June 5, 2019
Kevin Hagen
Chief Executive Officer
PotNetwork Holdings, Inc.
3531 Griffin Road
Fort Lauderdale, FL 33312
Re: PotNetwork Holdings, Inc.
Form 10-12G
Filed May 9, 2019
File No. 000-55969
Dear Mr. Hagen:
We have reviewed your filing and have the following comments. In some of
our
comments, we may ask you to provide us with information so we may better
understand your
disclosure.
Please respond to these comments within ten business days by providing
the requested
information or advise us as soon as possible when you will respond. If you do
not believe our
comments apply to your facts and circumstances, please tell us why in your
response.
After reviewing your response and any amendment you may file in response
to these
comments, we may have additional comments.
Form 10-12G
Item I. Description of Business
New Product Pipeline and Scientific Advisory Board, page 6
1. Please disclose the names of the members of your Scientific Advisory
Board, as well as
their relevant credentials, including the institutions with which they
are affiliated. In
addition, please disclose whether you or your affiliates compensate the
members for their
service on your board, specifying the types and amounts of compensation
paid or to be
paid.
Product Formulation and Production, page 6
2. Please disclose your major suppliers and manufacturers and their
locations. In addition,
please clarify, if true, that you do not hold any inventory. In this
regard, we note Note 5 to
your financial statements, in which you state the "Company has arranged
to buy the exact
Kevin Hagen
FirstName LastNameKevin Hagen
PotNetwork Holdings, Inc.
Comapany NamePotNetwork Holdings, Inc.
June 5, 2019
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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." Please make
conforming
revisions, as necessary, throughout the registration statement.
Government Regulation, page 7
3. Please tell us why you believe that the Agriculture Improvement Act of
2018 made your
products not subject to the Controlled Substances Act of 1970, and
revise your
disclosure accordingly. In addition, please expand your discussion of
the Agriculture
Improvement Act of 2018 to address the other provisions it contains
that may be relevant
to your business, such as the lack of legal protection under the act
for hemp-based
products that contain more than 0.3 percent THC and the risks to which
this subjects your
business, as well as the shared state-federal jurisdiction over hemp
cultivation and
production. Finally, please modify your risk factor disclosure as
necessary to address the
impact of the Agriculture Improvement Act of 2018 on your business.
4. We note your receipt of the Warning Letter from the Food and Drug
Administration dated
March 28, 2019. The Warning Letter cites particular concerns of the
U.S. Food and Drug
Administration regarding the claims on your website that your products
are "drugs"
because they are intended for the use in the cure, mitigation,
treatment, or prevention of
disease. The letter also warns you that new drugs may not be
introduced or delivered for
introduction into interstate commerce without prior approval from the
FDA, which you
have not obtained for any of your products. Finally, the letter states
that some of your
products, including your "Liquid Gold Gummies (Sweet Mix)" and "Liquid
Gold
Gummies (Sour Mix)," contain a Nutrition Fact panel; however, the FDA
does not permit
introduction into interstate commerce of any food to which CBD has
been added.
Please significantly revise your disclosure here and in the Risk
Factors section to set forth
the FDA concerns related to your products, your marketing and your
labeling, all as
outlined in the Warning Letter. In addition, please update your
disclosure to summarize
the current status of your efforts to address the matters cited in the
letter.
5. We note your disclosure on page 7 that the FDA Warning Letter "did not
state or imply
any consumer or other complaint relating to any of Company's products
in terms of their
purity, quality, or labeling." However, the FDA Warning Letter takes
issue with your
product "blue CBD Crystals Isolate 1500mg" labeled as a "nutritional
supplement."
Please remove your statement on page 7 as it relates to labeling.
Item 1A. Risk Factors, page 8
6. A reference is made to the FDA Warning Letter dated March 28, 2019.
Please include
risk factor disclosure, which describes the material risks that may
arise if you fail to
remedy the violations outlined in the FDA letter. As an example only,
we note that the
violations of the FTC Act may result in a legal action seeking a
Federal District Court
injunction or Administrative Cease and Desist Order. An order also may
require that you
Kevin Hagen
FirstName LastNameKevin Hagen
PotNetwork Holdings, Inc.
Comapany NamePotNetwork Holdings, Inc.
