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 ENDEDFebruary 28, 2019

For the quarterly period endedNovember 30, 2019

[  ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM ______ TO ________For the transition period from ___________ to ____________

 

Commission file number000-26331

 

GREYSTONE LOGISTICS, INC.

(Exact name of registrant as specified in its charter)

 

Oklahoma 75-2954680

(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 Securities 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 [  ]

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]Accelerated filer [  ]
Non-accelerated filer [  ][X]Smaller reporting company [X]
Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by checkmark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes [  ] No [X][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:AprilJanuary 10, 20192020 - 28,361,201

 

 

 

  
 

 

GREYSTONE LOGISTICS, INC.

FORM 10-Q

For the Period Ended February 28,November 30, 2019

 

   Page
PART I.FINANCIAL INFORMATION  
    
Item 1.Financial Statements 
    
 

Consolidated Balance Sheets (Unaudited) As of February 28,November 30, 2019 and May 31, 20182019

 1

Consolidated Statements of Income (Unaudited) For the Six Months Ended November 30, 2019 and 2018

2
    
 Consolidated Statements of Income (Unaudited) For the NineThree Months Ended February 28,November 30, 2019 and 20182
Consolidated Statements of Operations (Unaudited) For the Three Months Ended February 28, 2019 and 2018 3
    
 

Consolidated Statements of Changes in Equity (Unaudited) For the Six Months Ended November 30, 2019 and 2018

4

Consolidated Statements of Cash Flows (Unaudited) For the NineSix Months Ended February 28,November 30, 2019 and 2018

 45
    
 Notes to Consolidated Financial Statements (Unaudited) 56
    
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations 1416
    
Item 3.Quantitative and Qualitative Disclosures About Market Risk 1921
    
Item 4.Controls and Procedures 1921
    
PART II. OTHER INFORMATION  
    
Item 1.Legal Proceedings 1921
    
Item 1A.Risk Factors 1921
    
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 1921
    
Item 3.Defaults Upon Senior Securities 2021
    
Item 4.Mine Safety Disclosures 2021
    
Item 5.Other Information 2022
    
Item 6.Exhibits 2022
    
SIGNATURES 2123

 

  
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial StatementsStatements.

 

Greystone Logistics, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

 February 28, 2019  May 31, 2018  November 30, 2019  May 31, 2019 
Assets                
Current Assets:                
Cash $1,094,895  $379,632  $1,580,845  $1,255,408 
Accounts receivable -                
Trade  4,242,272   4,951,148   4,391,278   6,320,875 
Related party  26,698   60,045 
Related parties  103,834   50,320 
Inventory  5,151,417   3,089,267   3,692,991   2,620,991 
Prepaid expenses  239,548   215,617   99,978   239,146 
Total Current Assets  10,754,830   8,695,709   9,868,926   10,486,740 
Property, Plant and Equipment,net  32,811,038   25,353,876   32,413,476   32,680,472 
                
Total Assets $43,565,868  $34,049,585  $42,282,402  $43,167,212 
                
Liabilities and Equity                
Current Liabilities:                
Current portion of long-term debt $2,961,095  $2,324,046  $3,442,269  $3,030,630 
Current portion of capital leases  1,948,191   2,160,807 
Current portion of financing leases  2,111,028   1,516,629 
Current portion of operating leases  72,144   58,236 
Accounts payable and accrued liabilities  6,315,163   4,651,695   7,442,317   6,520,721 
Deferred revenue  2,652,507   3,404,334   1,514,495   2,201,067 
Accrued liabilities - related party  -   55,104 
Preferred dividends payable  108,219   -   102,637   112,192 
Total Current Liabilities  13,985,175   12,595,986   14,684,890   13,439,475 
Long-Term Debt, net of current portion  19,854,056   16,836,180   17,905,736   19,629,148 
Capital Leases, net of current portion  5,531,906   1,733,007 
Financing Leases,net of current portion  3,732,262   5,238,190 
Operating Leases,net of current portion  146,489   122,558 
Deferred Tax Liability  977,265   490,965   1,246,642   926,642 
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   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   2,836   2,836 
Additional paid-in capital  53,790,764   53,790,764   53,790,764   53,790,764 
Accumulated deficit  (51,695,914)  (52,485,313)  (50,361,999)  (51,108,677)
Total Greystone Stockholders’ Equity  2,097,691   1,308,292   3,431,606   2,684,928 
Non-controlling interest  1,119,775   1,085,155   1,134,777   1,126,271 
Total Equity  3,217,466   2,393,447   4,566,383   3,811,199 
                
Total Liabilities and Equity $43,565,868  $34,049,585  $42,282,402  $43,167,212 

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

1

Greystone Logistics, Inc.

Consolidated Statements of Income

(Unaudited)

  For the Six Months Ended November 30, 
  2019  2018 
       
Sales $38,167,971  $32,939,240 
         
Cost of Sales  33,656,973   28,801,518 
         
Gross Profit  4,510,998   4,137,722 
         
Selling, General and Administrative Expenses  2,190,228   1,792,741 
         
Operating Income  2,320,770   2,344,981 
         
Other Income (Expense):        
Other income  4,913   5,290 
Interest expense  (913,699)  (848,318)
         
Income before Income Taxes  1,411,984   1,501,953 
Provision for Income Taxes  320,000   440,100 
Net Income  1,091,984   1,061,853 
         
Income Attributable to Non-controlling Interest  (130,306)  (123,527)
         
Preferred Dividends  (215,000)  (208,045)
         
Net Income Attributable to Common Stockholders $746,678  $730,281 
         
Income Per Share of Common Stock -    
Basic and Diluted $0.03  $0.03 
Weighted Average Shares of Common Stock Outstanding -      
Basic  28,361,201   28,361,201 
Diluted  29,005,432   29,009,949 

 

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

Greystone Logistics, Inc.

