CABINET GROW, INC.
319 CLEMATIS STREET, SUITE 1008
WEST PALM BEACH, FL. 33401
September25, 2014
Filed via EDGAR
U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-4631
| ATTN: | Justin Dobbie |
| Legal Branch Chief |
| Re: | Cabinet Grow, Inc. |
| Registration Statement on Form S-1 | |
| Filed July 31, 2014 | |
| File No. 333-197749 |
DearMr. Dobbie
This letter is in response to the comments of the U.S. Securities and Exchange Commission (the “Commission”) dated August 27, 2014, with respect to the above-referenced filing. Amendment No. 1 to Registration Statement on Form S-1 of Cabinet Grow, Inc., a Nevada corporation (the “Company”), incorporates our responses to your comments. Our responses below follow the text of each comment and are reproduced consecutively for your convenience.
General
| 1. | Pleaseprovideuswithcopies ofallwrittencommunications,asdefinedinRule 405 undertheSecuritiesAct,thatyou, oranyone authorizedto do so onyourbehalf, presentto potentialinvestorsinrelianceonSection 5(d)oftheSecurities Act,whetherornot theyretaincopies ofthe communications.Similarly,pleaseprovideuswithanyresearchreports aboutyouthatarepublishedordistributedinrelianceuponSection2(a)(3)oftheSecuritiesActaddedbySection 105(a)oftheJumpstartOurBusinessStartups Actbyanybrokerordealerthatis participatingorwillparticipateinyouroffering. |
Response 1: We hereby advise the Staff that we will supplementally provide the Staff with copies of all written communications presented to potential investors in reliance on Section 5(d) of the Securities Act. To date, we have not sent any such communication to any potential investors, however, we will retain copies of any such communications. The Company is not aware of any research reports by any broker or dealer that is participating or will participate in the offering. To the extent that any such written communications are made in reliance on Section 5(d) of the Securities Act or any such reports are published or distributed in the future, the Company will supplementally provide them to the Staff.
Rule 135 Safe Harbor.
This notice/press release is being made pursuant to and in accordance with Rule 135 under the Securities Act of 1933, as amended. As required by Rule 135, this notice does not constitute an offer to sell or the solicitation of an offer to buy securities, and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction.
ProspectusSummary,page5
OurCompany,page5
| 2. | Pleasedisclosethatyourindependentauditorhas expressed substantialdoubtregardingyourabilitytocontinueas agoingconcern.Pleasesimilarlyrevisethethirdriskfactorandcaption on page8. |
Response 2: We have disclosed that our independent auditor has expressed substantial doubt regarding our ability to continue as a going concern and have revised our risk factor and related caption.
CorporateInformation,page5
| 3. | Pleasedisclose here,iftrue,thatyourprincipalexecutive officeandyour chief financial officerareinFloridaandbrieflydiscuss anycostsor risksthatyoumayincurfrom havingyourprincipalexecutive officeandchieffinancialofficeratsuchadistancefromyourprincipalplaceofbusinessandyourothertwoexecutiveofficers. |
Response 3: As our Chief Financial Officer’s office is located in Florida, we will incur additional costs of travel. We estimate that he will travel to our place of business approximately two times per quarter at an annual cost of approximately $10,000. As a matter of clarity the Company will only be utilizing the Florida address for regulatory correspondence matters, and the Irvine California office will serve as the principal place of business as well as the executive office.
SummaryFinancialData, page6
| 4. | Please expandNote(1)on page7to provideadetailed break-outofeachproformaadjustmenttocash,totalassets,workingcapital(deficit),andtotalstockholders’equity(deficit)thatreconcilestothe amounts presentedinthetable. |
Response 4: Previously Note (1) included adjustments to the March 31, 2014, balance sheet for activity that occurred after March 31, 2014. The previous pro forma adjustments are now included in the June 30, 2014, balance sheet presented herein.
5.Pleasetellusyourbasis underGAAPforrecognizing a$1,000,000receivable andan offsetting$1,000,000payablefortheunfunded portion oftheconvertiblepromissory notecommitment.
Response 5:We determined that recognition of the $1,000,000 note receivable was required because it did not meet the criteria in ASC 210-20-45-1, Balance Sheet Offsetting because neither the Company, nor the issuer of the note receivable and holder of the convertible notes payable, intend to set off the amounts owed pursuant to the related convertible notes payable against the right to receive proceeds pursuant to the note receivable. We concluded that netting was prohibited because the condition specified under ASC 210-20-45-1-c. was not met. We further concluded, consistent with ASC 210-20-45-5, that netting, and not recording the related convertible notes payable, would not be a representationally faithful presentation of the Company’s obligations on its statement of financial position.
