Notes
to Consolidated Financial Statements
(Unaudited)
Note
1. Basis of Financial Statements
In
the opinion of Greystone Logistics, Inc. (“Greystone”), the accompanying unaudited consolidated financial statements
contain all adjustments and reclassifications, which are of a normal recurring nature, necessary to present fairly its financial
position as of February 28, 2018, the results of its operations for the nine-month and three-month periods ended February 28,
2018 and 2017, and its cash flows for the nine-month periods ended February 28, 2018 and 2017. 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 nine-month and
three-month periods ended February 28, 2018 and 2017 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:
|
|
2018
|
|
|
2017
|
|
Nine-month
periods ended February 28:
|
|
|
|
|
|
|
|
|
Preferred
stock convertible into common stock
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
|
|
|
|
|
|
|
|
|
Three-month
periods ended February 28:
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
200,000
|
|
|
|
-
|
|
Warrants
to purchase common stock
|
|
|
500,000
|
|
|
|
-
|
|
Preferred
stock convertible into common stock
|
|
|
3,333,333
|
|
|
|
3,333,333
|
|
Total
|
|
|
4,033,333
|
|
|
|
3,333,333
|
|
The
following tables set forth the computation of basic and diluted earnings per share for the following periods:
|
|
2018
|
|
|
2017
|
|
Nine-month
periods ended February 28:
|
|
|
|
|
|
|
|
|
Numerator -
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
210,817
|
|
|
$
|
697,337
|
|
Denominator
-
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding - basic
|
|
|
28,361,201
|
|
|
|
28,309,003
|
|
Incremental
shares from assumed conversion of options and warrants
|
|
|
630,952
|
|
|
|
579,167
|
|
Diluted
shares
|
|
|
28,992,153
|
|
|
|
28,888,170
|
|
Income per share
-
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
Three-month
periods ended February 28:
|
|
|
|
|
|
|
|
|
Numerator -
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common
stockholders
|
|
$
|
(152,554
|
)
|
|
$
|
773,667
|
|
Denominator
-
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding - basic
|
|
|
28,361,201
|
|
|
|
28,361,201
|
|
Incremental
shares from assumed
conversion of options and warrants
|
|
|
-
|
|
|
|
573,913
|
|
Diluted
shares
|
|
|
28,361,201
|
|
|
|
28,935,114
|
|
Income (Loss)
per share -
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
Note
3. Inventory
Inventory
consists of the following:
|
|
February
28, 2018
|
|
|
May
31, 2017
|
|
Raw
materials
|
|
$
|
1,243,777
|
|
|
$
|
669,083
|
|
Finished
goods
|
|
|
2,844,997
|
|
|
|
918,469
|
|
Total
inventory
|
|
$
|
4,088,774
|
|
|
$
|
1,587,552
|
|
Note
4. Property, Plant and Equipment
A
summary of property, plant and equipment for Greystone is as follows:
|
|
February
28, 2018
|
|
|
May
31, 2017
|
|
Production
machinery and equipment
|
|
$
|
33,026,562
|
|
|
$
|
27,493,614
|
|
Plant
buildings and land
|
|
|
5,306,784
|
|
|
|
5,296,784
|
|
Leasehold
improvements
|
|
|
349,246
|
|
|
|
263,710
|
|
Furniture
and fixtures
|
|
|
402,870
|
|
|
|
392,371
|
|
|
|
|
39,085,462
|
|
|
|
33,446,479
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(16,200,844
|
)
|
|
|
(13,739,697
|
)
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$
|
22,884,618
|
|
|
$
|
19,706,782
|
|
Production
machinery and equipment includes equipment capitalized pursuant to a capital lease in the amount of $7,322,364. The equipment
is being amortized using the straight-line method over 12 years.
Production
machinery includes deposits on equipment in the amount of $366,503 that had not been placed into service as of February 28, 2018.
Two plant buildings and land are owned by GRE, a VIE, having a net book value of $3,041,389 at February 28, 2018.
Depreciation
expense, including amortization expense related to assets under capital leases, for the nine months ended February 28, 2018 and
2017 was $2,476,050 and $1,936,512, respectively.
Note
5. Related Party Transactions/Activity
Yorktown
Management & Financial Services, LLC
Yorktown
Management & Financial Services, LLC (“Yorktown”), an entity wholly-owned by Greystone’s CEO and President,
owns and rents to Greystone (1) grinding equipment used to grind raw materials for Greystone’s pallet production and (2)
extruders for pelletizing recycled plastic into pellets for resale and for use as raw material in the manufacture of pallets.