Consolidated Statements of Income

(Unaudited)

 

 For the Nine Months Ended
February 28,		 
 2019  2018  For the Three Months Ended November 30, 
       2019  2018 
Sales $50,163,707  $32,073,828  $19,503,462  $14,733,130 
                
Cost of Sales  44,257,438   27,325,588   17,353,239   13,041,366 
                
Gross Profit  5,906,269   4,748,240   2,150,223   1,691,764 
                
General, Selling and Administrative Expenses  2,752,029   2,177,164 
Selling, General and Administrative Expenses  1,112,630   853,650 
                
Operating Income  3,154,240   2,571,076   1,037,593   838,114 
                
Other Income (Expense):                
Other income  7,728   5,867   2,880   3,021 
Interest expense  (1,348,285)  (997,944)  (432,788)  (435,690)
        
Income before Income Taxes  1,813,683   1,578,999   607,685   405,445 
Provision for Income Taxes  520,400   899,100   135,000   108,500 
Net Income  1,293,283   679,899   472,685   296,945 
                
Income Attributable to Non-controlling Interest  (187,620)  (185,520)  (65,620)  (62,952)
        
Preferred Dividends  (316,264)  (283,562)  (102,637)  (105,100)
                
Net Income Attributable to Common Stockholders $789,399  $210,817  $304,428  $128,893 
                
Income Per Share of Common Stock -                
Basic and Diluted $0.03  $0.01  $0.01  $0.00 
        
Weighted Average Shares of Common Stock Outstanding -                
Basic  28,361,201   28,361,201   28,361,201   28,361,201 
Diluted  29,009,415   28,992,153   29,001,160   29,018,262 

 

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

2

Greystone Logistics, Inc.

Consolidated Statements of Operations

(Unaudited)

  For the Three Months Ended
February 28,		 
  2019  2018 
       
Sales $17,224,467  $12,064,651 
         
Cost of Sales  15,455,920   10,349,347 
         
Gross Profit  1,768,547   1,715,304 
         
General, Selling and Administrative Expenses  959,288   724,748 
         
Operating Income  809,259   990,556 
         
Other Income (Expense):        
Other income (expense)  2,438   (6,202)
Interest expense  (499,967)  (339,208)
         
Income before Income Taxes  311,730   645,146 
Provision for Income Taxes  80,300   639,600 
Net Income  231,430   5,546 
         
Income Attributable to Non-controlling Interest  (64,093)  (62,552)
         
Preferred Dividends  (108,219)  (95,548)
         
Net Income (Loss) Attributable to Common Stockholders $59,118  $(152,554)
         
Income (Loss) Per Share of Common Stock -        
Basic and Diluted $0.00  $(0.01)
         
Weighted Average Shares of Common Stock Outstanding -        
Basic  28,361,201   28,361,201 
Diluted  29,012,048   28,361,201 

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

 

 3 
 

 

Greystone Logistics, Inc. and Subsidiaries

Consolidated Statements of Cash FlowsChanges in Equity

For the Six Months Ended November 30, 2019 and 2018

(Unaudited)

 

  For the Nine Months Ended
February 28,		 
  2019  2018 
Cash Flows from Operating Activities:        
Net income $1,293,283  $679,899 
Adjustments to reconcile net income to net cash provided by operating activities -        
Depreciation and amortization  3,334,730   2,578,842 
Deferred tax expense  486,300   882,100 
Loss on sale of asset  -   7,932 
Decrease in trade accounts receivable  708,876   2,486,180 
Decrease in related party receivables  33,347   18,498 
Increase in inventory  (2,062,150)  (2,501,222)
Decrease (increase) in prepaid expenses  (23,931)  30,470 
Increase (decrease) in accounts payable and accrued liabilities  1,943,133   (2,778,406)
Increase (decrease) in deferred revenue  (751,827)  4,595,034 
Net cash provided by operating activities  4,961,761   5,999,327 
         
Cash Flows from Investing Activities:        
Purchase of property and equipment  (6,380,490)  (3,768,337)
Proceeds from sale of equipment  968,168   3,000 
Net cash used in investing activities  (5,412,322)  (3,765,337)
         
Cash Flows from Financing Activities:        
Proceeds from long-term debt  3,756,800   2,320,200 
Principal payments on long-term debt and capitalized leases  (3,567,629)  (4,371,488)
Proceeds from revolving loan  4,321,000   240,000 
Principal payments on revolving loan  (2,750,000)  - 
Principal payments on related party note payable and capital lease  (233,302)  (172,999)
Dividends paid on preferred stock  (208,045)  (313,288)
Distributions paid by non-controlling interest  (153,000)  (181,400)
Net cash provided by (used in) financing activities  1,165,824   (2,478,975)
         
Net Increase (Decrease) in Cash  715,263   (244,985)
Cash, beginning of period  379,632   579,021 
         
Cash, end of period $1,094,895  $334,036 
         
Non-cash Activities:        
Acquisition of equipment by capital lease $4,667,380  $1,998,500 
Capital expenditures in accounts payable $38,445  $- 
Revolver loan converted to term loan $-  $2,500,000 
Preferred dividend accrual $108,219  $- 
Supplemental information:        
Interest paid $1,394,789  $993,994 
Taxes paid $-  $10,000 
              Total       
        Additional     Greystone  Non-    
  Preferred Stock  Common Stock  Paid-in  Accumulated  Stockholders’  controlling  Total 
  Shares  Amount  Shares  Amount  Capital  Deficit  Equity  Interest  Equity 
Balances, May 31, 2019  50,000  $5   28,361,201  $2,836  $53,790,764  $(51,108,677) $  2,684,928  $1,126,271  $3,811,199 
Cash distributions  -   -   -   -   -   -   -   (52,200)  (52,200)
Preferred dividends, $2.25/share  -   -   -   -   -   (112,363)  (112,363)  -   (112,363)
Net income  -   -   -   -   -   554,613   554,613   64,686   619,299 
Balances, August 31, 2019  50,000   5   28,361,201   2,836   53,790,764   (50,666,427)  3,127,178   1,138,757   4,265,935 
Cash distributions  -   -   -   -   -   -   -   (69,600)  (69,600)
Preferred dividends, $2.05/share  -   -   -   -   -   (102,637)  (102,637)  -   (215,000)
Net income  -   -   -   -   -   407,065   407,065   65,620   472,685 
Balances, November 30, 2019  50,000  $5   28,361,201  $2,836  $53,790,764  $(50,361,999) $3,431,606  $1,134,777  $4,566,383 
                                     
Balances, May 31, 2018  50,000  $5   28,361,201  $2,836  $53,790,764  $(52,485,313) $1,308,292  $1,085,155  $2,393,447 
Cash distributions  -   -   -   -   -   -   -   (51,000)  (51,000)
Preferred dividends, $2.06/share  -   -   -   -   -   (102,945)  (102,945)  -   (102,945)
Net income  -   -   -   -   -   704,333   704,333   60,575   764,908 
Balances, August 31, 2018  50,000   5   28,361,201   2,836   53,790,764   (51,883,925)  1,909,680   1,094,730   3,004,410 
Cash distributions  -   -   -   -   -   -   -   (51,000)  (51,000)
Preferred dividends, $2.10/share  -   -   -   -   -   (105,100)  (105,100)  -   (105,100)
Net income  -   -   -   -   -   233,993   233,993   62,952   296,945 
Balances, November 30, 2018  50,000  $5   28,361,201  $2,836  $53,790,764  $(51,755,032) $2,038,573  $1,106,682  $3,145,255 

