GREYSTONE LOGISTICS, INC. - Quarter Report: 2021 November (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended November 30, 2021

For the transition period from ___________ to ____________

GREYSTONE LOGISTICS, INC.

(Exact name of registrant as specified in its charter)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ☒ No ☐

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

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 ☒

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: January 7, 2022 - 28,561,201

GREYSTONE LOGISTICS, INC.

FORM 10-Q

For the Period Ended November 30, 2021

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Greystone Logistics, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

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

Greystone Logistics, Inc.

Consolidated Statements of Income

For the Six Months Ended November 30,

(Unaudited)

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

Greystone Logistics, Inc.

Consolidated Statements of Operations

For the Three Months Ended November 30,

(Unaudited)

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

Greystone Logistics, Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

For the Six Months Ended November 30, 2021 and 2020

(Unaudited)

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

Greystone Logistics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended November 30,

(Unaudited)

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

GREYSTONE LOGISTICS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Financial Statements

In the opinion of Greystone Logistics, Inc. (“Greystone”), the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications, which are of a normal recurring nature, necessary to present fairly its financial position as of November 30, 2021, the results of its operations for the six months and three months ended November 30, 2021 and 2020 and its cash flows for the six months ended November 30, 2021 and 2020. 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, 2021 and the notes thereto included in the Form 10-K for such period. The results of operations for the six months and three months ended November 30, 2021 and 2020 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

Basic earnings per share is based on the weighted-average effect of all common shares issued and outstanding and is calculated by dividing net income (loss) 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 as of November 30 are as follows:

Schedule of Anti-dilutive Shares

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

Schedule of Basic and Diluted Earnings Per Share 

For the six months ended November 30, 2021 and 2020:

For the three months ended November 30, 2021 and 2020:

Note 3. Inventory

Inventory consists of the following:

Schedule of Inventory 

Note 4. Property, Plant and Equipment

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

Schedule of Property, Plant and Equipment 

Production machinery includes deposits on equipment in the amount of $825,182 at November 30, 2021, which has not been placed into service. Plant buildings and land include two properties which are owned by GRE, a variable interest entity (“VIE”) and have an aggregate net book value of $2,606,869 at November 30, 2021.

Depreciation expense, including amortization expense related to financing leases, for the six months ended November 30, 2021 and 2020 was $2,782,057 and $3,018,922, respectively.

Note 5. Related Party Transactions/Activity

Yorktown Management & Financial Services, LLC

Yorktown Management & Financial Services, LLC (“Yorktown”), an entity wholly-owned by Greystone’s President and CEO, 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 $715,000 for the each of the six months ended November 30, 2021 and 2020.

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 $24,000 for each of the six months ended November 30, 2021 and 2020. As of November 30, 2021, future minimum payments under the non-cancelable operating lease for the remaining year is $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 may purchase pallets from TriEnda for resale or sell Greystone pallets to TriEnda. During the six months ended November 30, 2021 and 2020, Greystone purchases from TriEnda totaled $4,222 and $52,356, respectively and sales to TriEnda totaled $52,129 and $-0-, respectively. As of November 30, 2021, TriEnda owed $78,244 to Greystone.

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 $300,390 and $236,250 for the six months ended November 30, 2021 and 2020, respectively. The account receivable due from Green as of November 30, 2021 was $23,970.

Note 6. Long-term Debt

Debt as of November 30, 2021 and May 31, 2021 is as follows:

 Schedule of Long-Term Debt

The prime rate of interest as of November 30, 2021 was 3.25%.

Debt issuance costs consists 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 $2,808 and $2,580 for the six months ended November 30, 2021 and 2020, respectively.

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.

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. Currently, the aggregate payments for the IBC term loans are approximately $251,000 per month.

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 amount which can be borrowed from time to time is dependent upon the amount of the borrowing base, as defined in the IBC Loan Agreement, not to exceed $4,000,000. The Revolving Loan bears interest at the greater of the prime rate of interest plus 0.5%, or 5.50% and matures January 31, 2023. 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. Greystone’s available revolving loan borrowing capacity was $2,600,000 as of November 30, 2021.

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”) subsequently amended and restated as of January 7, 2016, reducing the maximum aggregate guaranty limit to $3,500,000 if Greystone maintained a Debt Coverage Ratio of at least 1.35:1.00 for a period of six consecutive quarters. Greystone has maintained a ratio of at least 1.35:1.00 for the specified time and has notified IBC accordingly. 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 herein.

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.

