Note
4.
LONG-TERM DEBT
Long-term
debt consists of the following as of May 31:
|
|
2018
|
|
|
2017
|
|
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
|
|
$
|
3,945,443
|
|
|
$
|
4,626,191
|
|
|
|
|
|
|
|
|
|
|
Term loan B payable to International
Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing January 7, 2019
|
|
|
-
|
|
|
|
1,715,132
|
|
|
|
|
|
|
|
|
|
|
Term loan C payable to International
Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.0%, maturing August 4, 2020
|
|
|
1,613,445
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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
|
|
|
843,200
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Revolving loan payable to International
Bank of Commerce, prime rate of interest plus 0.5% but not less than 4.75%, due January 31, 2020
|
|
|
1,879,000
|
|
|
|
2,260,000
|
|
|
|
|
|
|
|
|
|
|
Term loan payable by GRE to International
Bank of Commerce, interest rate of 4.5%, monthly principal and interest payments of $26,215, due April 30, 2023
|
|
|
2,652,428
|
|
|
|
2,841,285
|
|
|
|
|
|
|
|
|
|
|
Note payable to Robert Rosene, 7.5%
interest, due January 15, 2020
|
|
|
4,469,355
|
|
|
|
4,469,355
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,099,447
|
|
|
|
1,396,448
|
|
|
|
|
|
|
|
|
|
|
Note payable to Yorktown Management
& Financial Services, LLC, 5.0% interest, due February 28, 2019, monthly principal and interest payments of $20,629
|
|
|
181,850
|
|
|
|
413,969
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
252,493
|
|
|
|
310,036
|
|
Face value of long-term debt
|
|
|
19,251,596
|
|
|
|
18,032,416
|
|
Less: Debt issue
costs, net of amortization
|
|
|
(91,370
|
)
|
|
|
(228,426
|
)
|
|
|
|
19,160,226
|
|
|
|
17,803,990
|
|
Less: Current
portion
|
|
|
(2,324,046
|
)
|
|
|
(2,493,236
|
)
|
Long-term debt
|
|
$
|
16,836,180
|
|
|
$
|
15,310,754
|
|
The
prime rate of interest as of May 31, 2018 was 4.75%. Effective June 15, 2018, the prime rate of interest increased to 5.00%.
Loan
Agreement between Greystone and International Bank of Commerce (“IBC”)
On
January 31, 2014, Greystone and GSM (the “Borrowers”) and International Bank of Commerce (“IBC”) entered
into a Loan Agreement (the “IBC Loan Agreement”). The IBC Loan Agreement, as amended, provides for certain term loans
and a revolver loan.
Effective
January 10, 2018, the Borrowers and IBC entered into the Fifth Amendment to the IBC Loan Agreement providing (i) a conversion
of the existing revolver loan with an outstanding balance of $2,500,000 into Term Loan D with a maturity date of January 10, 2022,
(ii) an advancing Term Loan E of $1,000,000 with a maturity date of January 10, 2022 for the procurement of production equipment,
and (iii) an amended and modified revolving loan of $3,000,000 with a maturity date of January 31, 2020. The three notes
bear interest at the greater of the prime rate of interest plus 0.5%, or 4.75%. At May 31, 2018, IBC had advanced $843,200 against
Term Loan E.
Effective
August 4, 2017, the Borrowers and IBC entered into the Fourth Amendment to the IBC Loan Agreement providing for Term Loan C in
the amount of $1,795,000 for the purchase of certain production equipment. Term Loan C bears interest at the greater of prime
plus 0.5%, or 4.00% and matures August 4, 2020.
The
IBC term loans make equal monthly payments of principal and interest in such amounts sufficient to amortize the principal balance
of (i) Term Loan A over a seven-year period beginning January 31, 2016 (currently $74,455 per month), (ii) Term Loan C over a
seven-year period beginning August 31, 2017 (currently $25,205 per month) and (iii) Term Loan D over a four-year period beginning
August 4, 2020 (currently $57,469 per month). Term Loan E requires monthly interest payments until January 10, 2019, after which
monthly payments of principal and interest are required in an amount sufficient to amortize the loan over a four-year period.
The monthly payments of principal and interest on the IBC term loans may vary as a result of changes in the prime rate of interest.