 

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

 

 4 
 

Greystone Logistics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

  For the Six Months Ended November 30, 
  2019  2018 
Cash Flows from Operating Activities:        
Net income $1,091,984  $1,061,853 
Adjustments to reconcile net income to net cash provided by operating activities -        
Depreciation and amortization  2,560,516   2,178,499 
Deferred tax expense  320,000   440,100 
Decrease in trade accounts receivable  1,929,597   2,591,083 
Increase in related party receivables  (53,514)  (41,262)
Increase in inventory  (1,072,000)  (2,298,739)
Decrease in prepaid expenses  139,168   159,246 
Increase in accounts payable and accrued liabilities  687,310   2,272,400 
Decrease in deferred revenue  (686,572)  (2,846,745)
Net cash provided by operating activities  4,916,489   3,516,435 
         
Cash Flows from Investing Activities:        
Purchases of property and equipment  (2,018,815)  (5,308,802)
         
Cash Flows from Financing Activities:        
Proceeds from long-term debt  672,000   3,514,265 
Principal payments on long-term debt and financing leases  (2,390,138)  (2,321,590)
Proceeds from revolving loan  690,000   2,421,000 
Principal payments on revolving loan  (972,000)  (1,300,000)
Principal payments on related party note payable and financing lease  (222,384)  (122,501)
Payments for debt issuance costs  (3,360)  - 
Dividends paid on preferred stock  (224,555)  (102,945)
Distributions paid by non-controlling interest  (121,800)  (102,000)
Net cash provided by (used in) financing activities  (2,572,237)  1,986,229 
Net Increase in Cash  325,437   193,862 
Cash, beginning of period  1,255,408   379,632 
Cash, end of period $1,580,845  $573,494 
Non-cash Activities:        
Acquisition of equipment by capital lease $-  $2,333,333 
Capital expenditures in accounts payable $507,851  $110,182 
Preferred dividend accrual $102,637  $105,100 
Supplemental information:        
Interest paid $913,992  $828,706 

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

 5
 

 

GREYSTONE LOGISTICS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.Basis of Financial Statements

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,November 30, 2019 and the results of its operations and cash flows for the ninesix months and three months ended February 28, 2019 and 2018, and its cash flows for the nine months ended February 28,November 30, 2019 and 2018. 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, 20182019 and the notes thereto included in Greystone’s Form 10-K for such period. The results of operations for the ninesix months and three months ended February 28,November 30, 2019 and 2018 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. All material intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Note 2.Earnings Per Share

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 attributable to common stockholders by the weighted-average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable 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. Instruments which have an anti-dilutive effect for the six months and three months ended November 30 are as follows:

 

  2019  2018 
Nine months ended February 28:        
Preferred stock convertible into common stock  3,333,333   3,333,333 
         
Total  3,333,333   3,333,333 
         
Three months 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  3,333,333   4,033,333 
  2019  2018 
         
Preferred stock convertible into common stock  3,333,333   3,333,333 

The following tables set forth the computation of basic and diluted earnings per share forshare:

For the nine months and threesix months ended February 28,November 30, 2019 and 2018:

 

 2019  2018  2019 2018 
Nine months ended February 28:        
Numerator -                
Net income attributable to common stockholders $789,399  $210,817  $746,678  $730,281 
Denominator -                
Weighted-average shares outstanding - basic  28,361,201   28,361,201   28,361,201   28,361,201 
Incremental shares from assumed conversion of options and warrants  648,214   630,952   644,231   648,748 
Diluted shares  29,009,415   28,992,153   29,005,432   29,009,949 
Income per share -                
Basic and Diluted $0.03  $0.01  $0.03  $0.03 
Three months ended February 28:        
Numerator -        
Net income (loss) attributable to common stockholders $59,118  $(152,554)
Denominator -        
Weighted-average shares outstanding - basic  28,361,201   28,361,201 
Incremental shares from assumed conversion of options and warrants  650,847   - 
Diluted shares  29,012,048   28,361,201 
Income (Loss) per share -        
Basic and Diluted $0.00  $(0.01)

 

For the three months ended November 30, 2019 and 2018:

Note 3.Inventory

  2019  2018 
Numerator -        
Net income attributable to common stockholders $304,428  $128,893 
Denominator -        
Weighted-average shares outstanding - basic  28,361,201   28,361,201 
Incremental shares from assumed conversion of options and warrants  639,959   657,061 
Diluted shares  29,001,160   29,018,262 
Income per share -        
Basic and Diluted $0.01  $0.00 

Note 3. Inventory

 

Inventory consists of the following:

 

  February 28, 2019  May 31, 2018 
Raw materials $2,006,573  $864,339 
Finished goods  3,144,844   2,224,928 
Total inventory $5,151,417  $3,089,267 

  November 30, 2019  May 31, 2019 
Raw materials $1,701,839  $1,295,991 
Finished goods  1,991,152   1,325,000 
Total inventory $3,692,991  $2,620,991 
Note 4.Property, Plant and Equipment

Note 4. Property, Plant and Equipment

 

A summary of property, plant and equipment for Greystone is as follows:

 

 February 28, 2019  May 31, 2018  November 30, 2019  

May 31, 2019

 
Production machinery and equipment $44,895,520  $35,270,326  $47,323,256  $45,645,910 
Plant buildings and land  6,271,202   5,739,491   6,724,513   6,336,855 
Leasehold improvements  924,641   534,637   1,129,474   979,890 
Furniture and fixtures  563,074   396,882   601,586   563,074 
Right-to-use assets under operating leases  218,634   180,794 
  52,654,437   41,941,336   55,997,463   53,706,523 
                
Less: Accumulated depreciation and amortization  (19,843,399)  (16,587,460)  (23,583,987)  (21,026,051)
                
Net Property, Plant and Equipment $32,811,038  $25,353,876  $32,413,476  $32,680,472 

 

Production machinery and equipment includes right-to-use equipment capitalized pursuant to capitalfinancing leases in the amount of $13,227,122.$7,861,233 at November 30, 2019 and May 31, 2019. The financing leases all include an option to purchase which management anticipates exercising and, accordingly, the related equipment is being amortized over the estimated useful life using the straight-line method over 3.5 years for pallet molds and 12 years for injection molding machines.

