(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted to Rule 405 of Regulation S-T (§232.405 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 ☐ 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
☒
(Do not check if a smaller reporting company)
Emerging Growth Company
☒
If an Emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of November 20, 2020, there were 779,836,384 shares of common stock issued and outstanding.
Common: Authorized 1,500,000,000 shares, $.00001 par value; and 779,836,384 Issued and outstanding as of September 30, 2020 and 700,836,384 shares issued and outstanding as of December 31, 2019
$
4,185,656
$
3,995,840
Preferred Stock Class A Authorized - 50,000 shares, $.00001 Par value; and 34,289 Issued and outstanding, as of September 30, 2020 and 34,289 issued and outstanding as of December 31, 2019
$
400
$
400
Additional Paid-in Capital
$
1,626,589
$
1,626,589
Retained Earnings
$
(6,289,482
)
$
(5,404,935
)
Total Stockholders' Equity
$
(476,837
)
$
217,893
Total Liabilities & Equity
$
5,399,991
$
6,124,893
The accompanying notes are an integral part of these financial statements.
PotNetwork Holdings, Inc. is a publicly traded holding company trading under the symbol “POTN”. The Company website is www.potnetworkholding.com.
The Company has two (2) wholly-owned subsidiaries:
(1) First Capital Venture Co., a Florida corporation which has as its wholly-owned subsidiary, Diamond CBD, Inc., a Delaware corporation. First Capital Venture Co. was acquired by the Company on January 31, 2017.
(2) PotNetwork Media Group, Inc., a Nevada corporation
Since the acquisition of First Capital Venture Co., the focus of the Company has been the development of the business of Diamond CBD, Inc. PotNetwork Media Group, Inc. is an early stage company. Any other subsidiaries are dormant having ceased operations. Hence, the financial statements reflect principally the business results of Diamond CBD business.
Diamond CBD, Inc. focuses on the research, development, and multinational marketing of premium hemp extracts that contain a broad range of cannabinoids and natural hemp derivatives.
Diamond CBD’s catalog can be found in http://catalog.diamondcbd.com.
Since the acquisition of First Capital Venture Co. and Diamond CBD on January 31, 2017, Diamond CBD’s business has become the primary business of this Company. Diamond CBD is treated as a wholly owned subsidiary of the Company and the accounts of the subsidiary are presented in the Company’s consolidated statements eliminating inter-company transactions. In accordance with ASC 805-40-45 the consolidated financial statements represent the continuation of the financial statements of the wholly owned subsidiary except for its capital structure. The Company, being the legal acquirer, but the accounting acquirer, did not have significant assets or revenues prior to the consolidation.
Investment in the wholly owned subsidiary is accounted for in accordance with ASC 810.
In February 2018, the Company reversed ab initio the March 17, 2017 holding company reorganization. As a result, the Company re-assumed its prior name, PotNetwork Holdings, Inc. (with an “s” on Holding), while remaining a Colorado corporation. None of the acquisitions or the share capital structure was affected.
In February 2018, the shares issued pursuant to the reorganization were cancelled, no other adjustments had been made.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
➢ BASIS OF PRESENTATIONS: The statements were prepared following generally accepted accounting principles of the United States of America which were consistently applied.
➢ USE OF ESTIMATES: Management uses estimates and assumptions in preparing these financial statements in accordance with U.S. generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
➢ REVENUE RECOGNITION - DIAMOND CBD BUSINESS: Revenue from the sale of goods is measured at fair value of the consideration received or receivable and is recognized in the statement of comprehensive income of the Company when significant risks and rewards of the ownership of the goods have been transferred to the buyers.
The Company applies the five-step model of revenue recognition under ASC 606 to the sales orders in the e-commerce platform. The following describes the Company’s process per each step (1-5) of ASC606:
Step 1: “Identify the contract with a customer”.
A. The company’s ecommerce website is making the offer to the customer.
B. The customer chooses the product(s) and quantities of each.
C. The customer enters its credit card information.
D. The contract between the company and the customer is concluded when the authorization is taken vis-a-vis the merchant account which processes the credit card payment.
Step 2: “Identify the performance obligations in the contract”.
The company ships the merchandise and subsequently records the customer payment
Step 3: “Determine the transaction price”.
The website states each product’s regular price, and applicable sale price which is the amount that the customer pays the company.
Step 4: “Allocate the transaction price to the performance obligations in the contract”. The company’s e-commerce platform applies any quantity discount or other discount offered by the Company, automatically.
Step 5: “Recognize revenue when the entity satisfies a performance obligation”. The Company records the sale upon the order’s shipping, identified by a tracking number.
➢ CASH AND CASH EQUIVALENTS: Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition and the balance cash in hand and the balance in bank accounts.
➢ACCOUNTS RECEIVABLE: Accounts Receivable (AR) is the payment which the Company will receive from its customers who have purchased its goods & services in the last month of the year and on credit terms. Usually the credit period is short, approximately a few days.
➢ ASSESSMENT OF COLLECTABILITY:
1.
Receivables supervisor is authorized to collect delinquent accounts
2.