RiskFactors, page8
Federalregulationandenforcementmayadverselyaffect, page8
6.Pleasedescribethespecificrisksand uncertainties offederalenforcement oftheControlled SubstancesAct, notwithstandingstatemedicalcannabislaws,inlightofthe“OgdenMemo” andthe“ColeMemo”issuedbytheDepartmentofJusticein 2009and
2011,respectively.
Response 6: The specific risks and uncertainties of federal enforcement of the Controlled Substance Act (the "CSA"), notwithstanding state medical cannabis laws, in light of the “Ogden Memo” and the “Cole Memo” issued by the Department of Justice (the “DOJ”) in 2009 and 2011, are reinforced and further clarified by the Cole Memo on August 29, 2013. In an effort to provide guidance to federal law enforcement, the DOJ has issued Guidance Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum provides that the DOJ is committed to enforcement of the CSA but the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent and rational way.
The August 29, 2013, memorandum provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state laws legalizing medical and recreational marijuana possession in small amounts. The memorandum sets forth certain enforcement priorities that are important to the federal government:
| · | Distribution of marijuana to children; |
| · | Revenue from the sale of marijuana going to criminals; |
| · | Diversion of medical marijuana from states where is legal to states where it is not; |
| · | Using state authorized marijuana activity as a pretext of other illegal drug activity; |
| · | Preventing violence in the cultivation and distribution of marijuana; |
| · | Preventing drugged driving; |
| · | Growing marijuana on federal property; and |
| · | Prevent possession or use of marijuana on federal property. |
As set forth in three separate DOJ memorandum setting forth enforcement priorities that are important to the federal government the DOJ has not devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but relied on state and local law enforcement to address marijuana activity.
7. Inthisregard, please addresstheriskstoyourbusinessresultingfrom theSupremeCourtrulingthatfederal lawmaypre-emptstate lawsrelatingtomarijuana,includingstatelawsrelatingtomedicalcannabis.
Response 7: The risks to our business resulting from the Supreme Court ruling that federal law may pre-empt state laws relating to marijuana, including state laws relating to medical cannabis based on our answer to question number 6 above. The U.S. Supreme Court has declined to hear a case brought by San Diego County, California that sought to establish federal preemption over state medical marijuana laws. The preemption claim was rejected by every court that reviewed the case. The California 4th District Court of Appeals wrote in its unanimous ruling, "Congress does not have the authority to compel the states to direct their law enforcement personnel to enforce federal laws." However, in Gonzales v. Raich the U.S. Supreme Court has held federal preemption exists as long as the CSA contains prohibitions against marijuana, that under the Commerce Clause of the United States Constitution, the United States may criminalize the production and use of homegrown cannabis even where states approve its use for medical purposes because Congress’ commerce power related to the production of a commodity meant for home consumption, be it wheat or marijuana, has a substantial effect on supply and demand in the national market for that commodity. Despite the Supreme Court finding federal preemption in Gonzales V. Raich, the administration’s policy toward small scale medical cannabis home consumption has been issued in three separate DOJ memorandum setting forth enforcement priorities that are important to the federal government the DOJ has not devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but relied on state and local law enforcement to address marijuana activity.
In anticipation of future Supreme Court litigation related to medical and recreational cannabis, Congress accepted the introduction of The Respect State Marijuana Law Act on April 12, 2013. This legislation has been sent to the House Judicial Committee and House Committee on Energy and Commerce for further congressional review. This legislation would amend the CSA to provide that provision of the CSA related to marijuana shall not be applied to any person acting in compliance with state laws related to the production, possession distribution, dispensing, administration or delivery of marijuana.
8. Tothe extentmaterial,please addariskfactordescribingtherisksifyouarefoundto be violating thelaws ofjurisdictionswheresale, possession, oruseofmedicalcannabisis notpermitted.