 

Production machinery includes deposits on equipment in the amount of $1,390,839 that had$923,063 at November 30, 2019 which have not been placed into service as of February 28, 2019.service. Two plant buildings and land are owned by GRE, a variable interest entity (“VIE”), having a net book value of $2,925,517$2,838,613 at February 28,November 30, 2019.

 

Depreciation expense, including amortization expense related to right-to-use assets under capitalfinancing leases, for the ninesix months ended February 28,November 30, 2019 and 2018 was $3,255,939$2,557,936 and $2,476,050,$2,131,971, respectively.

 

Note 5.

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$27,500 for use of Yorktown’s grinding equipment and $5,000pelletizing equipment. Rental fees were $715,000 for the use of Yorktown’s pelletizing equipment for which GSM paid Yorktown rental fees of $1,100,000 and $1,072,500 for each of the ninesix months ended February 28,November 30, 2019 and 2018 respectively.

2018.

Effective January 1, 2017, Greystone and Yorktown entered into a five-year lease for office space at a monthly rental of $4,000 per month. Total rent expense was $36,000$24,000 for each of fiscal yearthe six months ended November 30, 2019 and 2018. At February 28,November 30, 2019, future minimum payments under the non-cancelable operating lease for the remaining three years are $48,000, $48,000, and $44,000.

Effective December 28, 2018, Yorktown purchased certain production equipment from Greystone at net book value of $968,168 and entered into a four-year lease agreement with Greystone at a monthly rent of $27,915 for the initial thirty-six months and $7,695 for the following twelve months. The lease agreement provides for a bargain purchase option of $10,000 at the end of the lease.$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 periodically purchases material and pallets from TriEnda. Purchases for the ninesix months ended February 28,November 30, 2019 and 2018 totaled $42,349$5,400 and $123,072,$42,349, 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 $167,400$271,320 and $330,144$167,400 for the ninesix months ended February 28,November 30, 2019 and 2018, respectively. The account receivable due from Green at February 28,November 30, 2019 was $19,440.$96,900.

 

Note 6. Long-term Debt

Note 6.Debt

 

Debt as of February 28,November 30, 2019 and May 31, 20182019 is as follows:

 

  February 28, 2019  May 31, 2018 
Term loan A payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing April 30, 2023 $3,417,791  $3,945,443 
         
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  1,453,103   1,613,445 
         
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  1,889,391   2,314,935 
         
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  982,106   843,200 
         
Term loan F payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 5.25%, maturing February 8, 2021  3,545,514   - 
         
Revolving loan payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.75%, due January 31, 2021  3,450,000   1,879,000 
         
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  878,088   1,099,447 
         
Term loan payable by GRE to International Bank of Commerce, interest rate of 5.5%, monthly principal and interest payment of $26,215, due April 30, 2023  2,510,295   2,652,428 
         
Note payable to Robert Rosene, 7.5% interest, due January 15, 2021  4,467,330   4,469,355 
         
Note payable to Yorktown Management & Financial Services, LLC, paid in full in February 2019  -   181,850 
         
Other  234,112   252,493 
Total debt  22,827,730   19,251,596 
Debt issue costs, net of amortization  (12,579)  (91,370)
Total debt, net of debt issue costs  22,815,151   19,160,226 
Less: Current portion  (2,961,095)  (2,324,046)
Long-term debt $19,854,056  $16,836,180 
  November 30, 2019  May 31, 2019 
Term loan A payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing April 30, 2023 $2,861,716  $3,234,947 
         
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, 2024  1,287,485   1,399,490 
         
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  1,447,506   1,744,235 
         
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  814,945   927,199 
         
Term loan F payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 5.25%, maturing February 8, 2021  3,082,407   3,398,247 
         
Term loan G payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 5.25%, maturing April 30, 2024  858,375   876,934 
         
Term loan H payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 5.25%, maturing January 1, 2022  564,067   - 
         
Revolving loan payable to International Bank of Commerce, prime rate of interest plus 0.5% but not less than 5.5%, due January 31, 2021  2,923,000   3,205,000 
         
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  643,089   800,488 
         
Term loan payable by GRE to International Bank of Commerce, interest rate of 5.5%, monthly principal and interest payment of $27,688, due April 30, 2023  2,362,662   2,461,116 
         
Note payable to Robert Rosene, 7.5% interest, due January 15, 2021  4,340,285   4,426,631 
         
Other  200,934   223,177 
Total long-term debt  21,386,471   22,697,464 
Debt issuance costs, net of amortization  (38,466)  (37,686)
Total debt, net of debt issuance costs  21,348,005   22,659,778 
Less: Current portion of long-term debt  (3,442,269)  (3,030,630)
Long-term debt, net of current portion $17,905,736  $19,629,148 

 

The prime rate of interest as of February 28,November 30, 2019 was 5.5%4.75%.

 

Loan Agreement between Greystone and IBC

 

The Loan Agreement (“IBC Loan Agreement”), dated January 31, 2014 and as amended from time to time, among Greystone and GSM (the “Borrowers”) and International Bank of Commerce (“IBC”) provides for certain term loans and a revolver loan.

 

Effective August 10, 2018,July 1, 2019, the Borrowers and IBC entered into the seventhTenth Amendment to the IBC Loan Agreement providing (i) an advancingfor Term Loan FH in the amount of $3,600,000$672,000 with a maturity date of February 8, 2021January 1, 2022, for the procurement of production equipment and (ii) an extension of the maturity date of Term Loan A to April 30, 2023.equipment.

 

The IBC term loans make equal monthly payments of principal and interest in such amounts sufficient to amortize the principal balance as follows: (i) Term Loan A over a seven-year period beginning January 31,February 29, 2016 (currently $77,548$77,550 per month), (ii) Term Loan C over a seven-year period beginning February 28, 2018November 30, 2017 (currently $25,205 per month) and (iii) Term Loan D over a four-year period beginning August 4, 2020February 10, 2019 (currently $57,469 per month), (iv) Term Loan E over a four-year period beginning February 10, 2019 (currently $23,060) and$23,060 per month), (v) Term Loan F over a five-year period beginning February 28, 2019 (currently $68,849)$68,849 per month), (vi) Term Loan G over a fifteen-year period beginning April 30, 2019 (currently $7,466 per month) and (vii) Term Loan H over 30 months beginning August 1, 2019 (currently $24,203 per month). 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 $4,000,000 (the “Revolving Loan”). The Loan Agreement was amended December 28, 2018 increasing the principal amount under the Revolving Loan to $4,000,000 of which the amount which can be borrowed from time to time is dependent upon the amount of the borrowing base but can in no eventnot to exceed $4,000,000. The Revolving Loan bears interest at the greater of the prime rate of interest plus 0.5%, or 4.75%5.50% and matures January 31, 2021. 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, among other things, requires a quarterly affirmation that the Borrowers have maintained a debt service coverage ratio of 1:25 to 1:00. As of February 28,November 30, 2019, Greystone was not in compliance with this debt service coverage ratio. IBC has issued a waiver, dated January 14, 2020, with respect to this event of noncompliance.

