Item
1. Financial Statements
Greystone
Logistics, Inc. and Subsidiaries
Consolidated
Balance Sheets
(Unaudited)
|
|
November 30, 2017
|
|
|
May 31, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
528,450
|
|
|
$
|
579,021
|
|
Accounts receivable -
|
|
|
|
|
|
|
|
|
Trade, net of allowance for doubtful accounts of $31,660 at November 30, 2017 and May 31,
2017
|
|
|
1,940,167
|
|
|
|
6,160,145
|
|
Related party receivables
|
|
|
73,027
|
|
|
|
73,578
|
|
Inventory
|
|
|
3,039,936
|
|
|
|
1,587,552
|
|
Prepaid expenses
|
|
|
113,158
|
|
|
|
136,395
|
|
Total Current Assets
|
|
|
5,694,738
|
|
|
|
8,536,691
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
21,053,357
|
|
|
|
19,706,782
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Asset
|
|
|
38,915
|
|
|
|
281,415
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
26,787,010
|
|
|
$
|
28,524,888
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
2,794,286
|
|
|
$
|
2,493,236
|
|
Current portion of capital lease
|
|
|
2,194,217
|
|
|
|
2,261,560
|
|
Accounts payable and accrued expenses
|
|
|
3,921,631
|
|
|
|
5,727,903
|
|
Accrued expenses - related parties
|
|
|
-
|
|
|
|
29,076
|
|
Preferred dividends payable
|
|
|
30,822
|
|
|
|
29,726
|
|
Total Current Liabilities
|
|
|
8,940,956
|
|
|
|
10,541,501
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt, net of current portion
|
|
|
15,803,513
|
|
|
|
15,310,754
|
|
|
|
|
|
|
|
|
|
|
Capital Lease, net of current portion
|
|
|
518,072
|
|
|
|
1,532,503
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, cumulative, 20,750,000 shares authorized, 50,000 shares
issued and outstanding, liquidation preference of $5,000,000
|
|
|
5
|
|
|
|
5
|
|
Common stock, $0.0001 par value, 5,000,000,000 shares authorized, 28,361,201 shares issued and
outstanding
|
|
|
2,836
|
|
|
|
2,836
|
|
Additional paid-in capital
|
|
|
53,790,764
|
|
|
|
53,790,764
|
|
Accumulated deficit
|
|
|
(53,361,620
|
)
|
|
|
(53,724,991
|
)
|
Total Greystone Stockholders’ Equity
|
|
|
431,985
|
|
|
|
68,614
|
|
Non-controlling interest
|
|
|
1,092,484
|
|
|
|
1,071,516
|
|
Total Equity
|
|
|
1,524,469
|
|
|
|
1,140,130
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
26,787,010
|
|
|
$
|
28,524,888
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Greystone
Logistics, Inc. and Subsidiaries
Consolidated
Statements of Operations
(Unaudited)
|
|
For the Six Months Ended
November 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
20,009,177
|
|
|
$
|
17,065,972
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
16,976,241
|
|
|
|
14,868,884
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,032,936
|
|
|
|
2,197,088
|
|
|
|
|
|
|
|
|
|
|
General, Selling and Administrative Expenses
|
|
|
1,452,416
|
|
|
|
1,387,304
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
1,580,520
|
|
|
|
809,784
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Other income
|
|
|
12,069
|
|
|
|
-
|
|
Interest expense
|
|
|
(658,736
|
)
|
|
|
(542,800
|
)
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
933,853
|
|
|
|
266,984
|
|
Provision for Income Taxes
|
|
|
259,500
|
|
|
|
54,550
|
|
Net Income
|
|
|
674,353
|
|
|
|
212,434
|
|
|
|
|
|
|
|
|
|
|
Income Attributable to Variable Interest Entity
|
|
|
(122,968
|
)
|
|
|
(119,552
|
)
|
|
|
|
|
|
|
|
|
|
Preferred Dividends
|
|
|
(188,014
|
)
|
|
|
(169,212
|
)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable to Common Stockholders
|
|
$
|
363,371
|
|
|
$
|
(76,330
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) Per Share of Common Stock -
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares of Common Stock Outstanding -
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,361,201
|
|
|
|
28,283,332
|
|
Diluted
|
|
|
28,988,701
|
|
|
|
28,283,332
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Greystone
Logistics, Inc. and Subsidiaries
Consolidated
Statements of Operations
(Unaudited)
|
|
For the Three Months Ended
November 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
9,722,102
|
|
|
$
|
9,221,711
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
8,588,065
|
|
|
|
7,992,441
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,134,037
|
|
|
|
1,229,270
|
|
|
|
|
|
|
|
|
|
|
General, Selling and Administrative Expenses
|
|
|
621,013
|
|
|
|
664,275
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
513,024
|
|
|
|
564,995
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Other income
|
|
|
3,806
|
|
|
|
