Jim McNair contributed to this report
Two-time Masters champion Bubba Watson, who refers to himself on Twitter as a Christian, husband, daddy and golfer – in that order — has lent his name and reputation to a public company run jointly by a pornographer and a promoter with ties to multiple business failures and frauds. So have volleyball player Kerri Walsh Jennings, a three-time Olympic gold medalist, and retired NFL player Steve Smith Sr., a five-time pro bowl pick.
They are among more than 40 current or former athletes who signed endorsement deals with cbdMD Inc. (AMEX: YCBD), a Charlotte, N.C.-based company that markets cannabinoid oils, lotions, bath bombs, tinctures and even pet treats.
R. Scott Coffman, who became cbdMD’s co-chief executive in July, also operates the Adult Entertainment Broadcast Network. It offers streaming porn on a pay-per-minute basis and produces its own adult videos. His connection to AEBN was not disclosed in the biographies that cbdMD included in key Securities and Exchange Commission filings, such as the proxy statement for its annual meeting or the prospectus for a recent stock offering.
Coffman also was one of the creators of the blu e-cigarette brand, which helped usher in the vaping trend that has led to a surge in nicotine use by American teens.
Coffman is cbdMD’s biggest shareholder. SEC filings show that he owns or controls at least 11.6 million shares, or 42 percent of the total outstanding. He stands to receive as many as 14 million additional shares if the company hits certain revenue targets..
The other co-CEO, Martin A. Sumichrast, was the subject of a Sharesleuth investigation in 2008. It detailed his links to fraud schemes dating back to the early 1990s and the “Wolf of Wall Street,” Jordan Belfort, whose corrupt brokerage manipulated the public offerings of more than 30 companies, including one in which Sumichrast and his father were officers.
Since we published those findings, the share prices of five Sumichrast-connected companies featured in that report have fallen to zero, or something very close to it. Three were Chinese companies that gained listings on U.S. exchanges through reverse mergers. They no longer file financial reports and have all but vanished.
A fourth, Heart Tronics Inc. (OTC: HRTT) was charged with fraud by the SEC in 2011. An attorney who secretly controlled the company and created false press releases to boost the stock price while he dumped shares also was charged criminally. He is now in prison.
The fifth company, House of Taylor Jewelry (formerly AMEX: HOTJ) filed for bankruptcy just a few years after going public. In short, none of the public companies that Sumichrast has helped to launch or finance over the past 25 years has been a long-term success. And although those ventures helped to enrich Sumichrast and other early backers who got stock on the cheap, they have been losers for buy-and-hold retail investors.
More recently, Sumichrast was co-founder of Siskey Capital LLC (now Stone Street Partners LLC). Its namesake, Richard Siskey, committed suicide in December 2016 while under investigation for orchestrating a Ponzi scheme that took in tens of millions of dollars from investors. Sumichrast said in court filings that he was unaware of Siskey’s activities.
Sumichrast has never been charged with wrongdoing by the Securities and Exchange Commission or other regulatory or law-enforcement agency. But the Nasdaq did delist the shares of a brokerage firm he headed after an internal investigation concluded that he sold ownership interests to at least two financial felons who served time in prison.
Nasdaq officials never publicly revealed the reason for the delisting of that company, Global Capital Partners Inc. (formerly Nasdaq: GCAP) .
A NEW GOLD RUSH
cbdMD is trying to cash in on the growing popularity of hemp-based CBD products, which got a boost in December from federal legislation that removed hemp from the government’s list of controlled substances.
CBD’s proponents have claimed, often without evidence, that cannabidiol helps relieve anxiety and depression, reduces nerve and muscle pain and even inhibits the progression of cancer and Alzheimer’s disease.
Although sales of hemp-based CBD products in the United States were well under $1 billion in 2018, some market research firms have projected that total revenue could reach or exceed $20 billion by the middle of the decade. That figure, however fanciful, would exceed the domestic market for chocolate, for energy drinks and perhaps even for medical and recreational cannabis, now legal in more than half of the country.
cbdMD is trying to differentiate itself from rivals through endorsements from athletes and other influencers, including Internet-famous cats. It also is trying to set itself apart through representations about the quality and purity of its products. It says that all of its CBD comes from organically grown hemp and is free of synthetic pesticides. It also says that batches of all of its products are tested by a third-party laboratory.
cbdMD reported net sales of $8 million for the three months that ended June 30. That was up more than 40 percent from the previous quarter.
But the company also posted an operating loss of $8 million, and a net loss of $29 million. The bigger number reflected liabilities for additional shares it might have to issue to Coffman, Sumichrast and perhaps others. Those shares would have a current market value of $60 million. Based on the financial guidance that executives provided in a conference call last month, many of them could be earned by the end of next year.
At the rate cbdMD is burning cash, it will have to raise more capital or reverse its losses to survive that long. According to its latest quarterly financial report, the company had $11.6 million in cash as of June 30.
That meant it used up all of the $4.6 million it had on March 31, plus some of the $12.5 million it netted from a stock offering in May.