Arxis was retained to provide expert assistance in a litigation matter involving allegations of inventory theft, fraud, and breach of contract in California’s cannabis industry. The case centered on a marijuana grower who shipped plants to a trimming company responsible for categorizing the product, performing the trimming, securely storing the finished inventory, and drop-shipping it to the grower’s customers upon sale.
The dispute arose from claims of excessive product spoilage during processing and missing inventory after the business relationship was terminated. The plaintiffs engaged Arxis to trace specific inventory over an extended period, from the initial shipment from the fields to the trimmer, through processing, and ultimately to customer sales. This involved tracking thousands of pounds of cannabis, with alleged theft and intentional spoilage claims amounting to hundreds of thousands of dollars. Our primary objective was to quantify any missing inventory.
California’s cannabis industry – encompassing growing, processing, transportation, and sales – is highly specialized and tightly regulated. Depending on the product’s end use, the cycle from cultivation to sale may involve multiple processors across different locations, necessitating careful transportation. By law, all cannabis shipments require detailed “manifests,” which collectively enable pound-by-pound tracing from the field to final sale. This mandatory track-and-trace system proved invaluable in resolving the dispute.
These manifests are recorded in METRC, a cloud-hosted software platform required by the State of California for all cannabis licensees. Even when the defendant was unwilling or unable to provide certain records, the data remained accessible through the system. As a result, we could identify and track every pound entering and leaving the defendant’s business.
A trimmer typically accounts for incoming plants by weight. The trimming process naturally results in some reasonable and necessary waste, leading to an expected reduction from the initial weight to the “finished biomass” weight. Once processed, the inventory is stored with the assumption of minimal to no further loss. In this arrangement, the product was effectively on consignment: the grower (plaintiff) retained ownership, while the trimmer (defendant) held physical custody.
Arxis work:
The defendant company appeared to be struggling financially, with inadequate or unavailable recordkeeping. During the litigation (between filing and trial), the business ceased operations, abandoning its physical property and inventory. This created two key challenges: first, determining and proving how much of the plaintiff’s inventory remained – or should have remained – at the defendant’s facility; second, establishing a reasonable spoilage rate between incoming and finished biomass weights.
Leveraging the mandatory manifest system and sales invoices provided by the plaintiff, we traced every pound sent to the defendant and every pound shipped out for authorized sales. Our analysis revealed excessive reported spoilage rates and confirmed that inventory belonging to the plaintiff was indeed missing – a critical finding, given that wholesale marijuana prices at the time exceeded $1,000 per pound.
To quantify the loss, we used the defendant’s historical spoilage rates as a “normal” benchmark, accounting for the company’s unique operational nuances. Industry-wide spoilage rates were hard to obtain and deemed only marginally relevant, as the defendant’s past performance could differ from broader norms. By combining manifest data with reasonable spoilage estimates, we calculated the total inventory delivered to the trimmer, subtracted amounts transported for legitimate sales and expected spoilage, and determined the volume that should have remained in the warehouse as the grower’s property.
Result:
The investigation’s findings were detailed in a written report, supported by oral testimony during deposition and at trial. After an extended trial, the verdict favored the plaintiff, resulting in a significant financial judgment against the defendant.