-
|
|
Interest expense
|
|
|
(334,059
|
)
|
|
|
(306,169
|
)
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
182,771
|
|
|
|
258,826
|
|
Provision for Income Taxes
|
|
|
38,700
|
|
|
|
73,400
|
|
Net Income
|
|
|
144,071
|
|
|
|
185,426
|
|
|
|
|
|
|
|
|
|
|
Income Attributable to Variable Interest Entity
|
|
|
(61,915
|
)
|
|
|
(60,173
|
)
|
|
|
|
|
|
|
|
|
|
Preferred Dividends
|
|
|
(93,493
|
)
|
|
|
(84,144
|
)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable to Common Stockholders
|
|
$
|
(11,337
|
)
|
|
$
|
41,109
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Per Share of Common Stock -
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares of Common Stock Outstanding -
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,361,201
|
|
|
|
28,361,201
|
|
Diluted
|
|
|
28,361,201
|
|
|
|
28,940,368
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Greystone
Logistics, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
For the Six Months Ended
November 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
674,353
|
|
|
$
|
212,434
|
|
Adjustments to reconcile net income to net cash provided by operating activities -
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,612,143
|
|
|
|
1,222,574
|
|
Decrease in deferred tax asset
|
|
|
242,500
|
|
|
|
54,550
|
|
Decrease in trade accounts receivable
|
|
|
4,219,978
|
|
|
|
2,486,129
|
|
(Increase) Decrease in related party receivables
|
|
|
551
|
|
|
|
(22,142
|
)
|
(Increase) Decrease in inventory
|
|
|
(1,452,384
|
)
|
|
|
8,953
|
|
(Increase) Decrease in prepaid expenses
|
|
|
23,237
|
|
|
|
(157,932
|
)
|
Increase (Decrease) in accounts payable and accrued expenses
|
|
|
(1,733,329
|
)
|
|
|
239,547
|
|
Net cash provided by operating activities
|
|
|
3,587,049
|
|
|
|
4,044,113
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,996,530
|
)
|
|
|
(2,095,073
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
1,795,000
|
|
|
|
-
|
|
Payments on long-term debt and capitalized lease
|
|
|
(2,387,172
|
)
|
|
|
(1,619,936
|
)
|
Proceeds from revolving loan
|
|
|
240,000
|
|
|
|
-
|
|
Payments on revolving loan
|
|
|
-
|
|
|
|
(275,000
|
)
|
Debt issue costs
|
|
|
-
|
|
|
|
(64,000
|
)
|
Proceeds from exercised stock options
|
|
|
-
|
|
|
|
57,000
|
|
Dividends paid on preferred stock
|
|
|
(186,918
|
)
|
|
|
(172,813
|
)
|
Distributions paid by variable interest entity
|
|
|
(102,000
|
)
|
|
|
(102,000
|
)
|
Net cash used in financing activities
|
|
|
(641,090
|
)
|
|
|
(2,176,749
|
)
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash
|
|
|
(50,571
|
)
|
|
|
(227,709
|
)
|
Cash, beginning of period
|
|
|
579,021
|
|
|
|
897,377
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
528,450
|
|
|
$
|
669,668
|
|
|
|
|
|
|
|
|
|
|
Non-cash Activities:
|
|
|
|
|
|
|
|
|
Acquisition of equipment by capital lease
|
|
$
|
-
|
|
|
$
|
5,450,474
|
|
Conversion of related party accrued interest to long-term debt
|
|
$
|
-
|
|
|
$
|
2,475,690
|
|
Warrants to purchase common stock issued
|
|
$
|
-
|
|
|
$
|
120,000
|
|
Preferred dividend accrual
|
|
$
|
30,822
|
|
|
$
|
56,404
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
658,736
|
|
|
$
|
527,800
|
|
Taxes paid
|
|
$
|
10,000
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
GREYSTONE
LOGISTICS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note
1. Basis of Financial Statements
In
the opinion of Greystone Logistics, Inc. (“Greystone”), the accompanying unaudited consolidated financial statements
contain all adjustments and reclassifications, which are of a normal recurring nature, necessary to present fairly its financial
position as of November 30, 2017, the results of its operations for the six-month and three-month periods ended November 30, 2017
and 2016, and its cash flows for the six-month periods ended November 30, 2017 and 2016. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements as of and for the fiscal year ended May 31, 2017
and the notes thereto included in Greystone’s Form 10-K for such period. The results of operations for the six-month and
three-month periods ended November 30, 2017 and 2016 are not necessarily indicative of the results to be expected for the full
fiscal year.
The
consolidated financial statements of Greystone include its wholly-owned subsidiaries, Greystone Manufacturing, L.L.C. (“GSM”)
and Plastic Pallet Production, Inc. (“PPP”), and the variable interest entity, Greystone Real Estate, L.L.C. (“GRE”).
