CBDMD INC YCBD S
September 01, 2019 - 10:40pm EST by
trev62
2019 2020
Price: 4.10 EPS 0 0
Shares Out. (in M): 29 P/E 0 0
Market Cap (in $M): 120 P/FCF 0 0
Net Debt (in $M): 12 EBIT 0 0
TEV ($): 108 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

Sign up for free guest access to view investment idea with a 45 days delay.

Description

cbdMD (YCBD) is a JOBS Act IPO whose management has a string of questionable connections and failed ventures going back to the 1990s.  The company has never generated meaningful profits and is losing more money as it grows in an industry with dozens of similar competitors.  YCBD is small ($120 million market cap) and you should size this appropriately as it could very well double or triple before working. There is borrow available, and we believe the stock will eventually trade a small fraction of where it is today.  I’ll try to keep this brief and provide links with more details, which involve everything from the Wolf of Wall Street to Kathy Ireland, Chinese reverse merger frauds, and celebrity cats on Instagram.

Recent History

What is now YCBD was founded in 2015 as Level Beauty, whose primary business was a salon products company called “Beauty and Pinups.”  The company was backed by an investment firm then known as Siskey Capital. Siskey Capital changed its name to Stone Street Partners in 2016  after one of its founders, Rick Siskey, was accused by the FBI of running a Ponzi scheme. Shortly after that Siskey took his own life, and his partner at Siskey Capital, Martin Sumichrast, continued to operate Stone Street.  While Sumichrast wasn’t named by the FBI in the allegations against Siskey, he has his own colorful history which we’ll come back to later.

In 2016 Level Beauty changed its name to Level Brands after starting two new business lines, “I’M1” and EE1”.  The company described these as follows:

·        “I’M1 – Ireland Men One is a brand inspired by Kathy Ireland that plans to provide millennial-inspired lifestyle products under the I’M1 brand

·        “EE1 is a company and brand, which is designed to serve as a producer and marketer of multiple entertainment distribution platforms under the EE1 brand.

Level Brands IPO’d under the JOBS Act in late 2017, with Sumichrast as CEO, despite consistent losses and a large number of related party transactions.  In late 2018, Level Brands issued shares to buy a CBD business and changed its name to reflect its new focus on selling CBD products. The licensing and entertainment businesses have essentially shut down, generating just $23 thousand in revenue in Q2 2019. 

The founder of the CBD business, Scott Coffman, became co-CEO of YCBD alongside Sumichrast.  Coffman also owns a company in the adult video business and was involved in Blu-Ecig, an electronic cigarette brand that was sold to Lorilard in 2012.  YCBD’s press release claims that “Mr. Coffman started Blu and sold it to Lorillard Tobacco for $135 million”. At the time of the deal Coffman’s wasn’t mentioned in the Blu’s own press release, which described Jason Healy as the “President and Co-Founder of Blu.”  Wikipedia also describes Healy as the Founder of the company. 

Sources:

https://www.sec.gov/Archives/edgar/data/1644903/000165495417009735/level_253g1.htm

https://www.charlotteobserver.com/news/business/article215635655.html

https://www.charlotteobserver.com/news/business/article126535184.html

https://www.businesswire.com/news/home/20100212006285/en/AEBN-CEO-Scott-Coffman-Groundbreaking-RealTouch-Product

https://en.wikipedia.org/wiki/Blu_eCigs

https://web.archive.org/web/20150905101503/http://www.businessnc.com/articles/2013-03/vapor-trails-category/

 

The Company Today

cbdMD is one of many brands selling CBD oil and other CBD products online and in retail stores.  According to LinkedIn, since year-end, the company has more than doubled its headcount from 41 to 85 and has increased its quarterly marketing spend from $200 thousand to $2.6 million.  While this marketing effort has increased sales, losses have increased rapidly as well:

$ million

Q4 2018

Q1 2019

Q2 2019

Net Sales

$1.2

$5.7

$8.0

COGS

$0.5

$2.1

$3.0

Gross Profit

$0.8

$3.5

$5.1

Operating Expenses

$1.5

$5.9

$11.2

Operating Income

-$0.8

-$2.4

-$6.1

 *excludes write-downs of intangibles, marketable securities, etc.

The company has spent money on everything from a Times Square billboard to paid sponsorships of various athletes, one of the Jonas brothers, and several popular cats on social media.  I don’t know how much cats get paid to endorse products these days, but “nala_cat” has 4.2 million followers on Instagram so it likely wasn’t cheap. The company also paid “lil bub” (2.3 million followers) and “Venustwofacecat” (1.9 million) to endorse their pet CBD oil.

