Overview

The primary business of PotNetwork Holdings, Inc. ("POTN") is conducted through its primary subsidiary, First Capital Venture Co., whose subsidiary, CBD, LLC (d/b/a Diamond CBD) is engaged in the development and sales of hemp-derived CBD oil containing products. The Company also owns and operates PotNetwork Media Group, Inc., operator of the informational website to the cannabis and CBD industry, PotNetwork.com.





Results of Operations

Results of Operations and Nonrecurring Events during the year ended December 31, 2020 as compared to the year ended December 31, 2019.

For the year ended December 31, 2020 and 2019, we had revenues of $9,680,543 and $15,060,840 respectively. This represents a decrease in revenue of $(5,380,297) or 35.72%. This decrease in revenue was due to a retail distribution contraction as a result of the Covid-19 pandemic, and an overall reduction in direct sales activity specific to the COVID-19 pandemic.

Our Gross Profit from the sale of all products the year ended December 31, 2020 and 2019 was $3,428,205 and $4,816,604 respectively, or a decrease of $(1,388,399) or 28.83%. This decrease was due to the reduction in revenue year-over-year.

Our Net Profit (Loss) for the years ended December 31, 2020 increased to a Loss of $(5,584,669) from a Loss of $(3,367,831) in 2019. The Loss for 2020 is comprised of three distinct items: a loss on operating activities of $(1,877,171) and losses caused by two nonrecurring extraordinary items totaling $ (3,707,497). (There were no nonrecurring event items in 2019.) The operational loss was primarily caused by a reduction in gross margin attributable to a reduction in revenues. The two nonrecurring extraordinary items were (a) a loss attributable to the cost of the issuance of common stock to each of two former debtholders, specific to settlement agreements of long-standing court cases negotiated with each, in the amount of $695,048 in total (see "Item 3. Legal Proceedings"), and (b) a loss from the write off of the amount paid to the drop shipper in the amount of $ (3,012,449). This write-off specific to the drop shipper account includes an adjustment for the reduction in value of inventory beyond its expiration date, and for obsolete or unsalable inventory, both events significantly attributable to a decline in consumer demand because of the Covid-19 pandemic. It also represents an impairment of any remaining value in this asset, which is undergoing internal review. (See note "18 - Critical Audit Matters" in the notes to the financial statements.)

Operating expenses for the twelve-month period ended December 31, 2020 compared to the same period ended December 31, 2019 decreased to $4,930,753 as compared to $7,980,296, a decrease of $3,049,543, or 38.21% attributable to a decrease in advertising and marketing expense from $4,109,951 in the twelve months ended December 31, 2019 to $1,490,713 for the same period in 2020.

Total expenses for the year ended December 31, 2020 were $5,305,376 with interest expense being $374,623 compared to $8,314,435 with interest expense of $334,139 for the comparable period of 2019.

Liquidity and Capital Resources

Assets decreased from $6,124,894 at the Company's fiscal year end of December 31, 2019 to $709,931 at December 31, 2020. The decrease in the assets is attributable to (a) the reduction over the year of the deposit in the amount of $5,070,696 previously held by our drop shipper on December 31, 2019, to $-0- as the result of utilization of the deposit for fulfillment of 2020 orders, and write-offs including for obsolete/outdated/unsalable inventory of the drop shipper driven by the decline in revenues attributable in part to the Covid-19 pandemic.






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Total Liabilities decreased from $5,907,000 as of December 31, 2019 to $5,007,338 as of December 31, 2020. The decrease is mainly attributed to a reduction in the amounts of loans due to third parties. Liabilities include two SBA loans: (a) a Paycheck Protection Program ("PPP") Loan entered into on 5/6/2020 in the amount of $135,404; and (b) an Economic Injury Disaster Loan ("EIDL") entered into on 6/18/2020 in the amount of $150,000.

Cash Flow from Operating Activities

Net cash from operations for the year ended December 31, 2020 was $(1,362,590) as compared to $(3,599,572) for the same period in 2019.

Cash Flow from Investing Activities

Net cash provided by investing activities for the year ended December 31, 2020 was $1,069,368 as compared to $2,453,389 for the same period in 2019.

Cash Flow from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2020 was $263,206 as compared to $632,339 for the same period in 2019.

Off-balance sheet arrangements

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

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