The Treasurer has the authority to assign accounts to a third party for collection
3.
Recording of Accounts Receivable: All amounts due on physical delivery of the merchandise from the drop-shipper, must be promptly recorded as an accounts receivable. Each account receivable must be recorded and maintained until payment is received or the recorded amount is written off or extinguished.
An adequate provision for doubtful accounts must be established. When all reasonable efforts fail to collect an account receivable and it has been approved for write off, the related provision for doubtful accounts should be reduced.
5.
Control and Subsidiary Accounts: The accounting system incorporates control accounts, where applicable, to ensure the completeness and accuracy of individual accounts. The Receivables supervisor must maintain subsidiary accounts for individual debtors in a manner that discloses, at a given point in time, the aggregate amount owed by each debtor as well as individual amounts making up the aggregate amount. Monthly, the subsidiary accounts for each accounts receivable must be reconciled with the control account.
6.
Checks that are returned from the bank as non-negotiable are assessed a returned cheque charge. If there are 2 cheques returned from the same customer within a month, no further cheques will be accepted from the customer unless the cheques are certified, until there is an acceptable payment history for a further one-year period.
7.
Statements to Debtors: Statements must be issued to debtors, on a monthly basis, providing meaningful and concise information on the status of their debts. Accounts receivable are considered overdue when a debtor does not pay or resolve the debt within 30 days from the invoice date or a written request for payment to the debtor.
8.
All actions taken to collect overdue accounts must be documented.
9.
If there is no response after the initial contact at the 30-day point (within a 30-day period - 60 days from date of invoice), accounts will be forwarded to Treasury Staff to take prompt and vigorous action to collect overdue accounts receivable.
10.
Accounts receivable, in most cases, should be at least 30 days overdue (i.e., 60 days after invoice notification), before staff advises debtors that their accounts are overdue and that the accounts may be:
i.
Turned over to a private collection agency;
ii.
subject to legal action
iii.
Credit privileges will be revoked; and/or account may be suspended.
➢ PREPAID EXPENSES: Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired. The company’s prepaid expenses is mostly advance payment to the drop shipper
➢ PROPERTY AND EQUIPMENT: As on the date of the financial statements, the Company does not hold any assets.
Property and equipment are stated at the written-down value [that is, after deducting depreciation from the cost]. This Company adapted the depreciation rates as provided in IRS publications, using the Modified Accelerated Cost Recovery System (MACRS). Computers and office equipment are considered as 5-year property. Office furniture and fixtures are 7-year property in MACRS and apply the 200% declining balance method over a GDS recovery period. Wherever possible, section 179 depreciation is also applied. However, the accumulated depreciation shall not exceed the actual cost at any point of time. As on the date of the financial statements, the Company does not hold any assets.
➢ INTANGIBLE ASSETS
1)
Initial Measurement: Intangible asset acquisitions in which the consideration given is cash are measured by the amount of cash paid, which generally includes the transaction costs of the asset acquisition. However, if the consideration given is not in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement is based on either the cost which shall be measured based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is clearer and, thus, more reliably measurable
2)
Subsequent Measurement: The Company accounts for its intangible assets under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Subtopic (“ASC”) 350-30-35 “Intangibles-- Goodwill and Other--General Intangibles Other than Goodwill-Subsequent Measurement”. Under this method the Company is required to test an indefinite-lived intangible asset for impairment on at least an annual basis. This is done by comparing the asset’s fair value with its carrying amount. If the carrying amount exceeds the asset’s fair value, the difference in those amounts is recognized as an impairment loss.
➢ FINANCIAL INSTRUMENTS: For certain of the Company’s financial instruments, including cash, accrued expenses and short-term debt, the carrying amounts approximate their fair values due to their short maturities. We adopted ASC Topic 820, “Fair Value Measurements and Disclosures”, which requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.
The carrying amounts reported in the balance sheets for current liabilities qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of valuation hierarchy are defined as follows:
Level 1: Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority;
Level 2: Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability;
Level 3: Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and less observable and thus have the lowest priority.
ASC 350 requires capitalizing any money spent on product development and product improvement. During the current year, money spent on product development is very little and is not significant.
➢ Investments in subsidiaries: The March 17, 2017 reorganization is referred as holding Company reorganization. The Company did not make any payment in cash or check in connection with the reorganization. First Capital Venture Co., the parent of Diamond CBD, Inc. is now the wholly owned subsidiary. The entire amount of current year profit is attributable to the business generated by this wholly owned subsidiary. As required under ASC 810, consolidated accounts are presented in this financial statement.
➢ Redemption Right: In 2017, the Company signed convertible promissory notes for $1,200,000. The convertible notes have a redemption right, which reads as, “Notwithstanding any provision contained herein to the contrary including the conversion rights as set forth in this section, the Company shall be entitled, at any time prior to the expiration of five days from any notice of conversion, to repay this Note in full, plus interest, minus the credit accorded from prior payments, including from prior conversions, and avoid any further Note conversion and thus avoid the issuance of any additional shares of PotNetwork Holdings, Inc.” By this clause, no derivative liability exists. Further, these convertible promissory notes are exchanged for Common Stock Purchase Warrant, as mentioned supra.
