UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED February 28,August 31, 2011
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________

Commission file number        000-26331      
 
 
GREYSTONE LOGISTICS, INC. 
(Exact name of registrant as specified in its charter)
 
 
Oklahoma75-2954680
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
 
     
1613 East 15th Street, Tulsa, Oklahoma 74120
(Address of principal executive offices)     (Zip Code)
 
 
(918) 583-7441
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to post and submit such files).   Yes o      No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
(Do not check if a smaller reporting company) 
Smaller reporting company  x
 
Indicate by checkmark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    Yes o    No x
 
Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:   April 12,October 18, 2011 - 26,111,201
 
 
GREYSTONE LOGISTICS, INC.
FORM 10-Q
For the Period Ended February 28,August 31, 2011

 
 
 
 
PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial StatementsPage
   
 
Consolidated Balance Sheets
as of February 28,August 31, 2011 (Unaudited) and May 31, 20102011
1
   
 
Consolidated Statements of Operations (Unaudited) for
For the Nine MonthThree-Month Periods Ended February 28,August 31, 2011 and 2010
2
   
 Consolidated Statements of Operations (Unaudited) for the Three Month Periods Ended February 28, 2011 and 20103
Consolidated Statements of Cash Flows (Unaudited) for
For the Nine MonthThree-Month Periods Ended February 28,August 31, 2011 and 2010
43
   
 Notes to Consolidated Financial Statements (Unaudited)54
   
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations7
  
   
Item 4.  Controls and Procedures1210
  
  
   
PART II.  OTHER INFORMATION 
   
Item 5.  Other Information11
Item 6.  Exhibits1312
   
SIGNATURES13
Index to Exhibits14
 
 
 
 
 
ITEM 1.  FINANCIAL STATEMENTS.Financial Statements.
 
Greystone Logistics, Inc. and Subsidiaries
Consolidated Balance Sheets
  August 31,  May 31, 
  2011  2011 
  (Unaudited)    
Assets      
Current Assets:      
    Cash $317,356  $169,420 
    Accounts receivable -        
        Trade, net of allowance of $75,000 at August 31, 2011 and May 31, 2011  1,500,324   1,769,387 
        Related party  625,929   652,402 
    Inventory  1,217,584   543,557 
    Prepaid expenses and other  39,523   70,990 
Total Current Assets  3,700,716   3,205,756 
         
Property, Plant and Equipment  9,983,652   9,237,236 
Less: Accumulated Depreciation  (5,589,664)  (5,346,073)
    Property, Plant and Equipment, net
  4,393,988   3,891,163 
         
Assets of Variable Interest Entity  4,663,339   4,663,339 
Less: Accumulated Depreciation  (869,592)  (840,894)
    Assets of Variable Interest Entity, net
  3,793,747   3,822,445 
         
Other Assets  95,783   100,693 
         
Total Assets $11,984,234  $11,020,057 
         
Liabilities and Deficit        
Current Liabilities:        
    Current portion of long-term debt $3,722,179  $3,689,738 
    Advances payable - related party  690,580   725,080 
    Current portion of variable interest entities' long-term debt  369,517   383,016 
    Accounts payable and accrued expenses  2,086,703   1,927,162 
    Accounts payable and accrued expenses - related parties  1,730,759   1,621,838 
Total Current Liabilities  8,599,738   8,346,834 
         
Long-Term Debt, net of current portion
  5,451,017   5,192,259 
Long-Term Debt of Variable Interest Entities, net of current portion
  7,106,222   7,185,955 
         
Deficit:        
    Common stock, $0.0001 par value        
       Shares authorized: 5,000 000 000        
       Shares issued:  26,111,201 at August 31, 2011 and May 31, 2011  2,611   2,611 
    Additional paid-in capital  48,089,298   48,089,298 
    Accumulated deficit  (61,801,507)  (62,297,986)
Total Greystone Stockholders' Deficit  (13,709,598)  (14,206,077)
    Non-controlling interests  4,536,855   4,501,086 
Total Deficit  (9,172,743)  (9,704,991)
         
Total Liabilities and Deficit $11,984,234  $11,020,057 
         
The accompanying notes are an integral part of these consolidated financial statements.
- 1 -
Greystone Logistics, Inc. and Subsidiaries
Consolidated Balance SheetsStatements of Operations
(Unaudited)
 
  February 28,  May 31, 
  2011  2010 
Assets (Unaudited)    
Current Assets:      
     Cash $151,043  $163,749 
     Accounts receivable  1,362,620   1,605,160 
     Inventory  822,408   649,943 
     Prepaid expenses and other  69,370   68,673 
Total Current Assets  2,405,441   2,487,525 
         
