Form 10-12G/A PotNetwork Holdings,



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 1

to

FORM 10

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 000-55969

 

POTNETWORK HOLDINGS, INC.

(Exact Name Of Registrant As Specified In Its Charter)

 

Colorado

 

31-0149818

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

 

3531 Griffin Road

Fort Lauderdale, FL

 

33312

(Address of Principal Executive Offices)

 

(ZIP Code)

 

Registrant’s Telephone Number, Including Area Code: (800) 433-0127

 

Securities to be registered under Section 12(b) of the Act: None

 

Securities to be registered under Section 12(g) of the Exchange Act:

 

Common stock; $0.00001 par value

(Title of Class)

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act) or a smaller reporting company.

 

Large accelerated filer

¨

Accelerated filer

¨

Non-Accelerated filer

¨

Smaller reporting company

x

 

Emerging Growth Company

x

 

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

 

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and are subject to reduced public company reporting requirements. See “Item 1. Business” and “Item 1A. Risk Factors”. We are an emerging growth company and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.”

 

 

EXPLANATORY NOTE

 

PotNetwork Holdings, Inc. is filing this General Form for Registration of Securities on Form 10 to voluntarily register our common stock, $.00001 par value (the “Common Stock”), pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

Once this registration statement is deemed effective, we will be subject to the requirements of Regulation 13A under the Exchange Act, which will require us to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and we will be required to comply with all other obligations of the Exchange Act applicable to issuers filing registration statements pursuant to Section 12(g) of the Exchange Act. Unless otherwise noted, references in this registration statement to ” PotNetwork Holdings, Inc.”, the “Company”, “we”, “our” or “us” means PotNetwork Holdings, Inc.

 

 

TABLE OF CONTENTS

 

 

 

Forward-Looking Statements

 

This Registration Statement contains forward-looking statements that reflect our current views about future events. We use the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “will,” “intend,” “may,” “plan,” “project,” “should,” “could,” “seek,” “designed,” “potential,” “forecast,” “target,” “objective,” “goal,” or the negatives of such terms or other similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under Item 1A. Risk Factors, and elsewhere in this Registration Statement.

 

 

PART I

 

ITEM 1. DESCRIPTION OF BUSINESS

 

PotNetwork Holdings, Inc., (the “Company” or the “Registrant”) was originally incorporated in Nevada in 1996 as H P Capital Corp. The Company redomiciled in Wyoming in 2004 and changed its name to My Medical CD, Ltd. From May 2016 to March 2017, the Company was known as SND Auto Group, Inc. On March 3, 2017, the Company redomiciled in Colorado, and changed its name to PotNetwork Holdings, Inc.

 

On January 30, 2017 the Company acquired via reverse triangular merger 100% of the ownership interest of the privately-held First Capital Venture Co., a Florida corporation. First Capital Venture Co. is the owner of Diamond CBD, Inc. selling numerous CBD Oil products at both wholesale and retail. Pursuant to the Share Exchange and Reorganization Agreement, the First Capital Venture Co. shareholders exchanged their shares which they held in First Capital Venture Holdings Co. for an aggregate total of 50,000 Class A preferred shares of the Company, wherein the shareholders would own 100% of this class of stock of the Company (the “Class A Preferred Shareholders”), which in the aggregate conferred voting control of the Company. First Capital Venture Co. became a wholly-owned subsidiary of the Company as result of the transaction.

 

Pursuant to a Stock Purchase Agreement dated June 8, 2017, the Company acquired all the capital stock of PotNetwork Media Group, Inc., a Nevada corporation (“PMG”), in exchange for 3,000,000 shares of the Company’s common stock issued to the shareholders of PMG, and the cancellation of a $50,000 promissory note between the Company and PMG. As a result, PMG became a wholly-owned subsidiary of the Company. PMG is the owner of the website www.potnetwork.com. Potnetwork.com is an informational website on the overall cannabis industry and does not market any products.

 

The Company has two (2) wholly-owned subsidiaries:

 

 

·

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.

 

Existing Products

 

The Company’s primary business is conducted through its subsidiary, First Capital Venture Co., whose subsidiary, Diamond CBD, Inc. (“Diamond CBD”) is engaged in the development and sales of hemp-derived CBD oil containing products. Hemp-derived CBD products have a wide range of potential health and wellness supporting applications.

 

Today, hemp-derived CBD oil containing products are increasingly being used to help reduce pain, soothe anxiety, improve mood, decrease the symptoms of inflammatory arthritis, support the immune system, balance metabolism, and aid sleep. Such products are sold as health enhancing supplements and are not subject to governmental regulation.

 

 

Hemp-derived CBD is distinguishable from CBD derived from marijuana. Hemp-derived CBD does not contain THC, the active ingredient in marijuana. Marijuana is regulated under the Controlled Substances Act. We do not believe that our hemp-derived CBD products are regulated under the Controlled Substances Act, but under the Agricultural Act of 2014, known as the “Farm Bill”, which provides for the domestic cultivation of “industrial hemp”, and begins with the clause “Notwithstanding the [Controlled Substances Act] . . .”, thus indicating that “industrial hemp” is not to be treated as a controlled substance.

 

Diamond CBD’s products are marketed under 15 brand names, including “Diamond CBD”, ‘Chill”, “Relax”, “MediPets” and the premium “Meds BioTech” label, as well as many others. In total, Diamond CBD offers over 800 products in variations by flavor, concentration and size that are sold over a nationwide distribution network of over 550 distributors and resellers that sell to thousands of brick-and-mortar retailers and online merchants. The overall product line, because of its size, is constantly in flux as new products are added and products are culled based on several factors including, but not limited to, consumer acceptance, inventory levels, and replacement as the result of incremental improvement.

 

While most of Diamond CBD’s products are geared to human health and wellness, its “MediPets” product line is a 100% natural and organic cannabinoid oil-based health and wellness solution for dogs and cats. Along with the company’s Pet CBD Food for small, medium, large dogs and cats, these products offer pet owners a new way to support their pet’s mood and wellness in a non-invasive, non-toxic way. The global pet care industry is expected to reach $110 billion in 2017, according to Euromonitor Research (The State Of Global Pet Care: Trends And Growth Opportunities, September 2017). Technavio, a leading market research firm, recently analyzed the global pet care industry and forecasted a CAGR of 5% between 2016-2020 (Global Pet Dietary Supplements Market 2018-2022, March 2018). According to that report, rising pet ownership combined with increased consumer spending on premium natural and organic pet care products are fundamental factors driving that growth.

 

Diamond CBD also offers for sale a majority of its products direct to consumers via its website, http://www.diamondcbd.com/.

 

Diamond DBD’s products are grouped in the following categories:

 

 

·

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)

 

Consumer markets served by Diamond CBD are extensive. In terms of geography, the products are sold wherever legal and the Company stipulates to its distribution channels that the products may only be sold to end-user persons eighteen years of age or older (See Item 1A “Risk Factors” for a further explanation of the laws regarding the sale of hemp-derived CBD products). Initially the Company focused distribution on market segments receptive to hemp-derived CBD products, such as vape shops and various countercultural focused retail outlets. Distribution was expanded greatly throughout 2017 as the result of investment in new products and channel marketing (e.g., product catalogues and sell sheets, trade show and conference attendance, channel specific sales force), resulting in a vast broadening of distribution footprint and accelerated market growth, market penetration and revenue generation. For example, with the addition of specialized product lines, such as Meds BioTech and MediPets, the Company has been able to enter into new market segments such as vitamin/supplement shops, fitness centers, wellness practitioners of various disciplines, pet supply stores, and veterinary channels.

 

 

The strategic intent of the marketing plan in 2017 and 2018, has been to create a defendable “marketing wall” around distribution channels and retail outlets to keep competition out. The Company has spent approximately $9,000,000 in sales and marketing in 2017 and in 2018 year-to-date. In parallel with distribution strategies, the Company has embraced various cause-related marketing initiatives in association with non-profit entities in order to position itself as socially conscious and concerned with overall health and fitness. Diamond CBD is engaged in select target market consumer awareness and brand preference campaigns, and is launching in the fourth quarter of 2018, two new national sales programs, one to sell its products to consumers in shopping malls, and one to sell its products directly to brick-and-mortar resellers in metro markets in Florida via a fleet of mobile sales vans stocked with displays and product for immediate placement.

 

New Product Pipeline and Scientific Advisory Board

 

In July 2017, Diamond CBD initiated the formation of its “Scientific Advisory Board” which as of the date of this report is comprised of over half a dozen physicians and research scientists representing a variety of practice disciplines. The Scientific Advisory Board is charged with exploring the health and wellness benefits of hemp-derived CBD oil, its uses, and potential new applications. Costs incurred by the Scientific Advisory Board are reimbursed to the individual members on a monthly basis as they occur.

 

Product Formulation and Production

 

Diamond CBD relies on its commercial suppliers and contract manufacturers for most of its product research and development, formulation, quality testing, production and packaging. These suppliers and manufacturers hold, if required, the necessary regulatory and other licenses/permits specific to each one’s activity. For certain categories of products, Diamond CBD outsources fulfillment as well. Any and all raw materials constituting active ingredients in its products are routinely tested by a third-party laboratory for purity and consistency of active ingredient concentration. The Company owns its own propriety formulas for all its products, which it regards as trade secrets (the Company does not own any patents nor has any pending), and continuously is engaged in both new product development and product incremental improvement with its suppliers. New product development and incremental improvement costs are absorbed by each respective supplier as part of their overhead in providing services to the Company. 

 

Sales Channels

 

In addition to selling its products directly to consumers from its website, Diamond CBD, and indirectly the Company, depends upon its network of distributors and resellers to represent its product in various markets. During 2017, the Company signed 550 distributors across the U.S. which distribute to thousands of points of retail distribution. No single distributor represents more than 10% of the Company’s aggregate sales volume. The Company is continuously evaluating the performance of its distributors and sales channels and periodically restructures or updates its agreements and methods of distribution. For the development of European sales, Diamond CBD has recently established a foreign distribution center in Watford, United Kingdom.

 

The Markets for Our Products

 

Market research firm, Brightfield Group, estimates that the CBD oil industry is growing at a rate of 55% year over year and projects that the U.S. domestic market for CBD oil products will total a minimum of $1 billion by 2020 (Forbes, August 23, 2017).

 

The growth of the market shows that hemp-derived CBD products are becoming “mainstream” as the health and wellness benefits of such products grow in consumer and medical and clinical practice acceptance.

 

Competition

 

Currently, in the United States, there are no businesses that can demonstrate or claim a dominant market share of the growing CBD products market. Competition, outside those companies that provide THC containing CBD in states where that is allowed under state law, is limited to numerous small and mid-size health supplement brands and related general health and fitness brands. Overall, there are no major pharmaceutical manufacturing companies marketing into this market at this time, although the Company is expecting such an entry in the future. Competition also includes many small regional marketers/packagers of CBD oil containing products that have limited distribution and economic resources.

 

 

Employees

 

The Company has 13 full-time employees.

 

Patents and Trademarks

 

The Company holds trademark, “PotNetwork”, under U.S. registration number 86860539, registered on January 31, 2017, and expiring on January 31, 2027. It is used by the Company in its own branding and that of its website, PotNetwork.com.

 

The Company holds no patents, nor at this time, has any patent pending.

 

Government Regulation

 

The Company is not subject to any material government regulation specific to its business. While the Company is not currently subject to such regulation, it may be subject to regulation in the future as further set forth in Item A. Risk Factors, set forth below.

 

ITEM 1A. RISK FACTORS

 

An investment in our common stock involves a high degree of risk. An investor should carefully consider the following risk factors and the other information in this registration statement before investing in our common stock. Our business and results of operations could be seriously harmed by any of the following risks.

 

We may become subject to regulation by the Food and Drug Administration (FDA)

 

The FDA under the Federal Food, Drug, and Cosmetic Act regulates the formulation, manufacturing, packaging, labeling, distribution and sale of drugs, food, including dietary supplements, and over-the-counter drugs. We believe our hemp-derived CBD containing products are dietary supplements, not drugs. We have not obtained and do not plan to obtain FDA approval for our existing hemp-derived CBD containing products. As a result, we could be subject to enforcement proceedings by the FDA against our existing product line should the FDA decide that hemp-derived CBD products are subject to regulation.

 

We have a limited operating history and operate in a new industry, and we may not succeed.

 

The consumer products business is a highly competitive and risky business, and such competition from companies much bigger than us could adversely affect our operating results.

 

We compete with many national, regional and local businesses. We could experience increased competition from existing or new companies in our channel, which could create increasing pressures to grow ours. If we are unable to maintain our competitive position, we could experience downward pressure on prices, lower demand for our products, reduced margins, the inability to take advantage of new business opportunities and the loss of channel share, which would have an adverse effect on our operating results. Other factors that could affect our business are:

 

 

·

Consumer tastes

 

·

National, regional or local economic conditions

 

·

Disposable purchasing power

 

·

Demographic trends; and

 

·

The price of special ingredients that go into our products.

 

 

Increases in the cost of ingredients, labor and other costs could adversely affect our operating results.

 

Our principal products contain hemp-derived CBD oil. Increases in the cost of ingredients in our products could have a material adverse effect on our operating results. Significant price increases, market conditions, weather, acts of God and other disasters could materially affect our operating results. An increase in our operating costs could adversely affect our profitability. Factors such as inflation, increased labor and employee benefit costs and increased energy costs may adversely affect our operating costs. Many of the factors affecting costs are beyond our control and we may not be able to pass along these increased costs to our customers.

 

We do not have long-term contracts with many of our suppliers, and as a result they could seek to increase prices or fail to deliver.

 

We typically do not rely on written contracts or long-term arrangements with our suppliers. Although we have not experienced significant problems with our suppliers, our suppliers may implement significant price increases or may not meet our requirements in a timely fashion, if at all. The occurrence of any of the foregoing could have a material adverse effect on our operating results.

 

Any prolonged disruption in the operations of any of our packaging facilities could harm our business.

 

Any prolonged disruption in the operations of any facilities that perform our packaging, whether due to technical or labor difficulties, destruction or damage to the facility, real estate issues or other reasons, could result in increased costs and reduced revenues and our profitability and business results could be harmed.

 

Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.

 

Our ability to successfully grow our brand depends on our ability to attract and retain professionals with talent, integrity, enthusiasm and loyalty to our corporate team. If we are unable to attract or retain key personnel, our profitability and growth potential could be harmed.

 

We may not be able to adequately protect our intellectual property, which could harm the value of our brand and branded products and adversely affect our business.

 

We depend in large part on our brand and branded products as well as on our proprietary processes and believe that they are very important to our business. We rely on a combination of trademarks, copyrights, trade secrets and similar intellectual property rights to protect our brand and branded products. The success of our business depends on our continued ability to use our existing trademarks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We have registered, or will register, certain trademarks in the United States and may elsewhere. We may not be able to adequately protect our trademarks and our use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. We may from time to time be required to institute litigation to enforce our trademarks or other intellectual property rights, or to protect our trade secrets. Such litigation could result in substantial costs and diversion of resources and could negatively affect our sales, profitability and business results regardless of whether we are able to successfully enforce our rights.

 

Our annual and quarterly financial results are subject to significant fluctuations depending on various factors, many of which are beyond our control, which could adversely affect our ability to satisfy our debt obligations as they become due.

 

Our sales and operating results can vary significantly from quarter to quarter and year to year depending on various factors, many of which are beyond our control. These factors include:

 

 

·

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

 

 

Consequently, our results of operations may decline quickly and significantly in response to changes in order patterns or rapid decreases in demand for our products. We anticipate that fluctuations in operating results will continue in the future. The Company’s operating results may vary. We may incur net losses. The Company expects to experience variability in its revenues and net profit. While we intend to implement our business plan to the fullest extent we can, we may experience net losses. Factors expected to contribute to this variability include, among other things:

 

 

·

The general economy

 

·

The regulatory environment pertaining to our products

 

·

Climate, seasonality and environmental factors

 

·

Consumer demand

 

·

Transportation costs

 

·

Competition in products

 

You should further consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages. For example, unanticipated expenses, problems, and technical difficulties may occur and they may result in material delays in the operation of our business, in particular with respect to our new products. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment.

 

We may require additional capital to finance our operations in the future, but that capital may not be available when it is needed and could be dilutive to existing stockholders.

 

We may require additional capital for future operations. We plan to finance anticipated ongoing expenses and capital requirements with funds generated from the following sources:

 

 

·

Cash provided by operating activities

 

·

Available cash and cash investments

 

·

Capital raised through debt and equity offerings

 

Current conditions in the capital markets are such that traditional sources of capital may not be available to us when needed or may be available only on unfavorable terms. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control. Accordingly, we cannot assure you that we will be able to successfully raise additional capital at all or on terms that are acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our liquidity, financial condition, results of operations and prospects. Further, if we raise capital by issuing stock, the holdings of our existing stockholders will be diluted.

 

If we raise capital by issuing debt securities, such debt securities would rank senior to our common stock upon our bankruptcy or liquidation. In addition, we may raise capital by issuing equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, which may adversely affect the market price of our common stock. Finally, upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both.

 

Our stock price has been extremely volatile, and our common stock is not listed on a national stock exchange; as a result, stockholders may not be able to resell their shares at or above the price paid for them.

 

The market price of our common stock as has been historically volatile and could be subject to significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects, among other factors. Further, our common stock is not listed on a national stock exchange; we intend to list the common stock on a national stock exchange once we meet the entry criteria. An active public market for our common stock currently exists on the OTC Markets (www.otcmarkets.com) but may not be sustained. Therefore, stockholders may not be able to sell their shares at or above the price they paid for them.

 

 

Among the factors that could affect our stock price are:

 

 

·

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

 

Sales by our stockholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.

 

A substantial portion of our total outstanding shares of common stock may be sold into the market at any time, or a substantial portion of our total outstanding shares of preferred stock may be converted to common stock and sold into the market at any time. Some of these shares are owned by the management of the Company, and we believe that such holders have no current intention to either convert their preferred stock into common stock or to sell a significant number of shares of their common stock into the market. If all of the major stockholders were to decide to sell large amounts of stock over a short period of time such sales could cause the market price of our common stock to drop significantly, even if our business is performing well.

 

Our financial statements may not be comparable to those of other companies.

 

Pursuant to Section 107(b) of the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of The JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates, and our stockholders and potential investors may have difficulty in analyzing our operating results if comparing us to such companies.

 

The success of our new and existing products and services is uncertain.

 

We have committed, and expect to continue to commit, significant resources and capital to develop and market existing product enhancements and new products. We cannot assure you that we will achieve market acceptance for all of our products, or of new products that we may offer in the future. Moreover, these new products may be subject to significant competition with offerings by new and existing competitors. In addition, new products and enhancements may pose a variety of challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products or enhancements could seriously harm our business, financial condition and results of operations.

 

 

Our business is dependent upon continued market acceptance by consumers.

 

We are substantially dependent on continued market acceptance of our products by consumers. Although we believe that our products in the United States are gaining increasing consumer acceptance, we cannot predict that this trend will continue in the future.

 

As we expand our operations, we may be unable to successfully manage our future growth.

