Quarterly Report (10-q)

Date : 10/15/2019 @ 9:26PM
Source : Edgar (US Regulatory)
Stock : Greystone Logistics, Inc. (QB) (GLGI)
Quote : 0.44897  0.01897 (4.41%) @ 9:00PM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 31, 2019

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ____________

 

Commission file number 000-26331

 

GREYSTONE LOGISTICS, INC.

(Exact name of registrant as specified in its charter)

 

Oklahoma   75-2954680

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1613 East 15th Street, Tulsa, Oklahoma 74120
(Address of principal executive offices) (Zip Code)

 

(918) 583-7441
(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to post and submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
  Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by checkmark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Applicable only to corporate issuers:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: October 10, 2019 - 28,361,201

 

 

 

 
 

 

GREYSTONE LOGISTICS, INC.

FORM 10-Q

For the Period Ended August 31, 2019

 

      Page
PART I. FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
       
 

Consolidated Balance Sheets (Unaudited) As of August 31, 2019 and May 31, 2019

  1
       
 

Consolidated Statements of Income (Unaudited) For the Three Months Ended August 31, 2019 and 2018

  2
       
 

Consolidated Statements of Changes in Equity (Unaudited) For the Three Months Ended August 31, 2019 and 2018

  3
       
 

Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended August 31, 2019 and 2018

  4
       
  Notes to Consolidated Financial Statements (Unaudited)   5
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   16
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   19
       
Item 4. Controls and Procedures   19
       
PART II. OTHER INFORMATION    
       
Item 1. Legal Proceedings   20
       
Item 1A. Risk Factors   20
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   20
       
Item 3. Defaults Upon Senior Securities   20
       
Item 4. Mine Safety Disclosures   20
       
Item 5. Other Information   20
       
Item 6. Exhibits   20
       
SIGNATURES   21

 

 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Greystone Logistics, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

    August 31, 2019     May 31, 2019  
Assets                
Current Assets:                
Cash   $ 1,129,352     $ 1,255,408  
Accounts receivable -                
Trade     4,847,352       6,320,875  
Related parties     65,074       50,320  
Inventory     4,055,518       2,620,991  
Prepaid expenses     25,736       239,146  
Total Current Assets     10,123,032       10,486,740  
Property, Plant and Equipment, net     32,602,455       32,680,472  
                 
Total Assets   $ 42,725,487     $ 43,167,212  
                 
Liabilities and Equity                
Current Liabilities:                
Current portion of long-term debt   $ 3,385,019     $ 3,030,630  
Current portion of financing leases     1,952,140       1,516,629  
Current portion of operating leases     71,222       58,236  
Accounts payable and accrued liabilities     6,247,460       6,520,721  
Deferred revenue     2,201,067       2,201,067  
Preferred dividends payable     112,363       112,192  
Total Current Liabilities     13,969,271       13,439,475  
Long-Term Debt, net of current portion     18,830,293       19,629,148  
Financing Leases, net of current portion     4,383,502       5,238,190  
Operating Leases, net of current portion     164,844       122,558  
Deferred Tax Liability     1,111,642       926,642  
Equity:                
Preferred stock, $0.0001 par value, cumulative,
20,750,000 shares authorized, 50,000 shares issued and outstanding, liquidation preference of $5,000,000
    5       5  
Common stock, $0.0001 par value, 5,000,000,000 shares authorized, 28,361,201 shares issued and outstanding     2,836       2,836  
Additional paid-in capital     53,790,764       53,790,764  
Accumulated deficit     (50,666,427 )     (51,108,677 )
Total Greystone Stockholders’ Equity     3,127,178       2,684,928  
Non-controlling interest     1,138,757       1,126,271  
Total Equity     4,265,935       3,811,199  
Total Liabilities and Equity   $ 42,725,487     $ 43,167,212  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1
 

 

Greystone Logistics, Inc.

