Notes
to Unaudited Condensed Consolidated Financial Statements
March
31, 2019
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 Ennis, 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 March 31, 2019 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 July 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 March 31, 2019 and June 30, 2018 inventory consisted of:
|
|
3/31/19
|
|
6/30/18
|
Used
Tires for Resale
|
|
$
|
9,904
|
|
|
$
|
11,648
|
|
Petrozene
and Tire Oil
|
|
|
18,954
|
|
|
|
18,743
|
|
|
|
$
|
28,858
|
|
|
$
|
30,391
|
|
NOTE
3 – PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
At March 31, 2019 and June 30, 2018
Property, Plant and Equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
3/31/19
|
|
|
|
6/30/18
|
|
Land
|
|
$
|
360,000
|
|
|
$
|
360,000
|
|
Buildings and Improvements
|
|
|
706,700
|
|
|
|
706,700
|
|
Automotive Equipment
|
|
|
78,100
|
|
|
|
78,100
|
|
Machinery and Equipment
|
|
|
507,807
|
|
|
|
507,807
|
|
Capital
Lease Assets
|
|
|
444,088
|
|
|
|
56,738
|
|
|
|
|
2,096,695
|
|
|
|
1,709,345
|
|
Less
Accumulated Depreciation
|
|
|
448,867
|
|
|
|
349,373
|
|
|
|
$
|
1,647,828
|
|
|
$
|
1,359,972
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended March 31, 2019 and March 31, 2018 depreciation expense was $99,494 and $94,469, 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 March 31, 2019 and June 30, 2018 was $400,000.
NOTE 5 –CAPITAL LEASE OBLIGATIONS
Capital
lease assets of $444,088 and $56,738 and accumulated amortization of $50,827 and $31,556 are included in property, plant and equipment
on the balance sheet at March 31, 2019 and June 30, 2018, respectively. For the nine months ended March 31, 2019 and March 31,
2018 amortization expense was $19,270 and $8,511, respectively.
At March 31, 2019 and June 30, 2018 capital
lease obligations were as follows:
|
|
|
|
|
|
|
3/31/19
|
|
6/30/18
|
Lease payable bearing interest at 4.95% with monthly payments
of $315 maturing August 2019. The lease is secured by equipment
|
|
$
|
1,557
|
|
|
$
|
4,281
|
|
|
|
|
|
|
|
|
|
|
Lease payable bearing interest at 3.95% with monthly payments of $309
maturing December 2020. The lease is secured by equipment.
|
|
|
6,216
|
|
|
|
8,725
|
|
|
|
|
|
|
|
|
|
|
Lease payable bearing interest at 4.78% with monthly payments of $489 maturing September 2020.
The lease is secured by equipment.
|
|
|
8,525
|
|
|
|
12,602
|
|
|
|
|
|
|
|
|
|
|
Lease payable bearing interest at 1.8% with monthly payments of $14,000
maturing December 2022. The lease is secured by equipment.
|
|
|
387,350
|
|
|
|
–
|
|
|
|
|
403,648
|
|
|
|
25,608
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(127,267
|
)
|
|
|
(12,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
270,381
|
|
|
$
|
13,124
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2019 future maturities of capital lease obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending March 31:
|
|
|
|
|
|
|
|
|
|
2020
|
$
|
127,267
|
|
|
|
|
|
|
2021
|
|
135,266
|
|
|
|
|
|
|
2022
|
|
141,115
|
|
|
|
|
|
|
|
$
|
403,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
6 – NOTES PAYABLE
At March 31, 2019 and June 30, 2018 notes payable were as follows:
|
|
|
|
|
|
|
3/31/19
|
|
6/30/18
|
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.
|
|
$
|
49,923
|
|
|
$
|
79,826
|
|
Note payable to seller in connection with purchase of CTR bearing interest at 12% maturing May, 2021. Note amended to add $360,065 of accrued interest and penalties to principal in February, 2017. Interest only payable until August, 2019. Monthly payment of $45,904 thereafter. Secured by the common stock and assets of CTR.
|
|
|
902,496
|
|
|
|
975,163
|
|
|
|
|
952,419
|
|
|
|
(91,054,989
|
)
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(348,109
|
)
|
|
|
(339,858
|
)
|
|
|
|
|
|
|
|
|
|
Long Term Debt, Less Current Maturities
|
|
$
|
604,310
|
|
|
$
|
715,131
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2019 future maturities of long term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending March 31:
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
348,109
|
|
|
|
|
|
2020
|
|
$
|
513,860
|
|
|
|
|
|
2021
|
|
$
|
90,450
|
|
|
|
|
|
|
|
$
|
952,419
|
|
|
|
|
|
NOTE
7 — NOTES PAYABLE – RELATED PARTIES
At March 31, 2019 and June 30, 2018 notes payable
to officers and shareholders were as follows:
|
|
|
|
|
|
|
|
3/31/19
|
|
|
|
6/30/18
|
|
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. At March 31, 2019 the note was in default.
|
|
|
50,000
|
|
|
|
50,000
|
|
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. At March 31, 2018 the note was in default.
|
|
|
20,000
|
|
|
|
20,000
|
|
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. At March 31, 2019 the note is in default. (1)
|
|
|
1,516,875
|
|
|
|
1,509,919
|
|
Line
of credit for a maximum of $150,000 from stockholder bearing interest at 10% with a 5% origination fee. In August 2019
the note coverts to a 24 month term note with payments of $7,525. The note is unsecured.
|
|
|
121,784
|
|
|
|
—
|
|
Line
of credit for a maximum of $100,000 from stockholder bearing interest at 10% with a 5% origination fee. In August 2019
the note coverts to a 24 month term note with payments of $5,023. The note is unsecured.
|
|
|
81,190
|
|
|
|
—
|
|
|
|
|
1,789,849
|
|
|
|
1,579,919
|
|
Less
current maturities
|
|
|
(1,695,393
|
)
|
|
|
(1,679,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,456
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
At
March 31, 2019 future maturities of Notes Payable – Related Parties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending March 31:
|
|
|
|
|
|
|
|
|
|
2020
|
$
|
1,695,393
|
|
|
|
|
|
|
2021
|
|
94,456
|
|
|
|
|
|
|
|
$
|
1,789,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
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
March 31, 2019 and June 30, 2018 there were 98,288,177 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 ($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 ($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.
On
March 31, 2019 the Company issued 10,000,000 shares of common stock valued at $.03 a share to a consultant for services.
The
Company is authorized to issue 5,000,000 shares of preferred stock. As of March 31, 2019 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 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
of March 31, 2019, 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
The
Company has evaluated events from March 31, 2019, through the date whereupon the financial statements were issued and has determined
that there are no additional items to disclose.