UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___ to ____
Commission File Number: 000-32691

NEPTUNE INDUSTRIES, INC.
(Name of Small Business Issuer in its charter)
_
Florida
(State of Incorporation)

65-0838060_____________
(Employer Identification Number)

21218 St. Andrews Boulevard
Suite 645
Boca Raton, FL
Address of principal executive offices)

33433____
(Zip Code)

(561)-482-6408_______
(Issuer’s telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class:
______________________________________

Name of Exchange on Which registered:
_____________________________________

______________________________________

_____________________________________

Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[X]Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation SB is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
[ ]

 State the issuer’s revenues for its most recent fiscal year.

$638,599

State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity as
of a specified date within the past 60 days. $1,113,479 at August 31, 2008
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required
to by filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.[ ] Yes [ } No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer’s classes of
Common equity, as of the latest practicable date.
The outstanding shares of registrants common equity at August 31, 2008 was
as follows:
Common Stock

26,152,946 shares.
DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part
II, etc.) into which the document is incorporated: (1) any annual report to
security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of
1933 (Securities Act). The listed documents should be clearly described for
identification purposes (e.g., annual report to security holders for fiscal
year ended December 24, 1990).
Transitional Small Business Disclosure Format (check one): Yes___; No_X_

ii

 FORM 10-KSB
YEAR ENDED JUNE 30, 2008
TABLE OF CONTENTS
PART I
Item 1. DESCRIPTION OF BUSINESS.............................................. 1
Item 2. DESCRIPTION OF PROPERTY..............................................24
Item 3. LEGAL PROCEEDINGS....................................................24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................24
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................
Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION................................................
Item 7. FINANCIAL STATEMENTS................................................
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................

25
27
33
34

Item 8T. CONTROLS AND PROCEDURES............................................ 34
Item 8B. OTHER

INFORMATION................................................. 35
PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.....................................................
Item 10. EXECUTIVE COMPENSATION.............................................
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ......................................................
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................
Item 13. EXHIBITS ..........................................................
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................

35
39
40
41
42
42

SIGNATURES ................................................................. 43

iii

 FORWARD LOOKING STATEMENTS
In connection with, and because we desire to take advantage of, the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, we caution
readers regarding certain forward looking statements in the previous discussion
and elsewhere in this report and in any other statement made by, or on behalf
of our Company, whether or not in future filings with the Securities and
Exchange Commission. Forward looking statements are statements not based on
Historical information and which relate to future operations, strategies,
financial results or other developments. Forward looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control and many of which, with respect to future
business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward looking statements made
by, or on behalf of, our Company. We disclaim any obligation to update forward
looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATION AND GENERAL HISTORY
Neptune Industries, Inc. (the Company) was incorporated in the State of
Florida in May, 1998. It has been engaged since then in the aquaculture
industry, developing new technology and operating a working fish farm near
Florida City, Florida.
Unless the context otherwise requires, all references to the Company, we, our,
us, and other similar terms shall mean Neptune Industries, Inc. and its
operating subsidiaries.
BUSINESS
Neptune Industries, Inc. was incorporated in the State of Florida on May 8,
1998. We operate on a June 30 fiscal year. Our common shares are traded on
the OTC Bulletin Board under the symbol NPDI. Since our inception, we have
been engaged in aquaculture (fish farming)and in the development of new
technologies, systems and products that directly address some of the key
challenges faced by the aquaculture industry today.
Neptune Industries is a technology company which is committed to achieving
sustainable, eco-friendly aquaculture by innovating and pioneering a total
and comprehensive integrated systems solution approach to the mission critical
challenges facing the aquaculture industry today. Dwindling supplies of wild
caught stocks used for fishmeal, and the continued environmental damage,
escapism, and disease caused by self-polluting net pen systems, have severely
restricted industry growth on a global basis.
Our mission is to utilize our expanding production operations base of allnatural, sustainable farm raised seafood products, as the working platform for
the development of innovative, next-generation technologies to eliminate
current industry bottlenecks. Further, our commitment is one of systems
integration that targets zero waste. Fish, organic produce, and waste-toenergy systems synergize to form a production model with multi-revenue

