GREYSTONE LOGISTICS INC

Greystone Logistics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

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 29, 2024, the results of its operations for the nine months and three months ended February 29(28), 2024 and 2023 and its cash flows for the nine months ended February 29(28), 2024 and 2023. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the fiscal year ended May 31, 2023 and the notes thereto included in the Form 10-K for such period. The results of operations for the nine months and three months ended February 29(28), 2024 and 2023 are not necessarily indicative of the results to be expected for the full fiscal year.

The unaudited 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”) for the period from June 1, 2022 through July 29, 2022. All material intercompany accounts and transactions have been eliminated in the consolidated financial statements.

GRE owns two buildings located in Bettendorf, IA, which are occupied by Greystone. GRE is wholly owned by Robert B. Rosene, Jr., a member of Greystone’s Board of Directors. Effective July 29, 2022, GRE paid off its mortgage payable and, in conjunction with Greystone’s refinancing described in Note 6, GRE was removed from the cross-collateralization agreement. Following these transactions, Greystone was no longer determined to be the primary beneficiary of GRE. Accordingly, GRE was deconsolidated from Greystone’s consolidated financial statements as of July 29, 2022, resulting in the recognition of a gain in the amount of $569,997. Subsequent to the deconsolidation, Greystone entered into a new lease agreement with GRE and recorded right-of-use assets and liabilities for the new lease. See Note 7.

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 periods ended February 29(28) are as follows:

The following tables set forth the computation of basic and diluted earnings per share**.**

For the nine months ended February 29(28), 2024 and 2023:

For the three months ended February 29(28), 2024 and 2023:

Inventory consists of the following:

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

Production machinery includes deposits on equipment in the amount of $450,454 as of February 29, 2024, which has not been placed into service.

Depreciation expense, including amortization expense related to financing leases, for the nine months ended February 29(28), 2024 and 2023 was $4,296,383 and $3,954,444, respectively.

Yorktown Management & Financial Services, LLC

Yorktown Management & Financial Services, LLC (“Yorktown”), an entity wholly-owned by Warren F. Kruger, Greystone’s CEO, President, Chairman of the Board, and a significant stockholder of Greystone, 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 $27,500 for use of Yorktown’s grinding equipment and pelletizing equipment. Rental fees were $1,072,500 for the each of the nine months ended February 29(28), 2024 and 2023.

Greystone leases office space from Yorktown at a monthly rental of $5,200 per month which increased to $6,250 per month effective July 1, 2023, with the intent of Greystone and Yorktown finalizing a new lease agreement, subject to the Board of Directors approval. Total rent expenses were $55,200 and $46,800 for the nine months ended February 29(28), 2024 and 2023, respectively.

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 CEO, President, Chairman of the Board, and a significant stockholder of Greystone, 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 may purchase pallets from TriEnda for resale or sell Greystone pallets to TriEnda. During the nine months ended February 29(28), 2024 and 2023, Greystone purchases from TriEnda totaled $7,516 and $431, respectively and sales to TriEnda totaled $150,389 and $31,231, respectively. As of February 29, 2024, TriEnda owed $65,907 to Greystone and Greystone owed $7,716 to TriEnda.

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 CEO, President, Chairman of the Board, and a significant stockholder of Greystone. Greystone had sales to Green of $146,454 and $574,768 for the nine months ended February 29(28), 2024 and 2023, respectively. The account receivable due from Green as of February 29, 2024 was $59,295.

Debt as of February 29, 2024 and May 31, 2023 is as follows:

The prime rate of interest as of February 29, 2024 was 8.50%.

Debt issuance costs consist of the amounts paid to third parties in connection with the issuance and modification of debt instruments. These costs are shown on the consolidated balance sheet as a direct reduction to the related debt instrument. Amortization of these costs is included in interest expense. Greystone recorded amortization of debt issuance costs of $4,323 and $4,322 for the nine months ended February 29(28), 2024 and 2023, respectively.

Restated and Amended Loan Agreement between Greystone and IBC

On July 29, 2022, Greystone and GSM (each a “Borrower” and together the “Borrowers”) entered into an Amended and Restated Loan Agreement (“IBC Restated Loan Agreement”) with International Bank of Commerce (“IBC”) that provided for the consolidation of certain term loans and a renewed revolver loan.

The IBC term loans make equal monthly payments of principal and interest in such amounts sufficient to amortize the principal balance of the loans over the remaining lives. The monthly payments of principal and interest on the IBC term loans may vary due to changes in the prime rate of interest. As of February 29, 2024, the aggregate payments for the IBC term loans are approximately $254,000 per month.

The IBC Restated Loan Agreement, dated July 29, 2022, as amended, provided for IBC to make certain term loans to Greystone, to consolidate all existing term loans in the aggregate amount of approximately $2,700,000 and additional funding in the approximate amount of $13,200,000 for the purchase of equipment and renewal of the revolving loan with an increase of $2,000,000 to an aggregate principal amount of $6,000,000 (the “Revolving Loan”), subject to borrowing base limitations. As of February 29, 2024, Greystone’s available revolving loan borrowing capacity was approximately $5,770,000.