Response 8:We have added a new risk factor describing the risks ifwearefoundto be violating thelaws ofjurisdictionswheresale, possession, oruseofmedicalcannabisis notpermitted.
| 9. | Pleaseadd ariskfactordescribing theriskstoyourbusiness becauseofsignificant differences anduncertaintiesinvariousstatelegalandregulatoryregimesamongthosestatesthathavelegalizedmedicalcannabis.Inthisriskfactor, pleasealsodescribetherisks becauseoflocallawsand ordinancesthatmayrestrictmarijuana-relatedactivities,includingactivitiesrelatingtomedicalcannabis. |
Response 9: We have added a new risk factor. Of the twenty-three states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment, no two are identical. With the exception of Alaska and Colorado, state and local laws and regulations pertaining to medical cannabis generally trend to prohibit personal cultivation of medical cannabis. Our products are primarily designed for general agricultural use. We have no direct or indirect design features in our equipment specifically or primarily of the cultivation of medical cannabis. Our customers can grow anything they desire in our equipment. Particularly in areas that experience short growing season, in-door hydroponic and soil vegetable gardening is becoming more popular among those individuals seeking fresh organic food. Although it is possible that medical cannabis may be grown in our hydroponic and soil based equipment, we make no inquiry of our customers as to their intended agricultural use of or products.
Wearedependenton ourCEO,COOandoutsourcedconsultants, page11
10.Inaseparateriskfactorpleasedescribetherisks,includingrisks ofconflicts ofinterest, becauseyourCFOand otherofficers anddirectors do notdedicatetheir fulltimetoyour business.Wenoteyourdisclosureonpages 35and36.
Response 10: We have added a separate risk factor, includingrisks ofconflicts ofinterest, becauseourCFOand otherofficers anddirectors do notdedicatetheir fulltimetoour business.
OurDirectors andOfficers possessthemajorityofourvotingpower, page11
11.Pleaserevisethisriskfactortoclarifythattheowners ofyourClass APreferredStock,currentlyyourCEOandCOO,willhave51%ofthetotalvotes onanumberof significantstockholdermatters,regardless ofthe actualnumberofsharesofClass APreferredStockorcommon stockoutstandingat the time.Pleasealsoclarifythatthe shares ofClass APreferredStockheldbyyourCEOand COOhavebeenpledgedtoChicagoVenturePartners.
Response 11:We have revised the risk factor including clarifyingthatthe shares ofClass APreferredStockheldbyyourCEOand COOhavebeenpledgedtoChicagoVenturePartners.
ThepriceoftheShares offered has beenarbitrarilyestablished,page12
12.Pleaserevisethisriskfactortoclarifythattheofferingpricemaynotreflecttheintrinsicvalueofthe companyand itmaybesubstantiallyhigherthanfuturemarket pricestotheextent amarketforyourshares develops.
Response 12: We have revised the risk factor toclarifythattheofferingpricemaynotreflecttheintrinsicvalueofthe companyand itmaybesubstantiallyhigherthanfuturemarket pricestotheextent amarketforourshares develops.
There are convertiblenotes outstanding, page13
13.PleasedisclosethedatetheCVP notebecomes convertibleandthe conversion price.
Response 13: We have disclosed the date the CVP note becomes convertible and the conversion price.
Useof Proceeds, page14
14.Please clarifywhethertheuses ofproceeds itemizedinthetable arein orderofpriority.
RefertoInstruction 1toItem504 ofRegulationS-K.
Response 14: We have revised the table in order of priority pursuant to Item504 ofRegulationS-K.
15.Pleaserevisetheuseofproceeds tableto deductthe$40,000in offeringexpensesfromthegross offeringproceeds.
Response 15: We have revised the table to deduct the $40,000 in offering expenses from the gross offering proceeds.
16. You statethatyoumaydetermineto“allocatefundstoward securingpotentialfinancingand business opportunitiesin the shorttermratherthantoconservefundstosatisfycontinuousdisclosurerequirementsforalongerperiod.”Pleasediscussthe factorsyou will considerindeterminingwhethertochangetheuseofproceedsinthismanner. Additionally, disclosethe anticipated sourceof fundsto beutilizedforpublicreporting obligationsinthe eventyou determineto usetheproceedsallocatedforpublicreportingforanalternatepurpose.RefertoInstruction 7toItem504 ofRegulationS-K.
Response 16: We have revised the disclosure as we plan to conserve funds to satisfy our continuous disclosure requirements.
Capitalization, page15
17.Pleaseprovide anexplanation ofalladjustmentsmadeintheProForma columnincludingbutnot limitedtothe$306,000 deferred stockcompensation pro formaadjustment.
Response 17: Previously the Pro Forma column included adjustments to the March 31, 2014, balance sheet for activity that occurred after March 31, 2014. The previous pro forma adjustments are now included in the June 30, 2014, balance sheet presented herein.
