Tech Execs Raising Eyebrows Over Washington State’s Cannabis-Tracking Pact
Concerns Center on Transparency, Open Competition and Federal Scrutiny
The emerging cannabis industry in Washington is tied at the hip to the state’s burgeoning technology sector in no small measure because robust product-tracking data serves as a shield against federal pre-emption of the great marijuana-legalization experiment now underway.
That’s why a little-noticed flap within the state’s tech community is worth paying attention to as regulators in the state continue to roll out the infrastructure to support legal weed — approved by Washington voters in November 2012 through a referendum dubbed Initiative 502.
A Florida-based company that has been awarded a nearly $1.1 million state contract to provide a software solution to Washington regulators is at the center of that flap. That same company also has sold licensing rights for its cannabis-tracking software to a California firm that is now the subject of a U.S. Securities and Exchange Commission investigation and a class-action shareholder lawsuit.
Clearly, the Florida company, Bio-Tech Medical Software Inc., should not be marred by the California company’s current legal woes simply because it inked a business deal with that company. Guilt by association isn’t proof of anything.
But the fact that Washington State regulators doled out tax dollars to acquire software that also is now being marketed to businesses and other state regulators by an entity embroiled in an SEC probe does create some potential image problems for a fledgling cannabis industry trying to stay clear of federal scrutiny, some tech executives say.
“From where I sit, it just raises more eyebrows as to why they [state regulators] didn’t use Washington-based talent for the [software] contract,” says Justin Dufour, president and CEO of Viridian Sciences of Vancouver, Wash. — which was one of the unsuccessful bidders for the state software contract. “We love this industry and are trying to do right by it, and we know the feds are looking at it. And we only get one opportunity to shine and make it as transparent as possible.”
The privately-held Bio-Tech Medical Software Inc., via its BioTrackTHC division, in 2013 beat out 21 other companies, including about five tech firms based in Washington, for the Washington State software contract. Bio-Tech has since licensed its “seed-to-sale” cannabis-tracking software (called BioTrackTHC) to the Washington State Liquor Control Board and is assisting the regulator in the build-out of a statewide cannabis inventory-monitoring database that utilizes that software solution.
The Florida company also is charged with creating the data bridge that connects the state’s marijuana tracking system to the private market, including other tech firms seeking to develop business software that can interface with the state system. A well-functioning interface is critical to assuring that those private-sector vendors can offer their own custom software to marijuana producers, processors and retailers who, by law, have to provide the cannabis tracking data to the state system.
Some homegrown Washington tech players, though, contend that Bio-Tech has too much control over the tracking system and a conflict of interest because it also is marketing its own proprietary software to cannabis businesses. Any fixes or updates Bio-Tech makes to the state system, the critics allege, are pushed through first to their own commercial product and only later made available to competing software vendors, giving Bio-Tech and its BioTrackTHC division a marketing and market-timing edge in software sales.
On top of that edge, the critics also contend such a closed system is bad for the state’s overall tech industry because it diminishes the competition from other software vendors. That open-market competition, they add, creates jobs and fosters product improvements. Plus, the critics contend, the mere fact that the BioTrackTHC software is also being marketed via a product licensing deal by another company based in California that is under federal scrutiny creates a potential for blowback in Washington’s still fragile legal cannabis market.
"This software needs to work well, with the feds looking over our shoulder in Washington,” says David Busby, founder of WeedTraQR, a start-up tech venture active in Washington’s legal cannabis market. “If things are messed up, it will make it very difficult to bring legitimacy to a product that has been illegal for nearly 100 years.
“If the traceability [of the marijuana] is difficult or not working right, then legitimacy becomes a problem.”
Bio-Tech Medical executives take issue with the criticisms, as might be expected. They contend competitors have had full and timely access to the necessary software code and updates to develop commercial software that interfaces with the state system.
“If anything, BioTrackTHC has fostered development of an open, competitive and transparent market by raising the bar and lending its expertise to the entire industry via a standardization model that encompasses all aspects of marijuana,” Patrick Vo, an executive with Bio-Tech Medical Software, stated in an email to Narco News. “If anything, the company actually gave away a lot of the secrets, knowledge and competitive advantage gained over the years, for free, to all of its competitors.”
In addition, Vo says the federal scrutiny of the California company that also has licensed Bio-Tech’s software is not expected to affect Bio-Tech or its operations, including the company’s BioTrackTHC division.
Washington, in particular Seattle, is now ground zero for cloud-computing giants like Amazon, Microsoft and Google, all of which have major operations in the state. Thousands of tech engineers and entrepreneurs have flocked to the Evergreen State to tap into jobs and opportunities created by this vibrant cyber scene, creating a culture that one tech entrepreneur describes as being “like Silicon Valley before it got all weird.”
