U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

  

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2016

 

OR

 

[    ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

Commission File Number 000-28753

 

 

 

 

FREESTONE RESOURCES, INC.

 

(Exact name of registrant as specified in its charter)

 

 Nevada   90-0514308
 (State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)

 

 

Republic Center, Suite 1350

325 N. St. Paul Street Dallas, TX 75201

(Address of principal executive offices)

 

(214) 880-4870

(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last report)

 

 

 1 
 

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large Accelerated Filer [  ]  Accelerated Filer [  ]  
Non-Accelerated Filer   [  ]  Smaller Reporting Company [X]  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS325.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files), Yes [X] No [ ]

  

As of January 31, 2017 there were 91,363,177 shares of Common Stock of the issuer outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

 2 
 

 

 

 

Freestone Resources Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2016 and June 30, 2016
       
       
   December 31,  June 30,
   2016  2016
   (Unaudited)   
ASSETS      
       
Current Assets          
Cash  $18,335   $29,791 
Accounts receivable, less allowance for doubtful accounts          
of $4,000 and $4,000   114,126    141,134 
Inventory   28,336    69,570 
Prepaid and Other Assets   51,427    43,497 
Total Current Assets   212,224    283,992 
           
Property, plant and equipment, net of accumulated depreciation of          
$188,362 and $125,436   1,565,735    1,641,661 
           
TOTAL ASSETS  $1,777,959   $1,925,653 
           
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current Liabilities          
Accounts payable  $105,571   $86,661 
Accrued liabilities   461,788    205,382 
Environmental liability   400,000    400,000 
Current portion of capital lease obligations   11,675    11,419 
Current portion of long-term debt   1,374,960    1,212,261 
Total Current Liabilities   2,353,994    1,915,723 
           
Capital lease obligation, less current portion   31,644    37,523 
Long-term debt, less current portion   20,959    50,279 
           
TOTAL LIABILITIES   2,406,597    2,003,525 
           
STOCKHOLDERS' EQUITY (DEFICIT)          
Common stock, $.001 par value,  100,000,000 shares authorized,          
91,363,177 and 90,613,177 shares issued and outstanding   91,363    90,613 
Additional paid in capital   20,828,253    20,786,503 
Accumulated deficit   (22,023,891)   (21,304,159)
Total Freestone Resources, Inc. stockholders' deficit   (1,104,275)   (427,043)
Non-Controlling Interest   475,637    349,171 
Total equity (deficit)   (628,638)   (77,872)
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)  $1,777,959   $1,925,653 
           
           
           
The Accompanying Notes Are An Integral Part of These Unaudited Consolidated Financial Statements

 

 

 

 3 
 

 

 

Freestone Resources Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three and Six Months Ended December 31, 2016 and 2015
             
   Three Months  Three Months  Six Months  Six Months
   Ended  Ended  Ended  Ended
   December 31,  December 31,  December 31,  December 31,
   2016  2015  2016  2015
             
REVENUE                    
Tipping Fee Revenue  $143,460   $109,975   $277,962   $263,758 
Tire Repair Revenue   87,116    93,567    183,038    206,858 
Used Tire Sales   34,840    21,525    70,742    80,400 
Scrap Material Sales   11,391    8,850    29,682    20,522 
Total Revenue   276,807    233,917    561,424    571,538 
                     
COSTS OF REVENUE                    
Tipping Fee Operations   65,428    49,683    135,907    112,322 
Tire Repair   37,480    40,439    76,063    76,927 
Used Tire Sales   23,371    15,672    45,349    44,136 
Tire Disposal   73,153    57,140    152,557    120,714 
Scrap and Other Costs   —      —      3,862    —   
Total Cost of Revenue   199,432    162,934    413,738    354,099 
                     
GROSS PROFIT   77,375    70,983    147,686    217,439 
                     
OPERATING EXPENSES                    
Joint Venture Start Up Costs   71,415    177,009    165,981    234,627 
Selling   47,843    49,932    98,916    102,160 
General and Administrative   295,178    230,032    513,053    726,097 
Depreciation and Amortization   31,463    28,751    62,926    56,408 
Total Operating Expense   445,899    485,724    840,876    1,119,292 
                     