 

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 August 10, 2018, GRE and IBC entered into an amended agreement to extend the maturity of the note to April 30, 2023 and increase the interest rate to 5.5%. The note is secured by a mortgage on the two buildings in Bettendorf, Iowa, which are leased to Greystone.

 

9

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, 2021. 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. The balance of the note at February 28,November 30, 2019 was $4,467,330.$4,340,285.

 

Maturities

 

Maturities of Greystone’s long-term debt for the five years subsequent to February 28,November 30, 2019 are $2,961,095, $12,049,591, $3,070,785, $2,157,675$3,442,269, $12,683,643, $1,919,583, $2,416,434 and $2,588,584.$924,542.

 

Note 7. Leases

Note 7.Capital Leases

 

CapitalFinancing Leases

Financing leases as of February 28,November 30, 2019 and May 31, 2018:2019:

 

  February 28, 2019  May 31, 2018 
Non-cancellable capital leases $7,480,097  $3,893,814 
Less: Current portion  (1,948,191)  (2,160,807)
Non-cancellable capital leases, net of current portion $5,531,906  $1,733,007 

  November 30, 2019  May 31, 2019 
Non-cancellable financing leases $5,843,290  $6,754,819 
Less: Current portion  (2,111,028)  (1,516,629)
Non-cancellable financing leases, net of current portion $3,732,262  $5,238,190 

Greystone and an unrelated private company entered into fourthree lease agreements for certain production equipment with a total cost of approximately $12.2 million. The first agreement, dated August 7, 2016, was a three-year lease agreement for two injection molding machines and pallet molds, capitalized interest rate of 5.0% and maturity date of August 7, 2019 (“Agreement A”). The remaining three agreements,$6.9 million which were effective February 24, 2018, August 2, 2018 and December 21, 2018, wererespectively, with five-year lease agreements for three additional injection molding machinesterms and one pallet mold,a capitalized interest rate of 7.4% and maturity dates. Each of February 23, 2023, August 1, 2023 and December 20, 2023, respectively, (“Agreement B”). Thethe lease agreements include a bargain purchase option to acquire the production equipment at the end of the lease terms.term. The leased equipment is principally used to produce pallets for the private company. Lease payments are made as a credit on a perthe sales invoice basis at ratesthe rate of (i) $6.25 per$3.32 for each pallet produced and shipped from the respective leased equipment. The estimated aggregate monthly rental payments are approximately $178,000. The rent payments can vary each month depending on the equipment leased pursuantquantity of pallets produced from each machine. Due to Agreement A and sold toimprovements in the private companyproduction process, pallet production has increased since May 31, 2019 thereby resulting in an increase in the estimated at $180,000 per month and (ii) $3.32 per pallet produced on the equipment leased pursuant to Agreement B and sold to the private company estimated at an aggregate rent of $144,000 per month. Both Agreements A & Bfuture rental payments. The lease agreements 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.

 

Effective December 31,28, 2018, Yorktown purchased certain production equipment from Greystone at net book value of $968,168 and entered into a lease agreement with Greystone for the equipment with a monthly rent of $27,915 for the initial thirty-six months and $7,695 for the following twelve months and maturing December 27, 2023.2022. The lease agreement has a $10,000 bargain purchase option at the end of the lease.

The production equipment under the non-cancelable capitalfinancing leases has a gross carrying amount of $13,227,122$7,861,233 at February 28,November 30, 2019. Amortization of the carrying amount of approximately $776,000$416,000 and $402,000$449,000 was included in depreciation expense for the ninesix months ended February 28,November 30, 2019 and 2018, respectively.

Operating Leases

Greystone recognize a lease liability for each lease based on the present value of remaining minimum fixed rental payments, using a discount rate that approximates the rate of interest for a collateralized loan over a similar term. A right-of-use asset, reported in property, plant and equipment on the consolidated balance sheets, is recognized for each lease, valued at the lease liability. Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses on the consolidated statement of income. Variable and short-term rental payments are recognized as costs and expenses as they are incurred.

Greystone has three non-cancellable operating leases for (i) equipment with a fifty-two month term and a forty-eight month term and a discount rate of 5.40% and (ii) office space on a sixty month term and a discount rate of 5.0%. The leases are single-term with constant monthly rental rates.

Lease Summary Information

For the six months ended November 30, 2019 and 2018:

  2019  2018 
Lease Expense        
Financing lease expense -        
Amortization of right-of-use assets $416,000  $449,000 
Interest on lease liabilities  220,255   126,514 
Operating lease expense  39,650   24,000 
Short-term lease expense  797,835   749,843 
Total $1,473,740  $1,349,357 
         
Other Information        
Cash paid for amounts included in the measurement of lease liabilities for finance leases -        
Operating cash flows $220,255  $126,514 
Financing cash flows $911,529  $1,333,699 
Cash paid for amounts included in the measurement of lease liabilities for operating leases -        
Operating cash flows $39,650  $24,000 
Right-of-use assets obtained in exchange for lease liabilities -        
Financing leases $-  $2,333,333 
Operating leases $67,750  $- 
Weighted-average remaining lease term (in years) -        
Financing leases  3.2   3.4 
Operating leases  3.5   3.1 
Weighted-average discount rate -        
Financing leases  7.1%  7.0%
Operating leases  5.3%  5.0%

 

Future minimum lease payments under non-cancelable capital leases as of February 28,November 30, 2019, are approximately:

 

Twelve months ended February 29, 2020 $2,435,000 
Twelve months ended February 28, 2021  2,063,000 
Twelve months ended February 28, 2022  2,023,000 
Twelve months ended February 28, 2023  2,165,000 
Total lease payments  8,686,000 
Imputed interest  1,205,903 
Present value of minimum lease payments $7,480,097 
  Financing Leases  Operating Leases 
Twelve months ended November 30, 2020 $2,471,000  $81,881 
Twelve months ended November 30, 2021  2,471,000   81,881 
Twelve months ended November 30, 2022  1,506,000   37,881 
Twelve months ended November 30, 2023  -   27,751 
Twelve months ended November 30, 2024  -   9,037 
Total future minimum lease payments  6,448,000   238,431 
Present value discount  604,710   19,798 
Present value of minimum lease payments $5,843,290  $218,633 