Consolidated Statements of Income

(Unaudited)

 

    For the Three Months Ended August 31,  
    2019     2018  
             
Sales   $ 18,664,509     $ 18,206,110  
                 
Cost of Sales     16,303,734       15,760,152  
                 
Gross Profit     2,360,775       2,445,958  
                 
General, Selling and Administrative Expenses     1,077,598       939,091  
                 
Operating Income     1,283,177       1,506,867  
                 
Other Income (Expense):                
Other income     2,033       2,269  
Interest expense     (480,911 )     (412,628 )
                 
Income before Income Taxes     804,299       1,096,508  
Provision for Income Taxes     185,000       331,600  
Net Income     619,299       764,908  
                 
Income Attributable to Non-controlling Interest     (64,686 )     (60,575 )
                 
Preferred Dividends     (112,363 )     (102,945 )
                 
Net Income Attributable to Common Stockholders   $ 442,250     $ 601,388  
                 
Income Per Share of Common Stock -                
Basic and Diluted   $ 0.02     $ 0.02  
                 
Weighted Average Shares of Common Stock Outstanding -                
Basic     28,361,201       28,361,201  
Diluted     29,010,546       29,003,696  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2
 

 

Greystone Logistics, Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

For the Three Months Ended August 31, 2019 and 2018

(Unaudited)

 

    Preferred Stock     Common Stock     Additional Paid-in     Accumulated     Total Greystone Stockholders’     Non-controlling     Total  
    Shares     Amount     Shares     Amount     Capital     Deficit     Equity     Interest     Equity  
Balances, May 31, 2019     50,000     $ 5       28,361,201     $ 2,836     $ 53,790,764     $ (51,108,677 )   $ 2,684,928     $ 1,126,271     $ 3,811,199  
                                                                         
Cash distributions     -       -       -       -       -       -       -       (52,200 )     (52,200 )
                                                                         
Preferred dividends ($2.25 per share)     -       -       -       -       -       (112,363 )     (112,363 )     -       (112,363 )
                                                                         
Net income     -       -       -       -       -       554,613       554,613       64,686       619,299  
                                                                         
Balances, August 31, 2019     50,000     $ 5       28,361,201     $ 2,836     $ 53,790,764     $ (50,666,427 )   $ 3,127,178     $ 1,138,757     $ 4,265,935  
                                                                         
Balances, May 31, 2018     50,000     $       5       28,361,201     $ 2,836     $ 53,790,764     $ (52,485,313 )   $ 1,308,292     $ 1,085,155     $ 2,393,447  
                                                                         
Cash distributions     -       -       -       -       -       -       -       (51,000 )     (51,000 )
                                                                         
Preferred dividends ($2.06 per share)     -       -       -       -       -       (102,945 )     (102,945 )     -       (102,945 )
                                                                         
Net income     -       -       -       -       -       704,333       704,333       60,575       764,908  
                                                                         
Balances, August 31, 2018     50,000     $ 5       28,361,201     $ 2,836     $ 53,790,764     $ (51,883,925 )   $ 1,909,680     $ 1,094,730     $ 3,004,410  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3
 

 

Greystone Logistics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

    For the Three Months Ended August 31,  
    2019     2018  
Cash Flows from Operating Activities:                
Net income   $ 619,299     $ 764,908  
Adjustments to reconcile net income to net cash provided by operating activities -                
Depreciation and amortization     1,305,258       1,085,267  
Deferred tax expense     185,000       331,600  
Decrease in trade accounts receivable     1,473,523       479,605  
Increase in related party receivables     (14,754 )     (40,542 )
Decrease (increase) in inventory     (1,434,527 )     19,715  
Decrease in prepaid expenses     213,410       40,462  
Increase (decrease) in accounts payable and accrued liabilities     (271,366 )     2,543,462  
Decrease in deferred revenue     -       (3,280,500 )
Net cash provided by operating activities     2,075,843       1,943,977  
                 
Cash Flows from Investing Activities:                
Purchase of property and equipment     (1,172,574 )     (1,477,449 )
                 
Cash Flows from Financing Activities:                
Proceeds from long-term debt     672,000       1,856,800  
Principal payments on long-term debt and financing leases     (1,161,478 )     (1,101,336 )
Proceeds from revolving loan     690,000       1,000,000  
Principal payments on revolving loan     (972,000 )     (1,300,000 )
Principal payments on related party note payable and financing lease     (90,095 )     (61,887 )
Payments for debt issuance costs     (3,360 )     -  
Dividends paid on preferred stock     (112,192 )     -  
Distributions paid by non-controlling interest     (52,200 )     (51,000 )
Net cash provided by (used in) financing activities     (1,029,325 )     342,577  
Net Increase (Decrease) in Cash     (126,056 )     809,105  
Cash, beginning of period     1,255,408       379,632  
Cash, end of period   $ 1,129,352     $ 1,188,737  
Non-cash Activities:                
Acquisition of equipment by capital lease   $ -     $ 2,333,333  
Capital expenditures in accounts payable   $ 271,670     $ 110,182  
Preferred dividend accrual   $ 112,363     $ 102,945  
Supplemental information:                
Interest paid   $ 480,802     $ 396,786  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4
 

 

GREYSTONE LOGISTICS, INC.