GRE owns two buildings located in Bettendorf, Iowa which are leased to GSM.
Note
2. Earnings Per Share
Basic
earnings per share is based on the weighted-average effect of all common shares issued and outstanding and is calculated by dividing
net income (loss) available to common stockholders by the weighted-average shares outstanding during the period. Diluted earnings
per share is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common
shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming exercise
or conversion of all potentially dilutive common shares outstanding.
Greystone
excludes equity instruments from the calculation of diluted earnings per share if the effect of including such instruments is
anti-dilutive, as follows:
|
|
2017
|
|
|
2016
|
|
Six-month
periods ended November 30:
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
-
|
|
|
|
200,000
|
|
Warrants
to purchase common stock
|
|
|
-
|
|
|
|
500,000
|
|
Preferred
stock convertible into common stock
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,333,333
|
|
|
|
4,033,333
|
|
|
|
|
|
|
|
|
|
|
Three-month
periods ended November 30:
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
200,000
|
|
|
|
-
|
|
Warrants
to purchase common stock
|
|
|
500,000
|
|
|
|
-
|
|
Preferred
stock convertible into common stock
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,033,333
|
|
|
|
3,333,333
|
|
The
following tables set forth the computation of basic and diluted earnings per share for the following periods:
|
|
2017
|
|
|
2016
|
|
Six-month
periods ended November 30:
|
|
|
|
|
|
|
|
|
Numerator
-
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
363,371
|
|
|
$
|
(76,330
|
)
|
Denominator
-
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding - basic
|
|
|
28,361,201
|
|
|
|
28,283,332
|
|
Incremental
shares from assumed conversion of options and warrants
|
|
|
627,500
|
|
|
|
-
|
|
Diluted
shares
|
|
|
28,988,701
|
|
|
|
28,283,332
|
|
Loss
per share -
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
Three-month
periods ended November 30:
|
|
|
|
|
|
|
|
|
Numerator
-
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
(11,337
|
)
|
|
$
|
41,109
|
|
Denominator
-
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding - basic
|
|
|
28,361,201
|
|
|
|
28,361,201
|
|
Incremental
shares from assumed conversion of options and warrants
|
|
|
-
|
|
|
|
579,167
|
|
Diluted
shares
|
|
|
28,361,201
|
|
|
|
28,940,368
|
|
Loss
per share -
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
Note
3. Inventory
Inventory
consists of the following:
|
|
November
30, 2017
|
|
|
May
31, 2017
|
|
Raw
materials
|
|
$
|
774,037
|
|
|
$
|
669,083
|
|
Finished
goods
|
|
|
2,265,899
|
|
|
|
918,469
|
|
Total
inventory
|
|
$
|
3,039,936
|
|
|
$
|
1,587,552
|
|
Note
4. Property, Plant and Equipment
A
summary of the property, plant and equipment for Greystone is as follows:
|
|
November 30, 2017
|
|
|
May 31, 2017
|
|
Production
machinery and equipment
|
|
$
|
30,314,497
|
|
|
$
|
27,493,614
|
|
Plant
buildings and land
|
|
|
5,296,784
|
|
|
|
5,296,784
|
|
Leasehold
improvements
|
|
|
337,339
|
|
|
|
263,710
|
|
Furniture
and fixtures
|
|
|
392,370
|
|
|
|
392,371
|
|
|
|
|
36,340,990
|
|
|
|
33,446,479
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(15,287,633
|
)
|
|
|
(13,739,697
|
)
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$
|
21,053,357
|
|
|
$
|
19,706,782
|
|
Production
machinery and equipment includes equipment capitalized pursuant to a capital lease in the amount of $5,323,864. The equipment
is being amortized using the straight-line method over 10 years.
Production
machinery includes deposits on equipment in the amount of $149,220 that had not been placed into service as of November 30, 2017.
Two plant buildings and land are owned by GRE, a VIE, having a net book value of $3,070,357 at November 30, 2017.
Depreciation
expense including amortization expense related to assets under capital lease for the six months ended November 30, 2017 and 2016
was approximately $1,547,936 and $1,187,544, respectively.
Note
5. Related Party Transactions/Activity
Yorktown
Management & Financial Services, LLC
Yorktown
Management & Financial Services, LLC (“Yorktown”), an entity wholly owned by Greystone’s CEO and President,
owns and rents to Greystone (1) grinding equipment used to grind raw materials for Greystone’s pallet production and (2)
extruders for pelletizing recycled plastic into pellets for resale and for use as raw material in the manufacture of pallets.
GSM pays weekly rental fees to Yorktown of $22,500 for use of Yorktown’s grinding equipment and $5,000 for the use of Yorktown’s
pelletizing equipment for which GSM paid Yorktown rental fees of $742,500 and $715,000 for the six months ended November 30, 2017
and 2016, respectively.
