CABINET GROW, INC.
319 CLEMATIS STREET, SUITE 1008
WEST PALM BEACH, FL. 33401
October15, 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. |
| AmendmentNo. 1toRegistration StatementonFormS-1 | |
| Filed September26, 2014 | |
| FileNo. 333-197749 |
DearMr. Dobbie:
This letter is in response to the comments of the U.S. Securities and Exchange Commission (the “Commission”) dated October 8, 2014, with respect to the above-referenced filing. Amendment No. 2 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. | We noteyourresponsetoour priorcomment 36thatyoubelievethereis arelativelylowrisk thatyoumaybedeemedto befacilitatingthe selling ordistribution ofmarijuana.Consistent withyourresponseandyour priorgovernmentregulationdiscussion, please discloseinanappropriate section ofthe prospectusthatyou believethereisariskthatyoumaybedeemedtobefacilitatingthe sellingordistribution ofmarijuanainviolation of federallaw. |
Response 1:Because we do not sell or distribute any cannabis seed or cannabis plant products we have no risk of that we will be deemed to facilitate the selling or distribution of cannabis in violation of federal law. However, should it be determined under the CSA that our products or equipment are deemed to fall under the definition of drug paraphernalia because our products are primarily intended or designed for use in manufacturing or producing cannabis we could be found to be in violation of federal drug paraphernalia laws and there may be a direct and adverse effect on revenues and profits of the Company.We have added such disclosure in our second risk factor.
OurCompany,page5
| 2. | We noteyour responsetoourpriorcomment 2.PleasediscloseintheSummarythatyourindependentauditor has expressed substantial doubtregardingyourabilitytocontinueas agoingconcern. |
Response 2: We have included in the Summary a disclosure that our independent auditor has expressed substantial doubt regarding our ability to continue as a going concern.
SummaryFinancialData, page7
| 3. | Wenoteyour responsetoourpriorcomment4.Pleasetellus andexpandNote(1)toexplainthe additionaladjustment tocashotherthantheassumed saleofcommon stock. |
Response 3: We expanded Note (1) to explain the only adjustment to cash is the assumed sale of common stock, net of the offering costs of $40,000. Amendment No.1 also contained a transposition error of $270 that has been corrected in this filing.
| 4. | Wenoteyour responsetoourpriorcomment5.You statethatnetting,andnotrecordingtherelatedconvertiblenotes payable,would notbearepresentationallyfaithful presentation oftheCompany’s obligations onits statementof financialposition. However,wenoteyourdisclosureinItem15 onpageII-2thatyou“haveno obligationto payCVP anyamounts onanyunfunded portionoftheCompanyNote.”Giventhislack ofobligation,itdoes notappeartoberepresentationallyfaithfulto present aliabilityonyourbalancesheetforan unfunded noteforwhichyoustateyouhaveno obligationto pay.Further,inyour responseyoustatethatyouconcludedthatnetting was prohibited underGAAP becausethecondition specified underASC210-20-45-1-c,thereporting party intendsto setoff, was notmet. However,ASC210-20-45-1-astatesthatrightof setoffcan onlyexistwheneach oftwopartiesowestheotherdeterminable amounts. AsyoustateonpageII-2 ofyour filing,you havenoobligationtopayCVP anyamounts onanyunfunded portion ofthe note. Therefore,itdoes notappearthatreferencetotheright ofsetoffconditions in ASC210-20-45is applicabletotheunfunded portion. Giventhis, webelieveyou shouldamendyour filingtorestateyour financialstatementstocorrect notesreceivable andtheassociatedliabilityfortheunfunded portion ofthenotes. |
Response 4:Based on management’s further analysis that the Company has no obligation to pay for any unfunded portion of the issued convertible promissory note, we have restated our financial statements to correct notes receivable and the associated liability for the unfunded portion of the note.
RiskFactors,page8
Itis possiblethatfederal orstate legislationcouldbe enacted .. . . , page8
| 5. | Yourdisclosureinthesixthandseventh sentences ofthefirstparagraphandthefourthandfifth sentences ofthesecond paragraph ofthisriskfactortendstomitigatetherisk presented.Pleaserevisethisriskfactoraccordingly. |
Response 5: We have revised the risk factor and have removed any sentences that tended to mitigate the risk presented.
Potentialconflicts ofinterest. . . , page11
| 6. | Wenoteyour responsetoourpriorcomment3.Pleasequantifyinthisriskfactortheannual travelexpensestoreimburseyourCEOand CFO. |
Response 6: We have revised the risk factor to quantify the annual travel expense to be reimbursed to our CFO to be $10,000. Please note there are no additional travel expenses related to conflicts of interest for either or COO or CEO.
Plan ofDistribution,page17
TheOffering willbeSoldbyOurOfficers andDirectors, page17
| 7. | Wenoteyourresponsetopriorcomment19.Please clarifyinthefirstparagraphinthis sectionthattheofferingmaybeextendedanadditional90 daysatthesolediscretion ofyourBoard ofDirectors. |
Response 7: We have revised the risk factor to clarify that the offering may be extended by an additional 90 days at the sole discretion of our Board of Directors.