INCOME (LOSS) FROM OPERATIONS   (368,524)   (414,741)   (693,190)   (901,853)
                     
OTHER INCOME (EXPENSES)                    
Loss on Sale of Asset   —      —      (6,200)   —   
Interest Expense, net   (36,775)   (33,511)   (72,494)   (66,759)
    (36,775)   (33,511)   (78,694)   (66,759)
                     
NET INCOME(LOSS)   (405,299)   (448,252)   (771,884)   (968,612)
                     
Loss Attributable to Non-Controlling Interest   22,358    54,105    52,152    72,290 
                     
NET INCOME(LOSS) ATTRIBUTABLE TO FREESTONE  $(382,941)  $(394,147)  $(719,732)  $(896,322)
                     
Basic and diluted income (loss) per share                    
Net income (loss) per share   (0.00)   (0.00)   (0.01)   (0.01)
                     
Weighted average shares outstanding                    
Basic and diluted   91,239,536    86,138,177    91,122,688    83,861,003 
                     
The Accompanying Notes Are An Integral Part of These Unaudited Consolidated Financial Statements

 

 

 

 4 
 

 

  

Freestone Resources Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
Six Months Ended  December 31, 2016 and 2015
       
   December 31,  December 31,
   2016  2015
       
CASH FLOW FROM OPERATING ACTIVITIES          
Net Income (Loss)  $(771,884)  $(968,612)
Adjustments to reconcile net income (loss) to net cash provided          
by operating activities:          
Depreciation   62,926    56,408 
Shares Issued for Services   17,500    256,500 
Loss on Sale of Fixed Assets   6,200    —   
Changes in operating assets and liabilities          
Decrease in Accounts Receivable   27,008    12,928 
(Increase) Decrease in Inventory   41,234    32,140 
(Increase) Decrease in Prepaid Expenses   (7,930)   13,827 
Increase (Decrease) in Accounts Payable and Accrued Liabilities   289,459    209,614 
Net Cash Provided by (Used In) Operating Activities   (335,487)   (387,195)
           
CASH FLOW FROM INVESTING ACTIVITIES          
Proceeds From Sale of Fixed Assets   6,800    —   
Purchase of Fixed Assets   —      (4,947)
Net Cash Provided By (Used in) Investing Activities   6,800    (4,947)
           
CASH FLOW FROM FINANCING ACTIVITIES          
Sale of Stock for Cash   25,000    350,000 
Contributions to LLC by Holders of  Non-Controlling Interest in FDEP   164,475    137,528 
Proceeds from Notes Payable   171,261    —   
Repayment of Debt   (43,505)   (31,769)
Net Cash Provided by (Used In) Financing Activities   317,231    455,759 
           
Net Increase (Decrease)  in Cash   (11,456)   63,617 
           
Cash at Beginning of the Period   29,791    38,372 
           
Cash at the End of the Period  $18,335   $101,989 
           
Cash Transactions          
Total Amount of Interest Paid in Cash  $6,960   $5,099 
           
Non Cash financing and Investing Activities          
Notes Payable for Purchase of Assets  $—     $70,467 
           
ARO Assumed By Purchaser in Exchange for          
O&G Property  $—     $14,470 
           
Shares Issued for O&G Interest  $—     $20,000 
           
Expenses  Paid Directly by Holders of Non-Controlling          
Interest in FDEP  $14,143   $134,579 
           
           
The Accompanying Notes Are An Integral Part of These Unaudited Consolidated Financial Statements

   

 5 
 

 

Freestone Resources, Inc.

Notes to Consolidated Financial Statements

December 31, 2016

(Unaudited)

 

 

NOTE 1 – NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Activities, History and Organization:

 

Freestone Resources, Inc. (the “Company” or “Freestone”) is an oil and gas technology development company that is actively developing and marketing technologies and solvents designed to benefit various sectors in the oil and gas industry. The Company has re-launched its Petrozene™ solvent after developing a new and improved formula. Petrozene™ is primarily used to dissolve paraffin buildup, and it is primarily used for pipelines, oil storage tanks, oil sludge build up, de-emulsification, well treatment, as a corrosion inhibitor and as a catalyst in opening up formations thereby aiding in oil production.

