000
|
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
249,500
|
|
President and Chief
|
|
|
2015
|
|
|
$
|
240,000
|
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
242,000
|
|
Executive Officer
|
|
|
2014
|
|
|
$
|
240,000
|
|
|
$
|
32,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
272,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William W. Rahhal,
|
|
|
2016
|
|
|
$
|
107,500
|
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
109,500
|
|
Chief Financial Officer
|
|
|
2015
|
|
|
$
|
100,000
|
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
102,000
|
|
|
|
|
2014
|
|
|
$
|
79,808
|
|
|
$
|
14,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
94,308
|
|
The
following table provides information with respect to named executive officers concerning outstanding equity awards as of May 31,
2016:
Outstanding
Equity Awards at Fiscal Year End
Name
and
Principal
Position
|
|
Number
of Securities Underlying Unexercised
Options
–
Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options –
Unexercisable
|
|
|
Option
Exercise
Price
|
|
|
Option
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren F. Kruger,
President and Chief Executive Officer
|
|
|
-
|
|
|
|
125,000
|
(a)
|
|
$
|
0.12
|
|
|
5/31/2022
|
William W. Rahhal,
Chief Financial Officer
|
|
|
-
|
|
|
|
62,500
|
(a)
|
|
$
|
0.12
|
|
|
5/31/2022
|
Larry LeBarre, Member of Board of Directors
|
|
|
-
|
|
|
|
50,000
|
(a)
|
|
$
|
0.12
|
|
|
5/31/2022
|
Robert B. Rosene, Jr., Member of Board of Directors
|
|
|
-
|
|
|
|
87,500
|
(a)
|
|
$
|
0.12
|
|
|
5/31/2022
|
(a)
The options become exercisable June 1, 2016.
Directors’
Compensation
Greystone
does not have any plans or policies with respect to the compensation of its Board of Directors for their service on the Board.
However, during the fiscal year ended May 31, 2016, the Board of Directors approved compensation to board members of $7,500 per
meeting attended. In fiscal year 2016 $7,500 was paid to each of Messrs. Kruger, Rosene and LeBarre.
Because
the Board of Directors consists of three persons of which two are outside directors, the Board has not considered it necessary
to create a compensation committee. All of Greystone’s directors participate in determining compensation for officers with
Mr. Kruger abstaining from any discussions concerning his compensation.
Compensation
Program as it Relates to Risk
We
have reviewed our compensation policies and practices for both executives and non-executives as they relate to risk and have determined
that at this time they are not reasonably likely to have a material adverse effect on us.
Amended
and Restated Stock Option Plan
General
.
Greystone’s Amended and Restated Stock Option Plan (the “Stock Plan”) is administered by the Board of Directors
of Greystone or, if the Board so authorizes, by a committee of the Board of Directors consisting of not less than two members
of the Board of Directors. The Stock Plan is presently administered by the entire Board of Directors since no separate committee
of the Board has been designated to administer the Stock Plan. Accordingly, many of the references below in this description of
the Stock Plan to the Board of Directors could also be construed to be a committee thereof. All managerial and other key employees
of Greystone and/or its subsidiaries who hold positions of significant responsibility or whose performance or potential contribution,
in the judgment of the Board of Directors, will benefit the future success of Greystone are eligible to receive grants under the
Stock Plan. In addition, each director of Greystone who is not an employee of Greystone is eligible to receive certain option
grants pursuant to provisions of the Stock Plan. Previously, the Stock Plan was set to expire on May 11, 2011 and the maximum
number of shares of common stock in respect of which options could be granted under the Stock Plan was 2,000,000. However, on
May 5, 2012, the Board of Directors voted to cause the Stock Plan to be extended for another 10 years and to increase the number
of shares of common stock in respect of which options could be granted to 2,500,000. This number is subject to appropriate equitable
adjustment in the event of a reorganization, stock split or stock dividend or other similar change affecting Greystone’s
common stock.
Price
and Terms
.
Each option is evidenced by an agreement between Greystone and the optionee. Unless otherwise
determined by the Board of Directors at the time of grant, all options become exercisable at the rate of 25% of the total shares
subject to the option on each of the first four anniversary dates of the date of grant, provided that the Board of Directors may,
at any time, accelerate the date any outstanding option becomes exercisable. The exercise price for each share placed under option
pursuant to the Stock Plan is determined by the Board of Directors but cannot in any event be less than 100% of the fair market
value of such share on the date the option was granted.
Effect
of Termination or Death
.
If an optionee’s employment with Greystone is terminated for any reason other
than death or termination for cause, an option will be exercisable for a period of three months after the date of termination
of employment as to all then vested portions of the option. In addition, the Board of Directors may, in its sole discretion, approve
acceleration of the vesting of any unvested portions of the option. If an optionee’s employment with Greystone is terminated
for cause (as defined in the Stock Plan), the option shall terminate as of the date of such termination of employment, and the
optionee shall have no further rights to exercise any portion of the option. If an optionee dies while employed by Greystone,
any unvested portion of the option as of the date of death shall be vested as of the date of death, and the option shall be exercisable
in full by the heirs or legal representatives of the optionee for a period of 12 months following the date of death. In any event,
options terminate and are no longer exercisable after 10 years from the date of the grant.
Continued
Service as a Director
.
In the event any optionee who is an employee and also a director of Greystone ceases
to be employed by Greystone but continues to serve as a director of Greystone, the Board of Directors may determine that all or
a portion of such optionee’s options shall not expire three months following the date of employment as described above,
but instead shall continue in effect until the earlier of the date the optionee ceases to be a director of Greystone or the date
the option otherwise expires according to its stated date of expiration. Termination of any such option in connection with the
optionee’s termination of service as a director will be on terms similar to those described above in connection with termination
of employment.
Grants
to Non-Employee Directors
. In order to retain, motivate and reward non-employee directors of Greystone, the Stock Plan
extends participation to non-employee directors on the terms and conditions described below. The exercise price for options granted
to non-employee directors is equal to 100% of the fair market value per share of common stock on the date the option is granted.
As with options granted to employees, unless otherwise determined by the Board of Directors at the time of grant, all options
granted to non-employee directors become exercisable at the rate of 25% of the total shares subject to the option on each of the
first four anniversary dates of the date of grant. The Board of Directors is also entitled at any time to accelerate the date
any outstanding option becomes exercisable. If a non-employee director’s service on the Board of Directors is terminated
for any reason other than death or removal from the Board of Directors for cause, an option will be exercisable for a period of
three months after the date of removal from the Board of Directors as to all then vested portions of the option. If a non-employee
director is removed from the Board of Directors for cause, the option will terminate as of the date of such removal, and the optionee
shall have no further rights to exercise any portion of the option. If a non-employee director optionee dies while serving on
the Board of Directors, any unvested portion of the option as of the date of death shall be vested as of the date of death, and
the option shall be exercisable in full by the heirs or legal representatives of the optionee for a period of 12 months following
the date of death. In any event, options terminate and are no longer exercisable after 10 years from the date of the grant.