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, 2019 and the results of its operations and cash flows for the three months ended August 31, 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, 2019 and the notes thereto included in Greystone’s Form 10-K for such period. The results of operations for the three months ended August 31, 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 at August 31 are as follows:

 

    2019     2018  
             
Preferred stock convertible into common stock     3,333,333       3,333,333  

 

5
 

 

The following tables set forth the computation of basic and diluted earnings per share for the three months ended August 31, 2019 and 2018:

 

    2019     2018  
Numerator -                
Net income attributable to common stockholders   $ 442,250     $ 601,388  
Denominator -                
Weighted-average shares outstanding - basic     28,361,201       28,361,201  
Incremental shares from assumed conversion of options and warrants     649,345       642,495  
Diluted shares     29,010,546       29,003,696  
Income per share -                
Basic and Diluted   $ 0.02     $ 0.02  

 

Note 3. Inventory

 

Inventory consists of the following:

 

    August 31, 2019     May 31, 2019  
Raw materials   $ 2,165,268     $ 1,295,991  
Finished goods     1,890,250       1,325,000  
Total inventory   $ 4,055,518     $ 2,620,991  

 

Note 4. Property, Plant and Equipment

 

A summary of property, plant and equipment for Greystone is as follows:

 

    August 31, 2019     May 31, 2019  
Production machinery and equipment   $ 46,527,139     $ 45,645,910  
Plant buildings and land     6,403,855       6,336,855  
Leasehold improvements     1,174,340       979,890  
Furniture and fixtures     591,074       563,074  
Right-to-use assets under operating leases     236,066       180,794  
      54,932,474       53,706,523  
                 
Less: Accumulated depreciation and amortization     (22,330,019 )     (21,026,051 )
                 
Net Property, Plant and Equipment   $ 32,602,455     $ 32,680,472  

 

6
 

 

Production machinery and equipment includes right-to-use equipment capitalized pursuant to financing leases in the amount of $7,861,233 at August 31, 2019 and May 31, 2019. The financing leases all include an option to purchase which management anticipates exercising and, accordingly, the related equipment is being amortized over the estimated useful life 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 $1,054,726 at August 31, 2019 which has not been placed into service. Two plant buildings and land are owned by GRE, a variable interest entity (“VIE”), having a net book value of $2,867,581 at August 31, 2019.

 

Depreciation expense, including amortization expense related to right-to-use assets under financing leases, for the three months ended August 31, 2019 and 2018 was $1,303,968 and $1,053,003, 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 $27,500 for use of Yorktown’s grinding equipment and pelletizing equipment. Rental fees were $357,500 for the each of the three months ended August 31, 2019 and 2018.

 

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 $12,000 for each of the three months ended August 31, 2019 and 2018. At August 31, 2019, future minimum payments under the non-cancelable operating lease for the remaining three years are $48,000, $48,000, and $16,000.

 

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 three months ended August 31, 2019 and 2018 totaled $-0- and $41,975, 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 $77,520 and $55,080 for the three months ended August 31, 2019 and 2018, respectively. The account receivable due from Green at August 31, 2019 was $58,140.

 

7
 

 

Note 6. Long-term Debt

 

Debt as of August 31, 2019 and May 31, 2019 is as follows:

 

    August 31, 2019     May 31, 2019  
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   $ 3,050,443     $ 3,234,947  
                 
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     1,344,763       1,399,490  
                 
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     1,597,827       1,744,235  
                 
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     871,953       927,199  
                 
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     3,241,884       3,398,247  
                 
Term loan G payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 5.25%, maturing April 30, 2024     867,903       876,934  
                 
Term loan H payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 5.25%, maturing January 1, 2022     627,746       -  
                 
Revolving loan payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 5.5%, due January 31, 2021     2,923,000       3,205,000  
                 
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     721,581       800,488  
                 
Term loan payable by GRE to International Bank of Commerce, interest rate of 5.5%, monthly principal and interest payment of $27,688, due April 30, 2023     2,412,412       2,461,116  
                 
Note payable to Robert Rosene, 7.5% interest, due January 15, 2021     4,383,429       4,426,631  
                 
Other     212,127       223,177  
Total long-term debt     22,255,068       22,697,464  
Debt issuance costs, net of amortization     (39,756 )     (37,686 )
Total debt, net of debt issuance costs     22,215,312       22,659,778  
Less: Current portion of long-term debt     (3,385,019 )     (3,030,630 )
Long-term debt, net of current portion   $ 18,830,293     $ 19,629,148  

 

The prime rate of interest as of August 31, 2019 was 5.25%. Effective September 18, 2019, the prime rate of interest decreased to 5.00%.

