Note
6. Debt
Debt
as of August 31, 2017 and May 31, 2017 is as follows:
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|
August
31, 2017
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|
|
May
31, 2017
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|
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
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|
$
|
4,457,243
|
|
|
$
|
4,626,191
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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1,466,522
|
|
|
|
1,715,132
|
|
|
|
|
|
|
|
|
|
|
Term
note C payable to International Bank of
Commerce,
prime rate of interest plus 0.5% but
not less than 4.0%, maturing August 4, 2020
|
|
|
1,776,190
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|
|
|
-
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|
|
|
|
|
|
|
|
|
|
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
|
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2,260,000
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|
|
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2,260,000
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|
|
|
|
|
|
|
|
|
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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
|
|
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2,795,134
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|
|
|
2,841,285
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|
|
|
|
|
|
|
|
|
|
Note
payable to First Bank, prime rate of interest plus 1.45% but not less than 4.95%, monthly principal and interest payment of
$30,628, due August 21, 2021, secured by production equipment
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|
|
1,322,628
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|
|
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1,396,448
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|
|
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|
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Note
payable to Robert Rosene, 7.5% interest, due January 15, 2019
|
|
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4,469,355
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|
|
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4,469,355
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|
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|
|
|
|
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Note
payable to Yorktown Management & Financial Services, LLC, 5.0% interest, due February 28, 2019, monthly principal and
interest payments of $20,629
|
|
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357,021
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|
|
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413,969
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|
|
|
|
|
|
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Other
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284,157
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|
|
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310,036
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Total
debt
|
|
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19,188,250
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|
|
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18,032,416
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Debt
issue costs, net of amortization
|
|
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(198,483
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)
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|
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(228,426
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)
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|
|
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18,989,767
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|
|
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17,803,990
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Less:
Current portion
|
|
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(2,710,820
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)
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|
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(2,493,236
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)
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Long-term
debt
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$
|
16,278,947
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|
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$
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15,310,754
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The
prime rate of interest as of August 31, 2017 was 4.25%.
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 provided 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”). Effective August 4, 2017, the Borrowers and IBC entered into the Fourth
Amendment to the IBC Loan Agreement whereby IBC made an additional loan (“Term Loan C”) to Borrowers in the amount
of $1,795,000. The proceeds from the Term Note C were used to purchase production equipment.
The
Term Loans A, B and C bear interest at the New York Prime Rate plus 0.5% but not less than 4.0%. Term Loans A and B mature January
7, 2019; Term Loan C matures August 4, 2020. 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), (ii) the Term Loan B over the three-year life of the loan (currently $89,424 per month)
and (iii) the Term Loan C over a seven-year period beginning August 31, 2017 (currently $25,205 per month).
The
Revolving Loan bears interest at the New York Prime Rate plus 0.5% but not less than 4.0% and matures January 31, 2019. The Borrowers
are required to pay all interest accrued on the outstanding principal balance of the Revolving Loan on a monthly basis. Any principal
on the Revolving Loan that is prepaid by the Borrowers does not reduce the original amount available to the Borrowers.
The
IBC Loan Agreement includes customary representations and warranties and affirmative and negative covenants which include (i)
requiring the Borrowers to maintain a debt service coverage ratio of 1:25 to 1:00 and a funded debt to EBIDA ratio not exceeding
3:00 to 1:00, (ii) subject to certain exceptions, limiting the Borrowers’ combined capital expenditures on fixed assets
to $1,000,000 per year, (iii) prohibiting Greystone, without IBC’s prior written consent, from declaring or paying any dividends,
redemptions of stock or membership interests, distributions and withdrawals (as applicable) in respect of its capital stock or
any other equity interest, other than additional payments to holders of its preferred stock in an amount not to exceed $500,000
in any fiscal year, (iv) subject to certain exceptions, prohibiting the incurrence of additional indebtedness by the Borrowers,
and (v) requiring the Borrowers to prevent (A) any change in capital ownership such that there is a material change in the direct
or indirect ownership of (1) Greystone’s outstanding preferred stock, and (2) any equity interest in GSM, or (B) Warren
Kruger from ceasing to be actively involved in the management of Greystone as President and/or Chief Executive Officer. The foregoing
list of covenants is not exhaustive and there are several other covenants contained in the IBC Loan Agreement.
Greystone’s
debt service coverage ratio at August 31, 2017 was 1.06 which is not in compliance with the IBC Loan Agreement’s minimum
debt service coverage ratio of 1.25. The Third Amendment, dated December 12, 2016, to the IBC Loan Agreement waived this requirement
to maintain the minimum debt service ratio until February 28, 2018.
The
IBC Loan Agreement includes customary events of default, including events of default relating to non-payment of principal and
other amounts owing under the IBC Loan Agreement from time to time, inaccuracy of representations, violation of covenants, defaults
under other agreements, bankruptcy and similar events, the death of a guarantor, certain material adverse changes relating to
a Borrower or guarantor, certain judgments or awards against a Borrower, or government action affecting a Borrower’s or
guarantor’s ability to perform under the IBC Loan Agreement or the related loan documents. Among other things, a default
under the IBC Loan Agreement would permit IBC to cease lending funds under the IBC Loan Agreement, and require immediate repayment
of any outstanding loans with interest and any unpaid accrued fees.
The
IBC Loan Agreement is secured by a lien on substantially all of the assets of the Borrowers. In addition, the IBC Loan Agreement
is secured by a mortgage granted by GRE on the real property owned by GRE in Bettendorf, Iowa (the “Mortgage”). GRE
is owned by Warren F. Kruger, Greystone’s President and CEO, and Robert B. Rosene, Jr., a director of Greystone. Messrs.