Property, Plant and Equipment, net of accumulated depreciation
        
of $5,158,477 and $4,885,135 at February 28, 2011 and        
May 31, 2010, respectively  4,047,714   5,779,245 
         
Assets of Greystone Real Estate, LLC, net of accumulated
        
depreciation of $817,303 and $298,386 at February 28, 2011        
and May 31, 2010  3,878,533   1,765,960 
         
Other Assets, net
  85,280   95,176 
         
Total Assets $10,416,968  $10,127,906 
         
Liabilities and Deficit        
Current Liabilities:        
Current portion of long-term debt $3,557,260  $8,950,837 
Notes and advances payable - related parties  1,248,080   851,581 
Current portion of Greystone Real Estate, LLC long-term debt  90,206   55,067 
Accounts payable and accrued expenses  2,190,478   1,301,344 
Accounts payable and accrued expenses - related parties  1,198,048   1,660,195 
Preferred dividends payable  2,525,204   2,282,122 
Total Current Liabilities  10,809,276   15,101,146 
         
Long-Term Debt, net of current portion
  5,336,034   1,549,486 
Long-Term Debt of Greystone Real Estate, LLC, net of
  3,072,194   1,158,810 
current portion        
         
Deficit:        
Preferred stock, $0.0001 par value, 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, 26,111,201 shares issued and outstanding  2,611   2,611 
Additional paid-in capital  53,089,293   53,017,317 
Accumulated deficit  (62,797,255)  (61,527,891)
Total Greystone Stockholders' Deficit  (9,705,346)  (8,507,958)
Non-controlling interest  904,810   826,422 
Total Deficit  (8,800,536)  (7,681,536)
         
Total Liabilities and Deficit $10,416,968  $10,127,906 
  Three Months Ended August 31, 
  2011  2010 
       
       
Sales $5,783,624  $4,994,208 
         
Cost of Sales  4,627,974   4,738,456 
         
Gross Profit  1,155,650   255,752 
         
General, Selling and Administrative Expenses  411,987   491,084 
         
Operating Income (Loss)  743,663   (235,332)
         
Other Income (Expense):        
    Other Income (Expense)  (2,950)  7,650 
    Interest Expense  (265,353)  (189,960)
Total Other Expense, net  (268,303)  (182,310)
         
Net Income (Loss)  475,360   (417,642)
         
Loss (Income) Attributable to Variable Interest Entities, net  4,375   (20,592)
         
Preferred Dividends  —   (81,918)
         
Net Income (Loss) Available to Common Stockholders $479,735  $(520,152)
         
Income (Loss) Available to Common Stockholders        
    Per Share of Common Stock - Basic and Diluted $0.02  $(0.02)
         
Weighted Average Shares of Common Stock Outstanding -        
    Basic and Diluted  26,211,201   26,211,201 
 
The accompanying notes are an integral part of these consolidated financial statements.
1
Greystone Logistics, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
  Nine Months Ended February 28, 
  2011  2010 
       
Sales $14,253,173  $11,170,768 
         
Cost of Sales  13,120,654   9,136,907 
         
Gross Profit  1,132,519   2,033,861 
         
General, Selling and Administration Expenses  1,441,590   1,446,358 
         
Operating Income (Loss)  (309,071)  587,503 
         
Other Income (Expense):        
     Other Income  2,600   32,000 
     Interest Expense      (641,423)  (621,700)
Total Other Expense, net  (638,823)  (589,700)
         
Net Loss  (947,894)  (2,197)
         
Less: Income Attributable to Non-controlling Interest  (78,388)  (61,409)
         
Preferred Dividends  (243,082)  (243,082)
         
Net Loss Available to Common Stockholders $(1,269,364) $(306,688)
         
Loss Available to Common Stockholders Per Share of        
     Common Stock - Basic and Diluted $(0.05) $(0.01)
         
Weighted Average Shares of Common Stock Outstanding -        
     Basic and Diluted  26,111,000   26,111,000 
The accompanying notes are an integral part of these consolidated financial statements
2
Greystone Logistics, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
  Three Months Ended February 28, 
  2011  2010 
       
Sales $4,206,092  $3,544,522 
         
Cost of Sales  3,600,831   2,958,816 
         
Gross Profit  605,261   585,706 
         
General, Selling and Administration Expenses  452,809   460,620 
         
Operating Income  152,452   125,086 
         
Other Income (Expense):        
     Other  (5,050)  5,333 
     Interest Expense  (248,960)  (206,717)
Total Other Expense, net  (254,010)  (201,384)
         
Net Loss  (101,558)  (76,298)
         
Less: Income Attributable to Non-controlling Interest  (36,994)  (20,671)
         
