PART
II.
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information
Greystone’s
common stock is traded on the OTCQB under the symbol “GLGI.” The following table sets forth the range of high and
low per share bid quotations for Greystone’s common stock during the time periods indicated. The source of the foregoing
quotations was the Financial Industry Regulatory Composite Feed or other qualified inter dealer quotation medium as provided by
OTC Market Group, Inc.:
Quarter Ended
|
|
High
|
|
|
Low
|
|
Aug. 31, 2015
|
|
$
|
0.32
|
|
|
$
|
0.24
|
|
Nov. 30, 2015
|
|
|
0.29
|
|
|
|
0.15
|
|
Feb. 29, 2016
|
|
|
0.24
|
|
|
|
0.14
|
|
May 31, 2016
|
|
|
0.32
|
|
|
|
0.21
|
|
Aug. 31, 2016
|
|
|
0.31
|
|
|
|
0.22
|
|
Nov. 30, 2016
|
|
|
0.27
|
|
|
|
0.21
|
|
Feb. 28, 2017
|
|
|
0.25
|
|
|
|
0.21
|
|
May 31, 2017
|
|
|
0.34
|
|
|
|
0.22
|
|
Quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.
Holders
As
of approximately July 24, 2017, Greystone had approximately 238 common stockholders of record.
Dividends
Greystone
paid no cash dividends to its common stockholders during the last two fiscal years and does not plan to pay any cash dividends
in the near future. The loan agreement dated January 31, 2014 (the “IBC Loan Agreement”), among Greystone, GSM and
International Bank of Commerce (“IBC”) prohibits Greystone from declaring or paying any dividends in respect to its
common stock without IBC’s prior written consent. See Note 5 to the consolidated financial statements for additional information.
In addition, accrued preferred stock dividends must be paid before a dividend on common stock may be declared or paid, as set
forth in the Certificate of Designation, Preferences, Rights and Limitations relating to the preferred stock. See Note 8 to the
consolidated financial statements and “Liquidity and Capital Resources” in Item 7 of this Form 10-K for additional
information.
Greystone
paid dividends on its 2003 preferred stock in the amounts of $376,101 and $325,885 in fiscal years 2017 and 2016, respectively.
Item
6. Selected Financial Data.
Not
applicable.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary
Statement Regarding Forward-Looking Information
This
Annual Report on Form 10-K includes “forward looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements concern Greystone’s
plans, expectations and objectives for future operations. All statements, other than statements of historical facts, included
in this Form 10-K that address activities, events or developments that Greystone expects, believes or anticipates will or may
occur in the future are forward-looking statements. The words “believe,” “plan,” “intend,”
“anticipate,” “estimate,” “project” and similar expressions are intended to identify forward-looking
statements. These forward-looking statements include, among others, such things as:
|
●
|
expansion
and growth of Greystone’s business and operations;
|
|
●
|
future
financial performance;
|
|
●
|
future
acquisitions and developments;
|
|
●
|
potential
sales of products;
|
|
●
|
future
financing activities; and
|
|
●
|
business
strategy.
|
These
forward-looking statements are based on assumptions that Greystone believes are reasonable based on current expectations and projections
about future events and industry conditions and trends affecting Greystone’s business. However, whether actual results and
developments will conform to Greystone’s expectations and predictions is subject to a number of risks and uncertainties
that could cause actual results to differ materially from those contained in the forward-looking statements, including those factors
discussed under the section of this Form 10-K entitled “Risk Factors.” In addition, Greystone’s historical financial
performance is not necessarily indicative of the results that may be expected in the future and Greystone believes that such comparisons
cannot be relied upon as indicators of future performance.
Risk
Factors
Greystone
has attained operating profits and positive cash flow from operating activities but there is no assurance that it will be able
to sustain profitability.
Greystone
was incorporated on February 24, 1969. From April 1993 to December 1997, Greystone was engaged in various businesses, including
the business of exploration, production, and development of oil and gas properties in the continental United States and the operation
of a related service business. In December 1997, Greystone acquired all of the issued and outstanding stock of Plastic Pallet
Production, Inc., and its principal business changed to selling plastic pallets. Greystone incurred losses from operations from
such time through fiscal year 2007. The results of Greystone’s operations for the fiscal years after fiscal year 2007 showed
an operating profit and positive cash flows from operations with the exception of fiscal year 2011 for which Greystone incurred
a loss but had positive operating income and positive cash flows from operations. There is no assurance that Greystone will maintain
a positive operating profit or otherwise obtain funds to finance capital and debt service requirements.
Greystone
has granted security interests in substantially all of its assets in connection with certain debt financings and other transactions.
In
connection with certain debt financings and other transactions, Greystone has granted third parties security interests in substantially
all of its assets pursuant to agreements entered into with such third parties. Upon the occurrence of an event of default under
such agreements, the secured parties may enforce their rights and Greystone may lose all or a portion of its assets. As a result,
Greystone could be forced to materially reduce its business activities or cease operations.
Greystone’s
business could be affected by changes in availability of raw materials.
Greystone
uses a proprietary mix of raw materials to produce its plastic pallets. Such raw materials are generally readily available and
some may be obtained from a broad range of recycled plastic suppliers and unprocessed waste plastic. At the present time, these
materials are being purchased from local, national and international suppliers. The availability of Greystone’s raw materials
could change at any time for various reasons. For example, the market demand for Greystone’s raw materials could suddenly
increase, or the rate at which plastic materials are recycled could decrease, affecting both availability and price. Additionally,
the laws and regulations governing the production of plastics and the recycling of plastic containers could change and, as a result,
affect the supply of Greystone’s raw materials. Any interruption in the supply of raw materials or components could have
a material adverse effect on Greystone. Furthermore, certain potential alternative suppliers may have pre-existing exclusive relationships
with Greystone’s competitors and others that may preclude Greystone from obtaining raw materials from such suppliers.
Greystone’s
business could be affected by competition and rapid technological change.
Greystone
currently faces competition from many companies that produce wooden pallets at prices that are substantially lower than the prices
Greystone and other companies that manufacture plastic pallets charge for their plastic pallets. It is anticipated that the plastic
pallet industry will be subject to intense competition and rapid technological change. Greystone could potentially face additional
competition from recycling and plastics companies, many of which have substantially greater financial and other resources than
Greystone and, therefore, are able to spend more than Greystone in areas such as product development, manufacturing and marketing.
Competitors may develop products that render Greystone’s products or proposed products uneconomical or result in products
being commercialized that may be superior to Greystone’s products. In addition, alternatives to plastic pallets could be
developed, which would have a material adverse effect on Greystone.
Greystone
is dependent on a few large customers.
Greystone
derives, and expects that in the foreseeable future it will continue to derive, a large portion of its revenue from a few large
customers. Two customers currently account for approximately 71% of its total sales in fiscal year 2017 (56% in fiscal year 2016).
There is no assurance that Greystone will retain these customers’ business at the same level, or at all. The loss of a material
amount of business from one of these customers would have a material adverse effect on Greystone.
Greystone
may not be able to effectively protect Greystone’s patents and proprietary rights.
Greystone
relies upon a combination of patents and trade secrets to protect its proprietary technology, rights and know-how. There can be
no assurance that such patent rights will not be infringed upon, that Greystone’s trade secrets will not otherwise become
known to or independently developed by competitors, that non-disclosure agreements will not be breached, or that Greystone would
have adequate remedies for any such infringement or breach. Litigation may be necessary to enforce Greystone’s proprietary
rights or to defend Greystone against third-party claims of infringement. Such litigation could result in substantial cost to,
and a diversion of effort by, Greystone and its management and may have a material adverse effect on Greystone. Greystone’s
success and potential competitive advantage is dependent upon its ability to exploit the technology under these patents. There
can be no assurance that Greystone will be able to exploit the technology covered by these patents or that Greystone will be able
to do so exclusively.
Greystone’s
business could be affected by changing or new legislation regarding environmental matters.
Greystone’s
business is subject to changing federal, state and local environmental laws and regulations pertaining to the discharge of materials
into the environment, the handling and disposition of waste (including solid and hazardous waste) or otherwise relating to the
protection of the environment. As is the case with manufacturers in general, if a release of hazardous substances occurs on or
from Greystone’s properties or any associated off-site disposal location, or if contamination from prior activities is discovered
at any of Greystone’s properties, Greystone may be held liable. No assurances can be given that additional environmental
issues will not require future expenditures. In addition, the plastics industry is subject to existing and potential federal,
state, local and foreign legislation designed to reduce solid wastes by requiring, among other things, plastics to be degradable
in landfills, minimum levels of recycled content, various recycling requirements and disposal fees and limits on the use of plastic
products. Also, various consumer and special interest groups have lobbied from time to time for the implementation of these
and other such similar measures. Although Greystone believes that the legislation promulgated to date and such initiatives to
date have not had a material adverse effect on it, there can be no assurance that any such future legislative or regulatory efforts
or future initiatives would not have a material adverse effect.
Greystone’s
business could be subject to potential product liability claims.
The
testing, manufacturing and marketing of Greystone’s products and proposed products involve inherent risks related to product
liability claims or similar legal theories that may be asserted against Greystone, some of which may cause Greystone to incur
significant defense costs. Although Greystone currently maintains product liability insurance coverage that it believes is adequate,
there can be no assurance that the coverage limits of its insurance will be adequate under all circumstances or that all such
claims will be covered by insurance. In addition, these policies generally must be renewed every year. While Greystone has been
able to obtain product liability insurance in the past, there can be no assurance it will be able to obtain such insurance in
the future on all of its existing or future products. A successful product liability claim or other judgment against Greystone
in excess of its insurance coverage, or the loss of Greystone’s product liability insurance coverage could have a material
adverse effect upon Greystone.
Greystone
currently depends on certain key personnel.
Greystone
is dependent on the experience, abilities and continued services of its current management. In particular, Warren Kruger, Greystone’s
President and CEO, has played a significant role in the development, management and financing of Greystone. The loss or reduction
of services of Warren Kruger or any other key employee could have a material adverse effect on Greystone. In addition, there is
no assurance that additional managerial assistance will not be required, or that Greystone will be able to attract or retain such
personnel.
Greystone’s
executive officers and directors control a large percentage of Greystone’s outstanding common stock and all of Greystone’s
2003 preferred stock, which entitles them to certain voting rights, including the right to elect a majority of Greystone’s
Board of Directors.
Greystone’s
executive officers and directors (and their affiliates), in the aggregate, own approximately 44.3% of Greystone’s outstanding
common stock and have approximately 50.2% of the voting power. Therefore, Greystone’s executive officers and directors can
have significant influence with respect to the outcome of matters submitted to Greystone’s shareholders for approval (including
the election and removal of directors and any merger, consolidation or sale of all or substantially all of Greystone’s assets)
and to control Greystone’s management and affairs. In addition, two of Greystone’s directors (including one who also
serves as one of Greystone’s executive officers) own all of Greystone’s outstanding 2003 preferred stock, with each
owning 50%. The terms and conditions of Greystone’s 2003 preferred stock provide that such holder has the right to elect
a majority of Greystone’s Board of Directors. Such concentration of ownership may have the effect of delaying, deferring
or preventing a change in control, impeding a merger, consolidation, takeover or other business combination or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain control, which in turn could have an adverse effect
on the market price of Greystone’s common stock.