The
IBC Loan Agreement, as amended, provides a revolving loan in an aggregate principal amount of up to $3,000,000 (the “Revolving
Loan”). The exact amount which can be borrowed under the Revolving Loan from time to time is dependent upon the amount of
the borrowing base, but can in no event exceed $3,000,000. The Revolving Loan bears interest at greater of the prime rate of interest
plus 0.5%, or 4.75% and matures January 31, 2020. The Borrowers are required to pay all interest accrued on the outstanding
principal balance of the Revolving Loan on a monthly basis. Any principal on the Revolving Loan that is prepaid by the Borrowers
does not reduce the original amount available to the Borrowers.
The
IBC Loan Agreement includes customary representations and warranties and affirmative and negative covenants which include (i)
requiring the Borrowers to maintain a debt service coverage ratio of 1:25 to 1:00 and a funded debt to EBIDA ratio not exceeding
3:00 to 1:00, (ii) subject to certain exceptions, limiting the Borrowers’ combined capital expenditures on fixed assets
to $1,500,000 per year, (iii) prohibiting Greystone, without IBC’s prior written consent, from declaring or paying any dividends,
redemptions of stock or membership interests, distributions and withdrawals (as applicable) in respect of its capital stock or
any other equity interest, other than additional payments to holders of its preferred stock in an amount not to exceed $500,000
in any fiscal year, (iv) subject to certain exceptions, prohibiting the incurrence of additional indebtedness by the Borrowers,
and (v) requiring the Borrowers to prevent (A) any change in capital ownership such that there is a material change in the direct
or indirect ownership of (1) Greystone’s outstanding preferred stock, and (2) any equity interest in GSM, or (B) Warren
Kruger from ceasing to be actively involved in the management of Greystone as President and/or Chief Executive Officer. The foregoing
list of covenants is not exhaustive and there are several other covenants contained in the IBC Loan Agreement.
As
of May 31, 2018, Greystone was not in compliance to maintain the debt service coverage ratio required
by the IBC Loan Agreement. IBC issued a waiver, dated August 27, 2018, to Greystone for failure to maintain the debt
service coverage ratio at May 31, 2018.
The
IBC Loan Agreement includes customary events of default, including events of default relating to non-payment of principal and
other amounts owing under the IBC Loan Agreement from time to time, inaccuracy of representations, violation of covenants, defaults
under other agreements, bankruptcy and similar events, the death of a guarantor, certain material adverse changes relating to
a Borrower or guarantor, certain judgments or awards against a Borrower, or government action affecting a Borrower’s or
guarantor’s ability to perform under the IBC Loan Agreement or the related loan documents. Among other things, a default
under the IBC Loan Agreement would permit IBC to cease lending funds under the IBC Loan Agreement, and require immediate repayment
of any outstanding loans with interest and any unpaid accrued fees.
The
IBC Loan Agreement is secured by a lien on substantially all of the assets of the Borrowers. In addition, the IBC Loan Agreement
is secured by a mortgage granted by GRE on the real property owned by GRE in Bettendorf, Iowa (the “Mortgage”). GRE
is owned by Warren F. Kruger, Greystone’s President and CEO, and Robert B. Rosene, Jr., a director of Greystone. Messrs.
Kruger and Rosene have provided a combined limited guaranty of the Borrowers’ obligations under the IBC Loan Agreement,
with such guaranty being limited to a combined amount of $6,500,000 (the “Guaranty”). The Mortgage and the Guaranty
also secure or guaranty, as applicable, the obligations of GRE under the Loan Agreement between GRE and IBC dated January 31,
2014 as discussed in the following paragraph.
Loan
Agreement between GRE and IBC
On
January 31, 2014, GRE and IBC entered into a Loan Agreement (Real Estate Term Loan) (“GRE Loan Agreement) which provided
for a mortgage loan to GRE of $3,412,500. The loan provides for a 4.5% interest rate and a maturity of January 31, 2019 and is
secured by a mortgage on the two buildings in Bettendorf, Iowa which are leased to Greystone. As discussed in Note 16, Subsequent
Event, GRE and IBC entered into the First Amendment to the GRE Loan Agreement providing for an extension of the maturity date
of the loan to April 30, 2023 and a new interest rate of 5.5%.
Note
Payable between Greystone and Robert B. Rosene, Jr.