1

 streams.
The Company has either licensed or developed itself certain ground-breaking
technologies in the aquaculture industry, which are at the heart of its
business development model.
Aqua-Sphere™ is a state-of-the-art, scalable, modular, floating closed
containment system that is capable of concentrating and removing solid waste,
eliminating predation and escapement, utilizing alternative energy for remote
applications, and isolating crops from the environment. The system was first
designed by our founders, Ernest Papadoyianis and Sal Cherch, before the
Company was founded in 1998. In June 1998, the technology was first licensed
to Neptune in a 10 year license granting Neptune the right to use and develop
the technology for the North American market, and with a right of first
refusal for all other markets. As part of the license agreement, the Company
agreed to pursue patent protection for the technology in the names of the two
inventors, which the Company has done. Although the license agreement, which
had an automatic renewal clause for additional ten year terms, provided for
annual minimum royalties to Papadoyianis and Cherch after the first five years
of the license term, no royalties were ever paid by the Company on the license.
In July, 2008, the Company acquired the exclusive rights to the Aqua-Sphere®
technology through a Worldwide Licensing Agreement with the founders. The
agreement enabled the Company to develop, market, manufacture, re-design, or
license others to use the technology, and to develop and market products using
the technology, in the worldwide aquaculture industry. License fees due the
inventors under the previous license were waived as part of the new agreement.
Although the new license was signed on July 3, 2008, and then transferred to
Aqua Biologics, Inc, the Company was unable to pay the initial advance
royalties required, and is now in default under the license.
Ento-Protein® is a truly revolutionary development pioneered by Neptune as
a high quality, sustainable protein derived from insects which is intended to
be a replacement for the rapidly depleting fishmeal made from wild caught
feedstock species, which is currently a $7 billion global market.
Aquaponics is the existing practice of integrating fish and plant production
through soil-less culture (hydroponics) using the fish waste effluent as
fertilizer. Neptune has advanced this methodology through the use of the AquaSphere’. The hydroponic system provides a revenue stream from the waste
component of the fish production through the growth and sale of very high
quality organic herbs and vegetables. In addition, as another part of the
water treatment and aquaponics system, a derivative product of algae is grown
in floating socks. Algae is 30 times more productive than corn, on a per
acre basis, for the production of bio-diesel. Neptune has coined the term
Bioponix™ to describe the integration of fish farming, recycling and
hydroponic or agricultural production of vegetables, fruits and spices.
Finally to validate and test Neptune's solutions and technologies, the
Company’s wholly-owned subsidiary, Blue Heron Aquaculture, Inc., operates a
sustainable fish farming facility in Florida City, Florida called Blue Heron
Aqua Farms. Blue Heron Aqua Farms currently is one of the leading producers
of hybrid striped bass, which it markets nationally and internationally as
Everglades Striped Bass™.
Our business model also contemplates a number of acquisitions, both of other
farming and hydroponics operations and also of processing and distribution
facilities, so we can vertically expand, and, more importantly, can control

2

 all aspects of the integrated process, to insure that the resulting products
are as close to all-natural, sustainable seafood products as it is currently
possible to achieve, and so that we can seek organic certification of the
entire process. These potential acquisitions will allow us the opportunity
to use our own technology in actual production settings so that we are able
to continually improve and refine the technologies.
TECHNOLOGY
We have applied for patents and made significant progress in the development
of two technology platforms, one of which we have trademarked Ento-Protein®,
and the second of which we have trademarked Aqua-Sphere®. Each of these
disruptive technologies addresses what the Company believes to be the two,
mission critical, challenges facing the aquaculture industry today
Closed Containment Farming
The core technology driving our business model is the patent-pending
Aqua-Sphere®, which provides a highly efficient, environmentally friendly
solution to the multiple problems with existing seafood production methods,
while opening up new areas of the world to commercial scale aquaponics (fish
farming and hydroponic farming integrated into a single operation). The
Company has already received interest from around the world to license,
purchase, and distribute the technology. Licensing, sales and joint venture
activities will further expand and enhance our business model.
Sustainable Fish Feed
Our second major technology development is our Ento-Protein® sustainable,
high protein meal derived from insects, as a substitute for and replacement of
fish meal. This research is being conducted under a cooperative research
agreement with Mississippi State University.
I Aqua-Sphere®
A) Background
In October 1996, prior to the formation of Neptune, the Company’s founders,
Papadoyianis and Cherch, pioneered what they believe to be the first quarry
lake aqua-farm in South Florida. The pilot farm was conceived, constructed and
financed by Papadoyianis and Cherch, in a 60 acre lake in Hallandale Florida.
The operation was a test site to (1) determine the feasibility of raising fish
in large inland bodies of water utilizing cages/net pens; (2) accumulate
preliminary data regarding production costs and future pricing, and (3)
determine the marketability and desirability of specific selected
species.
Operations at the test site consisted of six, 4-foot x 8-foot x 6-foot deep
cages. Approximately 5,000 pounds of catfish, tilapia, and hybrid striped
bass were raised in the first year and given to local wholesale and retail
purveyors at no charge, as a grass-roots marketing effort to determine
the quality perception and demand. Each purveyor was interviewed and
completed a market survey aimed at determining their potential product
needs and establishing pricing guidelines. From 30 original customers, all
but two remain today on the Company’s repeat customer list.
During this period, the first rudimentary ‘Eco-tank’ was developed, as the

