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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Potnetwork Holdings Inc (CE) | USOTC:POTN | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.0001 | 0.00 | 01:00:00 |
|
POTNETWORK HOLDINGS, INC.
|
(Exact Name of Registrant as specified in its charter)
|
Colorado
|
|
2833
|
|
46-5470832
|
(State or other Jurisdiction
of Incorporation or Organization)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification No.)
|
Jonathan D. Leinwand, P.A.
|
18851 NE 29th Ave., Suite 1011
|
Aventura, FL 33180
|
Phone: 954-903-7856
|
Large accelerated filer
|
¨
|
Accelerated filer
|
¨
|
Non-Accelerated filer
|
¨
|
Smaller reporting company
|
|
|
Emerging Growth Company
|
|
|
Title of Each Class of
Securities to be Registered
|
|
Amount to be Registered (1)(2)
|
|
|
Offering
Price
Per Share
|
|
|
Aggregate
Offering
Price
|
|
|
Amount of Registration
Fee
|
|
||||
|
||||||||||||||||
Shares of Common Stock, par value $0.00001 per share, underlying notes
(3)
|
|
|
223,000,000 |
|
|
$ |
.02
|
|
|
$ |
4,460,000
|
|
|
$ | 1,297.33 |
|
|
||||||||||||||||
Total
|
|
|
223,000,000 |
|
|
$ |
.02
|
|
|
$ |
4,460,000
|
|
|
$ | 1,297.33 |
|
(1)
|
The shares of common stock being registered hereunder are being registered for resale by the selling stockholder named in the accompanying prospectus.
|
|
|
(2)
|
Pursuant to Rule 416 under the Securities Act of 1933, as amended, the shares being registered hereunder shall be deemed to cover additional securities to be offered to prevent dilution and thus includes such indeterminate number of shares of common stock as may be issuable with respect to the shares being registered hereunder as a result of stock splits, stock dividends or other similar transactions.
|
|
|
(3)
|
Represents shares of common stock issuable upon conversion of notes, offered by the selling stockholder named in this prospectus.
|
2 |
|
PRELIMINARY PROSPECTUS
|
SUBJECT TO COMPLETION
|
DATED February 19, 2020
|
3 |
|
|
6
|
|||
|
||||
|
7
|
|||
|
||||
|
8
|
|||
|
||||
|
16
|
|||
|
||||
|
16
|
|||
|
||||
|
18
|
|||
|
||||
|
22
|
|||
|
||||
|
28
|
|||
|
||||
|
30
|
|||
|
||||
|
30
|
|||
|
||||
|
31
|
|||
|
||||
|
32
|
|||
|
||||
|
35
|
|||
|
||||
|
36
|
|||
|
||||
|
36
|
|||
|
||||
|
37
|
|||
|
||||
|
F-1
|
|||
|
||||
|
F-16
|
4 |
|
5 |
|
6 |
|
|
·
|
First Capital Venture Co., a Florida corporation which has as its wholly-owned subsidiary, Diamond CBD, Inc., a Delaware corporation
|
|
·
|
PotNetwork Media Group, Inc., a Nevada corporation, operator of the website, PotNetwork.com.
|
Securities Offered by the Selling Stockholder
|
|
223,000,000 shares of the Company’s common stock
|
|
|
|
Price Per Share
|
|
$.02
|
|
|
|
Gross Proceeds
|
$4,460,000
|
|
|
|
|
Common stock Outstanding Before the Offering (1)
|
|
700,836,384
|
|
||
Common stock Outstanding After the Offering
|
|
923,836,384
|
|
||
Quotation of Common stock
|
|
The Company’s common shares are quoted on the OTC Markets Pink Tier
|
|
||
Use of Proceeds
|
|
We are not selling any shares of the common stock covered by this Prospectus. Consequently, we will not receive any of the offering proceeds from the sale of the shares of common stock registered and covered by this Prospectus.
|
|
||
Risk Factors
|
|
The common stock offered hereby involves a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See “Risk Factors” beginning on page 8.
|
(1)
|
Based on 700,836,384 shares outstanding as of January 31, 2020.
|
7 |
|
|
·
|
Consumer tastes
|
|
·
|
National, regional or local economic conditions
|
|
·
|
Disposable purchasing power
|
|
·
|
Demographic trends; and
|
|
·
|
The price of special ingredients that go into our products.
|
8 |
|
|
·
|
Variations in the timing and volume of our sales
|
|
·
|
The timing of expenditures in anticipation of future sales
|
|
·
|
Sales promotions by us and our competitors
|
|
·
|
Changes in competitive and economic conditions generally
|
|
·
|
Foreign currency exposure
|
9 |
|
|
·
|
The general economy
|
|
·
|
The regulatory environment pertaining to our products
|
|
·
|
Climate, seasonality and environmental factors
|
|
·
|
Consumer demand
|
|
·
|
Transportation costs
|
|
·
|
Competition in products
|
|
·
|
Cash provided by operating activities
|
|
·
|
Available cash and cash investments
|
|
·
|
Capital raised through debt and equity offerings
|
10 |
|
|
·
|
Industry trends and the business situation of our suppliers
|
|
·
|
Actual or anticipated fluctuations in our quarterly financial and operating results and operating results that vary from the expectations of our management or of securities analysts and investors
|
|
·
|
our failure to meet the expectations of the investment community and changes in investment community recommendations or estimates of our future operating results
|
|
·
|
Announcements of strategic developments, acquisitions, dispositions, financings, product developments and other materials events by us or our competitors
|
|
·
|
Regulatory and legislative developments
|
|
·
|
Litigation
|
|
·
|
General market conditions
|
|
·
|
Other domestic and international macroeconomic factors unrelated to our performance
|
|
·
|
Changes in key personnel
|
11 |
|
12 |
|
|
·
|
The level of product and price competition,
|
|
·
|
Our success in expanding our distribution network and managing our growth,
|
|
·
|
Our ability to develop and market product enhancements and new products,
|
|
·
|
The timing of product enhancements, activities of and acquisitions by competitors,
|
|
·
|
The ability to hire additional qualified employees, and
|
|
·
|
The timing of such hiring and our ability to control costs.
|
13 |
|
|
·
|
Election of our board of directors;
|
|
·
|
Removal of any of our directors;
|
|
·
|
Amendment of our articles of incorporation or bylaws; and
|
|
·
|
Adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
|
14 |
|
15 |
|
16 |
|
|
|
Price Range
|
|
|||||
Period
|
|
High
|
|
|
Low
|
|
||
Year Ended December 31, 2016:
|
|
|
|
|
|
|
||
First Quarter
|
|
$ | .25 |
|
|
$ | .01 |
|
Second Quarter
|
|
$ | .04 |
|
|
$ | .001 |
|
Third Quarter
|
|
$ | .025 |
|
|
$ | .0022 |
|
Fourth Quarter
|
|
$ | .0065 |
|
|
$ | .002 |
|
Year Ending December 31, 2017:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ | .0698 |
|
|
$ | .0025 |
|
Second Quarter
|
|
$ | .0995 |
|
|
$ | .017 |
|
Third Quarter
|
|
$ | .0839 |
|
|
$ | .0436 |
|
Fourth Quarter
|
|
$ | .1251 |
|
|
$ | .052 |
|
Year Ending December 31, 2018:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ | .0957 |
|
|
$ | .1199 |
|
Second Quarter
|
|
$ | .413 |
|
|
$ | .194 |
|
Third Quarter
|
|
$ | .3912 |
|
|
$ | .2206 |
|
Fourth Quarter
|
|
|
.2761 |
|
|
|
.0836 |
|
Year Ending December 31, 2019:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ | .1750 |
|
|
$ | .0980 |
|
Second Quarter
|
|
$ | .1650 |
|
|
$ | .0577 |
|
Third Quarter
|
|
$ | .1049 |
|
|
$ | .0375 |
|
Fourth Quarter
|
|
$
|
.052
|
|
|
$
|
.021
|
|
17 |
|
18 |
|
19 |
|
20 |
|
A. |
The Company’s ecommerce website makes 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-à-vis the merchant account which processes the credit card payment.
