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 February 28, 2019, the results of its operations for the nine months and three months ended February 28, 2019 and
2018, and its cash flows for the nine months ended February 28, 2019 and 2018. 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, 2018 and
the notes thereto included in Greystone’s Form 10-K for such period. The results of operations for the nine months and three
months ended February 28, 2019 and 2018 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. All material intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
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 attributable to common stockholders by the weighted-average shares outstanding during the period. Diluted earnings
per share is calculated by dividing net income 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. Instruments which have an anti-dilutive effect are as follows:
|
|
2019
|
|
|
2018
|
|
Nine
months ended February 28:
|
|
|
|
|
|
|
|
|
Preferred
stock convertible into common stock
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
|
|
|
|
|
|
|
|
|
Three
months ended February 28:
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
-
|
|
|
|
200,000
|
|
Warrants
to purchase common stock
|
|
|
-
|
|
|
|
500,000
|
|
Preferred
stock convertible into common stock
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
Total
|
|
|
3,333,333
|
|
|
|
4,033,333
|
|
The
following tables set forth the computation of basic and diluted earnings per share for the nine months and three months ended
February 28, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Nine
months ended February 28:
|
|
|
|
|
|
|
|
|
Numerator
-
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
789,399
|
|
|
$
|
210,817
|
|
Denominator
-
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding - basic
|
|
|
28,361,201
|
|
|
|
28,361,201
|
|
Incremental
shares from assumed conversion of options and warrants
|
|
|
648,214
|
|
|
|
630,952
|
|
Diluted
shares
|
|
|
29,009,415
|
|
|
|
28,992,153
|
|
Income per
share -
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
Three
months ended February 28:
|
|
|
|
|
|
|
|
|
Numerator
-
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
59,118
|
|
|
$
|
(152,554
|
)
|
Denominator
-
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding - basic
|
|
|
28,361,201
|
|
|
|
28,361,201
|
|
Incremental
shares from assumed conversion of options and warrants
|
|
|
650,847
|
|
|
|
-
|
|
Diluted
shares
|
|
|
29,012,048
|
|
|
|
28,361,201
|
|
Income
(Loss) per share -
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
Inventory
consists of the following:
|
|
February
28, 2019
|
|
|
May
31, 2018
|
|
Raw
materials
|
|
$
|
2,006,573
|
|
|
$
|
864,339
|
|
Finished
goods
|
|
|
3,144,844
|
|
|
|
2,224,928
|
|
Total
inventory
|
|
$
|
5,151,417
|
|
|
$
|
3,089,267
|
|
Note
4.
|
Property,
Plant and Equipment
|
A
summary of property, plant and equipment for Greystone is as follows:
|
|
February
28, 2019
|
|
|
May
31, 2018
|
|
Production
machinery and equipment
|
|
$
|
44,895,520
|
|
|
$
|
35,270,326
|
|
Plant
buildings and land
|
|
|
6,271,202
|
|
|
|
5,739,491
|
|
Leasehold
improvements
|
|
|
924,641
|
|
|
|
534,637
|
|
Furniture
and fixtures
|
|
|
563,074
|
|
|
|
396,882
|
|
|
|
|
52,654,437
|
|
|
|
41,941,336
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(19,843,399
|
)
|
|
|
(16,587,460
|
)
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$
|
32,811,038
|
|
|
$
|
25,353,876
|
|
Production
machinery and equipment includes equipment capitalized pursuant to capital leases in the amount of $13,227,122. The equipment
is being amortized using the straight-line method over 3.5 years for pallet molds and 12 years for injection molding machines.
Production
machinery includes deposits on equipment in the amount of $1,390,839 that had not been placed into service as of February 28,
2019. Two plant buildings and land are owned by GRE, a variable interest entity (“VIE”), having a net book value of
$2,925,517 at February 28, 2019.
Depreciation
expense, including amortization expense related to assets under capital leases, for the nine months ended February 28, 2019 and
2018 was $3,255,939 and $2,476,050, respectively.
Note
5.
|
Related Party
Transactions/Activity
|
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 $1,100,000 and $1,072,500 for each of the nine months
ended February 28, 2019 and 2018 respectively.
Effective
January 1, 2017, Greystone and Yorktown entered into a five-year lease for office space at a monthly rental of $4,000 per month.
Total rent expense was $36,000 for each of fiscal year 2019 and 2018. At February 28, 2019, future minimum payments under the
non-cancelable operating lease for the remaining three years are $48,000, $48,000 and $44,000.