3

 precursor to the Aqua-Sphere®. Papadoyianis and Cherch used large preformed black polyethylene planters (used in the landscaping industry) for
a solid walled tank. Foam cylinders were attached to act as floating collars
around the top of the tanks, and a wood frame top with plastic netting served
as the top. Modified airlifts with PVC plastic pipe were added to the
sides for circulation. The systems were initially used as prototype models
of what the founders conceived would become the Eco-Tank. Later, since the
system performed far better than anticipated, it was used to hold and
isolate 50 to 100 fish overnight in preparation for orders. The system
worked quite well in keeping the fish calm and free from predation.
The conclusion reached by Papadoyianis and Cherch from these early efforts was
that conventional technology, in the form of cages and net pens, had such
overwhelming deficiencies that a new production system was necessary for the
aquaculture industry as a whole to be able to raise fish in closed bodies of
water on a profitable, and environmentally sustainable basis. Over the next
three years, and two additional pilot operations, Neptune’s founders,
Papadoyianis and Cherch, conceptualized and developed the key elements of a
new production system, which today is called the Aqua-Sphere®.
In May, 1998, Neptune Industries was founded by Papadoyianis and Cherch
with the vision of developing sustainable fish farms, and further developing
and deploying sustainable, eco-friendly technologies for and in the quarry
lakes of South Florida. Following the formation of Neptune, Papadoyianis and
Cherch granted Neptune the exclusive right to develop and use this new system
in North America and a right of first refusal to use it in the rest of the
world, in return for Neptune paying for the costs of further development and
for the patent application costs for them, as well as the payment of royalties
beginning after the fifth year of the license term. This arrangement was
reduced to an agreement dated June 1, 1998 incorporating the agreed terms. The
initial term of the agreement was ten years, with automatic renewals for
additional ten year terms, and provided that Neptune would file and prosecute
patent applications for the technology in the names of Papadoyianis and Cherch,
which the Company has done. The agreement also provided for annual minimum
royalties after the fifth year of the term, but Neptune has never paid the
minimum royalties required under the agreement.
In January, 1999, a joint venture operation was initiated by Neptune and
Ryan Inc. of Deerfield, Florida under the name Aquaculture Specialties, Inc.
The joint venture bought cages, floating docks and equipment from an existing
farm operation in northern Florida, and installed it in a 20 acre quarry lake
in Fort Lauderdale Florida, and included a 200 foot floating dock and 32
floating cages, many of which were three times larger than the original cages.
Using the original design created by Papadoyianis and Cherch, the Company
installed several of the first components of the Eco-Tank on that farm. One of
these was a solar-powered, automatic feeding system that allowed all 32 cages
to be fed on pre-determined schedules throughout the day to maximize growth and
minimize labor costs. Another was an automated, pressurized water system which
could be used to clean equipment and wash docks and cages to maintain biosecurity. The founders also created and used a revolutionary concept which they
called ‘the cage sleeve’ which also was used at the site. This device was
designed to encapsulate an entire cage, thereby isolating the fish inside the
cage from the surrounding waters for medication purposes. This allowed for
treatment of disease. The development and testing of the feeding system, the
pressurized water and, more importantly, the ‘cage sleeve’ were the first
steps in the nine year development of what has resulted in today’s AquaSphere’. This operation ran for two years and produced multiple crops of

4

 hybrid striped bass, tilapia, catfish, and koi.
Although this pilot was successful in many aspects, major production
issues were experienced with stocking, harvesting, predation, pollution,
escarpment, disease, and low oxygen conditions. At this stage, it became
obvious to Papadoyianis and Cherch, that in order to utilize the abundant
quarry lake resources in Florida and throughout the US, new system technology
would have to be developed. The completion of the ‘Eco-tank’ would be critical.
In early 2000, through an affiliation already begun by Papadoyianis and Cherch,
the State of Florida’s Port Manatee hatchery began offering excess redfish
fingerlings to Aquaculture Specialties, Neptune’s joint venture operation, for
experimentation in quarry lakes. Experimentation at the Fort Lauderdale site
proved unsuccessful in rearing redfish, because the groundwater lacked
sufficient calcium, sodium and hardness. In October 2000, the Company made
arrangements to use a different quarry site in Fort Lauderdale that had
brackish water, higher salinity, and was used as a cooling discharge for
Florida Power & Light Company. Redfish fingerlings were stocked into four,
4-foot x 8-foot x 6-foot deep cages, and raised to market in six and a half
months. Although the production was successful this time, bio-fouling and
escapement were major problems. Further refinements were made, however, to
the engineering models for the future solar powered automatic feeding system.
In December, 2001, management determined that the 20 acre site had
provided all the data and opportunity it could. The joint venture partners
amicably agreed to end operations, although William Ryan, President of the
Ryan Group, currently serves as a member of Neptune’s Board of Directors.
In November, 2004, Neptune began the patent process and trademark for SAFE
(the original name for the Aqua-Sphere® system). As a result, in January,
2005, a provisional patent application was filed in the names of Papadoyianis
and Cherch, as provided in their agreement with the Company, for the ‘Aquatic
Habitat and Ecological Tank’, originally called the Eco-tank, but which is
today known as Aqua-Sphere®. In January, 2006, the full patent application
was filed. In March, 2007 we received an office action from the patent
office, which we responded to in August, 2007. In May, 2008, we received
another office action from the patent office, to which we have drafted
a response. We are awaiting a final submission from our patent attorney.
In April, 2006, the Company entered into an agreement with a manufacturer
to build the first, prototype sized [15 foot] Aqua-Sphere® with full
functionality. This tank was used to test and confirm all aspects of
the Aqua-Sphere® concept before making second generation design
improvements. The prototype was not self-supporting as it did not include
any built in floatation. This initial tank was manufactured using fiberglass
to conserve capital although fiberglass was not intended to be the final
material.
In May, 2007, the first pilot scale Aqua-Sphere® was installed in a 30 acre
quarry lake in Florida City, FL. The pilot system was fully integrated
with a solid waste recovery system, land-based methane digestion, and
hydroponics greenhouse. The system was stocked with 1,000 juvenile hybrid
striped bass. All of the solid waste was trapped, and pumped to shore
into an anaerobic digester. One by-product of the digested waste is bio-gas
(methane) which, in the future, will be used to augment energy requirements
for the air-powered Aqua-Sphere® system. The digested waste then was
diverted to fertilizer sumps for use in the hydroponic greenhouse, where