Other
than as described above, all options granted to non-employee directors are subject to the same terms and conditions generally
applicable to options granted to employees under the Stock Plan.
Exercise
of Options
.
The exercise price of options may be paid in cash, by certified check, by tender of stock of
Greystone (valued at fair market value on the date immediately preceding the date of exercise), by surrender of a portion of the
option, or by a combination of such means of payment. The prior consent of the Board of Directors is required in connection with
the payment of the exercise price of options by tender of shares or surrender of a portion of the option, except that the consent
of the Board of Directors is not required if the exercise price is paid by surrender of shares that have been owned by the optionee
for more than six months prior to the date of exercise of the option or by a combination of cash and shares that have been owned
for more than six months.
Effect
of Certain Corporate Transactions
. In the event of any change in capitalization affecting the common stock of Greystone,
such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or
other form of reorganization, liquidation, or any other change affecting the common stock, proportionate adjustments will be made
with respect to the aggregate number and type of securities for which options may be granted under the Stock Plan, the number
and type of securities covered by each outstanding option, and the exercise price of outstanding options so that optionees will
be entitled upon exercise of options to receive the same number and kind of stock, securities, cash, property or other consideration
that the optionee would have received in connection with the change in capitalization if such option had been exercised immediately
preceding such change in capitalization. The Board of Directors may also make such adjustments in the number of shares covered
by, and the price or other value of any outstanding options in the event of a spin-off or other distribution, other than normal
cash dividends, of company assets to shareholders. In addition, unless the Board of Directors expressly determines otherwise,
in the event of a Change in Control (as defined in the Stock Plan) of Greystone, all outstanding options will become immediately
and fully exercisable and optionees will be entitled to surrender, within 60 days following the Change in Control, unexercised
options or portions of options in return for a cash payment equal to the difference between the aggregate exercise price of the
surrendered options and the fair market value of the shares of common stock underlying the surrendered options.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities
Authorized for Issuance under Equity Compensation Plans
As
of May 31, 2016, Greystone had one equity incentive plan under which equity securities have been authorized for issuance to Greystone’s
directors, officers, employees and other persons who perform substantial services for or on behalf of Greystone. The following
table provides certain information relating to such stock option plan during the year ended May 31, 2016:
Equity
Compensation Plan Information
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Plan
Category
|
|
Number
of securities to be
issued upon
exercise
of
outstanding options, warrants
and
rights
|
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
|
|
Number
of securities remaining
available
for future issuance
under equity
compensation
plans
(excluding securities
reflected
in column (a))
|
|
Equity compensation plans approved by security holders
|
|
|
675,000
|
|
|
$
|
0.12
|
|
|
|
-0-
|
|
Equity compensation plans not approved by security holders
|
|
|
-0-
|
|
|
|
N/A
|
|
|
|
-0-
|
|
Total
|
|
|
675,000
|
|
|
$
|
0.12
|
|
|
|
-0-
|
|
Security
Ownership of Certain Beneficial Owners and Management
As
of May 31, 2016, Greystone had 27,886,201 shares of its common stock and 50,000 shares of its 2003 preferred stock outstanding.
Each share of the 2003 preferred stock is convertible into approximately 66.67 shares of Greystone’s common stock.
The
following table sets forth certain information regarding the shares of Greystone’s common stock beneficially owned as of
May 31, 2016, by (i) each person known by Greystone to own beneficially 5% or more of Greystone’s outstanding common stock,
(ii) each of Greystone’s directors and named officers, and (iii) all of Greystone’s directors and named officers as
a group:
Name and Address of
Beneficial Owner
|
|
Shares
of Common Stock
Beneficially
Owned
(1)
|
|
|
Percent
of Class
(2)
|
|
|
Shares
of Senior Preferred Stock Beneficially Owned
(3)
|
|
|
Percent of Class
|
|
|
Voting
Shares Beneficially Owned
(4)
|
|
|
Percent of Total Voting Power
|
|
Warren F. Kruger
Chairman, President and CEO
1613 East 15th Street
Tulsa,
OK 74120
|
|
|
9,898,563
|
(5)
|
|
|
33.35
|
%
|
|
|
25,000
|
|
|
|
50.00
|
%
|
|
|
9,773,563
|
|
|
|
31.31
|
%
|
William W. Rahhal
Chief Financial Officer
1613 East 15th Street
Tulsa, OK 74120
|
|
|
307,883
|
(6)
|
|
|
1.10
|
%
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
245,383
|
|
|
|
0.79
|
%
|
Robert B. Rosene, Jr.
Director
1323 E. 71st Street, Suite 300
Tulsa, OK 74136
|
|
|
4,885,717
|
(7)
|
|
|
16.48
|
%
|
|
|
25,000
|
|
|
|
50.00
|
%
|
|
|
4,798,217
|
|
|
|
15.37
|
%
|
Larry J. LeBarre
Director
7518 Middlewood Street
Houston, TX 77063
|
|
|
534,203
|
(8)
|
|
|
1.91
|
%
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
484,203
|
|
|
|
1.55
|
%
|
William Pritchard
1437 S. Boulder
Tulsa, OK 74119
|
|
|
2,007,503
|
(9)
|
|
|
7.18
|
%
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
1,920,003
|
|
|
|
6.15
|
%
|
All Directors & Officers as a Group (4 persons)
|
|
|
15,626,366
|
(10)
|
|
|
49.54
|
%
|
|
|
50,000
|
|
|
|
100.00
|
%
|
|
|
15,301,366
|
|
|
|
49.01
|
%
|
(1)
|
The
number of shares beneficially owned by each holder is calculated in accordance with the
rules of the Commission, which provide that each holder shall be deemed to be a beneficial
owner of a security if that holder has the right to acquire beneficial ownership of the
security within 60 days through options, warrants or the conversion of another security;
provided, however, if such holder acquires any such rights in connection with or as a
participant in any transaction with the effect of changing or influencing control of
the issuer, then immediately upon such acquisition, the holder will be deemed to be the
beneficial owner of the securities. The number the shares of common stock beneficially
owned by each holder includes common stock directly owned by such holder and the number
of shares of common stock such holder has the right to acquire upon the conversion of
the Senior Preferred Stock and/or upon the exercise of certain options or warrants.
