North California's cannabis industry weathers a tough summer of new rules, business hiccups

After a summer in which shifting state labeling and testing requirements have led to increased costs and logistical concerns, causing layoffs, shortages, and in extreme instances, business closures, North Bay cannabis cultivators, distributors and manufacturers are starting to see better times.

The state first issued its initial emergency regulations of the emerging cannabis industry on Dec. 7, 2017, and the second version of these regulations on June 4. Those took effect July 1. The changes phased in new testing requirements originally expressed in the January regulations. Permanent regulations introduced on Aug. 27, are expected to take effect in early December.

The major changes from the initial and second drafts of the emergency regulations included:

* More stringent laboratory testing.

* Permission for cannabis products to be delivered from any in-state location to any other in-state location.

* A potency rollback allowing medical cannabis products to have up to 500 milligrams per package. This is an increase from the previous limits of 100 milligrams per package.

* A requirement that each cannabis product be sold in its own child-resistant package followed by the August-proposed regulation that would eliminate the child-resistant packaging requirement. The August-proposed regulation substitutes the child-resistant packaging with a “new exit package” requirement, which states that a bag that a customer exits a cannabis store with be child-resistant, resealable and opaque.

“When you have to pivot, you may not be able to anticipate all of the costs. (Adapting) is toughest for a really big organization, with so many things to move, and a really small organization, which does not have a lot of resources,” said Samantha Miller, CEO of Pure Analytics, a Santa Rosa-based cannabis testing laboratory.

Dispensaries and delivery services felt the pinch

Although customers enjoyed knowing cannabis products were safer and pesticide-free, the more stringent lab-testing regulations led to a shortage in the cannabis supply for July and the first half of August.

“You almost feel like the cannabis family was pulled apart and shaken to see who could hold on,” said Nurit Raphael, founder of ONA.Life, a San Rafael-based cannabis delivery service. Raphael is also the current president and the founder of the Marin County Couriers Association, an association of cannabis delivery businesses in Marin County.

Raphael said that in July, her business went from having 150 stock-keeping units (SKU) to 5 SKUs available.

“We are just coming out of that. We're still not at our full load. By the end of September, the rest of the brands will come back. It has been hard explaining this to the customers. We've had to explain to every patient what was going on. We handled the demand by starting a wait list,” said Raphael.

Brian Bjork, CEO of San Rafael-based Marin Gardens, a medical cannabis collective and delivery-only dispensary, said the new regulations hurt his business “pretty badly.”

“After July 1, we had half as much inventory to choose from. All of our old inventory had to go to waste management. We are still in the process of rebuilding our inventory. The margins are extremely different as well,” said Bjork.

Eli Melrod, CEO of Solful, a recreational cannabis dispensary in Sebastopol, said the dispensary was out of stock of some products in July.

“There were a few weeks in July where we didn't have what we usually do. We still have a wait list for some products. I'd still say we're recovering. Right now the shelves are really well-stocked,” said Melrod.

Melrod said the impact of the emergency regulations changed how he orders products.

“Typically, we ordered two weeks' worth of supplies. Now we're ordering six to eight weeks' worth. This can impact how much cash we have on hand, but the last thing we want is to be out of stock,” said Melrod.

Monica Gray, owner of Nice Guys Delivery, a San Rafael-based cannabis delivery service, said she had to quarantine and destroy at least $40,000 worth of product.

“That cut into our margins. I would say the first two weeks of July were very difficult. Fortunately, now sales are up,” said Gray.

Gray said having consistency in popular items is the key to retail success.

“Our top shelf flowers are now all different from what we had July 1. Yet we've got a very good menu now. We're not struggling,” said Gray.

Gray said she cuts costs by using hybrid vehicles, including the Prius, to make deliveries. Nice Guys Delivery also requires a $50 minimum with no delivery fee, and a $100 to $150 minimum to travel to far-out locations like Bolinas and Stinson Beach.

