Cheeba Chews began as an experiment in a home kitchen and grew into one of the biggest successes of Colorado’s medical marijuana industry, winning awards and attracting fans with the promise of being “potent, consistent and discreet.”

Then, last spring, the medicated chocolate taffy began disappearing from shelves. There was no public explanation other than a letter from CEO James Howler citing “internal changes.” He promised things would get back on track soon.

The reasons behind the upheaval — spelled out more precisely in records and correspondence reviewed by The Denver Post — provide an inside look at how questionable marijuana business structures and state regulatory delays in scrutinizing them can lead to problems.

Cheeba Chews’ case also exposes a blind spot in the state’s regulation of edibles companies: By licensing out production, owners effectively can skirt the scrutiny that others in the business face, including criminal background checks and Colorado residency requirements.

Cheeba Chews stopped production after the state in March denied the business license application of Green Sky Confections, which had a licensing agreement to produce and distribute the brand.

The Colorado Department of Revenue cited 20 grounds for denial, including allegations of hidden ownership interests, off-the-books employees, an employee who had not passed a criminal-history check, record-keeping failures and unsanitary kitchen conditions.

The owner of Green Sky, Boulder entrepreneur Mark Mallen, challenged some findings, including the claim of illegal ownership. But the enforcement actions shut down his leased kitchen in Denver.

The state and Mallen reached a settlement that he said will ban him from the marijuana industry for a year.

Kevin Merrill, assistant special agent in charge of the Drug Enforcement Administration’s Denver field division, said the license denial validates the law enforcement belief that some marijuana businesses are not complying with state regulations and have taken advantage of the system and delays in processing applications.

“The catastrophic decision was allowing these businesses to operate without being properly vetted for a number of years,” he said. “Colorado is often touted as this best regulated system, this experiment. Yet the company was allowed to operate an illegal business for 3½ years? No one finds that concerning?”

Cheeba Chews marketing director Eric Leslie sought to distance the company from the state enforcement actions, saying they are unrelated to Cheeba Chews. He said the company follows the rules.

However, state regulators did raise red flags about the licensing of at least one Cheeba Chews employee.

Also, investigators questioned whether a related company — identified in business records as Cheeba Chews’ registered agent, Earthwise LLC — was essentially a partial owner of Green Sky’s license. An attorney for Mallen denied that.

Shared ownership

Mark Mallen owns Glacier Homemade Ice Cream and Gelato in Boulder. His move into the marijuana trade, he emphasizes, is separate. He said it began with shared ownership in a distribution company and branched into pot-infused ice cream he no longer makes.

In April 2012, Mallen entered into a contract to purchase Green Sky Confections and applied for an ownership transfer, according to his lawyer’s motion challenging the state enforcement action.

Ownership transfers are common in the Colorado pot industry. State regulators said the frequent changes, along with budget-driven staff cuts in 2012, contributed to a huge backlog in processing business applications that only recently was eliminated.

Mallen inherited a business that had applied for a license for marijuana-infused products in August 2010 — and was still waiting.

The business, like others stuck in the bureaucratic backlog, was allowed to operate while regulators processed applications.

On Feb. 27, 2013, it was Green Sky’s turn for a pre-licensing inspection.

The business occupied leased space at a commercial commissary kitchen on Morrison Road in Denver. Suite C offered stainless-steel tables, large ovens and bars on the door. Rent was $5,500 a month.

The investigator cited eight violations. Video surveillance coverage was lacking. Signs were missing. Labels on products in storage were dated or incomplete. Kitchen preparation areas and utensils were not cleaned properly.

Mallen characterized some findings as minor or off-base. The products in storage, he said, were never going to market.

Of the kitchen, he said: “Of course it’s not clean. Every single room is being used, and we’re making a product. It’s a kitchen. That’s insane. It’s clean at the beginning of the day and the end of the day.”

Nevertheless, Mallen said he promptly fixed everything. No one with the state reinspected the kitchen, he said.

The Marijuana Enforcement Division, however, began a separate financial investigation into the business’ ownership structure.

The findings are spelled out in an April grounds-for-denial letter. According to the Department of Revenue, Green Sky:

• Failed to disclose everyone with a direct or indirect financial interest in the license. The state defines ownership as “the person or persons whose proprietary interest is such that they bear risk of loss other than as an insurer, and have opportunity to gain profit from the operation or sale of the establishment.”

• Did not notify the state of all owners, officers, managers and employees before they began work or had a financial interest in the business.

• Employed individuals and had others working under contract who had not applied for or received a valid state license.

• Employed people who had not passed a criminal-history record check.

In a motion filed in Denver District Court, Mallen’s lawyer, Lauren Davis, contended the state provided “no basis in law or fact” in making a case for illegal ownership.

The motion said the state had a few reasons for its suspicion: Some employees were paid a flat fee per items produced instead of an established or hourly salary; checks were made out to an entity instead of an individual; and a supplier of sugar, flour and similar items was not licensed or an applicant.

Davis said none amounted to ownership, and she challenged the state’s legal interpretation of what constitutes ownership.

A judge denied the motion, and the state and Mallen settled for terms that have not been publicly disclosed.

The state’s financial investigation also involved another employee, Raymond Barker. In March 2012, Barker, Green Sky’s then-manager, was arrested and charged with driving under the influence, state records show.

Neither Barker nor Green Sky reported the arrest and pending charge to regulators, as required, the state said. According to Mallen’s lawyer, Barker was fired in late 2013 and had no ownership stake.