The financial statements are prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.
Since PotNetwork Holdings, Inc. has no uncertainties as on the balance sheet date, the financial statements need no adjustments.
Since Diamond CBD’s business originated in 2015, it is considered as a business with limited operating history. Hence, this business is subject to all risks inherent in a developing business enterprise. Continued success depends on the problems, difficulties, complications, and delays frequently encountered in the competitive and regulatory environment in which it operates.
Since the CBD business is a burgeoning industry, there are no established entities whose business model Diamond CBD can follow or build upon.
Regulatory risk: Hemp-based CBD is often confused with marijuana-based CBD which remains illegal under federal Law; although the Company maintains that its products are legal. Yet, this legal risk cannot be ignored.
Although Diamond CBD does not sell any marijuana-based CBD products, its products could be treated as being illegal by federal/state authorities and by consumers.
The Company is involved in a highly competitive industry where it may compete with numerous other companies who offer alternative methods or approaches, who may have far greater resources, more experience, and personnel perhaps more qualified than the Company does. Such resources, experience and personnel may provide a substantial competitive advantage to the competition.
NOTE 4 - Deferred Tax Computation:
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all the deferred tax assets will not be realized.
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
There was no income tax expense during this quarter. However, the availability of a net operating loss carryforward and the associated deduction, is subject to complex and restrictive federal income tax provisions as codified by Internal Revenue Code section 172 and related Treasury Regulations, all of which are subject to change and the availability of which can never be free from doubt.
The components of the deferred tax assets and liabilities are as follows:
Deferred tax assets:
September 30,
2020
December 31,
2019
Net operating loss carryovers
$
6,289,482
$
5,404,935
Stock-based compensation
-
-
Other temporary differences
-
-
Total deferred tax assets
$
6,289,482
5,404,935
Valuation allowance
(6,289,482
)
(5,404,935
)
Net deferred tax asset
$
-
$
-
NOTE 5 - INVENTORY DIAMOND CBD
This Company has arranged to buy the exact quantity from the suppliers, based on the customer orders and thereby has eliminated the need for holding inventory on hand at any point of time. Otherwise, this Company values the inventory at the lower of cost or market.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
There are no commitments and contingencies that exist at present, other than the legal disputes mentioned supra.
NOTE 7 - BUDGET & INTERNAL CONTROL PROCEDURES
1) Internal control procedures for inventory and cash control are being developed and implemented on an ongoing basis to ensure higher levels of performances.
2) Annual financial budget is reviewed by the Board of Directors.
3) Quarterly variance reports are reviewed by the Board of Directors.
NOTE 8 - CAPITAL STOCK
Common Stock, authorized 1,500,000,000 shares $ 0.00001 par value, 779,836,384 shares Issued and outstanding as on the balance sheet date. Further, this Company is obligated to issue additional shares to the noteholders mentioned in note 10.
Class A Preferred Stock - Preferred Stock Class A, $ 0.00001 par value, 50,000 shares authorized, 34,289 shares Issued and outstanding as on the balance sheet date
Company received a new loan on 1/9/2020 amounting $100,000 from Kabbage. Monthly payments are made on 2/29/2020, 3/27/2020,4/27/2020,5/27/2020 and 6/27/2020.The payment of $10,833.34 includes interest portion
Date
Beginning
Interest
Payment
Ending
2/27/2020
$
100,000.00
$
2,500.00
$
10,833.34
$
91,666.66
3/27/2020
$
91,666.66
$
2,500.00
$
10,833.34
$
83,333.32
4/27/2020
$
83,333.32
$
2,500.00
$
10,833.34
$
74,999.98
5/27/2020
$
74,999.98
$
2,500.00
$
10,833.34
$
66,666.64
6/27/2020
$
66,666.64
$
2,500.00
$
10,833.34
$
58,333.30
7/27/2020
$
58,333.30
$
2,500.00
$
10,833.34
$
49,999.90
8/27/2020
$
49,999.90
$
2,500.00
$
10,833.34
$
41,666.50
9/27/2020
$
41,666.50
$
2,500.00
$
10,833.34
$
33,333.10
NOTE 10 - Notes Payable
Payee: SBA
On June 18, 2020 this Company received $159,900 from the SBA as the Economic Injury Disaster Loan which is repayable with 1% interest for staying in the business during the pandemic.
On May 5, 2020 this Company received from the SBA, the sum of $135,404 as part of the Paycheck Protection Program, which is a grant and not re-payable, provided the lending bank certifies the forgiveness within this calendar year.
Payee: Sign N Drive
Principal Value: $1,850,000
Issue date: June 2, 2014, amended March 10, 2017
Terms: Interest Free, Fixed Conversion Rate at $.003 per share
Embedded Conversion Option: Given the fixed rate conversion price, no derivative liability calculation for the conversion option was deemed required. There is no maturity date for this note.