Loan Agreement with Great Western Bank

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

The Western Loan Agreement includes customary events of default, including events of default relating to non-payment of principal and other amounts owing under the Western Loan Agreement from time to time, inaccuracy of representations, violation of covenants, defaults under other agreements, bankruptcy and similar events, certain material adverse changes relating to a Borrower, certain judgments or awards against a Borrower, or guarantor’s ability to perform under the Western Loan Agreement. Among other things, a default under the Western Loan Agreement would permit Western to cease lending funds under the Western Loan Agreement and require immediate repayment of any outstanding notes with interest and any unpaid accrued fees.

The Western Loan Agreement is secured by a mortgage on two of Greystone’s warehouses.

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, 2023. 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 as of November 30, 2021 was $3,418,617.

Maturities

Maturities of Greystone’s long-term debt for the five years subsequent to November 30, 2021 are $2,956,846, $8,369,231, $709,406, $171,323 and $49,982 with $592,359 thereafter.

Note 7. Leases

Financing Leases

Financing leases as of November 30, 2021 and May 31, 2021:

 Schedule of Financing Lease

Greystone and an unrelated private company entered into three lease agreements for certain production equipment with a total cost of approximately $6.9 million which were effective February 24, 2018, August 2, 2018 and December 21, 2018, respectively, with five-year terms and an effective interest rate of 7.4%. Each of the lease agreements include a bargain purchase option to acquire the production equipment at the end of the lease term. The leased equipment is principally used to produce pallets for the private company. Lease payments are made as a credit on the sales invoice at the rate of $3.32 for each pallet produced and shipped from the respective leased equipment. The estimated aggregate monthly rental payments are approximately $130,000. The rent payments can vary each month depending on the quantity of pallets produced from each machine. 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 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, 2022. The lease agreement has a $10,000 purchase option at the end of the lease.

The production equipment under the non-cancelable financing leases has a gross carrying amount of $8,473,357 as of November 30, 2021. Amortization of the carrying amount of $505,935 and $505,935 was included in depreciation expense for the six months ended November 30, 2021 and 2020, 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 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 periods ending November 30, 2021 and 2020:

 Summary of Lease Activity 

Future minimum lease payments under non-cancelable leases as of November 30, 2021, are approximately:

 Schedule of Future Minimum Lease Payments

Note 8. Deferred Revenue

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 $3,008,575 and $3,770,160 during the six months ended November 30, 2021 and 2020, respectively. Customer advances received during the six months ended November 30, 2021 and 2020 were $13,560,500 and $1,380,000, respectively. The unrecognized balance of deferred revenue as of November 30, 2021 and May 31, 2021, was $16,982,532 and $6,430,607, respectively.

Note 9. Revenue and Revenue Recognition

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.

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 1.6% and 0.8% of sales during the six months ended November 30, 2021 and 2020, 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 six months ended November 30, 2021 and 2020, respectively, were as follows:

 Schedule of Sale of Revenues for Customer Categories

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 74% and 86% of its total sales from three customers (four customers in the prior period) during the six months ended November 30, 2021 and 2020, 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 $313,050 and $524,321 in fiscal years 2022 and 2021, respectively, were 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 November 30, 2021, Greystone is indebted to Mr. Rosene in the amount of $3,418,617 for a note payable due January 15, 2023. There is no assurance that Mr. Rosene will renew the note as of the maturity date.

COVID-19 Risks. The impact of COVID-19 and the related variants has created much uncertainty in the marketplace. To date, the demand for Greystone’s products has not been affected as Greystone’s pallets are generally used logistically by essential entities. The major issue that Greystone has incurred is maintaining adequate work force to meet demand for pallets. The virus has impacted the overall workforce in our operating area as well as Greystone’s workforce due to employees electing to stay at home for protection from COVID-19 and reductions of recruitment of new employees. Management is unable to predict the stability of its workforce due to the uncertainty created as long as the virus or variants thereof continue to stay active.

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.