|
(2)
|
The
percentage ownership for each holder is calculated in accordance with the rules of the
Commission, which provide that any shares a holder is deemed to beneficially own by virtue
of having a right to acquire shares upon the conversion of warrants, options or other
rights, or upon the conversion of preferred stock or other rights are considered outstanding
solely for purposes of calculating such holder’s percentage ownership.
|
(3)
|
Each
share of Senior Preferred Stock is convertible into approximately 66 2/3 shares of Greystone’s
common stock. Therefore, Mr. Kruger’s 25,000 shares of Senior Preferred Stock are
convertible into 1,666,666.66 shares of our common stock and Mr. Rosene’s 25,000
shares of Senior Preferred Stock are convertible into 1,666,666.66 shares of our common
stock.
|
(4)
|
Total
“Voting Shares” is defined as the number of shares of common stock outstanding,
each share of which receives one vote, plus the 3,333,333.32 votes afforded to the holders
of our Senior Preferred Stock, or 31,219,534.32 Voting Shares total. The number of Voting
Shares reported by each reporting person above represents the number of shares of common
stock beneficially owned by such reporting person plus the number of votes afforded to
such reporting person as a holder of shares of Senior Preferred Stock, as applicable.
|
(5)
|
The
total includes: (i) 8,081,097 shares of common stock beneficially owned directly by Mr.
Kruger; (ii) 19,000 shares held of record by Yorktown; (iii) 125,000 shares of common
stock that Mr. Kruger directly has the right to acquire in connection with options; (iv)
6,800 shares of common stock that Mr. Kruger holds as custodian for minor children; and
(v) 1,666,666 shares that Mr. Kruger has the right to acquire upon conversion of the
Senior Preferred Stock.
|
(6)
|
The
total includes: (i) 245,383 shares of common stock that Mr. Rahhal which owns as a joint
tenant and (ii) 62,500 shares of common stock that Mr. Rahhal has the right to acquire
in connection with options.
|
(7)
|
The
total includes: (i) 3,083,451 shares of common stock beneficially owned directly by Mr.
Rosene; (ii) 48,100 shares of common stock held of record by RMP Operating Co., (iii)
87,500 shares of common stock that Mr. Rosene has the right to acquire with options;
and (iv) 1,666,666 shares that Mr. Rosene has the right to acquire upon conversion of
the Senior Preferred Stock.
|
(8)
|
The
total includes (i) 484,203 shares of common stock beneficially owned directly by Mr.
LeBarre (ii) 50,000 shares of common stock that Mr. LeBarre has the right to acquire
in connection with options.
|
(9)
|
The
total includes: (i) 1,788,429 shares of common stock beneficially owned directly by Mr.
Pritchard; (ii) 131,574 shares held of record by Maritch Services, Inc. and (iii) 87,500
shares of common stock that Mr. Pritchard has the right to acquire with options.
|
(10)
|
The
director and officer group includes each reporting person in the above table other than
Mr. Pritchard. The total includes: (i) 11,968,034 shares of common stock; (ii) 325,000
shares of common stock issuable upon exercise of vested stock options; (iii) 1,666,666
shares of common stock that Mr. Kruger has the right to acquire upon conversion of the
Senior Preferred Stock; and (iv) 1,666,666 shares of common stock that Mr. Rosene has
the right to acquire upon conversion of the Senior Preferred.
|
Item
13.
Certain Relationships
and Related Transactions, and Director Independence
Transactions
with Related Persons
General
For
information regarding loans from or to Warren Kruger, see “Transactions with Warren Kruger and Related Entities” under
the heading “Liquidity and Capital Resources” in Item 7 of this Form10-K.
For
information regarding an advance from Robert Rosene, see “Advances and Loans from Robert Rosene” under the heading
“Liquidity and Capital Resources” in Item 7 of this Form10-K.
For
information regarding the loan from IBC and Messrs. Kruger’s and Rosene’s relationship thereto, see “Loan from
International Bank of Commerce (“IBC”) in Item 7 of this Form 10-K.
Transactions
with TriEnda Holdings, L.L.C.
TriEnda
Holdings, L.L.C. (“TriEnda”) is a manufacturer of plastic pallets, protective packaging and dunnage utilizing thermoform
processing of which Warren F. Kruger, Greystone’s President and CEO, has a majority ownership interest and serves TriEnda
as the non-executive Chairman of the Board. Greystone charges a tolling fee to TriEnda for blending and pelletizing plastic resin
using TriEnda’s equipment and raw materials. Revenue from TriEnda totaled $496,764 and $220,962 in fiscal years 2016 and
2015, respectively. The account receivable from TriEnda at May 31, 2016 was $82,274.
Transactions
with Green Plastic Pallets
Green
Plastic Pallet (“Green”) is an entity owned by James Kruger, a brother to Warren Kruger, Greystone’s President
and CEO. Green purchased pallets from Greystone totaling $295,362 and $333,253 in fiscal years 2016 and 2015, respectively. At
May 31, 2016, Green owed $73,440 to Greystone.
Other
Transactions
Greystone
leases two buildings located in Bettendorf, Iowa, from which it conducts its manufacturing operations, from Greystone Real Estate,
L.L.C., a variable interest entity which is owned by Robert B. Rosene, Jr., a member of Greystone’s board of director, and
Warren Kruger, Greystone’s President and CEO and a member of Greystone’s board of directors. Rental payments are $40,266
per month for both buildings.
Effective
January 1, 2009, Greystone entered into a lease agreement with an entity owned by Mr. Larry LeBarre, a member of Greystone’s
board of directors, to rent certain equipment to produce mid-duty pallets with a minimum monthly commitment of $25,000. The lease,
as amended, terminated as of September 30, 2015. Lease payments were $75,000 and $300,000 for fiscal years 2016 and 2015, respectively.
Director
Independence
Greystone
has determined that Messrs. LeBarre and Rosene are “independent” within the meaning of Rule 5605(a)(2) of the NASDAQ
listing standards. Because of the small size of Greystone’s Board of Directors, it has not established any committees. Rather,
the entire Board acts as, and performs the same functions as, the audit committee, compensation committee and nominating committee.
Mr. Kruger is not considered “independent” within the meaning of Rule 5605(a)(2) of the NASDAQ listing standards.