Barker declined to comment for this story.

Mallen acknowledged an “oversight” in the structuring of his business arrangement with his former employee. Barker ran a division of Green Sky and was involved in a brand called Twice Baked, Mallen said. At the end of the year, Barker was paid by getting a percentage of the profits, Mallen said.

“That was a mistake,” Mallen said.

Wrapped in colorful labels

At the kitchen on Morrison Road, workers with black Cheeba Chews shirts and matching caps stirred cannabis extract from small corked bottles into a baking dish layered with creamy chocolate.

After the all-organic-infused chocolate came out of the oven, it was sliced and wrapped in colorful labels.

The products included the flagship Cheeba Chews, Green Hornets and mint-flavored Dabba Chocolate bars.

In a March article, High Times Magazine called Cheeba Chews “far and away” the most successful medical marijuana edible company in the country.

That same month, regulators shut down the kitchen.

“The license holder had obligations and failed in those obligations,” said Leslie, Cheeba Chews’ marketing director. “He learned a very good lesson.”

Leslie said Cheeba Chews controlled branding and manufacturing.

Neither Leslie nor Mallen would discuss details of the licensing agreement. Typically, such agreements involve the licensor granting the licensee the right to produce and sell goods, or apply a brand name or trademark.

Cheeba Chews sought a licensing deal rather than its own infused-products license because it made it easier to deploy in multiple states, Leslie said. The company also has agreements to distribute in California and Washington state, he said.

Leslie described Cheeba Chews as a small business that puts the spotlight on the product and not its people. He said the sole owner, Howler, is “hands-off” and private.

In media interviews, Howler has described himself as a 31-year-old Boulder resident who legally produced hash from his medical marijuana grows and sold it to “compassion clubs” before starting Cheeba Chews.

The Post attempted to contact Howler by e-mail and received a response referring questions to Leslie. Leslie said Howler does not give interviews and answered previous media questions by e-mail.

A search of public records found no evidence of a James Howler living in Colorado. And no James Howler is licensed with the state Marijuana Enforcement Division.

A man named John Gardner filed articles of incorporation for Cheeba Chews LLC in 2011 with the Colorado secretary of state. The records identify Cheeba Chews’ registered agent as Earthwise. Gardner, in turn, is identified as Earthwise’s registered agent.

Both entities list the same mailing address — a mailbox at a UPS Store in Boulder.

Asked about Gardner, whom The Post was unable to locate or contact, Leslie said: “I think he may be a silent partner who came on at some point. I am not too familiar with the guy. He has not been active in the business.”

Cheeba Chews operations manager Dave Maggio is better known among local marijuana industry people. Maggio was a Green Sky employee dating to at least June 2012, according to Mallen’s lawyer. But according to state officials, Maggio first applied for and received a state license to work in the industry in January of this year.

Leslie said Maggio applied by mail in 2012. Processing delays occurred, Leslie said, and Maggio scheduled an appointment as soon as he could.

Handling of application

Mallen expressed frustration with the state’s handling of his application. His court motion said he paid thousands of dollars in license and applications fees while awaiting his fate and said his attempts to communicate with state regulators largely were ignored.

Mallen said he took several steps, including hiring a former top state marijuana regulator as an independent auditor.

The notice of denial was delivered March 28 — more than a year after Mallen’s kitchen was inspected.

“You sit there, and you’ve got 20 different violations,” Mallen said. “I’m not making excuses. I’m saying fine, some are legit. But we corrected it. We did everything we had to. We were as compliant as anyone in the market.”

Natriece Bryant, a spokeswoman for the Marijuana Enforcement Division, said follow-up on the initial inspection may have been delayed because of staffing shortfalls — at the time, 18 people were doing the work of 55. She also pointed to the complexity of such cases.

Jeff Gard, a Boulder lawyer who represents marijuana businesses and has no connection to the case, reviewed public records at The Post’s request and said the state was forced to act.

“The most concerning thing was, essentially, this business was truly a set of businesses holding itself out to be a single business,” Gard said. “If it quacks like a duck, it is a duck. You don’t get to rename it and retitle it and call it a licensing agreement.”

Lewis Koski, director of the Marijuana Enforcement Division, said license holders must disclose licensing agreements so regulators can determine whether they amount to ownership interests. Agreements vary widely, he said.

“The devil is really in the details in these kinds of situations,” he said.

If someone is getting paid a percentage of the profit, Koski said, that would “likely trigger a licensing event” — or possible enforcement action.

Mallen said the state was “trying to close us down” from the start. “They wanted to show your newspaper and the state of Colorado that they’re taking action, not everyone is getting licensed, we pulled down the biggest company,” he said.

Koski said that is not the case.

“We’re taking each case on a case-by-case basis on the merits of those cases, without respect to the size of the company or anything like that,” he said.

Mallen and Cheeba Chews have gone their separate ways.

And the brand that calls itself “America’s favorite edible” is about to return.

Leslie said the company has reached a new licensing agreement with another infused-product license holder. He said Cheeba Chews has been cooking in its new kitchen for the past few weeks. Dispensaries are beginning to advertise the edibles’ return.

Leslie would not identify the license holder or discuss details of the deal’s structure except to say it’s “a little bit different” than the previous one.

He said Cheeba Chews is working closely with the Marijuana Enforcement Division to make sure it complies with regulations — including turning over a copy of its new licensing agreement.

Eric Gorski: 303-954-1971, egorski@denverpost.com or twitter.com/egorski