5

 organic lettuce, basil, thyme, and dill were grown.
In early 2007, the Company also was contacted by Discovery Channel Canada,
which proposed a filming opportunity for a fisheries related series, called,
‘What’s That About’. The producers were interested in documenting a diversity
of venues in the seafood, commercial fisheries, aquaculture, and future
technology areas of the industry. Discovery Channel had read about the
Aqua-Sphere® technology, and our farming operations, and wanted to film what
they believed could be the next generation eco-friendly aquaculture
technology for the show. In June, 2007, Discovery Channel Canada visited our
Blue Heron farm site and the nearby Lake Linda site, where they spent the day
filming both of our land-based operations, and the fully integrated AquaSphere system with waste collection, methane digestion, and hydroponic
vegetable production. The show, which is titled, ‘HOOK, LINE AND SINKER’
aired on February 23, 2008 at 7PM in Canada. The rights to the
show were also syndicated to National Geographic Explorer, which aired
four times in August, 2008, and is scheduled to air again in January, 2009
under the name, ‘High Tech Fishing: Monster Hauls’. The recorded
show as broadcast in Canada is available for viewing on our website,
www.neptuneindustries.net.
In July, 2007, Neptune incorporated Aqua Biologics of Canada, Ltd., as a
wholly-owned Canadian subsidiary of Aqua Biologics, Inc., (the successor by
name change to Aquaculture Specialties, Inc.)to act as the technology
development entity for Aqua Biologics in Canada. AB Canada is a Canadian
national company based in British Columbia. In June, 2007, John Holder, of
JLH Consulting in Vancouver, British Columbia, agreed to join the Board of
AB Canada. Mr. Holder has been a been an active figure as a consultant,
engineer and systems designer in the salmon industry in Canada and worldwide
for over 30 years
In August, 2007, federal trademarks were granted for ‘Aqua-Sphere®’ and
Aqua-Cell®. Also in August, 2007, a Patent Cooperative Treaty application was
submitted, as the precursor to filing international patents for the
Aqua-Sphere® system. In December, 2007, the Company filed European patents,
again in the names of Papadoyianis and Cherch, as agreed.
On October 30, 2007, the Company entered an agreement with one of the top
plastics engineers in the country to assist in the design, engineering and
material analysis of our next generation Aqua-Sphere®.
On December 12, 2007 the Company signed an agreement with a large plastics
design and fabrication company to manufacture Aqua-Sphere®.
In March, 2008, Aqua Biologics took delivery of the second generation AquaSphere, a 30 foot diameter tank. The tank was installed with all of the
supporting infrastructure in April and May, 2008. at the Lake Linda test site.
Testing of the air-lift pumping system, and waste collection system have been
on-going, and it is anticipated that the final stocking will take place in
October, 2008. Following continuous testing, modifications have been made
to the air-lift system, self-leveling ballast system, and the waste
recovery system. A new waste recovery tank that increases waste recovery
efficiency has been designed, and is anticipated to be installed in October,
2008. A shade covering for the system has also been designed and is due to be
installed prior to the stocking of fingerlings.
In June, 2008, at the urging of its then investment advisor, Dawson James