Item
14. Principal Accounting Fees and Services.
The
following is a summary of the fees billed to Greystone by HoganTaylor LLP, Greystone’s independent registered public accounting
firm, for professional services rendered for the fiscal years ended May 31, 2016 and May 31, 2015:
Fee Category
|
|
Fiscal 2016 Fees
|
|
|
Fiscal 2015 Fees
|
|
|
|
|
|
|
|
|
Audit Fees(1)
|
|
$
|
140,000
|
|
|
$
|
143,000
|
|
Audit-Related Fees
|
|
|
0
|
|
|
|
0
|
|
Tax Fees
|
|
|
0
|
|
|
|
0
|
|
All Other Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
140,000
|
|
|
$
|
143,000
|
|
(1)Audit
Fees consist of aggregate fees billed for professional services rendered for the audit of Greystone’s annual consolidated
financial statements and review of the interim consolidated financial statements included in quarterly reports or services that
are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings
or engagements during the fiscal years ended May 31, 2016 and May 31, 2015, respectively.
The
entire Board of Directors of Greystone is responsible for the appointment, compensation and oversight of the work of the independent
registered public accounting firm and approves in advance any services to be performed by the independent registered public accounting
firm, whether audit-related or not. The entire Board of Directors reviews each proposed engagement to determine whether the provision
of services is compatible with maintaining the independence of the independent registered public accounting firm. All of the fees
shown above were pre-approved by the entire Board of Directors.
The accompanying notes
are an integral part of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
Notes
to Consolidated Financial Statements
May 31, 2016 and 2015
Note 1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
Greystone Logistics,
Inc. (“Greystone”), through its two wholly-owned subsidiaries, Greystone Manufacturing, LLC (“GSM”) and
Plastic Pallet Production, Inc. (“PPP”), is engaged in the manufacture and marketing of plastic pallets and pelletized
recycled plastic resin.
Principles
of Consolidation
The consolidated
financial statements include the accounts of Greystone, its subsidiaries and entities required to be consolidated by the accounting
guidance for variable interest entities (“VIE”). All material intercompany accounts and transactions have been eliminated.
Greystone consolidates
its VIE, Greystone Real Estate, L.L.C. (“GRE”), which owns the manufacturing facilities which are occupied by Greystone.
GRE is owned by Warren F. Kruger, President and CEO, and Robert B. Rosene, Jr., a member of Greystone’s board of directors.
Use of Estimates
The preparation
of Greystone’s financial statements in conformity with accounting principles generally accepted in the United States of
America requires Greystone’s management to make estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ materially from those estimates.
Accounts Receivable
and Allowance for Doubtful Accounts
Greystone carries
its accounts receivable at their face value less an allowance for doubtful accounts. On a periodic basis, Greystone evaluates
its accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances,
credit conditions and history of collections. Based on periodic reviews of outstanding accounts receivable, Greystone writes off
balances deemed to be uncollectible against the allowance for doubtful accounts.
Inventory
Inventory consists
of finished pallets and raw materials and is stated at the lower of average cost or market value.
Property,
Plant and Equipment
Greystone’s
property, plant and equipment is stated at cost. Depreciation expense is computed using the straight-line method over the estimated
useful lives, as follows:
Plant
buildings
|
|
39
years
|
Production
machinery and equipment
|
|
5-10
years
|
Leasehold
improvements
|
|
5-7
years
|
Furniture
& fixtures
|
|
3-5
years
|
Upon sale, retirement
or other disposal, the related costs and accumulated depreciation of items of property, plant or equipment are removed from the
related accounts and any gain or loss is recognized. When events or changes in circumstances indicate that assets may be impaired,
an evaluation is performed comparing the estimated future undiscounted cash flows associated with the asset to the asset’s
carrying amount. If the asset’s carrying amount exceeds the cash flows, a write-down to fair value is required.
Other Assets
Other assets includes
certain intangible costs as follows:
|
(1)
|
Patents
on the modular pallet system and accessories which are being amortized using the straight-line method over the estimated useful
life of 15 years.
|
|
|
|
|
(2)
|
Debt
issue costs which are being amortized over the term of the underlying note payable or five years.
|
Stock Options
The grant-date fair
value of stock options and other equity-based compensation issued to employees is amortized on the straight-line basis over the
vesting period of the award as compensation cost. The fair value of new option grants is estimated using the Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility, dividend yields and expected holding periods.
Recognition
of Revenues
Greystone’s
sales agreements to customers other than its primary customer generally provide for risk of loss to pass to the customers upon
shipment from Greystone’s plant in Bettendorf, Iowa. Revenue is recognized for these customers at the date of shipment.
Greystone’s
agreement with its major customer provides that (1) risk of loss or damages for product in transit remain with Greystone and (2)
the product is subject to approval and acceptance at the buyer’s premises. Accordingly, Greystone recognizes revenue when
product has been delivered to the customer’s sites and risk of loss has passed to the customer.
For sales to all
customers, cost of goods sold is recognized when the related revenue is recognized.
Income Taxes
Greystone accounts
for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the difference between the consolidated financial statements
and tax bases of assets and liabilities and tax loss carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Effective May 31,
2016, Greystone early adopted
Accounting Standards Update 2015-17,
Income Taxes: Balance Sheet Classification of Deferred
Taxes,
for which Greystone classified all deferred tax assets and liabilities as noncurrent. Accordingly, Greystone retrospectively
applied the guidance and reclassified as non-current the amount of $1,222,110 as of May 31, 2015 which was previously reported
as current portion.
Earnings Per
Share
Basic earnings per
share is computed by dividing the earnings available to common stockholders by the weighted average number of common shares outstanding
for the year. In arriving at income available to common stockholders, preferred stock dividends are deducted from net income for
the year. For fiscal years 2016 and 2015, convertible preferred stock is not considered as its effect is antidilutive.
The following securities
were not included in the computation of diluted earnings per share for the fiscal years ended May 31, 2016 and 2015 as their effect
would have been antidilutive:
|
|
2016
|
|
|
2015
|
|
Convertible
preferred stock
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
Recent Accounting
Pronouncements
In May 2014, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“
Revenue from Contracts with Customers
” (“ASU 2014-09”) which creates a comprehensive set of guidelines
for the recognition of revenue under the principle: “Recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services.” The requirements of ASU 2014-09 will require either retrospective application to each prior period presented
or retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption.
Greystone is currently evaluating the impact this ASU will have on our financial position and results of operations. On July 9,
2015, FASB voted to approve a one-year deferral of the effective date such that the effective date for Greystone’s interim
and annual periods begins June 1, 2018.
On April 7, 2015,
the FASB issued Accounting Standard Update 2015-03, “
Simplifying the Presentation of Debt Issuance Costs”
(“ASU
2015-03”) which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying
value of the associated debt liability, consistent with the presentation of a debt discount. The requirement of ASU 2015-03 is
effective for fiscal years beginning after December 15, 2015. Greystone does not believe that the impact of this ASU will have
a material impact on our financial position and results of operations.
