Notes to Unaudited Condensed Consolidated
Financial Statements
December 31, 2017
NOTE 1 – NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING
POLICIES
Nature of Activities, History and Organization
Freestone Resources, Inc. and subsidiaries
(“Freestone” or collectively the “Company”) are an oil and gas technology development company. The Company
is located in Dallas, Texas and is incorporated under the laws of the State of Nevada. The Company’s subsidiaries consist
of C.C. Crawford Retreading Company, Inc., Freestone Technologies, LLC and Freestone Dynamis Energy Products, LLC.
The Company’s primary business is the
development of new technologies that allow for the utilization of oil and gas resources in an environmentally responsible and cost
effective way.
C.C. Crawford Retreading Company, Inc. (“CTR”)
is an Off-The-Road (“OTR”) tire company located in Ennis, Texas and incorporated under the laws of the State of Texas.
CTR’s primary business is to repair, recycle, dispose of and sell OTR tires, which are used on large, industrial equipment.
Freestone Dynamis Energy Products, LLC (“FDEP”)
is a joint venture between Dynamis Energy, LLC and the Company. FDEP was established to pursue the production and marketing of
Petrozene™. FDEP’s initial operations will utilize a specialized pyrolysis technology in order to process CTR’s
feedstock, and begin large scale production of Petrozene™. Freestone owns 70% of FDEP.
Freestone Technology, LLC. is an inactive subsidiary.
On November 2, 2017 the Company formed
Freestone Dynamis Acquisition, LLC an Idaho limited liability Company for the purposed of facilitating the acquisition of Dynamis
Energy, LLC. as discuss farther in Note 11 below.
Unaudited Interim Financial Statements:
The accompanying unaudited interim condensed
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 six months ended December 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, 2017 Form 10-K.
Recently Issued Accounting Pronouncements:
The Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers
(Topic 606) in May 2014. ASU No. 2014-09 outlines a single, comprehensive revenue recognition model for revenue derived from contracts
with customers and it supersedes the most current revenue recognition guidance. This includes current guidance that is industry-specific.
Under ASU No. 2014-09, an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that
reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09
is effective for annual reporting periods beginning after December 15, 2017. Earlier adoption is permitted as of annual reporting
periods beginning after December 15, 2016. The Company is still evaluating the impacts it will have on its current revenue recognition
policy.
On May 10, 2017, the FASB issued ASU
2017-09, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the
types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification
accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions,
and classification of the awards are the same immediately before and after the modification. ASU No. 2017-09 is effective for annual
reporting periods beginning after December 15, 2017. The Company is still evaluating the impacts it will have on its current revenue
recognition policy.
NOTE 2 – INVENTORY
Inventory of the Company is carried at lower
of cost or market. The Company’s inventory consists of processed rubber from disposed tires carried at cost of processing,
used tires for sale carried at the cost of repairs and tire oil produced from the Company’s pyrolysis operations. As of December
31, 2017 and June 30, 2017 inventory consisted of:
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|
12/31/17
|
|
6/30/17
|
Crum Rubber for Processing
|
|
$
|
511
|
|
|
$
|
8,087
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|
Used Tire for Resale
|
|
|
10,711
|
|
|
|
15,041
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|
Tire Oil
|
|
|
7,410
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|
|
|
7,410
|
|
|
|
$
|
18,632
|
|
|
$
|
30,538
|
|
NOTE 3 – PROPERTY, PLANT AND
EQUIPMENT
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|
|
|
|
At December 31, 2017 and June 30, 2017 Property, Plant and Equipment was as follows:
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|
|
|
|
|
|
|
|
|
12/31/17
|
|
|
|
6/30/17
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|
Land
|
|
$
|
360,000
|
|
|
$
|
360,000
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|
Buildings and Improvements
|
|
|
700,000
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|
|
|
700,000
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|
Computers and Office Furniture
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|
|
—
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|
|
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8,967
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Automotive Equipment
|
|
|
120,585
|
|
|
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120,585
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Machinery and Equipment
|
|
|
507,807
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|
|
|
507,807
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Capital Lease Assets
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|
56,738
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|
|
|
56,738
|
|
|
|
|
1,745,130
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|
|
|
1,754,097
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Less Accumulated Depreciation and amortization
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304,946
|
|
|
|
251,287
|
|
|
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$
|
1,440,184
|
|
|
$
|
1,502,810
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|
|
|
|
|
|
|
|
|
|
For the six months ended December 31,
2017 and December 31, 2016 depreciation and amortization expense was $62,626 and $62,926 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 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 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 numbers of tires on hand within the next year. 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 and the balance at December 31, 2017 and
June 30, 2017 was $400,000, respectively.