 

All cat jokes aside, the company is trying to spend aggressively to establish itself as a leading brand in the growing CBD space.  While this had increased revenue (and losses), there are a large number of competitors and all of the spending does not seem to have made a big difference from a brand perspective for cbdMD. 

For example a recent Google search for “CBD Oil for Sale” listed the following brands on the first 15 pages (in this order) but cbdMD was not listed:

Google Results for "CBD for Sale"

Purekana

Core CBD

Palmetto Harmony

Katsbotanicals

Kratora

Fully Activated CBD

Royal CBD

Franny's Farmacy

Populum

Pluscbdoil

Charlotte's Web

Koi CBD

CBDistillery

CBD Biocare

Ignite CBD

Medterra

Verified CBD

Hemp Worx

Kushly

Activ8

Quality CBD

Bluebird Botanicals

California Finest

 

Infinite CBD

Elixinol

 

 

On what appears to be the leading CBD comparison site, cbdMD shows up on page 7 of 9, after all of the other brands shown in this table:

Brands listed on shoppingcbd.com

PureKana

Dragonfly CBD

CBD Lakeland

Hope CBD

Koi CBD

Green Roads

HempWorx

King Kanine CBD

HerbStrong CBD

CBDistillery

Premium Jane

Terra Vida CBD

Provacan CBD

Mary's Medicinals

Medterra

Hemp Bombs

OK CBD

Mary's Nutritionals

Quanta CBD

Kat's Naturals

CBD Pure

Pametto Harmony

Ignite CBD

JUUL CBD

Verified CBD

BreazyCBD

Charlotte's Web

Select CBD

Boots CBD

Fab CBD

Sunday Scaries

CBDFx

Savage CBD

MedixCBD

CBD Infusionz

Treatibles

Elixinol

Trokie CBD

CBD Brothers

cbdMD

TrytheCBD

Empire Wellness

Glo CBD

CBD Living

 

TruCure

Tweedle Farms

Blue Moon Hemp

Medical Marijuana

 

 

For another example, just last week Rob Gronkowski held a widely viewed press conference and endorsed a brand called “CBDMedic.”  The bottom line is the product is largely a commodity, there are dozens of competitors, and it will be difficult for cbdMD to establish any competitive advantage in the space.    

Management History and Red Flags

On top of consistent losses and lots of competitors, there are many additional red flags.  Sumichrast, in particular, has quite a history, which has been well documented elsewhere. I won’t rehash it all, but the following links cover it pretty well:

http://sharesleuth.com/investigations/2008/07/history_and_mystery

http://sharesleuth.com/investigations/2008/03/china_fire_security_group_inc

https://ipojournalist.wordpress.com/tag/sterling-winters/

https://www.barrons.com/articles/most-mini-ipos-fail-the-market-test-1518526753

https://www.washingtonpost.com/archive/business/1996/05/13/for-ipo-investors-the-prospectus-is-invaluable/e9b08083-9837-4ef8-bf31-be64607ec37c/?noredirect=on

 

The company has also had a large number of complicated related party transactions throughout its history.  A major one is that its products are sold in stores owned by Kure Corp, which is another Siskey/Sumichrast company.  In 2018 Kure merged with Isodiol, a publicly-traded Canadian company, whose stock has since fallen ~90%. Kure shares were then returned to its original shareholders in a spinoff on March 31st, 2019.  

https://www.prnewswire.com/news-releases/kure-corp-completes-47-million-second-round-of-funding-expansion-capital-to-fuel-growth-of-its-unique-vaporium-lounges-300091253.html

https://www.charlotteobserver.com/news/business/article210169884.html

https://isodiol.com/isodiol-news/isodiol-international-inc-announces-intent-to-divest-kure-corp-as-part-of-ongoing-efforts-to-curb-shareholder-dilution/

 

Timing and Risks

 

There is no imminent catalyst here, other than the company spending large amounts of money on marketing and headcount that we doubt will lead to any profits.  YCBD is a small company with experienced promoters behind it, so it could go up several fold before working out. Size appropriately. Between the company’s large losses, related party transactions, management history, and a commodity product in a competitive industry, we’re confident the stock will eventually be worth far less than it is today.  

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Continued losses

    show   sort by    
      Back to top