6

 Securities, Inc., an independent committee of the Company’s Board of Directors
determined to replace the existing license agreement with a new, worldwide
license agreement for the Aqua-Sphere® technology. After several meetings
without the involvement of Papadoyianis and Cherch, the Board of Directors
approved the new license agreement on July 2, 2008. Under this new worldwide
license agreement, a copy of which is attached as Exhibit 10 to this Report,
the Company agreed to license the technology on a worldwide basis in return
for an initial license fee of $200,000, payable half at signing and the other
half in one year, plus 1,000,000 shares of Series A Convertible Preferred
stock, plus additional royalties of the greater of 1.5 percent per year on
gross revenues or $100,000, commencing July 1, 2009. As noted, this license
is now in default for failure by the Company to pay the initial license fees
required, due to lack of funds.
The Company also agreed to undertake the cost of prosecuting patent protection
on behalf of and in the name of the licensors, as had been the case with the
earlier license agreement. In the event the Company defaults on any royalty
payments due to the founders, they have the option to terminate the license
and recover the technology. As of the date of this Report, the Company has
been unable to make the initial royalty payment required by the license and
has received notice of default from the licensors, but no further steps have
been taken to recover the technology or to cancel the license. Under the
terms of the license, the license terminates automatically on a change of
control of the Company, on notice of default with no cure within the cure
period provided, or on bankruptcy. All rights under the license were assigned
to the Company’s wholly-owned technology development subsidiary, Aqua
Biologics, Inc., at the time it was signed.
The new exclusive worldwide licensing agreement enabled the Company, through
Aqua Biologics, Inc., to develop, manufacture, market, re-design and license
others to use the technology, and to develop and market products using the
technology, in whatever manner it may choose in the worldwide aquaculture
market. Aqua Biologics, Inc. has been in licensing discussions for AquaSphere®’s use with organizations outside of North America.
The Aqua-Sphere® System, which is the result of this cooperative agreement, is
designed to address and resolve the objections of environmentalists to the
common methods of aquaculture used today, and for thousands of years in the
past, which result in significant pollution, escapism, and other environmental
problems.
In 2008, after more than 12 years of serious and committed development, both
by our founders initially, and thereafter in the Company, Neptune expects to
deploy, and to have ready for distribution and sale, the first commercial
production models of Aqua-Sphere®. Based on the already enormous interest in
these systems communicated to the Company from potential customers, not only
in North American and Europe, but also from around the globe, the Company
anticipates that commercial operations for its Aqua-Sphere® division can begin
in early 2009. The Company will have to meet the requirements of the license
agreement in order to do so, however, including making the initial royalty
payment plus interest to restore the license, with the consent of the
Inventors.
II

Ento-Protein®

In June 2006, during a strategic planning meeting, discussions arose
regarding the tremendous bottleneck facing the aquaculture industry with

7

 finding suitable replacements for fishmeal in aquaculture feeds. Then existing
research had concentrated on vegetable proteins, which were not proving very
successful for carnivorous species. Fishmeal and fish feed were rapidly
escalating in price due to supply constraints, and industry observers
agreed that this $7 billion market was ripe for technology innovation.
In the weeks that followed, several suggestions arose as alternative sources
for fish meal, including rats, insects, snails, worms and fish processing
waste, and extensive research was conducted. The team quickly concluded
that insects appeared to offer the greatest commercial potential. The fact
that freshwater fish consume insects continuously was one of several key
factors in our initial thinking. For example, some species such as trout,
thrive almost exclusively on microscopic insects living and hatching from the
riverbed. Following the decision to pursue insect protein as a fish
meal substitute, management began further development of the concept and also
began due diligence on the top entomology programs in the country in order to
identify a cooperative research partner to conduct future research and
development, with the goal of bringing a breakthrough product to market in a
two to three year period.
As a result of the preliminary work done by the Company, in July, 2006, we
retained patent counsel to begin a patent search and to file a provisional
patent for the Company. In September, 2006, a provisional patent was filed by
Neptune Industries (in its own name) for ‘Production and Processing of Insects
for Transformation into Protein Meal for Fish and Animal Diets.’ In April, 2007,
a trademark application was filed for ‘Ento-Protein®’ as an intent to use
filing.
In December, 2006, after extensive due diligence on various university
entomology departments, management contacted Dr. Frank Davis, Professor
Emeritus in the Entomology Department at Mississippi State University (MSU).
In January, 2007, Papadoyianis and Cherch visited Mississippi State and met
with Dr. Davis who has over 30 years experience in rearing a variety of
insect species for agricultural research. He has traveled internationally and
assisted other governments in insect rearing programs to eradicate pest
species. Dr. Davis also began the first insect rearing course ever in 2000 at
MSU to teach students how to raise quality insects. Dr. Davis served as a
member of Neptune’s Advisory Board for 8 months, but resigned in June, 2008 to
focus his limited time and energy on education. In June, 2008, Dr. Louis R.
D’Abramo, W.L. Giles Distinguished Professor at Mississippi State University,
Department of Wildlife and Fisheries, agreed to join the Advisory Board of
the Company. Dr. D’Abramo is a distinguished figure in the U.S.
aquaculture industry with over 40 years of applied research. He is the
former President of the World Aquaculture Society.
The joint research effort will be pursued in several stages, based on the
results of the prior stage:
STAGE

DESCRIPTION

STATUS

1a

Literature search, production
analyses requirements, and species
identification.

Completed July, 2007

1b

Feed acceptability and offflavor analysis

Completed November, 2007

8

 2.

Feeding trials for growth and survival
of juvenile hybrid striped bass

Completed April, 2008

3.

