Michigan Suspends Testing Facility License for Inaccurate Results

The Michigan Marijuana Regulatory authority suspended the license of Iron Laboratories, a Walled Lake testing facility, on August 16, 2019 due to inaccurate results and unreliable testing and reporting practices. Michigan warned consumers to be careful using products that were tested by Iron Laboratories as the tests may be unreliable.

This is the second testing facility that the MRA has identified as issuing inaccurate results. Last week, the MRA issued a warning that The Spott, a licensed medical cannabis testing facility in Kalamazoo, MI, issued inaccurate potency test results from May 3, 2019 through July 11, 2019. Michigan has not required the recall of these items at this time.

Vape Product Manufacturers Pose a Huge Risk to Cannabis Brands

The New York State Department of Health issued a health advisory to inform state residents that using vaping products that contain THC can be dangerous. New York indicated that ten (10) residents between the ages of 18 - 49 were hospitalized after they used vaping products that contained THC and other substances. New York is working with the Center for Disease Control (CDC) to investigate the causes.

The CDC reports that there are potentially 94 cases in 14 states that occurred from June 28, 2019, to August 15, 2019. Cases are being reported in Wisconsin, Illinois, California, Indiana, and Minnesota primarily in teenagers and young adults. The CDC indicates that there is no conclusive evidence that an infectious disease is causing the illnesses.

In April 2019, the Michigan Marijuana Regulatory Agency announced that it found lead in vape cartridges during testing. Michigan warned consumers of the risks associated with vaping and cited a study on the dangers of e-cigarettes conducted by the John Hopkins Bloomberg School of Public Health. The study indicates that chronic use of a contaminated e-cigarette can cause lung, liver, immune, cardiovascular and brain damage. The study tested the e-cigarette devices of 56 daily users, including the e-liquid and aerosol, for heavy metals. Researchers found heavy metals in the aerosol produced by e-liquid heated through coils. Almost half of the samples contained lead concentrations that were higher than the health standards issued by the Environmental Protection Agency.

It is clear that e-cigarettes and vaping products will be heavily regulated in the near future. The FDA’s Acting Commission, Ned Sharpless M.D., issued a statement in July on its efforts to regulate the e-cigarette market including the issuance of recommendations that require manufacturers to consider factors when designing an e-cigarette including how the e-liquid is heated, the aerosol is generated and transmitted to the user.

Brand building is the name of the game in the cannabis industry right now. Companies are developing recipes, products and marketing materials that are designed to win over consumers. One of the biggest risks for a brand is an event that will hurt its image or reputation such as a recall or consumer safety issue. Given the recent health reports, cannabis companies should take steps to ensure vaping products are safe for consumers.

Cannabis manufacturers that produce vaping cartridges or other vaping products and retailers should take the following steps:

  • Perform a third-party risk assessment on the vaping product supplier. The risk assessment should identify whether the supplier is in compliance with the FDA’s recommendations for responsible manufacturers and whether the design of the vape product may cause lead contamination or other safety issues.

  • Ensure that effective health and safety procedures are used for the extraction of THC products and in the cartridge filling process.

  • Test the vaping products and cartridges thoroughly for contaminants in the device and the aerosol.

  • Require the supplier to notify you before it makes changes to the design or materials used in manufacturing the vaping products.

  • Request research related to the safety of products safety and any possible risks.

  • Document the rationale for determining that the vaping product is safe and routinely test to ensure that the controls are still effective.

Companies that are developing brands should ensure that appropriate due diligence is performed for all suppliers that can impact the company’s operations or reputation. The review should occur on a periodic basis, and auditing rights will help ensure that the vendor’s representations are accurate. By vetting suppliers, companies can ensure the brand’s integrity and reputation.

California Voters May Legalize CBD If the Legislature Fails to Act

California’s Attorney General published for public comment two ballot initiatives that will legalize hemp products. The Cannabis Hemp Heritage Act of 2020 and The California Cannabis Hemp Initiative 2020 will provide voters with the ability to legalize the cultivation, processing, distribution, use, and consumption of cannabis hemp products in California. The ballot initiatives are similar to the efforts to legalize cannabis in that they require cannabis hemp euphoric products to be treated like alcohol and provide a 10% excise tax on retail sales.

Last week, the Senate Appropriations Committee held a hearing on AB-228, which will legalize the sale of CBD products in California. The California Department of Health issued a frequently asked question in 2018 that prohibited the sale of consumable CBD outside of the licensed dispensary system until the US FDA determined that CBD products can be used as a food or California made the determination that CBD was safe. The bill has been moving slowly through the legislative body since it was introduced in January 2019.

Currently, cannabis licensees may only use CBD derived from cannabis in products, and they may not sell industrial hemp products. The bill will allow cannabis licensees and others to manufacture, distribute and sell industrial hemp products. The industrial hemp products must be tested and labeled in a truthful manner. Hemp with THC levels greater than .3% can be provided to cannabis manufacturers.