|
·
|
Receivables supervisor is authorized to collect delinquent accounts
|
|
|
·
|
The Treasurer has the authority to assign accounts to a third party for collection
|
|
|
·
|
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.
|
|
|
·
|
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.
|
|
|
·
|
Checks that are returned from the bank as nonnegotiable 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.
|
|
|
·
|
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.
|
|
|
·
|
All actions taken to collect overdue accounts must be documented.
|
|
|
·
|
If there is no response after the initial contact at the 30-day point (within 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.
|
|
|
·
|
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:
|
21 |
|
|
o
|
turned over to a private collection agency;
|
|
o
|
subject to legal action;
|
|
o
|
credit privileges will be revoked; and/or account may be suspended.
|
22 |
|
|
·
|
First Capital Venture Co., a Florida corporation which has as its wholly-owned subsidiary, Diamond CBD, Inc., a Delaware corporation
|
|
·
|
PotNetwork Media Group, Inc., a Nevada corporation, operator of the website, PotNetwork.com.
|
23 |
|
|
·
|
Flavored and unflavored CBD oils in varying concentrations
|
|
·
|
Vaping pens and additives
|
|
·
|
Edibles such as chewable “gummies”, crumble “dabs”, and other edible forms
|
|
·
|
Beverage energy/relaxation “shots”
|
|
·
|
CBD topical application creams in varying concentrations (including the premium “Meds BioTech” brand)
|
|
·
|
Pet (dog and cat) wellness products in various dosages and delivery formats (the “MediPets” brand)
|
24 |
|
25 |
|
26 |
|
27 |
|
28 |
|
Name
|
|
Age
|
|
Title
|
Gary Blum
|
|
79
|
|
Director
|
Kevin Hagen
|
|
50
|
|
CEO/Director
|
Murugan Venkat
|
|
66
|
|
CFO
|
29 |
|
|
1.
|
any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
|
|
2.
|
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
3.
|
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;
|
|
4.
|
being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
|
|
5.
|
being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
|
|
6.
|
being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
|
|
Nonqualified
|
|||||||||||||||||||||||||||||||||
|
Non-Equity
|
|
Deferred
|
|
||||||||||||||||||||||||||||||
Name and
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
Compensation
|
|
All Other
|
|
|||||||||||||||||||||||
Principal
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
|
|||||||||||||||||||
Position
|
|
Year
|
|
Salary
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
||||||||||||||||
|
||||||||||||||||||||||||||||||||||
Kevin Hagen
|
|
2019
|
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||||||||||||
|
|
2018
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
||||||||||||||||||||||||||||||||||
Richard Goulding
|
2018
|
|
49,000
|
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
49,000
|
|
|||||||||||||||||||||
Former CEO(1)
|
2017
|
|
16,000
|
(2)
|
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
16,000
|
(2)
|
||||||||||||||||||||
|
2016
|
|
-0-
|
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
-0-
|
||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
Gary Blum
|
|
2018
|
|
-0-
|
|
-0-
|
|
170,000
|
|
-0-
|
-0-
|
-0-
|
-0-
|
170,000
|
|
|||||||||||||||||||
Director
|
|
2017
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||||||||||
|
2016
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
(1)
|
Richard Goulding, M.D., resigned as CEO on October 25, 2018 and was replaced by Kevin Hagen, Esq.
|
(2)
|
Represents accrued salary attributed to that period in the employment agreement with Dr. Goulding entered into in July 2018.
|
30 |
|
31 |
|
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
|
||||||||||||||||
|
||||||||||||||||
Common Stock
Name and Address of Beneficial Owner
(2)
|
|
Direct
|
|
Indirect
|
|
Total
|
|
Percentage
of Class (1)
|
||||||||
|
||||||||||||||||
Executive Officers and Directors
|
|
|||||||||||||||
Gary Blum
|
|
2,000,000
|
|
-0-
|
|
2,000,000
|
|
.29
|
%
|
|||||||
Kevin Hagen
|
|
27,750,000
|
|
-0-
|
|
27,750,000
|
|
3.96
|
%
|
|||||||
Murugan Venkat
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
%
|
|||||||
Officers and Directors as a Group
|
|
29,750,000
|
|
-0-
|
|
29,750,000
|
|
4.25
|
%
|
|||||||
|
||||||||||||||||
Other 5% Holders
|
|
|||||||||||||||
Elinor Taieb
|
|
64,651,438
|
|
-0-
|
|
64,651,438
|
|
9.23
|
%
|
|||||||
|
||||||||||||||||
Class A Preferred Stock
(4)
|
|
Direct
|
|
Indirect
|
|
Total
|
|
Percentage
of Class
|
|
|||||||
Kevin Hagen
|
|
20,742
|
|
-0-
|
|
20,742
|
|
60.4
|
%
|
|||||||
Elinor Taieb
|
|
13,547
|
|
-0-
|
|
13,597
|
|
39.5
|
%
|
(1)
|
Based on a total of issued and outstanding shares as of September 30, 2019 of 700,836,384.
|
(2)
|
The address of each officer is 3531 Griffin Road, Fort Lauderdale, FL 33312
|
(3)
|
Pursuant to the Convertible Notes that the Company has with Iliad Research, the Company is prohibited from issuing shares to Iliad Research if such issuance would cause Iliad Research to own more than 4.99% of the number of common shares of the Company outstanding at the time of such issuance. Thus, while Iliad Research may convert into an aggregate of 223,000,000 shares, it may not own more than 4.99% of the common shares of the Company at any one time and is therefore not included in the ownership table. Ownership is determined in accordance with Section 13(d) of the Securities Exchange Act of 1934.
|
(4)
|
Each share of Class A preferred stock is convertible into 0.01% of the total number of shares of Common Stock outstanding at the Conversion Time. On any matter presented to the shareholders of the Corporation for their action or consideration at any meeting of shareholders of the Corporation (or by written consent of shareholders in lieu of meeting), each holder of outstanding shares of Series A Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Series A Preferred Stock held by such holder are convertible as of the record date for determining shareholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Articles of Incorporation, holders of Series A Preferred Stock shall vote together with the holders of Common Stock as a single class.
Based on the preceding and upon a total quantity of issued and outstanding shares as of September 30, 2019 of 700,836,384, each share of Class A preferred stock is convertible into 70,084 shares of common stock. As a result, if each of the two Class A preferred shareholders listed were able to convert 100% of each’s Class A preferred stock, Kevin Hagen, who holds 20,742 Class A preferred shares, would receive 1,453,682,328 shares of common stock; and Elinor Taieb, who holds 13,547 Class A preferred shares, would receive 949, 427,948 shares of common stock.
|
32 |
|
|
·
|
the names of the Selling Stockholder;
|
|
·
|
the number of shares of common stock that can be acquired by the Selling Stockholder through the conversion of the Notes;
|
|
·
|
the number of shares of common stock being registered with respect to the Selling Stockholder;
|
|
·
|
the number of shares of common stock owned by the Selling Stockholders after the offering assuming all shares acquired by the Selling Shareholder are sold; and
|
|
·
|
the person with voting or investment control if the stockholder is not a natural person.
|
Selling Stockholder
|
|
Shares
Acquirable
upon
Conversion of
Note
|
|
Shares Being Registered
|
|
Shares Owned
After the
Offering
Assuming all
Note
Principal,
Interest and
Fees are
Converted and
all Shares Sold
|
|
Person with Voting or Investment Control
|
|
||||||
Iliad Research & Trading, L.P.(1)
|
|
223,000,000
|
|
223,000,000
|
|
0
|
|
John M. Fife
|
(1) |
Pursuant to the Convertible Notes that the Company has with Iliad Research, the Company is prohibited from issuing shares to Iliad Research if such issuance would cause Iliad Research to own more than 4.99% of the number of common shares of the Company outstanding at the time of such issuance. Thus, while Iliad Research may convert into an aggregate of 223,000,000 shares, it may not own more than 4.99% of the common shares of the Company at any one time. Ownership is determined in accordance with Section 13(d) of the Securities Exchange Act of 1934.