Pilot production facility development
and testing of habitats, feed, and
processing

Anticipated to begin in
Fall, 2008

In April, 2007, Neptune executed its first memorandum of understanding with
MSU to officially begin its research relationship and to start its initial
(Stage 1a) research experiments. Stage 1a involved the cooperative efforts
of MSU and Neptune to develop a comprehensive listing of optimal production
qualifications and parameters in order to qualify, or narrow down, the list
of insect species.
Once the list was created, a complete literature search was conducted to
carefully review species characteristics, nutritional analyses, etc. The
literature search proved to be extensive. This information was reviewed and
summarized by MSU data tables were created, where applicable, to indicate
nutritional profiles where they were available.
Four insect species emerged as the most promising mass production candidates.
These four species were then acquired by MSU, dried, and sent to an
independent laboratory for complete nutritional profiles, including amino acid,
fatty acid, and quantitative analyses. Of the four analyses completed, two
species showed considerably greater nutritional profiles, and were selected as
the two candidates for future research.
In August, 2007, Neptune executed its second memorandum of understanding with
MSU to commence Stage 1b research experiments. Stage 1b involved feed
acceptability and concurrent feed trials for ‘off-flavor’ analysis. Dried
insect meal from a select species, internally referenced as Species ‘A’, was
prepared at MSU and shipped to Zeigler Bros. feed mill in Gardners, PA for
inclusion in an experimental diet, at a rate equal to the normal fishmeal
portion in the control diet, i.e., 100 percent fishmeal replacement.
In September, 2007, a utility (non-provisional) patent application was filed
by Neptune Industries for ‘Production and Processing of Insects for
Transformation into Protein Meal for Fish and Animal Diets.’ In December,
2007, the trademark filed for ‘Ento-Protein®’ was approved for registration by
the U.S. Patent and Trademark Office. In June, 2008, we received notice
from the patent office estimating that the patent application would be reviewed
in ‘approximately 27 months’. In March, 2008, we received a Notice of Allowance
for the Ento-Protein trademark. The Company now needs to file a Statement of
Use to show the evidence of use of the trademark. The Company filed a six
month extension in August, 2008, in order to extend the time necessary to
demonstrate an intent to use through initial commerce.
In October, 2007, an 18 day feeding trial on juvenile hybrid striped bass
was conducted at Mississippi State University for diet acceptability and
off-flavor testing. Off flavor is an important consideration for any diet
development, because changes to the taste, texture or smell of the fish
flesh could adversely affect market appeal.
Two treatments, a control (standard fishmeal based) diet and an experimental
(100 percent replacement of fishmeal with insect protein meal) diet were
trialed. Both diets were submitted to the Mississippi State University
Chemical Laboratory for proximate analysis.

9

 On the eighteenth day of the trials, the fish were collected, immersed in an
ice bath and then filleted. The treatment-dependent filets were isolated
and either refrigerated for sensory analysis conducted by the Garrison
Sensory Evaluation Laboratory within three hours of sacrifice, or frozen for
proximate analysis conducted by the Mississippi State Chemical Laboratory.
Sensory analysis was conducted at the Food Science and Technology Department
of MSU. A blind panel evaluated the fish for taste, texture, and smell. The
results indicated that there was no significant differences reported in the
taste of the fish fed the insect meal based diet, versus the fish fed with
the fish meal based diet. Further, the majority of the panel actually
preferred the taste of the fish fed the insect meal based diet, over the
fish fed with the fish meal based diet.
In February 2008, Stage II research trials with MSU’s Entomology Department
and the Wildlife and Fisheries Department began. A 60-day feeding trial,
to assess growth in juvenile hybrid striped bass, was initiated. Five
treatments are being assessed, including a standard control diet (fishmealbased as before), and four experimental diets, all replacing 100 percent of
the fishmeal in the diets.
In April, 2008, all of the fish on all of the diets were weighed, and a
statistical analysis was done to compare the growth rates. Juvenile
hybrid striped bass fed the diets containing Ento-Protein (as a full
replacement for fishmeal) achieved a grow rate of 85% of the fish in the
control. These results were very encouraging as they showed
Ento-Protein may provide a superior sustainable protein replacement to any
of the currently researched vegetable derived substitutes. Feed conversion
ratios (FCR) were also calculated as the defining parameter for growth and
digestibility of the diets. FCR’s of experimental diets ranged from 1.19 ‘
1.21 to 1, compared to the fishmeal control at 1.10 to 1, which again was
very positive. Survival of the fish fed the Ento-Protein diets was 100% over
the 6 week period.
The advancement of additional research is awaiting the development of a
pilot scale production facility to further evaluate production costs,
diets, drying equipment, and scalability. It is anticipated that a small
pilot development will be deployed in the Fall of 2008 at the Florida City
farm site.
The Company currently has a high degree of confidence that Ento-Protein®,
which is being developed by Aqua Biologics, Inc., can become a significant
alternative to fishmeal in a rapidly growing $7 billion worldwide market.
Aqua Biologics, Inc. has begun entering discussions with universities,
commercial feed mills, and distributors of fish diets and feed about the
potential of integrating Ento-Protein® into various research diets,
specialty feeds, and all-natural/organic diets as an entrance into the
marketplace. The Company also recognizes there is still considerable
work to be done in research, product development, manufacturing, and
merchandizing, and that it is quite possible difficulties will emerge that
could delay or substantially impact the commercialization of this technology.
In May, 2008, Aqua Biologics, Inc. received a Letter of Intent from Zeigler
Bros, Inc. in Gardners, PA to purchase 40 tons per month of Ento-Protein® for
use in their aquaculture and pet diets. Aqua Biologics, Inc. anticipates that
other similar contracts will be forthcoming once pilot operations are in

