Submitted by Frank Rollins as part of our contributors program.
If you missed the 700% rally in BroadVision (NASDAQ: BVSN) from $8.50 to $56.46, the investor who bought at $8.50 is giving you a second chance.
The Investor Who Sold a Company to Yahoo for $270M and Bought BroadVision at $8.50
This article examines the relatively unknown history of Barry Honig, most famous for his role as Director at interCLICK (NASDAQ: ICLK) where he made a fortune helping the company grow from 2009 until 2011 when Yahoo (NASDAQ: YHOO) acquired it for $270 million. Honig now spends his days in abnormally lucrative deal-making from his offices in Florida. Last September, when BroadVision (NASDAQ: BVSN) was trading around $8 last September, Honig’s investment firm took a position of 248,771 shares. The stock rallied to $56 within six months, allowing Honig to capture millions in gains during the rally.
This article focuses on the most recent of Honig’s unusual investments: a small natural products company called ChromaDex (OTC: CDXC). Honig has begun conspicuously purchasing shares in the small company in the past few days. As Honig is a board member and large shareholder of the company, he is required to file changes in his ownership with the SEC..
In a Form 4 filing this past Thursday with the Securities and Exchange Commission (SEC), Honig disclosed buying 10,000 shares of ChromaDex at $0.70. This small purchase of a few thousand dollars would not normally be of much interest, except that this particular purchase seems to be a part of a recent campaign by Honig to conspicuously announce his interest in ChromaDex. Indeed, the purchase follows a series of purchases over the past few days, all punctually disclosed to the investing community in regulatory filings:
* bought 5,000 CDXC at $0.70 on May 29th
* bought 8,000 CDXC at $0.51 on May 18th
* bought 24,600 CDXC at $0.50 on May 16th
* bought 333,333 CDXC at $0.75 on February 10th
Why is this millionaire so meticulously purchasing shares of this small company in the open market, rather than negotiating more advantageous private investments? Why ChromaDex, in the first place? Finally, what is he trying to say with all of these purchase announcements?
Follow the Smart Money?
We know that as a board member of the company Honig now personally owns 3.8 million shares of common stock in ChromaDex and beneficially owns another 3.2 million shares of common stock through associated consulting firms. In total, Honig maintains approximately seven million shares of ChromaDex, or 9.5% of the company. His ownership stake has increased about 4.5% since he filed with the SEC on October 14th, 2011, and he has never sold a single share.*
Beginning with an obvious observation — the raw share performance of ChromaDex — Honig’s investment has preceded a turn-around in ChromaDex, with shares up over 50% from their lows a few months ago. The increase in market capitalization and liquidity provides greater security to the company and increases its ability to negotiate future business projects on advantageous terms. As a large shareholder, Honig’s conspicuous purchases have attracted the interest of other investors, all of whom provide progressive returns for his company and strengthen its financial position. Aside from improving the general capitalization to the company, however, there seems to be more to Honig’s investment than meets the eye.
The Human Clinical Study Everyone Has Overlooked
Several months ago, The University of Mississippi announced that it would commence a clinical study to test the effects of a chemical called pterostilbene on humans. Pterostilbene is a natural phytochemical that is present in small berries and some trees. ChromaDex has licenses from the USDA and several universities for pterostilbene and currently sells a pterostilbene-based dietary supplement at GNC, Walgreens, and Drugstore.com. The company hopes the clinical study will provide scientific evidence for additional health benefits and, thereby, attract additional customers.
Here is a timeline of events surrounding Honig’s purchases of ChromaDex shares:
* ChromaDex licenses pterostilbene patents from the USDA and other universities.
* The University of Mississippi launches a human health study using ChromaDex’s pterostilbene.
* ChromaDex announces that it will release results of the study in the second or third fiscal quarter of 2012.
* The status of ChromaDex’s human clinical study changes from In-Progress to Complete.
* A majority shareholder begins actively purchasing shares on the offer in small batches and across multiple days so that, presumably, he can make multiple public filings.
* We enter the month of June, the transition point between second and third fiscal quarters of 2012 and the anticipated timeframe for ChromaDex to announce clinical results.
* ChromaDex stock rallies 50% off its lows on heavy volume but on no significant news.
Why is Honig buying shares? It also seems self-evident. If the above timeline represents anything close to what is going through Honig’s mind, then Honig is buying because he anticipates a rally into ChromaDex’s clincial results. Furthermore, he is buying at prevailing prices in the open market and owns more shares (~7 million) than could realistically be sold in even several days of trading given current volume in ChromaDex. It would seem, therefore, that he is optimistic about an even larger rally in ChromaDex ahead of and/or including the announcement from The University of Mississippi.
