Will 2019 be a smooth year for California’s cannabis industry? One expert says upcoming ‘extinction events’ prove otherwise.
“We were told they would regulate us like alcohol, not like plutonium,” said cannabis expert Jacqueline McGowan, about California’s regulation of adult-use cannabis.
McGowan is a compliance specialist for Sacramento’s K Street Consulting, which represents the cannabis industry in California. She recently published a report predicting that “extinction events” this year would injure the statewide cannabis industry. The sky isn’t falling, but individual businesses such as dispensaries, manufacturers and even cultivators could fall, one by one, from overzealous state regulations, she warns.
“I don’t want to cause a panic,” she told SN&R. “I’ve caused enough panic with this.”
Still, it’s not something cannabis businesses should take lightly, whether it’s a veteran manufacturing company or the new dispensary on the block. An extinction event is any law, regulation or enforcement action that could financially harm or destroy thriving cannabis businesses.
McGowan, who worked as a Wall Street analyst for 18 years, is a voracious reader of articles relating to new regulations and actions within the cannabis industry, and she uses analytical data to prove her points. She cites the legalization of recreational use in 2018 as the first extinction event; many established dispensaries shut their doors while waiting for a business license, a process slowed with backlogs of applications.
Then last July, the state’s more comprehensive Phase 2 testing forced cannabis products that were on dispensary shelves to be sold, destroyed or retested by July 1 to stay compliant with the new standards. “We saw a lot of businesses go under from that,” she said.
As for any dangerous curves on the road ahead, here are a few more areas of concern McGowan highlighted in her report, “Upcoming Extinction Events.”
Get the lead out
On December 31, California implemented new rigorous testing known as Phase 3, which requires all harvested cannabis products to be tested for heavy metals (such as lead) and mycotoxins created by mold. Phase 3 lab tests are a more than 40 percent increase than the Phase 2 tests, and McGowan predicts more cannabis businesses will close because of it.
Yet, companies must find a solution for unhealthy, lead-laced vape cartridges with measurements above 0.5 parts per million showing up in test results. Dispensaries and retailers are allowed to sell off any cartridge inventory manufactured prior to the December 31 deadline, but when they restock they must sell cartridges with a later date stamped on the packaging. Now, businesses are scrambling to find replacements that will pass a Phase 3 test.
“This will have a negative impact on manufacturer sales and the retailers that run out of cartridges,” said McGowan. “We’re not seeing the drop-off yet, that’s more in the future.”
Matt Z’berg, vice president of Marysville’s Perfect Union dispensary, said that a half-percent of the vape cartridges being tested at local labs have failed lead contamination tests.
He theorized, as have other industry insiders, that acidic terpenes from the oil caused lead to leach into the cartridge.
But Josh Wurzer, president of SC Labs in Santa Cruz, a cannabis testing lab that meets California and Oregon requirements, has a different concern.
“Lead is not soluble into oil,” Wurzer said. He blames the lead levels on “cheap manufacturing techniques” in China, where a majority of cartridges are made.
A recent study on e-cigarette cartridges, published in Environmental Health Perspectives, also cites heating coils inside empty cartridges as the source of lead. And while no amount of lead is safe, California’s limit of 0.5 ppm is far lower than current standards, forcing manufacturers to redesign cartridges.
“I think it’s a really good example of regulations working for the consumer,” Wurzer said in a phone call to SN&R. “If I was in Oregon or Colorado, I would be more concerned, because they’re not doing any heavy metal testing.”
Nevertheless, McGowan’s report says the overall delay will cause shortages and eventually hurt businesses.
Test lab scrutiny
McGowan says that California testing labs will be “under exceptional scrutiny following the very public failure of Sequoia Analytical Labs in Sacramento.” Last December, Sequoia admitted to falsifying test results and failing to test for 23 different pesticides.
“As test labs proceed through ISO (International Organization of Standardization) certification, look for more of them to undergo significant recalls and threats to their licenses,” McGowan said.
SC Labs’ Wurzer agrees that test inconsistency is an industry problem. “There are people who saw an opportunity to make a lot of money in the testing business without regard to how much more complicated the tests were,” he said.
Several labs under review by the state, including Sequoia, have been suspended until they can pass recertification.
The taxman cometh
With $2 million budgeted for tax enforcement, 2019 will be the year many cannabis businesses get audited.
“There are hundreds of distributors which have not filed a single cannabis tax receipt,” said McGowan, who got her information from the California Department of Tax and Fee Administration. When asked to confirm, the CDTFA would only say that it “conducts audits of all account types.”
A “track-and-trace” requirement follows a cannabis plant from seed to sale. California is implementing a software system called Metrc so that businesses can do the tracking. McGowan says Metrc hasn’t been tested for a market the size of California’s.
Meanwhile, a severe processing backlog has held up new business licenses. An estimated 10,000 cannabis cultivators could lose their temporary licenses, set to expire in the coming months. When a temporary license expires, it forces the cannabis business to operate in a de facto black market, while waiting for the new license.
Also, business owners need those licenses before they can receive training on the Metrc system. While a legislative fix, Senate Bill 67, would grant a one-year extension from the December 31 deadline, it may not be signed in time by Gov. Gavin Newsom to help businesses with licenses expiring as early as March.
“There may be, not just a loss of connectivity by individual licensees, but a wholesale loss of access to an entire system,” McGowan said. Such a failure could prevent businesses from transporting cannabis.
Juli Crockett, a former chief of compliance officer with W Vapes and current director of compliance with MMLG, a cannabis consultant in Los Angeles, shares that sentiment.
“If you, as a Metrc operator, haven’t set up a culture of compliance and system of record keeping yet, it’s going to devastate some businesses,” she said during a recent panel discussion hosted by the Future Cannabis Project, a media and advocacy company.
To help avoid extinction events, McGowan said there needs to be more communication from the state. “A monthly Metrc update, a list of FAQs would give guidance on some of the issues that all of us are wondering about.”