Effective
December 15, 2005, Greystone entered into an agreement with Robert B. Rosene, Jr., a member of Greystone’s Board of Directors,
to convert $2,066,000 of advances into a note payable at 7.5% interest.
Effective
June 1, 2016, the note payable to Mr. Rosene was restated (the “Restated Note”) whereby accrued interest of $2,475,690
was combined with the outstanding principal of $2,066,000 resulting in a note payable in the principal amount of $4,541,690 with
an interest rate of 7.5% and a maturity of January 15, 2018, subsequently amended to January 15, 2020. The Restated Note requires
the payment of accrued interest to Mr. Rosene. In addition, the Restated Note allows Greystone to make additional payments, at
Greystone’s discretion, up to an amount allowed by the IBC Loan Agreement.
Note
Payable between Greystone and First Bank
In
connection with the acquisition of certain equipment from Yorktown Management & Financial Services, LLC (“Yorktown”)
effective February 1, 2017, Greystone assumed a note payable in the amount of $1,469,713 between Yorktown and First Bank. The
note bears interest at the prime rate of interest plus 1.45% but not less than 4.95%. The rate of interest was 6.20% at May 31,
2018. The First Bank note is secured by certain production equipment.
Note
Payable between Greystone and Yorktown Management & Financial Services, LLC (“Yorktown”)
On
February 29, 2016, Greystone entered into an unsecured note payable to Yorktown in the amount of $688,296 in connection with the
acquisition of equipment from Yorktown. The note payable bears interest at the rate of 5% and is payable over three years with
monthly principal and interest payments of $20,629.
Maturities
Maturities
of Greystone’s long-term debt for the five years after May 31, 2018 are $2,324,046, $8,764,654, $3,470,454, $2,168,481 and
$2,523,961.
Note
5.
CAPITAL LEASES
Capital
leases consist of the following as of May 31:
|
|
2018
|
|
|
2017
|
|
Non-cancelable capital
leases with private pallet leasing
company
|
|
$
|
3,893,814
|
|
|
$
|
3,794,063
|
|
Less: Current
portion
|
|
|
(2,160,807
|
)
|
|
|
(2,261,560
|
)
|
Non-cancelable
capital leases, net of current portion
|
|
$
|
1,733,007
|
|
|
$
|
1,532,503
|
|
In
February, 2018, Greystone entered into a five-year lease agreement, interest rate of 7.4% and maturity date of February 24, 2023,
(“Agreement A”) with an unrelated private company to provide for certain production equipment with a cost of approximately
$2.0 million. In August, 2016, Greystone entered into a three-year lease agreement, interest rate of 5.0% and maturity date of
August 7, 2019, (“Agreement B”) with the same unrelated private company to provide for certain production equipment
with a total cost of approximately $5.4 million. The lease agreements include a bargain purchase option to acquire the production
equipment at the end of the lease terms. Lease payments are made on a per invoice basis at rates of (i) $3.32 per pallet produced
on the leased equipment and sold to the private company, estimated at $46,000 per month, for Agreement A and (ii) $6.25 per pallet
produced on the equipment and sold to the private company, estimated at $154,000 per month, for Agreement B. Both Agreements A
& B provide for minimum monthly lease rental payments based upon the total pallets sold in excess of a specified amount not
to exceed the monthly productive capacity of the leased machines.
The
production equipment under the non-cancelable capital leases at May 31, 2018 and 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
Production equipment
under capital leases
|
|
$
|
7,591,574
|
|
|
$
|
5,365,889
|
|
Less: Accumulated
amortization
|
|
|
(974,811
|
)
|
|
|
(380,233
|
)
|
Production
equipment under capital leases, net
|
|
$
|
6,616,763
|
|
|
$
|
4,985,656
|
|
Amortization
of the carrying amount of $594,578 and $380,233 was included in depreciation expense for the years ended May 31, 2018 and 2017,
respectively.
Future
minimum lease payments under non-cancelable capital leases as of May 31, 2018, are approximately:
Year ended May 31, 2019
|
|
$
|
2,353,164
|
|
Year ended May 31, 2020
|
|
|
547,800
|
|
Year ended May 31, 2021
|
|
|
547,800
|
|
Year ended May 31, 2022
|
|
|
547,800
|
|
Year ended
May 31, 2023
|
|
|
338,490
|
|
Total lease payments
|
|
|
4,335,054
|
|
Imputed interest
|
|
|
441,240
|
|
Present value
of minimum lease payments
|
|
$
|
3,893,814
|
|
Note
6.
