Notes
to Consolidated Financial Statements
(Unaudited)
Note
1. Basis of Financial Statements
In
the opinion of Greystone Logistics, Inc. (“Greystone”), the accompanying unaudited consolidated financial statements
contain all adjustments and reclassifications, which are of a normal recurring nature, necessary to present fairly its financial
position as of August 31, 2016, and the results of its operations and its cash flows for the three-month periods ended August
31, 2016 and 2015. These consolidated financial statements should be read in conjunction with the audited consolidated financial
statements as of and for the fiscal year ended May 31, 2016 and the notes thereto included in Greystone’s Form 10-K for
such period. The results of operations for the three-month periods ended August 31, 2016 and 2015 are not necessarily indicative
of the results to be expected for the full fiscal year.
The
consolidated financial statements of Greystone include its wholly-owned subsidiaries, Greystone Manufacturing, L.L.C. (“GSM”)
and Plastic Pallet Production, Inc. (“PPP”), and its variable interest entity, Greystone Real Estate, L.L.C. (“GRE”).
GRE owns two buildings located in Bettendorf, Iowa which are leased to GSM.
Effective
June 1, 2016, Greystone adopted Accounting Standards Update 2015-03, “
Simplifying the Presentation of Debt Issuance Costs”
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. Accordingly, Greystone retrospectively applied
the guidance to the May 31, 2016 balance by reclassifying debt issue costs of $69,185, net of amortization, previously reported
as other assets to long-term debt.
Note
2. Earnings Per Share
Basic
earnings per share is based on the weighted-average effect of all common shares issued and outstanding and is calculated by dividing
net income (loss) attributable to common stockholders by the weighted-average shares outstanding during the period. Diluted earnings
per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of common
shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming exercise
or conversion of all potentially dilutive common shares outstanding.
Greystone
excludes equity instruments from the calculation of diluted earnings per share if the effect of including such instruments is
anti-dilutive. For the three months ended
August 31, 2016 and 2015
,
e
quity
instruments which have been excluded are Greystone’s convertible preferred stock which is convertible into 3,333,334 shares
of common stock and common stock options to purchase 200,000 and 1,150,000 of common stock, respectively.
Note
3. Inventory
Inventory
consists of the following:
|
|
August 31, 2016
|
|
|
May 31, 2016
|
|
Raw materials
|
|
$
|
781,856
|
|
|
$
|
536,350
|
|
Finished goods
|
|
|
536,642
|
|
|
|
768,145
|
|
Total inventory
|
|
$
|
1,318,498
|
|
|
$
|
1,304,495
|
|
Note
4. Property, Plant and Equipment
A
summary of the property, plant and equipment for Greystone is as follows:
|
|
August
31, 2016
|
|
|
May 31, 2016
|
|
Production machinery and equipment
|
|
$
|
22,149,817
|
|
|
$
|
18,616,603
|
|
Plant buildings and land
|
|
|
4,663,339
|
|
|
|
4,663,339
|
|
Leasehold improvements
|
|
|
245,568
|
|
|
|
198,568
|
|
Furniture and fixtures
|
|
|
168
005
|
|
|
|
168,005
|
|
|
|
|
27,226,729
|
|
|
|
23,646,515
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(11,599,772
|
)
|
|
|
(11,081,196
|
)
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
$
|
15,626,957
|
|
|
$
|
12,565,319
|
|
Production
machinery and equipment includes equipment capitalized pursuant to a capital lease in the amount of $2,731,152. The equipment
is being depreciated using the straight-line method of depreciation over 10 years.
Production
machinery includes deposits on equipment in the amount of $159,698 that had not been placed into service as of August 31, 2016.
The plant buildings and land are owned by GRE, a VIE, and have a net book value of $3,215,197 at August 31, 2016.
Depreciation
expense for the three months ended August 31, 2016 and 2015 is $518,576 and $378,966, respectively.
Note
5. Related Party Transactions
Yorktown
Management & Financial Services, LLC
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.
GSM pays weekly rental fees to Yorktown of $22,500 for use of Yorktown’s grinding equipment and $5,000 for the use of Yorktown’s
pelletizing equipment. GSM paid Yorktown total equipment rental fees of $385,000 and $357,500 for the three months ended August
31, 2016 and 2015, respectively.
In
addition, Yorktown provides office space for Greystone in Tulsa, Oklahoma at a monthly rental of $2,200.
TriEnda Holdings, L.L.C.
TriEnda Holdings, L.L.C.
(“TriEnda”) is a manufacturer of plastic pallets, protective packing and dunnage utilizing thermoform processing for
which Warren F. Kruger, Greystone’s president and CEO, serves TriEnda as the non-executive Chairman of the Board and is
a partner in a partnership which has a majority ownership interest. Greystone charges a tolling fee for blending and pelletizing
plastic resin using TriEnda’s equipment and raw materials. Revenue from TriEnda totaled $187,002 and $3,113 for the three
months ended August 31, 2016 and 2015, respectively. The account receivable from TriEnda at August 31, 2016 was $71,342.
The tolling service provided
by Greystone generates a certain amount of scrap material which is purchased by Greystone. Purchases for the three months ended
August 31, 2016 and 2015 totaled $8,905 and $-0-, respectively. Greystone had accounts payable to TriEnda of $7,628 at August
31, 2016.