The following table sets forth the number of shares of common stock issued pursuant to each conversion under the Note:
Dates
Quantity of shares
Conversion price
Amount converted
August 13, 2014
161,127,812
0.00032
$
51,561
April 4, 2016
2,750,000
0.004
11,000
August 2, 2016
4,500,000
0.0012
5,400
November 8, 2016
2,500,000
0.00152
3,800
December 22, 2016
10,000,000
0.00088
8,800
July 5, 2017
42,000,000
0.003
126,000
September 27, 2017
40,000,000
0.003
120,000
February 2, 2018
25,000,000
0.003
75,000
May 29, 2018
25,000,000
0.003
75,000
June 5, 2018
25,000,000
0.003
75,000
December 4, 2018
1,550,000
0.003
4,650
December 14, 2018
6,000,000
0.003
18,000
December 20, 2018
12,333,334
0.003
37,000
April 17, 2019
46,050,000
0.003
138,150
June 26, 2019
26,000,000
0.003
78,000
February 2,2020
27,000,000
0.003
92,520
August 20, 2020
24,000,000
0.003
82,248
Per the above table:
$246,000 was converted into common stock in 2017;
$284,650 was converted into common stock in 2018;
$216,150 was converted into common stock in 2019;
$174,768 was converted into common stock in 2020.
Payee: Iliad Research & Trading LP
On October 25, 2018, the Company issued a Note in the face amount of $5,525,000 which accrues interest at the rate of 10% per annum. The note has an Original Issue Discount (OID) of $500,000. The Note and any interest thereon is convertible at a fixed rate of $0.45 per share of common stock or after 12 months, at a variable conversion rate, the “redemption conversion price” at the lower of the fixed rate of $.45 per share, or a discount to the market price as defined in the Note. The Note is comprised of five (5) tranches (each, a “Tranche”), consisting of (i) an Initial Tranche in an amount equal to $1,400,000.00 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents (as defined in the Purchase Agreement) (the ‘‘Initial Tranche”), and (ii) four (4) additional Tranches, one (l) in the amount of $1,375,000.00, one (l) in the amount of $550,000.00, and two (2) in the amount of $1,100,000.00, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents.
On February 8, 2019, the Company issued a Note in the face amount of $3,325,000 which accrues interest at the rate of 10% per annum. The note has an Original Issue Discount (OID) of $300,000. The Note and any interest thereon is convertible at a fixed rate of $0.45 per share of common stock or after 12 months, at a variable conversion rate, the “redemption conversion price” at the lower of the fixed rate of $.45 per share, or a discount to the market price as defined in the Note. The Note is comprised of three (3) tranches (each, a “Tranche”), consisting of (i) an Initial Tranche in an amount equal to $1,125,000.00 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents (as defined in the Purchase Agreement) (the ‘‘Initial Tranche”), and (ii) two (2) additional Tranches, one (l) in the amount of $500,000.00, and one (1) in the amount of $1,650,000.00, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents.
$1,125,000 was received on 2/17/2019
$77,794 is the accrued interest through 3/31/19
$84,144 is the accrued interest from 4/1/2019 to 6/30/2019
$169,641 is the accrued interest from 7/1/2019 to 12/31/19
$415,557 is the accrued interest from 1/1/2020 to 3/31/2020
$83,979 is the accrued interest from 4/1/2020 to 6/30/2020
$84,210 is the accrued interest from 6/30/2020 to 9/30/2020
On June 16, 2020, the Board of Directors approved the Company’s subsidiary, First Capital Venture, entering into a Disaster Relief Loan from the US Small Business Administration in the amount of $150,000. The loan is secured by a security interest in all the assets of First Capital Venture and is for working capital purposes.
NOTE 11 - Management Assertions Regarding Current Legal Proceedings
First Capital Venture Co. VS T1 Payments, LLC et al., Case No. CACE-20-006914, UCN 062020CA006914AXXXCE, 17th Judicial Circuit in and Broward County, Florida. On April 22, 2020, First Capital Venture, a subsidiary of the Company filed a lawsuit against its previous merchant processor seeking the return of $649,311.73 being held by the merchant processor and for damages related to the processor ceasing to accept MasterCard payments from the Company’s customers for the Company’s products. The Court has granted a motion to transfer the case to Nevada where it will be filed as reflected in the merchant processing agreement. The litigation remains in its early stages.
In addition to the above, Company is involved in the following legal proceedings, each of which is specific to each plaintiff suing the Company based upon the convertibility of a promissory note. In each case the Company is contesting the validity of the request for conversion of shares pursuant to each such note (each referred to as a “Note”). The following are the case references to each case filed by each of the plaintiffs (collectively, the “Plaintiffs”):
•
Mammoth West Corporation v PotNetwork Holdings Inc., Case No. 17 CH 778, 19th Circuit Court of Lake County, IL. Filed May 26, 2017.
•
Southridge Partners II Limited Partnership vs. SND Auto Group, Inc., Case No. 3:17-cv-01925 US District Court for the District of Connecticut, filed January 5, 2018.
•
J. P. Carey Limited Partners, L.P. v. PotNetwork Holdings, Inc., Case No.3:18-CV-00873-WWE, US District Court for the District of Connecticut, filed May 24, 2018.