 

On June 24, 2015 Freestone purchased 100% of the common stock of C.C. Crawford Retreading Company, Inc. (“CTR”), a Texas corporation. CTR is an Off-The-Road (“OTR”) tire company located in Ennis, Texas, and a wholly owned subsidiary of Freestone. CTR’s primary business is to repair, recycle, dispose of and sell OTR tires, which are used on large, industrial equipment. Freestone made the decision to purchase CTR in order to utilize the CTR facility for the production of Petrozene™.

 

On June 24, 2015 the Company formed Freestone Dynamis Energy Products, LLC (“FDEP”), a Delaware limited liability company, with Dynamis Energy, LLC (“Dynamis”). FDEP was formed in order to operate and manage the specialized pyrolysis process that is used to create Petrozene™ and other byproducts of value. Freestone chose to work with Dynamis based on their extensive engineering and waste-to-energy expertise. Freestone owns a 70% member interest in FDEP.

 

The acquisition of CTR and the formation of FDEP have allowed Freestone to vertically integrate the Petrozene™ product line. CTR will remain an auxiliary company that will maintain existing operations that complement the efforts of FDEP and Freestone.

 

Unaudited Interim Financial Statements:

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary to present fairly the balance sheet, statement of operations, and statement of cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations. It is presumed that users of this interim financial information have read or have access to the audited financial statements and footnote disclosure for the preceding fiscal year contained in the Company’s Annual Report on Form 10-K. The results of operations for the six months ended December 31, 2016 are not necessarily indicative of the results of operations for the full year or any other interim period.  The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and Financial Statements and notes thereto included in the Company’s June 30, 2016 Form 10-K.   

  

Recently Issued Accounting Pronouncements:

 

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow.

 

 6 
 

 

NOTE 2 – INVENTORY

 

Inventory of the Company is carried at lower of cost or market. At the acquisition of CTR, the Company’s inventory was revalued at fair market value as part of the purchase price allocation. The Company’s inventory consists of processed rubber from disposed tires carried at cost of processing, and used tires for sale carried at the cost of repairs. As of December 31,2016 and June 30, 2016 inventory consisted of:

 

 

   12/31/16  6/30/16
Crum Rubber for Processing  $8,087   $8,087 
Used Tire for Resale   12,573    49,945 
Tire Oil   7,676    11,538 
   $28,336   $69,570 

 

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT

       
At December 31, 2016 and June 30, 2016 Property, Plant and Equipment was as follows:   
       
    12/31/16    6/30/16 
Land  $360,000   $360,000 
Buildings and Improvements   700,000    700,000 
Computers and Office Furniture   8,967    21,967 
Automotive Equipment   120,585    120,585 
Machinery and Equipment   507,807    507,807 
Capital Lease Assets   56,738    56,738 
    1,754,097    1,767,097 
Less Accumulated Depreciation   188,362    125,436 
   $1,565,735   $1,641,661 
           
           

Depreciation expense was $62,926 and $56,408 for the six months ended December 31, 2016 and December 31, 2015, respectively.

 

 

 

NOTE 4 – ENVIRONMENTAL LIABILITY

 