 

8
 

 

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 July 1, 2019, the Borrowers and IBC entered into the Tenth Amendment to the IBC Loan Agreement providing for Term Loan H in the amount of $672,000 with a maturity date of January 1, 2022, for the procurement of production equipment.

 

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 February 29, 2016 (currently $77,550 per month), (ii) Term Loan C over a seven-year period beginning August 31, 2017 (currently $25,205 per month) and (iii) Term Loan D over a four-year period beginning February 10, 2019 (currently $57,469 per month), (iv) Term Loan E over a four-year period beginning February 10, 2019 (currently $23,060 per month), (v) Term Loan F over a five-year period beginning February 28, 2019 (currently $68,849 per month), (vi) Term Loan G over a fifteen-year period beginning April 30, 2019 (currently $7,466 per month) and (vii) Term Loan H over 30 months beginning August 1, 2019 (currently $24,203 per month). 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.

 

9
 

 

The IBC Loan Agreement, as amended, provides a revolving loan in an aggregate principal amount of up to $4,000,000 (the “Revolving Loan”). The amount which can be borrowed from time to time is dependent upon the amount of the borrowing base not to exceed $4,000,000. The Revolving Loan bears interest at the greater of the prime rate of interest plus 0.5%, or 5.50% 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 August 31, 2019, Greystone was not in compliance with this debt service coverage ratio. IBC has issued a waiver, dated August 26, 2019, 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.

 

10
 

 

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 August 31, 2019 was $4,383,429.

 

Maturities

 

Maturities of Greystone’s long-term debt for the five years subsequent to August 31, 2019 are $3,385,019, $10,932,978, $3,570,812, $3,317,357 and $1,048,902.

 

Note 7. Leases

 

Effective June 1, 2019, Greystone adopted ASU 2016-02, Leases (Topic 842), utilizing the modified-retrospective transition approach. which is intended to improve financial reporting about leasing transactions. The standard requires the recognition of right-of-use assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. We elected to use the transition option that allows us to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the year of adoption. Comparable periods reflect the new guidance under ASC 842. The adoption of ASC 842 did not result in any adjustments to retained earnings.

 

In accordance with ASC 842, Greystone has made accounting policy elections (1) to not apply the new standard to lessee arrangements with a term of twelve months or less and (2) to combine lease and non-lease components. The non-lease components are not material and do not result in significant timing differences in the recognition of lease expense. In addition, Greystone elected the practical expedients upon adoption which permits the Company to not reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. Depending on the terms, leases are classified as either operating or finance leases.

 

Financing Leases

 

Financing leases as of August 31, 2019 and May 31, 2019:

 

    August 31, 2019     May 31, 2019  
Non-cancellable financing leases   $ 6,335,642     $ 6,754,819  
Less: Current portion     (1,952,140 )     (1,516,629 )
Non-cancellable financing leases, net of current portion   $ 4,383,502     $ 5,238,190  

 

11
 

 

Greystone and an unrelated private company entered into three lease agreements for certain production equipment with a total cost of approximately $6.9 million which were effective February 24, 2018, August 2, 2018 and December 21, 2018, respectively, with five-year terms and a capitalized interest rate of 7.4%. Each of the lease agreements include a bargain purchase option to acquire the production equipment at the end of the lease term. The leased equipment is principally used to produce pallets for the private company. Lease payments are made as a credit on the sales invoice at the rate of $3.32 for each pallet produced and shipped from the respective leased equipment. The estimated aggregate monthly rental payments are approximately $168,000. The rent payments can vary each month depending on the quantity of pallets produced from each machine. Due to improvements in the production process, pallet production has increased since May 31, 2019 thereby resulting in an increase in the estimated aggregate future rental payments. The lease agreements 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 28, 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, 2022. The lease agreement has a $10,000 purchase option at the end of the lease.