Preferred Dividends  (80,137)  (80,137)
         
Net Loss Available to Common Stockholders $(218,689) $(177,106)
         
Loss Available to Common Stockholders Per Share of        
     Common Stock - Basic and Diluted $(0.01) $(0.01)
         
Weighted Average Shares of Common Stock Outstanding -        
     Basic and Diluted  26,111,000   26,111,000 

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

 
3- 2 -
 
Greystone Logistics, Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
 (Unaudited)
 
  Nine Months Ended February 28, 
  2011  2010 
       
Cash Flows from Operating Activities:      
Net loss $(947,894) $(2,197)
Adjustments to reconcile net loss to net cash provided        
  by operating activities:        
Depreciation and amortization  801,835   758,847 
Stock-based compensation  71,976   71,976 
Recognition of deferred income  —   (32,000)
Changes in accounts receivable  242,540   (44,426)
Changes in inventory  (172,465)  200,874 
Changes in prepaid expenses and other  (697)  (20,835)
Change in other assets  320   (3,780)
Changes in accounts payable and accrued expenses  426,987   561,538 
Net cash provided by operating activities  422,602   1,489,997 
         
Cash Flows from Investing Activities:        
Purchases of property and equipment  (1,173,301)  (236,984)
         
Cash Flows from Financing Activities:        
Proceeds from notes payable to related party  500,000   — 
Payments on notes and advances payable to related parties  (103,501)  (136,938)
Payments on long-term debt  (1,607,029)  (874,070)
Proceeds from loan to Greystone Real Estate, LLC  2,000,000   — 
Payments on Greystone Real Estate, LLC, long-term debt  (51,477)  (38,500)
Non-controlling interest distribution  —   (43,071)
Net cash provided by (used in) financing activities  737,993   (1,092,579)
         
Net Increase (Decrease) in Cash  (12,706)  160,434 
Cash, beginning of period  163,749   274,765 
         
Cash, end of period $151,043  $435,199 
         
Non-cash Investing and Financing Activities:        
Preferred Dividend Accrual $243,082  $243,082 
Supplemental Information:        
Interest Paid $336,614  $341,518 

  Three Months Ended August 31, 
  2011  2010 
       
Cash Flows from Operating Activities:      
   Net income (loss) $475,360  $(417,642)
   Adjustments to reconcile net income (loss) to net cash        
    provided by operating activities:        
      Depreciation and amortization  276,509   272,246 
      Stock-based compensation  —   23,992 
      Changes in receivables  295,536   392,018 
      Changes in inventory  (674,027)  (264,189)
      Changes in prepaid expenses and other  31,467   16,861 
      Change in other assets  690   (3,750)
      Changes in accounts payable and accrued expenses  268,462   481,241 
Net cash provided by operating activities  673,997   500,777 
         
Cash Flows from Investing Activities:        
   Purchase of property and equipment  (183,390)  (192,724)
         
Cash Flows from Financing Activities:        
   Payments on long-term debt  (271,827)  (97,208)
   Payments on advances from related party  (34,500)  (126,501)
   Payments on long-term debt of variable interest entities  (93,232)  (13,447)
   Capital contributions to variable interest entity  75,000   — 
   Distributions by variable interest entity  (18,112)  — 
Net cash used in financing activities  (342,671)  (237,156)
         
Net Increase in Cash  147,936   70,897 
Cash, beginning of period  169,420   163,749 
         
Cash, end of period $317,356  $234,646 
         
Non-Cash Activities:        
   Acquisition of equipment by capital lease or debt $563,026  $390,000 
   Preferred dividend accrual  —   81,918 
Supplemental Information:        
   Interest paid  159,995   100,310 
The accompanying notes are an integral part of these consolidated financial statementsstatements.

 
4- 3 -
 
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 February 28,August 31, 2011, and the results of its operations for the nine and three month periods ended February 28, 2011 and 2010 and its cash flows for the nine monththree-month periods ended February 28,August 31, 2011 and 2010.  These consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the fiscal year ended May 31, 20102011 and the notes thereto included in Greystone's Form 10-K.10-K for such period. The results of operations for the nine and three monththree-month periods ended February 28,August 31, 2011 and 2010 are not necessarily indicative of the results to be expected for the full fiscal year.

