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 November 30, 2016, the results of its operations for the six-month and three-month periods ended November 30, 2016
and 2015, and its cash flows for the six-month periods ended November 30, 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 six-months and
three-month periods ended November 30, 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 the variable interest entity, Greystone Real Estate, L.L.C. (“GRE”).
GRE owns two buildings located in Bettendorf, Iowa which are leased to GSM.
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) available to common stockholders by the weighted-average shares outstanding during the period. Diluted earnings
per share is calculated by dividing net income (loss) available 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, as follows:
|
|
2016
|
|
|
2015
|
|
Six-month periods ended November 30:
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
200,000
|
|
|
|
675,000
|
|
Warrants to purchase common stock
|
|
|
500,000
|
|
|
|
-
|
|
Preferred stock convertible into common stock
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,033,333
|
|
|
|
4,008,333
|
|
|
|
|
|
|
|
|
|
|
Three-month periods ended November 30:
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
-
|
|
|
|
675,000
|
|
Preferred stock convertible into common stock
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
Total
|
|
|
3,333,333
|
|
|
|
4,008,333
|
|
The
following tables set forth the computation of basic and diluted earnings per share for the following periods:
|
|
2016
|
|
|
2015
|
|
Six-month periods ended November 30:
|
|
|
|
|
|
|
|
|
Numerator -
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(76,330
|
)
|
|
$
|
(113,735
|
)
|
Denominator -
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
|
|
28,283,332
|
|
|
|
27,520,217
|
|
Incremental shares from assumed conversion of options
and warrants
|
|
|
-
|
|
|
|
-
|
|
Diluted shares
|
|
|
28,283,332
|
|
|
|
27,520,217
|
|
Loss per share -
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Three-month periods ended November 30:
|
|
|
|
|
|
|
|
|
Numerator -
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
41,109
|
|
|
$
|
(22,420
|
)
|
Denominator -
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
|
|
28,361,201
|
|
|
|
27,630,432
|
|
Incremental shares from assumed conversion of options
and warrants
|
|
|
579,167
|
|
|
|
-
|
|
Diluted shares
|
|
|
28,940,368
|
|
|
|
27,630,432
|
|
Loss per share -
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
Note
3. Inventory
Inventory
consists of the following:
|
|
November 30, 2016
|
|
|
May 31, 2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
744,711
|
|
|
$
|
536,350
|
|
Finished goods
|
|
|
550,831
|
|
|
|
768,145
|
|
Total inventory
|
|
$
|
1,295,542
|
|
|
$
|
1,304,495
|
|
Note
4. Related Party Receivable
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 for which GSM paid Yorktown rental fees of $715,000 for the six months ended November 30, 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 $368,690 and $111,986
for the six months ended November 30, 2016 and 2015, respectively. The account receivable from TriEnda at November 30, 2016 was
$62,694.
The
tolling service provided by Greystone generates a certain amount of scrap material which is purchased by Greystone. Purchases
for the six months ended November 30, 2016 and 2015 totaled $24,265 and $60,584, respectively. Greystone had accounts payable
to TriEnda of $2,299 at November 30, 2016.
Green
Plastic Pallets
Greystone
sells plastic pallets to Green Plastic Pallets (“Green”), an entity that is owned by James Kruger, brother to Warren
Kruger, Greystone’s president and CEO. Greystone had sales to Green of $146,885 and $146,880 for the six months ended
November 30, 2016 and 2015, respectively. The account receivable due from Green at November 30, 2016 was $111,860.
