Notes to Consolidated Financial Statements
December 31, 2016
(Unaudited)
NOTE 1 – NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING
POLICIES
Nature of Activities, History and Organization
:
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.
Unaudited Interim Financial Statements:
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 nine months ended March 31, 2017 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 Management's Discussion and Analysis and Financial Statements and notes thereto included in the Company’s June 30, 2016
Form 10-K.
Recently Issued Accounting Pronouncements:
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.
NOTE 2 – INVENTORY
Inventory of the Company is carried at lower
of cost or market. At the acquisition of CTR, 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, 2017 and June 30, 2016 inventory consisted of:
|
|
3/31/17
|
|
6/30/16
|
Crum Rubber for Processing
|
|
$
|
8,087
|
|
|
$
|
8,087
|
|
Used Tire for Resale
|
|
|
11,936
|
|
|
|
49,945
|
|
Tire Oil
|
|
|
7,676
|
|
|
|
11,538
|
|
|
|
$
|
27,699
|
|
|
$
|
69,570
|
|
NOTE 3 – PROPERTY, PLANT AND
EQUIPMENT
|
|
|
|
|
At March 31, 2017 and June 30, 2016 Property, Plant and Equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
3/31/17
|
|
|
|
6/30/16
|
|
Land
|
|
$
|
360,000
|
|
|
$
|
360,000
|
|
Buildings and Improvements
|
|
|
700,000
|
|
|
|
700,000
|
|
Computers and Office Furniture
|
|
|
8,967
|
|
|
|
21,967
|
|
Automotive Equipment
|
|
|
120,585
|
|
|
|
120,585
|
|
Machinery and Equipment
|
|
|
507,807
|
|
|
|
507,807
|
|
Capital Lease Assets
|
|
|
56,738
|
|
|
|
56,738
|
|
|
|
|
1,754,097
|
|
|
|
1,767,097
|
|
Less Accumulated Depreciation
|
|
|
219,825
|
|
|
|
125,436
|
|
|
|
$
|
1,534,272
|
|
|
$
|
1,641,661
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $94,389 and
$87,116 for the nine months ended March 31, 2017 and March 31, 2016, respectively.
NOTE 4 – ENVIRONMENTAL LIABILITY
The Company’s tire recycling permit
requires the Company to ultimately dispose of all tires accepted for recycling. Tire disposal occurs in the normal course
of business however the Company always has tires stored at its facility that have not yet been disposed of. CTR had recorded liabilities
totaling $320,000 at June 30, 2014 (Predecessor) for estimated costs related to dispose of all tires at its Ennis, Texas facility.
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 plans to 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 was an estimate of cost of disposing of the tires that are not
acceptable for use as feedstock. At June 30, 2016, CTR increased its liability to $400,000 representing the estimated disposal
fees on the revised estimate of tires on hand. Although CTR still plans to convert the majority of the tires in crum rubber for
use by FDEP the liability was recorded as part of the plan submitted to the TCEQ to cure potential violations regarding it processing
permit. Since the plan requires CTR to significantly reduce the number of tires on hand within the next year and, to date, FDEP
has not been able to demonstrate the capacity to use the number of tires on hand, the liability is considered short-term. The environmental
liability has a balance of $400,000 as of March 31, 2017, and June 30, 2016, respectively. In December, 2016 the TCEQ notified
CTR of $48,750 of proposed penalties for violations. CTR has submitted additional information to the TCEQ seeking to have the penalties
waived or reduced however the amount has been accrued and is included in general and administrative expenses for the nine months
ended March 31, 2017.
NOTE 5 – CAPITAL LEASE OBLIGATIONS
Capital
lease assets of $56,738 and $56,738 and accumulated amortization of $17,372 and $8,861 are included in property, plant and equipment
on the balance sheet at March 31, 2017 and June 30, 2016, respectively. For the nine months ended March 31, 2017 and 2016 amortization
expense was $8,511 and $3,151, respectively.
At March 31, 2017 and June 30, 2016 capital
lease obligations were as follows:
|
|
|
|
|
|
|
|
3/31/17
|
|
|
|
6/30/16
|
|
Lease
payable bearing interest at 4.95% with monthly payments of $315 maturing August 2019. The lease is secured by equipment.
|
|
$
|
8,602
|
|
|
$
|
11,069
|
|
|
|
|
|
|
|
|
|
|
Lease
payable bearing interest at 3.95% with monthly payments of $309 maturing December, 2020. The lease is secured by
equipment.
|
|
|
12,712
|
|
|
|
14,969
|
|
|
|
|
|
|
|
|
|
|
Lease
payable bearing interest at 4.78% with monthly payments of $489 maturing September, 2020. The lease is secured
by equipment.
|
|
$
|
19,135
|
|
|
$
|
27,904
|
|
|
|
|
40,489
|
|
|
|
48,942
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
11,806
|
|
|
|
11,419
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,643
|
|
|
$
|
37,523
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2017
future maturities of capital lease obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending March
31:
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
11,805
|
|
|
|
|
|
|
2019
|
|
12,345
|
|
|
|
|
|
|
2020
|
|
10,672
|
|
|
|
|
|
|
2021
|
|
5,627
|
|
|
|
|
|
|
2022
|
|
-
|
|
|
|
|
|
|
|
$
|
40,449
|
|
|
|
|
|
NOTE
6 – NOTES PAYABLE
At March 31, 2017 and June 30, 2016 notes payable were as follows:
|
|
|
|
|
|
|
|
3/31/17
|
|
|
|
6/30/16
|
|
Note payable to bank bearing
interest at 4.5% with monthly payment of $390 maturing September, 2017. The note is secured by an automobile
|
|
$
|
2,310
|
|
|
$
|
5,676
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
38,262
|
|
|
|
79,293
|
|
Note
payable to bank bearing interest at 6.5% with monthly payment of $809 maturing April, 2020. The note is secured
by a Truck.