At the same time, a new cannabis market is now budding under a still-evolving legalization scheme closely monitored by federal authorities — who still stand poised to crack down on that industry if it doesn’t adhere closely to a strict set of guidelines outlined in a Department of Justice document known as the Cole memo.
Among the provisions of that memo are mandates that require state regulators to assure that all cannabis products are closely monitored to assure they are not being diverted to other states or into the hands of kids or criminal enterprises. To meet that demand, the Washington State Liquor Control Board, charged with regulating the cannabis industry, has turned to the tech industry to develop and implement software that tracks all marijuana products from farm to market — to assure every seed, plant, product and byproduct is accounted for and can be traced across the supply chain from grower to seller.
Bio-Tech Medical’s software, BioTrackTHC, is now Washington State’s regulatory tracking solution. But it also has been billed as a solution for helping to bolster sales for the California company, called Medbox Inc., that is currently under SEC scrutiny. Medbox’s flagship product is a high-tech vending machine that dispenses cannabis products — developed originally for medical-marijuana dispensaries.
A press release issued in March of last year by Medbox officials trumpets the firm’s new partnership with Bio-Tech and the Florida firm’s recently secured contract with Washington State:
Medbox, Inc. (OTC Markets: MDBX)), a leader in providing industry specific consulting services and patented systems to the medical and retail industries, today announced a new, expanded licensing agreement with Bio-Tech Medical Software, Inc. (Bio-Tech).
Bio-Tech is an innovative corporation that has developed the BioTrackTHC marijuana cultivation tracking system. Bio-Tech has been in business since 2007 and has been involved with multiple state bills in both Florida and Colorado. Most recently, they were awarded the Washington State software contract to oversee that state's recreational marijuana program.
Medbox’s CEO at the time the press release was issued, Dr. Bruce Bedrick, added that "with this licensing agreement and working relationship with Bio-Tech intact, we are poised to showcase an industry-leading suite of products and services for entrepreneurs and city/state governments alike."
Medbox announced in an SEC filing made in June of last year that it had sold the Bio-Tech licensing rights to a company controlled by Medbox’s founder, former chief operating officer and major shareholder: P. Vincent Mehdizadeh. Medbox did retain an option to repurchase the rights, however.
Mehdizadeh, Medbox SEC filings indicate, has himself been the subject of legal scrutiny.
“In July 2013, Mr. Mehdizadeh resolved a legal matter initiated by the Los Angeles County Department of Consumer Affairs from activities occurring from 2005-2008 relating to a law firm Mr. Mehdizadeh managed at the time as a non-attorney manager,” a Jan. 9, 2015, SEC filing states. “After a 15 count criminal complaint was filed against him in 2010, Mr. Mehdizadeh pled no-contest in 2013 to two felony counts after considering the potential for negative publicity for Medbox had he defended the case at trial.
“Under the terms of a negotiated plea agreement, Mr. Mehdizadeh received probation and agreed to pay $450,000 in restitution, which he paid in 2013,” the SEC filing states. “It was stipulated within the plea that once Mehdizadeh completed probation successfully, the conviction would be deleted from his record. Mr. Mehdizadeh also declared bankruptcy in July 2010, which was later discharged in 2011.”
Mehdizadeh did not respond to requests for comment.
In separate SEC filings made in October and November 2014 SEC filing, Medbox officials confirmed the company is the target of an SEC investigation and that a “federal grand jury document subpoena [was] served in August 2014 on the Company’s accountants by the U.S. Department of Justice.”
“The SEC said it is trying to determine whether there have been any violations of the Federal Securities Laws,” Medbox’s November SEC filing states. “It said further that the fact of the investigation does not mean that it has concluded that the Company or anyone else has broken the law or that it has a negative opinion of any person, entity or security.”
A class-action shareholder lawsuit filed late last month against Medbox, which also names Mehdizadeh as a defendant, is much more direct in its allegations concerning the company and its principals.
“During the Class Period, Defendants issued materially false and misleading statements regarding the Company’s financial results…,” the lawsuit, filed in federal court in California, alleges. “Specifically, Defendants overstated Medbox’s revenues by recognizing revenue on customer contracts before it had been earned. As a result of these false statements, Medbox’s stock traded at artificially inflated prices during the Class Period, reaching an intraday Class Period high of $93.50 on January 8, 2014.”
Roger Pondel of PondelWilkinson Inc., says his firm was recently retained by Medbox to provide public relations and crisis management services. He declined to comment on the SEC investigation or the class-action lawsuit, though SEC filings do indicate the company is cooperating with federal regulators and does plan in the near future to amend its financial statements over a three-year period. Pondel did stress that Medbox now has a new board of directors and management team in place.
"Anything that happens to MedBox or its principals would likely not have any affect on us,” Bio-Tech’s Vo says.
If officials at the Washington State Liquor Control Board are concerned that the Medbox SEC probe might in anyway create an image problem for their regulatory efforts, they aren’t saying right now. The agency did not respond to requests for comment.