The Company’s tire recycling permit requires the Company to ultimately dispose of all tires accepted for recycling.  Tire disposal occurs in the normal course of business however the Company always has tires stored at its facility that have not yet been disposed of. CTR had recorded liabilities totaling $320,000 at June 30, 2014 (Predecessor) for estimated costs related to dispose of all tires at its Ennis, Texas facility. The environmental liability was calculated by estimating the costs associated with the various disposal costs that would be necessary to remove the tires from the CTR permitted facility. Upon acquisition of CTR by Freestone the liability was reduced to $32,000 (Successor) as part of the purchase price allocation, and the revaluation of assets and liability to fair market value. The reduction was due to the formation of FDEP. CTR plans to convert the majority of the tires into crum rubber, and sell it to FDEP as a feedstock for its specialized pyrolysis operations. The remaining $32,000 was an estimate of cost of disposing of the tires that are not acceptable for use as feedstock. At June 30, 2016, CTR increased its liability to $400,000 representing the estimated disposal fees on the revised estimate of tires on hand. Although CTR still plans to convert the majority of the tires in crum rubber for use by FDEP the liability was recorded as part of the plan submitted to the TCEQ to cure potential violations regarding it processing permit. Since the plan requires CTR to significantly reduce the 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 so the liability is considered short-term. The environmental liability has a balance of $400,000 as of December 31, 2016, and June 30, 2016, respectively. In December, 2016 the TCEQ notified CTR of $48,750 of proposed penalties for violations. CTR has submitted additional information to the TCEQ seeking to have the penalties waived or reduced however the amount has been accrued and is included in general and administrative expenses for the six months ended December 31, 2016.

 

 7 
 

 

 

NOTE 5 – CAPITAL LEASE OBLIGATIONS

 

Capital lease assets of $56,738 and $40,269 and accumulated amortization of $14,535 and $8,861 are included in property, plant and equipment on the balance sheet at December 31, 2016 and June 30, 2016, respectively. For the six months ended December 31, 2016 and 2015 amortization expense was $5,674 and $3,151, respectively.

 

At December 31, 2016 and June 30, 2016 capital lease obligations were as follows:      
      12/31/16  6/30/16
Lease payable bearing interest at 4.95% with monthly payments of $315 maturing August 2019.  The lease is secured by equipment.       $9,433   $11,069
Lease payable bearing interest at 3.95% with monthly payments of $309 maturing December, 2020.  The lease is secured by equipment.        13,482   14,969
Lease payable bearing interest at 4.78% with monthly payments of $489 maturing September, 2020.  The lease is secured by equipment.        20,404   22,904
         43,319   48,942
           
Less current maturities        11,675   11,419
           
        $31,644   $37,523
           
At December 31, 2016 future maturities of capital lease obligations were as follows:          
           
Year Ending December 31:          
    2017   $11,675 
    2018    12,208 
    2019    11,495 
    2020    7,941 
    2021    0 
        $43,319 

 

 

 

 8 
 

 

 

NOTE 6 – NOTES PAYABLE

 

  

At December 31, 2016 and June 30, 2016 notes payable were as follows:        
      12/31/16       6/30/16  
Note payable to bank bearing interest at 4.5% with monthly payment of $390 maturing September, 2017.  The note is secured by an automobile   $ 3,444     $ 5,676  
                 
Note payable to bank bearing interest at 6.5% with monthly payment of $4,892 maturing November, 2017.  The note is secured by machinery and equipment     52,175       79,293

 

 

 

 

Note payable to bank bearing interest at 6.5% with monthly payment of $809 maturing April, 2020.  The note is secured by a Truck.

    29,040       32,853  

 

Note payable to vendor bearing interest at 6.0% with monthly payment of $800 maturing December, 2016.  The note is unsecured.

              -       4,718  

 

Note payable to officer bearing interest at 6.5% due April, 2017. The note is convertible into common stock at $.08 a share at maturity. The note is unsecured.

    50,000       50,000

 

 

 

 

 

 

Note payable to stockholder bearing interest at 6.5% due December, 2017. The note is convertible into common stock at $.05 a share at maturity. The note is unsecured.

 

 

  20,000                -  

 

 

Note payable to stockholder bearing interest at 6.5% due July, 2017. The note is convertible into common stock at $.05 a share at maturity. The note is unsecured.

    146,260              -

 

 

 

 

Line of credit with Bank maximum of $75,000 bearing interest at 6.5% due March, 2017. The line is secured by accounts receivable.

    75,000       70,000  
                 

 

 

Note payable to seller in connection with purchase of CTR bearing interest at 12%, and secured by the common stock and assets of CTR. The note is in default, with all principal, interest & penalties due as of January 4, 2017 and underlying collateral subject to foreclosure.