 

Since inception, our business has grown. This growth has placed substantial strain on our management, operational, financial and other resources. If we are able to continue expanding our operations in the United States and in other countries where we believe our products will be successful, as planned, we may experience periods of rapid growth, which will require additional resources. Any such growth could place increased strain on our management, operational, financial and other resources, and we will need to train, motivate, and manage employees, as well as attract management, sales, finance and accounting, international, technical, and other professionals. In addition, we will need to expand the scope of our infrastructure and our physical resources. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of operations.

 

Any future litigation could have a material adverse impact on our results of operations, financial condition and liquidity, particularly since we do not currently have director and officer (“D&O”) insurance. Our lack of insurance may also make it difficult for us to retain and attract talented and skilled directors and officers. While we intend to apply for D&O insurance, we cannot guarantee that such application will be accepted.

 

Despite our significant efforts in product quality control, we face risks of litigation from customers and others in the ordinary course of business, which may divert our financial and management resources. Any adverse litigation or publicity may negatively impact our financial condition and results of operations.

 

Claims of illness or injury relating to product quality or handling are common in the consumer products industry. While we believe our processes and high standards of quality control will minimize these instances, there is always a risk of occurrence, and so despite our best efforts to regulate quality control, litigation may occur. In that event, our financial condition, operating results and cash flows could be harmed.

 

From time to time we may be subject to litigation, including potential stockholder derivative actions. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. To date we have no directors and officers liability (“D&O”) insurance to cover such risk exposure for our directors and officers. Such insurance generally pays the expenses (including amounts paid to plaintiffs, fines, and expenses including attorneys’ fees) of officers and directors who are the subject of a lawsuit as a result of their service to the Company. While we intend to attempt to obtain such insurance, there can be no assurance that we will be able to do so at reasonable rates or at all, or in amounts adequate to cover such expenses should such a lawsuit occur. While neither Colorado law nor our articles of incorporation or bylaws require us to indemnify or advance expenses to our officers and directors involved in such a legal action, we expect that we would do so to the extent permitted by Colorado law. Without D&O insurance, the amounts we would pay to indemnify our officers and directors should they be subject to legal action based on their service to the Company could have a material adverse effect on our financial condition, results of operations and liquidity. Further, our lack of D&O insurance may make it difficult for us to retain and attract talented and skilled directors and officers, which could adversely affect our business.

 

Our prior operating results may not be indicative of our future results.

 

You should not consider prior operating results with respect to revenues, net income or any other measure to be indicative of our future operating results. The timing and amount of future revenues will depend almost entirely on our ability to sell our products to new customers. Our future operating results will depend upon many other factors, including:

 

 

·

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.

 

 

Our current Board of Directors consists of only one person

 

Gary Blum is our sole director.

 

We do not have any outside Board Directors which could create a conflict of interests and pose a risk from a corporate governance perspective.

 

Our Board of Directors consists of only one director, which means that we have no outside or independent directors. The lack of independent directors may prevent the Board from being independent from management in its judgments and decisions and its ability to pursue the Board responsibilities without undue influence. For example, an independent Board can serve as a check on management, which can limit management taking unnecessary risks. Furthermore, the lack of independent directors creates the potential for conflicts between management and the diligent independent decision-making process of the Board. Furthermore, our lack of outside directors deprives our company of the benefits of various viewpoints and experience when confronting the challenges we face. With no independent director sitting on the Board of Directors, it will be difficult for the Board to fulfill its traditional role as overseeing management.

 

Requirements associated with being a reporting public company will require significant company resources and management attention.

 

We have filed a Form 10 registration statement with the U.S. Securities and Exchange Commission (“SEC”). Once the Form 10 becomes effective, we will be subject to the reporting requirements of the Exchange Act and the other rules and regulations of the SEC relating to public companies. We are working with independent legal, accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as an SEC reporting company. These areas include corporate governance, internal control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas, including our internal control over financial reporting. However, we cannot provide assurances that these and other measures we may take will be sufficient to allow us to satisfy our obligations as an SEC reporting company on a timely basis.

 

In addition, compliance with reporting and other requirements applicable to SEC reporting companies will create additional costs for the Company and will require the time and attention of management and may require the hiring of additional personnel and legal, audit and other professionals. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the impact that our management’s attention to these matters will have on our business.

 

Our preferred shareholders have voting control.

 

As of March 3, 2017, the holders of our Series A Preferred Stock have voting control over the Company. As a result, they have the ability to control substantially all matters submitted to our stockholders for approval including:

 

 

·

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.

 

 

Our preferred stock may have rights senior to those of our common stock which could adversely affect holders of common stock.

 

Our articles of incorporation give our Board of Directors the authority to issue additional series of preferred stock without a vote or action by our stockholders. The Board also has the authority to determine the terms of preferred stock, including price, preferences and voting rights. The rights granted to holders of preferred stock in the future may adversely affect the rights of holders of our common stock. Any such authorized class of preferred stock may have a liquidation preference – a pre-set distribution in the event of a liquidation – that would reduce the amount available for distribution to holders of common stock or superior dividend rights that would reduce the amount of dividends that could be distributed to common stockholders. In addition, an authorized class of preferred stock may have voting rights that are superior to the voting right of the holders of our common stock.

 

We are an emerging growth company and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

 

We are an emerging growth company, as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies, but not to emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements, although some of these exemptions are available to us as a smaller reporting company (i.e. a company with less than $75 million of its voting equity held by affiliates). We have elected to adopt these reduced disclosure requirements. We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We do not expect to pay any cash dividends in the foreseeable future.

 

We intend to retain our future earnings, if any, in order to reinvest in the development and growth of our business and, therefore, do not intend to pay dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, and such other factors as our board of directors deems relevant. Accordingly, investors may need to sell their shares of our common stock to realize a return on their investment, and they may not be able to sell such shares at or above the price paid for them.

 

We can sell additional shares of common stock without consulting stockholders and without offering shares to existing stockholders, which would result in dilution of existing stockholders’ interests in the Company and could depress our stock price.

 

Our Articles of Incorporation authorize 1,000,000,000 shares of common stock, of which 448,921,254 were outstanding as of June 30, 2018 and 468,461,690 are outstanding on October 11, 2018; 50,000 shares of series A preferred stock, of which 45,151 shares were outstanding as of June 30, 2018, and 39,839 are outstanding on October 11, 2018. Moreover, our Board of Directors is authorized to issue additional shares of our common stock and preferred stock. Although our Board of Directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of our common stock or preferred stock convertible into common stock would cause immediate, and potentially substantial, dilution to our existing stockholders, which could also have a material effect on the market value of the shares.

 

 

Because we will be subject to “penny stock” rules, the level of trading activity in our stock may be reduced.

 

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges). The penny stock rules require a broker-dealer to deliver to its customers a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market prior to carrying out a transaction in a penny stock not otherwise exempt from the rules. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules.

 

Financial Industry Regulatory Authority (FINRA) sales practice requirements may also limit your ability to buy and sell our stock, which could depress our share price.

 

FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares, depressing our share price.

 

ITEM 2. FINANCIAL INFORMATION

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND PLAN OF OPERATION

 

The following Management’s Discussion and Analysis of Financial Condition and Plan of Operations (“MD&A”) is intended to help you understand our historical results of operations during the periods presented and our financial condition. This MD&A should be read in conjunction with our consolidated financial statements and the accompanying notes to consolidated financial statements and contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

 

PotNetwork Holdings, Inc., (the “Company” or the “Registrant”) was originally incorporated in Nevada in 1996 as H P Capital Corp. The Company redomiciled in Wyoming in 2004 and changed its name to My Medical CD, Ltd. In 2017, the Company redomiciled in Colorado, and changed its name to PotNetwork Holdings, Inc. The Company’s primary operational business is conducted through its subsidiary, First Capital Venture Co., whose subsidiary, Diamond CBD, Inc. (“Diamond CBD”) is engaged in the development and sales of hemp-derived CBD oil containing products. Hemp-derived CBD products have a wide range of potential health and wellness supporting applications which have been increasingly validated by leading medical organizations.

 

Results of Operations during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017

 

During the nine months ended September 30, 2018 and September 30, 2017, we generated revenues of $17,967,189 and $9,522,425, respectively, a 89% increase year over year. The increase is attributable to increased marketing expenditures and an increase in sales personnel. Sales and marketing expenses increased from $2,293,003 for the nine months ended September 30, 2017 to $6,613,279 for the nine months ended September 30, 2018, an increase of 188%. General and administrative expenses rose from $575,854 to $709,887 during the same period for an increase of 23%.

 

Our Net Profit for the nine months ended September 30, 2018 and September 30, 2017 decreased from $663,234 to $370,094, a decrease of 44%, as a substantial portion of gross profit was reinvested into sales and marketing.

 

 

Results of Operations during the year ended December 31, 2017 as compared to the year ended December 31, 2016

 

For the fiscal years ended December 31, 2017 and 2016 the Company had revenues of $14,388,204 and $2,810,942, an increase of 412%. The increase is attributable to increased marketing expenditures and an increase in sales personnel.

 

Selling, general and administrative expense increased to $4,751,451 from $1,071,188 for the years ended December 31, 2017 and 2016, respectively.

 

Net income increased to $290,720 for the year ended December 31, 2017 from $96,185for the year ended December 31, 2016.

 

Liquidity and Capital Resources

 

As of September 30, 2018, we had $3,205,860 in total assets including cash and cash equivalents of $248,397 and $1,220,864 in accounts receivable. As of December 31, 2017, we had $1,811,342 in total assets including cash and cash equivalents of $254,571 and $313,581 in accounts receivable.

 

As of September 30, 2018, we had total liabilities of $1,831,454 consisting of accounts payable of $192,916, notes payable of $1,430,624 and an amount due a third party of $207,914. As of December 31, 2017, we had total liabilities of $2,171,978 including accounts payable of $270,980 and notes payable of $1,655,624.

 

As of December 31, 2017, we had $1,806,342 in total assets including of cash and cash equivalents of $254,571 and $313,581 in accounts receivable compared to total assets of $226,249 consisting of $78,508 in accounts receivable and $147,741 in cash and cash equivalents as at December 31, 2016. The increase is attributable to an increase in cash and cash equivalents, an increase in accounts receivable and an increase in prepaid expenses.

 

Cash Flow from Operating Activities

 

Net cash from operations for the nine months ended September 30, 2018 was ($1,213,299) as compared to $576,780 for the nine months ended September 30, 2017.

 

Net cash from operations for the year ended December 31, 2017 was ($117,911) as compared to $96,409 for the year ended 2016.

 

Cash Flow from Investing Activities

 

Net cash provided by investing activities for the ninemonths ended September 30, 2018 was $1,207,126 as compared to $0 for the nine months ended September 30, 2017.

 

Net cash provided by investing activities for the years ended December 31, 2017 and December 31, 2016 was $224,841 and $0 respectively.

 

Cash Flow from Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2018 was $0 as compared to $0 for the nine months ended September 30, 2017.

 

Net cash provided by financing activities for the years ended December 31, 2017 and December 31, 2016 was $0 and $0.

 

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies and Estimates

 

This discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared under accounting principle generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

A summary of significant accounting policies is included in Note 2 to the consolidated financial statements included in this Registration Statement. Of these policies, we believe that the following items are the most critical in preparing our financial statements.

 

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

 

 

·

Sales are recognized when the sale proceeds are credited to the bank account during the year.

 

·

At each year end, the sales invoices are reviewed and based on the subsequent receipt of payments and are accounted as sales to comply with the matching principle of considering the expenses and revenues of the same year. Such book entries are reversed in the following year.

 

·

For online sales, merchandise is not shipped unless and until the customer pays for it.

 

·

For orders received over the phone, the merchandise will not ship unless and until the customer pays for it.

 

·

Sales on credit terms are exceptional and requires the customer to establish the credit.

 

·

Revenue transactions represent the actual merchandise shipped to the customers as drop shipments.

 

·

The revenue recorded in the books are net of sales and other taxes collected on behalf of governmental authorities.

 

·

The revenue includes shipping and handling costs which are generally included in the sale invoices.

 

·

Revenue is recognized when the title, ownership and risk of loss transfers, which is usually on the date of shipment.

 

·

Provision for discounts, when applicable, are stated in the sales invoice and used to determine the net of sales for each such invoice.

 

·

Returns are accounted as a reduction of sales when the returns are authorized.

 

 

o

 The customers enjoy free returns of unopened items within 15 days of purchase.

 

o

Free return labels are provided, meaning that the Company pays for the shipping cost for the returns by the customers.

 

o

The customers can easily initiate the returns online in the Company website.

 

o

Experienced professional staff reviews the selling price on an ongoing basis.

 

o

Exceptions are reviewed and approved by the manager.

 

o

Sales return are insignificant and hence no reserves are provided.

 

 

·

Trade promotions such as sale prices, coupons, etc. are offered to the customers on various occasions as part of marketing and sales promotion. In all such cases, sales are recorded net of trade promotions, which is generally incurred at the time of sale. Most of the arrangements are for a year or less. Expected payouts are not estimated and hence accounted as and when incurred.

 

·

Most of the sales are charged to the customers’ credit cards. Though there is a delay of 10 business days to receive the credit to the Company’s bank account, the sales are accounted as revenue based on the charge to the customers’ credit card but recorded as receivable. Also, the Company is subjected to 10% reserve for 90 days.

 

 

CASH AND CASH EQUIVALENTS: Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition.

 

PROPERTY AND EQUIPMENT: Property and equipment are stated at the written-down value [that is, after deducting depreciation from the cost]. The Company adapted the depreciation rates as provided in the 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.

 

Most Recent accounting pronouncements

 

Refer to Note 2 in the accompanying consolidated financial statements.

 

Impact of Most Recent Accounting Pronouncements

 

There were no recent accounting pronouncements that have had a material effect on the Company’s financial position or results of operations.

 

ITEM 3. PROPERTIES

 

We maintain our offices at 3531 Griffin Road, Fort Lauderdale, FL 33312. The space is provided to the Company at no cost by Kevin Hagen, the president of our wholly owned subsidiary First Capital Venture Co.

 

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

As of November 16, 2018, we had 544,481,378 common shares outstanding. The following table sets forth certain information regarding our shares of common stock beneficially owned as of November 16, 2018, for (i) each stockholder known to be the beneficial owner of five percent (5%) or more of our outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within sixty (60) days through an exercise of stock options or warrants or otherwise. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.

 

 

For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within sixty (60) days of the date of this Annual Report. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within sixty (60) days of the Closing Date is deemed to be outstanding but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.

 

AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP

Common Stock

 

Direct

 

 

Indirect

 

 

Total

 

 

Percentage of Class (Rounded)

 

Name and Address of Beneficial Owner (1)

 

 

 

 

 

 

 

 

 

 

 

 

Executive Officers and Directors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gary Blum

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

Kevin Hagen

 

 

27,750,000

 

 

 

-0-

 

 

 

27,750,000

 

 

 

5.97

 

Officers and Directors as a Group

 

 

27,750,000

 

 

 

-0-

 

 

 

27,750,000

 

 

 

5.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other 5% Holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Elinor Taieb

 

 

27,750,000

 

 

 

-0-

 

 

 

27,750,000

 

 

 

5.97

 

 

Class A Preferred Stock (2)

 

Direct

 

 

Indirect

 

 

Total

 

 

Percentage of Class (Rounded)

 

Kevin Hagen

 

 

20,742

 

 

 

-0-

 

 

 

20,742

 

 

 

52.06

 

Elinor Taieb

 

 

19,097

 

 

 

-0-

 

 

 

19.097

 

 

 

47.94

 

_____________

(1)

The address of each officer is 3531 Griffin Road, Fort Lauderdale, FL 33312

 

(2)

Each share of Class A preferred stock is convertible into 0.0018% of the total number of outstanding shares of common stock at the time of conversion. Class A Preferred Stock shall be entitled to a number of votes equal to the sum obtained by using the following quotient:

 

 

(x) the sum of all outstanding shares of common stock, plus the sum of the number of votes of all other outstanding shares of stock, including any preferred stock that may be outstanding, plus the sum of the votes of all other financial instruments outstanding which may be entitled to vote on any such matter, divided by (y) 0.9.

 

ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS; KEY EMPLOYEES

 

Our directors hold office until the next annual general meeting of the stockholders or until their successors are elected and qualified. Our officers are appointed by our Board of Directors and hold office until the earlier of their death, retirement, resignation, or removal.

 

The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each.

 

Name

 

Age

 

Title

 

 

 

 

 

Gary Blum

 

77

 

Director

 

 

 

 

 

Kevin Hagen

 

49

 

CEO

 

Gary L. Blum, 77, has been the Chairman of PotNetwork Holdings, Inc. since November 2015 and was its Chief Executive Officer from November 2015 until September 2017. Mr. Blum is also a practicing attorney since 1979 with the Law Offices of Gary L. Blum where his focus is advising a variety of closely held private companies as well as public companies in business, corporate, securities and entertainment law. Mr. Blum has served as a director of Rennova Health, Inc. since October 2017, and, from September 2009 until July 2017, served as the Chairman and CEO of Thunderclap Entertainment, Inc. (now TraqIQ, Inc.). Mr. Blum received his B.S., Magna Cum Laude, in Mathematics from Loras College in 1962; M.A. in Philosophy from the University of Notre Dame in 1966; and his J.D. and M.B.A. degrees from the University of Southern California Gould School of Law and Marshall School of Business, respectively, in 1978. He has been a member of the California State Bar since 1979.

 

Kevin Hagen, 49 has been the Chief Executive Officer of PotNetwork Holdings, Inc. since October 25, 2018, and previously since its inception has been the President of First Capital Venture Co., the parent of Diamond CBD, Inc. Mr. Hagen is a practicing attorney with Hagen & Hagen Law Firm with over 22 years of experience. He is also a member of the Florida Bar Association. He completed his BS from University of Florida and JD from Nova Southeastern University.

 

 

Significant Employees

 

Kevin Hagen is the president of First Capital Venture Co., a subsidiary of the Company that is responsible for the majority of the Company’s sales. Mr. Hagen graduated with honors from the University of Florida and attended law school at Nova Southeastern University. After admission to the Florida Bar, Mr. Hagen served on several bar committees including Law School Liaison and Consumer Protection Law. Among his legal certifications, Mr. Hagen is admitted to practice in the United States Supreme Court, United States District Court for the Southern and Middle Districts of Florida and the United States Court of Appeals for the Eleventh Circuit.

 

Family Relationships

 

There are no familial relationships among any of our officers or directors. None of our directors or officers is a director in any other reporting companies except as disclosed. The Company is not aware of any proceedings to which any of the Company‚ officers or directors, or any associate of any such officer or director, is a party adverse to the Company or any of the Company subsidiaries or has a material interest adverse to it or any of its subsidiaries.

 

ITEM 6. EXECUTIVE COMPENSATION.

 

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our chief executive officer for services rendered in all capacities for the periods set forth below.