DEFERRED REVENUE
In
February, 2018, a new customer entered into a contract with Greystone to purchase plastics pallets with shipments occurring from
May 2018 through about August 2018. The customer prepaid $4,595,034 to provide funding to Greystone for procuring raw materials
to produce the pallets. Revenue will be recognized by Greystone as pallets are shipped to the customer. The unrecognized balance
at May 31, 2018 was $3,404,334.
Note
7.
RELATED PARTY TRANSACTIONS
Transactions
with Warren F. Kruger, Chairman
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.
Greystone compensates Yorktown for the use of equipment as discussed below.
Rental
fees.
GSM pays weekly rental fees of $22,500 and $5,000 to Yorktown for grinding equipment and pelletizing equipment, respectively.
Total rental fees of approximately $1,430,000 were paid in both fiscal years 2018 and 2017.
Yorktown
provides office space in Tulsa, Oklahoma for Greystone at a monthly rental of $2,200 until December 31, 2016. Effective January
1, 2017, Greystone and Yorktown entered into a five-year lease for expanded office space at a monthly rental of $4,000 per month.
Total rent expense was $48,000 and $35,400 for fiscal years 2018 and 2017, respectively. At May 31, 2018, future minimum payments
under the non-cancelable operating lease are $48,000 for fiscal years 2019, 2020 and 2021 and $28,000 for fiscal year 2022.
Acquisitions
from Yorktown.
On September 1, 2016, Yorktown acquired the plastic resin pelletizing equipment from TriEnda Holdings, L.L.C.,
which was used by Greystone to blend and pelletize plastic resin for a tolling fee. During the period from September 1, 2016 through
January 31, 2017, Greystone rented this equipment from Yorktown for a total of $163,204. Effective February 1, 2017, Greystone
acquired this equipment from Yorktown for $1,500,076, which included a cash payment of $30,627 and the assumption of a note payable
to First Bank in the amount of $1,469,713.
Compensation
related to Loan Guarantees.
Effective September 1, 2016, Greystone’s Board of Directors authorized the issuance of warrants
to purchase 250,000 shares of Greystone’s common stock for $0.01 per share to Mr. Kruger and a cash payment of $65,000 as
compensation for providing guarantees on Greystone’s debt with International Bank of Commerce. The warrants are vested and
expire January 10, 2027. The warrants, valued as of the measurement date for approximately $60,000, and the cash payment were
capitalized as debt issue costs to be amortized over the remaining loan term.
Transactions
with TriEnda Holdings, L.L.C.
TriEnda
Holdings, L.L.C. (“TriEnda”) is a manufacturer of plastic pallets, protective packaging and dunnage utilizing thermoform
processing of which Warren F. Kruger, Greystone’s President and CEO, is the non-executive chairman of the board of directors
of Kruger Brown Holdings, LLC (“KBH”), which owns a majority interest in TriEnda. Mr. Kruger’s net interest
through KBH is not a majority ownership interest in TriEnda. Greystone charged a tolling fee to TriEnda for blending and pelletizing
plastic resin using TriEnda’s equipment and raw materials. Revenue from TriEnda totaled $538,024 in fiscal year 2017. Effective
March 1, 2017, services to TriEnda were discontinued.
Greystone
purchases certain pallet designs from TriEnda for resale. During fiscal year 2018, Greystone purchases from TriEnda totaled $68,302.
Transactions
with Robert B. Rosene, Jr., Director
Note
payable.
Effective December 15, 2005, Greystone entered into an agreement with Robert B. Rosene, Jr., a member of Greystone’s
Board of Directors, to convert $2,066,000 of advances into a note payable at 7.5% interest. Effective June 1, 2016, the note payable
to Mr. Rosene was restated (the “Restated Note”) whereby the accrued interest as of June 1, 2016 of $2,475,690 was
combined with the outstanding principal of $2,066,000, resulting in a note payable in the principal amount of $4,541,690 with
an interest rate of 7.5% and a maturity of January 15, 2018, subsequently amended to January 15, 2020. The Restated Note requires
the payment of accrued interest to Mr. Rosene. In addition, the Restated Note allows Greystone to make additional payments, at
Greystone’s discretion, up to an amount allowed by the IBC Loan Agreement.