Investing in Real-Time Intelligence
What else could Honig be thinking, the man who took a stake in interCLICK three years before it was acquired by Yahoo and took a stake in BroadVision immediately before a 700% rally. Throughout his engagement with ChromaDex, Honig has never sold a share and appears to be a long-term investor. As noted above, he knows that ChromaDex’s first product line was built around pterostilbene, which is due to have test results out within a few days. However, Honig also knows about the company’s laboratories in Colorado. ChromaDex’s laboratories are part of the company’s legacy business of providing testing and reference standards for the natural products industry. They provide consistent cash flow and, more importantly, real-time intelligence about the current status of the pharmaceutical industry. He knows that this laboratory had many years’ advance notification that stevia sweetener would be “the next big thing” (due to unquestionably obvious orders for stevia extracts), and that this laboratory is actively acquiring patents and technology for nicotinamide ribocide (NR), an investigational alternative to Abbott Labs’ (NYSE: ABT) Niaspan.
Niaspan is the largest niacin treatment in the world and targets the high-cholesterol market. (Niacin is a common, naturally-occurring, B-complex vitamin that is widely used as an additive in foods like milk and meat.) Abbott Labs’ Niaspan generates approximately a little under $1 billion in annual revenue but struggles to capture more market share because of the drug’s side effect: flushing. Individuals taking Niaspan commonly report an uncomfortable redness and a flush of heat when taking the supplement, so much so that Abbott Labs dedicates a section of its website to helping people cope with this discomfort.
What ChromaDex has learned, interestingly, is that NR is a common metabolite of niacin and has many of the same effects as niacin- at lower dosages and with no noticeable side effects. ChromaDex learned of the world’s interest in NR because of early intelligence gathering at its laboratories in Colorado and, quickly thereafter, licensed a NR patent from Cornell. With the possibility of NR becoming a more attractive alternative to niacin, ChromaDex will have rights to this compound and its commercial success. It could also launch its own product line featuring NR, much as it has already done with its pterostilbene-based product line that is currently on GNC and Walgreens shelves nationwide.
Honig undoubtedly knows about NR. Perhaps he is interested in the potential of NR or, more likely, the potential of an entire company that receives early warning about major commercial opportunities because of its day-to-day operations.
So, the millionaire in Florida who you have never met is buying shares of ChromaDex ahead of a major clinical announcement. He owns about seven million shares, is buying at prevailing prices, and seems to want the world to know. Given the current volume in the stock, he could not possibly sell his 9.5% stake without a significant negative impact on the share price; and regardless, even when prices above $1 were available to him, he has never used the opportunity to sell.
This article has attempted to analyze some possible reasons for Honig’s large position in the company and the reason for his conspicuous purchases. Among other reasons, Honig might be interested in the following upside catalysts for ChromaDex in the next few months:
1) A clinical study regarding the health benefits of the company’s patented pterostilbene is complete, and data is set to be released soon that could provide scientific validation for more uses of the company’s supplement line,
2) Monetization of ChromaDex’s patents and licenses for NR, a niacin competitor and possible alternative to Abbott Labs’ billion-dollar Niaspan drug, and
3) Commercial opportunities generated from ChromaDex’s intelligence-gathering laboratories, which successfully predicted the stevia phenomenon due to obvious, unusual order flow.
At its current market capitalization of $63 million, ChromaDex has significant upside potential, although its cash needs could create dilutive events for shareholders in the future. With pterostilbene, ChromaDex is already operating in the weight loss market worth tens of billions, and positive clinical results could increase its pterostilbene-based products’ sales significantly. With NR, ChromaDex would compete in another billion-dollar market. Finally, other opportunities that ChromaDex finds through laboratory information flow and customer relationships could new revenue opportunities. Honig certainly seems that shares are moving higher, and another billionaire, Dr. Phillip Frost of Opko Health (NYSE: OPK), also maintains an ownership stake of 19%. Only the future will tell whether these wealthy investors make a return on their ChromaDex investment to rival their former successes.
* A somewhat immaterial footnote is that in SEC filings, Honig’s wife 401K ownership in ChromaDex reduced by approximately 9%, but those shares were simply transferred over to Honig’s other accounts and not outright sold. Also, Honig later increased his stake by more than an equivalent amount of shares in the open market and has never sold his shares, so in total, Honig’s net ownership of ChromaDex has only ever increased over time.