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 purpose of facilitating the acquisition of Dynamis Energy,
LLC as discussed further 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 nine months ended March 31, 2018 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:
Stock compensation
In March 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 amending several aspects of share-based
payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded in the income statement
when the awards vest or are settled, with prospective application required. The guidance also changes the classification of such
tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating activity, with retrospective
or prospective application allowed. Additionally, the guidance requires the classification of employee taxes paid when an employer
withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows, with retrospective application
required. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15,
2016. As such, The Company adopted these provisions as of the fiscal year beginning January 1, 2017. There was no material effect
of the new provisions on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation
– Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09). ASU 2017-09 provides clarity and
reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock
Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this update provide guidance
about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting
in Topic 718. The amendments in this update are effective for all entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2017. Early adoption is permitted. As such, The Company is required to adopt these
provisions as of the fiscal year beginning on January 1, 2018. The amendments in this update should be applied prospectively to
an award modified on or after the adoption date. We are currently assessing the potential impact of ASU 2017-09 on our consolidated
financial statements and results of operations.
Leases
In February 2016, FASB issued ASU 2016-02—
Leases (Topic 842). The update is intended to increase transparency and comparability among organizations by recognizing lease
assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in
this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Early application of the amendments in this update is permitted. As such, The Company is required to adopt these provisions as
of the fiscal year beginning on January 1, 2019. The Company is currently evaluating the impact of FASB ASU 2016-02 and expects
the adoption thereof will have a material effect on The Company’s presentation of balance sheet assets and liabilities based
on the present value of future lease payments, but does not expect a material effect on the presentation of expenses and cash flows.
Revenue:
Revenue from Contracts with Customers: In May
2014, ASC 606 was issued related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised
goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for
those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes
effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted.
The standard will be effective for the Company's fiscal year beginning January 1, 2018, including interim reporting periods within
that year. The new guidance is not expected to have an impact on the Company's consolidated financial statements. The Company has
analyzed the standard and will implement any relevant provisions for the interim periods beginning January 1,2018.
Inventory
In July 2015, FASB issued ASU 2015-11—
Inventory (Topic 330): “Simplifying the Measurement of Inventory”. The update is effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. As such, the Company adopted these provisions beginning
on January 1, 2017. The amendments in this Update should be applied prospectively with earlier application permitted as of the
beginning of an interim or annual reporting period. The update is part of FASB’s Simplification Initiative, the objective
of which is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity
can be reduced. Pursuant to the update, an entity should measure inventory at the lower of cost and net realizable value. The amendments
in the update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial
Reporting Standards (IFRS). Adoption of the new guidance did not have an impact on the Company's consolidated financial statements.
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 March
31, 2018 and June 30, 2017 inventory consisted of:
|
|
3/31/18
|
|
6/30/17
|
Crum Rubber for Processing
|
|
$
|
511
|
|
|
$
|
8,087
|
|
Used Tires for Resale
|
|
|
12,422
|
|
|
|
15,041
|
|
Tire Oil
|
|
|
7,410
|
|
|
|
7,410
|
|
|
|
$
|
20,343
|
|
|
$
|
30,538
|
|
NOTE 3 – PROPERTY, PLANT AND
EQUIPMENT
|
|
|
|
|
At March 31, 2018 and June 30, 2017 Property, Plant and Equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
3/31/18
|
|
|
|
6/30/17
|
|
Land
|
|
$
|
360,000
|
|
|
$
|
360,000
|
|
Buildings and Improvements
|
|
|
706,700
|
|
|
|
700,000
|
|
Computers and Office Furniture
|
|
|
—
|
|
|
|
8,967
|
|
Automotive Equipment
|
|
|
120,585
|
|
|
|
120,585
|
|
Machinery and Equipment
|
|
|
507,807
|
|
|
|
507,807
|
|
Capital Lease Assets
|
|
|
56,738
|
|
|
|
56,738
|
|
|
|
|
1,751,830
|
|
|
|
1,754,097
|
|
Less Accumulated Depreciation and amortization
|
|
|
336,789
|
|
|
|
251,287
|
|
|
|
$
|
1,415,041
|
|
|
$
|
1,502,810
|
|
|
|
|
|
|
|
|
|
|
For the six months ended March 31, 2018
and March 31, 2017 depreciation and amortization expense was $94,469 and $94,389, respectively. This includes the amortization
expense of capital lease assets as discussed in Note 5.
