Freestone Resources, Inc. (the “Company”
or “Freestone”) is an oil and gas technology development company that is actively developing and marketing technologies
and solvents designed to benefit various sectors in the oil and gas industry. The Company has re-launched its Petrozene™
solvent after developing a new and improved formula. Petrozene™ is primarily used to dissolve paraffin buildup, and it is
primarily used for pipelines, oil storage tanks, oil sludge build up, de-emulsification, well treatment, as a corrosion inhibitor
and as a catalyst in opening up formations thereby aiding in oil production.
On June 24, 2015 Freestone purchased 100% of
the common stock of C.C. Crawford Retreading Company, Inc. (“CTR”), a Texas corporation. CTR is an Off-The-Road (“OTR”)
tire company located in Ennis, Texas, and a wholly owned subsidiary of Freestone. CTR’s primary business is to repair, recycle,
dispose of and sell OTR tires, which are used on large, industrial equipment. Freestone made the decision to purchase CTR in order
to utilize the CTR facility for the production of Petrozene™.
On June 24, 2015 the Company formed Freestone
Dynamis Energy Products, LLC (“FDEP”), a Delaware limited liability company, with Dynamis Energy, LLC (“Dynamis”).
FDEP was formed in order to operate and manage the specialized pyrolysis process that is used to create Petrozene™ and other
byproducts of value. Freestone chose to work with Dynamis based on their extensive engineering and waste-to-energy expertise. Freestone
owns a 70% member interest in FDEP.
The acquisition of CTR and the formation of
FDEP have allowed Freestone to vertically integrate the Petrozene™ product line. CTR will remain an auxiliary company that
will maintain existing operations that complement the efforts of FDEP and Freestone.
The accompanying unaudited interim consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America and the rules of the Securities and Exchange Commission. These financial statements are unaudited and, in the
opinion of management, include all adjustments (consisting of normal recurring accruals) necessary to present fairly the balance
sheet, statement of operations and statement of cash flows for the periods presented in accordance with accounting principles generally
accepted in the United States. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC
rules and regulations. It is presumed that users of this interim financial information have read or have access to the audited
financial statements and footnote disclosure for the preceding fiscal year contained in the Company’s Annual Report on Form
10-K. The results of operations for the three and nine months ended March 31, 2016 are not necessarily indicative of the results
of operations for the full year or any other interim period. The information included in this Form 10-Q should be read
in conjunction with the Financial Statements and notes thereto included in the Company’s June 30, 2015 Form 10-K.
On June 24, 2015 Freestone acquired 100% of
the outstanding common stock of CTR. The operations of Freestone were insignificant in comparison to CTR, so the consolidated financial
statements included for the three and nine months ended March 31, 2015 are presented under predecessor entity reporting wherein
the prior historical information consists solely of CTR’s results of operations and cash flows. The consolidated balance
sheets as of March 31, 2016 and June 30, 2015 and results of operations and cash flows for the quarter and nine months ended March
31, 2016 are presented under successor entity reporting.
The Company does not expect the adoption of
recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial
position or cash flow.
Inventory of the predecessor company is carried
at lower of cost or market. At acquisition the Company’s inventory was revalued at fair market value as part of the purchase
price allocation. The Company’s inventory consists of processed rubber from disposed tires carried at cost of processing,
and used tires for sale carried at the cost of repairs. As of March 31, 2016 and June 30, 2015 inventory consisted of:
Depreciation expense was $30,708 and $19,500
for the three months ended March 31, 2016 (Successor) and March 31, 2015 (Predecessor), respectively. Depreciation expense was
$87,116 and $52,044 for the nine months ended March 31, 2016 (Successor) and March 31, 2015 (Predecessor), respectively.
On August 27, 2015 the Company disposed of
its remaining oil and gas interest in exchange for the assumption of the plugging liability by the purchaser.