The accompanying financial statements have been prepared assuming that Greystone will continue as a going concern.  ForGreystone reported a net loss for the fiscal year ended May 31, 20102011 and net income for the two previous fiscal years Greystone has reported net income, although Greystone has incurred losses thus far in fiscal year 2011.prior thereto.  Greystone believes that it has the capacity to produce sufficient plastic pallets to achieve profitability.  However, Greystone continues to be dependent on one customer. Sales to this major customer were approximately 74%73% of pallet sales (56%(54% of total sales) for the nine monththree-month period ended February 28,August 31, 2011 (70%and 77% of pallet sales (58% of total sales) for the nine monththree-month period ended February 28, 2010).August 31, 2010. To date, Greystone has received substantial advances from investors to finance its operations and will require additional substantial funding and/or personal guarantees of debt in order to attain its business plan and continue to achieve profitable operations.  Historically, managementGreystone has been successful in financing its operations primarily through short-term loans and personal guarantees of bank loans by its officers and directors. Management has continued to seek long-term and/or permanent financing, and on March 15, 2011, Greystone entered into an amended bank loan agreement which provides for a three-year term on Greystone’s primary indebtedness.  While such amendmentamendment’s extended terms provided important near-term relief, profitable growth will still requiresrequire additional capital resources. Neither the receipt of additional funding in adequate amounts nor the successful implementation of itsGreystone’s business plan can be assured.  The combination of these factors raises substantial doubt about Greystone's ability to continue as a going concern.
 

Note 2.                  Earnings Per Share

For the three month periods and  nine month periodsthree-month period ended February 28,August 31, 2011, and 2010, basic and diluted EPS arewere the same dueas the effect of the stock options to purchase common stock and the loss attributable to common stockholders.convertible provisions of the Series 2003 preferred stock were anti-dilutive.

5
The following securities (rounded to thousands) were not included in the computation of diluted earnings per share for the nine and three month periodsperiod ended February 28,August 31, 2011 as their effect would have been antidilutive:

- 4 -
Options to purchase common stock  1,970,0001,940,000 
Convertible preferred stock  3,333,000 
   5,303,0005,273,000 
 
Note 3.                  Inventory consists of the following:
 
 February 28,  May 31,  August 31,   May 31, 
 2011  2010  2011  2011 
 (Unaudited)     (Unaudited)    
              
Raw materials $128,877  $331,539  $525,771  $171,104 
Finished goods  693,531   318,404   691,813   372,453 
        
Total inventory $822,408  $649,943  $1,217,584  $543,557 

 
Note 4.                  Notes payable
Capitalized Lease

Effective March 15,August 12, 2011, theGreystone entered into an agreement with Sonoco Products Company to lease certain molds for a period of sixty months at a monthly rental of $10,625 per month plus $0.50 per pallet sold each month in excess of 12,500.  The lease and related debt have been capitalized at 5% interest for a total amount of $563,026.

Note 5.                 Note Payable

Greystone, GSM, GRE and GLOG are parties to a loan agreement dated as of March 4, 2005, by and among Greystone Manufacturing, L.L.C. (GSM), GLOG Investment, L.L.C. and Theas amended, with F&M Bank & Trust Company (“F&M”).  Effective August 31, 2011, GLOG distributed its assets, Greystone’s Series 2003 Convertible Preferred Stock, to its members, Warren F. Kruger, Greystone’s president and CEO, and Robert B. Rosene, Jr., a member of Greystone’s board of directors (collectively, the “Borrowers”).   Effective as of August 31, 2011, the loan agreement was amended to renew, consolidate, increase(a) cause all of GLOG’s rights and extendobligations under the outstanding GSM loans with the bank in the aggregate amount of $6,097,776, with monthly payments of principal in the amount of $72,593 plus accrued interest, at the interest rate equalloan agreement to the bank’s base rate subjectbe transferred to  a minimum rate of 4.5% and a maturity date of March 13, 2014.  The current portion of long-term debt reflects the debt service requirements of this amended agreement.  The amended agreement includes cross default and cross collateralization provisions with respect to loans between the bank and Greystone; Warren Kruger, President and CEO of Greystone; GLOG Investment, L.L.C., an entity owned by WarrenF. Kruger and Robert B. Rosene, a memberJr., (b) affirm the cross-collateralization and cross-default provisions of the boardloan agreement among property and debts of directors of Greystone;GSM, GLOG and Greystone Real Estate, L.L.C., an entity owned by Warren F. Kruger and Robert Rosene;B. Rosene, Jr., (c) amend the cross-collateralization and Native American Plastics, L.L.C., an entity owned by an unrelated person which leasescross-default provisions of the loan agreement to include Messrs. Kruger and Rosene and (d) amend certain injection molding equipment to Greystone.financial covenants of the loan agreement. GLOG was dissolved effective September 20, 2011.

