Short Neptune. Retail gets pumped on Neptune

December 17, 2012 | RP

Prior to November, Neptune Technologies (NEPT) (NTB.TO) had been a Quebec-based producer of “krill oil”, a “neutraceutical” alternative to fish oil supplements as an Omega 3 source. The company currently still has a market cap of $150 million and typically trades over 200,000 shares per day and has liquid options in December, January and February.

On November 8th, a massive explosion ripped through Neptune’s only production facility, killing three people and sending 19 survivors to the hospital, some with critical injuries. In all, this amounts to 20% of Neptune’s workforce. The pictures and videosshow that it was a miracle that anyone was able to survive this horrific industrial disaster. All that remained of the factory was a smoldering pile of twisted metal I beams and pulverized concrete.

Given that there was no longer even a factory for the employees to return to, Neptune was then forced to terminate 70% of its employees. Ten people still remain employed on a full-time basis and they have all agreed to 20% salary cuts.

Neptune has established a Special Victims Fund which has been set up as a non-profit organization which can accept donations from both companies and individuals. As of now, I am not aware of a website that has been created or of any means of sending electronic donations. However, paper checks can be sent by regular mail as follows:

Payable to: Fonds d’Entraide Neptune Technologies

Address: 545, Promenade du Centropolis, Laval, (Quebec ), H7T 0A3

Note: In the remainder of this article, I discuss the difficult realities faced by Neptune as a company. I am painfully aware that management of Neptune is still recovering from a horrendous tragedy and that they have their hands more than full at the moment. I direct absolutely no criticism towards Neptune management, but I do direct very heavy criticism towards the various parties who areaggressively and inappropriately promoting this stock in light of the catastrophic impact that the disaster has had on Neptune’s ability to survive as a company.


Despite Neptune’s dire circumstances, a number of authors along with retail broker John Thomas Financial, have portrayed it to retail investors as a compelling buy which is likely to double or triple. This has spurred significant retail buying. The shares are currently 81% held by retail investors.

After plunging to $2.10, shares of Neptune quickly rebounded to as high as $3.01. The bullish articles have sought to minimize the impact of the fact that Neptune now has no factory, no product, no revenue and only ten employees. Instead they now suggest that Neptune will go to $5.00-$7.00 on the back of prospects for its Acasti (ACPHF.OB) subsidiary.

On Monday, Acasti released very early stage interim results for one of the Phase II clinical study of its CapRe drug. The interim results were the first of two interim results to be released on Phase II. The second study was delayed due to enrollment issues. So from this point, there is still substantially more data which needs to be seen before clarity is obtained on Phase II.

As expected, the CapRe product showed a good result in reduction of triglycerides, and as expected the study will proceed. Neptune management has informed me that Phase III is expected to be completed in 2015, such that potential revenue visibility is likely to become more clear in late 2014.

However, two weeks ago, Acasti exercised a pre-payment option to Neptune, eliminating the payment of royalties by Acasti to Neptune in exchange for giving Neptune greater ownership of the subsidiary. Neptune will now own 61% of the subsidiary, but will no longer be entitled to $700,000 per year in royalties.

The bulls are clearly quite misguided on Neptune, and are over playing the potential for Acasti while downplaying the facts of the situation at Neptune. In fact it is much more likely that the stock will end up trading at a slight premium to its $0.70 cash per share due to the fact that it has no factory, no revenue, no product and only ten employees.

The Acasti subsidiary may provide some additional premium over the $0.70 value by early 2014 as investors get additional visibility on the prospects for CapRe.

The share price last closed at $2.44.

The recent volatility in the stock has boosted the price of the call options, such that selling those call options will yield 20-30% as long as the stock stays flat or goes down. This strategy is equally applicable to those are currently long the stock (as a hedge) as well as those who simply choose to take the opposite side of the trade from John Thomas Financial.

During the course of my research, I have made it a point to have direct conversations with each of the following parties: Neptune management, Lise Vaillancourt of Quebec’s Environment Ministry, Neptune’s insurance provider AON Insurance (Quebec office), the Canadian government’s insurance regulator, and George Belesis (broker and co-founder of John Thomas Financial)

The conclusions I have reached are summarized as follows:

With no near-term revenue prospects from either krill oil or Acasti, Neptune’s ability to survive as a company is highly questionable. The $150 million market cap company has no factory, no product, no revenue and only ten employees. Meaningful production will be unable to begin until 2014, and even that is subject to a government investigation into the explosion, which has already produced two non-compliance letters to Neptune.

Following a recent equity offering which raised $31 million in proceeds, Neptune now has $0.70 per share in cash and no revenue producing assets remaining.

Meanwhile the current share price of Neptune remains at $2.44, which is just in line with where it traded in early 2012, when Neptune was fully operational and growing revenue.

