Notes to Unaudited Condensed Consolidated
Financial Statements
December 31, 2018
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.
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 period ended December 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, 2018 Form 10-K.
Recently Adopted Accounting Pronouncements:
Revenue:
Revenue from Contracts with Customers: In May 2014, ASC 606 was issued related to revenue from contracts with
customers.
This updated guidance supersedes the current
revenue recognition guidance, including industry-specific
guidance. The updated guidance introduces a
five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to
customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. To achieve this core principle, ASU 2014-09 includes provisions within its five-step model that includes
identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction
price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies
a performance obligation. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers.
The standard became effective for the Company
beginning July 1, 2018 and permits two methods of adoption: the full retrospective method, which requires the standard to be applied
to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized
as an adjustment to opening retained earnings in the period of adoption. The Company adopted the standard using the modified retrospective
method. There was no effect for any adjustments to retained earnings upon adoption of the standard on July 1, 2018.
Recently Issued Accounting Pronouncements:
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.
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, 2018 and June 30, 2018 inventory consisted of:
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|
12/31/18
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|
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6/30/18
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|
Used Tires for Resale
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$
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9,904
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|
|
$
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11,648
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|
Petrozene and Tire Oil
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18,743
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|
|
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18,743
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|
|
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$
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28,647
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|
|
$
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30,391
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NOTE 3 – PROPERTY, PLANT AND
EQUIPMENT
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At December 31, 2018 and June 30, 2018 Property, Plant and Equipment was as follows:
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12/31/18
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|
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6/30/18
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Land
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$
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360,000
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|
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$
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360,000
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Buildings and Improvements
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706,700
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706,700
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Automotive Equipment
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78,100
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78,100
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Machinery and Equipment
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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
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|
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1,709,345
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1,709,345
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Less Accumulated Depreciation
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408,529
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349,373
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$
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1,300,816
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$
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1,359,972
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For the six months ended December 31,
2018 and December 31, 2017 depreciation expense was $59,156 and $62,626, 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. 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. 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. 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 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 and the
balance at December 31, 2018 and June 30, 2018 was $400,000.
NOTE 5 – CAPITAL LEASE OBLIGATIONS
Capital lease assets of $56,738 and $56,738
and accumulated amortization of $37,230 and $31,556 are included in property, plant and equipment on the balance sheet at December
31, 2018 and June 30, 2018, respectively. For the six months ended December 31, 2018 and December 31, 2017 amortization expense
was $5,674 and $5,674, respectively.
At December 31, 2018 and June 30, 2018 capital lease obligations were as follows:
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12/31/18
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6/30/18
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Lease payable bearing interest at 4.95% with monthly payments of $315 maturing August 2019. The lease is secured by equipment.
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$
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2,476
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$
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4,281
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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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7,062
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8,725
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Lease payable bearing
interest at 4.78% with monthly payments of $489 maturing September, 2020. The lease is secured by equipment.
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9,898
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12,602
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19,436
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25,608
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Less current maturities
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(11,495
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)
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(12,484
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)
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$
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7,941
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|
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$
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13,124
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At December 31, 2018 future maturities of capital lease obligations were as follows:
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Year Ending December 31:
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2019
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$
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11,495
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2020
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$
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7,941
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$
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19,436
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NOTE 6 – NOTES PAYABLE
At December 31, 2018 and June 30, 2018 notes payable were as follows:
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12/31/18
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6/30/18
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Note payable to bank bearing interest at 7.0%
with monthly payment of $3,718 maturing June, 2020. The note is secured by accounts receivable.
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$
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60,017
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$
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79,826
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Note payable to seller in connection with purchase
of CTR bearing interest at 12% maturing October, 2020. Note amended to add $360,065 of accrued interest and penalties to principal
in February, 2017. Interest only payable until November, 2018. Monthly payment of $45,904 thereafter. Secured by the common stock
and assets of CTR. As of December 31, 2018 the note was in default. Subsequent to year end the Company reached an agreement with
the lender to amend the note and bring it current. See Note 12 Subsequent events for details of amendment.