In
addition, Yorktown provides office space for Greystone in Tulsa, Oklahoma at a monthly rental of $4,000.
TriEnda
Holdings, L.L.C.
TriEnda
Holdings, L.L.C. (“TriEnda”) is a manufacturer of plastic pallets, protective packing and dunnage utilizing thermoform
processing for which Warren F. Kruger, Greystone’s president and CEO, serves TriEnda as the non-executive Chairman of the
Board and is a partner in a partnership which has a majority ownership interest. Greystone provided tolling services, blending
and pelletizing plastic resin, for TriEnda through March 2017. Revenue from TriEnda totaled $-0- and $368,690 for the six months
ended November 30, 2017 and 2016, respectively.
Greystone
periodically purchases material and pallets from TriEnda. Purchases for the six months ended November 30, 2017 and 2016 totaled
$45,467 and $24,265, respectively.
Green
Plastic Pallets
Greystone
sells plastic pallets to Green Plastic Pallets (“Green”), an entity that is owned by James Kruger, brother to Warren
Kruger, Greystone’s president and CEO. Greystone had sales to Green of $256,819 and $146,885 for the six months ended November
30, 2017 and 2016, respectively. The account receivable due from Green at November 30, 2017 was $73,027.
Note
6. Debt
Debt
as of November 30, 2017 and May 31, 2017 is as follows:
|
|
November
30, 2017
|
|
|
May
31, 2017
|
|
Term
loan A payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing
January 7, 2019
|
|
$
|
4,287,282
|
|
|
$
|
4,626,191
|
|
|
|
|
|
|
|
|
|
|
Term
loan B payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing
January 7, 2019
|
|
|
1,215,061
|
|
|
|
1,715,132
|
|
|
|
|
|
|
|
|
|
|
Term
loan C payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing
August 4, 2020
|
|
|
1,721,667
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Revolving
loan payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, due January
31, 2019
|
|
|
2,500,000
|
|
|
|
2,260,000
|
|
|
|
|
|
|
|
|
|
|
Note
payable to First Bank, prime rate of interest plus 1.45% but not less than 4.95%, monthly principal and interest payment of
$30,628, due August 21, 2021, secured by production equipment
|
|
|
1,248,240
|
|
|
|
1,396,448
|
|
|
|
|
|
|
|
|
|
|
Term
loan payable by GRE to International Bank of Commerce, interest rate of 4.5%, monthly principal and interest payment
of $26,215, due January 31, 2019
|
|
|
2,748,105
|
|
|
|
2,841,285
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Robert Rosene, 7.5% interest, due January 15, 2019
|
|
|
4,469,355
|
|
|
|
4,469,355
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Yorktown Management & Financial Services, LLC, 5% interest, due February 28, 2019, monthly principal and interest
payments of $20,629
|
|
|
299,358
|
|
|
|
413,969
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
272,950
|
|
|
|
310,036
|
|
Total
Debt
|
|
|
18,762,018
|
|
|
|
18,032,416
|
|
Debt
issue costs, net of amortization
|
|
|
(164,219
|
)
|
|
|
(228,426
|
)
|
Less:
Current portion
|
|
|
(2,794,286
|
)
|
|
|
(2,493,236
|
)
|
Long-term
debt
|
|
$
|
15,803,513
|
|
|
$
|
15,310,754
|
|
The
prime rate of interest as of November 30, 2017 was 4.25%. Effective December 14, 2017, the prime rate of interest increased to
4.50%.
Loan
Agreement between Greystone and IBC
On
January 31, 2014, Greystone and GSM (the “Borrowers”) and International Bank of Commerce (“IBC”) entered
into a Loan Agreement (the “IBC Loan Agreement”). The IBC Loan Agreement 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 (“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
(“Term Loan A”). The Term Loan’s remaining principal balance of $3,000,000 was deemed to be a separate term
loan (“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 the Borrowers in the amount of $1,795,000. The
proceeds from Term Loan 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) Term Loan A over a seven-year period beginning January 31,
2016 (currently $74,455 per month), (ii) Term Loan B over the three-year life of the note (currently $89,424 per month) and (iii)
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%. Effective December 12, 2016, the Revolving
Loan was amended and restated to extend the maturity of the 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
IBC Loan Agreement includes customary representations and warranties and affirmative and negative covenants which include (i)
requiring the Borrowers to maintain a debt service coverage ratio of 1:25 to 1:00 and a funded debt to EBIDA ratio not exceeding
3:00 to 1:00 measured quarterly, (ii) subject to certain exceptions, limiting the Borrowers’ combined capital expenditures
on fixed assets to $1,000,000 per year, (iii) prohibiting Greystone, without IBC’s prior written consent, from declaring
or paying any dividends, redemptions of stock or membership interests, distributions and withdrawals (as applicable) in respect
of its capital stock or any other equity interest, other than additional payments to holders of its preferred stock in an amount
not to exceed $500,000 in any fiscal year, (iv) subject to certain exceptions, prohibiting the incurrence of additional indebtedness
by the Borrowers, and (v) requiring the Borrowers to prevent (A) any change in capital ownership such that there is a material
change in the direct or indirect ownership of (1) Greystone’s outstanding preferred stock, and (2) any equity interest in
GSM, or (B) Warren Kruger from ceasing to be actively involved in the management of Greystone as President and/or Chief Executive
Officer. The foregoing list of covenants is not exhaustive and there are several other covenants contained in the IBC Loan Agreement.