Effective
December 28, 2018, Yorktown purchased certain production equipment from Greystone at net book value of $968,168 and entered into
a four-year lease agreement with Greystone at a monthly rent of $27,915 for the initial thirty-six months and $7,695 for the following
twelve months. The lease agreement provides for a bargain purchase option of $10,000 at the end of the lease.
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 in TriEnda. Greystone periodically purchases material
and pallets from TriEnda. Purchases for the nine months ended February 28, 2019 and 2018 totaled $42,349 and $123,072, respectively.
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 $167,400 and $330,144 for the nine months ended February
28, 2019 and 2018, respectively. The account receivable due from Green at February 28, 2019 was $19,440.
Debt
as of February 28, 2019 and May 31, 2018 is as follows:
|
|
February
28, 2019
|
|
|
May
31, 2018
|
|
Term
loan A payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing April
30, 2023
|
|
$
|
3,417,791
|
|
|
$
|
3,945,443
|
|
|
|
|
|
|
|
|
|
|
Term
loan C payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing August
4, 2020
|
|
|
1,453,103
|
|
|
|
1,613,445
|
|
|
|
|
|
|
|
|
|
|
Term
loan D payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.75%, maturing January
10, 2022
|
|
|
1,889,391
|
|
|
|
2,314,935
|
|
|
|
|
|
|
|
|
|
|
Term
loan E payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.75%, maturing January
10, 2022
|
|
|
982,106
|
|
|
|
843,200
|
|
|
|
|
|
|
|
|
|
|
Term
loan F payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 5.25%, maturing February
8, 2021
|
|
|
3,545,514
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Revolving
loan payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.75%, due January 31,
2021
|
|
|
3,450,000
|
|
|
|
1,879,000
|
|
|
|
|
|
|
|
|
|
|
Note
payable to First Bank, prime rate of interest plus 1.45% but not less than 4.95%, monthly principal and interest payment of
$30,628, due August 21, 2021, secured by production equipment
|
|
|
878,088
|
|
|
|
1,099,447
|
|
|
|
|
|
|
|
|
|
|
Term
loan payable by GRE to International Bank of Commerce, interest rate of 5.5%, monthly principal and interest payment of $26,215,
due April 30, 2023
|
|
|
2,510,295
|
|
|
|
2,652,428
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Robert Rosene, 7.5% interest, due January 15, 2021
|
|
|
4,467,330
|
|
|
|
4,469,355
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Yorktown Management & Financial Services, LLC, paid in full in February 2019
|
|
|
-
|
|
|
|
181,850
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
234,112
|
|
|
|
252,493
|
|
Total
debt
|
|
|
22,827,730
|
|
|
|
19,251,596
|
|
Debt
issue costs, net of amortization
|
|
|
(12,579
|
)
|
|
|
(91,370
|
)
|
Total
debt, net of debt issue costs
|
|
|
22,815,151
|
|
|
|
19,160,226
|
|
Less:
Current portion
|
|
|
(2,961,095
|
)
|
|
|
(2,324,046
|
)
|
Long-term
debt
|
|
$
|
19,854,056
|
|
|
$
|
16,836,180
|
|
The
prime rate of interest as of February 28, 2019 was 5.5%.
Loan
Agreement between Greystone and IBC
The
Loan Agreement (“IBC Loan Agreement”), dated January 31, 2014 and as amended from time to time, among Greystone and
GSM (the “Borrowers”) and International Bank of Commerce (“IBC”) provides for certain term
loans and a revolver loan.
Effective
August 10, 2018, the Borrowers and IBC entered into the seventh Amendment to the IBC Loan Agreement providing (i) an advancing
Term Loan F of $3,600,000 with a maturity date of February 8, 2021 for the procurement of production equipment and (ii) an extension
of the maturity date of Term Loan A to April 30, 2023.
The
IBC term loans make equal monthly payments of principal and interest in such amounts sufficient to amortize the principal balance
as follows: (i) Term Loan A over a seven-year period beginning January 31, 2016 (currently $77,548 per month), (ii) Term Loan
C over a seven-year period beginning February 28, 2018 (currently $25,205 per month) and (iii) Term Loan D over a four-year period
beginning August 4, 2020 (currently $57,469 per month), (iv) Term Loan E over a four-year period beginning February 10, 2019 (currently
$23,060) and (v) Term Loan F over a five-year period beginning February 28, 2019 (currently $68,849). The monthly payments of
principal and interest on the IBC term loans may vary as a result of changes in the prime rate of interest.
