Bobby Mikkelsen’s CFO job is a lot less laid back than one might expect, given that he works for a cannabis company with a name that's inspired by the stoner comedy film “Pineapple Express.”
After he took Item 9’s finance reins in 2018, the Phoenix-based 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. But he still hedges his bets, choosing not to rely on just one institution — in case it has a change of heart. He said he's seeing increased, albeit slow-growing, interest in the cannabis 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 told CFO Dive 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 for recreational use, cannabis remains illegal under federal law. As a result, many otherwise routine financial transactions are often complicated or blocked due to the legal limbo in which the industry operates.
Borrowing can be expensive, partly because of the limited number of banks willing to operate in the space. The American Bankers Association has warned that any contact with money traced to cannabis 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 only 684 U.S. depositary institutions served marijuana-related businesses as of last year, according to Treasury Department data.
Aiming for a mix of debt, equity
In spite of the risks, the industry’s revenue has been growing quickly. Legal U.S. cannabis sales grew 40% last year 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). Its net revenues rose to $21.9 million from $8.1 million in fiscal 2020, and it narrowed its net loss to $10.9 million from $12.3 million, in part by improving processes, such as 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. 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 non-cannabis company might have a cost of capital for such debt between 7% and 11%.
The company also expects to raise at least $30 million through a Reg A+ offering, which it is targeting to sell to retail investors for a minimum outlay of $1,400, Mikkelsen said. Reg. A+ lets companies offer tens of millions of dollars 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 with economies of scale and operational support.
Traditional CFO career path
Mikkelsen said he expects 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 added that he's hopeful the company's growth — and expansion into other states — will soon turn its cash flow positive.
Mikkelsen said he 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 Mikkelsen said 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.