Eric Sklar, owner of Napa Valley Fumé, a Napa-based cannabis delivery service, said he is more concerned about local regulations than state regulations. The deregulation rules set in place when voters approved adult-use cannabis in 2016 require companies to meet state and local regulations, he said.

Sklar's company makes regular trips from a dispensary in Lake County to residents throughout Napa County.

“They (the county and cities in Napa) are so resistant that they're not doing it right. There's very little in terms of cannabis going on here. What we're doing is not very green (in terms of being environmentally friendly). It also makes our driver cost 25 to 30 percent higher than it would be otherwise,” said Sklar.

Manufacturers explain their losses

Manufacturers dealt with a multitude of packaging and testing changes.

Drew Bulfer, co-founder of Valhalla Confections, a San Rafael-based cannabis edibles business that makes cannabis-infused gummies, said the packaging regulations presented a huge problem.

“Almost everyone who's survived today is printing packaging in-house and/or adding multiple compliance stickers. The Proposition 65 compliance requirement to add a warning label is unfair and unreasonable. None of our ingredients are on the Prop. 65 list, yet dispensaries are requiring it,” said Bulfer.

Prop. 65 requires producers to provide a warning to consumers about any exposures to chemicals that have been identified by the state to cause cancer, birth defects or reproductive harm. In 2009, the state added marijuana smoke to the list of dangerous chemicals. Since then, cannabis flower and all products containing it are subject to Prop. 65 warnings, even if those products are not smoked.

Bulfer said the new regulations made it more difficult to get ingredients.

“Our non-cannabis organic ingredients failed the lab-required pesticide tests. We had to shift to other organic ingredients, but our supplier said they're going to stop providing organic ingredients to California altogether due to Prop 65 and cannabis. We're almost in a position to have to switch to artificial flavoring, but we're not there yet. Our new suppliers wouldn't sell to us if they knew we were cannabis,” said Bulfer.

Bulfer said Valhalla dealt with “the amazing amount of lab fees and new regulations and taxes” by raising prices.

Nicole Skibola, co-founder of Cosmic View, a San Rafael-based manufacturer of cannabis salves and tinctures, spent considerable time and energy designing child-resistant packaging. The emergency regulations then eliminated the requirement for such packaging.

“We can't buy anything (packaging) in large quantities. The lab testing is incredibly expensive. It's designed for people making really large batches. As a small business, it just feels like we're getting crushed,” said Skibola.

Skibola said Cosmic View is now making bigger batches of products at a time and increasing prices.

Karli Warner is the marketing and communication officer of Garden Society, a Cloverdale-based cannabis business that makes “pre-rolls,” which are pre-rolled joints, and cannabis-infused confections. Warner said one of her primary concerns is testing per the regulations.

“Right now we test our product at three points in the manufacturing process and label for potency. The product then goes into quarantine for a certificate of analysis test for retail. Often when those results come back they are different from the previous tests. Then (we) have to relabel. It's not efficient or cost-effective. When July 1 came, we were definitely off the shelves for a little while. July was a difficult month for us,” said Warner.

Alicia Rose Kelley is the founder of HerbaBuena, formerly a Mendocino-based cultivator and Marin-based delivery service and manufacturer of cannabis pre-rolls, elixirs, topicals, lubricants, and supplements. Rose Kelley said since the regulations took effect, HerbaBuena has ceased operations while it seeks its own permits and finds a manufacturing partner.

“In the name of maintaining absolute compliance, we shut our doors and laid off our staff last Christmas. For the last nine months, we've been trying to get permits in Sonoma, Napa, and Lake counties. In the meantime we're re-launching our intimacy oil and certified biodynamic pre-rolls. (We are) working with a licensed manufacturer and distributor to get our products back on shelves. We hope to offer HerbaBuena products directly to consumers in the future,” said Rose Kelley.