Even before the explosion, Neptune has never had a profitable year. Even as revenue were increasing, losses continued to grow larger rather than decrease.

Under these circumstances, the only analytically defensible share price target for the stock is at a slight premium to the $0.70 per share that it has in cash.

Any recommendation to buy Neptune shares at current levels, is indefensible and cannot be supported by analysis of the facts, the numbers or the circumstances.

Despite this clear reality, three recent bullish and promotional articles have come out since the explosion, and coincided with a significant bounce in Neptune’s share price, which briefly closed above $3.00. This can likely be attributed to the fact that Neptune is held almost exclusively by retail investors.

These articles provided no useable data or company specific projections, yet offered share price targets as high as $7.00,nearly a triple from the current level of $2.44 and 40% above Neptune’s all-time high. Instead of providing analysis, optimism was expressed towards the overall krill industry along with hopeful prospects for Neptune’s Acasti subsidiary. Management has stated that Acasti products are not expected to produce any material revenue until 2015.

Neptune has also been heavily promoted by retail brokerageJohn Thomas Financial, using mass cold calls touting the stock to unknown retail investors. As with the articles, heavy focus is given to Acasti. In my own phone call with the co-founder of John Thomas I was told that Neptune’s share price was expected to rise by 45% within three months, to pre-explosion levels, due to the fact that it had recently “doubled quarterly profits” and that “nothing actually is going to be hitting the bottom line because basically they have insurance to cover everything”

Ultimately, I was given a target of “way back over $5.00 per share”, so well more than a double from current levels, within 6-8 months.

Neptune has never in its history generated a profit, and certainly not in two consecutive quarters, so JTF was clearly mistaken. Neptune cannot even begin production until 2014.

In the month and a half since the explosion, Neptune has received no insurance monies and its own documents discloses the risk that it will not be covered by insurance.

According to management, even interim plans for partnership agreements to outsource some small production will require at least 6-12 months. So the notion that this stock will rise 45% inthree months, before exceeding $5.00 in 6-8 months is nothing short of fantasy. When I asked for recommendations for other stocks beyond Neptune, the JTF co-founder told me that he wouldonly recommend two stocks as buys at present, Neptune and controversial InterOil Corp (IOC), based in Papua New Guinea. As shown below, InterOil has been attacked from numerous angles as being a massive fraud and the share price has recently fallen to near 3-year lows.

I have included a link to a verbatim (not paraphrased)transcript of this call along with links to extensive online complaints from recipients of aggressive cold calls where they were pitched controversial stocks by JTF brokers, includingNeptune. I also include employee reviews of JTF which raise the term “boiler room” and which describe a firm that gives brokersphones to dial while not even giving them computers for reading about the stocks they pitch. I have also included details about the background of the founder of JTF, including his involvement with drugs, an organized car theft ring and a history with fivehighly troubled and sanctioned brokerages before founding his own brokerage. Many of these details became public during his testimony in a New York murder trial in which one his personal friends was convicted of killing three people.

I will also show that the longer-term prospects for Neptune are not much brighter than the short-term prospects. Neptune hasnever generated a profit in its entire history, and its planned expansion of capacity would result in Neptune single-handedlyexceeding its own estimate of total global demand for krill products by a wide margin. Neptune’s largest competitor, Aker BioMarine (AKKKF.PK), has already tripled the sales of Neptune, and the two are currently in a patent war trying to invalidate each others patents. Aker’s production capacity alone is in line with Neptune’s total estimate of global demand for krill products. Aker also plans to double capacity.

Again, it is not my intention to criticize Neptune’s management who are clearly enduring extremely difficult times. Instead it is my intention to spotlight what I see as an egregious promotion of the stock of a highly distressed company by parties who demonstrate no concern for the dramatic losses facing the retail investors who are being encouraged to buy the stock.

So again, my conclusion is that in contrast to the 100-200% upside target being promoted to retail investors, the real value of Neptune can clearly be demonstrated as just a slight premium to the company’s $0.70 per share in cash until such time as the company has a factory, a product, some revenue and employees.

The detailed analysis below can be segmented as follows:

I. Details of the ongoing investigation into the explosion

II. Assessment of prospects for any insurance payouts

III. Elements and timing of the Strategic Action Plan

IV. Details and analysis of promotional articles

V. John Thomas Financial – Blue Horseshoe Loves Neptune

VI. Options overhang – 7.5 million shares at $3.27

Part I – Details of the ongoing investigation into the explosion

This was not a small explosion. The tremendous explosion which could be seen and heard from kilometers away, quite literallydestroyed everything including the machinery, Neptune’s inventory and the entire factory itself. An adjacent expansion facility which had currently been under construction appears to have also sustained limited damage.