 

2017 Summary Compensation Table

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonqualified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Equity

 

 

Deferred

 

 

 

 

 

 

 

Name and

 

 

 

 

 

 

 

 

 

Stock

 

 

Option

 

 

Incentive Plan

 

 

Compensation

 

 

All Other

 

 

 

 

Principal

 

 

 

 

 

 

Bonus

 

 

Awards

 

 

Awards

 

 

Compensation

 

 

Earnings

 

 

Compensation

 

 

Total

 

Position

 

Year

 

Salary

 

 

($)

 

 

($)

 

 

($)

 

 

($)

 

 

($)

 

 

($)

 

 

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Richard Goulding

 

2017

 

 

16,000 (2)

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

16,000 (2)

Former CEO(1)

 

2016

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gary Blum

 

2017

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

Director

 

2016

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

___________

(1)

Richard Goulding, M.D., resigned as CEO on 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.

 

Employment Agreements

 

The Company entered into an employment agreement with Richard Goulding, M.D., prior CEO, on July 9, 2018 retroactive to September 5, 2017, for a period of one year. He was not engaged by the Company prior to that date. Under the terms of the agreement, Dr. Goulding received a base salary, received an initial common stock grant and common stock options. The agreement has expired and was not renewed.

 

The Company does not have any employment agreements with any of our officers and directors, all of whom have performed services on our behalf for no compensation, including Kevin Hagen, Esq. CEO.

 

 

Compensation of Directors

 

Our board of directors has not received any compensation to date.

 

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Related Party Transactions

 

We maintain our offices at 3531 Griffin Road, Fort Lauderdale, FL 33312. The space is provided to the Company at no cost by Kevin Hagen, the president of our wholly owned subsidiary First Capital Venture Co.

 

ITEM 8. LEGAL PROCEEDINGS.

 

The Company is involved in the following legal proceedings:

 

Mammoth West Corporation v PotNetwork Holdings Inc., Case No. 17 CH 778, 19th Circuit Court of Lake County, IL. Mammoth West is suing the Company based upon a convertible promissory note. The Company is contesting the validity of the request for conversion of shares pursuant to the Note.

 

Southridge Partners II Limited Partnership vs. SND Auto Group, Inc., Case No. 3:17-cv-01925 US District Court for the District of Connecticut. Southridge is suing the Company based upon a convertible promissory note. The Company is contesting the validity of the request for conversion of shares pursuant to the Note.

 

J.P. Carey Limited Partners, L.P. v. PotNetwork Holdings, Inc., Case No.3:18-CV-00873-WWE, US District Court for the District of Connecticut. J.P. Carey is suing the Company based upon a convertible promissory note. The Company is contesting the validity of the request for conversion of shares pursuant to the Note.

 

The Company is vigorously defending each of these actions.

 

ITEM 9. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTER

 

Market Information

 

Our common stock is quoted on the OTC Pink Sheets Market, an alternative trading system, under the symbol POTN. For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. The below prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

 

 

 

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

 

 

 

As of September 30, 2018, there were approximately 2,285 holders of record of our common stock.

 

Dividends. We have never declared or paid any cash dividends on our common stock nor do we anticipate paying any in the foreseeable future. We expect to retain any future earnings to finance our operations and expansion. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our earnings levels, capital requirements, any restrictive loan covenants and other factors the Board considers relevant.

 

Equity Compensation Plans. We do not have any equity compensation plans.

 

Penny Stock Considerations

 

Our shares will be “penny stocks,” as that term is generally defined in the Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00. Thus, our shares will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.

 

Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer must make a special suitability determination regarding the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt.

 

In addition, under the penny stock regulations, the broker-dealer is required to:

 

 

·

Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt;

 

 

·

Disclose commissions payable to the broker-dealer and our registered representatives and current bid and offer quotations for the securities;

 

 

·

Send monthly statements disclosing recent price information pertaining to the penny stock held in a customer’s account, the account’s value, and information regarding the limited market in penny stocks; and

 

 

·

Make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction, prior to conducting any penny stock transaction in the customer’s account.

 

Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, if our securities become publicly traded. In addition, the liquidity for our securities may be decreased, with a corresponding decrease in the price of our securities.

 

Our shares are subject to such penny stock rules and our shareholders will, in all likelihood, find it difficult to sell their securities.

 

ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES

 

On January 30, 2017 the Company acquired via reverse triangular merger 100% of the ownership interest of the privately-held First Capital Venture Co., a Florida corporation. First Capital Venture Co. is the owner of Diamond CBD, Inc., which sells numerous CBD oil products at both wholesale and retail. Pursuant to a Share Exchange and Reorganization Agreement, the First Capital shareholders exchanged their shares which they held in First Capital Venture Co. for an aggregate total of 50,000 Class A Preferred shares in the Company, wherein the shareholders would own 100% of this class of stock of the Company (the “Class A Preferred Shareholders”), which in the aggregate conferred voting control of the Company. First Capital Venture Co. became a wholly-owned subsidiary of the Company as result of the transaction. The Class A Preferred shares were issued pursuant to the exemption for registration contained in Section 4(a)(2) of the Securities Act of 1933.

 

 

Pursuant to a Stock Purchase Agreement dated June 8, 2017, the Company acquired all the capital stock of PotNetwork Media Group, Inc., a Nevada corporation (“PMG”), in exchange for 3,000,000 shares of the Company’s common stock issued to the shareholders of PMG, and the cancellation of a $50,000 promissory note between the Company and PMG. As a result, PMG became a wholly-owned subsidiary of the Company. PMG was the owner of the website www.potnetwork.com. The common stock issued in the transaction were issued pursuant to the exemption for registration contained in Section 4(a)(2) of the Securities Act of 1933.

 

On May 17, 2018, the Company issued 6,500,000 restricted common shares for services rendered by six advisors and consultants to the Company during 2017. The common stock issued in the transaction were issued pursuant to the exemption for registration contained in Section 4(a)(2) of the Securities Act of 1933.

 

On May 29, 2018 the Company issued 25,000,000 common shares to upon the conversion of indebtedness owed. The certificates evidencing the above mentioned common shares were issued without legend in that Rule 144 permits the lenders to tack back to the date of the debt which was more than one year prior to issuance, thereby qualifying it for share issuance without restrictive legend as permitted by SEC Rule 144, permitting the holders to tack back to the date of the debt was originally issued and paid for, more than one year prior to issuance, thereby qualifying it for share issuance without restrictive legend.

 

On June 4, 2018 the Company issued 12,500,769 common shares to upon the conversion of indebtedness owed. The certificates evidencing the above-mentioned common shares were issued without legend in that Rule 144 permits the lenders to tack back to the date of the debt which was more than one year prior to issuance, thereby qualifying it for share issuance without restrictive legend as permitted by SEC Rule 144, permitting the holders to tack back to the date of the debt was originally issued and paid for, more than one year prior to issuance, thereby qualifying it for share issuance without restrictive legend.

 

On June 5, 2018 the Company issued 25,000,000 common shares to upon the conversion of indebtedness owed. The certificates evidencing the above mentioned common shares were issued without legend in that Rule 144 permits the lenders to tack back to the date of the debt which was more than one year prior to issuance, thereby qualifying it for share issuance without restrictive legend as permitted by SEC Rule 144, permitting the holders to tack back to the date of the debt was originally issued and paid for, more than one year prior to issuance, thereby qualifying it for share issuance without restrictive legend.

 

On June 21, 2018, the Company cancelled 216,000,000 shares of common stock from the conversion of 300,000,000 shares on March 13, 2017 and reissued the 12,469 shares of its Series A Preferred Stock that had been exchanged for it.

 

On July 2, 2018, the Company issued 16,000,000 common shares upon the conversion of preferred shares held by a preferred shareholder. The certificates evidencing the above-mentioned common shares were issued without legend.

 

On July 12, 2018, the Company issued 2,000,000 common shares upon the conversion of preferred shares held by a preferred shareholder. The certificates evidencing the above-mentioned common shares were issued without legend.

 

On July 13, 2018 the Company issued 1,540,436 common shares to two unrelated third parties upon the conversion of indebtedness owed. The certificates evidencing the above mentioned common shares were issued without legend in that Rule 144 permits the lenders to tack back to the date of the debt which was more than one year prior to issuance, thereby qualifying it for share issuance without restrictive legend as permitted by SEC Rule 144, permitting the holders to tack back to the date of the debt was originally issued and paid for, more than one year prior to issuance, thereby qualifying it for share issuance without restrictive legend.

 

On November 7, 2018, the Company issued 76,019,688 common shares upon the conversion of preferred shares held by preferred shareholders. The certificates evidencing the above-mentioned common shares were issued with legend.

 

 

ITEM 11. DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED

 

The Company is authorized to issue up to 1,000,000,000 shares of common stock, $0.00001 par value. As of November 16, 2018, we had outstanding 544,481,378 shares of common stock. The holders of our Common Stock are entitled to one vote per share held and have the sole right and power to vote on all matters on which a vote of stockholders is taken. Voting rights are non-cumulative. Common stockholders are entitled to receive dividends when, as, and if declared by the Board of Directors, out of funds legally available therefore and to share pro rata in any distribution to stockholders. Upon liquidation, dissolution, or the winding up of our Company, common stockholders are entitled to receive the net assets of our Company in proportion to the respective number of shares held by them after payment of liabilities which may be outstanding. The holders of common stock do not have any preemptive right to subscribe for or purchase any shares of any class of stock of the Company. The outstanding shares of common stock will not be subject to further call or redemption and are fully paid and non-assessable. To the extent that additional common shares are issued, the relative interest of existing stockholders will likely be diluted.

 

Our Articles of Incorporation authorize the issuance by resolution of our Board of Directors of up to 50,000 shares of Class A preferred stock. As of November 16, 2018, we had 39,839 shares of Class A Preferred Stock issued and outstanding. Each share of Class A preferred stock is convertible into 0.0018% of the total number of outstanding shares of common stock at the time of conversion. Class A Preferred Stock shall be entitled to a number of votes equal to the sum obtained by using the following quotient: (x) the sum of all outstanding shares of common stock, plus the sum of the number of votes of all other outstanding shares of stock, including any preferred stock that may be outstanding, plus the sum of the votes of all other financial instruments outstanding which may be entitled to vote on any such matter, divided by (y) 0.9. Class A shareholders are not entitled to dividends paid to common shareholders and are not entitled to any assets of the Company upon liquidation.

 

ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

 

The Colorado Business Corporation Act (the “CBCA”) generally provides that a corporation may indemnify a person made party to a proceeding because the person is or was a director against liability incurred in the proceeding if: the person’s conduct was in good faith; the person reasonably believed, in the case of conduct in an official capacity with the corporation, that such conduct was in the corporation’s best interests, and, in all other cases, that such conduct was at least not opposed to the corporation’s best interests; and, in the case of any criminal proceeding, the person had no reasonable cause to believe that the person’s conduct was unlawful. The CBCA prohibits such indemnification in a proceeding by or in the right of the corporation in which the person was adjudged liable to the corporation or in connection with any other proceeding in which the person was adjudged liable for having derived an improper personal benefit. The CBCA further provides that, unless limited by its articles of incorporation, a corporation shall indemnify a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the person was a party because the person is or was a director or officer of the corporation, against reasonable expenses incurred by the person in connection with the proceeding. In addition, a director or officer, who is or was a party to a proceeding, may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. The CBCA allows a corporation to indemnify and advance expenses to an officer, employee, fiduciary or agent of the corporation to the same extent as a director.

 

As permitted by the CBCA, the Company’s articles of incorporation and bylaws generally provide that the Company shall indemnify its directors and officers to the fullest extent permitted by the CBCA. In addition, the Company may also indemnify and advance expenses to an officer who is not a director to a greater extent, not inconsistent with public policy, and if provided for by its bylaws, general or specific action of the Company’s board of director or shareholders.

 

ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The financial statements required by this Item begin on page F-1.

 

 

ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

On July 23, 2018, East West Accounting Services (“East-West”) resigned as the independent registered public accounting firm of the Company. The resignation was accepted by the Board of Directors of the Company. East-West stated that the reason for their resignation was the loss of their PCAOB certification as the result of an unrelated matter connected to an audit inadequacy that occurred in an audit for an unrelated company in 2015.

 

The audit report of East-West on the Company’s financial statements for the fiscal year ended December 31, 2017, did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.

 

During the Company’s 2017 fiscal year and through July 23, 2018, (1) there were no disagreements with East-West on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of East-West, would have caused East-West to make reference to the subject matter of the disagreements in connection with its report, and (2) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

 

As a result of East-West’s resignation, the Company engaged Manohar Chowdhry & Associates (“MCA”), a PCAOB member firm, as the Company’s independent accountant to audit the Company’s financial statements and to perform reviews of interim financial statements. During the fiscal years ended December 31, 2015, December 31, 2016 and December 31, 2017 through July 23, 2018 neither the Company nor anyone acting on its behalf consulted with MCA regarding (i) either the application of any accounting principles to a specific completed or contemplated transaction of the Company, or the type of audit opinion that might be rendered by MCA on the Company’s financial statements; or (ii) any matter that was either the subject of a disagreement with East-West or a reportable event with respect to East-West.

 

ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.

 

(a) Financial Statements and Schedules

 

The consolidated financial statements required to be filed as part of this Registration Statement are included in Item 13 hereof.

 

(b) Exhibits

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

POTNETWORK HOLDINGS, INC.

 

Date: November 20, 2018

 

By: /s/ Kevin Hagen             

Kevin Hagen

Chief Executive Officer

 

 

PotNetworkHolding.com

DiamondCBD.com

 

 

Consolidated Financial Statements

For the Year ended December 31, 2017

AUDITED

 

 

 

 

 

 

 

 

Potnetwork Holdings Inc

Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Dec 31,

2017

 

 

Dec 31,

2016

 

 

Dec 31,

2015

 

 

 

Total

 

 

Total

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

Cash/Bank Balances

 

$ 254,571

 

 

$ 147,741

 

 

$ 51,332

 

Accounts Receivable

 

$ 313,581

 

 

$ 78,508

 

 

$ 1,957,922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Current assets

 

$ 568,152

 

 

$ 226,249

 

 

$ 2,009,254

 

Other Assets

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill [ASC 805-40 Business Combinations]

 

$ 53,934

 

 

$

 

 

$

 

First Capital Venture

 

 

 

 

 

 

 

 

 

 

 

 

10 days in transit

 

$ 575,367

 

 

$

 

 

$

 

Others

 

 

 

 

 

$ 89,537

 

 

$ 104,432

 

Prepaid Expenses

 

$ 608,889

 

 

$

 

 

$

 

Total other assets

 

$ 1,238,190

 

 

$ 89,537

 

 

$ 104,432

 

TOTAL ASSETS

 

$ 1,806,342

 

 

$ 315,786

 

 

$ 2,113,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Payables

 

$ 270,980

 

 

$ 232,100

 

 

$ 571,663

 

Total Current Liabilities

 

$ 270,980

 

 

$ 232,100

 

 

$ 571,663

 

Other Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Loan from 3rd Party with interest

 

$ 245,374

 

 

$ 338,352

 

 

$ 223,733

 

Note Payable

 

$ 1,655,624

 

 

$ 2,018,624

 

 

$ 1,984,000

 

POTN

 

 

 

 

 

 

 

 

 

 

 

 

Total other liabilities

 

$ 1,900,998

 

 

$ 2,356,976

 

 

$ 2,207,733

 

Total Liabilities

 

$ 2,171,978

 

 

$ 2,589,076

 

 

$ 2,779,396

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Common: Authorized 1,000,000,000 shares, $ .00001 par value; and 569,920,485 Issued and outstanding at December 31, 2017 and 89,571,121 Issued and outstanding at December 31, 2016 respectively.

 

$ 450,573

 

 

$ 87,573

 

 

$ 87,573

 

Preferred Stock Class A Authorized – 50,000 shares, $ .00001 Par value; and 32,682 Issued and outstanding at December 31,, 2017 and None Issued and outstanding at December 31, 2016 respectively.

 

$ 400

 

 

$ 400

 

 

$ 400

 

Additional paid in capital

 

$ 1,463,131

 

 

$ 263,131

 

 

$ 1,461,532

 

Retained Earnings

 

$ (2,279,739 )

 

$ (2,624,394 )

 

$ (2,215,215 )

Total Stockholders’ Equity

 

$ (365,635 )

 

$ (2,273,290 )

 

$ (665,710 )

Total Liabilities & Equity

 

$ 1,806,342

 

 

$ 315,786

 

 

$ 2,113,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

Re-grouped the previous year figures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Potnetwork Holdings Inc

 

Consolidated Income Statement for the year ended 31 December 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

Total

 

 

Total

 

 

Total

 

Sales

 

$ 14,388,204

 

 

$ 2,810,942

 

 

$ 5,810,792

 

Cost of Goods Sold

 

$ 9,318,271

 

 

$ 1,643,569

 

 

$ 2,801,832

 

Gross Profit (Loss)

 

$ 5,069,933

 

 

$ 1,167,373

 

 

$ 3,008,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$ 524,720

 

 

$

 

 

$

 

Sales & Marketing

 

$ 3,491,555

 

 

$ 619,115

 

 

$ 414,943

 

General & Administrative Expenses

 

$ 735,175

 

 

$ 452,073

 

 

$ 1,203,658

 

Total Expenses

 

$ 4,751,451

 

 

$ 1,071,188

 

 

$ 1,618,601

 

Profit (Loss) before Income Tax

 

$ 318,483

 

 

$ 96,185

 

 

$ 1,390,360

 

Accounting Changes impacing Receivable

 

$

 

 

$

 

 

$

 

Unrecoverable balances written off

 

$ (27,763 )

 

$

 

 

$

 

Prior Year Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

Provision for Income Tax

 

$

 

 

$

 

 

$

 

Net Profit (Loss)

 

$ 290,720

 

 

$ 96,185

 

 

$ 1,390,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

Re-grouped the previous year figures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Potnetwork Holdings Inc

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Surplus

 

Description

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

(Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock as on Dec. 31, 2015

 

 

7,621,650,326

 

 

$ 87,573

 

 

$ 1,461,532

 

 

($51,267)

 

1 for 1000 split reduction

 

 

(7,614,025,192 )

 

 

 

 

 

 

 

 

 

 

 

After the split

 

 

7,625,134

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued – Free

 

 

82,773,847

 

 

 

1,198,401

 

 

($1,198,401)

 

 

 

 

Shares Issued – Reserve

 

 

206,990,307

 

 

 

 

 

 

 

 

 

 

 

 

Net Profit (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

($2,668)

 

Common Stock as on Dec. 31, 2016

 

 

297,389,288

 

 

$ 87,573

 

 

$ 263,131

 

 

($53,935)

 

Triangular Merger

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 53,934

 

Shares Issued – Legend

 

 

309,322,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued – Free

 

 

121,000,000

 

 

$ 363,000

 

 

$ 1,200,000

 

 

 

 

 

Shares Issued – Reserve

 

 

(157,791,417 )

 

 

 

 

 

 

 

 

 

 

 

 

Net Profit (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 290,720

 

Common Stock as on Dec. 31, 2017

 

 

569,920,485

 

 

$ 450,573

 

 

$ 1,463,131

 

 

($2,279,739)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note: Number of shares as of Dec. 31, 2017 is agreement with the statement received from the Share Transfer Agent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

Re-grouped the previous year figures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Potnetwork Holdings Inc

 

Statement of Cash Flows for the year ended 31 December, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

Total

 

 

Total

 

 

Total

 

Operating Activities

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$ 290,720

 

 

$ (522,690 )

 

$ 687,158

 

Adjustments to reconcile net income (loss) to calculate the net cash provided by/used by the operations

 

 

 

 

 

 

 

 

 

 

 

 

Accounts Receivable

 

$ 235,074

 

 

$ 578,870

 

 

$ (741,705 )

Goodwill [ASC 805-40 Business Combinations]

 

$ 53,934

 

 

$

 

 

$

 

10 days in transit

 

$ 585,367

 

 

$

 

 

$

 

Prepaid Expenses

 

$ 608,889

 

 

$

 

 

$

 

Payable

 

$ (63,629 )

 

$ 40,229

 

 

$ 105,779

 

3rd Party Loan

 

$ (172,641 )

 

$

 

 

$

 

Note Payable

 

$ (1,655,624 )

 

$

 

 

$

 

Total Adjustments to reconcile net income (loss) to calculate the net cash provided by/used by the operations

 

$ (408,631 )

 

$ 619,099

 

 

$ (635,926 )

Net cash from the current year operations

 

$ (117,911 )

 

$ 96,409

 

 

$ 51,232

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

$ (450,573 )

 

$

 

 

$

 

Preferred A Stock

 

$ (400 )

 

$

 

 

$

 

Additional Capital

 

$ (1,463,131 )

 

$

 

 

$

 

Retained Earnings

 

$ 2,138,945

 

 

$

 

 

$

 

Net cash provided by investing activities

 

$ 224,841

 

 

$

 

 

$

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

$

 

 

$

 

 

$

 

NET CASH INCREASE (DECREASE) For PERIOD

 

$ 106,930

 

 

$ 96,409

 

 

$ 51,232

 

Cash, Beginning

 

$ 147,641

 

 

$ 51,332

 

 

$ 100

 

Cash, Ending

 

$ 254,571

 

 

$ 147,741

 

 

$ 51,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

Re-grouped the previous year figures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PotNetworkHolding.com

DiamondCBD.com

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

PotNetwork Holdings, Inc. is a publicly traded holding company trading under the symbol “POTN”. The Company website is www.potnetworkholding.com.