Greystone’s
stock trades in a limited public market and is subject to price volatility. There can be no assurance that an active trading market
will develop or be sustained.
There
has been a limited public trading market for Greystone’s common stock and there can be no assurance that an active trading
market will develop or be sustained. The trading price of Greystone’s common stock could be subject to significant fluctuations
in response to variations in quarterly operating results or even mild expressions of interest on a given day. Accordingly, Greystone’s
common stock should be expected to experience substantial price changes in short periods of time. Even if Greystone is performing
according to its plan and there is no legitimate company-specific financial basis for this volatility, it must still be expected
that substantial percentage price swings will occur in Greystone’s common stock for the foreseeable future. In addition,
the limited market for Greystone’s common stock may restrict Greystone’s shareholders ability to liquidate their shares.
Greystone
does not expect to declare or pay any dividends on its common stock in the foreseeable future.
Greystone
has not declared or paid any dividends on its common stock. Greystone currently intends to retain future earnings to fund the
development and growth of its business, to repay indebtedness and for general corporate purposes, and, therefore, does not anticipate
paying any cash dividends on its common stock in the foreseeable future. Pursuant to the terms and conditions of certain loan
documentation with International Bank of Commerce and the terms and conditions of Greystone’s 2003 preferred stock, Greystone
is restricted in its ability to pay dividends to holders of its common stock.
Greystone’s
common stock may be subject to secondary trading restrictions related to penny stocks.
Certain
transactions involving the purchase or sale of Greystone’s common stock may be affected by a Commission rule for “penny
stocks” that imposes additional sales practice burdens and requirements upon broker-dealers that purchase or sell such securities.
For transactions covered by this penny stock rule, among other things, broker-dealers must make certain disclosures to purchasers
prior to the purchase or sale. Consequently, the penny stock rule may impede the ability of broker-dealers to purchase or sell
Greystone’s common stock for their customers and the ability of persons now owning or subsequently acquiring Greystone’s
common stock to resell such securities.
Greystone
may issue additional equity securities, which would lead to further dilution of Greystone’s issued and outstanding stock.
The
issuance of additional common stock or securities convertible into common stock would result in further dilution of the ownership
interest in Greystone held by existing shareholders. Greystone is authorized to issue, without shareholder approval, 20,700,000
shares of preferred stock, $0.0001 par value per share, in one or more series, which may give other shareholders dividend, conversion,
voting and liquidation rights, among other rights, which may be superior to the rights of holders of Greystone’s common
stock. In addition, Greystone is authorized to issue, without shareholder approval, over 4,971,638,799 additional shares of its
common stock and securities convertible into common stock.
Results
of Operations
General
The
consolidated financial statements include Greystone and its two wholly-owned subsidiaries, Greystone Manufacturing, L.L.C. (“GSM”),
and Plastic Pallet Production, Inc. (“PPP”), and one variable interest entity, Greystone Real Estate, L.L.C. (“GRE”).
Greystone’s
primary business is the manufacturing of plastic pallets utilizing recycled plastic and selling the pallets through one of its
wholly owned subsidiaries, GSM.
As
of May 31, 2017, Greystone had 162 full-time employees and used temporary personnel as needed. Greystone’s in-house production
capacity for its injection molding machines capable of producing pallets is about 120,000 plastic pallets per month, or 1,440,000
per year. Production levels generally vary proportionately with sales orders. In addition, Greystone plans to add two additional
injection molding machines during fiscal year 2018 which will add production capacity of approximately 30,000 pallets per month,
or 360,000 per year.
Year
Ended May 31, 2017 Compared to Year Ended May 31, 2016
Sales
Sales
were $40,044,110 for fiscal year 2017 compared to $26,340,405 for fiscal year 2016 for an increase of $13,703,705. The increase
in pallet sales from fiscal year 2016 to 2017 is principally due to sales to a customer whose business is leasing plastic pallets.
Greystone has two major customers who account for approximately 71% of total sales in fiscal year 2017 compared to 56% in fiscal
year 2016.
Cost
of Sales
Cost
of sales was $32,573,570 (81% of sales) and $21,591,039 (82% of sales) in fiscal years 2017 and 2016, respectively. Increased
production in fiscal year 2017 compared to fiscal year 2016 had a positive effect on the ratio of cost of sales to sales.
General,
Selling and Administrative Expenses
General,
selling and administrative expense was $3,015,960 for fiscal year 2017 compared to $2,555,249 for fiscal year 2016 for an increase
of $460,711 or approximately 18%. The increase in general, selling & administrative expenses from fiscal year 2016
to fiscal year 2017 is primarily due to the additional support necessary to maintain the increased activity in production and
sales that occurred in the current year and expected for future periods.
Interest
Expense
Interest
expense was $1,212,857 in fiscal year 2017 compared to $862,428 in fiscal year 2016 for an increase of $350,429. This increase
is primarily attributable to an increase in debt related to the acquisition of production equipment in both fiscal years
2017 and 2016.
Provision
for Income Taxes
The
provision for income taxes was $1,011,990 in fiscal year 2017 compared to $495,555 in fiscal year 2016. The effective tax rate
differs from federal statutory rates due to net income from GRE which, as a limited liability company, is not taxed at the corporate
level.
As
of May 31, 2017, as well as May 31, 2016, Greystone’s management determined that no valuation allowance was considered necessary.
Until the NOLs are fully realized for income tax purposes, management will continue to evaluate the extent that a valuation allowance
is needed. Factors that management will consider, among others, are continued diversity in Greystone’s customer base and
stability in its sales volumes.
Based
upon a review of its income tax filing positions, Greystone believes that its positions would be sustained upon an audit by the
Internal Revenue Service and does not anticipate any adjustments that would result in a material change to its financial position.
Therefore, no reserves for uncertain income tax positions have been recorded.
Net
Income
Net
income was $2,246,908 in fiscal year 2017 compared to $836,134 in fiscal year 2016 for an increase of $1,410,774 for the reasons
discussed above.
Net
Income Attributable to Common Stockholders
After
deducting preferred dividends and income attributable to non-controlling interests, the net income attributable to common stockholders
was $1,660,921, or $0.06 per share, in fiscal year 2017 compared to $271,726, or $0.01 per share, in fiscal year 2016 for the
reasons discussed above.
Liquidity
and Capital Resources
General
A
summary of Greystone’s cash flows for the year ended May 31, 2017 is as follows:
Cash provided by operating activities
|
|
$
|
6,251,305
|
|
Cash used in investing activities
|
|
$
|
(2,698,665
|
)
|
Cash used in financing activities
|
|
$
|
(3,870,996
|
)
|
Long-term
debt obligations of Greystone as of May 31, 2017 are as follows:
Total
|
|
|
1 year
|
|
|
2-3 years
|
|
|
4-5 years
|
|
|
Over 5 years
|
|
$
|
18,032,416
|
|
|
$
|
2,493,236
|
|
|
$
|
14,898,899
|
|
|
$
|
640,281
|
|
|
$
|
—
|
|
Greystone
had a working capital deficit of $(2,004,810) at May 31, 2017.
During
fiscal year 2017, Greystone incurred new debt of $7,112,327 principally for the acquisition of production equipment. The new debt
included a capital lease in the amount of $5,323,864 to acquire two injection molding machines and related molds to increase its
production for one of its major customers whose business is leasing plastic pallets. Future minimum lease payments are based
on sales of pallets produced by the equipment and are projected to be $2,400,000 and $1,560,936 in fiscal years 2018 and 2019,
respectively.
Greystone’s
principal long-term debt obligations include term notes with International Bank of Commerce which mature on January 7, 2019 and
a note payable to Mr. Rosene maturing on January 15, 2019. To provide for the funding to meet Greystone’s operating activities
and contractual obligations as of May 31, 2017, Greystone will have to continue to produce positive operating results or explore
various options including long-term debt and equity financing. However, there is no guarantee that Greystone will continue to
create positive operating results or be able to raise sufficient capital to meet these obligations.
As
described below, substantially all of the financing that Greystone has received through May 31, 2017, has been provided by loans
or through bank loan guarantees from the officers and directors of Greystone, the offerings of preferred stock to current and
former officers and directors of Greystone in 2001 and 2003 and through a private placement of common stock completed in March
2005. Greystone continues to be dependent upon its officers and directors to provide and/or secure additional financing and there
is no assurance that either will do so.
Greystone
has 50,000 outstanding shares of cumulative 2003 Preferred Stock for a total of $5,000,000 with a preferred dividend rate at the
prime rate of interest plus 3.25%. Greystone paid the accumulated dividends to its preferred stockholders during fiscal years
2017 and 2016 and plans to continue to make preferred stock dividend payments to the holders of its preferred stock as allowed
under the terms of the IBC Loan Agreement as discussed herein under the caption “Loans from International Bank of Commerce”
which allows for such payments not to exceed $500,000 per year. Greystone does not anticipate that it will make cash dividend
payments to any holders of its common stock unless and until the financial position of Greystone improves through increased revenues,
additional financing or otherwise. Further, pursuant to the terms and conditions of certain loan documentation with International
Bank of Commerce, as discussed herein under the caption “Loans from International Bank of Commerce,” and the terms
and conditions of Greystone’s 2003 preferred stock, Greystone is restricted in its ability to pay dividends to holders of
its common stock.
Transactions
with Warren Kruger and Related Entities
Yorktown
Management & Financial Services, LLC (“Yorktown”), an entity wholly owned by Mr. Kruger, 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 use as raw material in the manufacture of pallets. Greystone
compensates Yorktown for the use of equipment as discussed below.
Rental
fees.
GSM pays weekly rental fees of $22,500 and $5,000 to Yorktown for grinding equipment and pelletizing equipment, respectively.
Total rental fees of approximately $1,430,000 were paid in both fiscal years 2017 and 2016.
In
addition, Yorktown provides office space for Greystone in Tulsa, Oklahoma at a month-to-month rental basis of $2,200 per month.
Effective January 1, 2017, Yorktown provided additional office space to Greystone thereby increasing the rental rate to $4,000
per month.
Acquisitions
from Yorktown.
On September 1, 2016, Yorktown acquired the plastic resin pelletizing equipment from TriEnda Holdings, L.L.C.,
which was used by Greystone to blend and pelletize plastic resin for a tolling fee. During the period from September 1, 2016 through
January 31, 2017, Greystone rented this equipment from Yorktown for a total of $163,204. Effective February 1, 2017, Greystone
acquired this equipment from Yorktown for $1,500,076, which included a cash payment of $30,627 and the assumption of a note payable
to First Bank in the amount of $1,469,713.