Compensation
related to Loan Guarantees.
Effective September 1, 2016, Greystone’s Board of Directors authorized the issuance of warrants
to purchase 250,000 shares of Greystone’s common stock for $0.01 per share to Mr. Rosene and a cash payment of $65,000 as
compensation for providing guarantees on Greystone’s debt with International Bank of Commerce. The warrants are vested and
expire January 10, 2027. The warrants, valued as of the measurement date for approximately $60,000, and the cash payment were
capitalized as debt issue costs to be amortized over the remaining loan term.
Transactions
with Green Plastic Pallets
Green
Plastic Pallets (“Green”) is an entity owned by James Kruger, a brother to Warren Kruger, Greystone’s President
and CEO. Green purchased pallets from Greystone totaling $421,966 and $312,130 in fiscal years 2018 and 2017, respectively. At
May 31, 2018, Green owed $55,080 to Greystone.
Note
8.
FEDERAL INCOME TAXES
Deferred
taxes as of May 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
2,015,616
|
|
|
$
|
2,102,924
|
|
Accrued expenses
|
|
|
101,320
|
|
|
|
113,021
|
|
Allowance for doubtful
accounts
|
|
|
-
|
|
|
|
8,788
|
|
Other
|
|
|
27,432
|
|
|
|
27,540
|
|
Total deferred tax
asset
|
|
|
2,144,368
|
|
|
|
2,252,273
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization, tax reporting
in excess of financial
|
|
|
(2,635,333
|
)
|
|
|
(1,970,858
|
)
|
Net deferred
tax asset (liability)
|
|
$
|
(490,965
|
)
|
|
$
|
281,415
|
|
In
assessing the reliability of deferred tax assets, management considers the likelihood of whether it is more likely than not the
net deferred tax asset will be realized. Based on this evaluation, management has determined that Greystone will be able to realize
the full effect of the deferred tax asset and no valuation allowance has been recorded as of May 31, 2018 and 2017, respectively.
The
net change in deferred taxes for the year ended May 31, 2018 and 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
Net operating loss carryforward
|
|
$
|
(87,308
|
)
|
|
$
|
(229,465
|
)
|
Depreciation and amortization, tax reporting
|
|
|
|
|
|
|
|
|
in excess of financial
|
|
|
(664,475
|
)
|
|
|
(911,766
|
)
|
Stock compensation costs
|
|
|
-
|
|
|
|
18,124
|
|
Allowance for doubtful accounts
|
|
|
(8,788
|
)
|
|
|
4,280
|
|
Accrued expenses
|
|
|
(11,701
|
)
|
|
|
113,021
|
|
Other
|
|
|
(108
|
)
|
|
|
3,539
|
|
Net decrease
|
|
$
|
(772,380
|
)
|
|
$
|
(1,002,267
|
)
|
The
provision for income taxes at May 31, 2018 and 2017 consists of the following:
|
|
2018
|
|
|
2017
|
|
Current income tax –
Federal and State
|
|
$
|
-
|
|
|
$
|
9,723
|
|
Deferred income
tax provision
|
|
|
772,380
|
|
|
|
1,002,267
|
|
Provision for
income taxes
|
|
$
|
772,380
|
|
|
$
|
1,011,990
|
|
Greystone’s
provision for income taxes for the years ended May 31, 2018 and 2017 differs from the federal statutory rate as follows:
|
|
2018
|
|
|
2017
|
|
Tax provision using statutory
rates
|
|
|
21
|
%
|
|
|
34
|
%
|
State income taxes
|
|
|
9
|
|
|
|
-
|
|
Federal tax rate change adjustment
|
|
|
(2
|
)
|
|
|
-
|
|
Expiring net operating losses
|
|
|
3
|
|
|
|
-
|
|
VIE income passed
to members
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Tax provision
per financial statements
|
|
|
29
|
%
|
|
|
31
|
%
|
On
December 22, 2017, the President signed into legislation The Tax Cuts and Jobs Act (the Act). The Act changes existing U.S. tax
law and included numerous provisions that will affect Greystone’s business, including income tax accounting, disclosure
and tax compliance. Greystone revalued all deferred tax assets and liabilities as of the date of the Act. The result of this revaluation
was an increase in deferred taxes in the amount of $57,039 and a like decrease in the provision for income taxes.