5.Note 6.                 Variable Interest EntityEntities (VIE)
 
The consolidated financial statements of Greystone include Greystone Real Estate, L.L.C. (“GRE”), formerly named Greystone Properties, and GLOG Investments, L.L.C., an entity owned by Warren Kruger and Robert Rosene. (“GLOG”).  GRE owns a buildingtwo buildings located in Bettendorf, Iowa which isare leased to Greystone Manufacturing, L.L.C. Effective January 15,(“GSM”).  At August 31, 2011 Greystone Manufacturing, L.L.C. (GSM) entered into a sale and ten-year leaseback transaction with GRE with respect to GSM’s manufacturing facility located in Bettendorf, Iowa.  GRE, a partyprior to the amended loan agreementasset distribution discussed in Note 4, borrowed $2.0 million to purchase5 above, GLOG’s sole asset was Greystone’s Series 2003 Convertible Preferred Stock in the building from which Greystone retired the pre-existing indebtedness on the facility.face amount of $5,000,000 and its only liability was a $3,669,084

 
6- 5 -
 
note payable to F&M Bank & Trust Company (“F&M”).  GRE, GLOG, and GSM were parties to an amended loan agreement with F&M which contained cross-collateralization and cross-default provisions.  Effective June 1, 2010, Greystone adoptedwith the Financial Accounting Standards Board’s Accounting Standard Update No. 2009-17 (“ASU 2009-17”), Improvements to Financial ReportingAugust 31, 2011 loan amendment with F&M as discussed in Note 5 above, GLOG was replaced by Enterprises Involved with Variable Interest Entities. The scope of this standard is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements.  Adoption of ASU 2009-17 resulted in the separate presentation of GRE’s assets and liabilities in Greystone’s consolidated balance sheet for all periods presented.Borrowers under the loan agreement.

Note 7.                 Fair Value of Financial Instruments

The following methods and assumptions are used in estimating the fair-value disclosures for financial 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 of comparable loans.  The carrying amounts reported in the balance sheet approximate fair value.

 
Note 8.                 Subsequent Event

As discussed in Note 5, GLOG was dissolved effective September 20, 2011 and, accordingly, ceased to be a variable interest entity of Greystone.  Accordingly, GLOG will be de-consolidated effective September 1, 2011.  A condensed pro forma balance sheet as of August 31, 2011 showing the effect of the de-consolidation is as follows:
Assets:   
Current assets $3,700,716 
Property, plant and equipment, net of accumulated depreciation  4,393,988 
Assets of variable interest entity, net of accumulated depreciation  3,793,747 
Other assets  95,783 
Total Assets $11,984,234 
     
Liabilities and Deficit:    
Current liabilities $11,156,983 
Long-term debt, net of current portion  5,451,017 
Long-term debt of variable interest entity, net of current portion  3,558,598 
Deficit -    
Greystone stockholders’ deficit  (9,109,392)
Non-controlling interests  927,028 
Total deficit  (8,182,364)
Total Liabilities and Deficit $11,984,234 

- 6 -
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., its two wholly-owned subsidiaries, Greystone Manufacturing, L.L.C., or GSM, and Plastic Pallet Production, Inc., or PPP, and aPPP.  Greystone also consolidates its variable interest entity,entities, Greystone Real Estate, L.L.C., or GRE, and GLOG Investment, L.L.C., or GLOG.  All material intercompany accounts and transactions have been eliminated.

References to fiscal year 20112012 refer to the nine and three month periodsperiod ended February 28,August 31, 2011, as applicable.  References to fiscal year 20102011 refer to the nine and three month periodsperiod ended February 28,August 31, 2010, as applicable.

Sales

Greystone's primary businessfocus 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 manufacturingUnited States and sellingengaged 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 through its wholly owned subsidiary, GSM.  Greystone sells its pallets through direct sales andcould greatly reduce the destruction of trees on a network of independent contractor distributors.  worldwide basis.

Greystone also sells its pallets and pallet leasing services to certain large customers direct through contract distributors and its President Senior Vice President of Sales and Marketing and other employees.

In addition, GSM recycles plastics by grinding, pelletizingGreystone derives a substantial portion of its revenue from a national brewer.  This customer accounted for approximately 73% and selling the recycled resin through an arrangement with Yorktown Management & Financial Services, L.L.C. (“Yorktown”), an entity owned by Warren Kruger, Greystone’s President and CEO.  Greystone purchases its raw material from Yorktown at cost, processes it into pelletized recycled plastic and sells the pelletized recycled plastic.  Greystone also pays 40%77% of the gross profit received from third party sales of pelletized recycled plastic, defined as revenue less cost of material and selling commissions, to Yorktown.  Greystone intends to grow the product sales of recycled plastic.
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Greystone’s pallet sales to one national brewer forand 54% and 58% of Greystone’s total sales in fiscal years 2012 and 2011, respectively.  The design of Greystone’s recycled plastic pallets are approved for use by the customer and 2010 were approximately 74% and 70%are the only plastic pallets in use for case goods at the current time by the customer. There is no assurance that Greystone will retain this customer’s business at the same level, or at all.  The loss of total pallet sales, respectively.a material amount of business from this customer could have a material adverse effect on Greystone.