Two weeks after the blast, Radio Canada reported that Neptune had breached environmental standards and that during the investigation of the blast, investigators had found that the quantity of highly flammable acetone being stored was much higher than what had been approved. Radio Canada went on to say that Lise Vaillancourt, a senior official with Quebec’s Environment Ministry was on the record as saying that notices of non-compliance had already been sent to Neptune.

Radio Canada went on to say that Neptune’s factory expansion project had been conducted without authorization by the ministry and that despite the lack of authorization Neptune had secured $3 million in funding from the Quebec government to fund it.

None of this is either final or resolved though. Neptune quicklyresponded that at the time of the blast it felt that acetone levels were within regulations, but did also confirm a notice of non-compliance from the Ministry which pointed to the plant’s equipment and expansion.

Neptune did confirm that it had failed to adhere to equipment standards. But no comment was provided regarding the unauthorized plant expansion or the $3 million funding.

In my conversation with management, I was told that there had been a misunderstanding by the government and the investigators and that the excess acetone in question was assumed to have been in tanks at the expansion plant, but that since this plant is not operational they were empty at the time.

When I spoke to Lise Vaillancourt with the Environment Ministry she said that the Ministry was not offering further public comments for the time being and would not confirm or refute any of the statements made be either Radio Canada or by Neptune, nor would she provide any updates to any statements previously made.

Neptune has advised that the investigation is still ongoing and until it is completed no updates can be given as to the cause of the accident. I re-confirmed this with management to see if there had been any further progress or clarity since that announcement in November. I was informed that at this time there are no updates and that no estimate of completion time can currently be given due to the fact that the investigation is being conducted by the government and the investigators which is understandably beyond the control or influence of Neptune.

Part II – Assessment of prospects for any insurance payouts

Neptune has stated that it has both property insurance and business interruption insurance, up to certain specified limits. However at the current time, Neptune is not disclosing any of the terms or amounts related to these policies.

Neptune has further stated that the insurance proceeds would cover a portion of any reconstruction, while bank loans would be needed to finance the remainder. Both the insurance payout and the bank loans will depend on Neptune receiving a clean report from the investigators.

When I spoke to management I was told that Neptune has not yet received any proceeds from any insurance policies provided by Aon insurance and that the specific terms and amounts of such coverage are currently not being disclosed. It has now beenone and a half months since the explosion and no insurance monies have been received. However management is still hopeful that some insurance proceeds will be released sometime soon.

All affected parties will no doubt be hoping for the best. However, the possibility that Neptune will not receive insurance proceeds needs to be carefully considered. This has been disclosed by Neptune in the equity prospectus as follows:

Lost sales or increased costs that the Company may experience during the disruption of operations may not be recoverable under the Company’s insurance policies, and longer-term business disruptions could result in a loss of customers

Part III – Elements and timing of the Strategic Action Plan

Three weeks after the explosion Neptune released a strategic action plan. Goals included the following:

a) Resuming operations and certain levels of sales

b) Reconstructing a plant using the expansion facility

c) Pursuing partnerships for the outsourcing of production

d) Maintaining key customer relationships and market share

e) Continuing its product development and clinical trials

f) Defending its patents and intellectual property

g) Supporting the development of Acasti and NeuroBio

The is certainly an ambitious to-do list for the ten remaining employees to undertake but it is certainly an accurate list of what needs to be done.

In terms of timing, under the strategic action plan, Neptune will see no material revenue for 6-12 months at a minimum, and in fact no material revenue for over one year is highly likely. As for the cost, we can see clearly that Neptune plans to spend effectively all of the proceeds from its equity offering at a time when it has no revenue.

a) resuming operations, sales and b) reconstructing an operational plant

Rebuilding a new factory is estimated to take 6-9 months. This will hopefully begin after the investigation is completed and after the Canadian winter. As a result, it is expected that that factory will be completed by 2014 at which time Neptune can begin to purchase and process inventory. Any revenue would therefore be expected to begin in early-mid 2014. revenue would need to start over from a low base, so I am assuming they could begin at around $2 million per quarter, ramping up to as much as $5 million per quarter or more by the end of 2014. Given that Neptune best ever quarter saw $8 million in revenue, this estimate seems sensible.

So by the end of 2014, or perhaps early 2015, Neptune could realistically be back on par with where it was during 2011 in terms of total revenue.

In terms of cost, the expansion facility had been budgeted at$21 million, so this can be used as a rough estimate.

c) pursuing partnerships for the outsourcing of production

Identifying and securing new partners could potentially provide Neptune with an earlier revenue stream. Management advised me that it is exploring a variety of options. However, estimated time for this to happen was given as 6-12 months.

In looking at the prospect of outsourcing Neptune has disclosed in the action plan that “Neptune’s operations for the foreseeable future, particularly during an initial transition period, are expected to yield significantly lower sales margins“.