Note 8. Deferred Revenue

 

Deferred revenue as of February 28, 2019 and May 31, 2018 represents advance paymentsAdvances from a customer pursuant to purchasea contract for the sale of plastic pallets with shipments expected to be completeis recognized as deferred revenue. Revenue is recognized by January 3, 2020. Greystone recognizes revenue as plastic pallets are shipped to the customer. Recognized revenuecustomer(s). Customer advances totaled $4,252,500$-0- and $3,280,500 during the ninesix months ended February 28, 2019.November 30, 2019 and 2018, respectively. Revenue recognition from customer advances during the six months ended November 30, 2019 was $686,572. The unrecognized balance of deferred revenue at November 30, 2019 and May 31, 2019, was $1,514,495 and $2,201,067, respectively.

 

Note 9. Revenue and Revenue Recognition

 

On June 1, 2018, Greystone adopted Accounting Standards Update (ASU) 2014-09,Revenue from Contracts with Customers (Topic 606), as amended, using the retrospective method. Greystone determined that there was no cumulative effect adjustment to the Consolidated Financial Statements and the adoption of the new standard did not requireany adjustments to Greystone’s consolidated financial statements for prior periods. Under the guidance of the new standard, revenue is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives the service performed. Sales arrangements with customers are short-term in nature involving single performance obligations related to the delivery of goods and generally provide for transfer of control at the time of shipment. In limited circumstances, where acceptance of the goods is subject to approval by the customer, revenue is recognized upon approval by the customer unless, historically, there have been insignificant rejections of goods by the customer. Contract liabilities associated with sales arrangements primarily relate to deferred revenue on prepaid sales of goods. Greystone generally permits returns of product due to defects; however, product returns are historically insignificant.

The amount of revenue recognized reflects the consideration to which Greystone expects to be entitled to receive in exchange for its products. The following steps are applied in determining the amount and timing of revenue recognition:

1.Identification of a contract with a customer is a sales arrangement involving a purchase order issued by the customer stating each party’s rights regarding the plastic pallets to be transferred. Payment terms vary by customer from net 30 days to 90 days. Discounts on sales arrangements are generally not provided. Credit worthiness is determined by Greystone based on payment experience and financial information available on the customer.
2.Identification of performance obligations in the sales arrangement which is predominantly the promise to transfer plastic pallets to Greystone’s customer.
3.Determination of the transaction price which is specified in the purchase order based on product pricing negotiated between Greystone and the customer.
4.Allocation of the transaction price to performance obligations.
5.Recognition of revenue which predominantly occurs upon completion of the performance obligation and transfer of control. Transfer of control generally occurs at the point of shipment which is Greystone’s manufacturing and warehouse locations.

 

Greystone’s principal product is plastic pallets produced from recycled plastic resin. Sales are primarily to customers in the continental United States of America. International sales are made to customers in Canada and Mexico which totaled approximately $408,499$1,803,000 and $527,750$291,000 in fiscal years 20192020 and 2018,2019, respectively.

 

Greystone’s customers include stocking and non-stocking distributors and direct sales to end-user customers. Sales to the following categories of customers for the ninesix months ended February 28,November 30, 2019 and 2018, respectively, were as follows:

 

Category 2019 2018  2019 2018 
Major customers (end users)  85%  76%
End Users – Major Customers  88%  84%
End Users - Other  1%  2%
Distributors  14%  22%  11%  14%
Total  99%  98%

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Note 10. 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 on the balance sheets approximate fair value.

 

Note 11. Concentrations, Risks and Uncertainties

 

Greystone derived approximately 85%88% and 76%84% of its total sales from threefour customers (three in fiscal year 2019) in fiscal years 20192020 and 2018,2019, respectively. The loss of a material amount of business from one or more 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 $1,249,653$1,019,279 and $1,200,335$814,764 in fiscal years 20192020 and 2018,2019, 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,November 30, 2019, Greystone is indebted to Mr. Rosene in the amount of $4,467,330$4,340,285 for a note payable due January 15, 2021. There is no assurance that Mr. Rosene will renew the note as of the maturity date.

 

Note 12. Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 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. Management has reviewed Greystone’s leases and determined that the implementation of ASU 2016-02 will not have a material impact on the consolidated financial statements.

Note 13. Commitments

 

At February 28,November 30, 2019, Greystone had commitments totaling $945,000$2,468,000 toward the purchase of production equipment.

Note 14. Reclassifications

Certain amounts in the Consolidated Statement of Cash Flows for the nine months ended February 28, 2018 have been reclassified to conform to classifications utilized in the nine months ended February 28, 2019.

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 2020 refer to the six months and three months ended November 30, 2019. References to fiscal year 2019 refer to the ninesix months and three months ended February 28, 2019. References to fiscal year 2018 refer to the nine months and three months ended February 28,November 30, 2018.

 

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 personnel includes both full-time employees and temporary contract personnel. Temporary personnel train for ninety days and, if appropriate, hired as full-time. Greystone had approximately 220268 and 197185 full-time employees as of February 28,November 30, 2019 and 2018, respectively. In addition, temporary personnel totaled 145 and 107 as of November 30, 2019 and 2018, respectively.

 

NineSix Months Ended February 28,November 30, 2019 Compared to NineSix Months Ended February 28,November 30, 2018

 

Sales

Sales for fiscal year 20192020 were $50,163,707$38,167,971 compared to $32,073,828$32,939,240 in fiscal year 20182019 for an increase of $18,089,879.$5,228,731, or 16%. The increase in pallet sales in fiscal year 20192020 over 20182019 was primarily dueattributable to the sales growth withwithin Greystone’s largest customers which included a pallet leasing company, one of Greystone’s major customers.new customer in fiscal year 2020.