The legislature is proposing to use the Cannabis Control Fund to pay for the bill’s implementation, which is estimated to be around $6.7 million. The Department of Public Health expects that there will be 750 to 800 new firms that will create and distribute hemp-derived CBD products.

Colorado Steps Up Inspections and Testing Requirements Following Marijuana Recall

The Colorado Department of Revenue and the Department of Public Health and Environment issued a recall of products manufactured by Herbal Wellness LLC due to potentially unsafe levels of microbial contamination. A Public Health and Safety Advisory indicates that Herbal Wellness also failed to test certain harvest batches.

The Colorado regulator recalled 44 batches of contaminated medical and recreational marijuana that were produced between February and July 2019, and 66 batches of untested medical and recreational marijuana that were produced between December 2018 and May 2019. The recalled harvest batches included strains with names such as Chernobyl, Agent Orange, Gorilla Glue and Jack the Ripper.

Colorado’s recall was announced the day after the regulator issued an industry-wide bulletin notifying firms that marijuana products must be tested for mycotoxin contamination beginning on September 15, 2019.

The Denver Department of Public Health & Environment (DDPHE) also announced that it will test products at 25 randomly selected retail marijuana stores for pesticides, total yeast, and mold. The DDPHE will use METRC to identify flower, trim/shake and pre-rolls that will be included in the assessment. The regulator will publish its findings.

Colorado’s focus on product testing comes as marijuana regulators try to convince consumers that legal cannabis products are a better option. By publicizing recalls, consumers can get a better understanding of the types of dangers posed by untested products.

California Legislature Holds Hearing on Legalizing CBD Sales

The California Legislature held a hearing yesterday on 5 cannabis bills that it must move forward ahead of the 2019 session’s closing date on September 13, 2019. The most important bill that was deliberated by the Appropriations Committee was AB-228, which will legalize the sale of CBD products in California.

Below are the 5 bills that the Senate Appropriations Committee discussed during its public hearing on August 12, 2019.

Virginia Guidance on CBD Sales Offers Bright Spot for Industry

The Virginia Department of Agriculture and Consumer Services issued guidance related to in-state processing and sales of CBD products that are intended for human consumption. Virginia’s policy statement is significantly relaxed as compared to the position outlined by New York State recently.

Virginia will treat CBD oil that is intended for human consumption as an approved food ingredient or dietary supplement, and it may be added to food and beverages. Virginia will also allow the import of CBD oil from other states so long as it is produced in accordance with the state’s food laws and regulations.

Only CBD products that are tested may be sold in the state. The products must also be manufactured and labeled in accordance with federal regulations that apply to dietary supplements. Failure to comply with these requirements could result in the state initiating an enforcement action against the violator.

Virginia’s stance on the manufacturing and sales of CBD related products is a bright spot for the industry that has been hamstrung by restrictive policies issued by other states and recent enforcement activity by the US FDA.

Want to Avoid CannTrust's Fate? Adopt These 5 Good Governance Practices

CannTrust Holdings announced yesterday that Health Canada is investigating compliance violations at its manufacturing facility in Vaughan, Ontario. The company’s board of directors has initiated an internal investigation to determine the root cause of the problem and to initiate remediation steps. Investor’s reacted negatively to this news causing the stock price to collapse.

The company’s credibility is in tatters as news emerges from the internal investigations that are being performed as a result of compliance violations that were revealed in July.

On Friday, the company announced that KPMG was withdrawing audits from 2018 and the first quarter of 2019. KPMG’s decision was driven by the information revealed from the company’s Special Committee’s investigation as well as information that caused the firing of CEO, Peter Aceto, at the end of July.

The company also indicated that it was unclear what impact the Health Canada investigations would have on the value of its inventory and biological assets. In a separate announcement, CannTrust revealed that it will not sell or ship product from the Vaughan, Ontario facility until Health Canada’s investigation has concluded.

Health Canada’s most recent investigation shows significant compliance violations and a lack of internal controls. The company failed to obtain appropriate regulatory approval prior to making changes to its operating procedures and to the facility. The regulator also found that the firm’s operating procedures did not meet the regulatory requirements.

CannTrust is facing a serious situation that may result in the company’s sale, or even worse, shuttering. So, what are the lessons that CannTrust can provide to the cannabis industry?

1) Shareholders do not easily forgive. It is easy for shareholders to sue a company over a lost investment. Like any relationship, investors must trust that senior management will protect them. News of a regulatory violation may indicate that the company is playing fast and loose, which puts the company and its assets at risk. Investors that do not trust a company or senior management will sell the stock to protect as much of their investment as possible. Investors value honesty and information that can be relied upon.

2) Good governance can save your company. Everyone needs a boss including the CEO. The board of directors is charged with protecting investor interests by being fully engaged and keeping an eye on the big picture. The board must monitor high risk areas such as financial reporting and regulatory compliance for anomalies or other warning signs. By including independent board members, a company can demonstrate to investors that it values a fresh eye on the company to ensure that it has adequate controls and a culture of compliance.