The environmental liability was calculated
by estimating the costs associated with the various disposal costs that would be necessary to remove the tires from the CTR permitted
facility. Upon acquisition of CTR by Freestone the liability was reduced to $32,000 (Successor) as part of the purchase price allocation,
and the revaluation of assets and liability to fair market value. The reduction was due to the formation of FDEP. CTR will convert
the majority of the tires into crum rubber, and sell it to FDEP as a feedstock for its specialized pyrolysis operations. The remaining
$32,000 is an estimate of cost of disposing of the tires that are not acceptable for use as feedstock.
NOTE 5 – NOTES PAYABLE
At March 31, 2016 and June 30, 2015 Notes Payable were as follows:
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03/31/15
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6/30/15
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Note payable to bank bearing interest at 4.5% with monthly payment of $390 maturing September, 2017. The note is secured by an automobile
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$
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6,773
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$
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9,989
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Note payable to bank bearing interest at 6.5% with monthly payment of $4,892 maturing November, 2017. The note is secured by machinery and equipment
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92,523
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130,975
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Note payable to seller in connection with purchase of CTR bearing interest at 12% maturing June, 2019. Interest only payable for the first year. Monthly payment of $34,991 beginning July, 2016. Secured by the common stock and assets of CTR
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1,020,000
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1,020,000
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Note payable to bank bearing interest at 4.95% with monthly payments of $315 maturing August, 2019. The note is secured by equipment
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11,872
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—
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Notes payable to bank bearing interest 3.95% with monthly payments of $489 maturing September, 2020. The notes is secured by equipment
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24,135
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—
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Notes payable to bank bearing interest 4.78% with monthly payments of $309 maturing December, 2020. The notes is secured by equipment
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15,735
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—
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Note payable to vendor bearing interest at 6.0% with monthly payments of $800 maturing August, 2016. The note is unsecured.
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7,025
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—
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Line of Credit with bank for a maximum of $75,000
bearing interest at 6.5% due March, 2017. The note is secured by the Company’s accounts receivable.
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30,000
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—
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1,208,063
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1,160,964
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Less current maturities
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(339,341
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)
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(56,051
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$
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868,722
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$
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1,104,913
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At March 31, 2016 future maturities of long term debt were as follows:
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Year Ending March 31:
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2016
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$
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339,341
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2017
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379,561
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2018
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375,180
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2019
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108,355
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2020
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5,626
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$
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1,208,063
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NOTE 6 – EQUITY TRANSACTIONS
The Company
is authorized to issue 100,000,000 common shares at a par value of $0.001 per share. These shares have full voting rights. At
March 31, 2016 and June 30, 2015, there were 90,325,677 and 81,088,177 respectively, common shares outstanding. During the nine
months ended March 31, 2016 the Company sold 4,437,500 shares for cash proceeds of $425,000.
On September
23, 2015 the Company issued shares of the Company’s common stock to certain directors, officers and consultants for services
rendered to the Company. Clayton Carter, the Company’s Director and Chief Executive Officer, received 600,000 shares of
the Company’s common stock, G. Don Edwards, the Company’s Director and Chief Investment Officer, received 600,000
shares of the Company’s common stock, and James Carroll, the Company’s Director and Chief Financial Officer received
50,000 shares of the Company’s common stock. The Company also issued 100,000 shares to consultants as consideration for
services rendered to the Company. The stock was valued at $.19 per share based on the closing price on the date of award.
On September
14, 2015 the Company repurchased an 8.25% revenue interest in the Company’s Rogers Oil and Gas Lease for $20,000. The Company
issued 200,000 shares of common stock at $.10 to satisfy the debt.
On January 6, 2016,
the Company issued 100,000 shares of the Company’s common stock at $0.18 per share, restricted pursuant to Rule 144, to
a consultant for the company and a related party to a Director of the Company, for representing Freestone on the Board of Members
of FDEP and for consulting services rendered to the Company.
On January 6, 2016,
the Company issued 150,000 shares of the Company’s common stock at $0.18 per share, restricted pursuant to Rule 144, to
an accounting employee of the Company, for services rendered to the Company.