 

Greystone has three majorSales to Greystone’s four (three in fiscal year 2019) largest customers who accounted for approximately 85%88% and 76%84% of sales in fiscal years 2020 and 2019, and 2018, respectively. Pallet sales to Greystone’s major customers are generally based on the customers’ needs which may vary from period to 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 20192020 was $44,257,438,$33,656,973, or 88% of sales, compared to $27,325,588,$28,801,518, or 85%87% of sales, in fiscal year 2018. The2019. During the last two months of the six months ended November 30, 2019, Greystone achieved (i) significant increaseimprovements in sales volume that Greystone has experienced duringpallet production as a result of installation of hardware and software to improve the pastflow of resin into molds on two years has had a direct effect on productioninjection molding machines and material costs(ii) completion of the installation of an additional pelletizing line which increased Greystone’s capacity for pelletizing thereby resulting in the increasea cost savings over purchasing plastic in pelletized form.

Initiatives to facilitate and continue improvements to the ratio of cost of sales to sales from fiscalinclude resolution on production issues on certain machines and molds, hardware and software to improve resin mold flow on remaining injection molding machines, installation of an additional grinding machine allowing the purchase of lower-priced unprocessed recycled plastic, and completion of installation for robotics on two production lines. Greystone plans to complete the remaining initiatives throughout the year 2018 to 2019. Factors affecting the ratio of cost of sales to sales include: start-up costs to accommodate the growth; certain newer products are more labor intensive; and Greystone’s requirement for refined plastic resin has exceeded its capacity for grinding and pelletizing material resulting in purchases of ground and pelletized material at a higher cost than in-house processed material.

Machinery to provide additional capacity for grinding and pelletizing plastic resin was anticipated on being installed during the third quarter of FY2019, but has since been delayed to April 2019. Additionally, machinery to automate certain production lines which will improve working conditions for production labor as well as reduce labor costs is expected to be installed byending May 31, 2019.2020.

 

Selling, General Selling and Administrative Expenses

 

General, sellingSelling, general and administrative expenses were $2,752,029,$2,190,228, or 5%6% of sales, in fiscal year 20192020 compared to $2,177,164,$1,792,741, or 7%5% of sales, in fiscal year 2018 for an increase of $574,865,$397,487 or approximately 26%22%. The increase in fiscal year 20192020 over fiscal year 20182019 results principally from increased costs relatedfor administrative personnel. The selling, general and administrative are estimated to administrative personnel.increase proportionately with increases in sales.

 

Other Income (Expenses)

 

Other income was $7,728 and $5,867$4,913 in fiscal years 2019 and 2018, respectively. The source of other income is the sale of scrap material.year 2020 compared to $5,290 in fiscal year 2019.

 

Interest expense was $1,348,285 and $997,944$913,699 in fiscal yearsyear 2020 compared to $848,318 in fiscal year 2019 and 2018 for an increase of $350,341.$65,381. The increase in interest expense in fiscal year 2019 over fiscal year 2018 is principally due to an increase in debt and capitalized leases and a 1.00% increase in the prime rate of interest declined from February 28,5.50% at May 31, 2019 to 4.75% at November 30, 2019. The weighted average prime rate of interest was 5.19% compared to 5.07% for the six months ended November 30, 2019 and 2018, to February 28, 2019.respectively.

 

Provision for Income Taxes

 

The provision for income taxes was $520,400$320,000 and $889,100$440,100 in fiscal years 2020 and 2019, and 2018, respectively. A change inThe effective tax rate differs from federal corporate taxstatutory rates enacted in December 2017 resulted in an adjustmentdue to the provision for income taxes in fiscal year 2018. The provision for income taxes does not include thenet income from the variable interest entityGRE which, as the entitya limited liability company of which Greystone has no equity ownership, is not includedtaxed at the corporate level, charges which have no tax benefit and changes in the income tax returns of Greystone and the taxable income of the entity is passed-through to the respective owners.valuation allowance.

 

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 $1,293,283$1,091,984 in fiscal year 20192020 compared to $679,899$1,061,853 in fiscal year 20182019 primarily for the reasons discussed above.

Net Income Attributable to Common Stockholders

 

NetThe net income attributable to common stockholders for fiscal year 20192020 was $789,399,$746,678, or $0.03 per share, compared to $210,817,$730,281, or $0.01$0.03 per share, in fiscal year 20182019 primarily for the reasons discussed above.

Three Months Ended February 28,November 30, 2019 Compared to Three Months Ended February 28,November 30, 2018

 

Sales

 

Sales for fiscal year 20192020 were $17,224,467$19,503,462 compared to $12,064,651$14,733,130 in fiscal year 20182019 for an increase of $5,159,816.$4,770,332, or 32%. The increase in pallet sales in fiscal year 20192020 over 20182019 was primarily due to the sales growth with the pallet leasing company and sales to the latest addition ofwithin Greystone’s largest customers which included a major customer.new customer in fiscal year 2020.

 

Sales to Greystone’s threefour (three in fiscal year 2019) largest customers accounted for approximately 86%88% and 80%85% of sales in fiscal years 20192020 and 2018,2019, respectively. 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 20192020 was $15,455,920,$17,353,239, or 90%89% of sales, compared to $10,349,347,$13,041,366, or 86%89% of sales, in fiscal year 2018. The2019. During the last two months of the six months ended November 30, 2019, Greystone achieved (i) significant increaseimprovement in sales volume that Greystone has experienced duringpallet production per machine as a result of installation of hardware and software to improve the pastflow of resin into molds on two years has had a direct effect on production costsinjection molding machines and (ii) completion of the installation of an additional pelletizing line which increased Greystone’s capacity for pelletizing thereby resulting in the increasea cost savings over purchasing plastic in pelletized form.

Initiatives to facilitate and continue improvements to the ratio of cost of sales to sales from fiscalinclude resolution on production issues on certain machines and molds, hardware and software to improve resin mold flow on remaining injection molding machines, installation of an additional grinding machine allowing the purchase of lower-priced unprocessed recycled plastic, and completion of installation for robotics on two production lines. Greystone plans to complete the remaining initiatives throughout the year 2018 to 2019. Factors affecting the ratio of cost of sales to sales include: start-up costs to accommodate the growth; certain newer products are more labor intensive; and Greystone’s requirement for refined plastic resin has exceeded its capacity for grinding and pelletizing material resulting in purchases of ground and pelletized material at a higher cost than in-house processed material.

Machinery to provide additional capacity for grinding and pelletizing plastic resin was anticipated on being installed during the third quarter of FY2019, but has since been delayed to about April 2019. Additionally, machinery to automate certain production lines which will improve working conditions for production labor as well as reduce labor costs is expected to be installed byending May 31, 2019.2020.