|
33 |
|
|
·
|
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
·
|
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
|
|
·
|
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
|
|
·
|
an exchange distribution in accordance with the rules of the applicable exchange;
|
|
·
|
privately negotiated transactions;
|
|
·
|
settlement of short sales entered into after the date of this prospectus;
|
|
·
|
broker-dealers may agree with the Selling Stockholder to sell a specified number of such shares at a stipulated price per share;
|
|
·
|
a combination of any such methods of sale;
|
|
·
|
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; or
|
|
·
|
any other method permitted pursuant to applicable law.
|
34 |
|
35 |
|
Description of Note 1
|
|
Number of shares issuable on conversion
|
|
Conversion
price ($)
|
|
Material
Terms
|
|
||
Notes in the principal face amount of $5.525 million
|
|
138,825,352
|
|
See below (1)
|
|
See below (1)
|
Description of Note 2
|
|
Number of shares issuable on conversion
|
|
Conversion
price ($)
|
|
Material
Terms
|
|
||
Notes in the principal face amount of $3.325 million
|
|
84,174,648
|
|
See below (2)
|
|
See below (2)
|
36 |
|
37 |
|
|
F-2
|
||
|
|||
|
F-3
|
||
|
|||
|
F-4
|
||
|
|||
|
F-6
|
F-1
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
||
Assets
|
|
|
|
|
|
|
||
Current Assets
|
|
|
|
|
|
|
||
Cash/Bank Balances
|
|
$ | 68,476 |
|
|
$ | 584,426 |
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
From Customers
|
|
$ | 63,414 |
|
|
$ | 119,274 |
|
From related parties
|
|
|
|
|
|
$ | - |
|
From others
|
|
$ | 500,000 |
|
|
$ | - |
|
Total Accounts Receivable
|
|
$ | 563,414 |
|
|
$ | 119,274 |
|
Advances - Drop Shipper
|
|
$ | 4,876,880 |
|
|
$ | 4,289,928 |
|
Prepaid Expenses
|
|
$ | 823,801 |
|
|
$ | 220,902 |
|
Total Current assets
|
|
$ | 6,332,571 |
|
|
$ | 5,214,530 |
|
TOTAL ASSETS
|
|
$ | 6,332,571 |
|
|
$ | 5,214,530 |
|
Liabilities
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Payables
|
|
$ | 171,008 |
|
|
$ | 469,821 |
|
Current portion of Notes Payable, convertible
|
|
$ | 248,002 |
|
|
$ | 306,150 |
|
Total Current Liabilities
|
|
$ | 419,010 |
|
|
$ | 775,971 |
|
Long-term Liabilities
|
|
|
|
|
|
|
|
|
Loan from 3rd Party with interest
|
|
$ | 40,320 |
|
|
$ | 38,400 |
|
Notes Payable
|
|
$ | 4,728,906 |
|
|
$ | 3,267,824 |
|
Total long-term liabilities
|
|
$ | 4,769,226 |
|
|
$ | 3,306,224 |
|
Total Liabilities
|
|
$ | 5,188,236 |
|
|
$ | 4,082,195 |
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Common: Authorized 1,000,000,000 shares, $.00001 par value; and 700,836,384 Issued and outstanding as of September 30, 2019 and 569,364,762 shares issued and outstanding as of December 31, 2018
|
|
$ | 3,565,065 |
|
|
$ | 3,169,040 |
|
Preferred Stock Class A Authorized - 50,000 shares, $.00001 Par value; and 34,289 Issued and outstanding, as of September 30, 2019 and 39,839 issued and outstanding as of December 31, 2018
|
|
$ | 400 |
|
|
$ | 400 |
|
Retained Earnings
|
|
$ | (2,421,130 | ) |
|
$ | (2,037,105 | ) |
Total Stockholders' Equity
|
|
$ | 1,144,335 |
|
|
$ | 1,132,335 |
|
Total Liabilities & Equity
|
|
$ | 6,332,571 |
|
|
$ | 5,214,530 |
|
F-2 |
|
|
3 months ended
|
|
|
9 months ended
|
|
|||||||||||
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
||||
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales
|
|
$ | 3,629,621 |
|
|
$ | 5,923,161 |
|
|
$ | 14,157,742 |
|
|
$ | 17,967,189 |
|
Cost of goods sold
|
|
$ | 2,181,802 |
|
|
$ | 2,969,227 |
|
|
$ | 8,557,686 |
|
|
$ | 10,272,081 |
|
Gross profit
|
|
$ | 1,447,819 |
|
|
$ | 2,953,934 |
|
|
$ | 5,600,056 |
|
|
$ | 7,695,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$ | - |
|
|
$ | - |
|
|
$ | - |
|
|
$ | - |
|
Sales & Marketing
|
|
$ | 1,695,562 |
|
|
$ | 2,551,862 |
|
|
$ | 5,108,343 |
|
|
$ | 6,615,125 |
|
General & Administrative Expenses
|
|
$ | 172,461 |
|
|
$ | 356,532 |
|
|
$ | 627,756 |
|
|
$ | 709,887 |
|
Total operating expenses
|
|
$ | 1,868,023 |
|
|
$ | 2,908,394 |
|
|
$ | 5,736,099 |
|
|
$ | 7,325,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Exp
|
|
$ | 84,764 |
|
|
$ | 4,220 |
|
|
$ | 247,982 |
|
|
$ | 12,133 |
|
Total financing expenses
|
|
$ | 84,764 |
|
|
$ | 4,220 |
|
|
$ | 247,982 |
|
|
$ | 12,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
$ | 1,952,787 |
|
|
$ | 2,912,614 |
|
|
$ | 5,984,081 |
|
|
$ | 7,337,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (Loss) before Income Tax
|
|
$ | (504,968 | ) |
|
$ | 41,320 |
|
|
$ | (384,025 | ) |
|
$ | 357,963 |
|
Provision for Income Tax
|
|
$ | - |
|
|
$ | - |
|
|
$ | - |
|
|
$ | - |
|
Net Profit (Loss)
|
|
$ | (504,968 | ) |
|
$ | 41,320 |
|
|
$ | (384,025 | ) |
|
$ | 357,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$ | (0.000721 | ) |
|
$ | 0.000092 |
|
|
$ | (0.000548 | ) |
|
$ | 0.000797 |
|
Basic and diluted
|
|
$ | (0.000721 | ) |
|
$ | 0.000092 |
|
|
$ | (0.000548 | ) |
|
$ | 0.000797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
700,836,384 |
|
|
|
448,921,254 |
|
|
|
700,836,384 |
|
|
|
448,921,254 |
|
F-3 |
|
|
|
3 months ended
|
|
|
9 months ended
|
|
||||||||||
|
|
30-Sep-19
|
|
|
30-Sep-18
|
|
|
30-Sep-19
|
|
|
30-Sep-18
|
|
||||
Net Income (Loss)
|
|
$ | (504,968 | ) |
|
$ | 41,320 |
|
|
$ | (384,025 | ) |
|
$ | 357,963 |
|
Adjustments to reconcile net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable from customers
|
|
$ | 43,847 |
|
|
$ | (19,879 | ) |
|
$ | 55,860 |
|
|
$ | (119,274 | ) |
Accounts Receivable from others
|
|
$ | (500,000 | ) |
|
$ | 395,331 |
|
|
$ | (500,000 | ) |
|
$ | (395,331 | ) |
Other Assets
|
|
$ | 570,695 |
|
|
$ | (271,405 | ) |
|
$ | (1,189,851 | ) |
|
$ | (4,510,830 | ) |
Payable
|
|
$ | 75,683 |
|
|
$ | (233,610 | ) |
|
$ | (356,961 | ) |
|
$ | (251,766 | ) |
Total Adjustments to reconcile net income (loss)
|
|
$ | 190,225 |
|
|
$ | (129,563 | ) |
|
$ | (1,990,952 | ) |
|
$ | (5,277,201 | ) |
Net cash from the current year operations
|
|
$ | (314,743 | ) |
|
$ | (88,243 | ) |
|
$ | (2,374,977 | ) |
|
$ | (4,919,238 | ) |
