July 1 could be ‘extinction event’ for some California cannabis businesses

Just Released! Get realistic market forecasts, state-by-state insights and benchmarks with the new 2024 MJBiz Factbook member program, now with quarterly updates. Make informed decisions.

Many California marijuana companies are worried if they will survive past the state’s July 1 deadline for complying with a comprehensive set of readopted and updated emergency regulations.

The deadline to sell product that hasn’t passed mandated tests might even prove an “extinction event” for businesses struggling to comply, observed Pamela Epstein, founder of Los Angeles-based Green Wise Consulting.

Consultants, lobbyists, manufacturers, distributors and retailers in California pinpointed five pain points the state’s licensed operators are feeling:

1. Compliance ‘cash crunch’

The price tag of coming into line with California’s regulations, in addition to state and local licensing costs and state and local taxes, could make this the first year in a decade that Oakland-based infused-product manufacturer VCC Brands spends more money than it makes, according to the company’s CEO, Kenny Morrison.

“We’re calling it the great cash crunch of the cannabis industry because everybody is so tight right now,” said Kristi Knoblich Palmer, co-founder of Oakland-based edibles producer Kiva Confections.

2. Testing costs and lab gridlock

The new testing regulations’ cost is three to five times higher than when Oakland-based edibles producer Korova, a licensed manufacturer and distributor, voluntarily submitted product for testing, said CEO Steve Adkins. Other manufacturers provided similar estimates.

To be cost-efficient, cultivators and manufacturers are sending larger amounts of product to labs.

But doing so puts them in the position of having large amounts of product fail, or having it sit for weeks in quarantine until samples are processed.

“This is not how traditional food manufacturing is done. This is not how pharmaceutical manufacturing is done,” Kiva’s Knoblich Palmer said. “This model we’re putting in place in California has never been done.”

If final product fails testing, distributors must pay to have the goods destroyed and, thus, manufacturers lose market opportunity.

California has 31 licensed testing labs, but it’s unclear how many are in operation and certified to do all the required tests. That means operators are expecting labs to be inundated with product, and infused-product makers must adjust their manufacturing processes to accommodate testing.

Infused-product makers have increased batch sizes, converted weights in recipes for added precision and started testing distillate or infused ingredients earlier in the manufacturing process – all to accommodate the new testing requirements.

“It’s not like on Jan. 1, when the emergency regulations came out (that) any lab was offering these tests, so the real crunch is getting manufacturing processes adjusted to hit those test marks,” Korova’s Adkins said.

3. Regulations are unclear

Operators and consultants say California’s regulations – drafted by the state’s Bureau of Cannabis Control (BCC), Department of Public Health (DPH) and Department of Food and Agriculture (DFA) – are tricky to navigate.

Regulations are either extremely detailed, vague or contradictory:

  • Some labeling rules dictate specific font size and color.
  • Others prohibit cartoons on labels but provide no direction on illustrations.
  • Yet more have manufacturers and distributors simply wondering or waiting. For example, the DPH says ethanol is allowed as an ingredient in tinctures. But the BCC classifies ethanol as a residual solvent in testing – which would cause products with ethanol, including tinctures, to fail state testing requirements.

In an email to Marijuana Business Daily, the health department wrote that it’s “working closely with the Bureau of Cannabis Control (BCC) to clarify requirements for these products,” and “the BCC regulates testing of cannabis products and can address how these and other products are currently tested.”

The BCC did not respond to a request to elaborate on the health department’s statement.

When enforcement of the regulations starts, rules interpretations may have to be decided in courts, noted Korova’s Adkins.

4. Compliant packaging is pricey, hard to find

Kiva Confections, Korova and VCC Brands sourced child-resistant packaging before the state’s Jan. 1 emergency regulations kicked in. Others who didn’t might find themselves in a tight spot July 1.

Child-resistant packaging that’s brand-consistent is costly – up to five times more expensive than that used by some companies in the past, manufacturers told Marijuana Business Daily.

Manufacturers and distributors also noted they face long lead times for supply, often having to order a minimum of 10,000 units of a single stock-keeping unit (SKU) more than 90 days in advance. And most suppliers want cash payments up front.

The state’s packaging regulations leave some unanswered questions, too.

For example, a health department regulation stipulates that all packaging for edible products must be opaque. Bottles for VCC Brands’ Cannabis Quenchers beverages carry a transparent strip that shows milliliters of THC and CBD.

Morrison is waiting for the state’s permanent regulations to define whether the strip is allowed.

The health department wrote in an email to MJBizDaily: “The permanent regulatory text, which will be released later this summer, may contain clarification.”

5. Retailers are unloading product

Retailers are sitting on stock they purchased before emergency regulations took effect Jan. 1, and there’s a sense of immediacy to get those products sold instead of destroying them, said Joshua Drayton, communications director for the California Cannabis Industry Association.

Delivery services and online menus for retailers throughout the state show dispensaries are deeply discounting product.

One lobbyist said 50% of a client’s inventory won’t meet July 1 regulations, and CCIA’s Drayton said fire sales have been a common occurrence as the compliance date nears.

Joey Peña can be reached at joeyp@mjbizdaily.com