Legal Proceeding

On February 1, 2021, iGPS Logistics, LLC (“iGPS”), filed a Demand for Arbitration (the “Demand”) with the International Centre for Dispute Resolution of the American Arbitration Association (the “AAA”) against Greystone Manufacturing, LLC (“GSM”). iGPS alleges breaches by GSM under that certain manufacturing supply agreement dated as of December 16, 2015, by and between iGPS and GSM (the “MSA”) and the implied covenant of good faith and fair dealing, including, among other things, with respect to (1) improperly terminating the MSA, (2) improperly seeking to revoke its warranty of workmanship and materials, (3) failing to utilize a lower-priced and higher-quality PiRod, (4) making knowing false representations about compliance with UL certification requirements, and (5) refusing to permit an audit. iGPS seeks, among other things, (a) a declaratory judgment that iGPS is entitled to an audit of GSM’s material costs, (b) damages in excess of $500,000, including pre-judgment and post-judgment interest, (c) indemnification pursuant to MSA, (d) a preliminary and permanent injunction preventing GSM from taking any actions that are contrary to the exclusivity and non-competition provisions of the MSA, and (e) fees, costs, and expenses of bringing the arbitration.

GSM denies the allegations set forth in the Demand and intends to vigorously defend itself. On March 1, 2021, GSM filed an Answer to the Demand with the AAA (the “Answer”). In its Answer, GSM states, among other things, (i) within the first year of the MSA, and repeatedly thereafter, iGPS made substantial and material reconfigurations of the original mold design, routinely demanding that GSM alone bear virtually all the increasing costs and provide warranties for the experimental redesigns iGPS demanded, (ii) the iGPS-GSM relationship changed dramatically in 2019 after a leadership change, (iii) the new iGPS leadership began disclaiming the understandings reached between iGPS and GSM in the earlier years, (iv) although GSM terminated the MSA on March 17, 2020, it has not missed a run on any of the pallets sold to iGPS over a year after termination, and (v) GSM has not breached the exclusivity and non-competition provisions of the MSA. GSM seeks, among other things, (A) certain declaratory awards, (B) damages, including pre-judgment and post-judgment interest, and (C) attorney’s fees, costs, and expenses associated with the arbitration.

Greystone continues to manufacture and sell plastic pallets to iGPS.

Note 12. Commitments

As of November 30, 2021, Greystone had commitments totaling $1,136,228 toward the purchase of production equipment.

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 the variable interest entity, Greystone Real Estate, L.L.C. (“GRE”). All material intercompany accounts and transactions have been eliminated.

References to fiscal year 2022 refer to the six months and three months ended November 30, 2021. References to fiscal year 2021 refer to the six months and three months ended November 30, 2020.

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 had full-time-equivalents of approximately 264 and 272 full-time employees and 73 and 11 temporary employees as of November 30, 2021 and 2020, respectively. Full-time equivalent is a measure based on time worked.

Six Months Ended November 30, 2021 Compared to Six Months Ended November 30, 2020

Sales

Sales for fiscal year 2022 were $30,618,966 compared to $33,091,494 in fiscal year 2021 for a decrease of $2,472,528, or 7.5%. This decline in sales was principally due to a decline of approximately 13% in pallet production during fiscal year 2022 compared to the prior period. Greystone has been unable to operate on a full-time basis because of shortage of production personnel and machine downtime. The shortage of personnel appears to be a problem for companies as recovery from the COVID-19 and its variants has affected the availability of job seekers. Greystone has been working with a new temporary employment agency with the goal of expanding the workforce to achieve maximum productive capacity.

Greystone is working with its customers to affect an increase in pricing, where possible, to mitigate the impact of material and labor price increases as discussed below under Cost of Sales. Based on new orders and relationships, Greystone believes that the demand for its pallets is increasing which is primarily expected to have a positive impact on operations during the last half of the current fiscal year as well as future years.

Greystone had three customers (four in fiscal year 2021) which accounted for approximately 74% and 86% of sales in fiscal years 2022 and 2021, 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 2022 was $28,179,906, or 92% of sales, compared to $27,032,690, or 82% of sales, in fiscal year 2021. The increase in cost of sales to sales in fiscal year 2022 was the result of several factors. Because of the disruption in the supply chain from the COVID-19 and its variants, prices of raw materials have continued to increase significantly. Also as discussed above, a shortage of personnel and machine downtime resulted in an increase in production cost per pallet due to Greystone’s relatively inflexible cost structure.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,352,504 in fiscal year 2022 compared to $2,471,457 in fiscal year 2021 for a decrease of $(118,953). The decrease is the net of a decline in administrative salaries offset by an increase in legal expenses related to arbitration costs for the arbitration initiated by a major customer. While Greystone is striving to resolve the arbitration with the customer, it is not possible to determine the remaining cost associated therewith.

Other Income (Expenses)

A gain was recognized in fiscal year 2022 from the forgiveness of the PPP loan and accrued interest in the amount of $3,068,497. Other income in fiscal year 2022 was $32,043 which included a gain of $22,336 from the sale of equipment plus sales of scrap material while fiscal year 2021 was from sales of scrap material in the amount of $8,944.