10

 production, and sample quantities can be distributed to interested parties.
Aqua Biologics already has received letters and emails of interest from
around the world.
Farming Operations
Current farming operation are managed by our Blue Heron Aquaculture, Inc.
subsidiary on a 48 acre site at the edge of the Florida Everglades, owned by
the South Florida Water Management District, an agency of the State of
Florida. Blue Heron Aquaculture, Inc., is the successor to Blue Heron AquaFarms, LLC, the previous farm manager, which transferred the management
agreement for the farm property to the new corporation as of January 1, 2008.
The actual leasehold interest in the 48 acre farm is held by South Florida
Aquaculture, Inc., a Florida corporation with which Blue Heron Aqua-Farms, LLC
entered into a management agreement in 2000. On January 1, 2008, Blue Heron
Aqua-Farms, LLC acquired a controlling interest (85+ percent) in the common
stock of South Florida Aquaculture, Inc. from two shareholders, including
James Harvey, who is also a director of Neptune, in exchange for 105,000
shares of the common stock of Neptune. At the same time, Mr. Papadoyianis also
transferred shares in South Florida Aquaculture, Inc. which he had acquired
with his own funds several years ago, in exchange for 19,000 shares of Neptune
common stock, using the same exchange ratio. This transaction, and the
interests of Mr. Harvey and Mr. Papadoyianis, were fully disclosed to the
independent members of the Board of Directors of Neptune, and the Board
unanimously approved the transaction, with Mr. Harvey and Mr. Papadoyianis
abstaining.
Utilizing a water use permit from the District, Blue Heron draws water from the
limestone aquifer, oxygenates the water, and then pumps the water through a
series of tanks, in which hybrid striped bass in various graduated sizes, are
raised. This unique flow through system insures that the fish at the farm are
raised in constantly flowing, clean water, with all wastes removed on a
continuous basis. The water is then discharged into a settling pond on the
site, and from there flows into a blind canal, also fully on the site, where
the water returns to the aquifer through the natural limestone. No water or
waste is ever discharged from the site. The resulting hybrid striped bass,
which we call Everglades Striped Bass, have a natural, sweet flavor, and
demand for our product far exceeds our current available supply. We use no
hormones, antibiotics, coloring agents, or other artificial treatments in our
farming operations, and we have begun the process of developing an ‘organic
farm plan’ as the first step in seeking organic certification for our
Everglades Striped Bass’.
Since our current farm operation had used only a small fraction of the 48 acres
at the site, and was not an economically viable operation at such a small size,
we implemented a plan to expand the farm. A portion of the total proceeds from
the debenture offering conducted through Dawson James Securities during fiscal
year ending June 30, 2007, have been used for that purpose, once the ownership
of the lease was secured by the acquisition of a controlling interest in South
Florida Aquaculture, Inc on January 1, 2008 and the necessary regulatory
approvals for the expansion were obtained.
Our expansion timetable was delayed by several months due to unexpected
regulatory and licensing issues, as well as the need to complete the
acquisition of South Florida Aquaculture, Inc, closed on January 1, 2008, so
that we could control the entire lease property ourselves. The delays included
unexpected obstacles in renewing our existing water permits for the site and