The
IBC Loan Agreement provides a revolving loan in an aggregate principal amount of up to $4,000,000 (the “Revolving Loan”).
The Loan Agreement was amended December 28, 2018 increasing the principal amount under the Revolving Loan to $4,000,000 of which
the amount which can be borrowed from time to time is dependent upon the amount of the borrowing base, but can in no event exceed
$4,000,000. The Revolving Loan bears interest at the greater of the prime rate of interest plus 0.5%, or 4.75% and matures January
31, 2021. 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, among other things, requires a quarterly affirmation that the Borrowers have maintained a debt service coverage
ratio of 1:25 to 1:00. As of February 28, 2019, Greystone was not in compliance with this debt service coverage ratio. IBC has
issued a waiver with respect to this event of noncompliance.
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 notes 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
August 10, 2018, GRE and IBC entered into an amended agreement to extend the maturity of the note to April 30, 2023 and increase
the interest rate to 5.5%. The note 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 an unsecured 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 an
unsecured note payable of $4,541,690 with an extended maturity date of January 15, 2021. 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. The balance of the note at February 28, 2019 was $4,467,330.
Maturities
Maturities
of Greystone’s long-term debt for the five years subsequent to February 28, 2019 are $2,961,095, $12,049,591, $3,070,785,
$2,157,675 and $2,588,584.
Capital
leases as of February 28, 2019 and May 31, 2018:
|
|
February
28, 2019
|
|
|
May
31, 2018
|
|
Non-cancellable
capital leases
|
|
$
|
7,480,097
|
|
|
$
|
3,893,814
|
|
Less:
Current portion
|
|
|
(1,948,191
|
)
|
|
|
(2,160,807
|
)
|
Non-cancellable
capital leases, net of current portion
|
|
$
|
5,531,906
|
|
|
$
|
1,733,007
|
|
Greystone
and an unrelated private company entered into four lease agreements for certain production equipment with a total cost of approximately
$12.2 million. The first agreement, dated August 7, 2016, was a three-year lease agreement for two injection molding machines
and pallet molds, capitalized interest rate of 5.0% and maturity date of August 7, 2019 (“Agreement A”). The remaining
three agreements, effective February 24, 2018, August 2, 2018 and December 21, 2018, were five-year lease agreements for three
additional injection molding machines and one pallet mold, capitalized interest rate of 7.4% and maturity dates of February 23,
2023, August 1, 2023 and December 20, 2023, respectively, (“Agreement B”). The lease agreements include a bargain
purchase option to acquire the production equipment at the end of the lease terms. Lease payments are made on a per invoice basis
at rates of (i) $6.25 per pallet produced on the equipment leased pursuant to Agreement A and sold to the private company estimated
at $180,000 per month and (ii) $3.32 per pallet produced on the equipment leased pursuant to Agreement B and sold to the private
company estimated at an aggregate rent of $144,000 per month. Both Agreements A & B provide for minimum monthly lease rental
payments based upon the total pallets sold in excess of a specified amount not to exceed the monthly productive capacity of the
leased machines.
Effective
December 31, 2018, Yorktown purchased certain production equipment from Greystone at net book value of $968,168 and entered into
a lease agreement with Greystone for the equipment with a monthly rent of $27,915 for the initial thirty-six months and $7,695
for the following twelve months and maturing December 27, 2023. The lease agreement has a $10,000 bargain purchase option at the
end of the lease.
The
production equipment under the non-cancelable capital leases has a gross carrying amount of $13,227,122 at February 28, 2019.
Amortization of the carrying amount of approximately $776,000 and $402,000 was included in depreciation expense for the nine months
ended February 28, 2019 and 2018, respectively.
Future
minimum lease payments under non-cancelable capital leases as of February 28, 2019, are approximately:
Twelve months ended February 29, 2020
|
|
$
|
2,435,000
|
|
Twelve months ended February 28, 2021
|
|
|
2,063,000
|
|
Twelve months ended February 28, 2022
|
|
|
2,023,000
|
|
Twelve months ended February 28, 2023
|
|
|
2,165,000
|
|
Total lease payments
|
|
|
8,686,000
|
|
Imputed interest
|
|
|
1,205,903
|
|
Present value of minimum lease payments
|
|
$
|
7,480,097
|
|
Note
8. Deferred Revenue
Deferred
revenue as of February 28, 2019 and May 31, 2018 represents advance payments from a customer to purchase plastic pallets with
shipments expected to be complete by January 3, 2020. Greystone recognizes revenue as plastic pallets are shipped to the customer.