Given Neptune’s historical lack of profitability even with higher margins, the logic behind this strategy seems to be driven towards retaining customers and preventing a total absence of Neptune’s product during construction of the new factory. As a result, this strategy is expected in incur significantly larger losses than in the past.

Neptune still owns some amount of frozen krill which had not been processed into saleable inventory. Current potential partners are being evaluated in the US, China and Australia and management advised me that they feel that shipping the frozen krill to these locations for outsourced processing is an achievable prospect.

The reason for the large losses is that the outsourcers would need to make a profit and then there would also be the cost ofshipping the frozen krill to the US, China and/or Australia.

Neptune also disclosed specifically that the rationale for identifying potential partners was “both as an interim measure to ensure certain levels of production prior to its new plant being fully operational and as a longer-term strategy to diversify sources and means of production.”

In light of the recent developments, the diversification is certainly sensible. As we have now seen, when a company concentrates all of its production facilities and inventory storage in a single location, it is painfully susceptible to a company wide shut down in the event that the unexpected happens. This is all the more prudent when the production process must make use of volatile and explosive chemicals such as acetone.

Neptune had already made investors aware of this risk factor, stating “The Company is dependent on a single manufacturing facility” in the equity prospectus. Further detail is provided saying:

If operations at the Company’s manufacturing plant were to be disrupted as a result of equipment failures, natural disasters, fires, accidents, work stoppages, power outages or other reasons, the Company’s business, financial condition and/or results of operations could be materially adversely affected. Lost sales or increased costs that the Company may experience during the disruption of operations may not be recoverable under the Company’s insurance policies, and longer-term business disruptions could result in a loss of customers.

d) maintaining key customer relationships and market share

Maintaining customer relationships will be difficult with no product available but presumably it can be facilitated through marketing spend. As part of the strategic action plan, Neptune disclosed:

Neptune believes that the proceeds of the [Equity] Offering can ultimately be deployed, over a longer period of time than initially planned given the incident, in substantially the same allocation as was disclosed.

In the prospectus, $9 million had been allocated for sales, marketing and inventory purchases.

Determining market share for Neptune is a difficult task. When Neptune went out to raise the $31 million via an equity offering, the prospectus included a 2012 study by Frost and Sullivan which stated that:

the krill oil market had global revenue of US$51.1 million in 2011, and is projected to grow at a compound annual growth rate, or CAGR, of 16.4% between 2011 and 2016

Therefore the total global krill market in 2012 is estimated at$60 million according to Neptune. In the same prospectus Neptune reiterated revenue guidance of $7-8 million per quarter, or roughly $30 million per year. So in reading the prospectus it is easy to come to the conclusion that Neptune was capturing market share of 50% for the entire global market of krill oil products

Yet as announced in the same prospectus, Neptune had planned to more than double its production capacity by 2013, which would presumably mean that Neptune alone would be capable of satisfying the entire world demand for all of the world’s krill oil products. And Neptune also disclosed that production capacity would triple by 2014, in which case its production capacity would exceed global demand by a wide margin.

Competitor Aker BioMarine recently reported quarterly revenue of nearly $20 million (€$14.65 million), which would equate to nearly $80 million per year, roughly triple those of Neptune.

In its Q3 financial report, Aker also announced that it was roughlydoubling its production capacity of Superba Krill Oil 1000 MT. It also announced that it had recorded a pre-tax profit that quarter of $7 million on revenue of $24 million for the quarter.

Other krill suppliers are also flooding the market with capacity, as noted in this 2012 article “Israeli krill player doubles capacity.”

The conclusion is that maintaining market share when it has no factory or product will be difficult for Neptune. It will be all the more difficult given that its two largest competitors are both doubling capacity and their capacity alone will quickly exceed global demand for krill.

e) Continuing its product development and clinical trials

Funding ongoing clinical trials (such as CapRe) and other regulatory needs will continue as planned according to the strategic action plan. The estimate disclosed is $3 million.

Moving past Phase II trials is generally a fairly straightforward process. A much higher (and more expensive) hurdle will be getting full FDA approval upon completion of Phase III. Management currently expects this to occur by 2015 at anundisclosed cost. Using the already incurred cost of Phase II as a point of comparison, Phase III will likely cost $10-20 million.

On Monday, Neptune released the first of two interim results for one of the two Phase II studies for CapRe. As would be expected for an Omega 3 product, CapRe was shown to have a good result in reducing triglycerides and the study will continue as expected. The second study was delayed pending further enrollment, but is also expected to ultimately show a beneficial effect.

Neptune management has told me that the larger Phase III trial is expected to be completed in 2015, such that any potential revenue prospects will become more visible in 2014.