On January
7, 2016, 3,000,000 million shares of the Company’s common stock, restricted pursuant to Rule 144, were issued to Michael
McGhan at a price of $0.18 per share per the terms and conditions of Mr. McGhan’s Employee Agreement. (See note 10 below)
Stock Warrants:
In connection
with the sale of 5,000,000 shares of the Company’s common stock associated with the purchase of CTR during June 2015 the
Company issued 5,000,000 warrants to purchase shares of common stock at 80% of the average closing bid and sale cost over the
previous ten days at exercise date. The warrants vest immediately and have a one year term.
On July 30,
2015 the Company reached an agreement with the holders to cancel the 1,000,000 warrants outstanding which would have expired November
15, 2015.
NOTE 7
– THE ACQUISITION OF C.C. CRAWFORD RETREADING COMPANY, INC.
On June 24,
2015 the Company acquired 100% of the outstanding common stock of C.C. Crawford Retreading Co., Inc., a privately held company,
for an aggregate price of $1,520,000. Terms of the purchase were $500,000 cash at closing and a note payable to the seller for
$1,020,000. The cash down payment was paid direct to a seller by a third party from sale of stock proceeds. The Company estimated
the fair value of assets acquired net of liabilities assumed to be $1,648,750 resulting in a bargain purchase gain of $128,750.
See notes to the Company’s June 30, 2015 10-K for details of the purchase price allocation and pro forma financial statements.
Unaudited pro
forma results of operations data for the three and nine months ended March 31, 2015 as if the Companies had been combined as of
July 1, 2014, follow. The pro forma results include estimates and assumptions which management believes are reasonable. However
pro form results do not include any anticipated cost savings or other effects of the planned integration of these entities, and
are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates
indicated or which may result in the future.
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Three Months
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Nine Months
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Ended
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Ended
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03/31/15
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03/31/15
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Revenue
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$
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234,078
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$
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864,738
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Net Income (Loss)
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$
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(80,307
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)
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$
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(195,781
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)
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E.P.S
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$
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(0.00
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$
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(0.00
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Weight Average Shares Outstanding
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79,543,177
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79,738,907
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NOTE 8
– THE FORMATION OF FREESTONE DYNAMIS ENERGY PRODUCTS, LLC.
On June 24,
2015 the Company entered into an agreement with Dynamis in order to form Freestone Dynamis Energy Products, LLC. (“FDEP”),
a Delaware limited liability company. Freestone determined to form FDEP with Dynamis based on their track record and experience
in the waste-to-energy industry, and their ability to provide the necessary funding to fully integrate the production, marketing
and sale of Petrozene™ to current and future customers. The terms of the agreements between the Company and Dynamis are
as follows:
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Freestone owns a 70% member interest in FDEP for licensing the
rights to use Petrozene™ to FDEP; and
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·
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Dynamis owns a 30% member interest FDEP in exchange providing
funding up to $5,000,000 to operate FDEP, and purchase a continuous-feed pyrolysis machine capable of producing a product
that can be used to produce Petrozene™; and
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·
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FDEP will be leasing employees from CTR, and said employees
will operate the machine. FDEP will reimburse CTR for the leased employees; and
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·
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FDEP has the right, but not the obligation to purchase CTR from
Freestone through cash compensation to Freestone, the issuance of additional units in FDEP to Freestone or a combination of
both cash and units in FDEP as mutually agreed upon by FDEP and Freestone; and
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·
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FDEP will lease a building from CTR in order to operate the
specialized pyrolysis technology for payment of either the ad valorem taxes associated with the rented property or $1,000
per month depending on which amount is the greater of the two; and
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·
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Dynamis will receive 80% of the distributions
from FDEP until they have reached a 25% initial rate of return on funds invested into FDEP. Once the 25% initial rate of return
threshold is met all distributions from FDEP will be split according to the 70 / 30 member interest of FDEP owned by the Company
and Dynamis.