On
August 18, 2015, the FASB issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting
,
which adds to the
FASB Accounting Standards Codification
®
SEC paragraphs pursuant to the SEC staff announcement
at the June 18, 2015 Emerging Issues Task Force (EITF) meeting about the presentation and subsequent measurement of debt issuance
costs associated with line-of-credit (LOC) arrangements. Specifically, the ASU states that the SEC staff would not object to an
entity deferring and presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance costs ratably
over the term of the LOC arrangement, regardless of whether there are outstanding borrowings under that LOC arrangement.
In February 2016,
the FASB issued Accounting Standards 2016-02,
Leases (Topic 842)
, which is intended to improve financial reporting about
leasing transactions. The ASU will require organizations (“lessees”) that lease assets with lease terms of more than
twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.
Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP. In
addition, the ASU will require disclosures to help investors and other financial statement users better understand the amount,
timing and uncertainty of cash flows arising from leases. The effective date of this ASU is for fiscal years beginning after December
31, 2018 and interim periods within that year. Greystone is currently reviewing the ASU to assess the potential impact on the
consolidated financial statements.
In March 2016, FASB
issued Accounting Standards 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amends ASC Topic 718,
Compensation – Stock Compensation
. The objective of this amendment is part of the FASB’s Simplification Initiative
as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date
of the amendment is for fiscal years beginning after December 31, 2016 and interim periods within that reporting period. Greystone
is currently reviewing the ASU to assess the potential impact on the consolidated financial statements.
Note 2.
INVENTORY
Inventory consists of the following
as of May 31:
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
536,350
|
|
|
$
|
665,702
|
|
Finished pallets
|
|
|
768,145
|
|
|
|
763,642
|
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
1,304,495
|
|
|
$
|
1,429,344
|
|
Note 3.
PROPERTY, PLANT AND EQUIPMENT
A summary of the property, plant
and equipment for Greystone is as follows, as of May 31:
|
|
2016
|
|
|
2015
|
|
Production machinery and
equipment
|
|
$
|
18,616,603
|
|
|
$
|
13,120,285
|
|
Plant buildings and land
|
|
|
4,663,339
|
|
|
|
4,663,339
|
|
Leasehold improvements
|
|
|
198,568
|
|
|
|
198,568
|
|
Furniture and
fixtures
|
|
|
168
005
|
|
|
|
90,280
|
|
|
|
|
23,646,515
|
|
|
|
18,072,472
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated
depreciation
|
|
|
(11,081,196
|
)
|
|
|
(9,563,157
|
)
|
|
|
|
|
|
|
|
|
|
Net Property,
Plant and Equipment
|
|
$
|
12,565,319
|
|
|
$
|
8,509,315
|
|
Production machinery and equipment
includes equipment in the amount of $510,827 that had not been placed into service as of May 31, 2016. The plant buildings and
land are owned by GRE, a VIE, and have a net book value of $3,244,165 at May 31, 2016.
Depreciation expense for the years
ended May 31, 2016 and 2015 is $1,518,039 and $1,398,269, respectively.
Note 4.
OTHER ASSETS
Other assets consist of the following
as of May 31:
|
|
2016
|
|
|
2015
|
|
Patents
|
|
$
|
190,739
|
|
|
$
|
190,739
|
|
Debt issue costs
|
|
|
129,722
|
|
|
|
129,722
|
|
Accumulated amortization
|
|
|
(228,071
|
)
|
|
|
(190,827
|
)
|
Other
|
|
|
200
|
|
|
|
-
|
|
Total Other Assets
|
|
$
|
92,590
|
|
|
$
|
129,634
|
|
Amortization of intangibles was
$37,244 and $33,554 for 2016 and 2015, respectively. Future amortization for the next five years will be $36,467, $35,982, $19,941,
$-0- and $-0-.
Note 5.
LONG-TERM DEBT
Long-term debt consists of the following
as of May 31:
|
|
2016
|
|
|
2015
|
|
Term note A payable to International
Bank of Commence, prime rate of interest plus 0.5% but not less than 4.0%, maturing January 7, 2019
|
|
$
|
5,310,179
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Term note B payable to International
Bank of Commence, prime rate of interest plus 0.5% but not less than 4.0%, maturing January 7, 2019
|
|
|
2,688,659
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Term note payable to International Bank
of Commerce, interest rate of 4.5%, refinanced January 7, 2016
|
|
|
-
|
|
|
|
6,945,884
|
|
|
|
|
|
|
|
|
|
|
Revolving note payable to International
Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, due January 31, 2018
|
|
|
1,675,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
Term note payable by GRE to International
Bank of Commerce, interest rate of 4.5%, monthly principal and interest payments of $26,215, due January 31, 2019
|
|
|
3,021,734
|
|
|
|
3,207,553
|
|
|
|
|
|
|
|
|
|
|
Note payable to Robert Rosene, 7.5%
interest, due January 15, 2018
|
|
|
2,066,000
|
|
|
|
2,066,000
|
|
|
|
|
|
|
|
|
|
|
Note payable to Yorktown Management
& Financial Services, LLC, 5.0% interest, due February 28, 2019, monthly principal and interest payments of $20,629
|
|
|
634,616
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
50,560
|
|
|
|
59,574
|
|
|
|
|
15,446,748
|
|
|
|
12,579,011
|
|
Less: Current
portion
|
|
|
(2,088,327
|
)
|
|
|
(2,278,164
|
)
|
Long-term debt
|
|
$
|
13,358,421
|
|
|
$
|
10,300,847
|
|
The prime rate of
interest as of May 31, 2016 was 3.5%.
Loan Agreement
between Greystone and International Bank of Commerce (“IBC”)
On January 31, 2014,
Greystone and GSM (the “Borrowers”) and International Bank of Commerce (“IBC”) entered into a Loan Agreement
(the “IBC Loan Agreement”). The IBC Loan Agreement provides for a revolving loan in an aggregate principal amount
of up to $2,500,000 (the “Revolving Loan”) and a term loan in the aggregate principal amount of $9,200,000 (the “Term
Loan”). The exact amount which can be borrowed under the Revolving Loan from time to time is dependent upon the amount of
the borrowing base, but can in no event exceed $2,500,000. On January 7, 2016, the Borrowers and IBC entered into the First Amendment
to the IBC Loan Agreement (the “First Amendment”) whereby IBC made an additional term loan to Borrowers in the original
principal amount of $2,530,072 (the “New Equipment Loan”). The New Equipment Loan and $2,917,422 of the principal
amount outstanding on the Term Loan were consolidated into a new loan in the combined principal amount of $5,447,504 (the “Term
Loan A”). The Term Loan’s remaining principal balance of $3,000,000 was deemed to be a separate term loan (the “Term
Loan B”). The additional proceeds of $2,530,072 that were provided by the First Amendment were principally used to acquire
new production equipment.