Two weeks ago, Acasti exercised a pre-payment option to Neptune, eliminating the payment of royalties by Acasti to Neptune in exchange for giving Neptune greater ownership of the subsidiary. Neptune will now own 61% of the subsidiary, but will no longer be entitled to $700,000 per year in royalties.

f) defending its patents and intellectual property

Offense and defense against patent infringement against Aker BioMarine will continue to be both important and expensive, even while Neptune has no product to sell.

Aker is Neptune’s larger competitor and currently brings in triple the revenue of Neptune. Neptune has patented its krill process in the US and has stated that “This implies that competition will not be authorized to sell krill oil in the US unless they reach an agreement with Neptune.”

This statement was made in 2011, yet Aker has continued to sell in the US.

Aker has fought the US patent claim, stating that similar results had been achieved prior to Neptune’s invented process such that Neptune actually invented nothing, and ,”It also alleged that the USPTO had not been informed of proceedings in the European patent office ‘in which Neptune’s related European patent was ruled invalid.'”

In October 2012, Aker filed in the US for a re-examinationstating that Neptune’s process was “un-patentable” and again that Neptune had failed to submit all relevant information to the US Patent Office. Neptune quickly rejected this.

As a counter attack, Neptune filed a similar action against Aker inAustralia stating that Aker’s patent was “neither new nor inventive“.

The point is that both sides are saying that the other is trying to patent something which cannot be patented. This is simply a tactic for preventing one another from selling in major markets.

Aker will no doubt seize upon Neptune’s inability to produce in order to attempt to capture Neptune’s market share in the US.

Neptune has allocated $3 million of the proceeds from the recent equity offering for the purposes including continuing the patent war.

g) Acasti and NeuroBio subsidiaries

According to the strategic action plan, both Acasti and NeuroBio will continue to be funded with $8 million as planned and disclosed.

It is safe to say that from a value perspective, NeuroBio can be ignored by investors for the medium term. NeuroBio is in thevery early stages of exploring the use of krill in treating variousmental disorders, however nothing has advanced beyond pre-clinical stages so nothing has even entered Phase I trials. Even if anything does ultimately work out with NeuroBio, there is no prospect for any revenue from it for many years to come.NeuroBio was partially spun off as a dividend to Neptune investors in September 2012.

Acasti on the other hand is currently progressing through two Phase II clinical trials for its CapRe product. Acasti is also currently developing Onemia as a “medical food” which will only be administered under the supervision of a physician and which is intended to serve as an Omega 3 dietary supplement. However, Onemia has generated just $10,000 of lifetime revenue. Acasti also generated $116,000 in revenue by conducting contracted research in fiscal 2012.

Acasti’s other potential product is CaPre which is designed as a medical treatment for reducing high triglycerides and “bad cholesterol”. As mentioned above, CaPre is currently in Phase II trials. Management expects that Phase II will be completed in late 2013, and then Phase III in 2015.

Despite the ongoing financial support being provided by Neptune, Acasti recently exercised a royalty pre-payment option. However, this payment was made with stock (warrants) such that Neptune will not receive any cash. This eliminates Acasti’s obligation to pay Neptune $700,000 per year in royalties. Neptune had an independent valuation conducted which concluded that the value of this non-cash transaction to Neptune was $15 million, however this is based on the equity value of the ownership in the subsidiary, not on any cash which would have otherwise been received.

Part IV – Promotional articles

In recent weeks Neptune hit a high of $3.01, higher than where it was in early 2012. Even after dropping to $2.44 it is just in line with where it was in early 2012, when Neptune was producing and selling its product and reporting record revenue and growth. Looking back further, we can see than Neptune has traded as low as $1.08 in 2010 even when annual revenue were above $6 million.

The obvious question becomes: If Neptune’s prospects are so grim then why is the current share price on par with where it was when business was booming in early 20012 ?

After initially plunging to as low as $2.11 the share price rebounded to as high as $3.01. This jump corresponded with a bullish investment article entitled:

Neptune’s Crisis Could Mean It’s Time To Acquire This Speculative Equity.”

The optimism here was pointed at the promising future for the krill industry in general rather than at Neptune specific prospects. The description of Neptune’s situation clearly contradicts the bullish title draws the conclusion that it is time to sell rather than buy. For example:

Despite these promising trends, NEPT’s near-term business is problematic. The recent explosion effectively destroyed both its production facility and its warehouse of product. Prior to the event, Neptune had already initiated construction plans to double the company’s production capacity by 2013. The company also indicated that it had already received orders that nearly fully utilized production capacity. Now, NEPT can neither meet those orders with new or prior production

Optimism was also expressed towards the CapRe product, despite the fact that Phase III trials will not be completed until2015. At that time the product may ultimately begin to generaterevenue according to management. This of course assumes that the product is ultimately deemed safe and effective by the FDA.