GSM pays weekly rental fees to Yorktown of $22,500 for use of Yorktown’s grinding equipment and $5,000 for the use of Yorktown’s
pelletizing equipment for which GSM paid Yorktown rental fees of $1,072,500 and $1,100,000 for the nine months ended February
28, 2018 and 2017, 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 in TriEnda. Greystone provided tolling services,
blending and pelletizing plastic resin, for TriEnda through March 2017. Revenue from TriEnda totaled $-0- and $519,814 for the
nine months ended February 28, 2018 and 2017, respectively.
Greystone
periodically purchases material and pallets from TriEnda. Purchases for the nine months ended February 28, 2018 and 2017 totaled
$123,072 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 $330,144 and $220,325 for the nine months ended February
28, 2018 and 2017, respectively. The account receivable due from Green at February 28, 2018 was $55,080.
Note
6. Debt
Debt
as of February 28, 2018 and May 31, 2017 is as follows:
|
|
February
28, 2018
|
|
|
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
|
|
$
|
4,116,415
|
|
|
$
|
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%
|
|
|
-
|
|
|
|
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
|
|
|
1,667,182
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Term
loan D payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.75%, maturing January
10, 2022
|
|
|
2,452,757
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Term
loan E payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.75%, maturing January
10, 2022
|
|
|
525,200
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Revolving
loan payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.75%, due January 31,
2020
|
|
|
-
|
|
|
|
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
|
|
|
1,176,233
|
|
|
|
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
|
|
|
2,700,205
|
|
|
|
2,841,285
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Robert Rosene, 7.5% interest, due January 15, 2020
|
|
|
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
|
|
|
240,970
|
|
|
|
413,969
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
263,141
|
|
|
|
310,036
|
|
Total
Debt
|
|
|
17,611,458
|
|
|
|
18,032,416
|
|
Debt
issue costs, net of amortization
|
|
|
(125,634
|
)
|
|
|
(228,426
|
)
|
Less:
Current portion
|
|
|
(8,240,541
|
)
|
|
|
(2,493,236
|
)
|
Long-term
debt
|
|
$
|
9,245,283
|
|
|
$
|
15,310,754
|
|
The
prime rate of interest as of February 28, 2018 was 4.50%. Effective March 22, 2018, the prime rate of interest increased to 4.75%.
Loan
Agreement between Greystone and IBC
The
Loan Agreement (“IBC Loan Agreement”), dated January 31, 2014, among Greystone and GSM (the “Borrowers”)
and International Bank of Commerce (“IBC”), as amended, provides for certain term loans and a revolver loan.
Effective
January 10, 2018, the Borrowers and IBC entered into the Fifth Amendment to the IBC Loan Agreement providing (i) a conversion
of the existing revolver loan with an outstanding balance of $2,500,000 into Term Loan D with a maturity date of January 10, 2022,
(ii) an advancing Term Loan E of $1,000,000 with a maturity date of January 10, 2022 for the procurement of production equipment,
and (iii) an amended and modified revolving loan of $3,000,000 with a maturity date of January 31, 2020. The three notes bear
interest at the greater of the prime rate of interest plus 0.5%, or 4.75%.
Effective
August 4, 2017, the Borrowers and IBC entered into the Fourth Amendment to the IBC Loan Agreement providing for Term Loan C in
the amount of $1,795,000 for the purchase of certain production equipment. Term Loan C bears interest at the greater of prime
plus 0.5%, or 4.00% and matures August 4, 2020.
The
IBC term loans 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 C over a
seven-year period beginning August 31, 2017 (currently $25,205 per month) and (iii) Term Loan D over a four-year period beginning
August 4, 2020 (currently $57,469 per month). Term Loan E requires monthly interest payments until January 10, 2019, after which
monthly payments of principal and interest are required in an amount sufficient to amortize the loan over a four-year period.
The monthly payments of principal and interest on the IBC term loans may vary as a result of changes in the prime rate of interest.
The
IBC Loan Agreement, as amended, provides a revolving loan in an aggregate principal amount of up to $3,000,000 (the “Revolving
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 $3,000,000.The Revolving Loan bears interest at greater of the prime rate of interest
plus 0.5%, or 4.75% and matures January 31, 2020. 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 $1,500,000 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.
As
of February 28, 2018, management has concluded that Greystone was in compliance with the covenants of the IBC Loan Agreement.