 

The production equipment under the non-cancelable financing leases has a gross carrying amount of $7,861,233 at August 31, 2019. Amortization of the carrying amount of $208,157 and $208,245 was included in depreciation expense for the three months ended August 31, 2019 and 2018, respectively.

 

Operating Leases

 

Greystone recognize a lease liability for each lease based on the present value of remaining minimum fixed rental payments, using a discount rate that approximates the rate of interest for a collateralized loan over a similar term. A right-of-use asset, reported in property, plant and equipment on the consolidated balance sheets, is recognized for each lease, valued at the lease liability. Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses on the consolidated statement of income. Variable and short-term rental payments are recognized as costs and expenses as they are incurred.

 

Greystone has three non-cancellable operating leases for (i) equipment with a fifty-two month term and a forty-eight month term and a discount rate of 5.40% and (ii) office space on a sixty month term and a discount rate of 5.0%. The leases are single-term with constant monthly rental rates.

 

12
 

 

Lease Summary Information

 

For the periods ending August 31, 2019 and 2018:

 

    2019     2018  
Lease Expense            
Financing lease expense -                
Amortization of right-of-use assets   $ 208,157     $ 208,245  
Interest on lease liabilities     121,151       67,656  
Operating lease expense     19,179       12,000  
Short-term lease expense     368,611       342,819  
Total   $ 717,098     $ 630,720  
                 
Other Information                
Cash paid for amounts included in the measurement of lease liabilities for finance leases -                
Operating cash flows   $ 121,151     $ 67,656  
Financing cash flows   $ 419,177     $ 608,094  
Cash paid for amounts included in the measurement of lease liabilities for operating leases -                
Operating cash flows   $ 19,179     $ 12,000  
Right-of-use assets obtained in exchange for lease liabilities -                
Financing leases   $ -     $ 2,333,333  
Operating leases   $ 67,750     $ -  
Weighted-average remaining lease term (in years) -                
Financing leases     3.2       3.2  
Operating leases     3.4       3.3  
Weighted-average discount rate -                
Financing leases     7.5 %     6.9 %
Operating leases     5.2 %     5.0 %

 

Future minimum lease payments under non-cancelable leases as of August 31, 2019, are approximately:

 

    Financing Leases     Operating Leases  
Twelve months ended August 31, 2020   $ 2,355,000     $ 81,881  
Twelve months ended August 31, 2021     2,355,000       81,881  
Twelve months ended August 31, 2022     1,889,000       49,881  
Twelve months ended August 31, 2023     525,000       32,348  
Twelve months ended August 31, 2024     -       12,910  
Total future minimum lease payments     7,124,000       258,901  
Present value discount     788,358       22,835  
Present value of minimum lease payments   $ 6,335,642     $ 236,066  

 

13
 

 

Note 8. Deferred Revenue

 

Advances from a customer pursuant to a contract for the sale of plastic pallets is recognized as deferred revenue. Revenue is recognized by Greystone as pallets are shipped to the customer. Customer advances totaled $-0- and $3,280,500 during the three months ended August 31, 2019 and 2018, respectively. The unrecognized balance of deferred revenue at August 31, 2019 and May 31, 2019, was $2,201,067, respectively.

 

Note 9. Revenue and Revenue Recognition

 

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 $105,000 and $170,000 in fiscal years 2020 and 2019, respectively.

 

14
 

 

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 three months ended August 31, 2019 and 2018, respectively, were as follows:

 

Category   2019     2018  
Major customers (end users)     87 %     84 %
Distributors     12 %     14 %

 

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 87% and 84% of its total sales from three customers in fiscal years 2020 and 2019, 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 $561,657 and $392,272 in fiscal years 2020 and 2019, 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, 2019, Greystone is indebted to Mr. Rosene in the amount of $4,383,429 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. Commitments

 

At August 31, 2019, Greystone had commitments totaling $2,484,278 toward the purchase of production equipment.

 

15
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Results of Operations

 

General to All Periods

 

The unaudited consolidated statements include Greystone Logistics, Inc., and its two wholly-owned subsidiaries, Greystone Manufacturing, L.L.C. (“GSM”) and Plastic Pallet Production, Inc. (“PPP”). Greystone also consolidates its variable interest entity, Greystone Real Estate, L.L.C. (“GRE”). All material intercompany accounts and transactions have been eliminated.

 

References to fiscal year 2020 refer to the three months ended August 31, 2019. References to fiscal year 2019 refer to the three months ended August 31, 2018.