Effective
June 1, 2015, Greystone assumed operations of Yorktown’s Sand Springs facility which included grinders for recycling plastic
and a wash line. Greystone made rental payments totaling $105,000 to Yorktown through February 29, 2016 for use of this equipment
whereupon Greystone and Yorktown entered into an Asset Purchase Agreement and Bill of Sale (the “Bill of Sale”) providing
for Greystone’s acquisition of the equipment located therein for $1,137,865. Payment consisted of an offset against the
purchase price of $449,569 which was an amount that Yorktown owed to GSM as of the date of the acquisition and a note payable
in the amount of $688,296 which Greystone issued to Yorktown payable over 36 months at 5% interest. Greystone assumed the month-to-month
rental of the facility with an unrelated party until May 15, 2017 when the equipment was moved to Greystone’s Camanche,
Iowa warehouses.
Compensation
related to Loan Guarantees.
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 Mr. Kruger and a cash payment of $65,000 as
compensation for providing guarantees on Greystone’s debt with International Bank of Commerce. The warrants are vested and
expire January 10, 2027. The warrants, valued as of the measurement date for approximately $60,000, and the cash payment were
capitalized as debt issue costs to be amortized over the remaining loan term.
Loans
from International Bank of Commerce (“IBC”)
On
January 31, 2014, Greystone and GSM (the “Borrowers”) and IBC entered into a Loan Agreement (the “IBC Loan Agreement”).
The IBC Loan Agreement provides for a revolving loan in an aggregate principal amount of up to $2,500,000 (the “Revolving
Loan”) and a term loan in the aggregate principal amount of $9,200,000 (the “Term Loan”). The exact amount which
can be borrowed under the Revolving Loan from time to time is dependent upon the amount of the borrowing base, but can in no event
exceed $2,500,000. On January 7, 2016, the Borrowers and IBC entered into the First Amendment to the IBC Loan Agreement (the “First
Amendment”) whereby IBC made an additional term loan to Borrowers in the original principal amount of $2,530,072 (the “New
Equipment Loan”). The New Equipment Loan and $2,917,422 of the principal amount outstanding on the Term Loan were consolidated
into a new loan in the combined principal amount of $5,447,504 (the “Term Loan A”). The Term Loan’s remaining
principal balance of $3,000,000 was deemed to be a separate term loan (the “Term Loan B”). The additional proceeds
of $2,530,072 that were provided by the First Amendment were principally used to acquire new production equipment.
The
Term Loans A and B bear interest at the New York Prime Rate plus 0.5% but not less than 4.0% and mature January 31, 2019. The
Borrowers are required to make equal monthly payments of principal and interest in such amounts sufficient to amortize the principal
balance of (i) the Term Loan A over a seven year period beginning January 31, 2016 with the balance due at maturity and (ii) the
Term Loan B over the three-year life of the loan.
The
Revolving Loan bears interest at the New York Prime Rate plus 0.5% but not less than 4.0%. The Third Amendment to the IBC Loan
Agreement extended the maturity date of the Revolving Loan 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 proceeds from the Revolving Loan
are used for general working capital purposes.
Transactions
with Robert B. Rosene, Jr.
Loan.
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 payable to Mr. Rosene was restated (the “Restated Note”) whereby the accrued interest as of
June 1, 2016 of $2,475,690 was combined with the outstanding principal of $2,066,000 resulting in a note payable in the principal
amount of $4,541,690 with an interest rate of 7.5% and a maturity of January 15, 2018, subsequently amended to January 15, 2019.
The Restated Note requires the payment of accrued interest to Mr. Rosene. In addition, the Restated Note allows Greystone to make
additional payments, at Greystone’s discretion, up to an amount allowed by the IBC Loan Agreement.
Compensation
related to Loan Guarantees.
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 Mr. Rosene and a cash payment of $65,000 as
compensation for providing guarantees on Greystone’s debt with International Bank of Commerce. The warrants are vested and
expire January 10, 2027. The warrants, valued as of the measurement date for approximately $60,000, and the cash payment were
capitalized as debt issue costs to be amortized over the remaining loan term.
Off-Balance
Sheet Arrangements
Greystone
does not have any off-balance sheet arrangements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
Item
8. Financial Statements and Supplementary Data.
The
consolidated financial statements of Greystone are set forth on pages F-1 through F-16 inclusive, found at the end of this report.
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Evaluation of Disclosure Controls
and Procedures
Disclosure controls
and procedures are designed to ensure that information required to be disclosed by Greystone in reports filed or submitted under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and
communicated to management, including the principal executive and financial officers, as appropriate, to allow timely decisions
regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
As of May 31, 2017,
an evaluation was performed under the supervision and with the participation of Greystone’s principal executive officer
(CEO) and principal financial officer (CFO) of the effectiveness of the design and operation of Greystone’s disclosure controls
and procedures pursuant to the Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, Greystone’s CEO and
CFO have concluded that Greystone’s disclosure controls and procedures were not effective as of May 31, 2017 as a result
of one material weakness identified below.
Management’s Report on
Internal Control Over Financial Reporting
Greystone’s CEO
and CFO are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Greystone’s internal controls were designed to provide reasonable assurance
as to the reliability of Greystone’s financial reporting and the preparation of the consolidated financial statements for
external purposes in accordance with generally accepted accounting principles in the United States, as well as to safeguard assets
from unauthorized use or disposition.
Due to inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of control
effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions
or that the degree of compliance with the policies or procedures may deteriorate.
Greystone’s
CEO and CFO made an assessment of the effectiveness of Greystone’s internal control over financial reporting as of May
31, 2017. In making this assessment, Greystone’s CEO and CFO used the criteria established in Internal
Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). During this evaluation, Greystone’s CEO and CFO identified one material weakness. As a result of this one
material weakness, Greystone’s CEO and CFO concluded that Greystone did not maintain effective internal control over
financial reporting as of May 31, 2017. The material weakness is as follows:
Greystone, at the parent
entity level, has limited resources to ensure that monitoring of internal controls and the related risk assessments may not be
addressed in a timely manner. The lack of timely assessment of internal controls may result in internal controls not being implemented
and followed throughout the company, including its subsidiaries. Because of this limitation with respect to the ability to allocate
sufficient resources to monitoring and assessment, material misstatements could occur and remain undetected.
Changes in Internal Control over
Financial Reporting
During the period covered by this report, Greystone’s implemented certain procedures to provide
the necessary oversight to mitigate any instances of segregation of duties.
Item
9B. Other Information.
None.
PART
III.
Item
10. Directors, Executive Officers and Corporate Governance.
Directors,
Executive Officers, Promoters and Control Persons
The
following lists the directors and executive officers of Greystone and a significant employee of Greystone. Directors of Greystone
are elected at annual meetings of shareholders unless appointed by the Board of Directors to fill a vacancy upon the resignation
or removal of a member or an increase in the number of members of the Board of Directors. Executive officers serve at the pleasure
of the Board of Directors.
Name
|
|
Position
|
|
Term
as Director Expires
|
Warren
F. Kruger
|
|
President,
Chief Executive Officer and Director
|
|
2017
|
Larry
LeBarre
|
|
Director
|
|
2017
|
Robert
B. Rosene, Jr.
|
|
Director
|
|
2017
|
William
W. Rahhal
|
|
Chief
Financial Officer
|
|
N/A
|
Warren
F. Kruger, President, Chief Executive Officer and Director
Mr.
Warren F. Kruger, Manager/CEO of privately held Yorktown Management & Financial Services, L.L.C., is 61 years old. Yorktown
is involved in investment banking, real estate, manufacturing and energy endeavors. Mr. Kruger is the non-executive chairman of
the board of directors of Kruger Brown Holdings, LLC, which owns TriEnda Holdings, LLC. and PendaForm, LLC. TriEnda Holdings manufactures
plastic pallets utilizing a thermoform process. Because of the different qualities between the pallets manufactured by Greystone
and TriEnda, there is no direct competition between the two companies. Mr. Kruger earned a Bachelor of Business Administration
degree from the University of Oklahoma, and an Executive M.B.A. from Southern Methodist University. Mr. Kruger has forty years
of experience in the financial services industry. In 1980, Mr. Kruger co-founded MCM Group, Ltd., which owned and controlled United
Bank Club Association, Inc. until 1996 when the firm was sold to a subsidiary of Cendant Corp. (a former NYSE company). He also
owned and operated Century Ice, a manufacturer and distributor of ice products from 1996 to 1997, when Packaged Ice, Inc., acquired
Century Ice in an industry rollup.
Mr.
Kruger became a director of Greystone on January 4, 2002, served as President and Chief Executive Officer from January 10, 2003
to August 15, 2005 and, most recently, has served as President and Chief Executive Officer from November 18, 2006 to the present.
Mr.
Kruger’s business experience and knowledge of the day to day operations of Greystone make him well suited to serve on Greystone’s
Board of Directors.
Mr.
Larry J. LeBarre, Director
Mr.
LeBarre, age 61, was President and CEO of privately-held Native American Marketing (“Native American”) until 2014
when the company was sold to Seminole Energy. Native American was founded by Mr. LeBarre in 2004 as an oil transportation, storage,
and marketing business. Mr. LeBarre earned a Bachelor of Business Administration degree from the University of Oklahoma, became
a Certified Public Accountant while working for Price Waterhouse & Co. (now PriceWaterhouseCoopers, LLP) and continued his
career in the hazardous waste industry and later with Plains Resources. Mr. LeBarre is also actively involved in investment banking,
real estate, and oil and gas investments.
Mr.
LeBarre became a director of Greystone effective May 5, 2012. Mr. LeBarre’s business experience makes him qualified to serve
as a member of Greystone’s Board of Directors.
Mr.
Robert B. Rosene, Jr., Director
Mr. Rosene,
age 63, is President of Patriot Auto Group, LLC, which owns three auto dealerships in Oklahoma. In addition, Mr. Rosene serves
on the Board of Managers of Continuum Energy Services, LLC, which owns natural gas gathering and related facilities and crude
oil trucking equipment, a company he co-founded in 1998. Also, Mr. Rosene co-founded Summit Exploration Company, LLC, an oil and
gas production company that owns oil and gas production interests in several states. Mr. Rosene has a B.A. with an emphasis in
accounting from Oklahoma Baptist University.
Mr.
Rosene became a director of Greystone effective June 14, 2004. Mr. Rosene’s business experience and longstanding relationship
with Greystone make him a good fit as a member of Greystone’s Board of Directors.
William
W. Rahhal, Chief Financial Officer
Mr.
Rahhal, age 76, served as managing partner of Rahhal Henderson Johnson, PLLC, Certified Public Accountants, in Ardmore, Oklahoma,
from 1988 to 2010 and retired from the firm effective December 31, 2013. Mr. Rahhal previously served as Greystone’s Chief
Financial Officer from October 1, 2002 to October 1, 2004 and subsequently served Greystone as an accounting and financial consultant
until his appointment as its Chief Financial Officer. Mr. Rahhal earned his B.B.A. from the University of Oklahoma and is a Certified
Public Accountant licensed in Oklahoma and Texas. Mr. Rahhal has also previously served as a Senior Manager with Price Waterhouse
& Co. (now PriceWaterhouseCoopers, LLP) and as financial manager of a privately-held oil and gas production company and contract
drilling company.