Investing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$ | 9,875 |
|
|
$ | - |
|
|
$ | 396,025 |
|
|
$ | 2,444,714 |
|
Preferred A Stock
|
|
|
|
|
|
$ | 0 |
|
|
|
|
|
|
$ | 0 |
|
Net cash provided by investing activities
|
|
$ | 9,875 |
|
|
$ | 0 |
|
|
$ | 396,025 |
|
|
$ | 2,444,714 |
|
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Party Loan
|
|
$ | 640 |
|
|
$ | 2,514 |
|
|
$ | 1,920 |
|
|
$ | 301,295 |
|
Notes Payable
|
|
$ | 268,332 |
|
|
$ | - |
|
|
$ | 1,461,082 |
|
|
$ | 1,837,200 |
|
Net cash provided by financing activities
|
|
$ | 268,972 |
|
|
$ | 2,514 |
|
|
$ | 1,463,002 |
|
|
$ | 2,138,495 |
|
Net change in cash and cash equivalents
|
|
$ | (35,896 | ) |
|
$ | (85,729 | ) |
|
$ | (515,950 | ) |
|
$ | (336,029 | ) |
Cash and cash equivalents, beginning of period
|
|
$ | 104,372 |
|
|
$ | 334,126 |
|
|
$ | 584,426 |
|
|
$ | 584,426 |
|
Cash and cash equivalents, end of period
|
|
$ | 68,476 |
|
|
$ | 248,397 |
|
|
$ | 68,476 |
|
|
$ | 248,397 |
|
F-4 |
|
|
|
Preferred
|
|
|
Preferred
Share
|
|
|
Common
|
|
|
|
|
Surplus
|
|
||||||
|
|
Shares
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
(Deficit)
|
|
|||||
Common Stock as on Dec. 31, 2016
|
|
|
0 |
|
|
$ | - |
|
|
|
297,389,288 |
|
|
$ | 88,573 |
|
|
$ | (53,935 | ) |
Triangular Merger
|
|
|
39,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ | 53,935 |
|
Shares Issued - Restricted
|
|
|
|
|
|
|
|
|
|
|
309,322,614 |
|
|
|
|
|
|
|
|
|
Shares Issued - Free
|
|
|
|
|
|
|
|
|
|
|
121,000,000 |
|
|
$ | 363,000 |
|
|
|
|
|
Shares Issued - Reserve
|
|
|
|
|
|
|
|
|
|
|
(157,791,417 | ) |
|
|
|
|
|
|
|
|
Net Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ | 301,603 |
|
Balance as of Dec. 31, 2017
|
|
|
39,839 |
|
|
$ | 400 |
|
|
|
569,920,485 |
|
|
$ | 450,573 |
|
|
$ | (2,279,739 | ) |
Shares Issued
|
|
|
|
|
|
|
|
|
|
|
215,444,227 |
|
|
$ | 2,718,467 |
|
|
|
|
|
Shares Cancelled
|
|
|
|
|
|
|
|
|
|
|
(216,000,000 | ) |
|
|
|
|
|
|
|
|
Net Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ | 242,634 |
|
Balance as of Dec. 31, 2018
|
|
|
39,839 |
|
|
$ | 400 |
|
|
|
569,364,712 |
|
|
$ | 3,169,040 |
|
|
$ | (2,037,105 | ) |
Shares Issued
|
|
|
|
|
|
|
|
|
|
|
131,471,672 |
|
|
$ | 396,025 |
|
|
|
|
|
Net Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ | (384,025 | ) |
Balance as of September 30, 2019
|
|
|
34,289 |
|
|
$ | 400 |
|
|
|
700,706,621 |
|
|
$ | 3,565,065 |
|
|
$ | (2,421,130 | ) |
F-5 |
|
|
·
|
SND Auto Group, Inc. until 3-2017
|
|
·
|
PotNetwork Holdings, Inc. until 5-2016
|
|
·
|
United Treatment Centers, Inc. until 7-2015
|
|
·
|
Element Trading Holdings, Inc. until 3-2014
|
|
·
|
United Treatment Centers, Inc. until 10-2013
|
|
·
|
MyMedicalCD, Ltd. until 6-2008
|
|
·
|
Interactive Solutions Corp. until 11-2004
|
|
o
|
State of incorporation changed from Nevada to Wyoming in 11-2004
|
|
·
|
Araldica Wineries Ltd. until 2-2000
|
|
·
|
H P Capital Corp. until 9-1996
|
|
·
|
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.
|
|
·
|
Blockchain Crypto Technology, Corp., an inactive Colorado corporation.
|
|
·
|
Grinder Distribution, Inc., an inactive Florida corporation
|
|
·
|
PNH Holdings, Inc., an inactive Colorado corporation
|
|
·
|
SND Auto Group, Inc., an inactive Colorado corporation
|
F-6 |
|
➢
|
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.
|
F-7 |
|
➢
|
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:
|
|
o
|
Receivables supervisor is authorized to collect delinquent accounts
|
|
o
|
The Treasurer has the authority to assign accounts to a third party for collection
|
|
o
|
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.
|
|
o
|
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.
|
|
o
|
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 account receivable must be reconciled with the control account.
|
|
o
|
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.
|
|
o
|
Statements to Debtors: Statements must be issued to debtors, on a monthly basis, providing meaningful and concise information on the status of their debts.
|
|
o
|
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.
|
|
o
|
All actions taken to collect overdue accounts must be documented.
|
|
o
|
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.
|
|
o
|
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:
|
F-8 |
|
|
·
|
turned over to a private collection agency;
|
|
·
|
subject to legal action
|
|
·
|
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:
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
|
|
o
|
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 noncash 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.
|
|
o
|
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.
|
|
·
|
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.
|
➢
|
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.
|
F-9 |
|
➢
|
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, this Company signed convertible promissory notes for $1,200,000. The convertible note has the 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.
|
F-10 |
|
|
|
30th Sep
2019
|
|
|
31st Dec
2018
|
|
||
Deferred tax assets:
|
|
|
|
|
|
|
||
Net operating loss carryovers
|
|
$ | 2,421,130 |
|
|
$ | 2,037,105 |
|
Stock-based compensation
|
|
|
- |
|
|
|
- |
|
Other temporary differences
|
|
|
- |
|
|
|
- |
|
Total deferred tax assets
|
|
|
2,421,130 |
|
|
|
2,037,105 |
|
Valuation allowance
|
|
|
(2,421,130 | ) |
|
|
(2,037,105 | ) |
Net deferred tax asset
|
|
$ | - |
|
|
$ | - |
|
|
·
|
Internal control procedures for inventory and cash control are being developed and implemented on an ongoing basis to ensure higher levels of performances.
|
|
·
|
Annual financial budget is reviewed by the Board of Directors.
|
|
·
|
Quarterly variance reports are reviewed by the Board of Directors.
|
|
·
|
Common Stock
: Authorized 1,000,000,000 shares, $.00001 par value; and 700,836,384 issued and outstanding as on the balance sheet date. Further, this Company is obligated to issue additional shares to the noteholders mentioned here below.
