(This story has been updated after the California Department of Public Health confirmed late on Nov. 7 it had suspended 13 manufacturing business licenses. That brings the total number of suspended permits to 407.)

California has suspended more than 400 marijuana business permits, temporarily paralyzing roughly 5% of the state’s legal cannabis supply chain ranging from retailers to distributors.

Those companies must cease all sales transactions until their licenses are reinstated to “active” status, leading one prominent trade group to criticize the state for temporarily reducing the number of legal shops.

The Bureau of Cannabis Control (BCC) on Nov. 1 issued notices to 394 retailers, delivery services, distributors and microbusinesses that they won’t be legally able to conduct business until they’ve undergone mandatory track-and-trace system training and credentialing, a spokesman for the agency confirmed.

As of Wednesday, the suspended licenses had dipped to 385 and included:

63 retailers

61 delivery services

47 microbusinesses

185 distributors

29 distributors that are transport-only

The BCC currently oversees 2,630 marijuana companies that hold either provisional or annual licenses, while the California Department of Public Health (CDPH) oversees an additional 932 manufacturers, and the state Department of Food and Agriculture (CDFA) oversees 3,830 MJ farmers.

All told, California has a total of 7,392 licensed cannabis businesses.

Failure to complete track-and-trace steps

The problem, said BCC spokesman Alex Traverso, is that all the 394 affected businesses have had ample time to complete the required track-and-trace steps and to begin uploading their inventory data so state regulators can keep tabs on the cannabis supply chain via Florida-based Metrc’s software.

The Metrc requirement is part of receiving a provisional license, a transitional process from a temporary license to a permanent annual permit. All temporary licenses expired over the summer.

Any business that was given a provisional business permit was also given five days to sign up for Metrc, take required training and begin using the system.

But the 394 companies hadn’t done so.

“So, finally, about a week ago, we sent out another note, saying, ‘By this past Friday (Nov. 1), you guys need to be in Metrc, signed up, or officially your license is going to be suspended,'” Traverso said. “The gist of it is, now if they go out and they get their credential, the suspension is lifted.”

By comparison, Traverso noted, another 2,236 licensed businesses completed the Metrc credentialing process and are uploading their inventory data.

“These were just the stragglers,” he said. “It turned out to be a couple extra months that we gave them. It’s just a matter of getting a password, getting a login and doing the training.”

Traverso estimated it takes three hours to complete the requirements to get a suspension lifted and he doubts any companies will refuse to comply.

Firms take steps to comply

The CDFA also did not list any suspended licenses, but spokeswoman Rebecca Foree wrote in an email to Marijuana Business Daily that the CDFA sent notices to 103 cannabis farmers on Oct. 22 that their permits would be suspended if they didn’t complete the required track-and-trace participation.

“All but three of the licensees CDFA contacted have responded and are working on becoming credentialed into the system,” Foree wrote.

A CDPH spokesperson wrote in an email to MJBizDaily late Thursday that it had “suspended 13 cannabis manufacturing licenses this week for noncompliance with (Metrc) credentialing requirements” and that 909 of its 932 licensees were already properly credentialed for the track-and-trace system.

“The licenses that were suspended were issued more than 30 days ago, and the licensees received numerous written notices and phone calls from staff instructing them to comply,” according to the email.

.As of Wednesday morning, the number of suspended licenses had already dropped to 385, according to BCC licensing data.

“People have already done it. We’ve already seen people do that and get their suspensions lifted,” Traverso said on Tuesday. “I think there were about 80, since Friday afternoon, that had already gone in and got their credential.”

He added that the change in license status – from suspended to active – may not be immediately reflected in the BCC’s online data.

Boon to the illicit market?

However, some industry insiders expressed alarm at the move and suggested the step could only be another advantage for the illicit market, especially if retailers in particular are forced to halt operations, even temporarily.

“It’s very concerning,” said Josh Drayton, communications director for the California Cannabis Industry Association.

He pointed specifically to the fact that licenses were suspended for 63 retailers and 61 delivery services. That equates to about 10% of the legal MJ shops and 20% of legal delivery businesses.

“There’s a huge pause right now. And in a time when we’re trying to incentivize consumers to buy regulated, tested product … it’s minimizing their options,” Drayton said. “We’re kind of incentivizing the illicit market, which is a much more affordable option right now (for consumers). What we really need to be focused on is access and affordability.”

Drayton also criticized the BCC and said state regulators haven’t been as communicative to industry stakeholders as they need to be.

“This has flown under the radar” in much of the industry, Drayton said. “It comes back to communication.

“Metrc has been a looming issue that folks may not have received the messaging, that this has to happen immediately, that you need to get on-ramped into Metrc.”

But Traverso defended the move and said the requirement has been quite clear from the get-go.

“They need to be nudged in this direction. This is part of the reality,” he said.

“It’s part of the deal as it relates to being legal: You have to use Metrc.”

Business as usual

Sacramento-based consultant Jackie McGowan said she doesn’t believe the suspensions will have that big of an impact on the legal supply chain, in part because there’s apparently a technical glitch within the Metrc program that allows companies with suspended licenses to continue doing business.

“I don’t see this being any disruption to the supply chain, unless any of those operators decide to shut down for some reason,” McGowan said.

The glitch even came to the attention of Yolo County officials, who issued a notice to all their licensed MJ farmers to check on the license status of any distributor or other business type before selling them any cannabis.

“Metrc is currently allowing transfers to occur (using the licensed transfer page) with those businesses that have suspended licenses,” an official with the Yolo County Cannabis Program wrote to farmers in an email obtained by MJBizDaily.

“I have brought this to the state’s attention but do not know when a resolution to the issue will be performed.”

A spokesperson for Metrc referred MJBizDaily to the CDFA.

Foree, the CDFA spokeswoman, wrote in an email that the agency “does not comment on its investigations.”

John Schroyer can be reached at [email protected]