Personnel

Greystone had approximately 8794 and 7187 full-time employees as of February 28,August 31, 2011 and 2010, respectively.

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Taxes

For all years presented, Greystone's effective tax rate is 0%.  Greystone has generated substantial net operating losses which would normally reflect a tax benefit in the statements of operations and a deferred asset on the balance sheet.  However, because of the current uncertainty as to Greystone's ability to achieve and sustain profitability, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the consolidated statements of operations.

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. At February 28,August 31, 2011, Greystone had no unrecognized tax benefits.

NineThree Month Period Ended February 28,August 31, 2011 Compared to NineThree Month Period Ended February 28,August 31, 2010

Sales
Sales for fiscal year 20112012 were $14,253,173$5,783,624 compared to $11,170,768$4,994,208 in fiscal year 2010,2011 for an increase of $3,082,405.$789,416.  Pallet sales were $10,730,570$4,288,919 in fiscal year 2012 compared to $3,739,631 in fiscal year 2011 compared to $11,170,768 in fiscal year 2010 for a decreasean increase of $440,198.$549,288. Greystone’s pallet sales to its major customer in fiscal year 20112012 were 74%73% of total pallet sales compared to 70%77% of total pallet sales in fiscal year 2010.    Repairs and maintenance of production equipment2011.  Pallet sales during the period was the primary reason for the decline in pallet sales.

Sales of recycled plastic resin were $3,522,603 in fiscal year 2011 comparedwere hindered primarily due to no sales of recycled resin in fiscal year 2010.lost production time on the pallet production lines for necessary repair and maintenance.

Pallet sales to Greystone’s major customer are generally based on the customer’s needsneed to maintain its pallet inventory and may vary by period.  Greystone cannot predict the major customer’s future needs to maintain or grow its pallet inventory but has been able to grow sales to new pallet customers developed through Greystone’s marketing efforts to broaden and increase its customer base.

Sales of recycled plastic resin were $1,494,705 in fiscal year 2012 compared to $1,254,577 in fiscal year 2011 for an increase of $240,128.  Greystone’s strategic plan is to continue to grow the sales of recycled plastic resin.
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Cost of Sales
 
Cost of sales in fiscal year 20112012 was $13,120,654,$4,627,974, or 92%80% of sales, compared to $9,136,907,$4,738,456, or 82%95% of sales, in fiscal year 2010.2011.  The increase in thehigher ratio of cost of sales to sales in fiscal year 2011 over fiscal year 2010 iswas primarily due to (1) inelastic labor and manufacturing overhead costs for pallet production during a period of reduced product volume resulting from lost production time on the pallet production lines for necessary repair and (2) the lower profit margin for recycled plastic resin as compared to the gross margin for pallet sales.maintenance. The profit margin for resin sales was approximately nil in fiscal year 2012 and 2011 due to pricing, production costs and the fees (40% of revenue less material, freight and commissions) paid or accrued to Yorktown Management, LLC, an entity owned by Warren Kruger, President and CEO of Greystone.  Greystone’s business plan is to increase resin sales with improved profit margins toward the realization of a positive gross margin. Yorktown’s share of gross profits from resin sales totaled approximately $339,000$53,102 and $104,042 in fiscal years 2012 and 2011, respectively. During fiscal year 2012, the profit margins for recycled plastic resin decreased due to increases in the cost of raw materials.

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General, Selling and Administrative Expenses

General, selling and administrative expenses were $411,987 in fiscal year 2011.
Other Income
Other income decreased $29,400 from $32,0002012 compared to $491,084 in fiscal year 20102011 for a decrease of $79,097. The decrease in selling, general and administrative expenses was primarily due to $2,600the salary and related expenses associated with the resignation of the Senior Vice President for Sales and Marketing in fiscal yearApril, 2011.  Other income in fiscal year 2010 is from the amortization of deferred income which was fully amortized in fiscal year 2010.

Net LossIncome (Loss)
 
Greystone recorded net income of $475,360 compared to a net loss of $(947,894)$(417,642) in fiscal year 2011 compared to $(2,197) in fiscal year 2010 for the reasons discussed above.

Net Loss Available to Common Stockholders
After deducting preferred dividends and income from non-controlling interest, the net loss available to common stockholders was $(1,269,364), or $(0.05) per share, in fiscal year 2011 compared to net loss available to common stockholders of $(306,688), or $(0.01) per share, in fiscal year 2010 for the reasons discussed above.