|
|
·
|
Class A preferred stock
: Authorized 50,000 shares, $ .00001 par value; and 34,289 Issued and outstanding as on the balance sheet date. Designation details are in Document # 20181127754 filed with the Secretary of State, Colorado on February 13, 2018. On May 7, 2019, the Company filed with the Secretary of State, Colorado, amended Articles of Incorporation, under Document # 20171182699, whereby it changed the designation provisions of its Series A Preferred Stock.
|
F-11 |
|
|
|
|
|
|
|
|
|
|
8
%
|
|
|
|
8
%
|
|
|
|
8
%
|
|
|
|
8
%
|
|
||||||||||||||||||
|
|
|
|
|
|
|
|
Interest
|
|
|
Interest
|
|
|
Interest
|
|
|
Interest
|
|
||||||||||||||||||||||
|
|
Loan
|
|
|
2018
|
|
|
2019 Q1
|
|
|
2019 Q2
|
|
|
2019 Q3
|
|
|||||||||||||||||||||||||
7/1/2016
|
|
$ | 25,000 |
|
|
$ | 28,000 |
|
|
$ | 2,000 |
|
|
$ | 30,000 |
|
|
$ | 500 |
|
|
$ | 30,500 |
|
|
$ | 500 |
|
|
$ | 31,000 |
|
|
$ | 500 |
|
|
$ | 31,500 |
|
7/1/2016
|
|
$ | 7,000 |
|
|
$ | 7,840 |
|
|
$ | 560 |
|
|
$ | 8,400 |
|
|
$ | 140 |
|
|
$ | 8,540 |
|
|
$ | 140 |
|
|
$ | 8,680 |
|
|
$ | 140 |
|
|
$ | 8,820 |
|
|
|
|
|
|
|
$ | 35,840 |
|
|
$ | 2,560 |
|
|
$ | 38,400 |
|
|
$ | 640 |
|
|
$ | 39,040 |
|
|
$ | 640 |
|
|
$ | 39,680 |
|
|
$ | 640 |
|
|
$ | 40,320 |
|
Year
|
|
Interest
Waived
|
|
|
2017
|
|
$ | 7,318 |
|
2018
|
|
|
4,351 |
|
2019 (through 9/30)
|
|
|
7,155 |
|
|
|
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 |
|
F-12 |
|
|
· |
$1,400,000 was received on 10/31/2018
|
|
· |
$825,000 was received on 12/18/2018
|
|
· |
$18,410 is the accrued interest for 2018
|
|
· |
$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 June 30, 2019
|
|
·
|
$84,144 is the accrued interest from 6/1/2019 to Sep 30, 2019
|
F-13 |
|
|
➢
|
Mammoth West Corporation [case# 17 CH 778, 19th Circuit Court of Lake County, IL] and Southridge Partners II Limited Partnership [case# 3:17-cv-01925, Connecticut] each filed a civil complaint about its convertible promissory note (each referred to as a “Note”).
|
|
➢
|
In each instance, the Note was issued not by the Company, but by the Company’s predecessor issuer, SND Auto Company Inc. (which predecessor issuer had changed its name before changing it back to SND Auto Group, Inc.). The Note was issued by SND Auto Company Inc., on June 13, 2016 and on July 18, 2016, respectively, for money paid to SND Auto Company Inc., at a time in which SND Auto Company Inc. was the public Company, operating in the automobile industry. However, on March 14, 2017, SND Auto Company Inc. formed the Company and engaged in a holding Company reorganization whereby the Company became the public entity while SND Auto Company Inc., became its subsidiary. The holding Company reorganization was an express condition of First Capital Venture Holdings Co., which is the parent Company to Diamond CBD, Inc. being acquired by the Company and thereby entering the CBD oil business. The acquisition would not have occurred without the holding Company reorganization. Following this acquisition and the holding Company reorganization, and following the Company becoming the public entity, the stock price increased significantly. In other words, the CBD oil company stock price (the Company, i.e., PotNetwork Holdings, Inc.) was much greater than the stock price of the automobile Company (SND Auto Company Inc.).
|
|
➢
|
The plaintiff invested in an automobile Company, not in the CBD oil business. Yet, plaintiff wants to convert its Note issued by the automobile company into shares of the CBD oil Company, which was not the maker of the Note.
|
|
➢
|
As of December 31, 2017, SND Auto Company Inc., not the Company, owed Mammoth West Corporation $7,280 and Southridge Partners II Limited Partnership $26,000, on the Notes, which obligations were never disputed by SND Auto Company Inc. (which SND Auto Group, Inc. agreed to pay each, in full).
|
|
➢
|
The Company has maintained that these were not debts of the Company, and the holding Company reorganization was engaged in to assure as much, not to avoid payment, but instead, to isolate this debt from the new CBD oil business, SND Auto Company Inc. being a separate and distinct legal entity with its own assets and debts.
|
|
➢
|
However, on February 7, 2018, the Company and its predecessor issuer, SND Auto Company Inc., unwound the March 14, 2017 holding Company reorganization.
|
|
➢
|
Because of that unwinding, Company’s counsel agrees that the Company, the public entity, became liable for this SND Auto Group, Inc. Notes, but only as of the February 7, 2018 rewinding, not prior thereto.
|
|
➢
|
So, at this point, the dispute between the parties surrounds the conversion price.
|
|
➢
|
In each case, the terms of the Note entitle the plaintiff, as holder, to convert into shares of the maker’s common stock.
|
|
➢
|
On March 28, 2017 and on April 24, 2017, the conversion notice in each case was issued, not to SND Auto Group, Inc., the maker, but to the Company, for shares of the Company’s common stock.
|
|
➢
|
The terms of the Note entitle the plaintiff to payment in cash or in shares of the maker (SND Auto Group, Inc.), at a discount of 65% of the lowest trading price of the preceding 30 trading days.
|
|
➢
|
Instead, however, the plaintiff has throughout, sought to convert into shares of the Company, at a fraction of a penny per share, or approximately 2,700,000 shares in each instance (as opposed to approximately 56,000 shares in each instance),
of the Company
, based on
SND Auto Group, Inc.
’s share price, when SND Auto Group, Inc. was the public Company, and prior to the Company even being in existence, let alone being public.
|
|
➢
|
It is the Company’s position that the Company only became obligated for the Note (which is the obligation of the maker, SND Auto Group, Inc.), upon the unwinding of the reorganization, or as of February 7, 2018, when the Company’s stock price was considerably higher (and therefore obligated to issue far fewer shares in satisfaction of the conversion notice) than it was prior to the holding Company reorganization and the acquisition of First Capital Venture Holdings Co.
|
|
➢
|
The Company intends to vigorously defend against this claim. The Company is confident in its position.