 

On 27th June 2017, this Company filed the name change with the state as, Biotech Hemp, Inc., but the FINRA name change is progressing and not yet complete.

 

This Company was previously known as:

 

 

· 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

 

The Company has six (6) wholly-owned subsidiaries:

 

 

· 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., a Colorado corporation, an early stage cryptocurrency mining company.

 

· Grinder Distribution, Inc., a Florida corporation, a distributor of herbal grinders.

 

· PNH Holdings, Inc., an inactive Colorado corporation

 

· SND Auto Group, Inc., an inactive Colorado corporation

 

Since the acquisition of First Capital Venture Co., the focus of the Company has been the development of the business of Diamond CBD, Inc. SND Auto Group Inc. became dormant in October 2016. All other subsidiaries are in early development stage. Hence, the financial statements reflect principally the business results of Diamond CBD business.

 

Diamond CBD, Inc. focuses on the research, development, and multi-national marketing of premium hemp extracts that contain a broad range of cannabinoids and natural hemp derivatives.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

Diamond CBD’s 94-page catalog can be found in http://catalog.diamondcbd.com.

 

Since January 31, 2017, Diamond CBD’s business has become the primary business of this Company.

 

In February 2018, the Company reversed ab initio the March 17, 2017 holding company reorganization. As a result, the Company reassumed its prior name, PotNetwork Holdings, Inc. (with an “s” on Holding), while remaining a Colorado corporation. None of the acquisitions or the share capital structure were affected.

 

Since January 2016, Gary Blum has served and continues to serve as sole director and until October 2017, when Richard Goulding, M.D., joined PotNetwork Holdings, Inc. as its Chief Executive Officer, had served Company’s CEO as well.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

➢ 

BASIS OF PRESENTATIONS: The statements were prepared following generally accepted accounting principles of the United States of America which were consistently applied.

USE OF ESTIMATES: Management uses estimates and assumptions in preparing these financial statements in accordance with U.S. generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.

REVENUE RECOGNITION – DIAMOND CBD BUSINESS

 

 

· Sales are recorded when the sale proceeds are credited to the bank account.

 

· Revenue is recognized when the title, ownership and risk of loss transfers, which is usually on the date of shipment

 

· At each year end, the sales invoices are reviewed and based on the subsequent receipt of payments and are accounted as sales to comply with the matching principle of considering the expenses and revenues of the same year. Such book entries are reversed in the following year.

 

· For online sales, merchandise is not shipped unless and until the customer pays for it.

 

· For orders received over the phone, the merchandise will not ship unless and until the customer pays for it.

 

· Sales on credit terms are exceptional and requires the customer to establish credit.

 

· Revenue transactions represent the actual merchandise shipped to the customers as drop shipments.

 

· The revenue recorded in the books are net of sales and other taxes collected on behalf of governmental authorities.

 

· The revenue includes shipping and handling costs which are generally included in the sale invoices.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

 

· Provision for discounts, when applicable, are stated in the sales invoice and used to determine the net of sales for each such invoice.

 

· Returns are accounted as a reduction of sales when the returns are authorized.

 

 

The customers enjoy free returns of unopened items within 15 days of purchase.

 

Free return labels are provided, meaning that the Company pays for the shipping cost for the returns by the customers.

 

The customers can easily initiate the returns online in the Company website.

 

Experienced professional staff reviews the selling price on an ongoing basis.

 

Exceptions are reviewed and approved by the manager.

 

Sales return are insignificant and hence no reserves are provided.

 

 

· Trade promotions such as sale prices, coupons, etc. are offered to the customers on various occasions as part of marketing and sales promotion. In all such cases, sales are recorded net of trade promotions, which is generally incurred at the time of sale. Most of the arrangements are for a year or less. Expected payouts are not estimated and hence accounted as and when incurred.

 

· Most of the sales are charged to the customers’ credit cards. Though there is a delay of 10 business days to receive the credit to the Company’s bank account, the sales are accounted as revenue based on the charge to the customers’ credit card but recorded as receivable. Also, this Company is subjected to 10% reserve for 90 days.

 

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.

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 the 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 statement, 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.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

 

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.

 

 

For the CBD business, $27,707.54 for trade mark registration, as a privately held company. For various reason, it was not pursued in 2016 and was expensed by the then private company.

 

On becoming the wholly owned subsidiary, this Company confirmed not to pursue trade mark registration.

 

▪  

ASC 350 requires capitalizing any money spent on product development and product improvement. Before becoming a wholly owned subsidiary, CBD business expensed the payments for the product development.

 

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 a 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. Included in the profit for the current accounting period is $348,556 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.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

NOTE 3 – GOING CONCERN

 

The financial statements are prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.

 

Since PotNetwork Holdings, Inc. has no uncertainties as on the balance sheet date, the financial statements need no adjustments.

 

Since Diamond CBD’s business originated in 2015, it is considered as a business with limited operating history. Hence, this business is subject to all risks inherent in a developing business enterprise. Continued success depends on the problems, difficulties, complications, and delays frequently encountered in the competitive and regulatory environment in which it operates.

 

Since the CBD business is a burgeoning industry, there are no established entities whose business model Diamond CBD can follow or build upon.

 

Regulatory risk: Hemp-based CBD is often confused with marijuana-based CBD which remains illegal under federal Law, although the Company maintains that its products are legal. Yet, this legal risk cannot be ignored.

 

Although Diamond CBD does not sell any marijuana-based CBD products, its products could be treated as being illegal by federal/state authorities and by consumers.

 

The Company is involved in a highly competitive industry where it may compete with numerous other companies who offer alternative methods or approaches, who may have far greater resources, more experience, and personnel perhaps more qualified than the Company does. Such resources, experience and personnel may provide a substantial competitive advantage to the competition.

 

Since the middle of 2016, the auto business was not pursued, due to declining sales.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

NOTE 4 – DEFERRED TAX COMPUTATION

 

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all the deferred tax assets will not be realized.

 

ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.

 

There was no income tax expense during this quarter. However, the availability of a net operating loss carryforward and the associated deduction, is subject to complex and restrictive federal income tax provisions as codified by Internal Revenue Code section 172 and related Treasury Regulations, all of which are subject to change and the availability of which can never be free from doubt.

 

The components of the deferred tax assets and liabilities are as follows:

 

 

 

30 th June

2018

 

 

31st Dec

2017

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryovers

 

$ 1,586,648

 

 

$ 2,275,848

 

Stock-based compensation

 

 

 

 

 

 

Other temporary differences

 

 

 

 

 

 

Total deferred tax assets

 

 

1,586,648

 

 

 

2,275,848

 

Valuation allowance

 

 

(1,586,648 )

 

 

(2,275,848 )

Net deferred tax asset

 

$

 

 

$

 

 

 

PotNetworkHolding.com

DiamondCBD.com

 

NOTE 5 – INVENTORY – DIAMOND CBD

 

This Company has arranged to buy the exact quantity from the suppliers, based on the customer orders and thereby has eliminated the need for holding inventory on hand at any point of time.

 

Otherwise, this Company values the inventory at the lower of cost or market.

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES: There are no commitments and contingencies that exist at present, other than the legal disputes mentioned supra.

 

NOTE 7 – BUDGET & INTERNAL CONTROL PROCEDURES

 

 

· 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.

 

NOTE 8 – PAYROLL PROCEDURE

 

Payroll is processed by an independent payroll company to determine the taxes to be withheld and paid.

 

NOTE 9 – CAPITAL STOCK

 

 

· Common Stock: Authorized 1,000,000,000 shares, $.00001 par value; and 448,921,254 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 60,000 shares, $ .00001 par value; and 45,151 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.

 

· Share issuance for Services: [1] On March 12, 2018, one million shares were issued for services as agreed with the third party on March 5, 2018. [2] On May 5, 2018, 6,500,000 shares were issued for services as agreed with six independent contractors on various dates in 2017.

 

· Additional Paid-in Capital: In 2017, this Company borrowed $1,200,000 from a third-party investor, which loan amount has been converted into a common stock purchase warrant for 4.8M shares at $.25 per share exercisable over 5 years. $1,362,131 was received for the issuance of common stock purchase warrants in the first quarter of 2018 and $64,000 was received for the issuance of common stock purchase warrants in the first quarter of 2018.

  

NOTE 10 – LOAN FROM THIRD PARTIES

  

 

 

 

 

 

 

 

8%

 

 

 

 

 

8%

 

 

 

 

 

8%

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

 

before

 

 

 

 

 

for

 

 

 

 

 

for

 

 

 

 

 

 

 

 

Loan

 

 

2017

 

 

 

 

 

2017

 

 

 

 

 

2018 HY

 

 

 

 

A

 

9/11/2012

 

$ 100,000

 

 

$ 12,000

 

 

$ 112,000

 

 

$ 8,000

 

 

$ 120,000

 

 

$ 4,000

 

 

$ 124,000

 

B

 

7/1/2016

 

$ 25,000

 

 

$ 1,000

 

 

$ 26,000

 

 

$ 2,000

 

 

$ 28,000

 

 

$ 1,000

 

 

$ 29,000

 

C

 

7/1/2016

 

$ 7,000

 

 

$ 280

 

 

$ 7,280

 

 

$ 560

 

 

$ 7,840

 

 

$ 280

 

 

$ 8,120

 

D

 

4/28/2016

 

$ 42,000

 

 

$ 2,240

 

 

$ 44,240

 

 

$ 3,360

 

 

$ 47,600

 

 

$ 1,153

 

 

 

 

 

E

 

5/4/2016

 

$ 37,000

 

 

$ 1,974

 

 

$ 38,974

 

 

$ 2,960

 

 

$ 41,934

 

 

$ 1,480

 

 

$ 43,414

 

 

 

 

 

 

 

 

 

$ 17,494

 

 

$ 228,494

 

 

$ 16,880

 

 

$ 245,374

 

 

$ 7,913

 

 

$ 204,534

 

  

 

PotNetworkHolding.com

DiamondCBD.com

 

NOTE 11 – NOTES PAYABLE TO SIGN N DRIVE AUTO MALL, INC.

 

 

· The original note was for $1,850,000 dated June 2, 2014.

 

· The annual interest was 8%. But the interest has been waived based on an agreement for a fixed conversion rate.

 

· 121 million shares of common stock were issued in 2017.

 

· 25 million shares of common stock were issued in the First Quarter of 2018.

 

· 50 million shares of common stock were issued in the Second Quarter of 2018.

 

NOTE 12 – MANAGEMENT ASSERTIONS ON THE COURT CASES REGARDING CONVERTIBLE PROMISSORY NOTES OF THE PREDECESSOR.

 

 

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”). The details of the Promissory notes in the legal suit is as below.

 

Sl.No

 

Party Name

 

Date of Issue

 

Value of the Promissory Note

 

 

 

 

 

 

 

 

 

1.

 

Mammoth West Corporation

 

June 13, 2016

 

$ 7,280

 

 

 

 

 

 

 

 

 

 

2.

 

Southridge Partners II Limited Partnership

 

July 18, 2016

 

$ 26,000

 

 

 

In each instance, it is the Company’s contention that the requests to convert certain portions of each Note was improper and sought to convert into a number of common shares of the Company at a price not called for in each Note.

 

 

 

 

The possible outcome of the cases is expected to be repayment of promissory notes as agreed conversion ratio with predecessor and the unfavourable impact could be conversion of the promissory notes into shares of the PotNetwork Holdings Inc. Whereas the conversion ratio is unascertained.

 

NOTE 13 – NOTES PAYABLE

 

A. This original note is for $1,850,000 dated June 2, 2014

 

· $2,018,624 was due as on 31st December 2016

· The annual interest was eight percent (8%). But the interest does not accrue since the addendum agreement in exchange for a fixed conversion. Refer the terms of a security purchase agreement, “Sign”

·121,000,000 shares are converted in 2017 for $117,000

· $1,655,624 is due as on 31st December 2017.

 

B. In the second quarter of 2017, “Sign” wire-transferred $285,500 and the company signed a new note with no interest, applying the addendum agreement in exchange for a fixed conversion.

 

C. In the third quarter of 2017, “Sign” wire-transferred $477,500 and the company signed a new note with no interest, applying the addendum agreement in exchange for a fixed conversion.

 

D. In the fourth quarter of 2017, “Sign” wire-transferred $437,000 and the company signed a new note with no interest, applying the addendum agreement in exchange for a fixed conversion.

 

A

$1,655,624

B

$285,500

C

$477,500

D

$437,000

 

$2,855,624

 

NOTE 14 – UNRECOVERABLE BALANCES WRITTEN OFF

 

The business of auto dealership was closed in 2016.

 

 

As is the trade practice, the combined balance of $27,763 [both receivable as well as payable, and including Fixed Assets such as desk top computers, fixtures and fittings] are written off in 2017.

 

NOTE 16 – MANAGEMENT ASSERTIONS ON CRITICAL AUDIT MATTERS

 

 

· 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.

 

· Payment processing system: In 2017, this Company established its payment processing system with a 3level hierarchy for assurance of internal control procedures. Also, within this system, to assure effective controls, there is the segregation of duties. To increase efficiency going forward, this company is considering shifting to sophisticated third-party software which will provide a more efficient and faster attachment of bills and invoices to every transaction.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

 

· Drop shipments: The Company as prepared a reconciliation of quantity sold as per the sales invoices with the payments made to its vendors per each quarter. In order to track of each sale’s invoice to its suppliers’ invoices the Company is evaluating specialized software to automate the reconciliation.

 

· 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.

 

· Diamond CBD business was started in 2015 as a private business. On acquisition, it continued to follow the same procedures as when it was privately held, including, but not limited to, the informal rental or lease of real property for its facilities. , the Company now is ascertaining that all rental and lease agreements are formal.

 

· Sunrise Auto Mall Inc was a private business and was merged in 2015, by exchange of shares among the related shareholders for which there is no agreement in the company name. Since said auto sale business was closed in 2016, the 2015 share exchange agreement among its shareholders was misplaced

 

· Additional Paid in Capital. Requests for share issuances for $ 263,131 are awaited.

 

· 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.

 

· Manuals and handbooks: When the CBD business was started as a private business, well experienced professionals were involved in the day to day operations, who did 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. The company plans to have all the required manuals and handbooks within the next year.

 

· Transaction wise entries with source documents: In 2017, there were 10,575 entries. Anticipating this volume of entries, the Company customized the systematized computation into two steps. By accessing the data from online banking, a ledger is prepared and a trial balance is extracted as step 1. Batch entries are made in Quick Books as step 2. All Journal entries are made in Quick Books. The approach in step 1 helped the Company to avoid human errors. As an accounting best practice, the Company is moving toward individual entries in Quick Books to facilitate ease of verification with the source documents. The Company is also discussing with its software development team a methodology for the importing of the individual transactions into Quick Books.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

 

· Paperless office and Source documents: As a paperless office, the Company relied on the details contained in the bank statements as well as the credit card statements. With the emphasis of the receipts issued by the vendors, as source documents to qualify as a source documents for the payments carried out. For ease of access, the Company is now considering scanning the documents and storing them online.

 

· Securing the product formulae with patent rights, trademarks: The Company regards its product formulations as trade secrets, without the publishing of such formulae in governmental patents. The nature of many formulation makes their patentability questionable. The Company maintains one existing trademark and may seek others.

 

· Single Vendor: The Company has been using the facility of a single manufacturer for the drop shipping arrangements. Upon review of this arrangement it is understood that any impact for the business of the vendor/manufacturer can ultimately impact the Company’s business. This company is now evaluating the alternatives.

 

· Configuration of the back-end software: In the e-commerce world, various apps are linked to an e-commerce platform. The choice of any app in use as well as the manner of its configuration did not consider the requirements of an audit trial. This was highlighted in the earlier audit in April, 2018. Accordingly, this company has changed said apps effective June 2018

 

· Inventory: The Company chose drop shipping arrangements with a manufacturer mainly to avoid inventory and its expense. However, drop shipping procedures do not require the creation of purchase invoices. Since the Company realized the need for maintenance of the inventory records for reconciling the individual sale transaction with the related purchase transaction, now the Company plans to develop a system which can automate these entries from its e-commerce platform.