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On June 24,
2015 FDEP simultaneously entered into a lease agreement with a company that has developed a continuous-feed pyrolysis technology
that will be operated by FDEP at the Company’s facility in Ennis, Texas. FDEP and the company that developed the pyrolysis
technology will split the revenues generated from the machine. FDEP will receive 70% of the revenues generated from the machine,
and the company providing the continuous-feed pyrolysis technology will receive 30% of the revenues. This revenue split will remain
in place so long as the machine is operating at the Company’s facility in Ennis, Texas. The agreement between the two companies
allows FDEP the opportunity to ensure that the technology continues to operate properly under the strict conditions that are necessary
to produce Petrozene™. If the leased pyrolysis machine operates within certain, predefined parameters then FDEP has the
right to purchase additional machines.
During the nine
months ended March 31, 2016, Dynamis paid $142,625 for certain engineering and general administrative costs on behalf of FDEP,
which are shown on the Statement of Cash Flows as a non-cash financing activity. These payments were treated as capital contributions
to the entity by Dynamis. Dynamis also made cash contributions totaling $253,741 to the entity during the nine months ended March
31, 2016.
At March 31,
2016 and June 30, 2015 the consolidated assets of Freestone included $16,727 and $0, respectively of cash which is only available
to settle the liabilities of FDEP.
NOTE 9
– GOING CONCERN
As of the date
of this quarterly report, there is doubt regarding the Company’s ability to continue as a going concern as we have not generated
sufficient cash flows to fund our business operations and loan commitments. Our future success and viability, therefore,
are dependent upon our ability to generate capital financing. The failure to generate sufficient revenues or raise
additional capital may have a material and adverse effect upon the Company and our shareholders.
The Company
formed FDEP in order to vertically integrate its Petrozene™ product line, and utilize a specialized pyrolysis process in
order to produce other byproducts of value that will generate revenue for FDEP. In turn, the ability of FDEP to process large
quantities of OTR tires will allow the Company to increase the amount of OTR tires it can dispose of and process, which will generate
additional revenue of the Company. Additionally, the Company intends to raise equity or debt financing that will allow the Company
to expand its current operations.
NOTE 10 – COMMITMENTS
AND CONTINGENCIES
The Company
leases office space in Dallas, TX under a non-cancelable operating lease that expires in July 2017 and warehouse space in Ennis,
TX under a one-year lease with a purchase option for $260,000. Future minimum lease payments are as follows:
Year
End June 30
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Amount
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2016
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$ 11,562
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2017
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26,545
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2018
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1,884
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Total
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$ 39,991
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Rent expense,
included in general and administrative expenses, totaled approximately $11,562 and $30,744 for the three and nine months ended
March 31, 2016 (Successor), respectively. The predecessor had no lease expense for the three and nine months ended March 31, 2015.
Freestone has
royalty and commission agreements with certain consultants related to the sale of Petrozene™ for their work in the re-launch
of the Petrozene™ product line. These royalty and commission agreements range from 2.5% to 7.5% of the net income
the Company receives from Petrozene™ sales, and the agreements also have special royalty provisions for certain customers
that expire on April 14, 2016. Royalties paid during the three and nine months ended March 31, 2016 are $400 and $400 respectively.
On
January 7, 2016
Michael McGhan and the Company entered into a two-year employment agreement
(“Employment Agreement”). The terms of the Employment Agreement include an initial salary of $5,000 per month, which
will increase to $10,000 per month after six months, as well as stock-based compensation in the amount of 3,000,000 shares of
the Company’s restricted stock pursuant to Rule 144. Subject to Board approval, Mr. McGhan is eligible to receive warrants
for up to 2,000,000 shares of the Company’s common stock (the “Warrants”). The Warrants are not issued on the
date of the Employment Agreement. The Board is not required to issue the Warrants. If the Warrants are issued to Mr. McGhan during
the term of his Employment Agreement, the terms and conditions of the Warrants will be determined by the Board on the date the
Warrants are issued. Mr. McGhan will also be eligible to participate in the Company’s employee benefit plan that is generally
available to all other employees at the Company.