The Term Loans A
and B bear interest at the New York Prime Rate plus 0.5% but not less than 4.0% and mature January 7, 2019. The Borrowers are
required to make equal monthly payments of principal and interest in such amounts sufficient to amortize the principal balance
of (i) the Note A Term Loan over a seven year period beginning January 31, 2016 (currently $74,455 per month) and (ii) the Note
B Term Loan over the three-year life of the loan (currently $88,790 per month).
The Revolving Loan
bears interest at the New York Prime Rate plus 0.5% but not less than 4.0%. The First Amendment extended the maturity date of
the Revolving Loan to January 31, 2018. The Borrowers are required to pay all interest accrued on the outstanding principal balance
of the Revolving Loan on a monthly basis. Any principal on the Revolving Loan that is prepaid by the Borrowers does not reduce
the original amount available to the Borrowers. The proceeds from the Revolving Loan are used for general working capital purposes.
The IBC Loan Agreement
includes customary representations and warranties and affirmative and negative covenants which include (i) requiring the Borrowers
to maintain a debt service coverage ratio of 1:25 to 1:00 and a funded debt to EBIDA ratio not exceeding 3:00 to 1:00, (ii) subject
to certain exceptions, limiting the Borrowers’ combined capital expenditures on fixed assets to $1,000,000 per year, (iii)
prohibiting Greystone, without IBC’s prior written consent, from declaring or paying any dividends, redemptions of stock
or membership interests, distributions and withdrawals (as applicable) in respect of its capital stock or any other equity interest,
other than additional payments to holders of its preferred stock in an amount not to exceed $500,000 in any fiscal year, (iv)
subject to certain exceptions, prohibiting the incurrence of additional indebtedness by the Borrowers, and (v) requiring the Borrowers
to prevent (A) any change in capital ownership such that there is a material change in the direct or indirect ownership of (1)
Greystone’s outstanding preferred stock, and (2) any equity interest in GSM, or (B) Warren Kruger from ceasing to be actively
involved in the management of Greystone as President and/or Chief Executive Officer. The foregoing list of covenants is not exhaustive
and there are several other covenants contained in the IBC Loan Agreement.
Greystone’s
debt service coverage ratio at May 31, 2016 was 0.96 which is not in compliance with the IBC Loan Agreement’s minimum debt
service coverage ratio of 1.25. Greystone has received a waiver from IBC for the instance of non-compliance.
The IBC Loan Agreement
includes customary events of default, including events of default relating to non-payment of principal and other amounts owing
under the IBC Loan Agreement from time to time, inaccuracy of representations, violation of covenants, defaults under other agreements,
bankruptcy and similar events, the death of a guarantor, certain material adverse changes relating to a Borrower or guarantor,
certain judgments or awards against a Borrower, or government action affecting a Borrower’s or guarantor’s ability
to perform under the IBC Loan Agreement or the related loan documents. Among other things, a default under the IBC Loan Agreement
would permit IBC to cease lending funds under the IBC Loan Agreement, and require immediate repayment of any outstanding loans
with interest and any unpaid accrued fees.
The IBC Loan Agreement
is secured by a lien on substantially all of the assets of the Borrowers. In addition, the IBC Loan Agreement is secured by a
mortgage granted by GRE on the real property owned by GRE in Bettendorf, Iowa (the “Mortgage”). GRE is owned by Warren
F. Kruger, Greystone’s President and CEO, and Robert B. Rosene, Jr., a director of Greystone. Messrs. Kruger and Rosene
have provided a combined limited guaranty of the Borrowers’ obligations under the IBC Loan Agreement, with such guaranty
being limited to a combined amount of $6,500,000 (the “Guaranty”). The Mortgage and the Guaranty also secure or guaranty,
as applicable, the obligations of GRE under the Loan Agreement between GRE and IBC dated January 31, 2014 as discussed in the
following paragraph.
Loan Agreement
between GRE and IBC
On January 31, 2014,
GRE and IBC entered into a Loan Agreement which provided for a mortgage loan to GRE of $3,412,500. The loan provides for a 4.5%
interest rate and a maturity of January 31, 2019 and is secured by a mortgage on the two buildings in Bettendorf, Iowa which are
leased to Greystone.
Note Payable
between Greystone and Robert B. Rosene, Jr.
Effective December
15, 2005, Greystone entered into an agreement with Robert B. Rosene, Jr., a member of Greystone’s board of directors, to
convert $2,066,000 of advances into a note payable at 7.5% interest. Mr. Rosene has waived payment of principal until January
15, 2018. Greystone accrued interest on the note and unpaid interest in the amounts of $332,415 and $307,276 for the years ended
May 31, 2016 and 2015, respectively. Accrued interest due to Mr. Rosene at May 31, 2016 was $2,475,690.
Effective June 1,
2016, the note payable to Mr. Rosene was restated (the “Restated Note”) whereby the accrued interest was combined
with the outstanding principal resulting in a note payable in the principal amount of $4,541,690 with an interest rate of 7.5%
and a maturity of January 15, 2018. The Restated Note requires the payment of accrued interest to Mr. Rosene. In addition, the
Restated Note allows Greystone to make additional payments, at Greystone’s discretion, up to an amount allowed by the IBC
Loan Agreement.
Note Payable
between Greystone and Yorktown Management Financial Services, LLC (“Yorktown”)
On February 29,
2016, Greystone entered into an unsecured note payable to Yorktown in the amount of $688,296 in connection with the acquisition
of equipment from Yorktown as discussed in Note 6, Related Party Transactions. The note payable bears interest at the rate of
5% and is payable over three years with monthly principal and interest payments of $20,629.
Maturities
Maturities of Greystone’s
long-term debt for the five years after May 31, 2016 are $2,088,327, $5,918,177, $7,428,579, $11,665 and $-0-.
Note 6.
RELATED PARTY TRANSACTIONS
Transactions
with Warren F. Kruger, Chairman
Yorktown Management
& Financial Services, LLC (“Yorktown”), an entity wholly owned by Greystone’s CEO and President, owns and
rents to Greystone (1) grinding equipment used to grind raw materials for Greystone’s pallet production and (2) extruders
for pelletizing recycled plastic into pellets for resale and for use as raw material in the manufacture of pallets. Greystone
compensates Yorktown for the use of equipment as discussed below.