    1,020,000       1,020,000  
      1,395,919       1,262,540  
                 
Less current maturities     (1,374,960 )     (1,212,261 )
                 
    $ 20,959     $ 50,279  
                 
At December 31, 2016 future maturities of long term debt were as follows:                
                 
Year Ending December 31:                
  2017 $ 1,374,960          
  2018 $ 8,597          
  2019 $ 9,173          
  2020 $ 3,189          
    $ 1,395,919          

 

 

 

 9 
 

 

 

NOTE 7 – EQUITY TRANSACTIONS

 

The Company is authorized to issue 100,000,000 common shares at a par value of $0.001 per share. These shares have full voting rights.  At December 31, 2016 and June 30, 2016, there were 91,363,117and 90,613,177 respectively, common shares outstanding.

 

During the three months ended September 30, 2016 the Company sold 500,000 shares for cash proceeds of $25,000.

 

On September 30, 2016, the Company issued 125,000 shares of common stock to its Chief Financial Officer for services rendered under his employment contract valued at $0.08 per share which was the fair market value.

 

On December 31, 2016, the Company issued 125,000 shares of common stock to its Chief Financial Officer for services rendered under his employment contract valued at $0.06 per share which was the fair market value.

 

As of December 31, 2016 there were no stock warrants outstanding 

 

NOTE 8 – GOING CONCERN

 

As of the date of this quarterly report, there is substantial doubt regarding the Company’s ability to continue as a going concern as we have not generated sufficient cash flows to fund our business operations and loan commitments.  Our future success and viability, therefore, are dependent upon our ability to generate capital financing.  The failure to generate sufficient revenues or raise additional capital may have a material and adverse effect upon the Company and our shareholders.

 

The Company formed FDEP in order to vertically integrate its Petrozene™ product line, and utilize a specialized pyrolysis process in order to produce other byproducts of value that will generate revenue for FDEP. In turn, the ability of FDEP to process large quantities of OTR tires will allow the Company to increase the amount of OTR tires it can dispose of and process, which will generate additional revenue of the Company. Additionally, the Company intends to raise equity or debt financing that will allow the Company to expand its current operations. 

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

The Company leases office space in Dallas, TX under a non-cancelable operating lease that expires in July 2017, a truck for its tire disposal operations at CTR under a 30-month lease expiring in April, 2019 and warehouse space in Ennis, TX on a month to month basis.   Future minimum lease payments are as follows:

 

Year End June 30    Amount
2017   22,170
2018   22,584
2019   13,800
Total            58,554

 

 

 10 
 

 

 

Rent expense, included in general and administrative expenses, totaled approximately $28,299 and $18,163 for the six months ended December, 2016 and 2015, respectively.

 

Freestone has royalty and commission agreements with certain consultants related to the sale of Petrozene™ for their work in the re-launch of the Petrozene™ product line.  These royalty and commission agreements range from 2.5% to 7.5% of the net income the Company receives from Petrozene™ sales, and the agreements also have special royalty provisions for certain customers that expire on April 14, 2030.

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

One of the consultants who has a royalty and commission agreement as discussed in Note 9 is a related party and the brother of the former Chief Executive Officer of the Company.

 

NOTE 11 – DISPOTION OF INVESTMENT

  

In November, 2016 the Company disposed of its 33.33% interest in Aqueous Services, LLC by transferring it membership interest to the other partners in exchange for release of any contingent liabilities. The investment had previously been impaired to zero value for financial reporting so the transaction had no effect on the current quarters financial statements.

 

NOTE 12 – SUBSEQUENT EVENTS

  

On January 4, 2017, the Company received a notice of default from the holder of the seller note related to our purchase of CTR for out failure to make timely payments, specifically our payment of $20,000 due on December 15, 2016. As a result, the holder has accelerated the note’s principal, interest and penalties, totaling $1,414,130, and the underlying collateral is subject to foreclosure. The Company has begun negotiations with the note holder to restructure and extend the note and is also seeking alternative financing.