Greystone’s
debt service coverage ratio as of November 30, 2017 was 1:27 to 1:00 which meets the minimum requirement as discussed above.
The
IBC Loan Agreement includes customary events of default, including events of default relating to non-payment of principal and
other amounts owing under the IBC Loan Agreement from time to time, inaccuracy of representations, violation of covenants, defaults
under other agreements, bankruptcy and similar events, the death of a guarantor, certain material adverse changes relating to
a Borrower or guarantor, certain judgments or awards against a Borrower, or government action affecting a Borrower’s or
guarantor’s ability to perform under the IBC Loan Agreement or the related loan documents. Among other things, a default
under the IBC Loan Agreement would permit IBC to cease lending funds under the IBC Loan Agreement, and require immediate repayment
of any outstanding notes with interest and any unpaid accrued fees.
The
IBC Loan Agreement is secured by a lien on substantially all of the assets of the Borrowers. In addition, the IBC Loan Agreement
is secured by a mortgage granted by GRE on the real property owned by GRE in Bettendorf, Iowa (the “Mortgage”). GRE
is owned by Warren F. Kruger, Greystone’s President and CEO, and Robert B. Rosene, Jr., a director of Greystone. Messrs.
Kruger and Rosene have provided a combined limited guaranty of the Borrowers’ obligations under the IBC Loan Agreement,
with such guaranty being limited to a combined amount of $6,500,000 (the “Guaranty”). The Mortgage and the Guaranty
also secure or guaranty, as applicable, the obligations of GRE under the Loan Agreement between GRE and IBC dated January 31,
2014 as discussed in the following paragraph.
Loan
Agreement between GRE and IBC
On
January 31, 2014, GRE and IBC entered into a Loan Agreement which provided for a mortgage note to GRE of $3,412,500. The note
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 an unsecured note payable at 7.5% interest. Effective June 1, 2016, the note was restated
(the “Restated Note”) to combine the outstanding principal, $2,066,000, and accrued interest, $2,475,690, into an
unsecured note payable of $4,541,690 with an extended maturity date of January 15, 2019. The Restated Note provides that accrued
interest is payable monthly and allows Greystone to use commercially reasonable efforts to pay such amounts as allowed by the
IBC Loan Agreement against the interest accrued prior to the restatement.
Note
Payable between Greystone and Yorktown Management Financial Services, LLC (“Yorktown”)
On
February 29, 2016, Greystone entered into an unsecured note payable to Yorktown in the amount of $688,296 in connection with the
acquisition of equipment from Yorktown. The note payable bears interest at the rate of 5% and is payable over three years with
monthly principal and interest payments of $20,629.
Maturities
Maturities
of Greystone’s long-term debt for the five years subsequent to November 30, 2017 are $2,794,286, $13,895,875, $1,638,153,
$433,704 and $-0-.
Note
7. Capital Lease
Capital
lease as of November 30, 2017 and May 31, 2017:
|
|
November
30, 2017
|
|
|
May
31, 2017
|
|
Non-cancellable
capital lease with private company, interest rate of 5%, due August 7, 2019
|
|
$
|
2,712,289
|
|
|
$
|
3,794,063
|
|
Less:
Current portion
|
|
|
(2,194,217
|
)
|
|
|
(2,261,560
|
)
|
Non-cancellable
capital lease, net of current portion
|
|
$
|
518,072
|
|
|
$
|
1,532,503
|
|
In
August, 2016, Greystone entered into a three-year lease agreement with an unrelated 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 the non-cancelable capital lease has a gross carrying amount of $5,323,864 at November 30, 2017. Amortization
of the carrying amount of approximately $266,000 and $111,000 was included in depreciation expense for the six months ended November
30, 2017 and 2016, respectively.
Future
minimum lease payments under the non-cancelable capital lease as of November 30, 2017, are approximately:
Twelve
months ended November 30, 2018
|
|
$
|
2,280,000
|
|
Twelve
months ended November 30, 2019
|
|
|
521,607
|
|
Total
lease payments
|
|
|
2,801,607
|
|
Imputed
interest
|
|
|
89,318
|
|
Present
value of minimum lease payments
|
|
$
|
2,712,289
|
|
Note
8. Fair Value of Financial Instruments
The
following methods and assumptions are used in estimating the fair-value disclosures for financial instruments:
Debt:
The carrying amount of notes with floating rates of interest approximate fair value. Fixed rate notes are valued based on cash
flows using estimated rates of comparable notes. The carrying amounts reported in the balance sheet approximate fair value.