Kruger and Rosene have provided a combined limited guaranty of the Borrowers’ obligations under the IBC Loan Agreement,
with such guaranty being limited to a combined amount of $6,500,000 (the “Guaranty”). The Mortgage and the Guaranty
also secure or guaranty, as applicable, the obligations of GRE under the Loan Agreement between GRE and IBC dated January 31,
2014, as discussed in the following paragraph.
Loan
Agreement between GRE and IBC
On
January 31, 2014, GRE and IBC entered into a Loan Agreement which provided for a mortgage loan to GRE of $3,412,500. The loan
provides for a 4.5% interest rate and a maturity of January 31, 2019 and is secured by a mortgage on the two buildings in Bettendorf,
Iowa which are leased to Greystone.
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. Payments were not made on the interest accruing under
the note from commencement through May 31, 2016. Effective June 1, 2016, the note was restated (the “Restated Note”)
to combine the outstanding principal, $2,066,000, and accrued interest, $2,475,690, into a note payable of $4,541,690.
Note
Payable between Greystone and Yorktown Management Financial Services, LLC (“Yorktown”)
On
February 29, 2016, Greystone entered into an unsecured note payable to Yorktown in the amount of $688,296 in connection with the
acquisition of equipment from Yorktown. The note payable bears interest at the rate of 5% and is payable over three years with
monthly principal and interest payments of $20,629.
Maturities
Maturities
of Greystone’s long-term debt for the five years subsequent to August 31, 2017 are $2,710,820, $14,245,980, $1,686,601,
$401,647 and $143,202.
Note
7. Capital Lease
Capital
lease as of August 31, 2017 and May 31, 2017:
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August
31, 2017
|
|
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May
31, 2017
|
|
Non-cancellable
capital lease with private company, interest rate of 5%, due August 7, 2019
|
|
$
|
3,247,595
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|
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$
|
3,794,063
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|
Less:
Current portion
|
|
|
(2,245,129
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)
|
|
|
(2,261,560
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)
|
Non-cancellable
capital lease, net of current portion
|
|
$
|
1,002,466
|
|
|
$
|
1,532,503
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|
In
August, 2016, Greystone entered into a three-year lease agreement with a private company to provide for certain production equipment
with a total cost of approximately $5.4 million. The lease agreement includes a bargain purchase option to acquire the production
equipment at the end of the lease term. 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 private
company. The lease bears an interest rate of 5%, has a three-year maturity and provides for minimum monthly lease rental payment
based upon the total pallets sold in excess of a specified amount not to exceed the monthly productive capacity of the leased
machines.
The
production equipment under non-cancelable capital leases has a gross carrying amount of $5,323,864 at August 31, 2017. Amortization
of the carrying amount of approximately $134,000 was included in depreciation expense for the three months ended August 31, 2017.
Future
minimum lease payments under non-cancelable leases as of August 31, 2017, are approximately:
Twelve
months ended August 31, 2018
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$
|
2,357,500
|
|
Twelve
months ended August 31, 2019
|
|
|
1,015,157
|
|
Total
lease payments
|
|
|
3,372,657
|
|
Imputed
interest
|
|
|
125,062
|
|
Present
value of lease payments
|
|
$
|
3,247,595
|
|
Note
8. Fair Value of 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 August 31, 2017 and May 31, 2017, the carrying amounts reported in
the balance sheet approximate fair value for the variable and fixed rate loans.
Note
9. Recent Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “
Revenue from Contracts with Customers
” (“ASU 2014-09”) which creates a comprehensive
set of guidelines for the recognition of revenue under the principle: “Recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services.” The requirements of ASU 2014-09 will require either retrospective application to each prior
period presented or retrospective application with the cumulative effect of initially applying the standard recognized at the
date of adoption. Greystone is currently evaluating the impact this ASU will have on our financial position and results of operations.
On July 9, 2015, FASB voted to approve a one-year deferral of the effective date such that the effective date for Greystone’s
interim and annual periods begins June 1, 2018.
In
February 2016, the FASB issued Accounting Standards 2016-02,
Leases (Topic 842)
, which is intended to improve financial
reporting about leasing transactions. The ASU will require organizations (“lessees”) that lease assets with lease
terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created
by those leases. Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from
current GAAP. In addition, the ASU will require disclosures to help investors and other financial statement users better understand
the amount, timing and uncertainty of cash flows arising from leases. The effective date of this ASU is for fiscal years beginning
after December 31, 2018 and interim periods within that year. Greystone is currently reviewing the ASU to assess the potential
impact on the consolidated financial statements.
Note
10. Concentrations, Risks and Uncertainties
Greystone
derived 73% and 66% of its sales in fiscal years 2018 and 2017, respectively, from two customers. The loss of a material amount
of business from these customers could have a material adverse effect on Greystone.
Greystone
purchases damaged pallets from its customers at a price based on the value of the raw material content in the pallet. A majority
of these purchases, totaling $493,104 and $478,752 in fiscal years 2018 and 2017, respectively, is from one of its major customers.
Robert
B. Rosene, Jr., a Greystone director, has provided financing and guarantees on Greystone’s bank debt. As of August 31, 2017,
Greystone is indebted to Mr. Rosene in the amount of $4,469,355 pursuant to a note payable due January 15, 2019. There is no assurance
that Mr. Rosene will continue to provide extensions in the future.
Note
11
. Commitments
At
August 31, 2017, Greystone had commitments totaling $359,000 for the purchase of production equipment.
References
to fiscal year 2018 refer to the three month period ended August 31, 2017. References to fiscal year 2017 refer to the three month
period ended August 31, 2016.