Three Month Period Ended February 28, 2011 Compared to Three Month Period Ended February 28, 2010

Sales
Sales for fiscal year 2011 were $4,206,092 compared to $3,544,522 in fiscal year 2010 for an increase of $661,570.  Pallet sales were $3,425,976 in fiscal year 2011 compared to $3,544,522 in fiscal year 2010 for a decrease of $118,546. Greystone’s sales to its major customer in fiscal year 2011 were 69% of total pallet sales compared to 72% of total pallet sales in fiscal year 2010.    Repairs and maintenance of production equipment during the period was the primary reason for the decline in pallet sales.
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Sales of recycled plastic resin were approximately $780,116 in fiscal year 2011 compared to no sales of recycled resin in fiscal year 2010.   Recycled plastic resin sales declined $707,794, or 48%, from sales of $1,487,910 during the preceding three month period ended November 30, 2010 due to quality issues with raw materials.  As a result, Greystone implemented additional procedures to verify the quality of purchased raw materials.

Pallet sales to Greystone’s major customer are generally based on the customer’s needs to maintain its pallet inventory and may vary by period.  Greystone cannot predict the major customer’s future needs to maintain or grow its pallet inventory but has been able to grow sales to new pallet customers developed through Greystone’s marketing efforts to broaden and increase its customer base.

Cost of Sales
Cost of sales in fiscal year 2011was $3,600,831, or 86% of sales, compared to $2,958,816, or 84% of sales, in fiscal year 2010.  The increase in the ratio of cost of sales to sales in fiscal year 2011 over fiscal year 2010 is due to (1) inelastic manufacturing costs for pallet production during a period of reduced product volume and (2) the lower profit margin for recycled plastic resin as compared to the gross margin for pallet sales. The profit margin for resin sales was approximately nil in fiscal year 2011 due to pricing, production costs and the fees (40% of revenue less material, freight and commissions) paid or accrued to Yorktown Management, LLC, an entity owned by Warren Kruger, President and CEO of Greystone.  Greystone’s business plan is to increase resin sales with improved profit margins toward the realization of a positive gross margin. Yorktown’s share of gross profits from resin sales totaled approximately $85,000 in fiscal year 2011.

Net Loss
Greystone recorded net loss of $(101,558) in fiscal year 2011 compared to $(76,298) in fiscal year 2010 for the reasons discussed above.

Net LossIncome (Loss) Attributable to Common Stockholders
 
After deducting preferred dividends andNet income attributableavailable to non-controlling interests,common stockholders for fiscal year 2012 was $479,735, or $0.02 per share, compared to the net loss attributable to common stockholders  was $(218,689)of $(520,152), or $(0.01)$(0.02) per share, in fiscal year 2011 compared to $(177,106), or $(0.01) per share, in fiscal year 2010 for the reasons discussed above.

Liquidity and Capital Resources

Greystone’s operations have provided positive cash flows for each of the years beginning in fiscal year 2007 through the ninethree month period ended February 28,August 31, 2011. While the amendment to the loan agreement provided important near-term relief, Greystone will require additional cash to achieve growth and to meet Greystone's contractual obligations, and Greystone continues to explore various options including refinancing long-term debt and equity financing.  However, there is no guarantee that Greystone will be able to raise sufficient capital to meet these obligations.

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A summary of cash flows for the ninethree months ended February 28,August 31, 2011 is as follows:
 
Cash provided by operating activities $422,602  $673,997 
        
Cash used in investing activities  (1,173,301)  (183,390)
        
Cash provided by financing activities  737,993 
Cash used in financing activities  (342,671)


The contractual obligations of Greystone are as follows:

 
 
Total
Less than
1 year
 
1-3 years
 
4-5 years
Over
5 years
Long-term debt$8,893,294$3,557,260$1,698,213
$3,637,821
 
$    —
  Total  
Less than
1 year
  1-3 years  4-5 years  
Over
5 years
 
Long-term debt $9,173,196  $3,722,179  $5,168,410  $250,997  $31,610 

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Greystone had a working capital deficit of $8,403,835$4,899,022 at February 28,August 31, 2011, which includes the current portion of long-term debt of $3,557,260$3,722,179, including $2,593,716 to related parties, and accounts payable and accrued liabilities of $3,388,526. The working capital deficit at February 28, 2011 decreased $4,209,786 from the working capital deficit of $12,613,621 at May 31, 2010 due primarily$3,817,462, including $1,730,759 to the refinancing of loans with F&M Bank.related parties. The working capital deficit reflects the uncertain financial condition of Greystone resulting from its limitations on its ability to obtain long-term financing.  There is no assurance that Greystone will secure suchadditional long-term financing.