Each Plaintiff filed a civil complaint with regard to their rights to convert a specific convertible promissory Note. In each case, the Note was issued not by the Company, but by its predecessor issuer, SND Auto Company Inc. (which predecessor issuer had changed its name before changing it back to SND Auto Group, Inc.). Each Note was issued by SND Auto Company Inc., respectively on June 13, 2016 to Mammoth West Corporation and on July 18, 2016 to Southridge Partners II Limited Partnership, for money paid to SND Auto Company Inc., at a time when SND Auto Company Inc. was the public entity, with sole operations in the automotive industry. (Plaintiff, J. P. Carey Limited Partners, L.P., on March 1, 2018, was a subsequent purchaser of a portion of the Southridge Partners II Limited Partnership Note and conversion rights connected to the amount purchased, which it then attempted to convert on the pre-reorganization terms and conditions of the Note, as more fully defined below.) Subsequent to the issuance of the Notes, on March 14, 2017, SND Auto Company Inc. engaged in a holding company reorganization whereby SND Auto Company Inc., became a subsidiary of the public entity. The holding company reorganization was an express condition of a private company, First Capital Venture Holdings Co., whose acquisition was the principal reason for the reorganization.
Each Plaintiff has sought to convert into shares of the post reorganization Company, at a conversion price of a fraction of a penny per share, based on SND Auto Group, Inc.’s share price prior to the reorganization. The Company disputed the conversion amounts presented by the Plaintiffs
The relief sought by each Plaintiff in each case is as follows:
•
Mammoth West Corporation: Issuance of the shares per each of its conversion notices per the original terms of its Note, reasonable attorneys’ fees and reimbursement of court costs, and such other and further relief as the court deems appropriate.
•
Southridge Partners II Limited Partnership: Damages of at least $743,150, interest, punitive damages, a mandatory injunction seeking specific performance, reasonable attorneys’ fees and reimbursement of court costs, and such other and further relief as the court deems appropriate.
•
J. P. Carey Limited Partners, L.P.; Damages of at least $573,890, interest, punitive damages, a mandatory injunction seeking specific performance, reasonable attorneys’ fees and reimbursement of court costs, and such other and further relief as the court deems appropriate.
On August 17, 2020, JP Carey Limited Partners L.P. and the Company came to a settlement, whereby the Company agreed to issue 28 million shares of the Company’s common stock to JP Carey, subject to certain leak out provisions. The case has subsequently been dismissed.
On August 27, 2020, the Court dismissed the case brought by Southridge Partners II Limited Partnership for failing to obtain counsel to prosecute the case after the Court’s order to do so. Southridge may seek to refile its claim.
On October 22, 2020, the Company entered into a settlement agreement with Mammoth Corporation which is subject to a fairness hearing scheduled for November 20, 2020.
Potter v. PotNetwork Holdings, Inc., Diamond CBD, Inc., and First Capital Venture Co., CASE NO.: 19-24017-CV-SCOLA, US District Court for the Southern District of Florida.
Plaintiff Potter alleged that she purchased certain products from Diamond CBD that contained levels of CBD that were less than the amount stated on the packaging and south class action status.
The Company and its subsidiaries settled the matter at mediation on July 14, 2020. The parties completed the final documentation of the settlement and the case was dismissed on August 27, 2020. Pursuant to the settlement agreement the Company agreed to issue a $10 voucher to purported class members, pay the named plaintiff $5,000 and pay the law firms that brought the suit $200,000 in legal fees to be paid over 30 months, secured by a pledge of shares of the Company’s common stock.
NOTE 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE,
Related Party Transactions
During the fiscal year 2019, Distribution Wholesale, Inc, a Florida Corporation, of which Kevin Hagen, CEO and President, advanced to the company $1,626,588.64 (the Advances) in the form of payments to several suppliers. On December 31, 2019, on the settlement of the debt created by the Advances, the board of Directors of the company issued a common stock Purchase Warrant, exercisable over 5 years, for 75,305,030 shares of common stock of the company at a price per share of $0.0216 to the Distribution Wholesale, Inc.
Consequently, the advances have been recorded as additional paid in capital on the Balance sheet of the company as of March 31, 2020.
NOTE 13. SUBSEQUENT EVENTS
We have evaluated events subsequent to the period ended September 30, 3030 through November 17, 2020.
On October 1, 2020, the Company issued 8,854,782 common shares to a note holder upon the conversion of $75,000 of indebtedness owed. The common stock issued in the transaction were issued pursuant to the exemption for registration contained in Section 4(a)(2) of the Securities Act of 1933.
As reported on Form 8-K on October 27, 2020, on October 22, 2020 Kevin Hagen resigned as Chief Executive Officer, President and a director of PotNetwork Holdings, Inc. (the “Company”). Mr. Hagen will retain his position as President of First Capital Venture Co., a subsidiary of the Company. Mr. Hagen’s resignation was not the result any disagreement with the Board of Directors of the Registrant with respect to its operations, policies or practices. He continues to be a significant shareholder of the Registrant.
On October 22, 2020, Lee Lefkowitz was appointed as Chief Executive Officer, President and a director of the Company. At this time, the Company has not entered into an employment agreement with Mr. Lefkowitz.