 

Sales

 

Greystone’s primary focus is to provide quality plastic pallets to its existing customers while continuing its marketing efforts to broaden its customer base. Greystone’s existing customers are primarily located in the United States and engaged in the beverage, pharmaceutical and other industries. Greystone has generated, and plans to continue to generate, interest in its pallets by attending trade shows sponsored by industry segments that would benefit from Greystone’s products. Greystone hopes to gain wider product acceptance by marketing the concept that the widespread use of plastic pallets could greatly reduce the destruction of trees on a worldwide basis. Greystone’s marketing is conducted through contract distributors, its President and other employees.

 

Personnel

 

Greystone had approximately 237 and 211 full-time employees as of August 31, 2019 and 2018, respectively.

 

Three Months Ended August 31, 2019 Compared to Three Months Ended August 31, 2018

 

Sales

 

Sales for fiscal year 2020 were $18,664,509 compared to $18,206,110 in fiscal year 2019 for an increase of $458,399. The increase in pallet sales in fiscal year 2020 over 2019 was primarily due to the sales growth with the pallet leasing company and sales to a new customer.

 

Sales to Greystone’s three largest customers accounted for approximately 87% and 84% of sales in fiscal years 2020 and 2019, respectively. Greystone is not able to predict the future needs of these major customers and will continue its efforts to grow sales through the addition of new customers developed through Greystone’s marketing efforts.

 

Cost of Sales

 

Cost of sales in fiscal year 2020 was $16,303,734, or 87% of sales, compared to $15,760,152, or 87% of sales, in fiscal year 2019. Greystone has realized substantial improvements in pallet production as a result of installation on two machines of hardware and software to improve the flow of resin into molds. Based on the positive results, this product has been ordered to install on the remaining machines.

 

Other scheduled initiatives to facilitate improvements to the ratio of cost of sales to sales were unable to be completed during the quarter ended August 31, 2019, which included resolution of certain machine and mold issues, completion of additional capacity for grinding and pelletizing, and implementation of robotics on two production line. Greystone plans to complete these initiatives throughout fiscal year 2020.

 

16
 

 

General, Selling and Administrative Expenses

 

General, selling and administrative expenses were $1,077,598, or 6% of sales, in fiscal year 2020 compared to $939,091, or 5% of sales, for an increase of $138,507 or 15%. The increase in fiscal year 2020 over fiscal year 2019 results principally from increased costs for administrative personnel.

 

Other Income (Expenses)

 

Other income was $2,033 in fiscal year 2020 compared to $2,269 in fiscal year 2019.

 

Interest expense was $480,911 in fiscal year 2020 compared to $412,628 in fiscal year 2019 for an increase of $68,283. The prime rate of interest was 5.50% during most of fiscal year 2020, until the rate decreased to 5.25% on August 1, 2019, compared to 5.00% at August 31, 2018.

 

Provision for Income Taxes

 

The provision for income taxes was $185,000 and $331,600 in fiscal years 2020 and 2019, respectively. The effective tax rate differs from federal statutory rates due to net income from GRE which, as a limited liability company of which Greystone has no equity ownership, is not taxed at the corporate level, charges which have no tax benefit and changes in the valuation allowance.

 

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

 

Greystone recorded net income of $619,299 in fiscal year 2020 compared to $764,908 in fiscal year 2019 primarily for the reasons discussed above.

 

Net Income Attributable to Common Stockholders

 

The net income attributable to common stockholders for fiscal year 2020 was $442,250, or $0.02 per share, compared $601,388, or $0.02 per share, in fiscal year 2019 primarily for the reasons discussed above.

 

Liquidity and Capital Resources

 

A summary of cash flows for the three months ended August 31, 2019 is as follows:

 

Cash provided by operating activities   $ 2,075,843  
         
Cash used in investing activities   $ (1,172,574 )
         
Cash used in financing activities   $ (1,029,325 )

 

17
 

 

The contractual obligations of Greystone are as follows:

 

    Total     Less than
1 year
    1-3 years     4-5 years     More than
5 years
 
Long-term debt   $ 22,255,068     $ 3,385,019     $ 14,503,790     $ 4,366,259     $      -  
Financing leases   $ 7,124,000     $ 2,355,000     $ 4,244,000     $ 525,000     $ -  
Operating leases   $ 258,901     $ 81,881     $ 131,762     $ 45,258     $ -  
Commitments   $ 2,484,278     $ 2,484,278     $ -     $ -     $ -  

 

Greystone had a working capital deficit of $(3,846,239) at August 31, 2019. To provide for the funding to meet Greystone’s operating activities and contractual obligations as of August 31, 2019, Greystone will have to continue to produce positive operating results or explore various options including additional 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.

