Case Study: Using Third Party Data Sources in Cash-Based Marijuana Businesses with Poor Accounting Records

Issue:

Two cousins who own a marijuana retail store (the “Company”) ended up in a dispute. The Claimant was a silent partner and lived out of state while the Respondent managed the retail shop and also owned a grow operation. The Claimant learned from the Company’s bookkeeper that his cousin and business partner had loaned and distributed money from the Company to himself, in violation of the Company’s Operating Agreement, while the Claimant received zero distributions. The Claimant commenced an arbitration as required by the Operating Agreement.

Assignment:

The Claimant hired us to analyze the historical financial records of the Company, including its QuickBooks accounting records. We determined the business operated without a bank account for several years, conducting its business entirely in cash. No detailed sales records or inventory records were maintained by the Company. The accounting records were in disarray, with several sets of books that did not match one another, and tax returns that did not match any set of books. We also observed numerous unusual transactions between the Respondent and his related-party grower.

Since the Company held no contemporaneous financial or business records to support its accounting records, we sought other, third-party evidence to support our investigation. The Oregon Liquor and Cannabis Commission (OLCC), requires licensees to maintain and submit detailed reporting of marijuana inventory, including sales, purchases, and adjustments through the state-administered cannabis tracking system (METRC). We obtained monthly yearly and monthly METRC sales reports filed, which contained sales detail by item, including the quantity, weight, dollar amount, and volume of sales. We also obtained data from the Company’s point-of-sale system (Greenbits) that reported its cannabis activity to the OLCC.

We analyzed the Greenbits reports and the underlying data, identifying several areas of concern. We found a discrepancy between the Company’s accounting records, which reported extraordinarily higher purchases from the Respondent’s related grow operation than the purchases reported within Greenbits. We also identified numerous inventory adjustments in Greenbits related to purchases from the Respondent’s related grow operations. The descriptions of the adjustments contradicted one another, significantly increasing the quantities of product in one year and then decreasing them in the following year, purportedly for the same reason. The inventory adjustments suggested that significant volumes of products were transferred between the Company and Respondent’s related grow operation without payment or at inaccurate quantities.

In addition to the anomalies discovered in Greenbits, our investigation found that unauthorized loans were created by cash transfers from the Company to the Respondent and his related grow operation, violating the Company’s Operating Agreement. 

Resolution:

We prepared a memorandum of our findings for mediation. Counsel for the Claimant used our evidence to argue that the commingling of the businesses by the Respondent was cause for the Claimant to compel production of the financial records of the Respondent’s related grow operation. Counsel for Claimant also used our evidence to establish breaches of duty by the Respondent as significant leverage in settlement negotiations. The matter was resolved in mediation.

“The analysis performed by Serena and Kevin was crucial to an expeditious, cost-effective, and favorable resolution of this matter.” Jesse Mondry, Harris Bricken Sliwoski, LLP, Counsel for Claimant

******************

Have questions about this type of analysis? Reach out to Kevin Marold.
Email: [email protected]