Identification
of the Audit Committee; Audit Committee Financial Expert
As
of May 31, 2017, Greystone had not established an audit committee and the entire board of directors essentially serves as Greystone’s
audit committee.
Code
of Ethics
Effective
April 8, 2008, Greystone adopted a Code of Ethics applicable to Greystone’s officers and directors, including Greystone’s
principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions.
Greystone undertakes to provide any person without charge, upon request, a copy of such Code of Ethics. Requests may be directed
to Greystone Logistics, Inc., 1613 East 15th Street, Tulsa, Oklahoma 74120, or by calling (918) 583-7441.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires Greystone’s directors, officers and persons who beneficially own more
than 10% of any class of Greystone’s equity securities registered under Section 12 to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of such registered securities of Greystone. Officers,
directors and greater than 10% beneficial owners are required by regulation to furnish to Greystone copies of all Section 16(a)
reports they file.
Based
solely on review of the copies of such reports furnished to Greystone and any written representations that no other reports were
required during fiscal year 2017, to Greystone’s knowledge, all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners during fiscal year 2017 were complied with on a timely basis.
Item
11. Executive Compensation.
The
following table sets forth the compensation paid to named executive officers during the fiscal years ended May 31, 2017, 2016
and 2015:
Summary
Compensation Table
Name
and
Principal Position
|
|
Fiscal
Year
Ending May 31,
|
|
|
Salary
|
|
|
Bonus
|
|
|
Option
Awards
|
|
|
Nonqualified
Deferred
Compensation Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren
F. Kruger,
|
|
|
2017
|
|
|
$
|
240,000
|
|
|
$
|
62,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
302,000
|
|
President and Chief
|
|
|
2016
|
|
|
$
|
240,000
|
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
242,000
|
|
Executive Officer
|
|
|
2015
|
|
|
$
|
240,000
|
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
242,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William W. Rahhal,
|
|
|
2017
|
|
|
$
|
130,000
|
|
|
$
|
32,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
162,000
|
|
Chief Financial Officer
|
|
|
2016
|
|
|
$
|
107,500
|
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
109,500
|
|
|
|
|
2015
|
|
|
$
|
100,000
|
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
102,000
|
|
The
following table provides information with respect to named executive earning outstanding equity awards as of May 31,
2017:
Outstanding
Equity Awards at Fiscal Year End
None.
Directors’
Compensation
Greystone
does not have any plans or policies with respect to the compensation of its Board of Directors for their service on the Board.
However, during the fiscal year ended May 31, 2016, the Board of Directors approved compensation to board members of $7,500 per
meeting attended. In fiscal years 2017 and 2016, $30,000 and $7,500, respectively, were paid to each of Messrs. Kruger, Rosene
and LeBarre.
Because
the Board of Directors consists of three persons of which two are outside directors, the Board has not considered it necessary
to create a compensation committee. All of Greystone’s directors participate in determining compensation for officers with
Mr. Kruger abstaining from any discussions concerning his compensation.
Compensation
for Loan Guarantees
Effective
September 1, 2016, the Board of Directors awarded each of Messrs. Kruger and Rosene a warrant to purchase 250,000 of Greystone’s
common stock at an exercise price of $0.01 per share and a cash payment of $65,000. The warrants are fully vested and have a life
of ten years.
Compensation
Program as it Relates to Risk
We
have reviewed our compensation policies and practices for both executives and non-executives as they relate to risk and have determined
that at this time they are not reasonably likely to have a material adverse effect on us.
Amended
and Restated Stock Option Plan
General
.
Greystone’s Amended and Restated Stock Option Plan (the “Stock Plan”) is administered by the Board of Directors
of Greystone or, if the Board so authorizes, by a committee of the Board of Directors consisting of not less than two members
of the Board of Directors. The Stock Plan is presently administered by the entire Board of Directors since no separate committee
of the Board has been designated to administer the Stock Plan. Accordingly, many of the references below in this description of
the Stock Plan to the Board of Directors could also be construed to be a committee thereof. All managerial and other key employees
of Greystone and/or its subsidiaries who hold positions of significant responsibility or whose performance or potential contribution,
in the judgment of the Board of Directors, will benefit the future success of Greystone are eligible to receive grants under the
Stock Plan. In addition, each director of Greystone who is not an employee of Greystone is eligible to receive certain option
grants pursuant to provisions of the Stock Plan. Previously, the Stock Plan was set to expire on May 11, 2011 and the maximum
number of shares of common stock in respect of which options could be granted under the Stock Plan was 2,000,000. However, on
May 5, 2012, the Board of Directors voted to cause the Stock Plan to be extended for another 10 years and to increase the number
of shares of common stock in respect of which options could be granted to 2,500,000. This number is subject to appropriate equitable
adjustment in the event of a reorganization, stock split or stock dividend or other similar change affecting Greystone’s
common stock.
Price
and Terms
.
Each option is evidenced by an agreement between Greystone and the optionee. Unless otherwise determined
by the Board of Directors at the time of grant, all options become exercisable at the rate of 25% of the total shares subject
to the option on each of the first four anniversary dates of the date of grant, provided that the Board of Directors may, at any
time, accelerate the date any outstanding option becomes exercisable. The exercise price for each share placed under option pursuant
to the Stock Plan is determined by the Board of Directors but cannot in any event be less than 100% of the fair market value of
such share on the date the option was granted.
Effect
of Termination or Death
.
If an optionee’s employment with Greystone is terminated for any reason other than
death or termination for cause, an option will be exercisable for a period of three months after the date of termination of employment
as to all then vested portions of the option. In addition, the Board of Directors may, in its sole discretion, approve acceleration
of the vesting of any unvested portions of the option. If an optionee’s employment with Greystone is terminated for cause
(as defined in the Stock Plan), the option shall terminate as of the date of such termination of employment, and the optionee
shall have no further rights to exercise any portion of the option. If an optionee dies while employed by Greystone, any unvested
portion of the option as of the date of death shall be vested as of the date of death, and the option shall be exercisable in
full by the heirs or legal representatives of the optionee for a period of 12 months following the date of death. In any event,
options terminate and are no longer exercisable after 10 years from the date of the grant.
Continued
Service as a Director
.
In the event any optionee who is an employee and also a director of Greystone ceases to
be employed by Greystone but continues to serve as a director of Greystone, the Board of Directors may determine that all or a
portion of such optionee’s options shall not expire three months following the date of employment as described above, but
instead shall continue in effect until the earlier of the date the optionee ceases to be a director of Greystone or the date the
option otherwise expires according to its stated date of expiration. Termination of any such option in connection with the optionee’s
termination of service as a director will be on terms similar to those described above in connection with termination of employment.
Grants
to Non-Employee Directors
. In order to retain, motivate and reward non-employee directors of Greystone, the Stock Plan
extends participation to non-employee directors on the terms and conditions described below. The exercise price for options granted
to non-employee directors is equal to 100% of the fair market value per share of common stock on the date the option is granted.
As with options granted to employees, unless otherwise determined by the Board of Directors at the time of grant, all options
granted to non-employee directors become exercisable at the rate of 25% of the total shares subject to the option on each of the
first four anniversary dates of the date of grant. The Board of Directors is also entitled at any time to accelerate the date
any outstanding option becomes exercisable. If a non-employee director’s service on the Board of Directors is terminated
for any reason other than death or removal from the Board of Directors for cause, an option will be exercisable for a period of
three months after the date of removal from the Board of Directors as to all then vested portions of the option. If a non-employee
director is removed from the Board of Directors for cause, the option will terminate as of the date of such removal, and the optionee
shall have no further rights to exercise any portion of the option. If a non-employee director optionee dies while serving on
the Board of Directors, any unvested portion of the option as of the date of death shall be vested as of the date of death, and
the option shall be exercisable in full by the heirs or legal representatives of the optionee for a period of 12 months following
the date of death. In any event, options terminate and are no longer exercisable after 10 years from the date of the grant.
Other
than as described above, all options granted to non-employee directors are subject to the same terms and conditions generally
applicable to options granted to employees under the Stock Plan.
Exercise
of Options
. The exercise price of options may be paid in cash, by certified check, by tender of stock of Greystone (valued
at fair market value on the date immediately preceding the date of exercise), by surrender of a portion of the option, or by a
combination of such means of payment. The prior consent of the Board of Directors is required in connection with the payment of
the exercise price of options by tender of shares or surrender of a portion of the option, except that the consent of the Board
of Directors is not required if the exercise price is paid by surrender of shares that have been owned by the optionee for more
than six months prior to the date of exercise of the option or by a combination of cash and shares that have been owned for more
than six months.
Effect
of Certain Corporate Transactions
. In the event of any change in capitalization affecting the common stock of Greystone,
such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or
other form of reorganization, liquidation, or any other change affecting the common stock, proportionate adjustments will be made
with respect to the aggregate number and type of securities for which options may be granted under the Stock Plan, the number
and type of securities covered by each outstanding option, and the exercise price of outstanding options so that optionees will
be entitled upon exercise of options to receive the same number and kind of stock, securities, cash, property or other consideration
that the optionee would have received in connection with the change in capitalization if such option had been exercised immediately
preceding such change in capitalization. The Board of Directors may also make such adjustments in the number of shares covered
by, and the price or other value of any outstanding options in the event of a spin-off or other distribution, other than normal
cash dividends, of company assets to shareholders. In addition, unless the Board of Directors expressly determines otherwise,
in the event of a Change in Control (as defined in the Stock Plan) of Greystone, all outstanding options will become immediately
and fully exercisable and optionees will be entitled to surrender, within 60 days following the Change in Control, unexercised
options or portions of options in return for a cash payment equal to the difference between the aggregate exercise price of the
surrendered options and the fair market value of the shares of common stock underlying the surrendered options.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities
Authorized for Issuance under Equity Compensation Plans
As
of May 31, 2017, Greystone had one equity incentive plan under which equity securities have been authorized for issuance to Greystone’s
directors, officers, employees and other persons who perform substantial services for or on behalf of Greystone. The following
table provides certain information relating to such stock option plan during the year ended May 31, 2017:
Equity
Compensation Plan Information
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Plan Category
|
|
|
Number of securities to be
issued upon exercise
of outstanding options,
warrants and rights
|
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
|
|
Number
of securities
remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
|
|
Equity compensation plans approved by security holders
|
|
|
200,000
|
|
|
$
|
0.12
|
|
|
|
-0-
|
|
Equity compensation plans not approved by security holders
|
|
|
500,000
|
|
|
$
|
0.01
|
|
|
|
-0-
|
|
Total
|
|
|
700,000
|
|
|
$
|
0.04
|
|
|
|
-0-
|
|
Security
Ownership of Certain Beneficial Owners and Management
As
of May 31, 2017, Greystone had 28,361,201 shares of its common stock and 50,000 shares of its 2003 preferred stock outstanding.
Each share of the 2003 preferred stock is convertible into approximately 66.67 shares of Greystone’s common stock.