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975,163
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975,163
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|
|
|
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1,035,180
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|
|
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1,054,989
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)
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Less current maturities
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(1,016,897
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)
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(339,858
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)
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Long Term Debt, Less Current Maturities
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$
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18,283
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$
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715,131
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At September 30, 2018 future maturities of long term debt were as follows:
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Year Ending September 30:
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2019
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$
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1,016,897
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2020
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$
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18,283
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2021
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$
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-
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$
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1,035,180
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NOTE 7. CONVERTIBLE NOTES PAYABLE –
RELATED PARTIES
At December 31, 2018 and June 30, 2018 notes payable to officers and shareholders were as follows:
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12/31/18
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6/30/18
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Note payable to officer 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.
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50,000
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50,000
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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.
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20,000
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20,000
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|
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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 $.05 a share at maturity.
The note is unsecured.(1)
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1,516,875
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1,509,919
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1,586,875
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1,579,919
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Less
current maturities
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(1,586,875
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)
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(1,679,919
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)
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$
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—
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$
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—
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At December 31, 2018 future maturities
of Notes Payable – Related Parties were as follows:
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Year Ending December 31:
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|
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2019
|
$
|
1,586,875
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|
|
|
|
$
|
1,586,875
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|
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(1)
|
On
August 15, 2018 the noteholder converted $125,000 of debt into common stock at $.05 a
share in accordance with the note agreement. See Note 8 below.
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NOTE
8 – EQUITY
The Company
is authorized to issue 600,000,000 common shares at a par value of $0.001 per share. These shares have full voting rights. At
December 31, 2018 and June 30, 2018 there were 98,238,177 and 91,988,177 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
October 9, 2018 the Company filed a Pre 14C Form with the SEC notifying stockholders regarding a resolution to file with the Nevada
Secretary of State a Certificate of Change: (i) increasing our authorized shares of common stock from one hundred million (100,000,000)
shares having a par value of one mill ($0.001) per share to six hundred million (600,000,000) shares and retaining the par value
of $0.001 per share (the “Common Stock Resolution”); and (ii) increasing our authorized shares of preferred stock
from five million (5,000,000) shares having a par value of one mill ($0.001) per share to ten million (10,000,000) shares and
retaining the par value of $0.001 per share (the “Preferred Stock Resolution”). Under Nevada law the increase
can be implemented by a joint resolution passed by the board of directors approved by a simple majority of the outstanding shares.
The joint resolution included in the Form 14C filing included the approval of ten shareholders representing 51.36% of the outstanding
common shares. On December 3, 2018 the Certificate of changed was filed with the Nevada Secretary of State.
On August
15, 2018 the Company issued a total of 2,500,000 shares of common stock to a note holder for conversion of $125,000 of convertible
debt at $.05 a share in accordance with the note agreement.
On August
21, 2018 the Company issued 3,750,000 shares of common stock valued at $.05 a share to its Officers as compensation.
The Company
is authorized to issue 5,000,000 shares of preferred stock. As of December 31, 2018 and June 30, 2018 there were no shares
issued and outstanding.
NOTE
9 – 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 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 of December
31, 2018, the two Companies continue to work toward completing the merger. Dynamis Energy has encountered delays in completing
the required audited financial statements to comply with SEC requirements. Freestone remains committed to completing the merger
once these issues are resolved. However, the Company is reviewing all options and seeking additional capital investment.
NOTE
10 – 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
11 – 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 12
– SUBSEQUENT EVNETS
On February
4, 2019 the Company executed an amendment to its notes payable to the seller in connection with the purchase of CTR. Under the
amended terms the Company agrees to make a payment of $116,308 to bring the note current. Beginning February 24, 2019, the Company
will make monthly payments of $12,000 interest only through July, 2019. In August 2019 the Company will resume monthly payments
of $45,905. The final maturity date of the loan was moved to June, 2021.