Substantially all of the financing that Greystone has received through February 28, 2011the last few fiscal years has been provided by loans or through loan guarantees from the officers and directors of Greystone, the offerings of preferred stock to current and former officers and directors of Greystone in fiscal years 2001 and 2003 and a private placement of common stock completed in March 2005.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 preferred stock or its common stock unless and until the financial position of Greystone improves through increased revenues, another financing transaction or otherwise.

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 federal securities laws.  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, 2010,2011, which was filed on September 14, 2010.16, 2011.  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.

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Item 4.   Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, Greystone carried out an evaluation under the supervision of Greystone's Chief Executive Officer and Chief Financial
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Officer of the effectiveness of the design and operation of Greystone's disclosure controls and procedures pursuant to the Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based on an evaluation as of May 31, 2010,2011, Warren F. Kruger, Greystone's Chief Executive Officer, and William W. Rahhal, Greystone’s Chief Financial Officer, identified two material weaknesses.  As a result of these two material weaknesses, Greystone’s CEO and Chief Financial Officer concluded that Greystone did not maintain effective internal control over financial reporting as of February 28,August 31, 2011. The material weaknesses as of February 28,August 31, 2011 were as follows:

 
1.   Greystone does not have a risk assessment process for identifying and mitigating risks that financial statements may be materially misstated and lacks the necessary corporate accounting resources to maintain adequate segregation of duties. Reliance on these limited resources impairs Greystone’s ability to provide for proper segregation of duties and the ability to ensure consistently complete and accurate financial reporting, as well as disclosure controls and procedures.

2.   Greystone has limited resources to ensure that necessary internal controls are implemented and followed throughout the company. Because of this limitation with respect to the ability to allocate sufficient resources to internal controls and the lack of an audit committee and a well-defined communication process, material misstatements could occur and remain undetected, implementation of new accounting standards could be hindered and risk assessment and monitoring may not be addressed in a timely manner.

During the quarter ended February 28,August 31, 2011, there were no changes in Greystone's internal controls over financial reporting that have materially affected, or that are reasonably likely to materially affect, Greystone's internal control over financial reporting.


 

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PART II.  OTHER INFORMATION

Item 5.   Other Information

Effective as of August 31, 2011, (a) Warren F. Kruger, President, Chief Executive Officer and a director of the Company, (b) Robert B. Rosene, Jr., a director of the Company, (c) F&M, (d) GSM, a wholly-owned subsidiary of the Company, and (e) GLOG, an entity owned by Warren F. Kruger and Robert B. Rosene, Jr., entered into an amendment (the “Third Amendment”) to that certain Loan Agreement, dated March 4, 2005 (as amended from time to time, the “Loan Agreement”).  The Third Amendment (v) causes all of GLOG’s rights and obligations under the Loan Agreement to be transferred to  Warren F. Kruger and Robert B. Rosene, Jr., (w) affirms the cross-collateralization and cross-default provisions of the Loan Agreement among property and debts of GSM, GLOG and Greystone Real Estate, L.L.C., an entity owned by Warren F. Kruger and Robert B. Rosene, Jr., (x) amends the cross-collateralization and cross-default provisions of the Loan Agreement to include Messrs. Kruger and Rosene, (y) amends certain financial covenants of the Loan Agreement and (z) includes certain other provisions that are customary in such types of agreements.  The Third Amendment was a result of GLOG distributing its assets to its members, Warren F. Kruger and Robert B. Rosene, Jr., and subsequently being dissolved.
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Item 6.   Exhibits.

 10.1Real Property Sale and LeaseThird 2011 Amendment to Loan Agreement between Greystone Manufacturing, L.L.C., and Greystone Real Estate, L.L.C., dated January 18, 2011.March 5, 2005.

 11.1Computation of Loss per Share is in Note 2 in the Notes to the financial statements.

 31.1Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 31.2Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
 
 
 
 
 


 
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SIGNATURES

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

 GREYSTONE LOGISTICS, INC. 
 (Registrant) 
   
    
Date: April 19,October 24, 2011
By:/s/ Warren F. Kruger 
  Warren F. Kruger 
  President and Chief Executive Officer 
    
 

   
   
   
    
Date: April 19,October 24, 2011
By:/s/ William W. Rahhal 
  William W. Rahhal 
  Chief Financial Officer 
    
 
 
 
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INDEX TO EXHIBITS

10.1 Third 2011 Amendment to Loan Agreement dated March 5, 2005.

11.1 Computation of Loss per Share is in Note 2 in the Notes to the financial statements.

31.1Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
 
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