NOTE 5 – CAPITAL LEASE OBLIGATIONS
Capital lease assets of $56,738 and $56,738
and accumulated amortization of $25,883 and $20,209 are included in property, plant and equipment on the balance sheet at December
31, 2017 and June 30, 2017, respectively. For the six months ended December 31, 2017 and December 31, 2016 amortization expense
was $5,674 and $5,674, respectively.
At December 31, 2017 and June 30, 2017 capital lease obligations were as follows:
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|
|
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|
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12/31/17
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6/30/17
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Lease payable bearing interest at 4.95% with monthly payments of $315 maturing August 2019. The lease is secured by equipment.
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$
|
6,041
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|
|
$
|
7,758
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|
|
|
|
|
|
|
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Lease payable bearing interest at 3.95% with monthly payments of $309 maturing December, 2020. The lease is secured by equipment.
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10,348
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|
|
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11,934
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|
|
|
|
|
|
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Lease payable bearing interest at 4.78% with monthly payments of $489 maturing September, 2020. The lease is secured by equipment.
|
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15,255
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|
|
|
17,836
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|
|
|
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31,644
|
|
|
|
37,528
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|
|
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|
|
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Less current maturities
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(12,208
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)
|
|
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(11,920
|
)
|
|
|
|
|
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|
|
|
|
|
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$
|
19,436
|
|
|
$
|
25,608
|
|
|
|
|
|
|
|
|
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|
At December 31, 2017 future maturities of capital lease obligations were as follows:
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|
|
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Year Ending December 31:
|
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|
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|
|
|
|
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2018
|
$
|
12,208
|
|
|
|
|
|
|
2019
|
$
|
11,495
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|
|
|
|
|
|
2020
|
$
|
7,941
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|
|
|
|
|
|
|
$
|
31,644
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|
|
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NOTE 6 – NOTES PAYABLE
At December 31, 2017 and June 30, 2017 notes payable were as follows:
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|
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12/31/17
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6/30/17
|
Note payable to bank bearing interest at 4.5% with monthly
payment of $390 maturing September, 2017. The note is secured by an automobile.
|
|
$
|
—
|
|
|
$
|
1,162
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|
|
|
|
|
|
|
|
|
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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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|
—
|
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|
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24,139
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|
|
|
|
|
|
|
|
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Note payable to bank bearing interest at 6.5% with monthly payment of $809 maturing April, 2020. The
note is secured by a truck.
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|
21,005
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|
|
|
25,054
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|
|
|
|
|
|
|
|
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Line of Credit with
Bank maximum $75,000 bearing interest at 6.5% due March, 2018. Line is secured by accounts receivable.
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75,000
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75,000
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|
|
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|
|
|
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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 payable until July, 2017.
Monthly payment of $45,904 thereafter. Secured by the common stock and assets of CTR
|
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|
1,184,685
|
|
|
|
1,382,065
|
|
|
|
|
1,280,690
|
|
|
|
1,507,420
|
|
|
|
|
|
|
|
|
|
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Less current maturities
|
|
|
(515,577
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)
|
|
|
(515,527
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)
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|
|
|
|
|
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|
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$
|
765,113
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|
|
$
|
991,893
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|
|
|
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|
|
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At December 31, 2017 future maturities of long term debt were as
follows:
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Year Ending December 31:
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|
|
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|
|
|
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2018
|
$
|
515,577
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|
|
|
|
|
|
2019
|
$
|
495,887
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|
|
|
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2020
|
$
|
269,226
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|
|
|
|
|
|
|
$
|
1,280,690
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NOTE 7. CONVERTIBLE NOTES PAYABLE –
RELATED PARTIES
At December 31, 2017 and June 30, 2017 notes payable to officers and shareholders were as follows:
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12/31/17
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6/30/17
|
Note payable to officer bearing interest at 6.5% due June, 2018. The note is convertible into common stock
at $.055 upon closing a Dynamis merger. The note is unsecured.
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
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|
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Note payable to stockholder bearing interest at 6.5% due December, 2018. The note is convertible into common
stock at $.05 a share at maturity. The note is unsecured.