At
May 31, 2018, Greystone had a net operating loss (NOL) for Federal income tax purposes from inception through May 31, 2005 of
$14,467,000 expiring in fiscal year 2019 through fiscal year 2025 of which $1,575,000 is management’s estimate of the usable
amount pursuant to Internal Revenue Code Section 382. The limitation is due to a change in control of Greystone during the fiscal
year ended May 31, 2005. The utilization of NOL’s accumulated through fiscal year 2005 is limited to approximately $225,000
per year.
|
|
NOL
Carryforward
|
|
|
Year
Expiring
|
|
Cumulative through May 31, 2005
|
|
$
|
1,575,000
|
|
|
|
2019
- 2025
|
|
Year ended May 31, 2006
|
|
|
120,983
|
|
|
|
2026
|
|
Year ended May 31, 2007
|
|
|
2,151,837
|
|
|
|
2027
|
|
Year ended May 31, 2011
|
|
|
746,484
|
|
|
|
2031
|
|
Year ended May 31, 2015
|
|
|
321,625
|
|
|
|
2035
|
|
Year Ended May 31, 2016
|
|
|
1,060,747
|
|
|
|
2036
|
|
Year Ended May 31, 2018
|
|
|
1,481,098
|
|
|
|
N/A
|
|
Note
9.
STOCKHOLDERS’ EQUITY
Convertible
Preferred Stock
In
September 2003, Greystone issued 50,000 shares of Series 2003, cumulative, convertible preferred stock, par value $0.0001, for
a total purchase price of $5,000,000. Each share of the preferred stock has a stated value of $100 and a dividend rate equal to
the prime rate of interest plus 3.25% and may be converted into common stock at the conversion rate of $1.50 per share or an aggregate
of 3,333,333 shares of common stock. The holder of the preferred stock has been granted certain voting rights so that such holder
has the right to elect a majority of the Board of Directors of Greystone. Preferred stock dividends must be fully paid before
a dividend on the common stock may be paid.
Warrants
to Purchase Common Stock
Effective
September 1, 2016, Greystone’s Board of Directors authorized the issuance of warrants to purchase 250,000 shares of Greystone’s
common stock for $0.01 per share to each of Warren F. Kruger, President and CEO, and Robert B. Rosene, Jr., a member of Greystone’s
board, as compensation for providing guarantees on Greystone’s debt with IBC. The warrants are vested and expire January
10, 2027. The issuance was capitalized as debt issuance cost as of the measurement date for approximately $120,000 and amortized
over the remaining guaranty term.
The
value of Greystone’s common stock on September 1, 2016 was $0.24 per share. The estimated fair value at the date of the
grant for the warrants utilizing the Black-Scholes option valuation model and the assumptions used in the Black-Scholes option
model for fiscal year 2017 are as follows:
Estimated fair value
of warrants at date of grant
|
|
$
|
120,000
|
|
Black-Scholes model assumptions
|
|
|
|
|
Average expected
life (years)
|
|
|
6
|
|
Average expected
volatility factor
|
|
|
145.77
|
%
|
Average risk-free
interest rate
|
|
|
4.0
|
%
|
Average expected
dividend yields
|
|
$
|
-0-
|
|
Note
10.
STOCK OPTIONS
Greystone
has a stock option plan that provides for the granting of options to key employees and non-employee directors. The options are
to purchase common stock at not less than fair market value at the date of the grant. Stock options generally expire in ten years
from the date of grant or upon termination of employment, and are generally exercisable one year from date of grant in cumulative
annual installments of 25%. Following is a summary of option activity for the two years ended May 31, 2018:
|
|
Number
|
|
|
Weighted
Average Exercise Price
|
|
|
Remaining
Contractual
Life (years)
|
|
|
Intrinsic
Value
|
|
Total outstanding, May 31, 2016
|
|
|
675,000
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Exercised during
fiscal year 2017
|
|
|
(475,000
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Total outstanding May 31, 2017
|
|
|
200,000
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Total outstanding May 31, 2018
|
|
|
200,000
|
|
|
$
|
0.12
|
|
|
|
4.0
|
|
|
|
|
|
Exercisable as of May 31, 2018
|
|
|
200,000
|
|
|
$
|
0.12
|
|
|
|
4.0
|
|
|
$
|
54,000
|
|
Non-vested as of May 31, 2018
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation cost was $-0- and $53,424 for fiscal years 2018 and 2017, respectively.