GovernmentRegulation,page25
| 8. | Wenoteyour reviseddisclosureinthis section.Tothe extentmaterialtoan understandingoftheregulationsapplicabletoyourbusiness,pleasediscussthe provisions oftheControlledSubstances Actthatare applicabletothegrowth, sale, or possession ofmedicalcannabis and discussthe consequencesifyouwerefound notincompliancewiththeControlledSubstances Act. |
Response 8: The provisions of the Controlled Substances Act (“CSA”) (21 U.S.C. § 811), that are applicable to the growth, sale or possession of medical cannabis are based on the fact that the federal government does not recognize the difference between medical and recreational use of cannabis. Under federal law, cannabis is treated like every other controlled substance, such as cocaine and heroin. The federal government places every controlled substance in a schedule, in principle according to its relative potential for abuse and medicinal value. Under the CSA, cannabis is classified as a Schedule I drug, which means that the federal government views medical cannabis as highly addictive and having no medical value. Under 21 U.S.C. § 863 It is unlawful for any person (1) to sell or offer for sale drug paraphernalia; (2) to use the mails or any other facility of interstate commerce to transport drug paraphernalia; or (3) to import or export drug paraphernalia.
The term "drug paraphernalia" means any equipment, product, or material of any kind which is primarily 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. It includes items primarily intended or designed for use in ingesting, inhaling, or otherwise introducing marijuana, cocaine, hashish, hashish oil, PCP, methamphetamine, or amphetamines into the human body.
The extent to which the regulation of drug paraphernalia under the CSA is applicable to our business and the sale of our product is found in the definition of drug paraphernalia. Drug paraphernalia means any equipment, product, or material of any kind which is primarilyintended 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. 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. If the Department of Justice (the “DOJ”) Guidance Regarding Marijuana Enforcement to all United States Attorneys from Deputy Attorney General David Ogden on October 19, 2009, and from Deputy Attorney General James Cole on June 29, 2011 and again from Deputy Attorney General James Cole on August 29, 2013, were reversed and it was determined that the Company violated the regulation of drug paraphernalia under the CSA then the Company would need to make appropriate modifications to its products to avoid violation of the CSA. Until Congress amends the CSA with respect to medical marijuana, there is a risk that federal authorities may enforce current federal law. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the Company. The risk of strict enforcement of the CSA in light of congressional activity, judicial holdings and stated federal policy remains uncertain.
| 9. | Wenoteyour responsetoourpriorcomment36.Pleasediscloseinthis sectionyour beliefthat theControlledSubstances Actandstatelawswould prohibityoufromsellingyourproductsifyouknewthepurposewastogrowrecreationalcannabis.Please alsoclarifyyourbeliefwithrespectto sales ofyourproductsifyouknewthepurposewastogrowcannabisformedicalpurposes. |
Response 9:The extent to which the regulation of drug paraphernalia under the CSA is applicable to our business and the sale of our product is found in the definition of drug paraphernalia. Drug paraphernalia means any equipment, product, or material of any kind which is primarily 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. 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. If the Department of Justice (the “DOJ”) Guidance Regarding Marijuana Enforcement to all United States Attorneys from Deputy Attorney General David Ogden on October 19, 2009, and from Deputy Attorney General James Cole on June 29, 2011 and again from Deputy Attorney General James Cole on August 29, 2013, were reversed and it was determined that the Company violated the regulation of drug paraphernalia under the CSA then the Company would need to make appropriate modifications to its products to avoid violation of the CSA.
| 10. | Please clarifywhetherornotyou believeyou haveanaffirmativeobligationtoconfirmthepurposesforwhichcustomers purchaseyourproducts under federalorstatelaws. |
Response 10: 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 do not believe we have an affirmative obligation to inquire from our customers their intended use of a legal hydroponic and soil based equipment intended for small scale recreational agricultural. Similarly, we would not expect a potting soil manufacturer to inquire from its customers if they intended to use the soil to grow medical cannabis or a recreational greenhouse manufacturer to inquire from its customers if they intended to use the green house to grow medical cannabis.
Note5:ConvertibleNotesPayable, pageF-19
| 11. | Wenoteyour responsetoourpriorcomment18.Pleasetellus howyoudeterminedthattheconversionfeatureshould beseparatedandtreatedas aderivative,including specificallyhowitmetallofthecriteriain ASC815-15-25-1.Includeinyour response howthe“certain defaults andremedyclauses containedintheterms andconditions”referencedinyour responseresultedinyourcurrentaccounting treatment. |
Response 11:We have restated our financial statements and disclosures as we have determined that the conversion feature should not be separated and should not be treated as a derivative as the Company did not meet all the criteria in ASC 815-15-25-1. Since the Company is a private company, the conversion option does not qualify as a derivative and the convertible option would not be required to be bifurcated from the host contract.Since the convertible note included an embedded conversion feature that did not qualify to be bi-furcated as a derivative, management evaluated this feature to determine whether it meets the definition of a beneficial conversion feature (“BCF”) within the scope of ASC 470-20, “Debt with Conversion and Other Options”, and determined that a BCF existed. The Company recorded a discount against the debt of $25,874 to be amortized into interest expense over the term of the loan. Amortization of the discount totaled $1,184 for the six months ended June 30, 2014.
The Company also issued a five year warrant to CVP to purchase the number of shares equal to $420,000 divided by 70% of the average of the three (3) lowest closing bid prices in the twenty (20) trading days immediately preceding the applicable conversion. Based on the current discounted cash flow valuation, the Company estimated that CVP can purchase 6,000,000 shares of common stock, with an exercise price of $0.20 per share. The Company allocated $254,319 of the proceeds from the note to the warrants based on their relative fair value, and recorded a discount against the debt to be amortized into interest expense over the term of the loan. Amortization of the discount totaled $11,637 for the six months ended June 30, 2014.The carrying amount of the Company Note as of June 30, 2014, was $242,416, net of unamortized discounts of $315,084.
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 & Compliance, LLC |