Yorktown previously
owned a plastic grinding and wash line plastic recycling facility located in Sand Springs, Oklahoma. Effective June 1, 2015, Greystone
assumed operations of the Sand Springs facility and made rental payments totaling $105,000 to Yorktown for use of this equipment
through February 29, 2016. On and effective February 29, 2016, GSM and Yorktown entered into an Asset Purchase Agreement and Bill
of Sale (the “Bill of Sale”) providing for GSM’s acquisition of the equipment located at the facility for $1,137,865.
Payment consisted of an offset against the purchase price of $449,569 which was an amount that Yorktown owed to GSM as of the
date of the acquisition and a note payable in the amount of $688,296 which Greystone issued to Yorktown payable over 36 months
at 5% interest. GSM continued to operate within the facility by assuming the month-to-month rental of the facility with an unrelated
party.
In fiscal year 2015,
Greystone paid the labor on behalf of Yorktown’s Sand Springs, Oklahoma grinding operation and invoiced Yorktown for the
cost. This procedure terminated June 1, 2015 when Greystone assumed operation of the Sand Springs plant as discussed herein.
Rental fees.
GSM pays a weekly rental fees of $22,500 and $5,000 to Yorktown for grinding equipment and pelletizing equipment, respectively.
Total rental fees of approximately $1,430,000 were paid in both fiscal years 2015 and 2015.
In addition, Yorktown
provides office space for Greystone in Tulsa, Oklahoma at a monthly rental of $2,200 ($2,000 prior to April 1, 2015).
Transactions
with TriEnda Holdings, L.L.C.
TriEnda Holdings,
L.L.C. (“TriEnda”) is a manufacturer of plastic pallets, protective packing and dunnage utilizing thermoform processing
of which Warren F. Kruger, Greystone’s President and CEO, has a majority ownership interest and serves TriEnda as the non-executive
Chairman of the Board. Greystone charges a tolling fee for blending and pelletizing plastic resin using TriEnda’s equipment
and raw materials. Revenue from TriEnda totaled $496,764 and $220,962 in fiscal years 2016 and 2015, respectively. The account
receivable from TriEnda at May 31, 2016 was $82,274.
Transactions
with Robert B. Rosene, Jr., Director
Greystone accrued
interest in the amounts of $332,415 and $307,276 in fiscal years 2016 and 2015, respectively, on the promissory note dated December
15, 2005 payable to Mr. Rosene. Accumulated accrued interest due to Mr. Rosene at May 31, 2016 is $2,475,690.
Transactions
with Larry J. LeBarre, Director
Effective January
1, 2009, Greystone entered into a lease agreement with an entity owned by Mr. LeBarre to rent certain equipment to produce mid-duty
pallets with a minimum monthly commitment of $25,000. The lease terminated in September 30, 2015. Lease payments were $75,000
and $300,000 for fiscal years 2016 and 2015, respectively.
Transactions
with Green Plastic Pallets
Green Plastic Pallet
(“Green”) is an entity owned by James Kruger, a brother to Warren Kruger, Greystone’s President and CEO. Green
purchased pallets from Greystone totaling $295,362 and $333,253 in fiscal years 2016 and 2015, respectively. At May 31, 2016,
Green owed $73,440 to Greystone.
Note 7.
FEDERAL INCOME TAXES
Deferred taxes as
of May 31 are as follows:
|
|
2016
|
|
|
2015
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
2,288,919
|
|
|
$
|
1,892,673
|
|
Stock compensation
costs
|
|
|
25,346
|
|
|
|
21,632
|
|
Allowance for doubtful
accounts
|
|
|
4,508
|
|
|
|
4,508
|
|
Other
|
|
|
24,001
|
|
|
|
13,429
|
|
Total deferred tax
asset
|
|
|
2,342,774
|
|
|
|
1,932,242
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization, tax reporting in excess of financial
|
|
|
(1,059,092
|
)
|
|
|
(153,005
|
)
|
Net
deferred tax asset
|
|
$
|
1,283,682
|
|
|
$
|
1,779,237
|
|
In assessing the
reliability of deferred tax assets, management considers the likelihood of whether it is more likely than not the net deferred
tax asset will be realized. Based on this evaluation, management has determined that Greystone will be able to realize the full
effect of the deferred tax asset and no valuation allowance has been recorded as of May 31, 2016 and 2015, respectively.
The net change in
deferred taxes for the year ended May 31, 2016 and 2015 is as follows:
|
|
2016
|
|
|
2015
|
|
Net operating loss carryforward
|
|
$
|
396,246
|
|
|
$
|
(44,121
|
)
|
Depreciation and amortization, tax reporting in
excess of financial
|
|
|
(906,087
|
)
|
|
|
(372,843
|
)
|
Stock compensation costs
|
|
|
3,714
|
|
|
|
(14,696
|
)
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
(12,532
|
)
|
Other
|
|
|
10,572
|
|
|
|
13,429
|
|
Total
|
|
$
|
(495,555
|
)
|
|
$
|
(430,763
|
)
|
The provision for
income taxes at May 31 consists of the following:
|
|
2016
|
|
|
2015
|
|
Current income
tax – Federal and State
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
income tax provision
|
|
|
495,555
|
|
|
|
430,763
|
|
Provision
for income taxes
|
|
$
|
495,555
|
|
|
$
|
430,763
|
|
Greystone’s
provision for income taxes for the years ended May 31, 2016 and 2015 differs from the federal statutory rate as follows:
|
|
2016
|
|
|
2015
|
|
Tax
provision using statutory rates
|
|
|
34
|
%
|
|
|
34
|
%
|
Net operating loss
expiration
|
|
|
6
|
|
|
|
7
|
|
Other
|
|
|
(3
|
)
|
|
|
1
|
|
Tax
provision per financial statements
|
|
|
37
|
%
|
|
|
42
|
%
|
At May 31, 2016,
Greystone had a net operating loss (NOL) for Federal income tax purposes from inception through May 31, 2005 of $17,242,600 expiring
in fiscal year 2016 through fiscal year 2025 of which $2,025,000 is management’s estimate of the usable amount pursuant
to Internal Revenue Code Section 382. The limitation is due to a change in control of Greystone during the fiscal year ended May
31, 2005. The utilization of NOL’s accumulated through fiscal year 2005 is limited to approximately $225,000 per year.
|
|
NOL
Carryforward
|
|
|
Year
Expiring
|
Cumulative through May 31, 2005
|
|
$
|
2,025,000
|
|
|
2016 - 2025
|
Year ended May 31, 2006
|
|
|
237,364
|
|
|
2026
|
Year ended May 31, 2007
|
|
|
2,151,837
|
|
|
2027
|
Year ended May 31, 2011
|
|
|
746,484
|
|
|
2031
|
Year ended May 31, 2015
|
|
|
352,719
|
|
|
2035
|
Year Ended May 31, 2016
|
|
|
1,346,555
|
|
|
2036
|
Greystone does not
have any uncertain tax positions that could result in a material change to its financial position.