18.Wenotethatthethree convertiblepromissorynotesinMayandJune2014andtheadditionalconvertible promissorynoteissuedinJune2014allcontainedconversion priceslessthanyourinitialpublicofferingprice.Pleasetellusandreviseto discloseyourplannedaccountingforthesenotes,includingyourdetermination ofwhethera beneficialconversionfeaturewill berecorded.Ifanamount willnotberecorded,tellusand disclosethespecificreasonsforthedifferenceinthevalueofyourstockfromthe date ofissuanceofthenotestotheestablishedofferingprice.
Response 18: The Company has recorded the notes in the June 30, 2014, financial statements included in Form S-1/A filed in conjunction with this response letter. We have not recorded a beneficial conversion feature, however, due to certain defaults and remedies clauses contained in the terms and conditions of the Company Note, the Company estimated the fair value of the conversion feature of the note (and the fair value of the warrant issued) using the Black Scholes formula and Monte Carlo simulations. Since the amounts exceeded the face value of the note, the Company recorded on the issuance date, a derivative liability expense of $270,368 and $1,507,500 as a discount to the note (to be amortized to interest expense over the life of the note) and $1,777,868 as derivative liabilities on the issuance date.
Plan ofDistribution,page17
19.Refertothesecondto lastparagraph on page17.Pleasereconcileyourdisclosureherethattheoffering willbeforninemonthswithyourdisclosureon page18thattheofferingis openfor180 days, subjectto one90-dayextension.
Response 19: We have amended this disclosure that the offering will be open for six (6) months here to be consistent with the disclosures elsewhere throughout the registration statement.
20.Wenotethestatementthatyouintendto sellthisofferingthroughyourofficers and directors, butyoumayuselicensedbroker/dealers andpaythebrokers acommissionfor proceedsraised.Pleaseconfirmyourunderstanding,consistent withtheundertakingrequiredbyItem512(a)(1)(iii)ofRegulationS-K,thatyouwillfile apost-effectiveamendment tothisregistrationstatementtoinclude anyadditionalmaterialinformation ontheplan ofdistribution notpreviouslydisclosedintheregistrationstatementoranymaterialchangeto such informationintheregistration statement.
Response 20: Weconfirmourunderstanding,consistent withtheundertakingrequiredbyItem512(a)(1)(iii)ofRegulationS-K,thatwewillfile apost-effectiveamendment tothisregistrationstatementtoinclude anyadditionalmaterialinformation ontheplan ofdistribution notpreviouslydisclosedintheregistrationstatementoranymaterialchangeto such informationintheregistration statement.
Terms oftheOffering,page18
21.PleasetelluswhetheryourdisclosureherethattheBoard ofDirectors willvotewhethertoextendtheofferinganadditional90 daysinconsistentwithExhibit4.10,which providesthatanextensionoftheclosingdatewillbeat theCEO’s solediscretion.
Response 21: We have amended Exhibit 4.10 to state that an extension of the closing date will be by vote of the Board of Directors.
Description oftheBusiness, page21
Overview,page21
22.Refertothefirstandthird paragraphs ofthis section.Pleasebrieflyexplainwhatyoumeanbythe“discreet”horticulturalmarketanda“stealthy”growingprocess.
Response 22: We have eliminated the use of the words “discreet” and “stealthy” in our “Description of the Business”.
23. You stateherethatyouareamanufacturerofcabinetbased horticulturalsystems.Inthelastriskfactoron page9,youstatethatyoumaydepend oncontractmanufacturersinthefutureto produceyourcabinets andotherproducts.Pleasereviseyourbusiness sectiontoclarifythatyoucurrentlymanufactureyourown products andto providethedetails ofanyplansyou haveto outsourcemanufacturinginthefuture.
Response 23: The Company purchases cabinets from a third party, as well as lights, filters and fans. Upon receipt of an order form a customer, the Company assembles the parts into a “finished horticulture” cabinet for sale. We have revised the related risk factor to disclose certain risks regarding our suppliers. We have also revised the “Overview”.
24.Refertothefourth paragraph ofthissection.PleasebrieflyexplainwhytheMediCab Micro does notpermit“completeautonomysothatgrowers canmanageallstages ofgrowth.”
Response 24: The MediCab Micro is a single chamber grow system, where our larger grow cabinets are designed with dual grow chambers. In the dual chamber model, each chamber operates independently from the other, enabling growers to manage multiple stages of plant life concurrently. That means a grower can plant a single seed, mature the plant, take clones from the mature plant, and raise the clones in one chamber while blooming the mature plant in the other. This process is perpetually repeated creating autonomy for the grower. However, when growing in a single chamber system, the grower may start from seed or clone, and complete the entire grow cycle within that chamber, but must procure new seeds or clones each time a new crop is planted.