 

The management has been resolving these issues diligently and none will appear at year-end for the 2018.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

POTNETWORK HOLDINGS, INC

 

Consolidated Financial Statements

For the 3 months ended March 31, 2018

UNAUDITED

 

BALANCE SHEET (In $000)

 

Mar. 31,

2018

 

 

Dec. 31,

2017

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash/Bank Balances

 

 

209

 

 

 

240

 

Accounts Receivable

 

 

1,584

 

 

 

330

 

Total Current assets

 

 

1,793

 

 

 

570

 

Fixed Assets [NET]

 

 

 

 

 

 

Investments in Diamond CBD [wholly owned] at cost (IAS 27)

 

 

367

 

 

 

170

 

Other Assets

 

 

1,060

 

 

 

1,293

 

TOTAL ASSETS

 

 

3,220

 

 

 

2,033

 

Liabilities

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Payables

 

 

311

 

 

 

271

 

Total Current Liabilities

 

 

311

 

 

 

271

 

Other Liabilities

 

 

 

 

 

 

 

 

Loan from 3rd Party with interest

 

 

250

 

 

 

245

 

Note Payable

 

 

1,581

 

 

 

1,878

 

Total other liabilities

 

 

1,831

 

 

 

2,124

 

Total Liabilities

 

 

2,142

 

 

 

2,395

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common: Authorized 1,000,000,000 shares, $.00001 par value; and 595,920,485 Issued and outstanding

 

 

526

 

 

 

451

 

Preferred Stock Class A Authorized – 50,000 shares, $ .00001 Par value; and 32,682 Issued and outstanding

 

 

0

 

 

 

0

 

Additional paid in capital

 

 

2,438

 

 

 

1,463

 

Retained Earnings

 

 

(1,886 )

 

 

(2,276 )

Total Stockholders’ Equity

 

 

1,078

 

 

 

(362 )

Total Liabilities & Equity

 

 

3,220

 

 

 

2,033

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

PotNetworkHolding.com

DiamondCBD.com

 

POTNETWORK HOLDINGS, INC

 

Consolidated Financial Statements

For the 3 months ended March 31, 2018

UNAUDITED

 

 

Quarter Ended

 

 

Quarter Ended

 

INCOME STATEMENT

(In $000s, except per-share data)

 

Mar 31,

2018

 

 

Dec 31,

2017

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

Sales

 

 

6,284

 

 

 

1,858

 

Cost of goods sold

 

 

3,772

 

 

 

1,196

 

Gross profit

 

 

2,512

 

 

 

662

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

 

0

 

 

 

0

 

Sales & Marketing

 

 

2,084

 

 

 

309

 

General & Administrative Expenses

 

 

231

 

 

 

157

 

Interest

 

 

4

 

 

 

43

 

Total operating expenses

 

 

2,319

 

 

 

509

 

 

 

 

 

 

 

 

 

 

Profit (Loss) before Income Tax

 

 

193

 

 

 

154

 

Provision for Income Tax

 

 

0

 

 

 

0

 

Net Profit (Loss)

 

 

193

 

 

 

154

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

0.0003

 

 

 

0.0003

 

Basic and diluted

 

 

0.0003

 

 

 

0.0003

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

 

595,920,485

 

 

 

569,920,485

 

 

The accompanying notes are an integral part of these financial statements.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

POTNETWORK HOLDINGS, INC

 

Consolidated Financial Statements

For the 3 months ended March 31, 2018

UNAUDITED

 

 

Quarter Ended

 

 

Quarter Ended

 

CASH FLOWS STATEMENT

(In $000)

 

Mar 31,

2018

 

 

Mar 31,

2017

 

Operations

 

 

 

 

 

 

Net Income (Loss)

 

 

193

 

 

 

154

 

Adjustments to reconcile net income (loss)

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

608

 

 

 

18

 

Inventory

 

 

 

 

 

 

(370 )

Other Assets

 

 

(233 )

 

 

51

 

Payable

 

 

(40 )

 

 

(49 )

Third Party Loan

 

 

(4 )

 

 

121

 

Notes Payable

 

 

298

 

 

 

61

 

Total Adjustments to reconcile net income (loss)

 

 

629

 

 

 

(168 )

Net cash from the current year operations

 

 

822

 

 

 

(14 )

Investing

 

 

 

 

 

 

 

 

In wholly owned subsidiary

 

 

197

 

 

 

0

 

Net cash provided by investing activities

 

 

197

 

 

 

0

 

Financing

 

 

 

 

 

 

 

 

Changes in Equity

 

 

(75 )

 

 

0

 

Changes in Class A Preferred Stock

 

 

0

 

 

 

0

 

Changes in Additional Capital

 

 

(975 )

 

 

0

 

Net cash provided by financing activities

 

 

(1,050 )

 

 

0

 

Net change in cash and cash equivalents

 

 

(32 )

 

 

(14 )

Cash and cash equivalents, beginning of period

 

 

241

 

 

 

148

 

Cash and cash equivalents, end of period

 

 

209

 

 

 

134

 

 

The accompanying notes are an integral part of these financial statements.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

POTNETWORK HOLDINGS, INC

 

Consolidated Financial Statements

For the 3 months ended March 31, 2018

UNAUDITED

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Additional

 

 

Surplus

 

(In $000)

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

(Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock as on Dec. 31, 2016

 

 

297,389,288

 

 

 

88

 

 

 

263

 

 

 

(2,421 )

Triangular Merger

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(54 )

Shares Issued – Restricted

 

 

309,322,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued – Free

 

 

121,000,000

 

 

 

363

 

 

 

 

 

 

 

 

 

Shares Issued – Reserve

 

 

(157,791,417 )

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

 

 

 

 

 

 

 

 

1,200

 

 

 

 

 

Net Profit (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

179

 

Common Stock as on Dec. 31, 2017

 

 

569,920,485

 

 

 

451

 

 

 

1,463

 

 

 

(2,276 )

Shares Issued – for Services

 

 

1,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued – Free

 

 

25,000,000

 

 

 

75

 

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

 

 

 

 

 

 

 

 

975

 

 

 

 

 

Changes in valuation – IAS 27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

197

 

Net Profit (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

193

 

Common Stock as on Mar. 31, 2018

 

 

595,920,485

 

 

 

526

 

 

 

2,438

 

 

 

(1,886 )

  

The accompanying notes are an integral part of these financial statements.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

POTNETWORK HOLDINGS, INC

NOTES TO THE FINANCIAL STATEMENTS

For the Quarter Ended March 31, 2018

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

PotNetwork Holdings, Inc. is a publicly traded Company trading under the symbol “POTN”.

 

The Company website is www.potnetworkholding.com.

 

This Company was previously known as:

 

 

· Formerly=SND Auto Group, Inc. until 3-2017

 

· Formerly=PotNetwork Holdings, Inc. until 5-2016

 

· Formerly=United Treatment Centers, Inc. until 7-2015

 

· Formerly=Element Trading Holdings, Inc. until 3-2014

 

· Formerly=United Treatment Centers, Inc. until 10-2013

 

· Formerly=MyMedicalCD, Ltd. until 6-2008

 

· Note=11-04 State of Incorporation Nevada changed to Wyoming

 

· Formerly=Interactive Solutions Corp. until 11-2004

 

· Formerly=Araldica Wineries Ltd. until 2-2000

 

· Formerly=H P Capital Corp. until 9-1996

  

On January 31, 2017, this Company acquired First Capital Venture Co., the parent of Diamond CBD, Inc. (“Diamond CBD”), www.diamondcbd.com, the producers and marketers of hemp-derived CBD oil products, as a wholly-owned subsidiary.

 

SND Auto Group Inc., formed on 14th March 2017 as a pre-owned vehicle auto dealership, as a successor to Sunrise Auto Mall Inc., a Florida Profit Corporation established in April 2014, is another wholly-owned subsidiary.

 

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, was acquired under a stock purchase agreement and is another wholly-owned subsidiary.

 

Grinder Distribution Inc., a distributor of herbal grinders, is an another wholly-owned subsidiary.

 

Since the acquisition of First Capital Venture Co., the focus is the development of the business of Diamond CBD, Inc. SND Auto Group Inc. is dormant since October 2016. All other subsidiaries are in the early development stage. Hence, the financial statements reflect principally the business results of the Diamond CBD business.

 

Diamond CBD, Inc. focuses on the research, development, and multi-national marketing of premium hemp extracts that contain a broad range of cannabinoids and natural hemp derivatives.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

Diamond CBD’s 94-page catalog can be found in http://catalog.diamondcbd.com.

 

In 2017, Diamond CBD’s business was the sole business activity of this Company.

 

In February 2018, the Company reversed and unwound the March 17, 2017 merger and share exchange holding company reorganization. As a result, the Company reassumed its prior name, PotNetwork Holdings, Inc. (with an “s” on Holding), while remaining a Colorado corporation. None of the acquisitions or the share capital structure was affected.

 

Since January 2016, Gary Blum has served and continues to serve as sole director and CEO. In October 2017, Richard Goulding MD joined PotNetwork Holdings, Inc. as its Chief Executive Officer.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATIONS: The statements were prepared following generally accepted accounting principles of the United States of America which were consistently applied.

USE OF ESTIMATES: Management uses estimates and assumptions in preparing these financial statements in accordance with U.S. generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.

REVENUE RECOGNITION – DIAMOND CBD BUSINESS

 

 

· Sales are recognized when the sale proceeds are credited to the bank account during the year.

 

· At each year end, the sales invoices are reviewed and based on the subsequent receipt of payments and are accounted as sales to comply with the matching principle of considering the expenses and revenues of the same year. Such book entries are reversed in the following year.

 

· For online sales, merchandise is not shipped unless and until the customer pays for it.

 

· For orders received over the phone, the merchandise will not ship unless and until the customer pays for it.

 

· Sales on credit terms are exceptional and requires the customer to establish the credit.

 

· Revenue transactions represent the actual merchandise shipped to the customers as drop shipments.

 

· The revenue recorded in the books are net of sales and other taxes collected on behalf of governmental authorities.

 

· The revenue includes shipping and handling costs which are generally included in the sale invoices.

 

· Revenue is recognized when the title, ownership and risk of loss transfers, which is usually on the date of shipment.

 

· Provision for discounts, when applicable, are stated in the sales invoice and used to determine the net of sales for each such invoice.

 

· Returns are accounted as a reduction of sales when the returns are authorized.

 

 

 

PotNetworkHolding.com

DiamondCBD.com

 

 

n The customers enjoy free returns of unopened items within 15 days of purchase.

 

n Free return labels are provided, meaning that the Company pays for the shipping cost for the returns by the customers.

 

n The customers can easily initiate the returns online in the Company website.

 

n Experienced professional staff reviews the selling price on an ongoing basis.

 

n Exceptions are reviewed and approved by the manager.

 

n Sales return are insignificant and hence no reserves are provided.

  

 

· Trade promotions such as sale prices, coupons, etc. are offered to the customers on various occasions as part of marketing and sales promotion. In all such cases, sales are recorded net of trade promotions, which is generally incurred at the time of sale. Most of the arrangements are for a year or less. Expected payouts are not estimated and hence accounted as and when incurred.

 

· Most of the sales are charged to the customers’ credit cards. Though there is a delay of 10 business days to receive the credit to the Company’s bank account, the sales are accounted as revenue based on the charge to the customers’ credit card but recorded as receivable. Also, this Company is subjected to 10% reserve for 90 days.

  

CASH AND CASH EQUIVALENTS: Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition.

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 the 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.

INTANGIBLE ASSETS

  

 

· 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.

 

· 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. The Company impaired the trade mark as of December 31, 2015.

  

INCOME TAXES: The Company accounts for its income taxes in accordance with the Financial Accounting Standards (“SFAS”) No.109, “Accounting for Income Taxes”. Under this standard, deferred tax assets and liabilities represent the estimated tax effects of future deductible or taxable amounts attributed to differences between the financial statements carrying amounts and the tax bases of existing assets and liabilities. The standard also allows recognition of income tax benefits for loss carryforwards, credit carryforwards and certain temporary differences for which tax benefits have not previously been recorded. Valuation allowances are provided for uncertainties associated with deferred tax assets.

  

 

PotNetworkHolding.com

DiamondCBD.com

 

FINANCIAL INSTRUMENTS: Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. FASB ASC 820 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

  

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.

 

The carrying amounts reported in the balance sheet for cash, accounts payable and notes payable approximate their estimated fair market value based on the short-term maturity of this instrument. In addition, FASB ASC 825-10-25 “Fair Value Option” was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value.

 

Investments in subsidiaries: The March 17, 2017 reorganization is sometimes referred to as a holding Company reorganization. The Company did not make any payment in cash or check in connection with the reorganization. Hence, the Company has recorded the value of the investments in this wholly owned subsidiary as provided in ASC 323.

Redemption Right: The terms and conditions of the Note held by Sign N Drive contains a redemption right, which reads as, “Notwithstanding any provision contained herein to the contrary including the conversion rights as set forth in this section, the Company shall be entitled, at any time prior to the expiration of five days from any notice of conversion, to repay this Note in full, plus interest, minus the credit accorded from prior payments, including from prior conversions, and avoid any further Note conversion and thus avoid the issuance of any additional shares of PotNetwork Holdings, Inc.” By this clause, no derivative liability exists.

 

NOTE 3 – GOING CONCERN

 

The financial statements are prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.

 

Since PotNetwork Holdings, Inc. has no uncertainties as on the balance sheet date, the financial statements need no adjustments.

 

Since Diamond CBD’s business originated in 2015, it is considered as a business with limited operating history. Hence, this business is subject to all risks inherent in a developing business enterprise. Continued success depends on the problems, difficulties, complications, and delays frequently encountered in the competitive and regulatory environment in which it operates.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

Since the CBD business is a burgeoning industry, there are no established entities whose business model Diamond CBD can follow or build upon.

 

Regulatory risk: Hemp-based CBD is often confused with marijuana-based CBD which remains illegal under federal Law, although the Company maintains that its products are legal. Yet, this legal risk cannot be ignored.

 

Although Diamond CBD does not sell any marijuana-based CBD products, its products could be treated as being illegal by federal/state authorities and by consumers.

 

The Company is involved in a highly competitive industry where it may compete with numerous other companies who offer alternative methods or approaches, who may have far greater resources, more experience, and personnel perhaps more qualified than the Company does. Such resources, experience and personnel may provide a substantial competitive advantage to the competition.

 

NOTE 4 – PROVISION FOR INCOME TAXES

 

With the accumulated losses carried forward, no provision for tax liability has been made in the financial statements. Net operating loss carry-forward, expires twenty years from the date the loss was incurred.

 

Deferred Tax Computation: The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all the deferred tax assets will not be realized.

 

ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.

 

There was no income tax expense during this quarter. However, the availability of a net operating loss carryforward and the associated deduction, is subject to complex and restrictive federal income tax provisions as codified by Internal Revenue Code section 172 and related Treasury Regulations, all of which are subject to change and the availability of which can never be free from doubt.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

The components of the deferred tax assets and liabilities are as follows:

 

 

 

31st Mar

2018

 

 

31st Dec

2017

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryovers

 

$ 1,885,752

 

 

$ 2,275,848

 

Stock-based compensation

 

 

 

 

 

 

Other temporary differences

 

 

 

 

 

 

Total deferred tax assets

 

 

1,885,752

 

 

 

2,275,848

 

Valuation allowance

 

 

(1,885,752 )

 

 

(2,275,848 )

Net deferred tax asset

 

$

 

 

$

 

 

NOTE 5 – INVENTORY – DIAMOND CBD

 

This Company has arranged to buy the exact quantity from the suppliers, based on the customer orders and thereby has eliminated the need for holding inventory on hand at any point of time.

 

Otherwise, this Company values the inventory at the lower of cost or market.

 

This Company has been successfully handling the shipping as expeditiously as possible, despite the high quantity of its order volume. In effect, the marketing plan drawn by the Company’s team requires adequate arrangements, requiring advance bookings for the expositions, etc. including the travel arrangements. This consumes more and more working capital by way of prepayments for marketing arrangements with merchants.

 

In addition, this Company pays for the drop shipments, based on the sales orders. However, the drop shipments to the customers are in transit for a week or more until the tracking numbers are obtained and sent to the customers to obtain the payment from the customer.

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES: There are no commitments and contingencies that exist at present.

 

NOTE 7 – SALES DISCOUNT & RETURN POLICY – DIAMOND CBD

 

 

n The customers enjoy free returns of unopened items within 15 days of purchase.

 

n Free return labels are provided, meaning that the Company pays for the shipping cost for the returns by the customers.

 

n The customers can easily initiate the returns online in the Company website.

 

n Experienced professional staff reviews the selling price on an ongoing basis.

 

n Exceptions are reviewed and approved by the manager.

 

n Sales return are insignificant and hence no reserves are provided.

  

 

PotNetworkHolding.com

DiamondCBD.com

 

NOTE 8 – BUDGET & INTERNAL CONTROL PROCEDURES

 

 

· 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 considered by the Board of Directors.

 

NOTE 9 – PAYROLL PROCEDURE

 

Payroll is processed by an independent payroll company to determine the taxes to be withheld and paid.

 

NOTE 10 – Depreciation

 

The depreciation method is the Modified Accelerated Cost Recovery System (MACRS) of the tax code. http://www.irs.gov/pub/irs-pdf/i4562.pdf 3-, 5-, 7-, and 10-year property class is adapted. 200% declining balance method is followed. Section 179 deduction is also recorded in the books, where applicable.

 

NOTE 11 – CAPITAL STOCK

 

 

· Common Stock: Authorized 1,000,000,000 shares, $.00001 par value; and 595,920,485 issued and outstanding as on the balance sheet date. As of the date of this report, 300,000,000 shares are in the process of being cancelled in exchange for 17,318 shares of Class A preferred stock. Further, this Company is obligated to issue additional shares to the note holder as stated in Note 13.

 

 

 

 

· Class A preferred stock: Authorized 50,000 shares, $ .00001 par value; and 32,682 Issued and outstanding as on the balance sheet date. Designation details are in Document # 20181127754 filed with the Secretary of State, Colorado on 13th February 2018. Upon the cancellation of 300 million equity shares in exchange of 17,318 shares of Class A preferred stock, the number of issued and outstanding shall be 50,000.

 

 

 

 

· Share issuance for Services: On 12th March 2018, one million shares were issued for services as agreed with the third party on 5th March 2018.

 

 

 

 

· Additional Paid-in Capital: In the first quarter of 2018, $2,438,131 was received for the issuance of common stock purchase warrants.

  

 

PotNetworkHolding.com

DiamondCBD.com

 

NOTE 12 – LOAN FROM THIRD PARTIES

 

 

 

 

 

 

 

8%

 

 

 

 

 

8%

 

 

 

 

 

8%

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

before

 

 

 

 

 

for

 

 

 

 

 

for

 

 

 

 

 

 

 

Loan

 

 

2017

 

 

 

 

 

2017

 

 

 

 

 

2018 Q-1

 

 

 

 

A

9/11/2012

 

$ 100,000

 

 

$ 12,000

 

 

$ 112,000

 

 

$ 8,000

 

 

$ 120,000

 

 

$ 2,000

 

 

$ 122,000

 

B

7/1/2016

 

$ 25,000

 

 

$ 1,000

 

 

$ 26,000

 

 

$ 2,000

 

 

$ 28,000

 

 

$ 500

 

 

$ 28,500

 

C

7/1/2016

 

$ 7,000

 

 

$ 280

 

 

$ 7,280

 

 

$ 560

 

 

$ 7,840

 

 

$ 140

 

 

$ 7,980

 

D

4/28/2016

 

$ 42,000

 

 

$ 2,240

 

 

$ 44,240

 

 

$ 3,360

 

 

$ 47,600

 

 

$ 840

 

 

$ 48,440

 

E

5/4/2016

 

$ 37,000

 

 

$ 1,974

 

 

$ 38,974

 

 

$ 2,960

 

 

$ 41,934

 

 

$ 740

 

 

$ 42,674

 

 

 

 

 

 

 

 

$ 17,494

 

 

$ 228,494

 

 

$ 16,880

 

 

$ 245,374

 

 

$ 4,220

 

 

$ 249,594

 

 

NOTE 13 – NOTES PAYABLE

 

 

· The original note was for $1,850,000 dated June 2, 2014.