The
following table sets forth certain information regarding the shares of Greystone’s common stock beneficially owned as of
May 31, 2017, by (i) each person known by Greystone to own beneficially 5% or more of Greystone’s outstanding common stock,
(ii) each of Greystone’s directors and named officers, and (iii) all of Greystone’s directors and named officers as
a group:
Name and Address of
Beneficial Owner
|
|
Shares of
Common
Stock
Beneficially Owned
(1)
|
|
Percent of
Class
(2)
|
|
Shares
of Senior
Preferred Stock
Beneficially
Owned
(3)
|
|
Percent of
Class
|
|
Voting Shares
Beneficially
Owned
(4)
|
|
Percent of
Total
Voting
Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren F. Kruger
Chairman, President and CEO
1613 East 15th Street
Tulsa, OK 74120
|
|
|
10,443,842
|
(5)
|
|
|
34.49
|
%
|
|
|
25,000
|
|
|
|
50.00
|
%
|
|
|
10,193,842
|
|
|
|
32.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William W. Rahhal
Chief Financial Officer
1613 East 15th Street
Tulsa, OK 74120
|
|
|
307,883
|
(6)
|
|
|
1.09
|
%
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
307,883
|
|
|
|
0.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert B. Rosene, Jr.
Director
1323 E. 71st Street, Suite 300
Tulsa, OK 74136
|
|
|
5,135,717
|
(7)
|
|
|
16.96
|
%
|
|
|
25,000
|
|
|
|
50.00
|
%
|
|
|
4,885,717
|
|
|
|
15.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry J. LeBarre
Director
7518 Middlewood Street
Houston, TX 77063
|
|
|
520,093
|
(8)
|
|
|
1.83
|
%
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
520,093
|
|
|
|
1.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Pritchard
2113
East 59th Place
Tulsa, OK 74119
|
|
|
1,811,132
|
(9)
|
|
|
6.39
|
%
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
1,811,132
|
|
|
|
5.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Directors & Officers as a Group (4 persons)
|
|
|
16,407,535
|
(10)
|
|
|
50.96
|
%
|
|
|
50,000
|
|
|
|
100.00
|
%
|
|
|
15,907,535
|
|
|
|
50.19
|
%
|
|
(1)
|
The
number of shares beneficially owned by each holder is calculated in accordance with the rules of the Commission, which provide
that each holder shall be deemed to be a beneficial owner of a security if that holder has the right to acquire beneficial
ownership of the security within 60 days through options, warrants or the conversion of another security; provided, however,
if such holder acquires any such rights in connection with or as a participant in any transaction with the effect of changing
or influencing control of the issuer, then immediately upon such acquisition, the holder will be deemed to be the beneficial
owner of the securities. The number the shares of common stock beneficially owned by each holder includes common stock directly
owned by such holder and the number of shares of common stock such holder has the right to acquire upon the conversion of
the Senior Preferred Stock and/or upon the exercise of certain options or warrants.
|
|
|
|
|
(2)
|
The
percentage ownership for each holder is calculated in accordance with the rules of the Commission, which provide that any
shares a holder is deemed to beneficially own by virtue of having a right to acquire shares upon the conversion of warrants,
options or other rights, or upon the conversion of preferred stock or other rights are considered outstanding solely for purposes
of calculating such holder’s percentage ownership.
|
|
|
|
|
(3)
|
Each
share of Senior Preferred Stock is convertible into approximately 66 2/3 shares of Greystone’s common stock. Therefore,
Mr. Kruger’s 25,000 shares of Senior Preferred Stock are convertible into 1,666,666.66 shares of our common stock and
Mr. Rosene’s 25,000 shares of Senior Preferred Stock are convertible into 1,666,666.66 shares of our common stock.
|
|
(4)
|
Total
“Voting Shares” is defined as the number of shares of common stock outstanding, each share of which receives one
vote, plus the 3,333,333.32 votes afforded to the holders of our Senior Preferred Stock, or 31,694,534.32 Voting Shares total.
The number of Voting Shares reported by each reporting person above represents the number of shares of common stock beneficially
owned by such reporting person plus the number of votes afforded to such reporting person as a holder of shares of Senior
Preferred Stock, as applicable.
|
|
|
|
|
(5)
|
The
total includes: (i) 8,501,376 shares of common stock beneficially owned directly by Mr. Kruger; (ii) 19,000 shares held of
record by Yorktown; (iii) 6,800 shares of common stock that Mr. Kruger holds as custodian for minor children; 250,000 shares
of common stock that Mr. Kruger may acquire through the exercise of a warrant; and (iv) 1,666,666 shares that Mr. Kruger has
the right to acquire upon conversion of the Senior Preferred Stock.
|
|
|
|
|
(6)
|
The
total includes: (i) 255,000 shares of common stock beneficially owned directly by Mr. Rahhal; and (ii) 52,883 shares of common
stock that Mr. Rahhal which owns as a joint tenant.
|
|
|
|
|
(7)
|
The
total includes: (i) 3,219,051 shares of common stock beneficially owned directly by Mr. Rosene; 250,000 shares of common stock
that Mr. Rosene may acquire through the exercise of a warrant; and (ii) 1,666,666 shares that Mr. Rosene has the right to
acquire upon conversion of the Senior Preferred Stock.
|
|
|
|
|
(8)
|
The
total includes (i) 520,093 shares of common stock beneficially owned directly by Mr. LeBarre.
|
|
|
|
|
(9)
|
The
total includes: (i) 1,767,029 shares of common stock beneficially owned directly by Mr. Pritchard (ii) 9,000 shares of common
stock that Mr. Pritchard holds as custodian for a minor child and (iii) 35,103 shares held of record by Maritch Services,
Inc.
|
|
|
|
|
(10)
|
The
director and officer group includes each reporting person in the above table other than Mr. Pritchard. The total includes:
(i) 12,574,203 shares of common stock; (ii) 250,000 shares of common stock that Mr. Kruger has the right to acquire by exercising
a warrant; (iii) 250,000 shares of common stock that Mr. Rosene has the right to acquire by exercising a warrant; (v) 1,666,666
shares of common stock that Mr. Kruger has the right to acquire upon conversion of the Senior Preferred Stock; and (vi) 1,666,666
shares of common stock that Mr. Rosene has the right to acquire upon conversion of the Senior Preferred.
|
Item
13. Certain Relationships and Related Transactions, and Director Independence
Transactions
with Related Persons
General
For
information regarding loans from or to Warren Kruger, see “Transactions with Warren Kruger and Related Entities” under
the heading “Liquidity and Capital Resources” in Item 7 of this Form10-K.
For
information regarding an advance from Robert Rosene, see “Advances and Loans from Robert Rosene” under the heading
“Liquidity and Capital Resources” in Item 7 of this Form10-K.
For
information regarding the loan from IBC and Messrs. Kruger’s and Rosene’s relationship thereto, see “Loan from
International Bank of Commerce (“IBC”) in Item 7 of this Form 10-K.
Transactions
with TriEnda Holdings, L.L.C.
TriEnda
Holdings, L.L.C. (“TriEnda”) is a manufacturer of plastic pallets, protective packaging and dunnage utilizing thermoform
processing of which Warren F. Kruger, Greystone’s President and CEO, is the non-executive chairman of the board of directors
of Kruger Brown Holdings, LLC (“KBH”), which owns a majority interest in TriEnda. Mr. Kruger’s net interest
through KBH is not a majority ownership interest in TriEnda. Greystone charged a tolling fee to TriEnda for blending and pelletizing
plastic resin using TriEnda’s equipment and raw materials. Revenue from TriEnda totaled $531,487 and $496,764 in fiscal
years 2017 and 2016, respectively. Effective March 1, 2017, services to TriEnda were discontinued.
Transactions
with Green Plastic Pallets
Green
Plastic Pallet (“Green”) is an entity owned by James Kruger, a brother to Warren Kruger, Greystone’s President
and CEO. Green purchased pallets from Greystone totaling $312,130 and $295,362 in fiscal years 2017 and 2016, respectively. At
May 31, 2017, Green owed $73,578 to Greystone.
Other
Transactions
Greystone
leases two buildings located in Bettendorf, Iowa, from which it conducts its manufacturing operations, from Greystone Real Estate,
L.L.C., a variable interest entity which is owned by Robert B. Rosene, Jr., a member of Greystone’s board of director, and
Warren Kruger, Greystone’s President and CEO and a member of Greystone’s Board of Directors. Rental payments are $40,266
per month for both buildings.
Greystone
had a lease agreement with an entity owned by Mr. Larry LeBarre, a member of Greystone’s Board of Directors, to rent certain
equipment to produce mid-duty pallets with a minimum monthly commitment of $25,000. The lease, as amended, terminated as of September
30, 2015. Lease payments were $75,000 for fiscal year 2016.
Director
Independence
Greystone
has determined that Messrs. LeBarre and Rosene are “independent” within the meaning of Rule 5605(a)(2) of the NASDAQ
listing standards. Because of the small size of Greystone’s Board of Directors, it has not established any committees. Rather,
the entire Board acts as, and performs the same functions as, the audit committee, compensation committee and nominating committee.
Mr. Kruger is not considered “independent” within the meaning of Rule 5605(a)(2) of the NASDAQ listing standards.
Item
14. Principal Accounting Fees and Services.
The
following is a summary of the fees billed to Greystone by HoganTaylor LLP, Greystone’s independent registered public accounting
firm, for professional services rendered for the fiscal years ended May 31, 2017 and May 31, 2016:
Fee Category
|
|
Fiscal 2017 Fees
|
|
|
Fiscal 2016 Fees
|
|
|
|
|
|
|
|
|
Audit Fees(1)
|
|
$
|
168,000
|
|
|
$
|
150,000
|
|
Audit-Related Fees
|
|
|
0
|
|
|
|
0
|
|
Tax Fees
|
|
|
0
|
|
|
|
0
|
|
All Other Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
168,000
|
|
|
$
|
150,000
|
|
(1)
Audit Fees consist of aggregate fees billed for professional services rendered for the audit of Greystone’s
annual consolidated financial statements and review of the interim consolidated financial statements included in quarterly
reports or services that are normally provided by the independent registered public accounting firm in connection with
statutory and regulatory filings or engagements during the fiscal years ended May 31, 2017 and May 31, 2016,
respectively.
The
entire Board of Directors of Greystone is responsible for the appointment, compensation and oversight of the work of the independent
registered public accounting firm and approves in advance any services to be performed by the independent registered public accounting
firm, whether audit-related or not. The entire Board of Directors reviews each proposed engagement to determine whether the provision
of services is compatible with maintaining the independence of the independent registered public accounting firm. All of the fees
shown above were pre-approved by the entire Board of Directors.
Notes
to Consolidated Financial Statements
May
31, 2017 and 2016
Note
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Greystone
Logistics, Inc. (“Greystone”), through its two wholly-owned subsidiaries, Greystone Manufacturing, LLC (“GSM”)
and Plastic Pallet Production, Inc. (“PPP”), is engaged in the manufacture and marketing of plastic pallets and pelletized
recycled plastic resin.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Greystone, its subsidiaries and entities required to be consolidated
by the accounting guidance for variable interest entities (“VIE”). All material intercompany accounts and transactions
have been eliminated.