Green Plastic Pallets
Greystone sells plastics
pallets to Green Plastic Pallets (“Green”), an entity that is owned by James Kruger, brother to Warren F. Kruger,
Greystone’s president and CEO. Greystone had sales to Green of $18,365 and $55,080 for the three months ended August 31,
2016 and 2015, respectively. As of August 31, 2016, Greystone had an account receivable of $56,908 from Green.
Note 6. Debt
Debt as of August 31,
2016 and May 31, 2016 is as follows:
|
|
August 31, 2016
|
|
|
May 31, 2016
|
|
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
|
|
$
|
5,140,476
|
|
|
$
|
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
|
|
|
2,448,894
|
|
|
|
2,688,659
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
1,675,000
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2,977,666
|
|
|
|
3,021,734
|
|
|
|
|
|
|
|
|
|
|
Capital lease with a private pallet leasing company, interest rate of 5%, maturity of August
7, 2019
|
|
|
2,672,078
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to Robert Rosene, 7.5% interest, due January 15, 2018
|
|
|
4,541,690
|
|
|
|
2,066,000
|
|
|
|
|
|
|
|
|
|
|
Note payable to Yorktown Management & Financial Services, LLC, 5% interest, due February
28, 2019, monthly principal and interest payments of $20,629
|
|
|
580,614
|
|
|
|
634,616
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
47,158
|
|
|
|
50,560
|
|
|
|
|
|
|
|
|
|
|
Debt issue costs, net of amortization
|
|
|
(62,698
|
)
|
|
|
(69,185
|
)
|
|
|
|
20,020,878
|
|
|
|
15,377,563
|
|
Less: Current portion
|
|
|
(3,201,905
|
)
|
|
|
(2,088,327
|
)
|
Long-term debt
|
|
$
|
16,818,973
|
|
|
$
|
13,289,236
|
|
The prime rate of interest
as of August 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 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% and matures 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 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 August 31, 2016 was 0.84 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 this 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.
Capital Lease with Private Pallet Leasing
Company
In August, 2016, Greystone
entered into a three-year lease agreement with a private pallet leasing company to provide for 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 the pallet leasing company. Monthly lease payments, estimated at
approximately $100,000 per machine, are payable on a per invoice basis at the rate of $6.25 for each pallet produced by the leased
production equipment and shipped to the company. The lease bears an interest rate of 5%, has a three-year maturity and 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.
The first of the Milacron
machines was placed into service in August, 2016. The second machine was placed into service in September, 2016 under the same
terms and conditions as the first machine. Maturities for the three years subsequent to August 31, 2016 for the capital lease
placed in service in August, 2016 are estimated to be $1,091,375, $1,147,092 and $433,611.
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. Effective June 1, 2016, the note was restated (the “Restated
Note”) to combine the outstanding principal, $2,066,000, and accrued interest, $2,475,690, into a note payable of $4,541,690
with an extended maturity date of January 15, 2018. The Restated Note provides that accrued interest is payable monthly and allows
Greystone to use commercially reasonable efforts to pay such amounts as allowed by the IBC Loan Agreement against the interest
accrued prior to the restatement.
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. 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 and capital leases for the five years subsequent to August 31, 2016 are $3,201,905, $9,564,108, $7,309,827, $7,736
and $-0-.
Note 7. Stock Compensation Costs
Stock compensation costs,
resulting from stock options issued June 1, 2012, were $-0- and $13,356 for the three months ended August 31, 2016 and 2015, respectively.
Note 8. Fair Value of Financial Instruments
The following methods
and assumptions are used in estimating the fair-value disclosures for financial instruments:
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 of comparable loans. The carrying amounts reported in the balance sheet approximate fair value.
Note 9. 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.
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 10. Concentrations, Risks and Uncertainties
In fiscal year 2017, Greystone
derived 66% of its total sales from two customers (36% and 30% respectively). In fiscal year 2016, there was one significant customer
which accounted for approximately 31% of Greystone’s total sales. The loss of a material amount of business from these customers
could have a material adverse effect on Greystone.
Greystone purchases damaged
pallets from its customer at a price based on the value of the raw material content in the pallet. A majority of these purchases,
totaling $478,752 and $490,092 in fiscal years 2017 and 2016, respectively, is from one of its major customers.
Robert B. Rosene, Jr.,
a Greystone director, has provided financing and guarantees on Greystone’s bank debt. As of August 31, 2016, Greystone is
indebted to Mr. Rosene in the amount of $4,541,690 pursuant to a note payable due January 15, 2018. There is no assurance that
Mr. Rosene will continue to provide extensions in the future.
Note 11. Subsequent Event
Effective September 1,
2016, Greystone’s board of directors authorized the issuance of warrants to purchase 250,000 shares of Greystone’s
common stock for $0.01 per share to each of Warren F. Kruger, President and CEO, and Robert B. Rosene, Jr., a member of Greystone’s
board, as compensation for providing guarantees on Greystone’s debt with International Bank of Commerce. The warrants have
a vesting period of two years and expire August 31, 2026. The issuance will be capitalized as debt issue cost as of the measurement
date for approximately $125,000 and amortized over the remaining guaranty term.