3) Create a culture of compliance. A culture of compliance is worth its weight in gold. Culture can help a company mitigate the risk associated with internal threats posed by employees. Employees must be supervised and trained on the risks facing the company and how the employee’s actions can either exacerbate or mitigate this risk. A rogue senior management team can cause fast and loose practices to leach through an organization leading to the failures witnessed at CannTrust. Investors want a culture of compliance that will protect their investment.

4) Test, test, test. Companies must test operating procedures and controls to make sure they work. Operating procedures are designed to instruct employees on how the business is operated in a way that mitigates risk. By reducing risk, a company can ensure it maintains the value of its inventory and services and provides trustworthy financial statements. Companies that periodically test the controls and processes that are used in the operating procedures can demonstrate their effectiveness of the control framework to the board of directors and regulators.

5) A penny saved may cause a company to be lost. Recent news reports reflect a growing impatience by investors on the return on investment of the cannabis industry. Company’s that cut costs associated with maintaining effective controls and compliance will not be rewarded. As with CannTrust, companies that do not take good governance seriously will simply go away.

Michigan Testing Facility Issues Inaccurate Potency Results

The Michigan Regulatory Agency issued a warning that The Spott, a licensed medical cannabis testing facility in Kalamazoo, MI, issued inaccurate potency test results from May 3, 2019 through July 11, 2019. Michigan has not required the recall of these items at this time.

The Michigan regulator is working with The Spott to identify products that were impacted by this problem. Patients are cautioned to use care when ingesting medical cannabis that was tested by the facility as the potency on the label may be higher or lower than the number indicated. The regulator is also working with the facility to establish stronger controls that would prevent this problem from happening in the future.

Monterey County, CA: We Changed Our Mind, Hemp is a Little Like Cannabis....

Monterey’s County Board of Supervisors adopted an Industrial Hemp Pilot Program that will restrict the size, location, and the number of industrial hemp cultivators allowed in unincorporated areas of the county. The county will accept registration requests until August 31, 2020, and grant 30 registrations. To date, the county has received over 50 requests to cultivate hemp.

The California Department of Food and Agriculture established an industrial hemp program for the registration of industrial hemp cultivators. Under the program, applicants must register with a local county agricultural commissioner and abide by any local restrictions.

Monterey’s County Planning Commission held a meeting on July 10th during which the group debated whether hemp is an agricultural commodity or as cannabis. The Planning Commission concluded that hemp is a commodity that should be treated without restrictions.

During a meeting on July 23, the Board of Supervisors reversed that decision and adopted an ordinance that established an industrial hemp pilot program. The Board of Supervisors debated the impact of odors on local communities such as King City; the likelihood that hemp growers could inadvertently contaminate cannabis crops; and the lack of data available that is required to make clear decisions as to the effectiveness of buffer zones.

Monterey County is not alone in its hesitancy to treat hemp as an agricultural commodity. According to our data, seventeen (17) counties currently allow hemp cultivation, twenty-six (26) counties implemented a temporary moratorium that would give them time to figure out what to do, fifteen (15) counties are silent on whether hemp is permitted, and two (2) counties are moving quickly towards implementation.

Calfornia cities are also acting to prohibit hemp cultivation with Blue Lake, Furtuna, Hollister, Lake Forest, Pittsburg, San Jacinto all recently adopted moratoriums. We expect that more cities will move to prohibit hemp until more information is available as to the impact on local communities. It appears that the hemp industry will be constrained in California until more information is available on effective buffering zones that can mitigate the pungency of hemp odors and cross-pollination concerns.

Illinois Municipalities Announce Plans to Allow Adult-Use Cannabis Businesses

Local municipalities in Illinois are moving to adopt ordinances that permit adult-use cannabis businesses. Illinois’ new adult-use cannabis law provides medical marijuana establishments with priority for obtaining an adult-use license, which may begin operating in January 2020. We expect municipalities that currently allow medical marijuana businesses to amend zoning requirements to accommodate adult-use cannabis businesses. We are also seeing new municipalities proposing ordinances to enter into the new market.

Over the next couple of weeks, the cities of Homewood, Oak Park and Addison will hold public meetings to adopt adult-use cannabis ordinances. Medical marijuana establishments currently operate in all three cities. Other Illinois cities such as Lincolnwood, Crestwood, Mcleansboro, Wadsworth, Galesburg, and Northbrook are proposing ordinances to permit adult-use cannabis.

Those looking to enter the Illinois cannabis market should start looking for a city to establish a business as the process is lengthy and can be just as competitive as the state process. Starting a business in a city that is new to the cannabis industry can be risky as local sentiment and litigation can cause a city to quickly exit or cease movement on an ordinance.

We expect the competition for real estate in these cities to heat up as potential adult-use cannabis businesses seek a place where they can start construction. Real estate speculation in the cannabis industry is increasing as brokers continue to obtain exclusives on potential real estate sites. Market entrants should build in sufficient time and money to finding a location.