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, 2020. 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 February 28, 2018 are $8,240,541, $5,910,483, $3,078,725, $381,709
and $-0-.
The
current maturities of long-term debt include two notes with IBC with a January 31, 2019 maturity – IBC Term Loan A with
a February 28, 2018 balance of $4,116,415 and a term loan payable by GRE to IBC with a February 28, 2018 balance of $2,700,205.
Greystone and IBC are currently reviewing these notes for an extension or renewal.
Note
7. Capital Leases
Capital
leases as of February 28, 2018 and May 31, 2017:
|
|
February
28, 2018
|
|
|
May
31, 2017
|
|
Non-cancellable
capital leases with private company, interest rates of 7.4% and 5.0%, maturing February 24, 2023 and August 7, 2019
|
|
$
|
4,229,234
|
|
|
$
|
3,794,063
|
|
Less:
Current portion
|
|
|
(2,432,198
|
)
|
|
|
(2,261,560
|
)
|
Non-cancellable
capital leases, net of current portion
|
|
$
|
1,797,036
|
|
|
$
|
1,532,503
|
|
In
February, 2018, Greystone entered into a five-year lease agreement, interest rate of 7.4% and maturity date of February 24, 2023,
(“Agreement A”) with an unrelated private company to provide for certain production equipment with a cost of approximately
$2.0 million. In August, 2016, Greystone entered into a three-year lease agreement, interest rate of 5.0% and maturity date of
August 7, 2019, (“Agreement B”) with the same unrelated private company to provide for certain production equipment
with a total cost of approximately $5.4 million. The lease agreements include a bargain purchase option to acquire the production
equipment at the end of the lease terms. Lease payments are made on a per invoice basis at rates of (i) $3.32 per pallet produced
on the leased equipment and sold to the private company, estimated payments of $40,000 per month, for Agreement A and (ii) $6.25
per pallet produced on the equipment and sold to the private company, approximately $200,000 per month, for Amendment B. Both
Agreements A & B provide for minimum monthly lease rental payments based upon the total pallets sold in excess of a specified
amount not to exceed the monthly productive capacity of the leased machines.
The
production equipment under the non-cancelable capital leases has a gross carrying amount of $7,322,364 at February 28, 2018. Amortization
of the carrying amount of approximately $402,000 and $246,000 was included in depreciation expense for the nine months ended February
28, 2018 and 2017, respectively.
Future minimum lease payments under non-cancelable
capital leases as of February 28, 2018, are approximately:
Twelve
months ended February 28, 2019
|
|
$
|
2,844,000
|
|
Twelve
months ended February 28, 2020
|
|
|
573,700
|
|
Twelve
months ended February 28, 2021
|
|
|
573,700
|
|
Twelve
months ended February 28, 2022
|
|
|
573,700
|
|
Twelve
months ended February 28, 2023
|
|
|
240,500
|
|
Total
lease payments
|
|
|
4,805,600
|
|
Imputed
interest
|
|
|
576,366
|
|
Present
value of minimum lease payments
|
|
$
|
4,229,234
|
|
Note
8. Deferred Revenue
In
February, 2018, a new customer entered into a contract with Greystone to purchase plastics pallets with shipments occurring from
May, 2018 through about August, 2018. The customer prepaid $4,595,034 to provide funding to Greystone for procuring raw materials
to produce the pallets. Revenue will be recognized by Greystone as pallets are shipped to the customer.
Note
9. 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
10. Concentrations, Risks and Uncertainties
Greystone
derived approximately 76% 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 $1,200,335 and $1,202,381 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 February 28,
2018, Greystone is indebted to Mr. Rosene in the amount of $4,469,355 for a note payable due January 15, 2020. There is no assurance
that Mr. Rosene will renew the note as of the maturity date.
Note
11. 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. Management believes
that the impact of this ASU will not have a material effect 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
12. 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 Greystone’s business, including income tax accounting, disclosure
and tax compliance. As a result of the changes in tax rates as provided in the Act and reassessing deferred income taxes using
state income tax rates, Greystone revalued all deferred tax assets and liabilities, and as a result, the deferred taxes at February
28, 2018 decreased $474,100 and the provision for income taxes for the three months ended February 28, 2018 increased by a like
amount.
Note
13. Commitments
At
February 28, 2018, Greystone had commitments totaling $702,508 toward the purchase of production equipment. In March, 2018, Greystone
issued a purchase order for certain production equipment at a cost of approximately $2.3 million.