Greystone
consolidates its VIE, Greystone Real Estate, L.L.C. (“GRE”), which owns the manufacturing facilities which are occupied
by Greystone. GRE is owned by Warren F. Kruger, President and CEO, and Robert B. Rosene, Jr., a member of Greystone’s Board
of Directors.
Use
of Estimates
The
preparation of Greystone’s financial statements in conformity with accounting principles generally accepted in the United
States of America requires Greystone’s management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. Actual results could differ materially from those estimates.
Accounts
Receivable and Allowance for Doubtful Accounts
Greystone
carries its accounts receivable at their face value less an allowance for doubtful accounts. On a periodic basis, Greystone evaluates
its accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances,
credit conditions and history of collections. Based on periodic reviews of outstanding accounts receivable, Greystone writes off
balances deemed to be uncollectible against the allowance for doubtful accounts.
Inventory
Inventory
consists of finished pallets and raw materials which are stated at the lower of average cost or market value.
Property,
Plant and Equipment
Greystone’s
property, plant and equipment is stated at cost. Depreciation expense is computed using the straight-line method over the estimated
useful lives, as follows:
Plant
buildings
|
39
years
|
Production
machinery and equipment
|
5-12
years
|
Leasehold
improvements
|
5-7
years
|
Furniture
& fixtures
|
3-5
years
|
Upon
sale, retirement or other disposal, the related costs and accumulated depreciation of items of property, plant or equipment are
removed from the related accounts and any gain or loss is recognized. When events or changes in circumstances indicate that assets
may be impaired, an evaluation is performed comparing the estimated future undiscounted cash flows associated with the asset to
the asset’s carrying amount. If the asset’s carrying amount exceeds the cash flows, a write-down to fair value is
required.
Other
Assets
Other
assets includes certain intangible costs for patents on the modular pallet system and accessories which are being amortized using
the straight-line method over the estimated useful life of 15 years. The patents were fully amortized as of May 31, 2017.
Debt
Issuance Costs
The
Company capitalizes debt issuance costs as incurred and amortizes such costs on a straight-line basis across the term of the debt.
Debt issuance costs are fully amortized when the debt is repaid or refinanced.
Effective
June 1, 2016, Greystone adopted Accounting Standards Update 2015-03, “
Simplifying the Presentation of Debt Issuance Costs”
which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the
associated debt liability, consistent with the presentation of a debt discount. Accordingly, Greystone retrospectively applied
the guidance to the May 31, 2016 balance by reclassifying debt issue costs of $69,185, net of amortization and previously reported
as other assets, to long-term debt.
Stock
Options
The
grant-date fair value of stock options and other equity-based compensation issued to employees is amortized on the straight-line
basis over the vesting period of the award as compensation cost. The fair value of new option grants is estimated using the Black-Scholes
option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility, dividend yields and expected holding periods.
Recognition
of Revenues
Greystone’s
sales agreements to customers, other than one of its primary customers, generally provide for risk of loss to pass to the customers
upon shipment from Greystone’s plant in Bettendorf, Iowa. Revenue is recognized for these customers at the date of shipment.
Greystone’s
agreement with one of its major customers provides that (1) risk of loss or damages for product in transit remain with Greystone
and (2) the product is subject to approval and acceptance at the buyer’s premises. Accordingly, Greystone recognizes revenue
when product has been delivered to the customer’s sites and risk of loss has passed to the customer.
For
sales to all customers, cost of goods sold is recognized when the related revenue is recognized.
Income
Taxes
Greystone
accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the difference between the consolidated financial statements
and tax bases of assets and liabilities and tax loss carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Earnings
Per Share
Basic
earnings per share is computed by dividing the earnings available to common stockholders by the weighted average number of common
shares outstanding for the year. In arriving at income available to common stockholders, preferred stock dividends are deducted
from net income for the year. For fiscal years 2017 and 2016, convertible preferred stock is not considered as its effect is antidilutive.
Greystone’s
Series 2003 preferred stock, which is convertible into 3,333,333 shares of common stock, was not included in the computation of
diluted earnings per share for the fiscal years 2017 and 2016 as the effect would have been antidilutive.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “
Revenue from Contracts with Customers
” (“ASU 2014-09”) which creates a comprehensive
set of guidelines for the recognition of revenue under the principle: “Recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services.” The requirements of ASU 2014-09 will require either retrospective application to each prior
period presented or retrospective application with the cumulative effect of initially applying the standard recognized at the
date of adoption. Greystone is currently evaluating the impact this ASU will have on our financial position and results of operations.
On July 9, 2015, FASB voted to approve a one-year deferral of the effective date such that the effective date for Greystone’s
interim and annual periods begins June 1, 2018.
In
February 2016, the FASB issued Accounting Standards 2016-02,
Leases (Topic 842)
, which is intended to improve financial
reporting about leasing transactions. The ASU will require organizations (“lessees”) that lease assets with lease
terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created
by those leases. Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from
current GAAP. In addition, the ASU will require disclosures to help investors and other financial statement users better understand
the amount, timing and uncertainty of cash flows arising from leases. The effective date of this ASU is for fiscal years beginning
after December 31, 2018 and interim periods within that year. Greystone is currently reviewing the ASU to assess the potential
impact on the consolidated financial statements.
In
March 2016, FASB issued Accounting Standards 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amends
ASC Topic 718,
Compensation – Stock Compensation
. The objective of this amendment is part of the FASB’s Simplification
Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date
of the amendment is for fiscal years beginning after December 31, 2016 and interim periods within that reporting period. Greystone
is currently reviewing the ASU to assess the potential impact on the consolidated financial statements.
Reclassifications
Certain
amounts in the consolidated financial statements as of and for the year ended May 31, 2016 have been reclassified to conform to
the consolidated financial statements as of and for the year ended May 31, 2017. The reclassification is the result of Greystone’s
renegotiation with one of its primary customers with respect to the accounting treatment for purchases of damaged pallet. As a
result of the renegotiation, the Company now treats those purchases as payables, where previously they were treated as credits
to the outstanding accounts receivable balance of the customer. At May 31, 2016, $1,399,453 in accounts receivable credits were
reclassified to accounts payable to conform to the current year’s presentation.
Note
2.
INVENTORY
Inventory
consists of the following as of May 31:
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
669,083
|
|
|
$
|
536,350
|
|
Finished pallets
|
|
|
918,469
|
|
|
|
768,145
|
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
1,587,552
|
|
|
$
|
1,304,495
|
|
Note
3.
PROPERTY, PLANT AND EQUIPMENT
A
summary of the property, plant and equipment for Greystone is as follows, as of May 31:
|
|
2017
|
|
|
2016
|
|
Production machinery and equipment
|
|
$
|
27,493,614
|
|
|
$
|
18,616,603
|
|
Plant buildings and land
|
|
|
5,296,784
|
|
|
|
4,663,339
|
|
Leasehold improvements
|
|
|
263,710
|
|
|
|
198,568
|
|
Furniture and fixtures
|
|
|
392,371
|
|
|
|
168,005
|
|
|
|
|
33,446,479
|
|
|
|
23,646,515
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(13,739,697
|
)
|
|
|
(11,081,196
|
)
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
$
|
19,706,782
|
|
|
$
|
12,565,319
|
|
Production
machinery and equipment includes equipment in the amount of $132,600 that had not been placed into service as of May 31, 2017.
Leasehold improvements include $65,142 that had not been placed in service as of May 31, 2017.
Two
plant buildings and land located in Bettendorf, Iowa are owned by GRE, a variable interest entity, and have a net book value of
$3,128,293 at May 31, 2017.
Depreciation
expense for the years ended May 31, 2017 and 2016 is $2,658,501 and $1,518,039, respectively.
Note
4.
OTHER ASSETS
Other
assets consist of the following as of May 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Patents
|
|
$
|
190,739
|
|
|
$
|
190,739
|
|
Accumulated amortization
|
|
|
(190,739
|
)
|
|
|
(167,534
|
)
|
Other
|
|
|
-
|
|
|
|
200
|
|
Total Other Assets
|
|
$
|
-0-
|
|
|
$
|
23,405
|
|
Amortization
of intangibles was $23,205 and $11,299 for 2017 and 2016, respectively.
Note
5.
LONG-TERM DEBT AND CAPITAL LEASE
Long-term
debt consists of the following as of May 31
|
|
2017
|
|
|
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
|
|
$
|
4,626,191
|
|
|
$
|
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
|
|
|
1,715,132
|
|
|
|
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
|
|
|
2,260,000
|
|
|
|
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
|
|
|
2,841,285
|
|
|
|
3,021,734
|
|
|
|
|
|
|
|
|
|
|
Note payable to Robert Rosene, 7.5% interest, due January 15, 2019
|
|
|
4,469,355
|
|
|
|
2,066,000
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,396,448
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to Yorktown Management & Financial Services, LLC, 5.0% interest, due February 28, 2019, monthly principal and interest payments of $20,629
|
|
|
413,969
|
|
|
|
634,616
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
310,036
|
|
|
|
50,560
|
|
Face value of long-term debt
|
|
|
18,032,416
|
|
|
|
15,446,748
|
|
Less: Debt issue costs, net of amortization
|
|
|
(228,426
|
)
|
|
|
(69,185
|
)
|
|
|
|
17,803,990
|
|
|
|
15,377,563
|
|
Less: Current portion
|
|
|
(2,493,236
|
)
|
|
|
(2,088,327
|
)
|
Long-term debt
|
|
$
|
15,310,754
|
|
|
$
|
13,289,236
|
|
The
prime rate of interest as of May 31, 2017 was 4.0%. Effective June 15, 2017, the prime rate of interest increased to 4.25%.
Capital
lease consists of the following as of May 31:
|
|
2017
|
|
|
2016
|
|
Non-cancellable
capital lease with private company,
|
|
|
|
|
|
|
|
|
interest rate of 5%, due
August 7, 2019
|
|
$
|
3,794,063
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(2,261,560
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cancellable
capital lease, net of current portion
|
|
$
|
1,532,503
|
|
|
$
|
-
|
|
Loan
Agreement between Greystone and International Bank of Commerce (“IBC”)
On
January 31, 2014, Greystone and GSM (the “Borrowers”) and International Bank of Commerce (“IBC”) entered
into a Loan Agreement (the “IBC Loan Agreement”). The IBC Loan Agreement provides for a revolving loan in an aggregate
principal amount of up to $2,500,000 (the “Revolving Loan”) and a term loan in the aggregate principal amount of $9,200,000
(the “Term Loan”). The exact amount which can be borrowed under the Revolving Loan from time to time is dependent
upon the amount of the borrowing base, but can in no event exceed $2,500,000. On January 7, 2016, the Borrowers and IBC entered
into the First Amendment to the IBC Loan Agreement (the “First Amendment”) whereby IBC made an additional term loan
to Borrowers in the original principal amount of $2,530,072 (the “New Equipment Loan”). The New Equipment Loan and
$2,917,422 of the principal amount outstanding on the Term Loan were consolidated into a new loan in the combined principal amount
of $5,447,504 (the “Term Loan A”). The Term Loan’s remaining principal balance of $3,000,000 was deemed to be
a separate term loan (the “Term Loan B”). The additional proceeds of $2,530,072 that were provided by the First Amendment
were principally used to acquire new production equipment.