There is nothing wrong with making a speculative bet on a company which has a single product in Phase II trials. However that bet must be made within the context of the price of the stock. At the current price, the author can only be assuming that Acasti is both a “sure thing” and a “home run”.

Acasti may or may not be worth something. The problem is that Neptune now owns over 60% of the subsidiary and the subsidiary is financially dependent upon Neptune for survival. As a result,the Acasti stake can’t be monetized unless Neptune chooses to shop it around to strategic buyers. With no clarity on Phase II and no revenue prospects for years, any strategic purchase would need to come at deep discount to any perceived value that Acasti may have to Neptune.

The overall conclusion here is that the wisdom in “buying this speculative equity” is entirely dependent upon the price. Even at a price of $1.50, Neptune would still be substantially over valued, even in consideration of the prospects for Acasti as they are currently understood.

Two other promotional articles came out following the explosion.

Applying The Venture Capital Model To Public Companies

Do You Have The Guts To Take On Cutting-Edge Biotech Like This VC?

The argument made is clearly puzzling. The author quotes an analyst with:

He initiated coverage on Neptune in August 2012 with a $7 target. The main takeaway from his comment on Neptune following the explosion was very encouraging from an investment standpoint. He ran a hypothetical worst-case scenario, in which Neptune proves unable to produce product for a full year, and found that this subtracted only $0.68/share from his net present value [NPV].

Once again we see a $7.00 target, which is 40% above Neptune’s lifetime high share price. Yet following the absolute destruction of the factory and the inventory and the circumstance where “Neptune proves unable to produce product for a full year“, the target is reduced by just 10%, still 30% above its lifetime high, and nearly triple the current level.

For starters, it would appear that the “VC model” needs to be substantially recalibrated. After that, I would suggest that the author consider the merits of an old saying on Wall Street, “Models don’t buy stocks, people do.”

V – John Thomas Financial – Blue Horseshoe Loves Neptune

In addition to the highly bullish articles which came out after the explosion, there has also been a concentrated marketing effort by brokerage firm John Thomas Financial targeting retail investors. In the text below I have included 15 links which reveal extensive online complaints from individuals who have received aggressive cold calls from JTF pitching speculative stocks, including Neptune.

I have also included reviews from former employees where the term “boiler room” come up often and which describe brokers who are given phones for making cold calls, but not computers for learning about the stocks they pitch. These aren’t my observations, these are the observations that have been made in hundreds of online posts which span the course of several years, including in recent weeks.

I was curious to hear what sales pitch could possibly be given to retail investors when recommending they buy the stock of a company in this condition, so I put in a call to JTF to inquire about opening an account as well as the merits of Neptune stock.

I was put through to George Belesis, a senior broker who is a co-founder of JTF and brother of well-known founder Anastasios“Tommy” Belesis.

For those who are interested, I have posted a verbatim (not paraphrased) transcription of this call at

I expect that JTF adheres to the standard compliance procedureof recording all calls between brokers and prospective clients, so the accuracy of the transcription should not be the subject of any debate whatsoever.

Mr. Belesis chose to forego the traditional brokerage formalities of first inquiring about my risk toleranceinvestment experiencefinancial resourcesemployment status or other details.

Instead he immediately suggested I buy shares of Neptune.

Among the various positives, I was told that Neptune had “doubled its profits in the last quarter” which by definition means two consecutive profitable quarters.

Yet, Neptune has never shown a profit in its history and certainly not two in a row. And lest there be any confusion, even revenue only increased by 33%, while the net loss quadrupled.

I was also told that Neptune‘s share price was expected to more rise by 45% in the next three months, back to the pre-explosion level of around $3.50.

Obviously this is a tall order for a company with no factory, no product, no revenue and only ten employees. The ongoing investigation, which could easily last more than three months, would not seem to support these aggressive targets.

After rising 45%, I was told that JTF feels that Neptune will go to “way above $5.00” which leads me to the conclusion that perhaps JTF is also making use of the “Venture Capital Model”.

As for insurance, George informed me that “nothing actually is going to be hitting the bottom line because basically they have insurance to cover everything.”

I was initially confused about JTF’s investment banking involvement with Neptune. I had been familiar with several press releases such as here and here which had stated explicitly that JTF had acted as a co-manager in Neptune’s equity offering deal.

Later I verified with Neptune management that JTF had originally been slated to be a co-manager in the deal when it launched, but was removed before pricing due to some underwriting issue with JTF which was not clear. Instead, JTF received a flat fee of $300,000 in connection with the offering which was disclosed as follows:

the fee to John Thomas Financial, Inc. (“JTF”) equal to US$300,000 as compensation for financial advisory services provided in connection with an investment banking agreement dated April 26, 2012 between the Company and JTF;

My other concern was the possibility that JTF might actually own shares in Neptune while simultaneously promoting it to retail investors. In this case George was less certain, telling me:

Neptune ? I don’t believe the company [JTF] does, I can find out for sure. But I, ah, um, um, We don’t typically do that. We don’t make markets. We don’t uh, We don’t have inventory, if that’s what you’re looking at.