Note
11.
FINANCIAL INSTRUMENTS
The
following methods and assumptions are used in estimating the fair-value disclosures for financial instruments:
Cash,
Accounts Receivable and Accounts Payable: The carrying amounts reported in the balance sheet for cash, accounts receivable and
accounts payable approximate fair value due to the short-term maturity of these instruments.
Long-Term
Debt: The carrying amount of loans with floating rates of interest approximate fair value. Fixed rate loans are valued based on
cash flows using estimated rates for comparable loans. As of May 31, 2018 and 2017, the carrying amounts reported in the balance
sheet approximate fair value for the variable and fixed rate loans.
Note
12.
SUPPLEMENTAL INFORMATION OF CASH FLOWS
Supplemental
information of cash flows for the years ended May 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of equipment through capital lease
|
|
$
|
2,225,685
|
|
|
$
|
5,323,864
|
|
Revolver loan converted
to term loan
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
Acquisition of buildings
through note payable
|
|
$
|
-
|
|
|
$
|
318,750
|
|
Acquisition of
equipment from related party in
exchange for receivable and/or note payable
|
|
$
|
-
|
|
|
$
|
1,469,713
|
|
Acquisition of equipment
in accounts payable
|
|
$
|
373,214
|
|
|
$
|
102,019
|
|
Conversion of
related party accrued interest to
long-term debt
|
|
$
|
-
|
|
|
$
|
2,475,690
|
|
Warrants issued
as debt service costs
|
|
$
|
-
|
|
|
$
|
120,000
|
|
Preferred dividend
accrual
|
|
$
|
-
|
|
|
$
|
29,726
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,347,364
|
|
|
$
|
1,183,781
|
|
Note
13.
CONCENTRATIONS
For
the fiscal years 2018 and 2017, Greystone had two customers that accounted for approximately 76% and 71% of total sales, respectively.
Greystone
purchases damaged pallets from its customers at a price based on the value of the raw material content of the pallet. A majority
of these purchases are from one of Greystone’s major customers which were approximately $1,616,469 and $1,611,000 in fiscal
years 2018 and 2017, respectively.
Note
14.
VARIABLE INTEREST ENTITIES (VIE)
Greystone
Real Estate, L.L.C.
GRE,
is owned by Warren Kruger, President and CEO, and Robert Rosene, a member of the Board of Directors. GRE was created solely to
own and lease buildings that GSM occupies in Bettendorf, Iowa.
The
buildings, having a carrying value of $3,012,421 and $3,128,293 at May 31, 2018 and 2017, respectively, serve as collateral for
GRE’s debt. The debt had a carrying value of $2,652,428 and $2,841,285 at May 31, 2018 and 2017, respectively.
Note
15.
COMMITMENTS
At
May 31, 2018, Greystone had outstanding commitments totaling $2,071,400 for the acquisition of equipment.
Note
16.
SUBSEQUENT EVENT
On
August 8, 2018, Greystone and IBC entered into the Sixth Amendment to the IBC Loan Agreement dated January 31, 2014 (the “Sixth
Amendment”) whereby IBC made an additional term loan to Borrowers in the original principal amount of $3,600,000 (“Term
Loan F”). Term Loan F has an interest rate of the prime rate of interest plus 0.5% but not less than 5.25% and a maturity
date of February 8, 2021. The monthly principal and interest payments are based on an amortization of the principal over 60 months.
The proceeds from Term Loan F will be used to acquire new production equipment. In addition, the Sixth Amendment included extensions
for Term Loan A to April 30, 2023 and Term Loan C to July 31, 2020.
On
August 8, 2018, Greystone Real Estate, L.L.C. and IBC entered into the First Amendment to Loan Agreement (Real Estate Term Loan)
dated January 31, 2014 (“Agreement”) changing the rate of interest to 5.5% and extending the maturity date of the
loan to April 30, 2023.