Interest expense was $429,123 in fiscal year 2022 compared to $653,060 in fiscal year 2021 for a decrease of $223,937. Reductions in debt and financing lease obligations were the primary reason for the decline.

Provision for Income Taxes

The benefit from (provision for income taxes) was $135,000 and $(911,000) in fiscal years 2022 and 2021, respectively. The effective tax rate differs from federal statutory rates principally due to state income taxes, charges or income which have no tax benefit or expense, changes in the valuation allowance, and the basis that net income from GRE is not taxable at the corporate level because GRE is a limited liability company of which Greystone has no equity ownership.

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 $2,892,973 in fiscal year 2022 compared to $2,032,231 in fiscal year 2021 primarily for the reasons discussed above.

Net Income Attributable to Common Stockholders

The net income attributable to common stockholders (net income less preferred dividends and GRE’s net income) for fiscal year 2022 was $2,592,077, or $0.09 per share, compared $1,733,381, or $0.06 per share, in fiscal year 2021 primarily for the reasons discussed above.

Three Months Ended November 30, 2021 Compared to Three Months Ended November 30, 2020

Sales

Sales for fiscal year 2022 were $15,844,567 compared to $15,523,318 in fiscal year 2021 for an increase of $321,249. This increase in sales was principally the result of an approximately 8% increase in average price per pallet sold offset by an approximately 6% reduction in the number of pallets sold.

Greystone had three customers (four in fiscal year 2021) which accounted for approximately 78% and 84% of sales in fiscal years 2022 and 2021, 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 2022 was $14,867,601, or 94% of sales, compared to $12,423,073, or 80% of sales, in fiscal year 2021. The increase in cost of sales to sales in fiscal year 2022 was the result of several factors. Because of the disruption in the supply chain from the COVID-19 and its variants, prices of raw materials have continued to increase significantly. Also as discussed above, a shortage of personnel and machine downtime resulted in an increase in production cost per pallet due to Greystone’s relatively inflexible cost structure.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $1,133,900 in fiscal year 2022 compared to $1,331,219 in fiscal year 2021 for a decrease of $197,319. The decrease from fiscal year 2021 to fiscal year 2022 was primarily due to a decrease in administrative personnel costs and is not considered to continue during the remainder of fiscal year 2022.

Other Income (Expenses)

Other income from sales of scrap material was $5,218 in fiscal year 2022 compared to $2,434 in fiscal year 2021.

Interest expense was $205,769 in fiscal year 2022 compared to $291,387 in fiscal year 2021 for a decrease of $85,618. The decrease from fiscal year 2021 to fiscal year 2022 was primarily due to the decrease in debt and financing lease obligations.

Provision for Income Taxes

The benefit from (provision for) income taxes was $128,000 and $(457,000) in fiscal years 2022 and 2021, respectively. The effective tax rate differs from federal statutory rates due principally to state income taxes, charges or income which have no tax benefit or expense, changes in the valuation allowance, and the basis that the net income from GRE is not taxable at the corporate level because GRE is a limited liability company of which Greystone has no equity ownership.

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 (loss) of $(229,485) in fiscal year 2022 compared to $1,023,073 in fiscal year 2021 primarily for the reasons discussed above.

Net Income Attributable to Common Stockholders

The net income (loss) attributable to common stockholders (net income (loss) less preferred dividends and GRE’s net income) for fiscal year 2022 was $(378,844), or $(0.01) per share, compared $873,180, or $0.03 per share, in fiscal year 2021 primarily for the reasons discussed above.

Liquidity and Capital Resources

A summary of cash flows for the six months ended November 30, 2021 is as follows:

The contractual obligations of Greystone are as follows:

Greystone had a working capital deficit of $(2,583,893) as of November 30, 2021. To provide for the funding to meet Greystone’s operating activities and contractual obligations as of November 30, 2021, 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.

Greystone issued purchase orders in January 2022 for equipment including two injection molding machines and one pelletizing system for about $5.5 million to increase its pallet production capacities. Because of the significant decrease in debt and financial lease balances through November 30, 2021, management believes funding will be achieved through financial institutions.

A substantial amount of the Greystone’s debt financing has resulted primarily from bank notes which are guaranteed by certain officers and directors of Greystone and 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, 2021, which was filed on August 20, 2021. 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, 2021, 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 November 30, 2021.

During the three months ended November 30, 2021, 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.