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Company’s actual results could differ materially from those set forth on the forward-looking statements as a result of the risks set forth in the Company’s filings with the Securities and Exchange Commission, general economic conditions, and changes in the assumptions used in making such forward-looking statements.

 

General

 

Freestone Resources, Inc. (the “Company” or “Freestone”), a Nevada corporation, is an oil and gas technology development company that is actively developing and marketing technologies and solvents designed to benefit various sectors in the oil and gas industry. The Company has re-launched its Petrozene™ solvent after developing a new and improved formula. Petrozene™ is primarily used to dissolve paraffin buildup, and it is primarily used for pipelines, oil storage tanks, oil sludge build up, de-emulsification, well treatment, as a corrosion inhibitor and as a catalyst in opening up formations thereby aiding in oil production.

 

On June 24, 2015 Freestone purchased 100% of the common stock of C.C. Crawford Retreading Company, Inc. (“CTR”), a Texas corporation. CTR is an Off-The-Road (“OTR”) tire company located in Ennis, Texas, and a wholly owned subsidiary of Freestone. CTR’s primary business is to repair, recycle, dispose of and sell OTR tires, which are used on large, industrial equipment. Freestone made the decision to purchased CTR in order to utilize the CTR facility for the production of Petrozene™.

 

On June 24, 2015 the Company formed Freestone Dynamis Energy Products, LLC (“FDEP”) with Dynamis Energy, LLC (“Dynamis”). FDEP was formed in order to operate and manage the specialized pyrolysis process that is used to create Petrozene™ and other byproducts of value. Freestone chose to work with Dynamis based on their extensive engineering and waste-to-energy expertise. Freestone owns a 70% member interest in FDEP.

 

The acquisition of CTR and the formation of FDEP have allowed Freestone to vertically integrate the Petrozene™ product line. CTR will remain an auxiliary company that will maintain existing operations that complement the efforts of FDEP and Freestone.

 

 11 
 

 

 

Results of Operations

 

Three and six months ended December 31, 2016 compared to three and six months ended December 31, 2015

 

Revenue – Our revenue for the three months ended December 31, 2016 was $276,807 compared to $233,9171 for the three months ended December 31, 2015. The increase was primarily due to an increase in tipping fee revenue. For the six months ended December 31, 216 revenue was $561,424 down less 2% from the prior year of $571,538. The decrease was primarily due to issues with CTR’s trucking operations in July 2016 which limited revenue to less than 50% of the prior year’s revenue for the same month. The Company resolved those issues by leasing new equipment and implementing a new maintenance program and does not anticipate additional issues going forward. Revenue in next five months exceeded prior years as a result of these changes.

 

Cost of Revenues – Cost of revenue increased from $354,099 for the six months ended December 31, 2015 to $413,738 for the six months ended December 31, 2065 despite the decrease in revenue. This was due to increased costs in the Company’s trucking operations to implement the changes discussed above as well as increased costs associated with the expansion of the disposal operations and increase disposal costs due to the environmental issues discuss in Note 4. For the quarter ended December 31, 2016 cost similarly increased by $36,498 due to the same issues..

 

Operating Expense – Total operating expenses dropped from $485,724 for the three months ended December 31, 2015 to $445,899 for the three months ended December 31, 2016 and from $1,112,292 for the six months ended December 31, 2015 to $840,876 for the six months ended December 31, 2016,. The primary area of decrease was in the parent company Freestone in the form of decreased employee compensation and professional fees. The higher professional fees in the prior year were due to audit, legal and consulting cost associated with the acquisition of CTR. Operating expenses of CTR increased from $278,061 for the six months ended December 31, 2015 to $321,228 for the six months ended December 31, 2016 due primarily to the $48,750 for TCEQ penalties discussed in Note 4.. Startup costs for FDEP decreased from $234,637 for the six months ended December 31, 2015 to $165,981 for the six months ended December 31, 2016. This was primarily due to installation costs in the quarter ended December 31, 2015.