Lee Lefkowitz, age 50, CEO, President, Director. For much of his career Mr. Lefkowitz has been a serial entrepreneur owning and operating his own businesses. Most recently he has invested in and co-founded All Natural Way Corp. and B2H LLC, companies operating in areas of CBD business that POTN does not. He also was an early investor in several other startup companies. Prior to 2015 he worked as an accountant, focusing on both domestic and international corporate accounts. Mr. Lefkowitz, in addition, has considerable experience managing multi-faceted accounting functions, and in the private sector has overseen and administered an over $10 million annual budget. He holds a BA in Psychology for the State University of New York as well as an AAS in Business Administration.
On November 1, 2020, Murugan Venkat, Chief Financial Officer of the Company resigned due to other business commitments. As a result, Mr. Lefkowitz, CEO, assumed the responsibilities of the Chief Financial Officer position.
This section of this Form 10-Q includes forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward- looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.
Overview
The primary business of PotNetwork Holdings, Inc. (“POTN”) is conducted through its primary subsidiary, First Capital Venture Co., whose subsidiary, Diamond CBD, Inc. (“Diamond CBD”) is engaged in the development and sale of hemp-derived CBD oil containing products. The Company also owns and operates PotNetwork Media Group, Inc., operator of the informational website to the cannabis and CBD industry, PotNetwork.com.
Results of Operations
Results of Operations during the nine months ended September 30, 2020 as compared to the period ended September 30, 2019.
For the nine-month period ended September 30, 2020 and 2019 we had revenues of $7,476,938 and $14,157,742 respectively, a decrease of 47%. The decrease in revenue is due to increased competition in the sector and less overall spending on marketing.
Our Gross Profit from the sale of all products for the nine-month period ended September 30, 2020 and September 30, 2019 was $2,821,664 and $5,600,056 respectively, or a decrease of 50%. Percentage gross margin decreased slightly to 37.7% from 39.5%. Continued growth of the overall consumer market for CBD products and anticipated increases in competition are anticipated to continue to create pressure on gross profit margins. Conversely, the expanded market is creating beneficial price fluctuations in the costs of ingredients as sources of supply expand which we believe will enable us to sustain comparable margins in the year ahead.
Our Net Profit for the nine-month period ended September 30, 2020 compared to September 30, 2019 decreased to ($749,142) from ($384,025), a decrease of 130%, attributable to a decrease in overall revenues and gross margin for the period.
Operating expenses for the nine-month period ended September 30, 2020 compared to September 30, 2019 decreased to $3,350,139 as compared to $5,736,099, a decrease of 41.6% attributable to a decrease in in each category of operating expenses during the period in 2020.
Total expenses for the nine-month period ended September 30, 2020 were $3,706,211 with interest expense being $356,072 compared to $5,984,081in total expenses and interest expense of $247,982 for the comparable period of 2019. A decrease of 38% year over year.
Liquidity and Capital Resources
Assets decreased from $6,124,893 at the Company’s fiscal year end of December 31, 2019 to $5,399,991 at September 30, 2020. The decrease in the assets is attributable to a decrease in prepaid expenses, primarily in advances paid to the drop shipper.
Liabilities decreased from $5,907,000 as at December 31, 2019 to $5,876,828 as at September 30, 2020. The decrease is mainly attributed to a reduction in the outstanding balance of notes payable due to conversions to equity, and a reduction in 3rd party loans.
Net cash from operations for the nine-month period ended September 30, 2020 was ($670,328) as compared to ($2,374,974) for the same period in 2019.
Cash Flow from Investing Activities
Net cash provided by investing activities for the nine-month period ended September 30, 2020 was $189,816 as compared to $396,025 for the same period in 2019.
Cash Flow from Financing Activities
Net cash provided by financing activities for the nine-month period ended September 30, 2020 was $443,560 as compared to $1,463,002 for the same period in 2019.
Results of Operations during the three months ended September 30, 2020 as compared to the period ended September 30, 2019.
For the three-month period ended September 30, 2020 and September 30, 2019, we generated revenues of $2,486,678 and $3,629,621 respectively, a 31.5% decrease year over year.
Our Gross Profit from the sale of all products for the three-month period ended September 30, 2020 and September 30, 2019 was $803,776 and $1,447,819 respectively, or a decrease of 44.5%. Sales and marketing expenses decreased from $1,695,562 for the three-month period ended September 30, 2019 to $743,209 for the three-month period ended September 30, 2020, a decrease of 56%, and overall total operating expenses decreased for the same period from $1,868,023 to $1,180,451 a decrease of 58%. Our Net Profit (Loss) for the three-month period ended September 30, 2020 and September 30, 2019 decreased from ($504,968) in 2019 to ($466,797) in 2020, a change of 7.6%, attributable primarily to a reduction in total expenses for the period.