 

· The annual interest was 8%. But the interest was not accrued based on the security purchase agreement for a fixed conversion.

 

· 121 million shares of common stock were issued in 2017.

 

· 25 million shares of common stock were issued in the First Quarter of 2018.

  

NOTE 14 – CONVERTIBLE NOTES

 

 

· In 2017, this Company exchanged $1,200,000 in convertible promissory notes, net of accrued interest, in exchange for a fixed price stock conversion. In the first quarter of 2018, the same was re-negotiated for the issuance of a common stock purchase warrant at a fixed prepaid price.

 

NOTE 15 – MANAGEMENT ASSERTIONS ON THE COURT CASES REGARDING CONVERTIBLE PROMISSORY NOTES OF THE PREDECESSOR.

 

 

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”). The details of the Promissory notes in the legal suit is as below.

 

Sl.No

 

Party Name

 

Date of Issue

 

Value of the Promissory Note

 

 

 

 

 

 

 

 

 

1.

 

Mammoth West Corporation

 

June 13, 2016

 

$ 7,280

 

 

 

 

 

 

 

 

 

 

2.

 

Southridge Partners II Limited Partnership

 

July 18, 2016

 

$ 26,000

 

 

 

In each instance, it is the Company’s contention that the requests to convert certain portions of each Note was improper and sought to convert into a number of common shares of the Company at a price not called for in each Note.

 

 

 

 

The possible outcome of the cases is expected to be repayment of promissory notes as agreed conversion ratio with predecessor and the unfavourable impact could be conversion of the promissory notes into shares of the PotNetwork Holdings Inc. Whereas the conversion ratio is unascertained.

 

NOTE 16 – MANAGEMENT ASSERTIONS ON CRITICAL AUDIT MATTERS

 

The management has been resolving these issues diligently and none will appear at year-end for the 2018 audit.

  

 

PotNetworkHolding.com

DiamondCBD.com

 

Consolidated Financial Statements

For the 6 months ended June 30, 2018

UNAUDITED

 

 

PotNetworkHolding.com

DiamondCBD.com

 

Consolidated Financial Statements

For the 6 months ended June 30, 2018

UNAUDITED

 

BALANCE SHEET (In $000)

 

June 30,

2018

 

 

Dec. 31,

2017

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash/Bank Balances

 

 

334

 

 

 

240

 

Accounts Receivable

 

 

32

 

 

 

330

 

Total Current assets

 

 

366

 

 

 

570

 

Other Assets

 

 

2,734

 

 

 

1,293

 

TOTAL ASSETS

 

 

3,100

 

 

 

1,863

 

Liabilities

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Payables

 

 

327

 

 

 

514

 

Total Current Liabilities

 

 

327

 

 

 

514

 

Other Liabilities

 

 

 

 

 

 

 

 

Loan from 3rd Party with interest

 

 

205

 

 

 

245

 

Note Payable

 

 

1,430

 

 

 

1,656

 

Total other liabilities

 

 

1,635

 

 

 

1,901

 

Total Liabilities

 

 

1,962

 

 

 

2,415

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common: Authorized 1,000,000,000 shares, $.00001 par value; and 448,921,254 Issued and outstanding

 

 

724

 

 

 

451

 

Preferred Stock Class A Authorized – 50,000 shares, $.00001 Par value; and 45,151 Issued and outstanding

 

 

0

 

 

 

0

 

Additional paid in capital

 

 

2,562

 

 

 

1,463

 

Retained Earnings

 

 

(2,149 )

 

 

(2,465 )

Total Stockholders’ Equity

 

 

1,138

 

 

 

(551 )

Total Liabilities & Equity

 

 

3,100

 

 

 

1,863

 

 

The accompanying notes are an integral part of these financial statements.

Re-grouped the previous year figures

 

 

PotNetworkHolding.com

DiamondCBD.com

 

Consolidated Financial Statements

For the 6 months ended June 30, 2018

UNAUDITED

 

 

Six Months Ended

 

 

Six Months Ended

 

INCOME STATEMENT

(In $000s, except per-share data)

 

June 30,

2018

 

 

June 30,

2017

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

Sales

 

 

12,044

 

 

 

5,078

 

Cost of goods sold

 

 

7,303

 

 

 

3,336

 

Gross profit

 

 

4,741

 

 

 

1,741

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

 

0

 

 

 

0

 

Sales & Marketing

 

 

4,063

 

 

 

1,182

 

General & Administrative Expenses

 

 

353

 

 

 

183

 

Interest

 

 

8

 

 

 

7

 

Total operating expenses

 

 

4,425

 

 

 

1,372

 

 

 

 

 

 

 

 

 

 

Profit (Loss) before Income Tax

 

 

316

 

 

 

369

 

Provision for Income Tax

 

 

0

 

 

 

0

 

Net Profit (Loss)

 

 

316

 

 

 

369

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

0.0007

 

 

 

0.0006

 

Basic and diluted

 

 

0.0007

 

 

 

0.0006

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

 

448,921,254

 

 

 

569,920,485

 

 

The accompanying notes are an integral part of these financial statements.

Re-grouped the previous year figures

 

 

PotNetworkHolding.com

DiamondCBD.com

 

Consolidated Financial Statements

For the 6 months ended June 30, 2018

UNAUDITED

 

 

 

Six Months Ended

 

 

Six Months Ended

 

CASH FLOWS STATEMENT

(In $000)

 

June 30,

2018

 

 

June 30,

2017

 

Operations

 

 

 

 

 

 

Net Income (Loss)

 

 

316

 

 

 

369

 

Adjustments to reconcile net income (loss)

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

297

 

 

 

0

 

Other Assets

 

 

(1,440 )

 

 

2

 

Payable

 

 

(186 )

 

 

(356 )

Third Party Loan

 

 

(41 )

 

 

0

 

Notes Payable

 

 

(225 )

 

 

210

 

Total Adjustments to reconcile net income (loss)

 

 

(1,595 )

 

 

(144 )

Net cash from the current year operations

 

 

(1,279 )

 

 

225

 

Investing

 

 

 

 

 

 

 

 

In wholly owned subsidiary

 

 

0

 

 

 

0

 

Net cash provided by investing activities

 

 

0

 

 

 

0

 

Financing

 

 

 

 

 

 

 

 

Changes in Equity

 

 

274

 

 

 

0

 

Changes in Class A Preferred Stock

 

 

0

 

 

 

0

 

Changes in Additional Capital

 

 

1,099

 

 

 

0

 

Net cash provided by financing activities

 

 

1,373

 

 

 

0

 

Net change in cash and cash equivalents

 

 

94

 

 

 

226

 

Cash and cash equivalents, beginning of period

 

 

240

 

 

 

169

 

Cash and cash equivalents, end of period

 

 

334

 

 

 

395

 

 

The accompanying notes are an integral part of these financial statements.

Re-grouped the previous year figures

 

 

PotNetworkHolding.com

DiamondCBD.com

 

Consolidated Financial Statements

For the 6 months ended June 30, 2018

UNAUDITED

  

STOCKHOLDERS’ EQUITY

(In $000)

 

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Surplus

(Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock as on Dec. 31, 2016

 

 

297,389,288

 

 

 

88

 

 

 

263

 

 

 

(2,421 )

Triangular Merger

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(54 )

Shares Issued – Legend

 

 

309,322,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued – Free

 

 

121,000,000

 

 

 

363

 

 

 

 

 

 

 

 

 

Shares Reserved

 

 

(157,791,417 )

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

 

 

 

 

 

 

 

 

1,200

 

 

 

 

 

Net Profit (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

179

 

Common Stock as on Dec. 31, 2017

 

 

569,920,485

 

 

 

451

 

 

 

1,463

 

 

 

(2,276 )

Shares Issued – Legend

 

 

7,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued – Free

 

 

87,500,769

 

 

 

274

 

 

 

 

 

 

 

 

 

Shares Issued – Cancelled

 

 

(216,000,000 )

 

 

 

 

 

 

 

 

 

 

 

 

Cash Received

 

 

 

 

 

 

 

 

 

 

1,099

 

 

 

 

 

Net Profit (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

317

 

Common Stock as on June 30, 2018

 

 

448,921,254

 

 

 

725

 

 

 

2562

 

 

 

(2,149 )

 

The accompanying notes are an integral part of these financial statements.

Re-grouped the previous year figures

 

 

PotNetworkHolding.com

DiamondCBD.com

 

NOTES TO THE FINANCIAL STATEMENTS

For the 6 months Ended June 30, 2018

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

PotNetwork Holdings, Inc. is a publicly traded holding company trading under the symbol “POTN”. The Company website is www.potnetworkholding.com.

 

This Company was previously known as:

 

 

· 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, State of incorporation changed from Nevada to Wyoming in 11-2004

 

· Araldica Wineries Ltd. until 2-2000

 

· H P Capital Corp. until 9-1996

  

The Company has six (6) wholly-owned subsidiaries:

 

 

· 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., a Colorado corporation, an early stage cryptocurrency mining company.

 

· Grinder Distribution, Inc., a Florida corporation, a distributor of herbal grinders.

 

· PNH Holdings, Inc., an inactive Colorado corporation

 

· SND Auto Group, Inc., an inactive Colorado corporation

  

Since the acquisition of First Capital Venture Co., the focus of the Company has been the development of the business of Diamond CBD, Inc. SND Auto Group Inc. became dormant in October 2016. All other subsidiaries are in early development stage. Hence, the financial statements reflect principally the business results of Diamond CBD business.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

Diamond CBD, Inc. focuses on the research, development, and multi-national marketing of premium hemp extracts that contain a broad range of cannabinoids and natural hemp derivatives.

 

Diamond CBD’s 94-page catalog can be found in http://catalog.diamondcbd.com.

 

Since January 31, 2017, Diamond CBD’s business has become the primary business of this Company.

 

In February 2018, the Company reversed ab initio the March 17, 2017 holding company reorganization. As a result, the Company reassumed its prior name, PotNetwork Holdings, Inc. (with an “s” on Holding), while remaining a Colorado corporation. None of the acquisitions or the share capital structure were affected.

 

Since January 2016, Gary Blum has served and continues to serve as sole director and until October 2017, when Richard Goulding, M.D., joined PotNetwork Holdings, Inc. as its Chief Executive Officer, had served as Company’s CEO as well.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATIONS: The statements were prepared following generally accepted accounting principles of the United States of America which were consistently applied.

USE OF ESTIMATES: Management uses estimates and assumptions in preparing these financial statements in accordance with U.S. generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.

REVENUE RECOGNITION – DIAMOND CBD BUSINESS

  

 

· Revenue is recognized when the title, ownership and risk of loss transfers, which is usually on the date of shipment.

 

· Sales are recorded when the sale proceeds are credited to the bank account.

 

· At each year end, the sales invoices are reviewed and based on the subsequent receipt of payments and are accounted as sales to comply with the matching principle of considering the expenses and revenues of the same year. Such book entries are reversed in the following year.

 

· For online sales, merchandise is not shipped unless and until the customer pays for it.

 

· For orders received over the phone, the merchandise will not ship unless and until the customer pays for it.

 

· Sales on credit terms are exceptional and requires the customer to establish credit.

 

· Revenue transactions represent the actual merchandise shipped to the customers as drop shipments.

 

· The revenue recorded in the books are net of sales and other taxes collected on behalf of governmental authorities.

 

· The revenue includes shipping and handling costs which are generally included in the sale invoices.

  

 

PotNetworkHolding.com

DiamondCBD.com

 

 

· Provision for discounts, when applicable, are stated in the sales invoice and used to determine the net of sales for each such invoice.

 

· Returns are accounted as a reduction of sales when the returns are authorized.

 

 

· The customers enjoy free returns of unopened items within 15 days of purchase.

 

· Free return labels are provided, meaning that the Company pays for the shipping cost for the returns by the customers.

 

· The customers can easily initiate the returns online in the Company website.

 

· Experienced professional staff reviews the selling price on an ongoing basis.

 

· Exceptions are reviewed and approved by the manager.

 

· Sales return are insignificant and hence no reserves are provided.

 

 

· Trade promotions such as sale prices, coupons, etc. are offered to the customers on various occasions as part of marketing and sales promotion. In all such cases, sales are recorded net of trade promotions, which is generally incurred at the time of sale. Most of the arrangements are for a year or less. Expected payouts are not estimated and hence accounted as and when incurred.

 

· Most of the sales are charged to the customers’ credit cards. Though there is a delay of 10 business days to receive the credit to the Company’s bank account, the sales are accounted as revenue based on the charge to the customers’ credit card but recorded as receivable. Also, this Company is subjected to 10% reserve for 90 days.

  

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.

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 the 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 statement, the Company does not hold any assets.

INTANGIBLE ASSETS

  

 

· 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.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

 

· 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.

  

 

· For the CBD business, $27,707.54 for trade mark registration, as a privately held company. For various reason, it was not pursued in 2016 and was expensed by the then private company.

 

 

 

 

· On becoming the wholly owned subsidiary, this Company confirmed not to pursue trade mark registration.

 

 

 

 

·

ASC 350 requires capitalizing any money spent on product development and product improvement. Before becoming a wholly owned subsidiary, CBD business expensed the payments for the product development.

  

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 a 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. Included in the profit for the current accounting period is $348,556 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.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

NOTE 3 – GOING CONCERN

 

The financial statements are prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.

 

Since PotNetwork Holdings, Inc. has no uncertainties as on the balance sheet date, the financial statements need no adjustments.

 

Since Diamond CBD’s business originated in 2015, it is considered as a business with limited operating history. Hence, this business is subject to all risks inherent in a developing business enterprise. Continued success depends on the problems, difficulties, complications, and delays frequently encountered in the competitive and regulatory environment in which it operates.

 

Since the CBD business is a burgeoning industry, there are no established entities whose business model Diamond CBD can follow or build upon.

 

Regulatory risk: Hemp-based CBD is often confused with marijuana-based CBD which remains illegal under federal Law, although the Company maintains that its products are legal. Yet, this legal risk cannot be ignored.

 

Although Diamond CBD does not sell any marijuana-based CBD products, its products could be treated as being illegal by federal/state authorities and by consumers.

 

The Company is involved in a highly competitive industry where it may compete with numerous other companies who offer alternative methods or approaches, who may have far greater resources, more experience, and personnel perhaps more qualified than the Company does. Such resources, experience and personnel may provide a substantial competitive advantage to the competition.

 

NOTE 4 – DEFERRED TAX COMPUTATION

 

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all the deferred tax assets will not be realized.

 

ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.

 

There was no income tax expense during this quarter. However, the availability of a net operating loss carryforward and the associated deduction, is subject to complex and restrictive federal income tax provisions as codified by Internal Revenue Code section 172 and related Treasury Regulations, all of which are subject to change and the availability of which can never be free from doubt.

 

The components of the deferred tax assets and liabilities are as follows:

 

 

 

30th June

2018

 

 

31st Dec

2017

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryovers

 

$ 1,586,648

 

 

$ 2,275,848

 

Stock-based compensation

 

 

 

 

 

 

Other temporary differences

 

 

 

 

 

 

Total deferred tax assets

 

 

1,586,648

 

 

 

2,275,848

 

Valuation allowance

 

 

(1,586,648 )

 

 

(2,275,848 )

Net deferred tax asset

 

$

 

 

$

 

 

NOTE 5 – INVENTORY – DIAMOND CBD

 

This Company has arranged to buy the exact quantity from the suppliers, based on the customer orders and thereby has eliminated the need for holding inventory on hand at any point of time.

 

Otherwise, this Company values the inventory at the lower of cost or market.

 

 

PotNetworkHolding.com

DiamondCBD.com

 

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES: There are no commitments and contingencies that exist at present, other than the legal disputes mentioned supra.

 

NOTE 7 – BUDGET & INTERNAL CONTROL PROCEDURES

 

 

· 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.

  

NOTE 8 – PAYROLL PROCEDURE

 

Payroll is processed by an independent payroll company to determine the taxes to be withheld and paid.

 

NOTE 9 – CAPITAL STOCK

 

 

· Common Stock: Authorized 1,000,000,000 shares, $.00001 par value; and 448,921,254 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 45,151 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.

 

 

 

 

· Share issuance for Services: [1] On March 12, 2018, one million shares were issued for services as agreed with the third party on March 5, 2018. [2] On May 5, 2018, 6,500,000 shares were issued for services as agreed with six independent contractors on various dates in 2017.

 

 

 

 

· Additional Paid-in Capital: In 2017, this Company borrowed $1,200,000 from a third-party investor, which loan amount has been converted into a common stock purchase warrant for 4.8M shares at $.25 per share exercisable over 5 years. $1,362,131 was received for the issuance of common stock purchase warrants in the first quarter of 2018 and $64,000 was received for the issuance of common stock purchase warrants in the first quarter of 2018.

 

 

PotNetworkHolding.com

DiamondCBD.com

 
NOTE 10 – LOAN FROM THIRD PARTIES

 

 

 

 

 

 

 

 

8%

 

 

 

 

 

8%

 

 

 

 

 

8%

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

 

before

 

 

 

 

 

for

 

 

 

 

 

for

 

 

 

 

 

 

 

 

Loan

 

 

2017

 

 

 

 

 

2017

 

 

 

 

 

2018 HY

 

 

 

 

A

 

9/11/2012

 

$ 100,000

 

 

$ 12,000

 

 

$ 112,000

 

 

$ 8,000

 

 

$ 120,000

 

 

$ 4,000

 

 

$ 124,000

 

B

 

7/1/2016

 

$ 25,000

 

 

$ 1,000

 

 

$ 26,000

 

 

$ 2,000

 

 

$ 28,000

 

 

$ 1,000

 

 

$ 29,000

 

C

 

7/1/2016

 

$ 7,000

 

 

$ 280

 

 

$ 7,280

 

 

$ 560

 

 

$ 7,840

 

 

$ 280

 

 

$ 8,120

 

D

 

4/28/2016

 

$ 42,000

 

 

$ 2,240

 

 

$ 44,240

 

 

$ 3,360

 

 

$ 47,600

 

 

$ 1,153

 

 

 

 

 

E

 

5/4/2016

 

$ 37,000

 

 

$ 1,974

 

 

$ 38,974

 

 

$ 2,960

 

 

$ 41,934

 

 

$ 1,480

 

 

$ 43,414

 

 

 

 

 

 

 

 

 

$ 17,494

 

 

$ 228,494

 

 

$ 16,880

 

 

$ 245,374

 

 

$ 7,913

 

 

$ 204,534

 

 

NOTE 11 – NOTES PAYABLE TO SIGN N DRIVE AUTO MALL, INC.