Note
5. Debt
Debt
as of November 30, 2016 and May 31, 2016 is as follows:
|
|
November 30, 2016
|
|
|
May 31, 2016
|
|
Term note A payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing January 7, 2019
|
|
$
|
4,969,030
|
|
|
$
|
5,310,179
|
|
|
|
|
|
|
|
|
|
|
Term note B payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing January 7, 2019
|
|
|
2,206,666
|
|
|
|
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, 2019
|
|
|
1,400,000
|
|
|
|
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
|
|
|
2,932,721
|
|
|
|
3,021,734
|
|
|
|
|
|
|
|
|
|
|
Capital lease with a private pallet leasing company, interest rate of 5%, maturity of August 7, 2019
|
|
|
4,865,070
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to Robert Rosene, 7.5% interest, due January 15, 2018
|
|
|
4,534,331
|
|
|
|
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
|
|
|
525,758
|
|
|
|
634,616
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
44,400
|
|
|
|
50,560
|
|
|
|
|
|
|
|
|
|
|
Debt issue costs, net of amortization
|
|
|
(225,213
|
)
|
|
|
(69,185
|
)
|
|
|
|
21,252,763
|
|
|
|
15,377,563
|
|
Less: Current portion
|
|
|
(4,340,096
|
)
|
|
|
(2,088,327
|
)
|
Long-term debt
|
|
$
|
16,912,667
|
|
|
$
|
13,289,236
|
|
The
prime rate of interest as of November 30, 2016 was 3.5%. Effective December 15, 2016, the prime rate of interest increased to
3.75%.
Loan
Agreement between Greystone and 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”). Greystone’s board of directors
approved compensation to Warren F. Kruger, President and CEO, and Robert B. Rosene, Jr., a member of Greystone’s board of
directors, as the individual guarantors pursuant to the IBC Agreement, as amended. The compensation included a cash payment of
$65,000, of which the payment to Mr. Rosene was made in December 2016, and a warrant to purchase 250,000 shares of Greystone common
stock for $0.01 per share as discussed further in Note 6. The cost of the compensation is accounted for as debt issue costs to
be amortized over the remaining primary terms of the notes.
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%. Effective December 12, 2016,
the Revolving Loan was amended and restated to extend the maturity of the note to January 31, 2019. 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 measured quarterly, (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 as of November 30, 2016 was 0.65 to 1:00 which was less than the required minimum as discussed above.
Effective December 12, 2016, the Borrowers and IBC entered into the Third Amendment to the IBC Loan Agreement (the “Third
Amendment”) waiving this instance of noncompliance, and further removing the requirement to maintain the minimum debt service
coverage ratio until the rolling test period ending February 28, 2018.
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 leasing 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 November 30, 2016
for the capital lease are estimated to be $2,206,994, $2,319,848 and $338,228.
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 November 30, 2016 are $4,340,096, $10,477,053,
$6,660,827, $-0- and $-0-.
Note
6. Warrants to Purchase Common Stock
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 $120,000 and amortized over the remaining guaranty term.
The
value of Greystone’s common stock on September 1, 2016 was $0.24 per share. The estimated fair value at the date of the
grant for the warrants utilizing the Black-Scholes option valuation model and the assumptions that were used in the Black-Scholes
option model for fiscal year 2017 are as follows:
Estimated fair value of warrants at date of grant
|
|
$
|
120,000
|
|
Black-Scholes model assumptions
|
|
|
|
|
Average expected life (years)
|
|
|
6
|
|
Average expected volatility factor
|
|
|
145.77
|
%
|
Average risk-free interest rate
|
|
|
4.0
|
%
|
Average expected dividend yields
|
|
$
|
-0-
|
|
Note
7. 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
8. Concentrations, Risks and Uncertainties
Greystone
derived approximately 67% of its total sales from two customers (25% and 42% respectively) in fiscal year 2017 and approximately
40% (36% and 4%, respectively) in fiscal year 2016. 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 customers at a price based on the value of the raw material content in the pallet. A majority
of these purchases, totaling $864,874 and $478,752 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 November 30,
2016, Greystone is indebted to Mr. Rosene in the amount of $4,534,331 for a note payable and related accrued interest due January
15, 2018. There is no assurance that Mr. Rosene will renew the note as of the maturity date.
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 14-09”) 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 14-09 are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017 and 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.
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.