The
Term Loans A and B bear interest at the New York Prime Rate plus 0.5% but not less than 4.0%, 4.5% at May 31, 2017. 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 Term Loan A over a seven year period beginning January 31, 2016 (currently $74,455 per month) and (ii) the Term Loan
B over the three-year life of the loan (currently $89,226 per month).
The
Revolving Loan bears interest at the New York Prime Rate plus 0.5% but not less than 4.0%, 4.5% at May 31, 2017. The Third Amendment
extended the maturity date of the Revolving Loan 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 proceeds from the Revolving Loan are used
for general working capital purposes.
The
IBC Loan Agreement includes customary representations and warranties and affirmative and negative covenants which include (i)
requiring the Borrowers to maintain a debt service coverage ratio of 1:25 to 1:00 and a funded debt to EBIDA ratio not exceeding
3:00 to 1:00, (ii) subject to certain exceptions, limiting the Borrowers’ combined capital expenditures on fixed assets
to $1,000,000 per year, (iii) prohibiting Greystone, without IBC’s prior written consent, from declaring or paying any dividends,
redemptions of stock or membership interests, distributions and withdrawals (as applicable) in respect of its capital stock or
any other equity interest, other than additional payments to holders of its preferred stock in an amount not to exceed $500,000
in any fiscal year, (iv) subject to certain exceptions, prohibiting the incurrence of additional indebtedness by the Borrowers,
and (v) requiring the Borrowers to prevent (A) any change in capital ownership such that there is a material change in the direct
or indirect ownership of (1) Greystone’s outstanding preferred stock, and (2) any equity interest in GSM, or (B) Warren
Kruger from ceasing to be actively involved in the management of Greystone as President and/or Chief Executive Officer. The foregoing
list of covenants is not exhaustive and there are several other covenants contained in the IBC Loan Agreement.
Greystone’s
debt service coverage ratio at May 31, 2017 was 0.95 which is not in compliance with the IBC Loan Agreement’s minimum debt
service coverage ratio of 1.25. The Third Amendment to the IBC Loan Agreement waived this instance of non-compliance to maintain
a minimum debt service coverage ratio until February 28, 2018.
Section
8.5 of the IBC Loan Agreement specifies that Greystone will not spend or incur obligations to acquire fixed assets, other than
certain specified fixed asset acquisitions, for more than $1,000,000 in any single year. During fiscal year 2017, Greystone incurred
$1,541,865 for such fixed assets. The Fourth Amendment to the IBC Loan Agreement waived any default or event of default arising
from the excess fixed asset procurements by Greystone.
The
IBC Loan Agreement includes customary events of default, including events of default relating to non-payment of principal and
other amounts owing under the IBC Loan Agreement from time to time, inaccuracy of representations, violation of covenants, defaults
under other agreements, bankruptcy and similar events, the death of a guarantor, certain material adverse changes relating to
a Borrower or guarantor, certain judgments or awards against a Borrower, or government action affecting a Borrower’s or
guarantor’s ability to perform under the IBC Loan Agreement or the related loan documents. Among other things, a default
under the IBC Loan Agreement would permit IBC to cease lending funds under the IBC Loan Agreement, and require immediate repayment
of any outstanding loans with interest and any unpaid accrued fees.
The
IBC Loan Agreement is secured by a lien on substantially all of the assets of the Borrowers. In addition, the IBC Loan Agreement
is secured by a mortgage granted by GRE on the real property owned by GRE in Bettendorf, Iowa (the “Mortgage”). GRE
is owned by Warren F. Kruger, Greystone’s President and CEO, and Robert B. Rosene, Jr., a director of Greystone. Messrs.
Kruger and Rosene have provided a combined limited guaranty of the Borrowers’ obligations under the IBC Loan Agreement,
with such guaranty being limited to a combined amount of $6,500,000 (the “Guaranty”). The Mortgage and the Guaranty
also secure or guaranty, as applicable, the obligations of GRE under the Loan Agreement between GRE and IBC dated January 31,
2014 as discussed in the following paragraph.
Loan
Agreement between GRE and IBC
On
January 31, 2014, GRE and IBC entered into a Loan Agreement which provided for a mortgage loan to GRE of $3,412,500. The loan
provides for a 4.5% interest rate and a maturity of January 31, 2019 and is secured by a mortgage on the two buildings in Bettendorf,
Iowa which are leased to Greystone.
Note
Payable between Greystone and Robert B. Rosene, Jr.
Effective
December 15, 2005, Greystone entered into an agreement with Robert B. Rosene, Jr., a member of Greystone’s Board of Directors,
to convert $2,066,000 of advances into a note payable at 7.5% interest.
Effective
June 1, 2016, the note payable to Mr. Rosene was restated (the “Restated Note”) whereby accrued interest of $2,475,690
was combined with the outstanding principal of $2,066,000 resulting in a note payable in the principal amount of $4,541,690 with
an interest rate of 7.5% and a maturity of January 15, 2018, subsequently amended to January 15, 2019. The Restated Note requires
the payment of accrued interest to Mr. Rosene. In addition, the Restated Note allows Greystone to make additional payments, at
Greystone’s discretion, up to an amount allowed by the IBC Loan Agreement.
Note
Payable between Greystone and First Bank
In
connection with the acquisition of certain equipment from Yorktown Management & Financial Services, LLC (“Yorktown”)
effective February 1, 2017, Greystone assumed a note payable in the amount of $1,469,713 between Yorktown to First Bank. The note
bears interest at the prime rate of interest plus 1.45% but not less than 4.95%, 5.45% at May 31, 2017. The First Bank note is
secured by certain production equipment.
Note
Payable between Greystone and Yorktown Management & Financial Services, LLC (“Yorktown”)
On
February 29, 2016, Greystone entered into an unsecured note payable to Yorktown in the amount of $688,296 in connection with the
acquisition of equipment from Yorktown as discussed in Note 6, Related Party Transactions. The note payable bears interest at
the rate of 5% and is payable over three years with monthly principal and interest payments of $20,629.
Maturities
Maturities
of Greystone’s long-term debt for the five years after May 31, 2017 are $2,493,236, $14,530,243, $368,656,
$382,586 and $257,695.
See
Note 14, Commitments, for the future minimum payments under the non-cancellable capital lease.
Note
6.
RELATED PARTY TRANSACTIONS
Transactions
with Warren F. Kruger, Chairman
Yorktown
Management & Financial Services, LLC (“Yorktown”), an entity wholly owned by Greystone’s CEO and President,
owns and rents to Greystone (1) grinding equipment used to grind raw materials for Greystone’s pallet production and (2)
extruders for pelletizing recycled plastic into pellets for resale and for use as raw material in the manufacture of pallets.
Greystone compensates Yorktown for the use of equipment as discussed below.
Rental
fees.
GSM pays a weekly rental fees of $22,500 and $5,000 to Yorktown for grinding equipment and pelletizing equipment, respectively.
Total rental fees of approximately $1,430,000 were paid in both fiscal years 2017 and 2016.
During
fiscal years 2017 and 2016, Yorktown provided office space in Tulsa, Oklahoma for Greystone on a month-to-month rental basis at
a monthly rental of $2,200. Effective January 1, 2017, Yorktown rented additional office space which increased the monthly rental
to $4,000 per month.
Acquisitions
from Yorktown.
On September 1, 2016, Yorktown acquired the plastic resin pelletizing equipment from TriEnda Holdings, L.L.C.,
which was used by Greystone to blend and pelletize plastic resin for a tolling fee. During the period from September 1, 2016 through
January 31, 2017, Greystone rented this equipment from Yorktown for a total of $163,204. Effective February 1, 2017, Greystone
acquired this equipment from Yorktown for $1,500,076, which included a cash payment of $30,627 and the assumption of a note payable
to First Bank in the amount of $1,469,713.
Effective
June 1, 2015, Greystone assumed operations of Yorktown’s Sand Springs facility which included grinders for recycling plastic
and a wash line. Greystone made rental payments totaling $105,000 to Yorktown for use of this equipment for the period from June
1, 2015 through February 29, 2016 whereupon Greystone and Yorktown entered into an Asset Purchase Agreement and Bill of Sale (the
“Bill of Sale”) providing for Greystone’s acquisition of the equipment located therein for $1,137,865. Payment
consisted of an offset against the purchase price of $449,569 which was an amount that Yorktown owed to GSM as of the date of
the acquisition and a note payable in the amount of $688,296 which Greystone issued to Yorktown payable over 36 months at 5% interest.
Greystone assumed the month-to-month rental of the facility with an unrelated party until May 15, 2017 when the equipment was
moved to Greystone’s Camanche, Iowa warehouses.
Compensation
related to Loan Guarantees.
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 Mr. Kruger and a cash payment of $65,000 as
compensation for providing guarantees on Greystone’s debt with International Bank of Commerce. The warrants are vested and
expire January 10, 2027. The warrants, valued as of the measurement date for approximately $60,000, and the cash payment
were capitalized as debt issue costs to be amortized over the remaining loan term.
Transactions
with TriEnda Holdings, L.L.C.
TriEnda
Holdings, L.L.C. (“TriEnda”) is a manufacturer of plastic pallets, protective packaging and dunnage utilizing thermoform
processing of which Warren F. Kruger, Greystone’s President and CEO, is the non-executive chairman of the board of directors
of Kruger Brown Holdings, LLC (“KBH”), which owns a majority interest in TriEnda. Mr. Kruger’s net interest
through KBH is not a majority ownership interest in TriEnda. Greystone charged a tolling fee to TriEnda for blending and pelletizing
plastic resin using TriEnda’s equipment and raw materials. Revenue from TriEnda totaled $538,024 and $496,764 in fiscal
years 2017 and 2016, respectively. Effective March 1, 2017, services to TriEnda were discontinued.
Transactions
with Robert B. Rosene, Jr., Director
Note
payable.
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 payable
to Mr. Rosene was restated (the “Restated Note”) whereby the accrued interest as of June 1, 2016 of $2,475,690 was
combined with the outstanding principal of $2,066,000, resulting in a note payable in the principal amount of $4,541,690 with
an interest rate of 7.5% and a maturity of January 15, 2018, subsequently amended to January 15, 2019. The Restated Note requires
the payment of accrued interest to Mr. Rosene. In addition, the Restated Note allows Greystone to make additional payments, at
Greystone’s discretion, up to an amount allowed by the IBC Loan Agreement.
Compensation
related to Loan Guarantees.