For InterOil he was more certain, saying:

Oh, No No No No. We don’t make markets. The firm doesn’t own IOC, No.

For me, one investment idea from JTF simply wasn’t enough so I asked if they were currently recommending any other stocks. Mr. Belesis told me that aside from Neptune, he was only recommending one other stock which was that of InterOil .

For those who are not aware, InterOil is a controversial energy company which operates in the remote area of Papua New Guinea. Similar to Neptune, Mr. Belesis was recommending this stock to me because it has declined by roughly 50% and is now sitting near 3-year lows.

InterOil has been the subject of numerous allegations of fraud and the involvement of John Thomas with this stock has attracted considerable attention from vocal skeptics, including:

As InterOil tumbles, actor Shia LaBeouf and John Thomas Financial have egg on their faces

Are InterOil’s Auditors Capable of Uncovering Fraud?

Has InterOil Turned Into A Full-Blown Scam?

InterOil’s Own Geologists Say It Is Lying To Wall Street, Says Skeptic

Interoil: The Next Enron?

In the online complaints that have been lodged against JTF, I also came across one complaint where JTF had beenrecommending China Media Express (CCME.PK) as a $40.00 stock. China Media Express was the poster child for China fraud against American investors and when it last traded in August, it fetched a price of just $0.02 (two cents).

For those with further interest in reading about JTF’s involvement with other companies where fraud issues became relevant,America West Resources and Amber Ready make for a good starting point.

Please note, I am not making any suggestion of fraud at Neptune.

I found my conversation with John Thomas Financial to be amusing; however, it could certainly be less amusing to someone who is not well informed and chose to buy a stock that is purported to rise 45% in three months because “quarterly profit has doubled” and because “they have insurance to cover everything”.

Again, Neptune is held almost entirely by retail investors, who own 81% of the outstanding shares.

JTF was founded in 2007 by Anastasios “Tommy” Belesis. Belesis gained some amount of attention when he played the role of a bald, cigar smoking stock broker in Oliver Stone’s “Wall Street Two: Money Never Sleeps”.

However Belesis’ past seems deserving of a movie of its own. The New York Post ran an article entitled “Shady Past for Wall Street Mr. Clean” in which it describes a triple murder committed by a friend of Belesis and where Belesis was summoned to testify regarding his knowledge of the situation. The murderer, ChristianTarantino, was later convicted of killing Vincent Gargiulo, who happened to be the brother-in-law of Twisted Sister singer Dee Snyder. During his testimony, Belesis revealed his own involvement with drugs well as in an organized car theft ring.

Belesis was never charged for his involvement in these activities and he ended up pursuing a career on Wall Street. However, the Post goes on to note that:

Belesis’ troubles didn’t end when he made to it Wall Street. His brokerage record is marred by five customer disputes before he founded John Thomas Financial and one termination in 2005 amid allegations, never proven, that he misrepresented his identity to a customer.

FINRA Broker Check report for Belesis reveals the details of these customer complaints (pages 10-20) including churning, suitability, common law fraud, breach of contract, negligence, misrepresentation and excessive trading. The termination note says that Belesis was terminated from SW Bach & Co. for “inaccurate representation of identity to a customer” (page 20). Total damages sought by customers exceeded $1.2 million, however upon settlement only $350,000 was ultimately awarded to customers. Belesis has said that the misrepresentation of identity was never proven.

By comparison, JTF’s (the firm) own FINRA Broker Check report, is far cleaner. Although pages 16-27 do reveal a number of “disclosable events”, most of these are related to failure to disclose “handling fees” resulting in excessive commissions to customers, typically of around $20,000 per customer. In only one case (page 27) was there a customer complaint claiming fraud, churning and misrepresentation. This claim was denied in 2012.

Two pages of JTF employee reviews can be found here. Other reviews can be easily found online. The debate about JTF being a “boiler room” seems to come up with regularity. It is specifically noted that JTF pitches companies without knowing much about them, and without giving computers to the brokers, only telephones for making cold calls, as in this picture. As always, online postings from current and former employees should be taken with a grain of salt.

The cold calls from JTF originate from numerous different phone numbers. For those who are interested, I included 15 links. Others can be found online. The story in most of the complaints is the same: A JTF broker calls, pretending to know the intended recipient, and then launches a high pressure sales pitch to buy stock.