Note
9. Concentrations, Risks and Uncertainties
Greystone
derived approximately 73% and 67% of its total sales from two customers in fiscal years 2018 and 2017, respectively. The loss
of a material amount of business from one or both of these customers could have a material adverse effect on Greystone.
Greystone
purchases damaged pallets from its customers at a price based on the value of the raw material content in the pallet. A majority
of these purchases, totaling $890,562 and $864,874 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 November 30,
2017, Greystone is indebted to Mr. Rosene in the amount of $4,469,355 for a note payable due January 15, 2019. There is no assurance
that Mr. Rosene will renew the note as of the maturity date.
Note
10. Recent Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “
Revenue from Contracts with Customers
” (“ASU 14-09”) which creates a comprehensive
set of guidelines for the recognition of revenue under the principle: “Recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services.” The requirements of ASU 14-09 are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017 and will require either retrospective application to each prior period presented or retrospective
application with the cumulative effect of initially applying the standard recognized at the date of adoption. Greystone is currently
evaluating the impact this ASU will have on our financial position and results of operations.
In
February 2016, the FASB issued Accounting Standards 2016-02,
Leases (Topic 842)
, which is intended to improve financial
reporting about leasing transactions. The ASU will require organizations (“lessees”) that lease assets with lease
terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created
by those leases. 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
11. Income Taxes
On
December 22, 2017, the President signed into legislation The Tax Cuts and Jobs Act (the Act). The Act changes existing U.S. tax
law and includes numerous provisions that will affect our business, including our income tax accounting, disclosure and tax compliance.
We believe the most impactful changes within the Act are those that will reduce the U.S. corporate tax rates, business-related
exclusions and deductions and credits. ASC 740, “Income Taxes” (Topic 740), requires the effects of changes in tax
rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, as of
the date of enactment, and during the three months ended February 28, 2018, Greystone will value all deferred tax assets and liabilities
at the newly enacted Corporate U.S. income tax rate. Greystone is currently evaluating the impact of the Act, which will include
revaluing the deferred tax assets and liabilities and will disclose the estimated impact upon recognition in the third quarter
of fiscal 2018.
Note
12. Subsequent Event
On
January 10, 2018, Greystone and International Bank of Commerce (“IBC”) entered into the Fifth Amendment to the IBC
Loan Agreement dated January 31, 2014 (the “Fifth Amendment”) whereby (i) the existing Revolver Note with a current
balance of $2,500,000 was converted into a term loan (Term Loan D) with principal and interest amortized over four years and a
maturity date of January 10, 2022, (ii) an additional term loan from IBC to Borrowers in the original principal amount of $1,000,000
(Term Loan E) to provide funding for procurement of production equipment with interest only for one year and amortization of principal
and interest over four years beginning at the end of the first year and a maturity date of January 10, 2022, and (iii) a new $3,000,000
revolving loan to provide working capital with the same lending conditions as the existing Revolver Note and a maturity date of
January 10, 2020. The three new notes will bear interest at the greater of the prime rate of interest plus 0.5% or 4.75%.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results
of Operations
General
to All Periods
The
unaudited consolidated statements include Greystone Logistics, Inc., and its two wholly-owned subsidiaries, Greystone Manufacturing,
L.L.C. (“GSM”) and Plastic Pallet Production, Inc. (“PPP”). Greystone also consolidates its variable interest
entity, Greystone Real Estate, L.L.C. (“GRE”). All material intercompany accounts and transactions have been eliminated.
References
to fiscal year 2018 refer to the six and three month periods ended November 30, 2017. References to fiscal year 2017 refer to
the six and three month periods ended November 30, 2016.
Sales
Greystone’s
primary focus is to provide quality plastic pallets to its existing customers while continuing its marketing efforts to broaden
its customer base. Greystone’s existing customers are primarily located in the United States and engaged in the beverage,
pharmaceutical and other industries. Greystone has generated, and plans to continue to generate, interest in its pallets by attending
trade shows sponsored by industry segments that would benefit from Greystone’s products. Greystone hopes to gain wider product
acceptance by marketing the concept that the widespread use of plastic pallets could greatly reduce the destruction of trees on
a worldwide basis. Greystone’s marketing is conducted through contract distributors, its President and other employees.
Personnel
Greystone
had approximately 167 and 200 full-time employees as of November 30, 2017 and 2016, respectively.
Six-Month
Period Ended November 30, 2017 Compared to Six-Month Period Ended November 30, 2016
Sales
Sales
for fiscal year 2018 were $20,009,177 compared to $17,065,972 in fiscal year 2017 for an increase of $2,943,205. The increase
in pallet sales in fiscal year 2018 over 2017 was primarily due to sales growth to a pallet leasing company, one of Greystone’s
major customers.