|
F-14
|
|
F-15
|
|
F-16
|
|
F-17
|
|
|
|
Dec. 31,
2018
|
|
|
Dec. 31,
2017
|
|
||
Assets
|
|
|
|
|
|
|
||
Current Assets
|
|
|
|
|
|
|
||
Cash/Bank Balances
|
|
$ | 584,426 |
|
|
$ | 254,571 |
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
from Customers
|
|
$ | 119,274 |
|
|
$ | 138,341 |
|
from related parties
|
|
$ | - |
|
|
$ | - |
|
from others
|
|
$ | - |
|
|
$ | - |
|
Total Accounts Receivable
|
|
$ | 119,274 |
|
|
$ | 138,341 |
|
Advances - Drop Shipper
|
|
$ | 4,289,928 |
|
|
$ | 1,160,653 |
|
Prepaid Expenses
|
|
$ | 220,902 |
|
|
$ | 252,778 |
|
Total Current assets
|
|
$ | 5,214,530 |
|
|
$ | 1,806,343 |
|
TOTAL ASSETS
|
|
$ | 5,214,530 |
|
|
$ | 1,806,343 |
|
Liabilities
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Payables
|
|
$ | 469,821 |
|
|
$ | 270,980 |
|
Current portion of Notes Payable, convertible
|
|
$ | 306,150 |
|
|
$ | 172,650 |
|
Total Current Liabilities
|
|
$ | 775,971 |
|
|
$ | 443,630 |
|
Long-term Liabilities
|
|
|
|
|
|
|
|
|
Loan from 3rd Party with interest
|
|
$ | 38,400 |
|
|
$ | 245,374 |
|
Notes Payable, convertible
|
|
$ | 3,267,824 |
|
|
$ | 2,946,105 |
|
Total Long-term liabilities
|
|
$ | 3,306,224 |
|
|
$ | 3,191,479 |
|
Total Liabilities
|
|
$ | 4,082,195 |
|
|
$ | 3,635,109 |
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Common Stock, $ 0.00001 par value, 1,000,000,000 shares authorized, 569,364,712 shares Issued and outstanding as of December 31, 2018 and 569,920,485 shares Issued and outstanding as of December 31, 2017
|
|
$ | 3,169,040 |
|
|
$ | 450,573 |
|
Preferred Stock Class A, $ 0.00001 par value, 50,000,000 shares authorized, 39,839 shares Issued and outstanding as of December 31, 2018 and December 31, 2017
|
|
$ | 400 |
|
|
$ | 400 |
|
Additional Paid-in Capital
|
|
|
|
|
|
$ | 1,463,131 |
|
Retained Earnings
|
|
$ | (2,037,105 | ) |
|
$ | (2,279,739 | ) |
Total Stockholders’ Equity
|
|
$ | 1,132,335 |
|
|
$ | (1,828,766 | ) |
Total Liabilities & Equity
|
|
$ | 5,214,530 |
|
|
$ | 1,806,343 |
|
F-18 |
|
|
|
Year Ended
|
|
|
Year Ended
|
|
||
|
|
Dec. 31,
2018
|
|
|
Dec. 31,
2017
|
|
||
|
|
|
|
|
|
|
||
Revenue
|
|
|
|
|
|
|
||
Sales
|
|
$ | 25,583,761 |
|
|
$ | 14,388,204 |
|
Cost of goods sold
|
|
$ | 16,624,328 |
|
|
$ | 9,318,271 |
|
Gross profit
|
|
$ | 8,959,433 |
|
|
$ | 5,069,933 |
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Research and development
|
|
$ | - |
|
|
$ | 524,720 |
|
Sales & Marketing
|
|
$ | 7,894,819 |
|
|
$ | 3,491,555 |
|
General & Administrative Expenses
|
|
$ | 811,420 |
|
|
$ | 735,175 |
|
Total operating expenses
|
|
$ | 8,706,239 |
|
|
$ | 4,751,450 |
|
|
|
|
|
|
|
|
|
|
Financing expenses
|
|
|
|
|
|
|
|
|
Interest Exp
|
|
$ | 10,560 |
|
|
$ | 16,880 |
|
Total Financing expenses
|
|
$ | 10,560 |
|
|
$ | 16,880 |
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$ | 8,716,799 |
|
|
$ | 4,768,330 |
|
|
|
|
|
|
|
|
|
|
Profit (Loss) before Income Tax
|
|
$ | 242,634 |
|
|
$ | 301,603 |
|
Provision for Income Tax
|
|
$ | - |
|
|
$ | - |
|
Net Profit (Loss)
|
|
$ | 242,634 |
|
|
$ | 301,603 |
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$ | 0.0003 |
|
|
$ | 0.0005 |
|
Basic and diluted
|
|
$ | 0.0003 |
|
|
$ | 0.0005 |
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
569,364,712 |
|
|
|
569,920,485 |
|
F-19 |
|
|
|
Pref Shares
|
|
|
Preference share capital
|
|
|
Common Shares
|
|
|
Equity
|
|
|
Surplus
(Deficit)
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance as on Dec. 31, 2016
|
|
|
0 |
|
|
$ | - |
|
|
|
297,389,288 |
|
|
$ | 87,573 |
|
|
$ | (53,935 | ) |
Triangular Merger
|
|
|
39,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ | 53,935 |
|
Shares Issued - Restricted
|
|
|
|
|
|
|
|
|
|
|
309,322,614 |
|
|
|
|
|
|
|
|
|
Shares Issued - Free
|
|
|
|
|
|
|
|
|
|
|
121,000,000 |
|
|
$ | 363,000 |
|
|
|
|
|
Shares Issued - Reserve
|
|
|
|
|
|
|
|
|
|
|
(157,791,417 | ) |
|
|
|
|
|
|
|
|
Net Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ | 301,603 |
|
Balance as on Dec. 31, 2017
|
|
|
39,839 |
|
|
$ | 400 |
|
|
|
569,920,485 |
|
|
$ | 450,573 |
|
|
$ | (2,279,739 | ) |
Shares Issued
|
|
|
|
|
|
|
|
|
|
|
215,444,227 |
|
|
$ | 2,718,467 |
|
|
|
|
|
Shares Cancelled
|
|
|
|
|
|
|
|
|
|
|
(216,000,000 | ) |
|
|
|
|
|
|
|
|
Net Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ | 242,634 |
|
Balance as of Dec. 31, 2018
|
|
|
39,839 |
|
|
$ | 400 |
|
|
|
569,364,712 |
|
|
$ | 3,169,040 |
|
|
$ | (2,037,105 | ) |
F-20 |
|
|
|
Year Ended
|
|
|
Year Ended
|
|
||
|
|
Dec. 31, 2018
|
|
|
Dec. 31, 2017
|
|
||
Operations
|
|
|
|
|
|
|
||
Net Income (Loss)
|
|
$ | 242,634 |
|
|
$ | 290,720 |
|
Adjustments to reconcile net income (loss)
|
|
|
|
|
|
|
|
|
Advances & Accounts Receivable
|
|
$ | (3,078,333 | ) |
|
$ | 1,483,264 |
|
Payable
|
|
$ | 198,841 |
|
|
$ | (63,629 | ) |
Total Adjustments to reconcile net income (loss)
|
|
$ | (2,879,492 | ) |
|
$ | 1,419,635 |
|
Net cash from the current year
operations
|
|
$ | (2,636,858 | ) |
|
$ | 1,710,355 |
|
Investing
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$ | 2,718,467 |
|
|
$ | (450,573 | ) |
Preferred A Stock
|
|
|
|
|
|
$ | (400 | ) |
Additional Capital
|
|
$ | (1,463,131 | ) |
|
$ | 675,814 |
|
Net cash provided by
investing
activities
|
|
$ | 1,255,336 |
|
|
$ | 224,841 |
|
Financing
|
|
|
|
|
|
|
|
|
Third Party Loan
|
|
$ | (206,974 | ) |
|
$ | (172,641 | ) |
Notes Payable
|
|
$ | 1,918,350 |
|
|
$ | (1,655,624 | ) |
Net cash provided by
financing
activities
|
|
$ | 1,711,376 |
|
|
$ | (1,828,265 | ) |
Net change in cash and cash equivalents
|
|
$ | 329,854 |
|
|
$ | 106,931 |
|
Cash and cash equivalents, beginning of period
|
|
$ | 254,571 |
|
|
$ | 147,640 |
|
Cash and cash equivalents, end of period
|
|
$ | 584,426 |
|
|
$ | 254,571 |
|
F-21 |
|
·
|
SND Auto Group, Inc. until 3-2017
|
|
·
|
PotNetwork Holdings, Inc. until 5-2016
|
|
·
|
United Treatment Centers, Inc. until 7-2015
|
|
·
|
Element Trading Holdings, Inc. until 3-2014
|
|
·
|
United Treatment Centers, Inc. until 10-2013
|
|
·
|
MyMedicalCD, Ltd. until 6-2008
|
|
·
|
Interactive Solutions Corp. until 11-2004
|
o
|
State of incorporation changed from Nevada to Wyoming in 11-2004
|
·
|
Araldica Wineries Ltd. until 2-2000
|
|
·
|
H P Capital Corp. until 9-1996
|
·
|
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.