Link #1Link #2Link #3Link #4Link #5Link #6Link #7,Link #8Link #9Link #10Link #11Link #12Link #13Link #14Link #15,

In looking at complaints about cold calls from JTF, specific links can be found with reference to Neptune. Examples can be found in various places online, including here and here stating:

rang, attempting to offer some nept (neptune) stock. really hard sell, tries to make this seem just like you recognise them

Part VI – Options overhang – 7.5 million shares at $3.27

Following its recent equity offering, Neptune now has a total outstanding share count of 57 million, excluding warrants and options.

Yet in the 12 months to September 2012, Neptune issued an additional 7.5 million shares via warrants and options, half of which have a strike price of $3.00 or less. The table shows 53 different issuances of warrants and options within a 12 month period, so on average more than once per week.

Normally I would simply provide a link to the prospectus which shows this. However in this case I think it is very instructive to see both the frequency and the size of these issuances, so I am posting the combined table as an appendix for readers to see for themselves.

So far I have seen no reference to the size or the impact of this overhang by any of the bullish authors or by John Thomas Financial. In looking at the true market cap of Neptune, these options mean that Neptune is currently valued roughly $20 million more than investors currently realize, but only if the share price goes up just a bit more.


Neptune Technologies now has $0.70 per share in cash, but is planning to spend the majority of it in the coming year in an attempt to resurrect its business. Neptune has never generated a profit in its history and it currently has no factory, no product, norevenue and just ten full-time employees.

After one and a half months, the company has still received no insurance monies and previous disclosure alerted investors to the fact that it may receive none.

Until the company receives and can provide clarity on its own survival prospects, the only justifiable value for the shares is a slight premium to its current cash per share value of $0.70.

The share price is currently being supported by buying which has resulted from heavy promotional efforts and astronomical share price targets made by authors and John Thomas Financial who have either lacked any substantiation or who have cited facts about Neptune that are outright wrong.

When the promotion-driven buying stops, the share price can be expected to quickly find a level which is more reflective of its current value.

The recent volatility in the stock has caused a spike in the price of the call options despite the low likelihood of any rise in the share price over the coming months and investors who choose tosell call options can potentially realize a near term profit of 20-30% if the stock declines or even if the stock stays flat. At current option prices, this strategy also avoids any losses as long as the share price stays below $3.00. For this leg of the trade, these results apply to both long and short investors.

Appendix I – Option / warrant issuance Sep ’11 – Sep ’12

Date Shares Price Date Shares Price
16-Sep-11 150,000 $3.50 16-Apr-12 5,000 $3.05
22-Sep-11 10,000 $1.50 25-Apr-12 15,000 $1.50
22-Sep-11 13,500 $2.50 3-May-12 765,709 $2.65
30-Sep-11 22,002 $2.14 3-May-12 680,556 $2.75
9-Oct-11 1,685 $1.50 17-May-12 9,000 $2.50
9-Oct-11 22,053 $2.08 25-May-12 20,000 $2.25
9-Oct-11 11,027 $2.14 29-May-12 5,000 $1.50
9-Oct-11 20,430 $2.00 29-May-12 8,000 $2.50
9-Oct-11 143,282 $2.19 15-Jun-12 1,000,002 $5.00
17-Oct-11 27,027 $2.15 28-Jun-12 9,000 $1.50
1-Nov-11 125,000 $2.75 29-Jun-12 27,778 $2.75
28-Nov-11 55,000 $3.15 4-Jul-12 7,500 $2.50
1-Dec-11 250,000 $3.00 9-Jul-12 5,000 $4.50
19-Dec-11 15,000 $2.70 12-Jul-12 6,000 $2.50
20-Dec-11 400,000 $3.00 13-Jul-12 116,890 $2.65
1-Jan-12 250,000 $3.00 14-Jul-12 25,000 $2.50
4-Jan-12 40,000 $2.50 16-Jul-12 6,000 $2.25
1-Feb-12 25,000 $3.00 18-Jul-12 50,000 $1.50
6-Feb-12 15,000 $2.50 20-Jul-12 5,800 $2.65
23-Mar-12 10,000 $2.50 24-Jul-12 10,000 $1.50
26-Mar-12 750,000 $3.05 27-Jul-12 20,000 $1.50
26-Mar-12 150,000 $3.15 10-Aug-12 25,000 $2.65
27-Mar-12 1,250 $2.65 14-Aug-12 10,000 $2.50
2-Apr-12 100,000 $3.15 20-Aug-12 10,000 $1.50
5-Apr-12 50,000 $1.50 28-Aug-12 350,000 $5.00
11-Apr-12 1,680,000 $3.15 29-Aug-12 25,000 $2.75
4-Sep-12 5,000 $5.00

Total options and warrants: 7,559,491

Weighted avg. strike price: $3.27



Disclosure:  The author is short NEPT