 

Selling, General Selling and Administrative Expenses

 

General, sellingSelling, general and administrative expenses were $959,288,$1,112,630, or 6% of sales, in fiscal year 20192020 compared to $724,748,$853,650, or 6%7% of sales, in fiscal year 2018 for an increase of $234,540$258,980 or 32%30%. The increase in fiscal year 20192020 over fiscal year 20182019 results principally from increased costs relatedfor administrative personnel. The selling, general and administrative are estimated to administrative personnel.increase proportionately with increases in sales.

 

Other Income (Expenses)

 

Other income was $2,438 in fiscal years 2019 compared to a loss of $(6,202)$2,880 in fiscal year 2018.2020 compared to $3,021 in fiscal year 2019.

Interest expense was $499,967$432,788 in fiscal year 2020 compared to $435,690 in fiscal year 2019 compared to $339,208 in fiscal year 2018 for an increasea decrease of $160,759.$2,902. The increase in interest expense in fiscal year 2019 over 2018 is due principally to increases in the prime rate of interest 5.5%declined from 5.25% at February 28,August 31, 2019 to 4.75% at November 30, 2019. The weighted average prime rate of interest was 4.96% compared to 4.5% at February 28, 2018 and increases in amount of debt and capital leases.

5.18% for the three months ended November 30, 2018.

Provision for Income Taxes

 

The provision for income taxes was $80,300$135,000 and $639,600$108,500 in fiscal years 2020 and 2019, and 2018, respectively. A change inThe effective tax rate differs from federal corporate taxstatutory rates enacted in December 2017 resulted in an adjustmentdue to the provision for income taxes in fiscal year 2018. The provision for income taxes does not include thenet income from the variable interest entityGRE which, as the entitya limited liability company of which Greystone has no equity ownership, is not includedtaxed at the corporate level, charges which have no tax benefit and changes in the income tax returns of Greystone and the taxable income from this entity is passed-through to the respective owners.valuation allowance.

 

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 $231,430$472,685 in fiscal year 20192020 compared to $5,546$296,945 in fiscal year 20182019 primarily for the reasons discussed above.

 

Net Income (Loss) Attributable to Common Stockholders

 

The net income attributable to common stockholders for fiscal year 20192020 was $59,118,$304,428, or $0.00$0.01 per share, compared a net loss to common stockholders of $(152,554),$128,893, or $(0.01)$0.00 per share, in fiscal year 20182019 primarily for the reasons discussed above.

 

Liquidity and Capital Resources

 

A summary of cash flows for the ninesix months ended February 28,November 30, 2019 is as follows:

 

Cash provided by operating activities $4,961,761  $4,916,489 
        
Cash used in investing activities $(5,412,322) $(2,018,815)
        
Cash provided by financing activities $1,165,824 
Cash used in financing activities $(2,572,237)

The contractual obligations of Greystone for long-term debt and capital lease obligations are as follows:

 

  

 

Total

  

Less than

1 year

  

 

1-3 years

  

 

4-5 years

  

More than

5 years

 
Long-term debt and capital leases $30,307,827  $4,909,286  $18,610,958  $6,787,583  $-0- 

  

 

Total

  

Less than

1 year

  

 

1-3 years

  

 

4-5 years

  

More than

5 years

 
Long-term debt $21,386,471  $3,442,269  $14,603,226  $3,340,976  $- 
Financing lease rent $6,448,000  $2,471,000  $3,977,000  $-  $     - 
Operating lease rent $238,431  $81,881  $119,762  $36,788  $- 
Commitments $2,468,000  $2,468,000  $-  $-  $- 

Greystone had a working capital deficit of $(3,230,345)$(4,815,964) at February 28,November 30, 2019. To provide for the funding to meet Greystone’s operating activities and contractual obligations as of February 28,November 30, 2019, 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.

Effective August 10, 2018 and December 28, 2018, Greystone and IBC entered into the amendments to the IBC Loan Agreement dated January 31, 2014 which provided for new funding in the form of an advancing loan in the amount of $3,600,000 to purchase production equipment and increasing the line of credit under the revolving loan to $4,000,000, respectively. Additionally, during fiscal year 2019, production equipment valued at approximately $4.7 million was acquired through a capital leasing arrangement.

 

Substantially all of the financing that Greystone has received through the last few fiscal years resulted primarily from bank notes which are guaranteed by certain officers and directors of Greystone and, formerly, from loans provided 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, 2018,2019, which was filed on August 29, 2018.2019. 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

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 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, 2018,2019, Warren F. Kruger, Greystone’s Chief Executive Officer, and William W. Rahhal, Greystone’s Chief Financial Officer, identified no material weakness in Greystone’s internal control over financial reporting. As a result, Greystone’s CEO and Chief Financial Officer concluded that the design and operation of Greystone’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) were effective as of February 28,November 30, 2019.

 

During the ninesix months ended February 28,November 30, 2019, 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.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

Item 3.Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q.

 

 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 (submitted herewith).
   
 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 (submitted herewith).
   
 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 (submitted herewith).
   
 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 (submitted herewith).
   
 101Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets at February 28,November 30, 2019 and May 31, 2018,2019, (ii) the Consolidated Statements of Income (Operations) for the nine monthsSix Months and threeThree months ended February 28,November 30, 2019 and 2018, (iii) the Consolidated Statements of Changes in Equity for the Six Months and Three Months ended November 30, 2019 and 2018, (iv) the Consolidated Statements of Cash Flows for the nine monthsSix Months ended February 28,November 30, 2019 and 2018, and (iv)(v) the Notes to the Consolidated Financial Statements (submitted herewith).

 

 2022 
 

 

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: AprilJanuary 15, 20192020/s/ Warren F. Kruger
 Warren F. Kruger, President and Chief
 Executive Officer (Principal Executive Officer)
  
Date: AprilJanuary 15, 20192020/s/ William W. Rahhal
 William W. Rahhal, Chief Financial Officer
 (Principal Financial Officer and Principal Accounting Officer)

 

 2123 
 

 

Index to Exhibits

 

The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q.

 

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 (submitted herewith).
  
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 (submitted herewith).
  
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 (submitted herewith).
  
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 (submitted herewith).
  
101Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets at February 28,November 30, 2019 and May 31, 2018,2019, (ii) the Consolidated Statements of Income (Operations) for the nine monthsSix Months and threeThree months ended February 28,November 30, 2019 and 2018, (iii) the Consolidated Statements of Changes in Equity for the Six Months and Three months ended November 30, 2019 and 2018, (iv) the Consolidated Statements of Cash Flows for the nine monthsSix Months ended February 28,November 30, 2019 and 2018, and (iv)(v) the Notes to the Consolidated Financial Statements (submitted herewith).