|
|
·
|
PotNetwork Media Group, Inc., a Nevada corporation, the owner and operator of
www.Potnetwork.com
as a digital business magazine focusing on the cannabis industry, which was acquired under a stock purchase agreement.
|
|
·
|
Blockchain Crypto Technology, Corp., an inactive Colorado corporation.
|
|
·
|
Grinder Distribution, Inc., an inactive Florida corporation.
|
|
·
|
PNH Holdings, Inc., an inactive Colorado corporation
|
|
·
|
SND Auto Group, Inc., an inactive Colorado corporation
|
F-22 |
|
➢
|
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 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.
|
|
|
➢
|
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:
|
o
|
Receivables supervisor is authorized to collect delinquent accounts.
|
|
o
|
The Treasurer has the authority to assign accounts to a third party for collection.
|
|
o
|
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.
|
|
o
|
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.
|
|
o
|
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.
|
F-23 |
|
o
|
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.
|
|
o
|
Statements to Debtors: Statements must be issued to debtors, on a monthly basis, providing meaningful and concise information on the status of their debts.
|
|
o
|
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.
|
|
o
|
All actions taken to collect overdue accounts must be documented.
|
|
o
|
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.
|
|
o
|
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:
|
·
|
turned over to a private collection agency;
|
|
·
|
subject to legal action
|
|
·
|
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.
|
|
|
➢
|
INTANGIBLE ASSETS
|
o
|
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 noncash 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.
|
|
o
|
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.
|
·
|
ASC 350 requires capitalizing any money spent on product development and product improvement. During the current year, money spend on product development is very little and is not significant.
|
F-24 |
|
➢
|
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 are less observable and thus have the lowest priority.
|
➢
|
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, this Company signed convertible promissory notes for $1,200,000. The convertible note has the 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.
|
F-25 |
|
F-26 |
|
|
|
31st Dec
2018
|
|
|
31st Dec
2017
|
|
||
Deferred tax assets:
|
|
|
|
|
|
|
||
Net operating loss carryovers
|
|
$ | 2,037,105 |
|
|
$ | 2,279,739 |
|
Stock-based compensation
|
|
|
- |
|
|
|
- |
|
Other temporary differences
|
|
|
- |
|
|
|
- |
|
Total deferred tax assets
|
|
|
2,037,105 |
|
|
|
2,279,739 |
|
Valuation allowance
|
|
|
(2,037,105 | ) |
|
|
(2,279,739 | ) |
Net deferred tax asset
|
|
$ | - |
|
|
$ | - |
|
F-27 |
|
·
|
Objective:
To evaluate the adequacy and effectiveness of the internal control procedures taken by the Company to ensure the Company’s processes, governance structures and reporting regimes are in line with required accounting standards, laws and regulations.
|
|
|
||
·
|
Scope:
Identify the key risks2 and adequacy and effectiveness of controls designed to mitigate these risks.
|
|
|
||
·
|
Methodology
: Due to limited resources, the methodologies include interviewing the selected key personnel as well as checking the online eCommerce platform used by the Company.
|
|
|
||
·
|
Limitations:
No field work was performed during this internal audit; thus, no observation was made. No physical sampling was performed. Besides the records generated by online eCommerce platform, no vouching was performed
|
|
|
||
·
|
Conclusion:
The Company’s management team has a positive attitude towards enhancing internal control and ensuring the accuracy of financial statements, and the management team is open and has seriously dealt with the recommendations and suggestions. The Company uses the eCommerce platform for sales and distribution which has relatively low risk to be exposed to fraud and misconduct. Major decisions related to purchase and hiring are reviewed and approved by multiple levels of management.
|
·
|
Common Stock
: Authorized 1,500,000,000 shares, $.00001 par value; and 569,364,712 issued and outstanding as on the balance sheet date. Further, this Company is obligated to issue additional shares to the noteholders mentioned here below.
|
|
|
||
·
|
Class A preferred stock
: Authorized 50,000 shares, $.00001 par value; and 39,839 Issued and outstanding as on the balance sheet date. Designation details are in Document # 20181127754 filed with the Secretary of State, Colorado on February 13, 2018.
|
F-28 |
|
8%
|
8%
|
||||||||||||||||||||||||
Interest
|
Interest
|
||||||||||||||||||||||||
Loan
|
For 2017
|
For 2018
|
|||||||||||||||||||||||
A
|
9/11/2012
|
$
|
100,000
|
$
|
112,000
|
$
|
8,000
|
$
|
120,000
|
$
|
8,000
|
||||||||||||||
B
|
7/1/2016
|
$
|
25,000
|
$
|
26,000
|
$
|
2,000
|
$
|
28,000
|
$
|
2,000
|
$
|
30,000
|
||||||||||||
C
|
7/1/2016
|
$
|
7,000
|
$
|
7,280
|
$
|
560
|
$
|
7,840
|
$
|
560
|
$
|
8,400
|
||||||||||||
D
|
4/28/2016
|
$
|
42,000
|
$
|
44,240
|
$
|
3,360
|
$
|
47,600
|
||||||||||||||||
E
|
5/4/2016
|
$
|
37,000
|
$
|
38,974
|
$
|
2,960
|
$
|
41,934
|
||||||||||||||||
$
|
228,494
|
$
|
16,880
|
$
|
245,374
|
$
|
10,560
|
$
|
38,400
|
·
|
$1,400,000 was received on 10/31/2018
|
|
|
·
|
$825,000 was received on 12/18/2018 as partial funding of the second tranche of $1,375,000
|
|
|
·
|
$18,410 is the accrued interest for 2018
|
F-29 |
|
➢
|
Mammoth West Corporation [case# 17 CH 778, 19th Circuit Court of Lake County, IL] and Southridge Partners II Limited Partnership [case# 3:17-cv-01925, Connecticut] each filed a civil complaint about its convertible promissory note (each referred to as a Note ).
|
|
|
||
➢
|
In each instance, the Note was issued not by the Company, but by the Company’s predecessor issuer, SND Auto Company Inc. (which predecessor issuer had changed its name before changing it back to SND Auto Group, Inc.). The Note was issued by SND Auto Company Inc., on June 13, 2016 and on July 18, 2016, respectively, for money paid to SND Auto Company Inc., at a time in which SND Auto Company Inc. was the public company, operating in the automobile industry. However, on March 14, 2017, SND Auto Company Inc. formed the Company and engaged in a holding Company reorganization whereby the Company became the public entity while SND Auto Company Inc., became its subsidiary. The holding Company reorganization was an express condition of First Capital Venture Holdings Co., which is the parent company to Diamond CBD, Inc. being acquired by the Company and thereby entering the CBD oil business. The acquisition would not have occurred without the holding Company reorganization. Following this acquisition and the holding Company reorganization, and following the Company becoming the public entity, the stock price increased significantly. In other words, the CBD oil company stock price (the Company, i.e., PotNetwork Holdings, Inc.) was much greater than the stock price of the automobile company (SND Auto Company Inc.).
|
|
|
||
➢
|
The plaintiff invested in an automobile company, not in the CBD oil business. Yet, plaintiff wants to convert its Note issued by the automobile company into shares of the CBD oil Company, which was not the maker of the Note.
|
|
|
||
➢
|
As of December 31, 2017, SND Auto Company Inc., not the Company, owed Mammoth West Corporation $7,280 and Southridge Partners II Limited Partnership $26,000, on the Notes, which obligations were never disputed by SND Auto Company Inc. (which SND Auto Group, Inc. agreed to pay each, in full).
|
|
|
||
➢
|
The Company has maintained that these were not debts of the Company, and the holding Company reorganization was engaged in to assure as much, not to avoid payment, but instead, to isolate this debt from the new CBD oil business, SND Auto Company Inc. being a separate and distinct legal entity with its own assets and debts.