Note 8.
STOCKHOLDERS’ EQUITY
Convertible Preferred
Stock
In September 2003,
Greystone issued 50,000 shares of Series 2003, cumulative, convertible preferred stock, par value $0.0001, for a total purchase
price of $5,000,000. Each share of the preferred stock has a stated value of $100 and a dividend rate equal to the prime rate
of interest plus 3.25% and may be converted into common stock at the conversion rate of $1.50 per share or an aggregate of 3,333,333
shares of common stock. The holder of the preferred stock has been granted certain voting rights so that such holder has the right
to elect a majority of the Board of Directors of Greystone. Preferred stock dividends must be fully paid before a dividend on
the common stock may be paid.
Note 9.
STOCK OPTIONS
Greystone has a
stock option plan that provides for the granting of options to key employees and non-employee directors. The options are to purchase
common stock at not less than fair market value at the date of the grant. Effective May 5, 2012, Greystone’s board of directors
approved the renewal and extension of Greystone’s stock option plan through May 11, 2021 and increased the maximum number
of shares of common stock for which options may be granted to 2,500,000 of which none were available for grant at May 31, 2016.
Stock options generally expire in ten years from date of grant or upon termination of employment and are generally exercisable
one year from date of grant in cumulative annual installments of 25%. Following is a summary of option activity for the two years
ended May 31, 2016:
|
|
Number
|
|
|
Weighted
Average Exercise Price
|
|
|
Remaining
Contractual
Life (years)
|
|
|
Intrinsic
Value
|
|
Total outstanding, May
31, 2014
|
|
|
2,100,000
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Exercised
during fiscal year 2015
|
|
|
(950,000
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Total outstanding May 31, 2015
|
|
|
1,150,000
|
|
|
$
|
0.12
|
|
|
|
6.0
|
|
|
|
|
|
Exercised
during fiscal year 2016
|
|
|
(475,000
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Total outstanding
May 31, 2016
|
|
|
675,000
|
|
|
$
|
0.12
|
|
|
|
6.0
|
|
|
|
|
|
Exercisable
as of May 31, 2016
|
|
|
150,000
|
|
|
$
|
0.12
|
|
|
|
6.0
|
|
|
$
|
21,000
|
|
Non-vested
as of May 31, 2016
|
|
|
525,000
|
|
|
$
|
0.12
|
|
|
|
6.0
|
|
|
$
|
73,500
|
|
Share-based compensation
cost was $53,424 for fiscal years 2016 and 2015, respectively. As of May 31, 2016, there were no unrecognized compensation expenses
related to non-vested share-based options.
On August 1, 2016,
options to purchase 475,000 shares of common stock were exercised.
Note 10.
FINANCIAL INSTRUMENTS
The following
methods and assumptions are used in estimating the fair-value disclosures for financial instruments:
Cash, Accounts Receivable
and Accounts Payable: The carrying amounts reported in the balance sheet for cash, accounts receivable and accounts payable approximate
fair value due to the short-term maturity of these instruments.
Long-Term Debt:
The carrying amount of loans with floating rates of interest approximate fair value. Fixed rate loans are valued based on cash
flows using estimated rates for comparable loans. As of May 31, 2016 and 2015, the carrying amounts reported in the balance sheet
approximate fair value.
Note 11.
SUPPLEMENTAL INFORMATION OF
CASH FLOWS
Supplemental information
of cash flows for the years ended May 31:
|
|
2016
|
|
|
2015
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of equipment through capital lease
|
|
$
|
-
|
|
|
$
|
64,497
|
|
Acquisition of
equipment from related party in exchange for receivable and/or note payable
|
|
$
|
1,137,865
|
|
|
$
|
75,000
|
|
Acquisition of equipment
in accounts payable
|
|
$
|
113,047
|
|
|
$
|
-
|
|
Preferred dividend
accrual
|
|
$
|
5,690
|
|
|
$
|
26,712
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
542,442
|
|
|
$
|
511,496
|
|
Note 12.
CONCENTRATIONS
For the fiscal year ended May 31,
2016, Greystone had two customers that accounted for approximately 56% of total sales (41% and 15%, respectively). For the fiscal
year ended May 31, 2015, one of Greystone’s customers accounted for approximately 51% of total sales.
Greystone purchases damaged pallets
from its customers at a price based on the value of the raw material content of the pallet. A majority of these purchases are
from Greystone’s major customer which were approximately $1,605,000 and $1,582,000 in fiscal years 2016 and 2015, respectively.
Note 13.
VARIABLE INTEREST ENTITIES
(VIE)
Greystone Real Estate, L.L.C.
GRE, is owned by Warren Kruger,
President and CEO, and Robert Rosene, a member of the Board of Directors. GRE was created solely to own and lease one of the buildings
that GSM occupies at 2600 Shoreline Drive, Bettendorf, Iowa. In fiscal year 2012, GRE purchased the second building occupied by
Greystone, 2601 Shoreline Drive, Bettendorf, Iowa, in a sale and leaseback transaction with Greystone.
The buildings, having a carrying
value of $3,244,165 and $3,360,037 at May 31, 2016 and 2015, respectively, serve as collateral for GRE’s debt. The debt
had a carrying value of $3,021,734 and $3,207,553 at May 31, 2016 and 2015, respectively.
Note 14.
COMMITMENTS
At May 31, 2016, Greystone
had commitments totaling $169,829 for the acquisition of equipment.
Note 15.
SUBSEQUENT EVENT
In August, 2016, Greystone entered
into a three-year lease agreement with respect to certain production equipment with a total cost of approximately $5.4 million.
The lease agreement includes a bargain purchase option to acquire the production equipment at the end of the lease term. The lease
is for two Milacron injection molding machines and two pallet molds designed and dedicated to production of 48X40 pallets (the
“Pallets”) for a specific customer. Lease payments are payable on a per invoice basis at the rate of $6.25 for each
pallet shipped and produced by the leased production equipment. The lease provides for minimum monthly lease rental payment based
upon the total Pallets sold in excess of a specified amount not to exceed the monthly productive capacity of the leased machines.