|
|
|
27,053
|
|
|
|
32,853
|
|
Note
payable to vendor bearing interest at 6.0% with monthly payment of $800 maturing December, 2016. The note is
unsecured.
|
|
|
—
|
|
|
|
4,718
|
|
|
|
|
|
|
|
|
|
|
Note
payable to seller in connection with purchase of CTR bearing interest at 12% maturing June, 2020. Note amended to add
$360,065 of accrued interest and penalties to principal in February, 2017. Interest only payments due monthly until July,
2017. Monthly payments of $45,904 thereafter. Secured by the common stock and assets of CTR
|
|
|
1,382,065
|
|
|
|
1,020,000
|
|
|
|
|
1,524,690
|
|
|
|
1,262,540
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(424,341
|
)
|
|
|
(1,212,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,100,349
|
|
|
$
|
50,279
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2017 future maturities of long term debt were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending March 31:
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
424,341
|
|
|
|
|
|
|
2019
|
$
|
453,759
|
|
|
|
|
|
|
2020
|
$
|
510,785
|
|
|
|
|
|
|
2021
|
$
|
135,805
|
|
|
|
|
|
|
|
$
|
1,100,349
|
|
|
|
|
|
NOTE 7 – 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, 2017 and June 30, 2016, there were 91,488,177 and 90,613,177 respectively, common shares outstanding.
During the three
months ended September 30, 2016 the Company sold 500,000 shares for cash proceeds of $25,000.
On September
30, 2016, the Company issued 125,000 shares of common stock to its Chief Financial Officer for services rendered under his employment
contract valued at $0.08 per share which was the fair market value.
On December
31, 2016, the Company issued 125,000 shares of common stock to its Chief Financial Officer for services rendered under his employment
contract valued at $0.06 per share which was the fair market value.
On March
31, 2017, the Company issued 125,000 shares of common stock to its Chief Financial Officer for services rendered under his employment
contract valued at $0.05 per share which was the fair market value.
As of March
31, 2017 there were no stock warrants outstanding.
NOTE 8
– GOING CONCERN
As of the date
of this quarterly report, there is substantial 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 9 – COMMITMENTS
AND CONTINGENCIES
The Company
leases office space in Dallas, TX under a non-cancelable operating lease that expires in July 2017, a truck for its tire disposal
operations at CTR under a 30-month lease expiring in April, 2019 and warehouse space in Ennis, TX on a month to month basis. Future
minimum lease payments are as follows:
Year End June 30
|
|
Amount
|
|
2017
|
|
|
|
11,085
|
|
|
2018
|
|
|
|
22,584
|
|
|
2019
|
|
|
|
13,800
|
|
|
Total
|
|
|
|
45,036
|
|
Rent expense,
included in general and administrative expenses, totaled approximately $45,036 and $30,744 for the nine months ended March 31,
2017 and 2016, respectively.
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, 2030.
NOTE 10
– RELATED PARTY TRANSACTIONS
One
of the consultants who has a royalty and commission agreement as discussed in Note 9 is a related party and the brother of the
former Chief Executive Officer of the Company.
At March 31, 2017 and June 30, 2016 notes payable
to officers and shareholders were as follows:
|
|
|
|
|
|
|
|
3/31/17
|
|
|
|
6/30/16
|
Note
payable to officer bearing interest at 6.5% due July, 2017. The note is convertible into common stock at $.055 a share
at maturity. The note is unsecured.
|
|
|
50,000
|
|
|
|
50,000
|
Note
payable to stockholder bearing interest at 6.5% due December, 2017. The note is convertible into common stock at $.05
a share at maturity. The note is unsecured.
|
|
|
20,000
|
|
|
|
—
|
Note
payable to stockholder bearing interest at 6.5% due July, 2017. The note is convertible into common stock at $.055 a share
at maturity. The note is unsecured.
|
|
|
330,567
|
|
|
|
—
|
|
|
|
400,567
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
Less
current maturities
|
|
|
(400,567
|
)
|
|
|
(50,000
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
At
March 31, 2017 future maturities of Notes Payable – Related Parties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending March 31:
|
|
|
|
|
|
|
|
|
2018
|
$
|
400,567
|
|
|
|
|
|
|
$
|
400,567
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11
– DISPOSITION OF INVESTMENT
In November,
2016 the Company disposed of its 33.33% interest in Aqueous Services, LLC by transferring it membership interest to the other
partners in exchange for release of any contingent liabilities. The investment had previously been impaired to zero value for
financial reporting so the transaction had no effect on the current year’s financial statements.
NOTE 12 – SUBSEQUENT
EVENTS
On April 12,
2017 the Company extended is notes payable to the Company’s Chief Financial Officer amending the terms to lower the conversion
price to $.055 a share and adding a provision triggering the note as due upon any change in control of the Company. The terms
of this extension are reflected in Note 6 above.