Software Issues Continue to Impact Washington Cannabis Businesses

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Washington State Liquor and Cannabis Board Meetings Open to
New Approaches to Manage Supply Chain

Updates on a recent meeting by the
Washington State Liquor and Cannabis Board (LCB) Traceability Advisory
Committee were provided by committee member Gregory Foster at Cannabis Observer.
Foster’s account outlines the issues surrounding July’s software update to
Akerna’s (formerly MJ Freeway’s) Leaf Data Systems. Additionally, Foster
re-emphasized that, “business-to-business commerce in the regulated marketplace
was obstructed in many cases,” and, “supply side producers and processors lost
business.”

Our observations of wholesale
prices in Washington State at the time of the problematic Leaf Data Systems
software update do not show deviations from existing trends. In previous
discussions with market participants in the wake of prior issues with Leaf Data
Systems early in 2018, they stated that they did not believe problems
transferring product as a result of software glitches actually resulted in
buyers and sellers altering wholesale price arrangements, except perhaps in a
few isolated cases.

Additionally, Foster’s report on
the LCB’s Traceability Advisory Committee meeting states, “Some retailers
couldn’t receive scheduled deliveries, but stockpiled sufficient product in
advance,” of the software update. If such behavior was widespread, it is
possible that increased demand contributed to upward pressure on wholesale
prices in late June and early July.

The Observer’s reporting on the meeting also noted that no
representatives from Akerna were present, a significant change from prior
meetings. According to the Observer, “The future of Leaf Data Systems in
Washington State and the LCB’s relationship with MJ Freeway appeared
increasingly uncertain.” At the moment, Akerna / MJ Freeway’s contract with the
state has been renewed, but it was also amended to limit the scope of work to
bringing the current version of the software to full functionality, as opposed
to providing further updates in the future. In addition to facing the
possibility of another change in traceability software providers, the Observer
pointed out that LCB members appear “open to new approaches to regulating Washington
State’s cannabis supply chain.”

A separate LCB Board Caucus that
took place in early August was also recounted in Cannabis Observer,
this time by M. Bailey Hirschburg. The caucus included discussion by board
members of their experiences at the annual meeting of the Washington Sungrowers
Industry Association (WSIA). According to Hirschburg’s account, LCB members
discussed a “class of business people who style themselves as ‘brokers,’” who
“arrange sales for [producers and processors] with a variety of contractual
agreements.”

Notably, such brokers are not
licensed entities and are apparently participating in the state’s legal market
without oversight. LCB members reportedly described their actions as
“predatory” and characterized some of the contract language that they viewed as
“disturbing.” However, based on the account of the caucus published in the
Observer, it does not appear as if regulators will attempt to intervene in such
activities at this time.

The LCB Caucus also discussed
testimony from “two larger growers,” who stated essentially that the Seattle
retail market was the only game in town in terms of being able to market their
product. As we have noted in previous Premium Weekly Reports,
licensed retailers can be scarce in parts of Washington, particularly the
eastern half of the state, where local rules prohibit or limit cannabis
businesses from setting up shop. However, it should also be acknowledged that
such a situation is not dramatically different from the markets of Colorado or
Oregon, where most commerce takes place in the greater Denver and Portland
areas, respectively.

Furthermore, at the LCB’s August 6 Caucus, the Observer
quoted board member Russ Hauge as stating that tagging individual plants may
not be necessary to account for production and inventory.

Other updates from recent LCB meetings included more
information on the timeline for the ongoing process of formulating and
implementing quality assurance and safety testing of cannabis products. At the
August 6 Caucus the LCB said that the next step of the rulemaking process – the
initial drafting of proposed regulations – would likely not be forthcoming
until at least early November. Consequently, the actual imposition of new
testing requirements does not appear as if it will take place until the middle
or latter portion of 2020, at the earliest.

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