Greystone
has two major customers who accounted for approximately 73% and 67% of sales in fiscal years 2018 and 2017, respectively. Pallet
sales to Greystone’s major customers are generally based on the customers’ need which may vary by period. Greystone
is not able to predict the future needs of these major customers and will continue its efforts to grow sales through the addition
of new customers developed through Greystone’s marketing efforts.
Cost
of Sales
Cost
of sales in fiscal year 2018 was $16,976,241, or 85% of sales, compared to $14,868,884, or 87% of sales, in fiscal year 2017.
The decrease in cost of sales as a percentage of sales in fiscal year 2018 compared to fiscal year 2017 was principally due to
setup costs incurred in fiscal year 2017 to fulfill the production requirements for the pallet leasing company.
General,
Selling and Administrative Expenses
General,
selling and administrative expenses were $1,452,416 in fiscal year 2018 compared to $1,387,304 in fiscal year 2017 for an increase
of $65,112, or approximately 5%. The increase in fiscal year 2018 over fiscal year 2017 was attributable to general business growth.
Other
Income (Expenses)
Other
income was $12,069 and $-0- in fiscal years 2018 and 2017, respectively. The source of other income is the sale of scrap material.
Interest
expense was $658,736 and $542,800 in fiscal years 2018 and 2017 for an increase of $115,936. The increase in interest expense
in fiscal year 2018 over fiscal year 2017 is principally due to an increase in debt, a 0.75% increase in the prime rate of interest
and an increase in amortization expense associated with debt service costs.
Provision
for Income Taxes
The
provision for income taxes was $259,500 and $54,550 in fiscal years 2018 and 2017, respectively. The provision for income taxes
does not include the income from the variable interest entity as the entity is not included in the income tax returns of Greystone
and the taxable income of the entity is passed-through to the respective owners.
Based
upon a review of its income tax filing positions, Greystone believes that its positions would be sustained upon an audit by the
Internal Revenue Service and does not anticipate any adjustments that would result in a material change to its financial position.
Therefore, no reserves for uncertain income tax positions have been recorded.
Net
Income
Greystone
recorded net income of $674,353 in fiscal year 2018 compared to $212,434 in fiscal year 2017 primarily for the reasons discussed
above.
Net
Income (Loss) Attributable to Common Stockholders
Net
income attributable to common stockholders for fiscal year 2018 was $363,371, or $0.01 per share, compared to a net loss attributable
to common stockholders $(76,330), or $(0.00) per share, in fiscal year 2017 primarily for the reasons discussed above.
Three-Month
Period Ended November 30, 2017 Compared to Three-Month Period Ended November 30, 2016
Sales
Sales
for fiscal year 2018 were $9,722,102 compared to $9,221,711 in fiscal year 2017 for an increase of $500,391. The increase in pallet
sales in fiscal year 2018 over 2017 was primarily due to sales growth to a pallet leasing company, one of Greystone’s major
customers.
Greystone
has two major customers who accounted for approximately 73% and 70% of sales in fiscal years 2018 and 2017, respectively. Pallet
sales to Greystone’s major customers are generally based on the customers’ need which may vary by period. Greystone
is not able to predict the future needs of these major customers and will continue its efforts to grow sales through the addition
of new customers developed through Greystone’s marketing efforts.
Cost
of Sales
Cost
of sales in fiscal year 2018 was $8,588,065, or 88% of sales, compared to $7,992,441, or 87% of sales, in fiscal year 2017. Cost
of sales in fiscal year 2018 were adversely affected because of (a) two injection molding machines that were out-of-service during
the month of November 2017 for maintenance and (b) setup costs incurred to place an additional injection molding machine into
service in November 2017.
General,
Selling and Administrative Expenses
General,
selling and administrative expenses were $621,013 in fiscal year 2018 compared to $664,275 in fiscal year 2017 for a decrease
of $43,262 or 7%. The decrease in fiscal year 2018 over fiscal year 2017 is primarily attributable to timing of expenses for the
respective periods.
Other
Income (Expenses)
Other
income was $3,806 and $-0- in fiscal years 2018 and 2017, respectively. The source of other income is the sale of scrap material.
Interest
expense was $334,059 in fiscal year 2018 compared to $306,169 in fiscal year 2017 for an increase of $27,890. The increase is
principally attributable to increases in debt and an increase in the prime rate of interest by 0.75% at November 30, 2017 compared
to November 30, 2016.
Provision
for Income Taxes
The
provision for income taxes was $38,700 and $73,400 in fiscal years 2018 and 2017, respectively. The provision for income taxes
does not include the income from the variable interest entity as the entity is not included in the income tax returns of Greystone
and the taxable income from this entity is passed-through to the respective owners.