Liquidity and Capital Resources
As of September 30, 2020, we had $5,399,991 in total assets including cash and cash equivalents of $33,628 and $649,312 in accounts receivable and $4,717,051 in prepaid advances to our drop shipper, as compared to $6,124,893 in total assets on December 31, 2019 including cash and cash equivalents of $70,581 and $5,070,696 in prepaid advances to our drop shipper. A decrease in assets from December 31, 2019 to September 30, 2020 of 11.8%.
As of September 30, 2020, we had total liabilities of $5,741,424 consisting of accounts payable of $1,199,770, notes payable of $4,355,343 and amounts due to third parties of 26,412. In addition, we had a SBA payroll loan in the amount of $159,900. As of December 31, 2019, we had total liabilities of $5,907,000 including accounts payable of $1,673,501 and notes payable of $4,192,539 and an amount due a third party of $32,000, a year-to-date decrease of 2.8% in total liabilities.
Cash Flow from Operating Activities
Net cash from operations for the three-month period ended September 30, 2020 was ($87,660) as compared to ($314,744) for the same period in 2019.
Net cash provided by investing activities for the three-month period ended September 30, 2020 was $97,296 as compared to $9,875 for the same period in 2019.
Cash Flow from Financing Activities
Net cash provided by financing activities for the three-month period ended September 30, 2020 was ($12,674) as compared to $268,972 for the same period in 2019.
Off-balance sheet arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with this quarterly report, as required by Rule 15d-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. The material weaknesses in our disclosure control procedures are as follows:
1. Lack of formal policies and procedures necessary to adequately review significant accounting transactions. We utilize a third-party independent contractor for the preparation of our financial statements. Although the financial statements and footnotes are reviewed by our management, we do not have a formal policy to review significant accounting transactions and the accounting treatment of such transactions. The third-party independent contractor is not involved in our day to day operations and may not be provided information from our management on a timely basis to allow for adequate reporting/consideration of certain transactions.
2. Audit Committee and Financial Expert. We do not have an audit committee with a financial expert and, thus, we lack the appropriate oversight within the financial reporting process.
We intend to initiate measures to remediate the identified material weaknesses, including, but not necessarily limited to, the following:
·
Establishing a formal review process of significant accounting transactions that includes participation of our principal executive officer, principal financial officer and corporate legal counsel.
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Form an audit committee that will establish policies and procedures that will provide our Board of Directors with a formal review process that will among other things, assure that management controls and procedures are in place and being maintained consistently.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the current reporting period that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Effective of Disclosure Controls and Procedures
Management has carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The results of this evaluation determined that our disclosure controls and procedures, as well as our internal control over financial reporting, were effective as of September 30, 2020.
First Capital Venture Co. VS T1 Payments, LLC et al., Case No. CACE-20-006914, UCN 062020CA006914AXXXCE, 17th Judicial Circuit in and Broward County, Florida. On April 22, 2020, First Capital Venture, a subsidiary of the Company filed a lawsuit against its previous merchant processor seeking the return of $649,311.73 being held by the merchant processor and for damages related to the processor ceasing to accept MasterCard payments from the Company’s customers for the Company’s products. The Court has granted a motion to transfer the case to Nevada where it will be filed as reflected in the merchant processing agreement The litigation remains in its early stages.
In addition to the above, Company is involved in the following legal proceedings, each of which is specific to each plaintiff suing the Company based upon the convertibility of a promissory note. In each case the Company is contesting the validity of the request for conversion of shares pursuant to each such note (each referred to as a “Note”). The following are the case references to each case filed by each of the plaintiffs (collectively, the “Plaintiffs”):
·
Mammoth West Corporation v PotNetwork Holdings Inc., Case No. 17 CH 778, 19th Circuit Court of Lake County, IL. Filed May 26, 2017.
·
Southridge Partners II Limited Partnership vs. SND Auto Group, Inc., Case No. 3:17-cv-01925 US District Court for the District of Connecticut, filed January 5, 2018.
·
J. P. Carey Limited Partners, L.P. v. PotNetwork Holdings, Inc., Case No.3:18-CV-00873-WWE, US District Court for the District of Connecticut, filed May 24, 2018.
Each Plaintiff filed a civil complaint with regard to their rights to convert a specific convertible promissory Note. In each case, the Note was issued not by the Company, but by its predecessor issuer, SND Auto Company Inc. (which predecessor issuer had changed its name before changing it back to SND Auto Group, Inc.). Each Note was issued by SND Auto Company Inc., respectively on June 13, 2016 to Mammoth West Corporation and on July 18, 2016 to Southridge Partners II Limited Partnership, for money paid to SND Auto Company Inc., at a time when SND Auto Company Inc. was the public entity, with sole operations in the automotive industry. (Plaintiff, J. P. Carey Limited Partners, L.P., on March 1, 2018, was a subsequent purchaser of a portion of the Southridge Partners II Limited Partnership Note and conversion rights connected to the amount purchased, which it then attempted to convert on the pre-reorganization terms and conditions of the Note, as more fully defined below.) Subsequent to the issuance of the Notes, on March 14, 2017, SND Auto Company Inc. engaged in a holding company reorganization whereby SND Auto Company Inc., became a subsidiary of the public entity. The holding company reorganization was an express condition of a private company, First Capital Venture Holdings Co., whose acquisition was the principal reason for the reorganization.
