The transition period in the licensing authorities’ regulations allowing exceptions from specific regulatory provisions ends on June 30, 2018. Beginning July 1, 2018, cannabis goods must meet all statutory and regulatory requirements. Cannabis goods that do not meet all statutory and regulatory requirements must be destroyed in accordance with the rules pertaining to destruction.

On July 1, 2018 the six-month grace period for packaging and labeling and testing requirements for cannabis goods sold through licensed retailers expires. All licensed operators in California must comply with the regulations set forth under Prop 64 and the emergency regulations.

Before now, California’s regulatory authorities have extended this grace period to give operators the opportunity to understand, implement and comply with these new regulations – many of which have been in flux and have caused confusion and concern due to their perceived burdensome nature and cost.

The consequences of non-compliance have not been clearly defined and may not be for some time. Our experience working in regulated industries for decades suggests that navigating these nuances could mean the difference between maintaining or losing your license and ability to operate, or that violators could be subject to costly fines that could drastically impact your companies’ ability to operate.

The California Bureau of Cannabis Control (BCC) has released some useful guides during this transition period and should be used as a reference for licensed operators in order to comply with the July 1 deadline: “Transition Period Requirements” and the “Transition Period Fact Sheet.” In addition, the BCC recently posted their first installment of the Bureau of Cannabis Control’s “Question of the Week” on “Transition Period Requirements.”

Cannabis Compliance Crunch and Supply Implications

Due to the lack of clear guidance, or possibly the hope by some that regulators would yet again extend the grace period for compliance – as was done from January 1, 2018 to July 1, 2018 – many in the industry in California are feeling the crunch. The deadline and its strict requirements have been felt throughout the supply chain.

Retailers are trying to offload inventory so they don’t have to destroy it and take a complete loss. Distributors are trying to find outlets for as much non-compliant product as possible, and cultivators and manufacturers are assessing whether or not they can re-take possession of their goods within the supply chain and bring them up to compliance before the July 1, 2018 deadline. In this way they hope to reintroduce them to retailers soon thereafter and not lose shelf-space and possibly consumer mindshare.

The squeeze is exacerbated by the limited number of licensed testing labs that can provide timely results. Right now there are less than thirty facilities throughout California and even fewer have the ability to test at the standards set for July 1, many of which have already had challenges meeting self-imposed testing timelines with their clients.

In addition, and generally a good periodic practice, many licensees are holding internal training sessions prior to implementation to make sure all of their employees are familiar with the requirements and to help ensure compliance.

How a Cannabis Business Operator Handled the Deadline

We reached out to Scott Lambert, Co-founder and CEO of P&S Ventures about the impact of the regulatory compliance deadline. He confirmed that the deadline has affected “every aspect of his business.” He’s been forced to stop accepting new product as they’ve focused on clearing out old inventory that didn’t meet regulatory guidelines while sourcing new inventory that does. “We’ve had to slash prices” he added, “as a result our revenues have declined and so has the tax revenue collected.”

When asked what businesses should do if they are not yet compliant, Lambert emphasized disposing of the product legally and avoiding production until compliance is attained. Lambert added that businesses still working to become compliant may want to consider waiting out the emergency regulations and joining the market once the full regulations are in place, indicating that “the regulations are changing so fast and so often, one compliance mistake could cost $100,000.” He concluded that if you’re not already in, “I would wait until the ‘compliance dust’ settles before getting into the legal market.”

As many can expect, these changes will impact the overall market in California, with product flooding the black market, tax revenue falling sharply, and legal dispensaries struggling to stay operational. These concerns are widespread and many believe that the negative impacts will be felt for many months to come, and may undermine efforts to adequately and quickly shut down the illegal market.

What Other Operators are Doing

Many retailers have reacted by offering discounts of up to 50% on products that do not meet compliance requirements. Others are thinking through “gifting” strategies. Consumers have the ability to gift/donate once they’ve purchased the product at retail.  They may not get a charitable write-off or deduction, but they would certainly be donating to a good cause given the challenges that many compassion programs are facing.

Retailers may also decide to do the same by paying the required taxes and then donating product to compassion programs. Otherwise, make sure you run through the waterfall of options above and bring your products up to compliance if possible. The last resort will be to follow destruction guidelines and take the loss.

Helpful Tips:

  • Seek out and purchase as much compliant inventory that you can now.
  • Develop fast and aggressive sales/loyalty discounts for your patients and consumers.
  • If you have compliant inventory and will have sufficient levels for the foreseeable future, think about your communication efforts post July 1st as many of your competitors may not have inventory available for sale.

If you have questions or need help in achieving compliance throughout your supply chain or with product packaging and labeling, the professionals at ELLO and our partner companies are here to help.

If you have further questions for the BCC, you can reach them at:

(833) 768-5880

Helpful Guides & Resources:

CDFA: Emergency Regulations Summary for Cannabis Cultivators

BCC: Announcement of Readoption of Emergency Cannabis Regulations

Requirements for Ingredients and Appearance: California Department of Public Health

Laboratory Testing Requirements: Required Testing Chart

Transition Period Requirements

Transition Period Fact Sheet

Bureau of Cannabis Control’s “Question of the Week”