Customers, page21
25. You discloseinthesecondriskfactoron page8thatyoubelieve amaterialportion ofyourproductsalesaretomedicalcannabiscustomers.Pleasequantifythepercentage of unitsalestomedicalcannabis customersandanyothergroupconstituting amaterial percentageofyoursales.
Response 25: The Companydoes not qualify or formally track, customers based on their intended use of our products. However, we have observed that the number of inquiries from customers stating their desire to utilize the system for the purpose of growing medical marijuana is notable. As we do not track the number of inquiries made in this manner we do not have the percentage of unit sales to medical cannabis customers or any other grouping constituting a material percentage of our sales.
26.Pleasediscussthemethodsyou use,ifany,tomonitoranddeterminewhethercustomersarepurchasingyourproductsforuseingrowingmedicalcannabis orforotherpurposes,includingwhethersalesarerestrictedto persons with prescriptionsformedicalcannabis,to persons ofa certainage, orto personsincertainstates.
Response 26:Since our grow cabinets are intended to grow many varieties of plants we do not have in place any methods to monitor and to determine whether customers are purchasing our products for medical cannabis or for other purposes. Further, we do not restrict our sales to persons with prescriptions for medical cannabis, to persons of a certain age, or to persons in certain states. The Company likens the sale of its’ products to “Miracle Grow” soil. While that product may ultimately be used for the production of cannabis, neither Miracle Grow, nor its retail partners such as Home Depot qualify the consumer of the product based on its intended use.
27.Pleaseincludeadiscussion oftheexistingmarketforyourproducts aswell as anyadditionalmarkets orcategories ofcustomersyouaretargeting.Pleasediscuss,forexample,whetheryoutargetmedicalor recreationalcannabisgrowers oranyother specifictypeofcustomer.Wenotethatyourwebsite does notappeartohaveany directreferencestomedicalcannabisgrowers. Also, totheextentyourbusinessis dependent on alimitedmarketorconcentratedcustomerbase,pleaseincludeappropriate riskfactor disclosure.
Response 27:Our current existing market is vast. Our products are intended to bring new horticulture technology and grow methods into the consumer home. Based on demographics data available through Google Analytics, our customer age ranges from 18-70 and more than 80% live in the US. With growing demand for local, sustainable horticulture solutions.
28.Pleasediscusstheextenttowhich prospectivecustomersmaybedeterred fromdoing businesswith acompanywith asignificantnationwideonlinepresencebecauseof fears of federalorstateenforcementoflaws prohibitingpossessionandsale ofmedicalorrecreationalmarijuana.Tothe extentmaterial,please addariskfactorinthisregard.
Response 28: We have added a risk factor regarding prospectivecustomersmaybedeterred fromdoing businesswith ourcompany as we havesignificantnationwideonlinepresencebecauseof fears of federalorstateenforcementoflaws prohibitingpossessionandsale ofmedicalorrecreationalmarijuana.
OurProducts, page21
29.Pleaseclarifywhetheryou sell orplanto sellplantseedsas partofyourlineofkits and packages.
Response 29: We currently do not sell and have no plans to sell plant seeds.
Marketing&BusinessDevelopment,page24
30. You stateintheopening paragraphthatyouareexploringthepossibilityof retailstoresin DenverandSeattle. Pleaseexpandyourdiscussion ofthis aspectofyourbusiness strategy,includingestimatedcosts andmilestones.Pleasediscussthecriteriayouexpecttoutilizeinevaluating whetherto pursueretailexpansionandwhyyou haveidentified DenverandSeattleaskeymarkets.Pleasealsodisclosethe anticipated sourceof fundsasyou do notappeartoallocate netproceeds oftheofferingforretailexpansion.
Response 30: Management of the Company was initially “exploring” the possibility of retail stores in Denver and Seattle. We have determined at this time to remain focused on our business to consumer model and wholesale distribution, and accordingly, we are not currently contemplating opening retail stores. We have therefore revised this section, accordingly.
31.Please expandthediscussion ofeach ofyourmarketingstrategies,includingestimatedcosts andmilestones. Tothe extent the anticipatedproceedsavailableforeachstrategyvaries basedontheamountraisedintheoffering,discussherehowyourplanswillbeadjustedaccordingly.
Response 31: We have expanded this discussion to include estimated costs and milestones and discussed variations of each strategy based on the amount raised in the offering.
32.Pleaserevisetoeliminateorexplainindustryjargon suchas“SEO capabilities,”“dripcampaigns,”and“viralpotential.”