 

 

· The original note was for $1,850,000 dated June 2, 2014.

 

· The annual interest was 8%. But the interest has been waived based on an agreement for a fixed conversion rate.

 

· 121 million shares of common stock were issued in 2017.

 

· 25 million shares of common stock were issued in the First Quarter of 2018.

 

· 50 million shares of common stock were issued in the Second Quarter of 2018.

 

 

PotNetworkHolding.com

DiamondCBD.com

   

NOTE 12 – MANAGEMENT ASSERTIONS ON THE COURT CASES REGARDING CONVERTIBLE PROMISSORY NOTES OF THE PREDECESSOR.

 

 

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”). The details of the Promissory notes in the legal suit is as below.

 

Sl.No

 

Party Name

 

Date of Issue

 

Value of the Promissory Note

 

 

 

 

 

 

 

 

 

1.

 

Mammoth West Corporation

 

June 13, 2016

 

$ 7,280

 

 

 

 

 

 

 

 

 

 

2.

 

Southridge Partners II Limited Partnership

 

July 18, 2016

 

$ 26,000

 

 

 

In each instance, it is the Company’s contention that the requests to convert certain portions of each Note was improper and sought to convert into a number of common shares of the Company at a price not called for in each Note.

 

 

 

 

The possible outcome of the cases is expected to be repayment of promissory notes as agreed conversion ratio with predecessor and the unfavourable impact could be conversion of the promissory notes into shares of the PotNetwork Holdings Inc. Whereas the conversion ratio is unascertained.

 

NOTE 13 – MANAGEMENT ASSERTIONS ON CRITICAL AUDIT MATTERS

 

The management has been resolving these issues diligently and none will appear at year-end for the 2018 audit.

 

 

 

Consolidated Financial Statements

For the 9 months ended September 30, 2018

UNAUDITED

 

 

 

 

 

 

Consolidated Balance Sheet

 

 

 

 

 

Previous

 

 

 

Sep 30,

2018

 

 

Dec 31,

2017

 

 

 

 

 

 

Total

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash/Bank Balances

 

$ 248,397

 

 

$ 254,571

 

Accounts Receivable

 

$ 1,220,864

 

 

$ 313,581

 

 

 

 

 

 

 

 

 

 

Total Current assets

 

$ 1,469,261

 

 

$ 568,152

 

Other Assets

 

$ 1,736,599

 

 

$ 2,438,190

 

TOTAL ASSETS

 

$ 3,205,860

 

 

$ 3,006,342

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Payables

 

$ 192,916

 

 

$ 270,980

 

Total Current Liabilities

 

$ 192,916

 

 

$ 270,980

 

Other Liabilities

 

 

 

 

 

 

 

 

Loan from 3rd Party with interest

 

$ 207,914

 

 

$ 245,374

 

Note Payable

 

$ 1,430,624

 

 

$ 1,655,624

 

POTN

 

 

 

 

 

$ 1,200,000

 

Total other liabilities

 

$ 1,638,538

 

 

$ 3,100,998

 

Total Liabilities

 

$ 1,831,454

 

 

$ 3,371,978

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common: Authorized 1,000,000,000 shares, $.00001 par value; and 468,461,690 Issued and outstanding at September 30, 2018 and 569,920,485 Issued and outstanding at December 31, 2017

 

$ 724,326

 

 

$ 450,573

 

Preferred Stock Class A Authorized – 50,000 shares, $.00001 Par value; and 44,227 Issued and outstanding at September 30, 2018 and 45,151 Issued and outstanding at December 31, 2017

 

$ 400

 

 

$ 400

 

Additional paid in capital

 

$ 2,562,131

 

 

$ 1,463,131

 

Retained Earnings

 

$ (1,912,452 )

 

$ (2,279,740 )

Total Stockholders’ Equity

 

$ 1,374,405

 

 

$ (365,636 )

Total Liabilities & Equity

 

$ 3,205,860

 

 

$ 3,006,342

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

 

Re-grouped the previous year figures

 

 

 

 

 

 

 

 

 

 

 

Consolidated Income Statement

for 9 months ended 30th Sep., 2018

 

 

2018

 

 

2017

 

 

 

Total

 

 

Total

 

Sales

 

$ 17,967,189

 

 

$ 9,522,425

 

Cost of Goods Sold

 

$ 10,272,081

 

 

$ 5,990,334

 

Gross Profit (Loss)

 

$ 7,695,107

 

 

$ 3,532,091

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Research and development

 

$ 1,846

 

 

$

 

Sales & Marketing

 

$ 6,613,279

 

 

$ 2,293,003

 

General & Administrative Expenses

 

$ 709,887

 

 

$ 575,854

 

Total Expenses

 

$ 7,325,013

 

 

$ 2,868,857

 

Profit (Loss) before Income Tax

 

$ 370,094

 

 

$ 663,234

 

Prior Year Adjustments

 

 

 

 

 

 

 

 

Provision for Income Tax

 

$

 

 

$

 

Net Profit (Loss)

 

$ 370,094

 

 

$ 663,234

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

Re-grouped the previous year figures

 

 

 

 

 

 

 

 

 

 

 

Statement of Cash Flows for 9 months ended 30th Sep., 2018

 

 

2018

 

 

2017

 

 

 

Total

 

 

Total

 

Operating Activities

 

 

 

 

 

 

Net Income (Loss)

 

$ 370,094

 

 

$ 663,234

 

Adjustments to reconcile net income (loss) to calculate the net cash provided by/used by the operations

 

 

 

 

 

 

 

 

Accounts Receivable

 

$ (907,283 )

 

$ (259,003 )

Goodwill [ASC 805-40 Business Combinations]

 

$

 

 

$

 

Other Assets

 

$ (1,763,144 )

 

$ (483,956 )

Payable

 

$ (98,063 )

 

$

 

Other Liabilities

 

$ 1,185,096

 

 

$ 656,505

 

Total Adjustments to reconcile net income (loss) to calculate the net cash provided by/used by the operations

 

$ (1,583,394 )

 

$ (86,454 )

Net cash from the current year operations

 

$ (1,213,299 )

 

$ 576,780

 

Investing Activities

 

 

 

 

 

 

 

 

Common Stock

 

$ 273,753

 

 

$

 

Preferred A Stock

 

$

 

 

$

 

Additional Capital

 

$ 1,099,000

 

 

$

 

Retained Earnings

 

$ (165,627 )

 

$

 

Net cash provided by investing activities

 

$ 1,207,126

 

 

$

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

$

 

 

$

 

NET CASH INCREASE (DECREASE) For PERIOD

 

$ (6,174 )

 

$ 576,780

 

Cash, Beginning

 

$ 254,571

 

 

$ 100

 

Cash, Ending

 

$ 248,397

 

 

$ 576,880

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

 

Re-grouped the previous year figures

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Surplus

 

Description

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

(Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock as on Dec. 31, 2016

 

 

297,389,288

 

 

$ 87,573

 

 

$ 263,131

 

 

($2,275,848)

 

Triangular Merger

 

 

 

 

 

 

 

 

 

 

 

 

 

($53,934)

 

Shares Issued – Legend

 

 

151,531,197

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued – Free

 

 

121,000,000

 

 

$ 363,000

 

 

$ 1,099,000

 

 

 

 

Shares Reserved

 

 

157,791,417

 

 

 

 

 

 

 

 

 

 

 

 

Prior Period Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Profit (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 663,234

 

Common Stock as on Dec. 31, 2017

 

 

569,920,485

 

 

$ 450,573

 

 

$ 1,362,131

 

 

($2,279,740)

 

Shares Issued

 

 

114,541,205

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Reserved

 

 

82,000,000

 

 

$ 273,753

 

 

 

 

 

 

 

 

 

Shares Cancelled

 

 

(216,000,000 )

 

 

 

 

 

 

 

 

 

 

 

 

Net Profit (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 370,094

 

Common Stock as on Sep. 30, 2018

 

 

468,461,690

 

 

$ 724,326

 

 

$ 1,362,131

 

 

($1,912,452)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

Re-grouped the previous year figures

 

 

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the 9 months ended September 30, 2018

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

PotNetwork Holdings, Inc. is a publicly traded holding company trading under the symbol “POTN”. The Company website is www.potnetworkholding.com.

 

This Company was previously known as:

 

 

· 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, State of incorporation changed from Nevada to Wyoming in 11-2004

 

· Araldica Wineries Ltd. until 2-2000

 

· H P Capital Corp. until 9-1996

 

The Company has six (6) wholly-owned subsidiaries:

 

 

· 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., a Colorado corporation, an early stage cryptocurrency mining company.

 

· Grinder Distribution, Inc., a Florida corporation, a distributor of herbal grinders.

 

· PNH Holdings, Inc., an inactive Colorado corporation

 

· SND Auto Group, Inc., an inactive Colorado corporation

 

Since the acquisition of First Capital Venture Co., the focus of the Company has been the development of the business of Diamond CBD, Inc. SND Auto Group Inc. became dormant in October 2016. All other subsidiaries are in early development stage. Hence, the financial statements reflect principally the business results of Diamond CBD business.

 

Diamond CBD, Inc. focuses on the research, development, and multi-national marketing of premium hemp extracts that contain a broad range of cannabinoids and natural hemp derivatives.

 

 

 

Diamond CBD’s 94-page catalog can be found in http://catalog.diamondcbd.com.

 

Since January 31, 2017, Diamond CBD’s business has become the primary business of this Company.

 

In February 2018, the Company reversed ab initio the March 17, 2017 holding company reorganization. As a result, the Company reassumed its prior name, PotNetwork Holdings, Inc. (with an “s” on Holding), while remaining a Colorado corporation. None of the acquisitions or the share capital structure were affected.

 

Since January 2016, Gary Blum has served and continues to serve as sole director and until October 2017, when Richard Goulding, M.D., joined PotNetwork Holdings, Inc. as its Chief Executive Officer, had served Company’s CEO as well.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Ø

BASIS OF PRESENTATIONS: The statements were prepared following generally accepted accounting principles of the United States of America which were consistently applied.

Ø

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.

Ø

REVENUE RECOGNITION – DIAMOND CBD BUSINESS

 

 

· Revenue is recognized when the title, ownership and risk of loss transfers, which is usually on the date of shipment.

 

· Sales are recorded when the sale proceeds are credited to the bank account.

 

· At each year end, the sales invoices are reviewed and based on the subsequent receipt of payments and are accounted as sales to comply with the matching principle of considering the expenses and revenues of the same year. Such book entries are reversed in the following year.

 

· For online sales, merchandise is not shipped unless and until the customer pays for it.

 

· For orders received over the phone, the merchandise will not ship unless and until the customer pays for it.

 

· Sales on credit terms are exceptional and requires the customer to establish credit.

 

· Revenue transactions represent the actual merchandise shipped to the customers as drop shipments.

 

· The revenue recorded in the books are net of sales returns and other taxes collected on behalf of governmental authorities.

 

· The revenue includes shipping and handling costs which are generally included in the sale invoices.

 

· Provision for discounts, when applicable, are stated in the sales invoice and used to determine the net of sales for each such invoice.

 

· Returns are accounted as a reduction of sales when the returns are authorized.

 

 

§

The customers enjoy free returns of unopened items within 15 days of purchase.

 

§

Free return labels are provided, meaning that the Company pays for the shipping cost for the returns by the customers.

 

 

 

 

§

The customers can easily initiate the returns online in the Company website.

 

§

Experienced professional staff reviews the selling price on an ongoing basis.

 

§

Exceptions are reviewed and approved by the manager.

 

§

Sales return are insignificant and hence no reserves are provided.

 

 

· Trade promotions such as sale prices, coupons, etc. are offered to the customers on various occasions as part of marketing and sales promotion. In all such cases, sales are recorded net of trade promotions, which is generally incurred at the time of sale. Most of the arrangements are for a year or less. Expected payouts are not estimated and hence accounted as and when incurred.

 

· Most of the sales are charged to the customers’ credit cards. Though there is a delay of 10 business days to receive the credit to the Company’s bank account, the sales are accounted as revenue based on the charge to the customers’ credit card but recorded as receivable. Also, this Company is subjected to 10% reserve for 90 days.

 

Ø

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.

Ø

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 the 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 statement, the Company does not hold any assets.

Ø

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.

 

 

§

For the CBD business, $27,707.54 for trade mark registration, as a privately held company. For various reason, it was not pursued in 2016 and was expensed by the then private company.

 

§

On becoming the wholly owned subsidiary, this Company confirmed not to pursue trade mark registration.

 

§

ASC 350 requires capitalizing any money spent on product development and product improvement. Before becoming a wholly owned subsidiary, CBD business expensed the payments for the product development.

 

 

 

 

Ø

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.

 

Ø

Investments in subsidiaries: The March 17, 2017 reorganization is referred as a 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. Included in the profit for the current accounting period is $348,556 attributable to the business generated by this wholly owned subsidiary. As required under ASC 810, consolidated accounts are presented in this financial statement.

 

 

Ø

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.

 

 

 

NOTE 3 – GOING CONCERN

 

The financial statements are prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.

 

Since PotNetwork Holdings, Inc. has no uncertainties as on the balance sheet date, the financial statements need no adjustments.

 

Since Diamond CBD’s business originated in 2015, it is considered as a business with limited operating history. Hence, this business is subject to all risks inherent in a developing business enterprise. Continued success depends on the problems, difficulties, complications, and delays frequently encountered in the competitive and regulatory environment in which it operates.

 

Since the CBD business is a burgeoning industry, there are no established entities whose business model Diamond CBD can follow or build upon.

 

Regulatory risk: Hemp-based CBD is often confused with marijuana-based CBD which remains illegal under federal Law, although the Company maintains that its products are legal. Yet, this legal risk cannot be ignored.

 

Although Diamond CBD does not sell any marijuana-based CBD products, its products could be treated as being illegal by federal/state authorities and by consumers.

 

The Company is involved in a highly competitive industry where it may compete with numerous other companies who offer alternative methods or approaches, who may have far greater resources, more experience, and personnel perhaps more qualified than the Company does. Such resources, experience and personnel may provide a substantial competitive advantage to the competition.

 

NOTE 4 – DEFERRED TAX COMPUTATION

 

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all the deferred tax assets will not be realized.

 

ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.

 

 

 

There was no income tax expense during this quarter. However, the availability of a net operating loss carryforward and the associated deduction, is subject to complex and restrictive federal income tax provisions as codified by Internal Revenue Code section 172 and related Treasury Regulations, all of which are subject to change and the availability of which can never be free from doubt.

 

The components of the deferred tax assets and liabilities are as follows:

 

 

 

30th Sep

2018

 

 

31st Dec

2017

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryovers

 

$ 1,912,452

 

 

$ 2,279,740

 

Stock-based compensation

 

 

 

 

 

 

Other temporary differences

 

 

 

 

 

 

Total deferred tax assets

 

 

1,912,452

 

 

 

2,279,740

 

Valuation allowance

 

 

(1,912,452 )

 

 

(2,279,740 )

Net deferred tax asset

 

$

 

 

$

 

 

NOTE 5 – INVENTORY – DIAMOND CBD

 

This Company has arranged to buy the exact quantity from the suppliers, based on the customer orders and thereby has eliminated the need for holding inventory on hand at any point of time.

 

Otherwise, this Company values the inventory at the lower of cost or market.

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES: There are no commitments and contingencies that exist at present, other than the legal disputes mentioned supra.

 

NOTE 7 – BUDGET & INTERNAL CONTROL PROCEDURES

 

 

· 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.

 

NOTE 8 – PAYROLL PROCEDURE

 

Payroll is processed by an independent payroll company to determine the taxes to be withheld and paid.

 

 

 

NOTE 9 – CAPITAL STOCK

 

 

· Common Stock: Authorized 1,000,000,000 shares, $.00001 par value; and 468,461,690 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 44,227 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.

 

 

 

 

· Share issuance for Services: [1] On March 12, 2018, one million shares were issued for services as agreed with the third party on March 5, 2018. [2] On May 5, 2018, 6,500,000 shares were issued for services as agreed with six independent contractors on various dates in 2017.

 

 

 

 

· Additional Paid-in Capital: In 2017, this Company borrowed $1,200,000 from a third-party investor, which loan amount has been converted into a common stock purchase warrant for 4.8M shares at $.25 per share exercisable over 5 years. $1,362,131 was received for the issuance of common stock purchase warrants in the first quarter of 2018 and $64,000 was received for the issuance of common stock purchase warrants in the first quarter of 2018.

 

NOTE 10 – LOAN FROM THIRD PARTIES

 

 

 

 

 

 

 

 

8%

 

 

 

 

8%

 

 

 

 

8%

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

 

before

 

 

 

 

 

for

 

 

 

 

 

for

 

 

 

 

 

 

 

 

Loan

 

 

2017

 

 

 

 

 

2017

 

 

 

 

 

2018-9M

 

 

 

 

A

 

9/11/2012

 

$ 100,000

 

 

$ 12,000

 

 

$ 112,000

 

 

$ 8,000

 

 

$ 120,000

 

 

$ 6,000

 

 

$ 126,000

 

B

 

7/1/2016

 

$ 25,000

 

 

$ 1,000

 

 

$ 26,000

 

 

$ 2,000

 

 

$ 28,000

 

 

$ 1,500

 

 

$ 29,500

 

C

 

7/1/2016

 

$ 7,000

 

 

$ 280

 

 

$ 7,280

 

 

$ 560

 

 

$ 7,840

 

 

$ 420

 

 

$ 8,260

 

D

 

4/28/2016

 

$ 42,000

 

 

$ 2,240

 

 

$ 44,240

 

 

$ 3,360

 

 

$ 47,600

 

 

$ 1,153

 

 

 

 

 

E

 

5/4/2016

 

$ 37,000

 

 

$ 1,974

 

 

$ 38,974

 

 

$ 2,960

 

 

$ 41,934

 

 

$ 2,220

 

 

$ 44,154

 

 

 

 

 

 

 

 

 

$ 17,494

 

 

$ 228,494

 

 

$ 16,880

 

 

$ 245,374

 

 

$ 11,293

 

 

$ 207,914

 

 

NOTE 11 – NOTES PAYABLE TO SIGN N DRIVE AUTO MALL, INC.

 

 

· The original note was for $1,850,000 dated June 2, 2014.

 

· The annual interest was 8%. But the interest has been waived based on an agreement for a fixed conversion rate.

 

· 121 million shares of common stock were issued in 2017.

 

· 25 million shares of common stock were issued in the First Quarter of 2018.

 

· 50 million shares of common stock were issued in the Second Quarter of 2018.

 

 

  

NOTE 12 – MANAGEMENT ASSERTIONS ON THE COURT CASES REGARDING CONVERTIBLE PROMISSORY NOTES OF THE PREDECESSOR.

 

 

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”). The details of the Promissory notes in the legal suit is as below.

 

Sl.No

 

Party Name

 

Date of Issue

 

Value of the Promissory Note

 

 

 

 

 

 

 

 

 

1.

 

Mammoth West Corporation

 

June 13, 2016

 

$ 7,280

 

 

 

 

 

 

 

 

 

 

2.