The IBC Restated Loan Agreement includes customary events of default, including events of default relating to non-payment of principal and other amounts owing under the IBC Restated 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 Restated Loan Agreement or the related loan documents. In addition, without prior written consent, Greystone shall not declare or pay any dividends, redemptions, distributions and withdrawals with respect to its equity interest other than distributions to holders of its preferred stock in the aggregate of $500,000 in any fiscal year. Among other things, a default under the IBC Restated Loan Agreement would permit IBC to cease lending funds under the IBC Restated Loan Agreement and require immediate repayment of any outstanding notes with interest and any unpaid accrued fees.

The IBC Restated Loan Agreement is secured by a lien on substantially all assets of the Borrowers. Warren F. Kruger, the Company’s President, CEO and Chairman of the Board and a significant stockholder of Greystone, and Robert B. Rosene, Jr., a member of the Company’s Board of Directors, have provided limited guaranties of the Borrowers’ obligations under the IBC Restated Loan Agreement. Mr. Kruger’s guarantee is limited to 32.4% of all debt obligations to IBC. Mr. Rosene’s limited guaranty is the lesser of (i) $3,500,000 less all amounts paid on the principal amount of the loans after the date of the agreement excluding payments on the revolver and (ii) the amount owed to IBC of the loans outstanding from time to time including accrued interest and fees.

Loan Agreement with First Interstate Bank, formerly Great Western Bank

On August 23, 2021, Greystone entered into a loan agreement with First Interstate Bank (“FIB Loan Agreement”) to include prior commercial loans and subsequent loans. GSM is a named guarantor under the FIB Loan Agreement.

The FIB 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 as of the end of each fiscal year end and debt to tangible net worth ratio of 4:00 to 1:00 as of the end of each fiscal year end with a decrease of 0.50 in the ratio each year thereafter until reaching a minimum ratio of 3:00 to 1:00. In addition, the FIB Loan Agreement provides that Greystone shall not, without prior consent of the bank, incur or assume additional indebtedness or capital leases.

The FIB Loan Agreement is secured by a mortgage on one of Greystone’s warehouses.

Maturities

Maturities of Greystone’s long-term debt for the five years subsequent to February 29, 2024, are $2,384,993, $2,242,998, $2,404,975, $6,552,966 and $527,385.

Financing Leases

Financing leases as of February 29, 2024 and May 31, 2023:

The production equipment under the remaining non-cancelable financing leases as of February 29, 2024, has a gross carrying amount of $63,457 as of February 29, 2024. Amortization of the carrying amount of $21,470 and $189,927 was included in depreciation expense for the nine months ended February 29(28), 2024 and 2023, respectively.

Operating Leases

Greystone recognized 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 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 statements 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 afifty-two month term and aforty-eight month term and a discount rate of 5.40% and (ii) two buildings on a ten year lease with a five year renewal option and a discount rate of 6.00%. The leases are single-term with defined constant monthly rental rates.

Lease Summary Information

For the nine-months ended February 29(28), 2024 and 2023:

Future minimum lease payments under non-cancelable leases as of February 29, 2024, are approximately:

Advances from a customer pursuant to a contract for the sale of plastic pallets is recognized as deferred revenue. Revenue is recognized by Greystone as pallets are shipped to the customer which totaled $-0- and $6,378,040 during the nine months ended February 29(28), 2024 and 2023, respectively. Customer advances received during the nine months ended February 29(28), 2024 and 2023 were $545,292 and $1,072,000, respectively. The unrecognized balance of deferred revenue as of February 29, 2024 and May 31, 2023, was $568,299 and $23,007, respectively.

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 0.8% and 0.8% of sales during the nine months ended February 29(28), 2024 and 2023, 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 nine months ended February 29(28), 2024 and 2023, respectively, were as follows:

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 consolidated balance sheets approximate fair value.

Greystone derived approximately 83% and 71% of its total sales from its major customers (which generally ranges from two to four customers) during the nine months ended February 29(28), 2024 and 2023, 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 $637,906 and $599,700 during the nine months ended February 29(28), 2024 and 2023, respectively, were from one of its major customers.

Greystone is subject to litigation, claims and other commitments and contingencies arising in the ordinary course of business. Although the asserted value of these matters may be significant, the company currently does not expect that the ultimate resolution of any open matters will have a material adverse effect on its consolidated financial position or results of operations.

In February 2024, one of the Company’s storage warehouses caught fire with damage to finished goods inventory valued at $1,326,752 and the building with a net book value of $161,850. The Company recorded an insurance receivable of $1,488,602 as an estimate primarily for damage to the inventory. The insurer is currently reviewing the claim which may result in a change to the recovery. The Company anticipates that the final settlement will result in a gain primarily due to the damage to the building; however, there is insufficient information currently available to determine a reasonable estimate.

As of February 29, 2024, the Company had commitments outstanding of $166,800 toward the purchase of production equipment.