Response 32: We have revised the disclosure, to further explain the methods we will employ.
TechnologyandDevelopment, page24
33.Pleasetellus,with aviewtoreviseddisclosure,whetheryouexpectto havetocomply withanylocal, state, orfederalmedicalcannabislawswithrespect toyourplanstoautomatecustomercontactandreorderingandtoprovidesubscriptionbased supportandtraining.
Response 33: We plan to comply with all local, state and federal medical cannabis laws that apply to the Company. We do not anticipate any local, state or federal medical cannabis laws will apply to our plans to automate customer contact and reordering and subscription based support and training because these are common business practices employed by many companies selling goods and services to consumers.Our products are intended to bring new horticulture technology and grow methods into the consumer home. As with any new technology customer support will be critical to customer satisfaction.
Competition, page24
34.Pleaseprovide usthebasisforyourbeliefthatyouhavea“favorablereputationfor outstandingcustomerservice and satisfaction. .. ..”
Response 34: We have evaluated public reviews online and spoken to industry influencers, such as retailers and distributors, seeking feedback and establishing brand positioning pertaining our company as well as our competition. We have discovered reviews specifically addressing the issue of customer service, both prior to and after purchasing, where the Company is praised for its superior level of customer service.
IntellectualProperty,page25
35. You stateinthethird paragraph on page25thatyouenterintoconfidentialityand non- disclosureagreementswith,amongotherparties,somecustomers asyou deemnecessary.Pleasebrieflyexplainthe reasonswhyyouwouldenterintoconfidentialityornon- disclosureagreementswithcustomers.
Response 35: Some of our customers are also wholesale distributors for competitor's products and it is in the best interests of the company to restrict the flow of confidential information
GovernmentRegulation,page25
36.Please provide usthebasisforyour beliefthatfederal orstate laws do not prohibityoufromselling yourproductstomedicalcannabisgrowers. Additionally,please disclosewhetheryoubelievethereare anyfederal orstatelawsthatprohibityoufromsellingyour productstorecreationalcannabisgrowersand provide uswiththebasisforany such beliefs.Pleasealso provide uswiththebasisforyour beliefthatthereis a“relativelylow”riskthatyoumaybedeemedtobefacilitatingtheselling ordistribution ofmarijuana.Inyour responseletter,pleaseconfirmto usthatyourstatementthatyou do notbelievethatfederallaws prohibityoufromsellingyourproductstomedicalcannabisgrowersincludesrelevant provisions ofthefederalControlledSubstances Actdiscussedinthethird paragraph ofthis section.
Response 36: The basis of our belief that federal and state laws do not prohibit us from selling our products to medical cannabis growers is that under the Controlled Substance Act (“CSA”) Title 21, Section 863, (Drug Paraphernalia) is defined to mean any equipment, product, or material of any kind which isprimarily intended or designed for use in manufacturing, compounding, converting, concealing, producing processing, preparing, injecting ingesting, inhaling or otherwise introducing into the human body a controlled substance, possession of which is unlawful under this subchapter. Our products are primarily designed for general agricultural use. We have no direct or indirect design features in our equipment specifically or primarily of the cultivation of medical cannabis. Our customers can grow anything they desire in our equipment. Particularly in areas that experience short growing season, in-door hydroponic and soil vegetable gardening is becoming more popular among those individuals seeking fresh organic food. Although it is possible that medical cannabis may be grown in our hydroponic and soil based equipment, we make no inquiry of our customers as to their intended agricultural use of or products.
We believe that the CSA and state laws would prohibit us from selling our products if we knew the customers intended purpose was to grow recreational cannabis. We have no idea as to the intended agricultural use or customer have for our products. We sell our products to individuals interested in small scale hydroponic and soil based agriculture. Similar to a sporting goods store selling ammunition, the store does not ask the customer if he intends to go hunting or rob a bank, nor does a hardware store inquire of the customer purchasing a hammer if he intends to build a house or break the display case to rob a jewelry store. Similarly, we design, manufacture and sell a lawful piece of equipment to individuals interested in small scale hydroponic and soil based agriculture.
We believe there is a “relatively low” risk that we may be deemed to be facilitating the selling or distribution of marijuana because it would have to be established that we selling or distributing equipment which is primarily intended or designed for us in manufacturing, compounding, converting, concealing, producing processing, preparing, injecting ingesting, inhaling or otherwise introducing into the human body a controlled substance, possession of which is unlawful under the CSA. Because our products primarily intended to be sold to individuals interested in small scale hydroponic and soil based agriculture, and not primarily intended for selling or distribution marijuana.