June 5, 2019
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pay back money to customers.
Item 2. Financial Information
Management's Discussion and Analysis of Financial Condition and Plan of
Operations, page 15
7. In the first full paragraph, please remove the statement "Hemp-derived
CBD products
have a wide range of potential health and wellness supporting
applications which have
been increasingly validated by leading medical organizations[s]" or
tell us why you
believe it is appropriate to include in this section of the
registration statement.
Results of Operations during the year ended December 31, 2018 as compared to
the year ended
December 31, 2017, page 15
8. Please revise your MD&A to comply with Instruction 4 to Item 303(a) of
Regulation S-K.
In this regard, please address the following:
Revise your comparative discussions to provide quantification of the
expense
categories and specific factors you identify or discuss in this
section.
Revise to identify and quantify the "increased marketing
expenditures" and "expanded
product line" that affected the periods presented.
More clearly discuss the trends experienced in your various expense
categories,
specifically discussing the extent to which you expect those
trends to continue to
similarly affect those respective expense categories.
Quantify and discuss your gross profit margin percentages for the
periods presented.
Discuss the reasons for the changes in the percentage between
periods, and discuss the
extent to which you expect the trends experienced to date or other
known trends to
affect your gross margin.
Liquidity and Capital Resources, page 15
9. Please revise to quantify and describe the causes underlying the
increase in your advances
and accounts receivable. Please also clarify your statement regarding
an increase in
prepaid expenses as there is no indication that you have recorded any
such prepaid
expenses in your financial statements.
10. Please revise to quantify and describe the causes underlying the
changes in your accounts
payable, notes payable and due to third party.
Item 4. Security Ownership of Certain Beneficial Owners and Management, page 17
11. Please disclose the number of shares of common stock each of the named
holders of
preferred stock would receive if each of them converted their shares
of preferred stock
into common stock. Please use as the assumed conversion date the date
you use for the
share information in the beneficial ownership table. In addition,
please add this
information to the voting control risk factor on page 13.
Kevin Hagen
FirstName LastNameKevin Hagen
PotNetwork Holdings, Inc.
Comapany NamePotNetwork Holdings, Inc.
June 5, 2019
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Item 8. Legal Proceedings, page 20
12. We note your description of the three pending legal proceedings
against the company in
this section. For each of the proceedings please disclose the date
when the proceeding
was instituted, include a description of the factual basis alleged
that underlie the
proceeding, and the relief sought. Refer to Item 103 of Regulation
S-K.
Item 10. Recent Sales of Unregistered Securities, page 22
13. For each of the transactions listed in this section please disclose
the consideration received
and the registration exemption claimed. As to any securities sold
otherwise than for cash,
state the nature of the transaction and the nature and aggregate
amount of consideration
received by the registrant. Refer to Item 701 of Regulation S-K.
Report of Independent Registered Public Accounting Firm, page F-1
14. It appears the audit report from your independent registered public
accounting firm does
not cover the financial statements as of and for the year ended
December 31, 2017. Please
advise your independent registered public accounting firm to revise
their audit report to
properly identify all the periods of the financial statements covered
by the report. Please
refer to AU 508 and Rule 2-02 of Regulation S-X for further guidance.
15. We note the second paragraph of the audit report regarding an audit of
your internal
control over financial reporting (ICFR). Please confirm that your
independent registered
public accounting firm did, in fact, perform an audit of your ICFR and
if so, ask them to
revise their report to specifically identify the period for which they
are opining on the
effectiveness of your ICFR. Alternatively, please have them remove
this paragraph from
their report. Refer to Rule 2-02(f) of Regulation S-X and AS 5.
Consolidated Financial Statements
Balance Sheet, page F-2
16. Your Advances and Accounts Receivable comprise approximately 89% of
your total
assets as of December 31, 2018. Please revise to state separately
amounts receivable from
customers, related parties and others in accordance with ASC
210-10-S99-1. Please also
quantify the amount of any allowance for doubtful accounts for each
period presented.
17. As it appears that your Notes Payable are in fact convertible into
shares of your common
stock, please revise to label these notes as convertible on the face
of your Balance Sheet.
Please also classify the balance of the notes between current and
long-term based on its
payment terms.