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 Mr. Rosene and a cash payment of $65,000 as
compensation for providing guarantees on Greystone’s debt with International Bank of Commerce. The warrants are vested and
expire January 10, 2027. The warrants, valued as of the measurement date for approximately $60,000, and the cash payment were
capitalized as debt issue costs to be amortized over the remaining loan term.
Transactions
with Larry J. LeBarre, Director
Effective
January 1, 2009, Greystone entered into a lease agreement with an entity owned by Mr. LeBarre to rent certain equipment to produce
mid-duty pallets with a minimum monthly commitment of $25,000. The lease terminated in September 30, 2015. Lease payments were
$75,000 for fiscal year 2016.
Transactions
with Green Plastic Pallets
Green
Plastic Pallet (“Green”) is an entity owned by James Kruger, a brother to Warren Kruger, Greystone’s President
and CEO. Green purchased pallets from Greystone totaling $312,130 and $295,362 in fiscal years 2017 and 2016, respectively. At
May 31, 2017, Green owed $73,578 to Greystone.
Note
7.
FEDERAL INCOME TAXES
Deferred
taxes as of May 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
2,102,924
|
|
|
$
|
2,288,919
|
|
Stock compensation costs
|
|
|
-
|
|
|
|
25,346
|
|
Accrued expenses
|
|
|
113,021
|
|
|
|
-
|
|
Allowance for doubtful accounts
|
|
|
8,788
|
|
|
|
4,508
|
|
Other
|
|
|
27,540
|
|
|
|
24,001
|
|
Total deferred tax asset
|
|
|
2,252,273
|
|
|
|
2,342,774
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Depreciation and amortization, tax reporting in
excess of financial
|
|
|
(1,970,858
|
)
|
|
|
(1,059,092
|
)
|
Net deferred tax asset
|
|
$
|
281,415
|
|
|
$
|
1,283,682
|
|
In
assessing the reliability of deferred tax assets, management considers the likelihood of whether it is more likely than not the
net deferred tax asset will be realized. Based on this evaluation, management has determined that Greystone will be able to realize
the full effect of the deferred tax asset and no valuation allowance has been recorded as of May 31, 2017 and 2016, respectively.
The
net change in deferred taxes for the year ended May 31, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
Net operating loss carryforward
|
|
$
|
(229,465
|
)
|
|
$
|
396,246
|
|
Depreciation and amortization, tax reporting in excess of financial
|
|
|
(911,766
|
)
|
|
|
(906,087
|
)
|
Stock compensation costs
|
|
|
18,124
|
|
|
|
3,714
|
|
Allowance for doubtful accounts
|
|
|
4,280
|
|
|
|
-
|
|
Accrued expenses
|
|
|
113,021
|
|
|
|
-
|
|
Other
|
|
|
3,539
|
|
|
|
10,572
|
|
Net decrease
|
|
$
|
(1,002,267
|
)
|
|
$
|
(495,555
|
)
|
The
provision for income taxes at May 31, 2017 and 2016 consists of the following:
|
|
2017
|
|
|
2016
|
|
Current income tax – Federal and State
|
|
$
|
9,723
|
|
|
$
|
-
|
|
Deferred income tax provision
|
|
|
1,002,267
|
|
|
|
495,555
|
|
Provision for income taxes
|
|
$
|
1,011,990
|
|
|
$
|
495,555
|
|
Greystone’s
provision for income taxes for the years ended May 31, 2017 and 2016 differs from the federal statutory rate as follows:
|
|
2017
|
|
|
2016
|
|
Tax provision using statutory rates
|
|
|
34
|
%
|
|
|
34
|
%
|
Net operating loss expiration
|
|
|
-
|
|
|
|
6
|
|
Other
|
|
|
(3
|
)
|
|
|
(1
|
)
|
Tax provision per financial statements
|
|
|
31
|
%
|
|
|
39
|
%
|
At
May 31, 2017, Greystone had a net operating loss (NOL) for Federal income tax purposes from inception through May 31, 2005 of
$15,339,800 expiring in fiscal year 2018 through fiscal year 2025 of which $1,800,000 is management’s estimate of the usable
amount pursuant to Internal Revenue Code Section 382. The limitation is due to a change in control of Greystone during the fiscal
year ended May 31, 2005. The utilization of NOL’s accumulated through fiscal year 2005 is limited to approximately $225,000
per year.
|
|
NOL Carryforward
|
|
|
Year Expiring
|
|
Cumulative through May 31, 2005
|
|
$
|
1,800,000
|
|
|
|
2018 - 2025
|
|
Year ended May 31, 2006
|
|
|
73,284
|
|
|
|
2026
|
|
Year ended May 31, 2007
|
|
|
2,151,837
|
|
|
|
2027
|
|
Year ended May 31, 2011
|
|
|
746,484
|
|
|
|
2031
|
|
Year ended May 31, 2015
|
|
|
321,625
|
|
|
|
2035
|
|
Year Ended May 31, 2016
|
|
|
1,060,747
|
|
|
|
2036
|
|
Note
8.
STOCKHOLDERS’ EQUITY
Convertible
Preferred Stock
In
September 2003, Greystone issued 50,000 shares of Series 2003, cumulative, convertible preferred stock, par value $0.0001, for
a total purchase price of $5,000,000. Each share of the preferred stock has a stated value of $100 and a dividend rate equal to
the prime rate of interest plus 3.25% and may be converted into common stock at the conversion rate of $1.50 per share or an aggregate
of 3,333,333 shares of common stock. The holder of the preferred stock has been granted certain voting rights so that such holder
has the right to elect a majority of the Board of Directors of Greystone. Preferred stock dividends must be fully paid before
a dividend on the common stock may be paid.
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 IBC. The warrants are vested and expire January
10, 2027. The issuance was capitalized as debt issuance 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 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
9.
STOCK OPTIONS
Greystone
has a stock option plan that provides for the granting of options to key employees and non-employee directors. The options are
to purchase common stock at not less than fair market value at the date of the grant. Stock options generally expire in ten years
from the date of grant or upon termination of employment, and are generally exercisable one year from date of grant in cumulative
annual installments of 25%. Following is a summary of option activity for the two years ended May 31, 2017:
|
|
Number
|
|
|
Weighted Average Exercise Price
|
|
|
Remaining
Contractual
Life (years)
|
|
|
Intrinsic Value
|
|
Total outstanding, May 31, 2015
|
|
|
1,150,000
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Exercised during fiscal year 2016
|
|
|
(475,000
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Total outstanding May 31, 2016
|
|
|
675,000
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Exercised during fiscal year 2016
|
|
|
(475,000
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Total outstanding May 31, 2017
|
|
|
200,000
|
|
|
$
|
0.12
|
|
|
|
5.0
|
|
|
|
|
|
Exercisable as of May 31, 2017
|
|
|
200,000
|
|
|
$
|
0.12
|
|
|
|
5.0
|
|
|
$
|
36,000
|
|
Non-vested as of May 31, 2017
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation cost was $-0- and $53,424 for fiscal years 2017 and 2016, respectively.
Note
10.
FINANCIAL INSTRUMENTS
The
following methods and assumptions are used in estimating the fair-value disclosures for financial instruments:
Cash,
Accounts Receivable and Accounts Payable: The carrying amounts reported in the balance sheet for cash, accounts receivable and
accounts payable approximate fair value due to the short-term maturity of these instruments.
Long-Term
Debt: The carrying amount of loans with floating rates of interest approximate fair value. Fixed rate loans are valued based on
cash flows using estimated rates for comparable loans. As of May 31, 2017 and 2016, the carrying amounts reported in the balance
sheet approximate fair value for the variable and fixed rate loans.
Note
11.
SUPPLEMENTAL INFORMATION OF CASH FLOWS
Supplemental
information of cash flows for the years ended May 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition of equipment through capital lease
|
|
$
|
5,323,864
|
|
|
$
|
-
|
|
Acquisition of buildings through note payable
|
|
$
|
318,750
|
|
|
$
|
-
|
|
Acquisition of equipment from related party in
exchange for receivable and/or note payable
|
|
$
|
1,469,713
|
|
|
$
|
1,137,865
|
|
Acquisition of equipment in accounts payable
|
|
$
|
102,019
|
|
|
$
|
113,047
|
|
Conversion of related party accrued interest to
long-term debt
|
|
$
|
2,475,690
|
|
|
$
|
-
|
|
Warrants issued as debt service costs
|
|
$
|
120,000
|
|
|
$
|
-
|
|
Preferred dividend accrual
|
|
$
|
29,726
|
|
|
$
|
5,690
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,183,781
|
|
|
$
|
542,442
|
|
Note
12.
CONCENTRATIONS
For
the fiscal years 2017 and 2016, Greystone had two customers that accounted for approximately 71% and 56% of total sales, respectively.
Greystone
purchases damaged pallets from its customers at a price based on the value of the raw material content of the pallet. A majority
of these purchases are from one of Greystone’s major customers which were approximately $1,611,000 and $1,605,000 in fiscal
years 2017 and 2016, respectively.
Note
13.
VARIABLE INTEREST ENTITIES (VIE)
Greystone
Real Estate, L.L.C.
GRE,
is owned by Warren Kruger, President and CEO, and Robert Rosene, a member of the Board of Directors. GRE was created solely to
own and lease buildings that GSM occupies in Bettendorf, Iowa.
The
buildings, having a carrying value of $3,128,293 and $3,244,165 at May 31, 2017 and 2016, respectively, serve as collateral for
GRE’s debt. The debt had a carrying value of $2,841,285 and $3,021,734 at May 31, 2017 and 2016, respectively.
Note
14.
COMMITMENTS
At
May 31, 2017, Greystone had outstanding commitments totaling $1,913,900 for the acquisition of equipment.
Greystone
leases production equipment under non-cancelable capital leases with a gross carrying amount of $5,323,864 at May 31, 2017. The
lease agreement includes a bargain purchase option to acquire the production equipment at the end of the lease term. Monthly lease
payments, estimated at approximately $200,000 per month, 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. Amortization of the carrying amount of approximately
$380,000 was included in depreciation expense for the year ended May 31, 2017.
Future
minimum lease payments under non-cancelable leases as of May 31, 2017, are approximately:
Fiscal year ended May 31, 2018
|
|
$
|
2,400,000
|
|
Fiscal year ended May 31, 2019
|
|
|
1,560,936
|
|
Total lease payments
|
|
|
3,960,936
|
|
Imputed interest
|
|
|
(166,893
|
)
|
Present value of lease payments
|
|
$
|
3,794,063
|
|
Note
15.
SUBSEQUENT EVENT
On
August 4, 2017, Greystone and IBC entered into the Fourth Amendment to the IBC Loan Agreement dated January 31, 2014 (the “Fourth
Amendment”) whereby IBC made an additional term loan to Borrowers in the original principal amount of $1,795,000 (“Term
Loan C”). Term Loan C has an interest rate of the prime rate of interest plus 0.5% but not less than 4% and a maturity date
of August 4, 2020. The monthly principal and interest payments are based on an amortization of the principal over 84 months. The
proceeds from Term Loan C were used to acquire new production equipment.