NOTE 11
– RELATED PARTY TRANSACTIONS
One of the consultants
has a royalty and commission agreement as discussed in Note 10 is a related party and the brother of a Director of the Company.
NOTE 12-
SUBSEQUENT EVENTS
On April 1,
2016 the Company entered into a two-year employment agreement with the Company’s Controller and Director of Financial Reporting.
Terms of the agreement are an initial salary of $5,250 per month increasing to $6,667 after six months as well as stock based
compensation totaling 1,000,000 shares of the Company stock.
On April 12,
2016 the Company borrowed $50,000 from an employee of Freestone Resources, Inc. The Company signed a one year 6.5% note payable
convertible by the note holder any time after six months into common stock of the Company at a rate of $.08 per share.
On April 19,
2016 the Company filed an 8-K under Item 4.01 A Change in Registrants Certifying Accountant wherein the Company reported the dismissal
of MaloneBailey, LLP and engaged Heaton & Company, PLLC.
On May 3, 2016
the Company filed an 8-K under Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangement of Certain Officers wherein the Company reported the resignation of James F. Carroll as Chief
Financial Officer of the Company effective as of April 28, 2016
General
Freestone Resources,
Inc. (the “Company” or “Freestone”), a Nevada corporation, is an oil and gas technology development company
that is actively developing and marketing technologies and solvents designed to benefit various sectors in the oil and gas industry.
The Company has re-launched its Petrozene™ solvent after developing a new and improved formula. Petrozene™ is primarily
used to dissolve paraffin buildup, and it is primarily used for pipelines, oil storage tanks, oil sludge build up, de-emulsification,
well treatment, as a corrosion inhibitor and as a catalyst in opening up formations thereby aiding in oil production.
On June 24,
2015 Freestone purchased 100% of the common stock of C.C. Crawford Retreading Company, Inc. (“CTR”), a Texas corporation.
CTR is an Off-The-Road (“OTR”) tire company located in Ennis, Texas, and a wholly owned subsidiary of Freestone. CTR’s
primary business is to repair, recycle, dispose of and sell OTR tires, which are used on large, industrial equipment. Freestone
made the decision to purchase CTR in order to utilize the CTR facility for the production of Petrozene™.
On June 24,
2015 the Company formed Freestone Dynamis Energy Products, LLC (“FDEP”) with Dynamis Energy, LLC (“Dynamis”).
FDEP was formed in order to operate and manage the specialized pyrolysis process that is used to create Petrozene™ and other
byproducts of value. Freestone chose to work with Dynamis based on their extensive engineering and waste-to-energy expertise.
Freestone owns a 70% member interest in FDEP.
The acquisition
of CTR and the formation of FDEP have allowed Freestone to vertically integrate the Petrozene™ product line. CTR will remain
an auxiliary company that will maintain existing operations that complement the efforts of FDEP and Freestone.
The Company
owns a 33.33% interest in Aqueous Services, LLC (“Aqueous”). Aqueous is a full water management company with access
to a fresh water well that has been permitted to up to one thousand five hundred acre-feet of water per annum.
Results of Operations
The three and nine months ended
March 31, 2016 (Successor) compared to the three and nine months ended March 31, 2015 (Predecessor)
Revenue
–
Revenue for the nine months ended March 31, 2016 (Successor) was $822,124 compared to $862,016 for the nine months ended March
31, 2015 (Predecessor) due primarily to a decrease in tire repair revenue. Our revenue for the three months ended March 31, 2016
(Successor) was $250,586, compared to $234,867 for the three months ended March 31, 2015 (Predecessor) due primarily to an increase
in tire disposal revenue.
Cost of Revenues
– Cost of revenue increased from $445,020 for the nine months ended March 31, 2015 (Predecessor) to $514,719 for the
nine months ended March 31, 2016 (Successor). This was primarily a result of a $68,588 increase in disposal costs. Used tire cost
increased by $52,861 due primarily to the adjustment of inventory to fair value at acquisition which resulted in a higher per
tire cost for the tires sold during the period. Cost of revenue for the three months ended March 31, 2016 (Successor) was $160,620
compared to $131,105 for the three months ended March 31, 2015 (Predecessor). The increase was largely due to an increase in cost
of used tires resulting from the adjustment of inventory to fair value and the increase cost of tire disposal operations.