Finally, with respect to the last sentence to this question 36, we cannot confirm to you that we do not believe that federal laws prohibit us from selling our products to medical cannabis grows. In the third paragraph of this section we do not indicate that federal laws do not constitute a possible prohibition to selling our products to the medical cannabis industry. To the contrary, in this last sentence we disclose that our activities could possibly be deemed prohibited under the CSA if it was determined that our primary intend was to manufacture, sell and distribute equipment to medical cannabis growers. As indicated above, the intended use of our products is for small scale home hydroponic and soil general agriculture. However, we further indicated that federal authorities have not focused, nor have they threatened to focus their resources on tangential or secondary violation of the CSA. The basis of our belief that federal authorities have not focused, nor have they threatened to focus their resources on tangential or secondary violation of the CSA is from a recent memorandum from the Department of Justice (the “DOJ”) to provide guidance to federal law enforcement, entitled Guidance Regarding Marijuana Enforcement which was sent to all United States Attorneys from Deputy Attorney General James Cole on August 29, 2013. This memorandum provides that the DOJ is committed to enforcement of the CSA but the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent and rational way.
The memorandum provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state laws legalizing medical and recreational marijuana possession in small amounts. The memorandum sets forth certain enforcement priorities that are important to the federal government:
| · | Distribution of marijuana to children; |
| · | Revenue from the sale of marijuana going to criminals; |
| · | Diversion of medical marijuana from states where is legal to states where it is not; |
| · | Using state authorized marijuana activity as a pretext of other illegal drug activity; |
| · | Preventing violence in the cultivation and distribution of marijuana; |
| · | Preventing drugged driving; |
| · | Growing marijuana on federal property; and |
| · | Prevent possession or use of marijuana on federal property. |
As indicated in this DOJ memorandum federal law enforcement is not devoting resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but relied on state and local law enforcement to address marijuana activity.
37.Wenotethatyou sellproductsin 14countries. Please addressthegovernmentregulationand legalityof sales ofyourproduct inthese countries.
Response 37:A review of our records indicates we sell our products in 12 foreign countries. We have amended the Form S-1 to reflect this correction. Similar to states within the United States, many of countries where we sell our equipment have legalized medical cannabis or have decriminalized or legalized cannabis possession. In all the countries where we export our products, federal law enforcement is not devoting resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property. Our products are primarily designed for general agricultural use. We have no direct or indirect design features in our equipment specifically or primarily of the cultivation of medical cannabis. Our customers can grow anything they desire in our equipment. Although it is possible that medical cannabis may be grown in our hydroponic and soil based equipment, we make no inquiry of our customers as to their intended agricultural use of our products.
38.Pleaseidentifyinatablethosestatesinwhichyoudo businessthathavedecriminalized orlegalizedmedicalcannabisandthosestatesthathavenotdecriminalized orlegalizedmedicalcannabis.Totheextentthatthere aresignificantdifferencesamongstatemedicalcannabislegalregimes,pleasesummarizethesedifferences.
Response 38: We have added a table identifyingthestatesinwhichwedo businessthathavedecriminalized orlegalizedmedicalcannabisandthosestatesthathavenotdecriminalizedorlegalizedmedicalcannabis.
39.Ifapplicable, pleasedisclosethe extenttowhichtheregulation ofdrugparaphernalia undertheControlledSubstances Actis applicabletoyourbusinessandthesales ofyour products.Pleasealso provide us supportforyourstatementthatyouarenotawareofanyfederalorstateregulation ofthesaleofindoorcultivationequipmenttomedicalorrecreationalcannabisgrowers.Tothe extentmaterial,pleaseadd ariskfactordescribingtheattendantrisks.
Response 39: The extent to which the regulation of drug paraphernalia under the Controlled Substance Act (“CSA”) Title 21, Section 863, (Drug Paraphernalia) is applicable to our business and the sale of our produce is found in the definition of is defined drug paraphernalia. Drug paraphernalia means any equipment, product, or material of any kind which isprimarily intended or designed for use in manufacturing, compounding, converting, concealing, producing processing, preparing, injecting ingesting, inhaling or otherwise introducing into the human body a controlled substance, possession of which is unlawful under this subchapter. Our products are primarily designed for general agricultural use. We have no direct or indirect design features in our equipment specifically or primarily of the cultivation of medical cannabis. Our customers can grow anything they desire in our equipment. Particularly in areas that experience short growing season, in-door hydroponic and soil vegetable gardening is becoming more popular among those individuals seeking fresh organic food. Although it is possible that medical cannabis may be grown in our hydroponic and soil based equipment, we make no inquiry of our customers as to their intended agricultural use of or products.