 

Effective July 1, 2019, Greystone and IBC entered into an amendment to the IBC Loan Agreement dated January 31, 2014 which provided for new funding in the amount of $672,000 to purchase production equipment.

 

Substantially all of the financing that Greystone has received through the last few fiscal years resulted primarily from bank notes which are guaranteed by certain officers and directors of Greystone and, formerly, from loans provided by certain officers and directors of Greystone. Greystone continues to be dependent upon its officers and directors to provide and/or secure additional financing and there is no assurance that its officers and directors will continue to do so. As such, there is no assurance that funding will be available for Greystone to continue operations.

 

Greystone has 50,000 outstanding shares of cumulative 2003 Preferred Stock with a liquidation preference of $5,000,000 and a preferred dividend rate of the prime rate of interest plus 3.25%. 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, another financing transaction or otherwise. Pursuant to the IBC Loan Agreement, as discussed in Note 6 to the consolidated financial statements, Greystone may pay dividends on its preferred stock in an amount not to exceed $500,000 per year.

 

18
 

 

Forward Looking Statements and Material Risks

 

This Quarterly Report on Form 10-Q includes certain statements that may be deemed “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 forward-looking statements are made in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, that address activities, events or developments that Greystone expects, believes or anticipates will or may occur in the future, including decreased costs, securing financing, the profitability of Greystone, potential sales of pallets or other possible business developments, are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q could be affected by any of the following factors: Greystone’s prospects could be affected by changes in availability of raw materials, competition, rapid technological change and new legislation regarding environmental matters; Greystone may not be able to secure additional financing necessary to sustain and grow its operations; and a material portion of Greystone’s business is and will be dependent upon a few large customers and there is no assurance that Greystone will be able to retain such customers. These risks and other risks that could affect Greystone’s business are more fully described in Greystone’s Form 10-K for the fiscal year ended May 31, 2019, which was filed on August 29, 2019. Actual results may vary materially from the forward-looking statements. Greystone undertakes no duty to update any of the forward-looking statements contained in this Quarterly Report on Form 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, Greystone carried out an evaluation under the supervision of Greystone’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of Greystone’s disclosure controls and procedures pursuant to the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based on an evaluation as of May 31, 2019, Warren F. Kruger, Greystone’s Chief Executive Officer, and William W. Rahhal, Greystone’s Chief Financial Officer, identified no material weakness in Greystone’s internal control over financial reporting. As a result, Greystone’s CEO and Chief Financial Officer concluded that the design and operation of Greystone’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) were effective as of August 31, 2019.

 

During the three months ended August 31, 2019, there were no changes in Greystone’s internal controls over financial reporting that have materially affected, or that are reasonably likely to materially affect, Greystone’s internal control over financial reporting.

 

19
 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q.

 

  31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
     
  31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
     
  32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
     
  32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
     
  101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets at August 31, 2019 and May 31, 2019, (ii) the Consolidated Statements of Income for the three months ended August 31, 2019 and 2018, (iii) the Consolidated Statements of Changes in Equity for the three months ended August 31, 2019 and 2018, (iv) the Consolidated Statements of Cash Flows for the three months ended August 31, 2019 and 2018, and (v) the Notes to the Consolidated Financial Statements (submitted herewith).

 

20
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  GREYSTONE LOGISTICS, INC.
  (Registrant)
   
Date: October 15, 2019 /s/ Warren F. Kruger
  Warren F. Kruger, President and Chief
  Executive Officer (Principal Executive Officer)
   
Date: October 15, 2019 /s/ William W. Rahhal
  William W. Rahhal, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) 

 

21
 

 

Index to Exhibits

 

The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q.

 

31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
   
31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
   
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
   
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
   
101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets at August 31, 2019 and May 31, 2019, (ii) the Consolidated Statements of Income for the three months ended August 31, 2019 and 2018, (iii) the Consolidated Statements of Changes in Equity for the three months ended August 31, 2019 and 2018, (iv) the Consolidated Statements of Cash Flows for the three months ended August 31, 2019 and 2018, and (v) the Notes to the Consolidated Financial Statements (submitted herewith).

 

22
 

 

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