Item 9 CFO relishes fight to normalize cannabis industry

By Maura Webber Sadovi for CFODive.com

Bobby Mikkelsen’s CFO job is a lot less laid-back than might be expected given that he works for a cannabis company with a name that's inspired by the stoner comedy film “Pineapple Express.”  

Locking down financing and even accessing basic financial services for the Phoenix, Arizona-based Item 9 Labs has required him to adjust to a changing landscape. After he took Item 9’s finance reins in 2018, the company was kicked out of its payroll processor’s system, had a dozen checking accounts closed and Mikkelsen’s mother was locked out of her safe deposit box because he was a co-signer. 

He ultimately found a cannabis-friendly international payroll firm and a number of cannabis-friendly state-chartered banks and credit unions where he has moved the company's accounts while still hedging his bets by not relying on one institution in case they change their mind. He's now seeing increased, albeit slow-growing, interest in the space on the part of some financial service providers and other professional services like auditors. 

“The thing is, it’s a new industry — we’ll call it gray or edgy,” he said in an interview. “So, as a team and as an individual, we have new problems to solve every day to normalize the industry and get it out of the back alley.” 

 

Although 37 states have legalized medical marijuana and 18 recreational use, according to data compiled by the National Conference of State Legislatures last month, marijuana remains illegal under federal law. As a result, many otherwise routine financial transactions are often complicated or blocked due to the legal limbo that the industry operates in. 

For example, borrowing can be expensive, partly due to the limited number of banks willing to operate in the space. The American Bankers Association has warned that any contact with money traced to marijuana operations "could be considered money laundering," while the Secure and Fair Enforcement Banking Act (SAFE) that would have provided protections for banks that serve legal cannabis businesses stalled last year. There are more than 4,000 federally insured commercial banks, but as of last year only 684 U.S. depositary institutions served marijuana-related businesses, according to data from the U.S. Treasury. 

In spite of the risks, the industry’s revenues have been growing fast.  Last year legal U.S. cannabis sales grew 40% to $25 billion, according to BofA Securities.  

At Item 9, demand was greater than the supply it could produce in its fiscal year ending in September, according to a filing with the Securities and Exchange Commission (SEC). During that period, its net revenues rose to $21.9 million from $8.1 million the year earlier, and it narrowed its net loss to $10.9 million from $12.3 million, in part by improving processes, such as for purchasing equipment, that made it possible to increase its output of vaping cartridges and reorganizing its post-production space to make more timely deliveries to dispensaries.   

For now, the company is still in a cash burn situation and it's taken on a hefty debt burden to fund its expansion. For instance, Mikkelsen obtained a $19 million construction loan from Pelorus Equity Group last year to expand its growing site in Arizona and complete another one in Nevada. The loan carries a 16.5% interest rate and the all-in cost, including closing fees, is over 30%, he said, while a regular non-cannabis company might have a cost of capital for such debt in the 7%-11% range. 

The company also expects to raise at least $30 million to $35 million through a Reg A+ offering, which it is targeting to sell to retail investors for a minimum outlay of $1,400, according to Mikkelsen. Reg. A+ lets companies offer tens of millions in stock each year without having to meet full registration requirements imposed by the SEC. The company will use the proceeds for retail dispensary acquisitions, its cultivation business, working capital and general purposes, according to the offering.

Item 9 is promoting the offering through its Keep Cannabis Local campaign, which bills the franchises as a way for local entrepreneurs to compete by providing them economies of scale and operational support. 

Mikkelsen expects that the overall cost of the equity capital from that offering will be "substantially higher" than the debt although it's difficult to pinpoint that cost given that the cannabis sector is economically depressed. "That being said, equity capital is necessary as we don't have access to the same types of fundraising as non-cannabis businesses," he wrote in an email. "There has to be a mix of debt and equity, for cash flow and expansion purposes." 

He’s hopeful that the company's expansion and growth into other states will soon turn it cash flow positive. 

Mikkelsen by his own account is not a consumer of the company’s products and is somewhat surprised to have landed in the sector. Prior to the job, he took a fairly traditional career path. After graduating from the University of Arizona’s Eller College of Management, he spent 11 years as an auditor at Henry & Horne and went on to start his own firm in 2016. He previously worked with a range of clients, including large government agencies, and businesses in health care, mental health and the pharmaceutical industries. 

But his latest role is a good fit for Mikkelsen, who says he enjoys puzzling through obstacles.

“It's a little more hectic in cannabis," he said. But because of the sector's complexities, "There's a lot of fun in the industry" too.