Based
upon a review of its income tax filing positions, Greystone believes that its positions would be sustained upon an audit by the
Internal Revenue Service and does not anticipate any adjustments that would result in a material change to its financial position.
Therefore, no reserves for uncertain income tax positions have been recorded.
Net
Income
Greystone
recorded net income of $144,071 in fiscal year 2018 compared to $185,426 in fiscal year 2017 primarily for the reasons discussed
above.
Net
Income (Loss) Attributable to Common Stockholders
The
net loss attributable to common stockholders for fiscal year 2018 was $(11,337), or $(0.00) per share, compared to net income
of $41,109, or $0.00 per share, in fiscal year 2017 primarily for the reasons discussed above.
Liquidity
and Capital Resources
A
summary of cash flows for the six-month period ended November 30, 2017 is as follows:
Cash
provided by operating activities
|
|
$
|
3,587,049
|
|
|
|
|
|
|
Cash
used in investing activities
|
|
|
(2,996,530
|
)
|
|
|
|
|
|
Cash
used in financing activities
|
|
|
(641,090
|
)
|
The
contractual obligations of Greystone are as follows:
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
4-5
years
|
|
|
More
than
5
years
|
|
Long-term
debt
|
|
$
|
18,762,018
|
|
|
$
|
2,794,286
|
|
|
$
|
15,534,028
|
|
|
$
|
433,704
|
|
|
$
|
-0-
|
|
Greystone
had a working capital deficit of $(3,246,218) at November 30, 2017. To provide for the funding to meet Greystone’s operating
activities and contractual obligations as of November 30, 2017, Greystone will have to continue to produce positive operating
results or explore various options including additional long-term debt and equity financing. However, there is no guarantee that
Greystone will continue to create positive operating results or be able to raise sufficient capital to meet these obligations.
As
discussed in Note 6 to the consolidated financial statements, Greystone has one relatively near-term loan with IBC, Term Loan
A, which had an outstanding balance of $4,287,282 at November 30, 2017 with a maturity date of January 7, 2019. Greystone’s
management believes that IBC will renew this note at the appropriate time under similar terms. Effective January 10, 2018 and
as discussed further in Note 12 to the consolidated financial statements, Greystone and IBC entered into the Fifth Amendment to
the IBC Loan Agreement dated January 31, 2014 which provided for (1) converting the existing revolving loan with a balance of
$2,500,000 at November 30, 2017 into a four-year term loan, (2) new funding in the amount of $1,000,000 for the purchase of production
equipment with interest only for one year and principal and interest to be amortized over four years and (3) a new revolving loan
for $3,000,000 with a maturity date of January 31, 2020.
Substantially
all of the financing that Greystone has received through the last few fiscal years resulted from loans provided by certain officers
and directors of Greystone and bank notes which are guaranteed by certain officers and directors of Greystone. Greystone continues
to be dependent upon its officers and directors to provide and/or secure additional financing and there is no assurance that its
officers and directors will continue to do so. As such, there is no assurance that funding will be available for Greystone to
continue operations.
Greystone
has 50,000 outstanding shares of cumulative 2003 Preferred Stock with a liquidation preference of $5,000,000 and a preferred dividend
rate of the prime rate of interest plus 3.25%. Greystone does not anticipate that it will make cash dividend payments to any holders
of its common stock unless and until the financial position of Greystone improves through increased revenues, another financing
transaction or otherwise. Pursuant to the IBC Loan Agreement, as discussed in Note 6 to the consolidated financial statements,
Greystone may pay dividends on its preferred stock in an amount not to exceed $500,000 per year.
Forward
Looking Statements and Material Risks
This
Quarterly Report on Form 10-Q includes certain statements that may be deemed “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are made in reliance on the safe harbor protections provided under the Private Securities Litigation
Reform Act of 1995. All statements, other than statements of historical fact, that address activities, events or developments
that Greystone expects, believes or anticipates will or may occur in the future, including decreased costs, securing financing,
the profitability of Greystone, potential sales of pallets or other possible business developments, are forward-looking statements.
Such statements are subject to a number of assumptions, risks and uncertainties. The forward-looking statements contained in this
Quarterly Report on Form 10-Q could be affected by any of the following factors: Greystone’s prospects could be affected
by changes in availability of raw materials, competition, rapid technological change and new legislation regarding environmental
matters; Greystone may not be able to secure additional financing necessary to sustain and grow its operations; and a material
portion of Greystone’s business is and will be dependent upon a few large customers and there is no assurance that Greystone
will be able to retain such customers. These risks and other risks that could affect Greystone’s business are more fully
described in Greystone’s Form 10-K for the fiscal year ended May 31, 2017, which was filed on August 25, 2017. Actual results
may vary materially from the forward-looking statements. Greystone undertakes no duty to update any of the forward-looking statements
contained in this Quarterly Report on Form 10-Q.