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Note payable to stockholder bearing interest at 6.5% due June, 2018. The note is convertible into common stock
at $.055 a share at maturity limited to available shares. The note is unsecured.
|
|
|
966,048
|
|
|
|
535,013
|
|
|
|
|
1,036,048
|
|
|
|
605,013
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(1,036,048
|
)
|
|
|
(605,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017 future maturities of Notes Payable – Related
Parties were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
1,036,048
|
|
|
|
|
|
|
|
|
1,036,048
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
NOTE 8 – EQUITY
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 December 31, 2017 and June
30, 2017 there were 91,863,177 and 91,613,177 common shares outstanding, respectively.
On September 30, 2017, the Company issued
125,000 shares of common stock to its Chief Financial Officer for services rendered under his employment contract valued at $0.06
per share which was the fair market value.
On December 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.
The Company is authorized to issue 5,000,000
shares of preferred stock. As of December 31, 2017 and June 30, 2017 there were no shares issued and outstanding.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
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. One of the
contracts is with the brother of the former CEO of the Company. In case of change of control of the Company the agreement is voided.
NOTE 10 – GOING CONCERN
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 11 – MERGER AGREEMENT
On November 2, 2017 the Company formed
Freestone Dynamis Acquisition, LLC an Idaho limited liability Company.
On November 2, 2017, Freestone entered into
an Agreement and Plan of Merger (the “Plan”) with Freestone Dynamis Acquisition, LLC, an Idaho limited liability company
and wholly owned subsidiary of the Company (“Merger Sub”), and Dynamis Energy, LLC, an Idaho limited liability company
(“Dynamis”). Pursuant to the terms of the Plan, at the Effective Time (as defined in the Plan) thereof: (i) Merger
Sub will be merged with and into Dynamis, with the separate existence of Merger Sub to cease and with Dynamis to continue as the
surviving entity and as a wholly owned subsidiary of the Company; and (ii) all Units of Dynamis will be exchanged for shares of
the Company’s common stock to be paid in accordance with Article II of the Plan (the “Merger”). At the closing
of the Merger, it is expected that the members and warrant holders of Dynamis will collectively own or have the right to purchase
(through exercising a warrant to purchase Dynamis Units, which the Company will have the right to exchange shares of its common
stock in exchange for such Dynamis Units) shares of the Company’s common stock, representing approximately seventy five percent
(75%) of the Company’s issued and outstanding shares. The Merger contemplated by the Plan, together with the Rights Offering
(as defined below), is intended to qualify as a nontaxable exchange pursuant to Section 351 of the Internal Revenue Code of 1986,
as amended.
Dynamis is an Eagle, Idaho
based technology development company focused on waste management and energy production from solid wastes to provide sustainable
economic and environmental benefits, while turning such waste into usable products. As such,
Dynamis
provides technology to recycle municipal and other solid wastes to produce sustainable economic and environmental benefits, in
the form of fixed and mobile waste-to-energy plants.
Dynamis
has a network of agents worldwide to support the sale of its technology and products. Currently Dynamis has projects in various
stages of development in Europe, Asia, South America, the Caribbean, and the US.
The closing
of the Merger is subject to numerous conditions including, but not limited to, the following:
-
At or one week prior to the Effective Time, the Company
shall have commenced a rights offering to its stockholders on the terms set forth in the Plan (the “Rights Offering”),
which Rights Offering shall remain open for a period of 90 days;
-
The approval by the Company’s stockholders and the
filing with the Nevada Secretary of State of an amendment to the Company’s Articles of Incorporation to increase the number
of the Company’s authorized shares of common stock in an amount sufficient to consummate the Merger, the Rights Offering,
the Company’s new equity incentive plan and the other transactions contemplated by the Plan;
-
The effectiveness of the Company’s to-be-filed: (i)
Registration Statement on Form S-3 relating to the registration under the Securities Act, of the shares of Company common stock
to be issued in its Rights Offering; and (ii) Registration Statement on Form S-4 relating to the authorization and the registration
under the Securities Act of the shares of Company common stock to be issued in the Merger;
-
Dynamis members, together with Company stockholders participating
in the Rights Offering, shall collectively hold at least 80 percent of the total issued and outstanding shares of the Company’s
stock (other than stock subject to vesting restrictions); and
-
The Company’s stockholders shall have approved the
Company’s new equity incentive plan that is contemplated by the Plan.
In addition, either party
may terminate the Plan at any time prior to closing on certain terms and conditions as set forth in Article VIII thereof.
NOTE 12 – SUBSEQUENT EVENTS
The Company has evaluated events from December 31, 2017, through
the date whereupon the financial statements were issued and has determined that there are no additional items to disclose.