Labs, attorneys and marketers react

Scot Candell, CEO of CB Labs, a cannabis testing laboratory in Novato, closed down for July and half of August because the lab purchased $750,000 worth of new equipment and updated all its software as well as hired and trained additional staff.

“We needed to change the limits of detection. Our older machines weren't sensitive enough to test to those levels,” said Candell.

Candell said CB Labs finished “clearing out all the old samples” at the end of August.

“Because of the delay, we had to give a lot of discounts and free testing to keep our clients happy,” said Candell.

Miller said Pure Analytics is currently buying new equipment and leasing more lab space.

“We're growing (our clientele) by 30 percent a month. We're also going to be hiring, expanding from 12 employees to 20 by the end of the year,” said Miller.

Miller said she had to add additional costs for clients because of the stricter testing requirements.

Candell, who is also a San Rafael-based cannabis attorney, said his law firm is “booked solid.”

“Everybody has questions. It's such chaos. Perhaps the people who got most shaken up are the investors. They don't know how this (the regulation change) affects their investments,” said Candell.

Omar Figueroa, a Sebastopol-based cannabis attorney, said his clients would like to see the market settle down.

“Every time there's regulatory changes, it opens up shelf space. That creates market opportunities for larger, more agile manufacturers to move in. There's a lot of well-funded investors from Canada trying to buy up manufacturers from the North Bay,” said Figueroa.

Zack Darling is CEO of The Hybrid Creative, a cannabis product design and marketing agency in Santa Rosa. The Hybrid Creative is owned by Kush Bottles, a cannabis packaging and containers company based in Santa Ana.

“(The amount of business we've had) has been up and down. We had a long period of uncertainty, a lull in the beginning of 2018 when the emergency regulations were first introduced. The clearer the regulations have become, the easier it is for our clients to move forward with compliance,” said Darling.

A call for local government to act

Small family-owned and craft cannabis businesses throughout Marin, Napa, and Sonoma counties say they are interested in working with county and city governments to keep small cannabis businesses alive. But they are concerned that larger companies from outside the area will come to dominate North Bay markets.

“You rally, you make public comments, and then you get concerned that someone like Eaze (a large cannabis delivery service) will come in and their lobbying efforts will change the regulations,” said Raphael.

“The licensees that are already here have been working very hard to stay legal. It's important that the public know how much hard work has been put in to get to where we are today. However, we (the current licensees) will still continue to band together and make sure we are heard,” said Raphael.

Cosmic View's Skibola said the state as well as local governments should try to protect artisanal brands like hers.

“We make hand-infused herbal products and high-quality extracts. As a small start-up without giant scale, our costs are really high. The competition between cannabis companies is beginning to happen on price, which rarely favors the small guy. Of course we are concerned about being pushed out by big companies, as well as the increase in popularity and complete lack of regulation of hemp CBD. The longer-term threat is when big pharma moves in on the cannabis market,” said Skibola.

Attorney Figueroa said local governments can consider providing financing or technological assistance to cannabis businesses. Cannabis businesses have difficulty getting loans and storing money because of federal banking laws, he said.

He said local governments can also regulate cannabis more actively in a way that would “incentivize operations.”

“The bottleneck is at the local permit level. You have to get a local permit to get a state license,” said Figueroa.

Dispensary CEO Melrod said keeping taxes and permit fees low is a good strategy. He added that small cannabis businesses can do more to come together and support each other.

“One thing we can work on is normalizing cannabis and helping people feel comfortable with it. There is definitely a growing demand for this product. Solful is seeing hundreds of new customers come in every month. We have regular, local customers come in from Marin, Napa, and Sonoma counties. On the weekends we see an increase in traffic from the Bay Area. Yet we've also seen a lot of out-of-state tourists and foreign passports, from Japan, Italy, France, Sweden and South Africa. We want to put a map in the lobby where people put pins in to share where everyone coming to the North Bay to buy cannabis is coming from.”

CORRECTION: This story was updated to correct the first name spelling of Zack Darling's name.