|
|
|
||
➢
|
However, on February 7, 2018, the Company and its predecessor issuer, SND Auto Company Inc., unwound the March 14, 2017 holding Company reorganization.
|
|
|
||
➢
|
Because of that unwinding, Company’s counsel agrees that the Company, the public entity, became liable for this SND Auto Group, Inc. Notes, but only as of the February 7, 2018 rewinding, not prior thereto.
|
F-30 |
|
➢
|
So, at this point, the dispute between the parties surrounds the conversion price.
|
|
|
||
➢
|
In each case, the terms of the Note entitle the plaintiff, as holder, to convert into shares of the maker’s common stock.
|
|
|
||
➢
|
On March 28, 2017 and on April 24, 2017, the conversion notice in each case was issued, not to SND Auto Group, Inc., the maker, but to the Company, for shares of the Company’s common stock.
|
|
|
||
➢
|
The terms of the Note entitle the plaintiff to payment in cash or in shares of the maker (SND Auto Group, Inc.), at a discount of 65% of the lowest trading price of the preceding 30 trading days.
|
|
|
||
➢
|
Instead, however, the plaintiff has throughout, sought to convert into shares of the Company, at a fraction of a penny per share, or approximately 2,700,000 shares in each instance (as opposed to approximately 56,000 shares in each instance),
of the Company
, based on
SND Auto Group, Inc
.
’s share price, when SND Auto Group, Inc. was the public Company, and prior to the Company even being in existence, let alone being public.
|
|
|
||
➢
|
It is the Company’s position that the Company only became obligated for the Note (which is the obligation of the maker, SND Auto Group, Inc.), upon the unwinding of the reorganization, or as of February 7, 2018, when the Company ’ s stock price was considerably higher (and therefore obligated to issue far fewer shares in satisfaction of the conversion notice) than it was prior to the holding Company reorganization and the acquisition of First Capital Venture Holdings Co.
|
|
|
||
➢
|
The Company intends to vigorously defend against this claim. The Company is confident in its position.
|
I.
|
Delay in Tax filing
: The Company has found it necessary to have filed Form 4506-T requesting a Transcript of Tax Returns. It has engaging a tax-practitioner to review prior filings, make any adjustments necessary, and file any missing reports.
|
|
|
||
II.
|
Paperless office
: This Company is committed to the concept of a paperless office. However, such an approach creates gaps in the audit trail, which necessitates the linking and tracing the documents manually. Again, the Company is exploring the use of third- party software as a solution that will meet future audit requirements.
|
|
|
||
III.
|
Agreements
for marketing activities: Booking the space for a trade show, reserving the space for advertisement in a magazine, etc. as part of marketing efforts, often happens without signed agreements.
|
F-31 |
|
IV.
|
Manuals and handbooks
: When the CBD business was started as a private business, well experienced professionals were involved in the day to day operations, which do not need specialized training or formal guidance. However, the Management is aware of the need for standard operating procedures to educate and train its growing general staff. Preparation of manuals and handbooks is in progress.
|
|
|
||
V.
|
Securing the product formulae with patent rights, trademarks
: The Company regards its product formulations as trade secrets. The company is taking steps to establish the proprietary rights, as a safeguard against the possible misuse by anyone else.
|
|
|
||
VI.
|
Drop Shipment as a fulfillment model:
By this arrangement, the Company chose not to store any inventory, but places manufacturing orders on demand. The Company holds weekly meetings with the manufacturer to make sure this practice works efficiently and effectively. Improving the collaboration with the manufacturer is the focus in all the discussions.
|
F-32 |
|
·
|
Since the Company relies on its manufacturer to produce products that meet specific requirements, quality control is necessary to ensure that the products would meet PotNetwork Holdings standards.
|
|
·
|
It is necessary for the Company to maintain good long-term relationship with its manufacturer to avoid the additional expenses when switching manufacturers.
|
|
·
|
Extra effect should be put on inventory management since the Company decided to not store any inventory of its products.
|
|
·
|
Quite a few employees are home-based or part-time, which makes human resource management more challenging.
|
F-33 |
|
·
|
By using the shipping app, the drop shipper is able to access the orders directly from the back end and ships within one business day. This ensures timely process of purchase and sales order, as well as avoids mistakes caused by manual process
|
|
|
||
·
|
Any misplacement of orders caused during distribution and processed by drop shippers which reduces the amount of follow-up that the Company needs to incur .
|
|
|
||
·
|
Reports will be created by the eCommerce system automatically at the end of the day.
|
|
|
||
·
|
Usage of eCommerce platforms ensures accuracy of orders and avoids careless mistake made by accountants.
|
|
|
||
·
|
Back orders are reviewed and followed up by a dispatcher immediately.
|
|
|
||
·
|
Marketing director leads a team of 5 assistants and 1 supervisor to reconcile the monthly settlements with the drop shipper.
|
|
|
||
·
|
A separate team assists the drop shipper with the UPS, FedEx and USPS accounts to smooth the whole process.
|
|
|
||
·
|
Weekly meetings are held among sales director, marketing director and supervisors. Detailed sales analysis are discussed and reviewed.
|
|
|
||
·
|
Every two weeks, the marketing director discusses the sales data with the CEO.
|
|
|
||
·
|
Production plan meetings are held with the manufacturer on a regular basis to ensure that despite having no inventory, the Company can fulfil customers order in time and sell quality products that meet customer’s expectations.
|
|
|
||
·
|
Customer complaints (very rare) are handled in time while marketing director will personally be involved.
|
F-34 |
|
·
|
Different level of approval which makes it almost impossible for an individual employee to make a fraudulent expense
|
|
·
|
Company runs reasonableness check of expenses,
|
|
·
|
Control on the usage of company credit card: only level 4 managers have access to company credit card
|
|
·
|
Timely process of the payments: most of the expenses are reported, reviewed and paid within a week, only 5% of the expenses take longer than a week to process
|
|
·
|
Monthly review to reconcile the amount paid out by the Company and the amount stated on the invoice
|
|
·
|
Tracking numbers are used to prove that all vendors are real and existing business
|
·
|
Payroll records are reviewed regularly, any abnormal increase/decrease in monthly salary expenses can be identified easily.
|
|
|
||
·
|
Request for new hires are reviewed by multiple people and approved by CEO.
|
F-35 |
|
F-36 |
|
38 |
|
SEC registration fee
|
|
$ | 1,297.33 |
|
Legal fees and expenses
|
|
$ | 15,000.00 |
|
Accounting fees and expenses
|
|
$ | 25,000.00 |
|
Miscellaneous
|
|
$ | 5,000.00 |
|
TOTAL
|
|
$ | 46,297.33 |
|
39 |
|
40 |
|
41 |
|
42 |
|
Exhibit No.
|
|
Description
|
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
23.3
|
|
Consent of Jonathan D. Leinwand, P.A.(included in Exhibit 5.1)
|
43 |
|
44 |
|
|
POTNETWORK HOLDINGS, INC.
|
||
|
|||
Date: February 19, 2020
|
By:
|
/s/ Kevin Hagen
|
|
|
Kevin Hagen
|
||
|
Chief Executive Officer
|
Signature
|
|
Title
|
|
Date
|
|
||||
/s/ Kevin Hagen
|
|
Chief Executive Officer
|
|
February 19, 2020
|
Kevin Hagen
|
|
(Principal Executive and Director)
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||
|
||||
/s/ Gary Blum
|
|
Director
|
|
February 19, 2020
|
Gary Blum
|
||||
|
||||
/s/ Murugan Venkat
|
|
Chief Financial Officer
|
|
February 19, 2020
|
Murugan Venkat
|
|
(Principal Accounting Officer)
|
45 |
1 Year Potnetwork (CE) Chart |
1 Month Potnetwork (CE) Chart |
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