Recognized revenue totaled $4,252,500 during the nine months ended February 28, 2019.
Note
9. Revenue and Revenue Recognition
On
June 1, 2018, Greystone adopted Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers (Topic 606)
,
as amended, using the retrospective method. Greystone determined that there was no cumulative effect adjustment to the Consolidated
Financial Statements and the adoption of the new standard did not require
any adjustments
to Greystone’s consolidated financial statements for prior periods
. Under the guidance of the new standard, revenue
is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives
the service performed. Sales arrangements with customers are short-term in nature involving single performance obligations related
to the delivery of goods and generally provide for transfer of control at the time of shipment. In limited circumstances, where
acceptance of the goods is subject to approval by the customer, revenue is recognized upon approval by the customer unless, historically,
there have been insignificant rejections of goods by the customer. Contract liabilities associated with sales arrangements primarily
relate to deferred revenue on prepaid sales of goods. Greystone generally permits returns of product due to defects; however,
product returns are historically insignificant.
The
amount of revenue recognized reflects the consideration to which Greystone expects to be entitled to receive in exchange for its
products. The following steps are applied in determining the amount and timing of revenue recognition:
|
1.
|
Identification
of a contract with a customer is a sales arrangement involving a purchase order issued by the customer stating each party’s
rights regarding the plastic pallets to be transferred. Payment terms vary by customer from net 30 days to 90 days. Discounts
on sales arrangements are generally not provided. Credit worthiness is determined by Greystone based on payment experience
and financial information available on the customer.
|
|
2.
|
Identification
of performance obligations in the sales arrangement which is predominantly the promise to transfer plastic pallets to Greystone’s
customer.
|
|
3.
|
Determination
of the transaction price which is specified in the purchase order based on product pricing negotiated between Greystone and
the customer.
|
|
4.
|
Allocation
of the transaction price to performance obligations.
|
|
5.
|
Recognition
of revenue which predominantly occurs upon completion of the performance obligation and transfer of control. Transfer of control
generally occurs at the point of shipment which is Greystone’s manufacturing and warehouse locations.
|
Greystone’s
principal product is plastic pallets produced from recycled plastic resin. Sales are primarily to customers in the continental
United States of America. International sales are made to customers in Canada and Mexico which totaled approximately $408,499
and $527,750 in fiscal years 2019 and 2018, respectively.
Greystone’s
customers include stocking and non-stocking distributors and direct sales to end-user customers. Sales to the following categories
of customers for the nine months ended February 28, 2019 and 2018, respectively, were as follows:
Category
|
|
2019
|
|
|
2018
|
|
Major customers (end users)
|
|
|
85
|
%
|
|
|
76
|
%
|
Distributors
|
|
|
14
|
%
|
|
|
22
|
%
|
Total
|
|
|
99
|
%
|
|
|
98
|
%
|
Note
10. 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 notes with floating rates of interest approximate fair value. Fixed rate notes are valued based on cash
flows using estimated rates of comparable notes. The carrying amounts reported on the balance sheets approximate fair value.
Note
11. Concentrations, Risks and Uncertainties
Greystone
derived approximately 85% and 76% of its total sales from three customers in fiscal years 2019 and 2018, respectively. The loss
of a material amount of business from one or more of 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 $1,249,653 and $1,200,335 in fiscal years 2019 and 2018, 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 February 28,
2019, Greystone is indebted to Mr. Rosene in the amount of $4,467,330 for a note payable due January 15, 2021. There is no assurance
that Mr. Rosene will renew the note as of the maturity date.
Note
12. Recent Accounting Pronouncements
In
February 2016, the FASB issued ASU 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.
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. Management has reviewed Greystone’s leases and determined that the implementation
of ASU 2016-02 will not have a material impact on the consolidated financial statements.
Note
13. Commitments
At
February 28, 2019, Greystone had commitments totaling $945,000 toward the purchase of production equipment.
Note
14. Reclassifications
Certain
amounts in the Consolidated Statement of Cash Flows for the nine months ended February 28, 2018 have been reclassified to conform
to classifications utilized in the nine months ended February 28, 2019.