 

Other Income and Expenses – Other income and expense for the six months ended December 31, 2016 consisted of $72,494 of interest expense and a loss of $6,200 on the sale of fixed assets compared to other income and expense for the six months ended December 31, 2015 consisting of $66,659 of interest expense. Other income and expenses for the three months ended December 31, 2016 and 2015 consisted of $36,775 and $33,511 of interest, respectively. The increase in interest expense was due the Company’s increase in debt.

 

Net Income (Loss)

 

Net loss for the three months ended December 31, 2016 was $382,941 compared $394,147 for the three months ended December 31, 2015.   Net losses for the six months ended December 31, 2016 and 2015 were $719,732 and 896,322 respectively. The decrease in the net loss was primarily due to a decrease in the operating expenses of Freestone detailed above offset by the increase loss of CTR as a result of the decrease in revenue and increase in trucking disposal and operating costs..

 

Liquidity and Capital Resources

 

The Company has little cash reserves and liquidity to the extent we receive it from operations and through the sale of common stock.

 

The accompanying financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of the date of this quaterly report, there is 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.

 

 12 
 

 

 

 

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 reduce the cost of disposal of OTR tires by CTR. Additionally, the Company intends to raise equity or debt financing that will allow the Company to expand its current operations.

 

Net cash used in operations was $335,487 for the six months ended December 31, 2016 compared to net cash used by operations of $297,195 for the six months ended December 31, 2015. The change was due to the increased cash losses of CTR and FDEP. The decrease in Freestone’s loss was primarily due to a reduction in non- cash stock issuance expenses. The cash used in operations was offset by $164,475 of cash contributions to FDEP by the non-controlling interest, sale of common stock for proceeds of $25,000 and $171,261 of proceeds from borrowing.

 

As of December 31, 2016 the Company has negative equity of $628,638 and negative working capital of $2,141,770.

 

In addition its note payable to the seller is in default and subject to foreclosure. In order to continue operations the Company must restructure its existing debt and raise additional capital to cover future operating losses from shareholders or new equity partners.

 

Employees

 

As of December 31,2016 CTR had 14 full-time employees. Freestone has three employees.

 

Need for Additional Financing

 

The Company is uncertain of its ability to generate sufficient liquidity from its operations so the need for additional funding may be necessary.  The Company may sell stock and/or issue additional debt to raise capital to accelerate its growth.

 

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

 

ITEM 4: CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31,2016.  This evaluation was accomplished under the supervision and with the participation of our chief executive officer/principal executive officer, and chief financial officer/principal financial officer who concluded that our disclosure controls and procedures are not effective.

  

Based upon an evaluation conducted for the period ended December 31, 2016, our Chief Executive and Chief Financial Officer as of December 31, 016 and as of the date of this Report, has concluded that as of the end of the periods covered by this report, we have identified the following material weakness of our internal controls:

 

  Lack of sufficient accounting staff which results in a lack of segregation of duties necessary for a good system of internal control and financial statement presentation.

 

Changes in Internal Controls over Financial Reporting

 

We have not yet made any changes in our internal controls over financial reporting that occurred during the period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

 

Items No. 1, 2, 3, 4 - Not Applicable.

 

Item 5. Other Matters.

 

On June 24, 2015, we purchased 100% of the common stock of C.C. Crawford Retreading Company, Inc. (“CTR”), a Texas corporation. On January 4, 2017, the Company received a notice of default from the holder of the seller note related to our purchase of CTR for our failure to make timely payments, specifically our payment of $20,000 due on December 15, 2016. As a result, the holder has accelerated the note’s principal, interest and penalties, totaling $1,414,130, and the underlying collateral is subject to foreclosure. The Company has begun negotiations with the note holder to restructure and extend the note and is also seeking alternative financing.

  

Item 6 - Exhibits and Reports on Form 8-K

 

(a)The Company filed no Form 8-K during the period.

  

(b)   Exhibits

 

Exhibit Number

 

31.1  Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
   

  

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

FREESTONE RESOURCES, INC.

 

By /s/ Michael McGhan

 

Michael McGhan, CEO

 

Date: February 20, 2017

 

 

 

 13