Operating
Expense
– Total operating expenses for the nine months ended March 31, 2016 (Successor) were $2,069,945 compared to
the operating cost for the nine months ended March 31, 2015 (Predecessor) of $410,911 The increase was due to the inclusion of
Freestone resources and its related costs associated with being public company and the acquisition of CTR as well as startup cost
of FDEP. Specific costs included $841,500 of shares issued for services, $180,554 of professional fees and $150,210 of payroll.
The increase in depreciation expense was due to the write up of the acquired assets to fair value at acquisition. In addition,
the Company incurred $343,339 in startup cost for its FDEP operations. Operating expenses for the three months ended March 31,
2016 (Successor) were $950,653 compared to $124,359 for the three months ended March 31, 2015 (Predecessor). The increase was
due to $111,239 of startup cost for FDEP, as well as the inclusion of Freestone Resources and its cost of operating as a public
company. The largest Freestone cost was stock issued for services of $585,000.
Other Income
and Expenses
– Other income and expense for the nine months ended March 31, 2016 (Successor) consisted of $99,636 of
interest expense compared to other income and expense for the nine months ended March 31, 2015 (Predecessor) consisting of $8,248
of interest expense. For the three months ended March 31, 2016 (Successor) other expenses consisted of $32,877 of interest expense
compared to $2,093 for the three months ended March 31, 2015 (Predecessor). The increase in interest expense was due to the debt
taken on to finance the purchase of CTR and additional debt within CTR to fund new equipment purchases.
Net Income (Loss)
Net loss for
the nine months ended March 31, 2016 (Successor) was $1,757,182 compared to net income of $860,860 for the nine months ended March
31, 2015 (Predecessor). The loss was due to the expenses of Freestone as detailed above. CTR’s net income for
the nine months ended March 31, 2015 was $142,500 compared to net loss of $2,163 for the nine months ended March 31, 2015. Net
loss for the three months ended March 31, 2016 (Successor) was $860,860 compared to $22,690 for the three months ended March 31,
2015 (Predecessor). Increase was due to the addition of Freestone and FDEP as detailed above.
Liquidity and Capital Resources
The Company
has little cash reserves and liquidity to the extent we receive it from operations and through the sale of common stock.
The accompanying
financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As of the date of this annual report, there is doubt regarding the Company’s
ability to continue as a going concern as we have not generated sufficient cash flows to fund our business operations and loan
commitments. Our future success and viability, therefore, are dependent upon our ability to generate capital financing. The
failure to generate sufficient revenues or raise additional capital may have a material and adverse effect upon the Company and
our shareholders.
The Company
formed FDEP in order to vertically integrate its Petrozene™ product line, and utilize a specialized pyrolysis process in
order to produce other byproducts of value that will generate revenue for FDEP. In turn, the ability of FDEP to process large
quantities of OTR tires will allow the Company to increase the amount of OTR tires it can dispose of and process, which will generate
additional revenue of the Company. Additionally, the Company intends to raise equity or debt financing that will allow the Company
to expand its current operations.
Net cash used in operations was $647,808
for the nine months ended March 31, 2016 (Successor) compared to net cash provided by operations of $34,289 for the nine months
ended March 31, 2015 (Predecessor). The change was due to the increase costs from the addition of Freestone’s operations
to the predecessor financials. The cash used in operations was offset by $425,000 proceeds from the sale of Freestone common stock.
Employees
As of March 31, 2016 CTR had 16 full
time employees. Freestone has five employees.
Need for Additional Financing
The Company
is uncertain of its ability to generate sufficient liquidity from its operations so the need for additional funding may be necessary. The
Company may sell stock and/or issue additional debt to raise capital to accelerate its growth.