In its March issue, High Times Magazine called Cheeba Chews "far and away" the most successful medical marijuana edible firm in the U.S. (Hyoung Chang, The Denver Post)

Cheeba Chews licensing denial by state part of bigger mystery

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.

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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?”

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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.

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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.

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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.

Read the rest of the report on Cheeba Chews.

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