 

Southridge Partners II Limited Partnership

 

July 18, 2016

 

$ 26,000

 

 

 

In each instance, it is the Company’s contention that the requests to convert certain portions of each Note was improper and sought to convert into a number of common shares of the Company at a price not called for in each Note.

 

 

 

 

The possible outcome of the cases is expected to be repayment of promissory notes as agreed conversion ratio with predecessor and the unfavourable impact could be conversion of the promissory notes into shares of the PotNetwork Holdings Inc. Whereas the conversion ratio is unascertained.

   

NOTE 13 – MANAGEMENT ASSERTIONS ON CRITICAL AUDIT MATTERS

 

The management has been resolving these issues diligently and none will appear at year-end for the 2018 audit.

 

 

 

EXHIBIT 2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXHIBIT 3.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

EXHIBIT 3.3

 

BY-LAWS

 

OF

 

POTNETWORK HOLDINGS, INC.

 

ARTICLE I

 

OFFICES

 

1.1. Registered Office: The registered office shall be established and maintained at 30370 Coyote Run Ct., Oak Creek, Colorado 80467, United States and Roger Johnson, a Colorado resident, shall be the registered agent of the Corporation in charge thereof.

 

ARTICLE II

 

STOCKHOLDERS

 

2.1. Place of Stockholders’ Meetings: All meetings of the stockholders of the Corporation shall be held at such place or places, within or outside the State of Colorado as may be fixed by the Board of Directors from time to time or as shall be specified in the respective notices thereof. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any designated place, but may instead be held solely by means of remote communication. Stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication participate in a meeting of stockholders and be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (i) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (ii) the Corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation.

 

2.2. Date and Hour of Annual Meetings of Stockholders: If there be a failure to hold the annual meeting or to take action by written consent to elect Directors in lieu of an annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 13 months after the latest to occur of the organization of the Corporation, its last annual meeting or the last action by written consent to elect Directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or Director.

 

 

2.3. Purpose of Annual Meetings: At each annual meeting, the stockholders shall elect the members of the Board of Directors for the succeeding year. At any such annual meeting any further proper business may be transacted.

 

2.4. Special Meetings of Stockholders: Special meetings of the stockholders or of any class or series thereof entitled to vote may be called by the Board of Directors, President or by the Chairman of the Board of Directors, or at the request in writing by stockholders of record owning at least fifty (50%) percent of the issued and outstanding voting shares of common stock of the Corporation.

 

2.5. Notice of Meetings of Stockholders: Except as otherwise expressly required or permitted by law, not less than ten days nor more than sixty days before the date of every stockholders’ meeting the Secretary shall give to each stockholder of record entitled to vote at such meeting, written notice, served personally by mail or by telegram, stating the following: the place, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting; and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Such notice, if mailed shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address for notices to such stockholder as it appears on the records of the Corporation. Any notice to stockholders shall be effective if given by a form of electronic transmission consented to by the stockholder to whom notice is to be given.

 

2.6. Quorum of Stockholders: (a) Unless otherwise provided by the Certificate of Incorporation or by law, at any meeting of the stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of the votes thereat shall constitute a quorum. The withdrawal of any stockholder after the commencement of a meeting shall have no effect on the existence of a quorum, after a quorum has been established at such meeting.

 

(b) At any meeting of the stockholders at which a quorum shall be present, a majority of voting stockholders, present in person or by proxy, may adjourn the meeting from time to time without notice other than announcement at the meeting so long as the time, place, if any, and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. In the absence of a quorum, the Officer presiding thereat shall have power to adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting, other than announcement at the meeting, shall not be required to be given except as provided in paragraph (d) below and except where expressly required by law.

 

(c) At any adjourned session at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting originally called but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof, unless a new record date is fixed by the Board of Directors.

 

 

(d) However, if an adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

 

2.7. Chairman and Secretary of Meeting: The President, shall preside at meetings of the stockholders. The Secretary shall act as secretary of the meeting or if he is not present, then the presiding Officer may appoint a person to act as secretary of the meeting.

 

2.8. Voting by Stockholders: Except as may be otherwise provided by the Certificate of Incorporation or these by‑laws, at every meeting of the stockholders each stockholder shall be entitled to one vote for each share of voting stock standing in his name on the books of the Corporation on the record date for the meeting. Except as otherwise provided by these by-laws, all elections and questions shall be decided by the vote of a majority in interest of the stockholders present in person or represented by proxy and entitled to vote at the meeting.

 

2.9. Proxies: Any stockholder entitled to vote at any meeting of stockholders may vote either in person or by proxy. A proxy may be in writing, subscribed by the stockholder or his duly authorized attorney-in-fact, but need not be dated, sealed, witnessed or acknowledged, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy calls for a longer period. A stockholder may authorize another person to act for such stockholder as proxy by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the proxyholder, provided that any such communication must either set forth or be submitted with information from which it can be determined that such communication was authorized by the stockholder.

 

2.10. Inspectors: The election of Directors and any other vote by ballot at any meeting of the stockholders shall be supervised by one or more inspectors. Such inspectors may be appointed by the presiding Officer before or at the meeting; or if one or both inspectors so appointed shall refuse to serve or shall not be present, such appointment shall be made by the Officer presiding at the meeting.

 

2.11. List of Stockholders: (a) At least ten days before every meeting of stockholders, the Secretary shall prepare and make a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder.

 

(b) For a period of at least ten days prior to the meeting, such list shall be open to examination by any stockholder for any purpose germane to the meeting, either at the principal place of business of the Corporation during ordinary business hours or on a reasonably accessible electronic network, and the information required to gain access to such list is provided with the notice of the meeting. If the meeting is to be held at a designated place, then the list shall be produced and kept at the time and place where the meeting is to be held and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall be open to inspection of any stockholder during the meeting on a reasonably accessible electronic network and the information required to access such list shall be provided with the notice of the meeting.

 

 

(c) The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this Section 2.11 or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders.

 

2.12. Procedure at Stockholders’ Meetings: Except as otherwise provided by these by-laws or any resolutions adopted by the stockholders or Board of Directors, the order of business and all other matters of procedure at every meeting of stockholders shall be determined by the presiding Officer.

 

2.13. Action By Consent Without Meeting: Unless otherwise provided by the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. An electronic transmission consenting to an action to be taken and transmitted by a stockholder, member or proxyholder or by a person authorized to act for a stockholder, member or proxyholder, shall be deemed to be written, signed and dated for the purposes of this section provided that such electronic transmission sets forth information from which the Corporation can determine that the electronic transmission was transmitted by the stockholder or proxyholder and the date on which the stockholder or proxyholder transmitted such electronic transmission. The date on which such electronic transmission is transmitted shall be deemed the date on which such consent was signed. No consent given by electronic transmission shall be deemed delivered until reproduced in paper and delivered to the Corporation at its registered office in the state, its principal place of business or an Officer having custody of the record book of stockholder meetings in the manner provided by the Board of Directors.

 

2.14. Shareholders shall not be entitled to vote on any matter except for the election of members to the Board of Directors. All other functions and authority of the Corporation shall be performed by the officers and the members of the Board of Directors.

 

 

ARTICLE III

 

DIRECTORS

 

3.1. Powers of Directors: The property, business and affairs of the Corporation shall be managed by its Board of Directors which may exercise all the powers of the Corporation except such as are by the law of the State of Colorado or the Certificate of Incorporation or these by-laws required to be exercised or done by the stockholders. The powers of the Directors shall be the maximum possible under the law.

 

3.2. Number, Method of Election, Terms of Office of Directors: The number of Directors which shall constitute the Board of Directors shall be between one and five, unless and until otherwise determined by a vote of a majority of the entire Board of Directors. Each Director shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified, provided, however, that a Director may resign at any time. Directors need not be stockholders. All elections of Directors shall be by written ballot, unless otherwise provided in the Certificate of Incorporation; if authorized by the Board of Directors, such requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder or proxyholder.

 

3.3. Vacancies on Board of Directors; Removal: (a) Any Director may resign his office at any time by delivering his resignation in writing or by electronic transmission to the Chairman of the Board or to the President. The resignation will take effect at the time specified therein or, if no time is specified, it will be effective at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.

 

(b) Any vacancy in the authorized number of Directors may be filled by majority vote of the stockholders and any Director so chosen shall hold office until the next annual election of Directors by the stockholders and until his successor is duly elected and qualified or until his earlier resignation or removal.

 

(c) Any Director may be removed with or without cause at any time by the majority vote of the stockholders given at a special meeting of the stockholders called for that purpose.

 

3.4. Meetings of the Board of Directors: (a) The Board of Directors may hold its meetings, both regular and special, either within or outside the State of Colorado.

 

(b) Regular meetings of the Board of Directors may be held at such time and place as shall from time to time be determined by resolution of the Board of Directors. No notice of such regular meetings shall be required. If the date designated for any regular meeting shall be a legal holiday, then the meeting shall be held on the next day which is not a legal holiday.

 

 

(c) The first meeting of each newly elected Board of Directors shall be held immediately following the annual meeting of the stockholders for the election of Officers and the transaction of such other business as may come before it. If such meeting is held at the place of the stockholders’ meeting, no notice thereof shall be required.

 

(d) Special meetings of the Board of Directors shall be held whenever called by direction of the Chairman of the Board or the President or at the written request of any one Director.

 

(e) The Secretary shall give notice to each Director of any special meeting of the Board of Directors by mailing the same at least three days before the meeting or by telegraphing, telexing, or delivering the same not later than the date before the meeting. Unless required by law, such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting. Any and all business may be transacted at any meeting of the Board of Directors. No notice of any adjourned meeting need be given. No notice to or waiver by any Director shall be required with respect to any meeting at which the Director is present.

 

3.5. Quorum and Action: Unless provided otherwise by law or by the Certificate of Incorporation or these by-laws, a majority of the Directors shall constitute a quorum for the transaction of business; but if there shall be less than a quorum at any meeting of the Board, a majority of those present may adjourn the meeting from time to time. The vote of a majority of the Directors present at any meeting at which a quorum is present shall be necessary to constitute an act of the Board of Directors.

 

3.6. Presiding Officer and Secretary of the Meeting: The President, or, in his absence a member of the Board of Directors selected by the members present, shall preside at meetings of the Board. The Secretary shall act as secretary of the meeting, but in his absence the presiding Officer may appoint a secretary of the meeting.

 

3.7. Action by Consent Without Meeting: Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or electronic transmissions are filed with the minutes or proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

 

3.8. Action by Telephonic Conference: Members of the Board of Directors, or any committee designated by such board, may participate in a meeting of such board or committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting.

 

3.9. Committees: The Board of Directors shall, by resolution or resolutions passed by a majority of Directors, designate one or more committees, each of such committees to consist of one or more Directors of the Corporation, for such purposes as the Board shall determine. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee.

 

 

3.10. Compensation of Directors: Directors shall receive such reasonable compensation for their service on the Board of Directors or any committees thereof, whether in the form of salary or a fixed fee for attendance at meetings, or both, with expenses, if any, as the Board of Directors may from time to time determine. Nothing herein contained shall be construed to preclude any Director from serving in any other capacity and receiving compensation therefor.

 

ARTICLE IV

 

OFFICERS

 

4.1. Officers, Title, Elections, Terms: (a) The elected Officers of the Corporation shall be a President, a Vice President, a Treasurer and a Secretary, and such other Officers as the Board of Directors shall deem advisable. The Officers shall be elected by the Board of Directors at its annual meeting following the annual meeting of the stockholders, to serve at the pleasure of the Board or otherwise as shall be specified by the Board at the time of such election and until their successors are elected and qualified.

 

(b) The Board of Directors may elect or appoint at any time, and from time to time, additional Officers or agents with such duties as it may deem necessary or desirable. Such additional Officers shall serve at the pleasure of the Board or otherwise as shall be specified by the Board at the time of such election or appointment. Two or more offices may be held by the same person.

 

(c) Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors.

 

(d) Any Officer may resign his office at any time. Such resignation shall be made in writing and shall take effect at the time specified therein or, if no time be specified, at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.

 

(e) The salaries of all Officers of the Corporation shall be fixed by the Board of Directors.

 

4.2. Removal of Elected Officers: Any elected Officer may be removed at any time, either with or without cause, by resolution adopted at any regular or special meeting of the Board of Directors by a majority of the Directors then in office.

 

 

4.3. Duties: (a) President: The President shall be the principal executive Officer of the Corporation and, subject to the control of the Board of Directors, shall supervise and control all the business and affairs of the Corporation. He shall, when present, preside at all meetings of the stockholders and of the Board of Directors. He shall see that all orders and resolutions of the Board of Directors are carried into effect (unless any such order or resolution shall provide otherwise), and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time.

 

(b) Treasurer: The Treasurer shall: (1) have charge and custody of and be responsible for all funds and securities of the Corporation; (2) receive and give receipts for moneys due and payable to the Corporation from any source whatsoever; (3) deposit all such moneys in the name of the Corporation in such banks, trust companies, or other depositaries as shall be selected by resolution of the Board of Directors; and (4) in general perform all duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors. He shall, if required by the Board of Directors, give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine.

 

(c) Secretary: The Secretary shall: (1) keep the minutes of the meetings of the stockholders, the Board of Directors, and all committees, if any, of which a secretary shall not have been appointed, in one or more books provided for that purpose; (2) see that all notices are duly given in accordance with the provisions of these by-laws and as required by law; (3) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all documents, the execution of which on behalf of the Corporation under its seal, is duly authorized; (4) keep a register of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder; (5) have general charge of stock transfer books of the Corporation; and (6) in general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

 

ARTICLE V

 

CAPITAL STOCK

 

5.1. Stock Certificates: (a) Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of, the Corporation by the President or a Vice President and by the Treasurer or the Secretary, certifying the number of shares owned by him.

 

(b) If such certificate is countersigned by a transfer agent other than the Corporation or its employee, or by a registrar other than the Corporation or its employee, the signa-tures of the Officers of the Corporation may be facsimiles, and, if permitted by law, any other signature may be a facsimile.

 

(c) If any Officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such Officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such Officer at the date of issue.

 

 

(d) Certificates of stock shall be issued in such form not inconsistent with the Certificate of Incorporation as shall be approved by the Board of Directors, and shall be numbered and registered in the order in which they were issued.

 

(e) All certificates surrendered to the Corporation shall be canceled with the date of cancellation, and shall be retained by the Secretary, together with the powers of attorney to transfer and the assignments of the shares represented by such certificates, for such period of time as shall be prescribed from time to time by resolution of the Board of Directors.

 

5.2. Record Ownership: A record of the name and address of the holder of such certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Corporation’s books. The Corporation shall be entitled to treat the holder of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by law.

 

5.3. Transfer of Record Ownership: Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the certificate or his attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor and a written assignment of the shares evidenced thereby. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so.

 

5.4. Lost, Stolen or Destroyed Certificates: Certificates representing shares of the stock of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed in such manner and on such terms and conditions as the Board of Directors from time to time may authorize.

 

5.5. Transfer Agent; Registrar; Rules Respecting Certificates: The Corporation may maintain one or more transfer offices or agencies where stock of the Corporation shall be transferable. The Corporation may also maintain one or more registry offices where such stock shall be registered. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates.

 

5.6. Fixing Record Date for Determination of Stockholders of Record: The Board of Directors may fix, in advance, a date as the record date for the purpose of determining stockholders entitled to notice of, or to vote at, any meeting of the stockholders or any adjournment thereof, or the stockholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or to express consent to corporate action in writing without a meeting, or in order to make a determination of the stockholders for the purpose of any other lawful action. Such record date in any case shall be not more than sixty days nor less than ten days before the date of a meeting of the stockholders, nor more than sixty days prior to any other action requiring such determination of the stockholders. A determination of stockholders of record entitled to notice or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

 

 

5.7. Dividends: Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any funds of the Corporation available for dividends, such sum or sums as the Board of Directors from time to time in its discretion deems proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the Board of Directors shall deem conducive to the interests of the Corporation.

 

ARTICLE VI

 

SECURITIES HELD BY THE CORPORATION

 

6.1. Voting: Unless the Board of Directors shall otherwise order, the President, the Secretary or the Treasurer shall have full power and authority, on behalf of the Corporation, to attend, act and vote at any meeting of the stockholders of any corporation in which the Corporation may hold stock, and at such meeting to exercise any or all rights and powers incident to the ownership of such stock, and to execute on behalf of the Corporation a proxy or proxies empowering another or others to act as aforesaid. The Board of Directors from time to time may confer like powers upon any other person or persons.

 

6.2. General Authorization to Transfer Securities Held by the Corporation: (a) Any of the following Officers, to wit: the President and the Treasurer shall be, and they hereby are, authorized and empowered to transfer, convert, endorse, sell, assign, set over and deliver any and all shares of stock, bonds, debentures, notes, subscription warrants, stock purchase warrants, evidence of indebtedness, or other securities now or hereafter standing in the name of or owned by the Corpora-tion, and to make, execute and deliver, under the seal of the Corporation, any and all written instruments of assignment and transfer necessary or proper to effectuate the authority hereby conferred.

 

(b) Whenever there shall be annexed to any instrument of assignment and transfer executed pursuant to and in accordance with the foregoing paragraph (a), a certificate of the Secretary of the Corporation in office at the date of such certificate setting forth the provisions of this Section 6.2 and stating that they are in full force and effect and setting forth the names of persons who are then Officers of the Corporation, then all persons to whom such instrument and annexed certificate shall thereafter come, shall be entitled, without further inquiry or investigation and regardless of the date of such certificate, to assume and to act in reliance upon the assumption that the shares of stock or other securities named in such instrument were theretofore duly and properly transferred, endorsed, sold, assigned, set over and delivered by the Corporation, and that with respect to such securities the authority of these provisions of the by-laws and of such Officers is still in full force and effect.

 

 

ARTICLE VII

 

MISCELLANEOUS

 

7.1. Signatories: All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such Officer or Officers or such other person or persons as the Board of Directors may from time to time designate.

 

7.2. Seal: The seal of the Corporation shall be in such form and shall have such content as the Board of Directors shall from time to time determine.

 

7.3. Notice and Waiver of Notice: Whenever any notice of the time, place or purpose of any meeting of the stockholders, Directors or a committee is required to be given under the law of the State of Colorado, the Certificate of Incorporation or these by-laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, or a waiver by electronic transmission by the person entitled to notice whether before or after the holding thereof, or actual attendance at the meeting in person or, in the case of any stockholder, by his attorney-in-fact, shall be deemed equivalent to the giving of such notice to such persons.

 

7.4. Indemnity: The Corporation shall indemnify its Directors, Officers and employees to the fullest extent allowed by law, provided, however, that it shall be within the discretion of the Board of Directors whether to advance any funds in advance of disposition of any action, suit or proceeding, and provided further that nothing in this section 7.4 shall be deemed to obviate the necessity of the Board of Directors to make any determination that indemnification of the Director, Officer or employee is proper under the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of Section 145 of the Colorado General Corporation Law.

 

7.5. Fiscal Year: Except as from time to time otherwise determined by the Board of Directors, the fiscal year of the Corporation shall end on December 31.

 

 

 

EXHIBIT 10.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





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