Each Plaintiff has sought to convert into shares of the post reorganization Company, at a conversion price of a fraction of a penny per share, based on SND Auto Group, Inc.’s share price prior to the reorganization. The Company disputed the conversion amounts presented by the Plaintiffs.
The relief sought by each Plaintiff in each case is as follows:
·
Mammoth West Corporation: Issuance of the shares per each of its conversion notices per the original terms of its Note, reasonable attorneys’ fees and reimbursement of court costs, and such other and further relief as the court deems appropriate.
·
Southridge Partners II Limited Partnership: Damages of at least $743,150, interest, punitive damages, a mandatory injunction seeking specific performance, reasonable attorneys’ fees and reimbursement of court costs, and such other and further relief as the court deems appropriate.
·
J. P. Carey Limited Partners, L.P.; Damages of at least $573,890, interest, punitive damages, a mandatory injunction seeking specific performance, reasonable attorneys’ fees and reimbursement of court costs, and such other and further relief as the court deems appropriate.
On August 17, 2020, JP Carey Limited Partners L.P. and the Company came to a settlement, whereby the Company agreed to issue 28 million shares of the Company’s common stock to JP Carey, subject to certain leak out provisions. The case has subsequently been dismissed.
On August 27, 2020, the Court dismissed the case brought by Southridge Partners II Limited Partnership for failing to obtain counsel to prosecute the case after the Court’s order to do so. Southridge may seek to refile its claim.
On October 22, 2020, the Company entered into a settlement agreement with Mammoth Corporation which is subject to a fairness hearing scheduled for November 20, 2020.
Potter v. PotNetwork Holdings, Inc., Diamond CBD, Inc., and First Capital Venture Co., CASE NO.: 19-24017-CV-SCOLA, US District Court for the Southern District of Florida.
Plaintiff Potter alleged that she purchased certain products from Diamond CBD that contained levels of CBD that were less than the amount stated on the packaging and south class action status.
The Company and its subsidiaries settled the matter at mediation on July 14, 2020. The parties completed the final documentation of the settlement and the case was dismissed on August 27, 2020. Pursuant to the settlement agreement the Company agreed to issue a $10 voucher to purported class members, pay the named plaintiff $5,000 and pay the law firms that brought the suit $200,000 in legal fees to be paid over 30 months, secured by a pledge of shares of the Company’s common stock.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
On July 8, 2020 the Company issued 24,000,000 common shares to a note holder upon the conversion of $72,000 of indebtedness owed. The common stock issued in the transaction were issued pursuant to the exemption for registration contained in Section 4(a)(2) of the Securities Act of 1933.
On August 20, 2020 the Company issued 28,000,000 common shares to J.P. Carey Limited Partners, L.P., in settlement in full of the case, “J. P. Carey Limited Partners, L.P. v. PotNetwork Holdings, Inc., Case No.3:18-CV-00873-WWE, US District Court for the District of Connecticut”, filed May 24, 2018. The common stock issued in the transaction were issued pursuant to the exemption for registration contained in Section 4(a)(2) of the Securities Act of 1933.
On October 1, 2020, the Company issued 8,854,782 common shares to a note holder upon the conversion of $75,000 of indebtedness owed. The common stock issued in the transaction were issued pursuant to the exemption for registration contained in Section 4(a)(2) of the Securities Act of 1933.
As reported on Form 8-K on October 27, 2020, on October 22, 2020 Kevin Hagen resigned as Chief Executive Officer, President and a director of PotNetwork Holdings, Inc. (the “Company”). Mr. Hagen will retain his position as President of First Capital Venture Co., a subsidiary of the Company. Mr. Hagen’s resignation was not the result any disagreement with the Board of Directors of the Registrant with respect to its operations, policies or practices. He continues to be a significant shareholder of the Registrant.
On October 22, 2020, Lee Lefkowitz was appointed as Chief Executive Officer, President and a director of the Company. At this time, the Company has not entered into an employment agreement with Mr. Lefkowitz.
Lee Lefkowitz, age 50, CEO, President, Director. For much of his career Mr. Lefkowitz has been a serial entrepreneur owning and operating his own businesses. Most recently he has invested in and co-founded All Natural Way Corp. and B2H LLC, companies operating in areas of CBD business that POTN does not. He also was an early investor in several other startup companies. Prior to 2015 he worked as an accountant, focusing on both domestic and international corporate accounts. Mr. Lefkowitz, in addition, has considerable experience managing multi-faceted accounting functions, and in the private sector has overseen and administered an over $10 million annual budget. He holds a BA in Psychology for the State University of New York as well as an AAS in Business Administration.
On November 1, 2020, Murugan Venkat, Chief Financial Officer of the Company resigned due to other business commitments. As a result, Mr. Lefkowitz, CEO, assumed the responsibilities of the Chief Financial Officer position.
Pursuant to 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.
POTNETWORK HOLDINGS, INC.
Date: November 20, 2020
By:
/s/ Lee Lefkowitz
Lee Lefkowitz, CEO
Principal Executive Officer
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