Our understanding of federal or state regulation of the sale of indoor cultivation equipment to medical or recreational cannabis growers is prohibited if the primary intent or design of the manufacture is indoor cultivation equipment to medical or recreational cannabis growers. Our products are primarily designed for general agricultural use. We have no direct or indirect design features in our equipment specifically or primarily of the cultivation of medical cannabis. Our customers can grow anything they desire in our equipment. Particularly in areas that experience short growing season, in-door hydroponic and soil vegetable gardening is becoming more popular among those individuals seeking fresh organic food. Although it is possible that medical cannabis may be grown in our hydroponic and soil based equipment, we make no inquiry of our customers as to their intended agricultural use of or products.
Management’s Discussionand Analysis, page 26
Results ofOperations, page27
40.Pleaseexplainwhyyoubelieveyoursalesmix shiftedtomoremoderatelypricedcabinets duringthefiscalyearended December31, 2013.Pleasealso discusstheimpact shiftsin salesmixhaveonyourgross profit.Pleaseprovideasimilaranalysisforthemostrecentinterimperiod.
Response 40: We introduced the Medicab Micro during the quarter ended September 30, 2013. We realize a similar gross margin percentage on all of our cabinets. The effect of new sales resulting from a broader product line had the result of increasing sales, although the Company’s average unit sales price decreased. After further analyzing the classification of products, we have revised the units and sales dollars for December 31, 2012 and 2013 to properly reflect sales of cabinets and accessories.
FinancialStatements
41.Pleaseupdateyour financialstatements, as necessary,tocomplywithRule8-08 of
RegulationS-Xattheeffective dateoftheregistration statement.
Response 41: We have updated our financial statements.
ExhibitIndex
42.Pleasefilecomplete agreements,includingconformedsignatures andexhibits,attachments andschedules.Wenote,forexample,thatExhibit4.5 does notinclude allofthe exhibitstotheagreementandanumberoftheexhibitsyoufiled do notincludeconformedsignatures.
Response 42: We have filed as separate exhibits with conformed signatures, the exhibits to the Security Purchase Agreement (“SPA”) with CVP (Exhibit 4.5) that were not included in the prior filing. Some of the exhibits that were filed in the initial S-1 registration statement are being refiled to include the conformed signatures.
43.We also notethatyou havefiledcertain“Formof”agreements. Totheextent two ormorecontracts aresubstantiallyidentical,youmayfilea copyofonesuchagreementandincludeascheduleidentifyingtheotherdocumentsomittedand settingforththematerial differences.RefertoInstruction 2toItem601 ofRegulationS-Kandpleaserefileyouragreementsaccordingly.
Response 43: We have eliminated all “Form of” agreements and have filed the agreements with conforming signatures.
Exhibit3.3
44.WenotethatExhibit3.3includesbylaws ofCabinetGrow,Inc., aCalifornia corporation. Tothe extent the companyhasadopted newbylaws nowthat itisaNevadacorporation, pleasefilethosebylawsas an exhibittotheregistrationstatement.
Response 44: We have adopted and filed as Exhibit 3.5 new bylaws as a Nevada corporation.
Exhibit23.1
45.Pleaseprovideacurrentlydatedconsentfromtheindependentpublicaccountantintheamendment.
Response 45: We have provided a new currently dated consent from the independent public accountant in the amendment.
Weacknowledgethat:
| · | shouldtheCommissionorthestaff,actingpursuantto delegatedauthority,declarethefilingeffective,itdoesnotforeclosetheCommissionfromtakinganyaction withrespecttothefiling; |
| · | theaction oftheCommission orthestaff,actingpursuanttodelegatedauthority,in declaringthefilingeffective, does notrelievethecompanyfromitsfullresponsibilityfortheadequacyandaccuracyofthedisclosureinthefiling;and |
| · | thecompanymaynotassertstaffcommentsandthedeclaration ofeffectiveness as a defenseinanyproceedinginitiatedbytheCommission oranyperson underthefederal securities laws oftheUnitedStates. |
Should you have any questions or require further information, please do not hesitate to contact us.
Sincerely,
/s/Barry Hollander
Barry Hollander
Chief Financial Officer
| cc: | Sam May |
| Laura Anthony, Esq. | |
| Legal and Compliance, LLC |