18. Please revise the Stockholders' Equity section of your Balance Sheet
to quantify the
amount of common and preferred shares issued and outstanding at each
balance sheet
date.
Kevin Hagen
PotNetwork Holdings, Inc.
June 5, 2019
Page 5
Cash Flows Statement, page F-4
19. Please explain why you have classified your cash flows from your third
party loan and
notes payable as operating activities rather than financing.
Stockholders' Equity, page F-5
20. Please revise your Statement of Stockholders' Equity to include your
Preferred shares.
21. Given that the par value of your common stock is $0.00001 per share,
it is unclear how
you accounted for your common share issuances in both 2017 and 2018
and the resulting
impact (or lack thereof) on Additional Paid-in Capital. Please advise
or revise.
Notes on Accounts to the financial statements for the year 2018
Note 1 - Organization and Description of Business, page F-7
22. Your disclosures indicate a "reverse triangular merger" on January 30,
2017, a holding
company reorganization on March 31, 2017, and the "reversal ab initio"
of the holding
company reorganization in February 2018. Please provide us with a
detailed analysis
explaining how each of these events was accounted for and the
resulting impact on your
financial statements, including the basis for each period presented
(i.e. predecessor vs.
successor) and the impact on your capital accounts. Please also revise
your disclosures
accordingly throughout your filing to clarify the impact of these
transactions.
Consolidated Financial Statements
Note 2 Summary of Significant Accounting Policies, page F-8
23. Please revise to disclose your accounting policy for Advances &
Accounts Receivable,
including your assessment of collectibility and any establishment of
an allowance for
doubtful accounts.
24. It appears that you have not recorded any property & equipment,
intangible assets or
inventory in your financial statements. Accordingly, it is unclear as
to why you include
accounting policy footnotes for such items. Please consider removing
these disclosures or
explain why you believe they are useful.
Note 11 - Notes Payable to Sign N Drive, page F-12
25. Please revise to provide a more robust description of the terms of your
notes payable
FirstName LastNameKevin Hagen and conversion terms), as well as a discussion of
any
(including interest, maturity
Comapany NamePotNetwork Holdings, Inc. during the periods presented. Please
also explain
conversions and/or modifications made
June 5,your accounting for the embedded conversion option.
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Kevin Hagen
FirstName LastNameKevin Hagen
PotNetwork Holdings, Inc.
Comapany NamePotNetwork Holdings, Inc.
June 5, 2019
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General
26. Please be advised that your registration statement will automatically
become effective
60 days after filing. Upon effectiveness, you will become subject to
the
reporting requirements of the Securities Exchange Act of 1934. In
addition, we will
continue to review your filing until all of our comments have been
addressed. If the
review process has not been completed before that date, and you are
not required to
register pursuant to Section 12(g) of the Exchange Act, you should
consider withdrawing
the registration statement to prevent it from becoming effective and
file it again at such
time as you are able to respond to any remaining issues or comments.
27. We note your disclosure on page F-6 that one of your subsidiaries,
Blockchain Crypto
Technology, Corp., is an early stage cryptocurrency mining company.
Please disclose any
known or anticipated material commitments for capital expenditures,
the sources of funds
for such expenditures and expected timing with respect to the business
development of
this subsidiary. In addition, to the extent federal, state, local or
foreign regulation of
blockchain technology or digital assets may have a material effect on
your business or
intended business, please disclose the effect of existing or probable
governmental
regulation.
28. Please identify the blockchain network whose transactions Blockchain
Crypto
Technology, Corp. verifies, describe the type of consensus mechanism
that the blockchain
uses, and disclose whether your subsidiary intends to hold any digital
assets that it
receives as a reward or compensation for investment or to convert them
into flat currency
after receipt.
We remind you that the company and its management are responsible for
the accuracy
and adequacy of their disclosures, notwithstanding any review, comments, action
or absence of
action by the staff.
You may contact Bonnie Baynes at (202) 551-4924 or Angela Connell,
Accounting
Branch Chief, at (202) 551-3426 if you have questions regarding comments on the
financial
statements and related matters. Please contact Tonya K. Aldave at (202)
551-3601 or Dietrich
King at (202) 551-8071 with any other questions.
Sincerely,
Division of
Corporation Finance
Office of
Healthcare & Insurance
cc: Jonathan D. Leinwand, Esq.