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. At its acquisition
by Freestone CTR had recorded liabilitiesAtA 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. 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 March 31, 2018 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 $28,720 and $20,209 are included in property, plant and equipment on the balance sheet at March
31, 2018 and June 30, 2017, respectively. For the nine months ended March 31, 2018 and March 31, 2017 amortization expense was
$8,511 and $8,511, respectively.
At March 31, 2018 and June 30, 2017 capital lease obligations were as follows:
|
|
|
|
|
|
|
3/31/18
|
|
6/30/17
|
Lease payable bearing interest at 4.95% with monthly payments of $315 maturing August 2019. The lease is secured by equipment.
|
|
$
|
5,166
|
|
|
$
|
7,758
|
|
|
|
|
|
|
|
|
|
|
Lease payable bearing interest at 3.95% with monthly payments of $309 maturing December, 2020. The lease is secured by equipment.
|
|
|
9,542
|
|
|
|
11,934
|
|
|
|
|
|
|
|
|
|
|
Lease payable bearing interest at 4.78% with monthly payments of $489 maturing September, 2020. The lease is secured by equipment.
|
|
|
13,934
|
|
|
|
17,836
|
|
|
|
|
28,642
|
|
|
|
37,528
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(12,345
|
)
|
|
|
(11,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,297
|
|
|
$
|
25,608
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2018 future maturities of capital lease obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending March 31:
|
|
|
|
|
|
|
|
|
|
2019
|
$
|
12,345
|
|
|
|
|
|
|
2020
|
$
|
10,672
|
|
|
|
|
|
|
2021
|
$
|
5,625
|
|
|
|
|
|
|
|
$
|
28,642
|
|
|
|
|
|
NOTE 6 – NOTES PAYABLE
At March 31, 2018 and June 30, 2017 notes payable were as follows:
|
|
|
|
|
|
|
3/31/18
|
|
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
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
—
|
|
|
|
24,139
|
|
|
|
|
|
|
|
|
|
|
Note payable to bank bearing interest at 6.5% with monthly payment of $809 maturing April, 2020. The note is secured by a truck.
|
|
|
18,895
|
|
|
|
25,054
|
|
|
|
|
|
|
|
|
|
|
Line of Credit with Bank maximum $75,000 bearing interest at 6.5% due March, 2018. Line is secured by accounts receivable.
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,081,488
|
|
|
|
1,382,065
|
|
|
|
|
1,175,383
|
|
|
|
1,507,420
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(528,793
|
)
|
|
|
(515,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
646,590
|
|
|
$
|
991,893
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2018 future maturities of long term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending March 31:
|
|
|
|
|
|
|
|
|
|
2019
|
$
|
528,793
|
|
|
|
|
|
|
2020
|
$
|
510,785
|
|
|
|
|
|
|
2021
|
$
|
135,805
|
|
|
|
|
|
|
|
$
|
1,175,383
|
|
|
|
|
|
NOTE 7 – CONVERTIBLE NOTES
PAYABLE – RELATED PARTIES
At March 31, 2018 and June 30, 2017 notes payable to officers and shareholders were as follows:
|
|
|
|
|
|
|
3/31/18
|
|
6/30/17
|
Note payable to officer bearing interest at 6.5% due June, 2018. The note is convertible into common stock at $0.055 upon closing a Dynamis merger. The note is unsecured.
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Note payable to stockholder bearing interest at 6.5% due December, 2018. The note is convertible into common stock at $0.05 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 $0.055 a share at maturity limited to available shares. The note is unsecured.
|
|
|
1,170,395
|
|
|
|
535,013
|
|
|
|
|
1,245,395
|
|
|
|
605,013
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(1,245,395
|
)
|
|
|
(605,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2018 future maturities of Notes Payable – Related Parties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending March 31:
|
|
|
|
|
|
|
|
|
|
2019
|
$
|
1,245,395
|
|
|
|
|
|
|
|
|
1,245,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2018 and June 30,
2017 there were 91,988,177 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.
On March 31, 2018, the Company issued
125,000 shares of common stock to its Chief Financial Officer for services rendered under his employment contract valued at $0.04
per share which was the fair market value.
The Company is authorized to issue 5,000,000
shares of preferred stock. As of March 31, 2018 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.
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.
NOTE 13 – SUBSEUENT EVENTS
On April 30, 2018 the Company consolidated its $75,000 Bank Line
of Credit and the remaining balance of it installment bank note into a new installment note totaling $82,876. The new note bears
interest at 7.0% with monthly payments of $3,718 and matures in May, 2020.