11

 in obtaining consent of the South Florida Water Management District to the
expansion, as a result of water shortages in South Florida and heightened
regulatory scrutiny of water use in the area by all users. In addition, an
anonymous letter from a ‘concerned scientist’ was received by the South
Florida Water Management District and other, state and federal, regulatory
agencies claiming that there were environmental, immigration and other
operational issues at the farm by Blue Heron Aqua Farms, LLC. This letter
prompted a state review and investigation and the eventual issuing of a
report clearing Blue Heron of any issues at the farm. Blue Heron did,
however, agree to clear certain non-native plant species from the site, as
part of the lease terms. The Company also filed a John Doe action in the
Circuit Court of Palm Beach County seeking to identify the anonymous
writer, however after numerous legal inquiries to Yahoo and Hotmail,
such information could not be recovered. Given the lack of cooperation
from these providers, the case has been abandoned.
In June, 2008, the Company’s South Farm site was completely leveled in
preparation for an extensive expansion. An employee trailer was installed as
part of on-site management for the new facilities. The revised eco-friendly
development plan revolves around using the water several times as part of an
integrated model for producing both fish and produce, while reducing or even
eliminating waste products. The current expansion plan incorporates large
circular tanks to produce hybrid striped bass. The first 32 tanks have already
arrived on site and are being assembled. Our current estimates are that the
expanded operations will more than triple our total fish production. Part of
the expanded operation also will incorporate use of the effluent water and
waste for hydroponic growing of vegetables and herbs, a process already begun
on a trial basis at the Lake Linda site near the existing farm and named
Bioponix™ by the Company. The hydroponics farming will add a second income
stream to the farm operation, and should produce revenues faster than the
fish farming, which will take ten to twelve months from initial stocking
before the fish can be harvested. A 30,000 s.f. greenhouse has been erected
for the first phase of the hydroponic production. The Bioponix™ operation
will be operated and managed by Florida Aquaponics Corp., a wholly-owned
subsidiary. The Company intends to pursue organic certification for its
hydroponic herbs and vegetables grown with natural fish wastes. The Company
has earmarked capital from its next financing efforts to complete both the
greenhouse and the fish production expansion.
Effective January 1, 2008, the Company reorganized its subsidiary operating
structure to reflect its two major lines of business. BHA Holdings, Inc. was
incorporated as a wholly-owned subsidiary. Blue Heron Aquaculture, Inc. was
incorporated to take over the operations of the Blue Heron Aqua Farm from Blue
Heron Aqua Farms, LLC, which now continues as a non-operating entity. Florida
Aquaponics Corp. was incorporated to manage and operate the hydroponics and
aquaponics operations in Florida. Both companies are wholly-owned subsidiaries
of BHA Holdings, Inc. The Company also acquired a controlling interest in
South Florida Aquaculture, Inc., the tenant of the land on which the Blue Heron
Aqua Farms is operated, on January 1, 2008. Aqua Biologics, Inc. continued as
a separate wholly-owned subsidiary which manages all of the technology
development of the Company, and which holds the license rights to Aqua-Sphere®
and the ownership rights to Ento-Protein®.
Since June 30, 2008, the Company has incorporated a number of other
subsidiaries to undertake different aspects of the development and operating
plan, including Pennsylvania Bioponix, Inc., a Pennsylvania corporation which
will undertake the Pennsylvania development opportunity.

12

 Economic Development Model
Beginning in April, 2008, the State of Pennsylvania has encouraged Neptune to
bring its technology and eco-friendly, integrated agri-business to the
State. The State’s Department’s of Economic Development and Environmental
Protection have worked closely with the Company to identify a site that
meets all of the pre-qualifications set forth for successful operations.
Further, the State has committed its resources to provide a financial
incentive package to assist in developing the project, and marketing
assistance for ‘Pennsylvania Preferred’ products produced in the state.
Neptune has established a new corporation to conduct operations in
Pennsylvania. Pennsylvania Bioponix, Inc., a Pennsylvania corporation, will
utilize the Company’s technology and management expertise to develop a stateof-the-art aquaponic facility in northeastern Pennsylvania, and other
locations which may subsequently be identified as suitable. Neptune has a
letter of intent signed with a cogeneration power company for a lease-purchase
agreement on an eight acre parcel containing a 3.25 acre heated greenhouse.
Heat for the greenhouse will be supplied by the power company via waste heat
from the cooling towers at no cost to Neptune. Bioponix™ is the synergistic
application of fish farming, hydroponics and insect production combined
in an integrated process. Fish waste from the fish production operation is
used as organic fertilizer in the hydroponic system to produce organic
herbs and vegetables as a secondary crop. The fish waste is therefore
transformed from a liability into an asset. The herb and vegetable plants
remove nutrients from the water, thereby acting as a natural filtration
system, so the water can then be re-circulated back into the fish
production system over and over again, thereby significantly reducing water
consumption. The planned pilot insect production facility will utilize
various waste products to produce high quality protein meal that can be
incorporated into the fish diet.
Acquisition Plans
We intend to diversify our farming operations to include other marine products;
production of hydroponic herbs and vegetables; wholesale distribution,
processing and live delivery (hybrid striped bass and tilapia) to the Asian and
Latin markets; and value added products. Whether land or lake based operations,
the Company’s strategic South Florida location with its twelve month growing
season, tremendous local market, and a select niche market for live products,
provides a significant advantage over competitors. A focus on products limited
in the wild, or by seasonality, further increases market value and demand.
The Company also has identified and has begun acquisition discussions with a
number of acquisition candidates which will allow the Company to expand its
business plan to develop an operating model which utilizes waste and byproducts from one operation as fuel or feed for other parts of the business
model, with the goal of minimizing or eliminating all adverse environmental
impacts from the Company’s operations. These targets include hatchery
operations, processing and distribution operations, larger aqua-farms, and
operations in other natural and organic food products. The goal of the Company
is to grow to become a manufacturer, processor and distributor of organic and
natural seafood and other organic food and nutritional products using
processes that eliminate or at least minimize any adverse effect on the
environment by controlling waste and discharge from its operations.

13

 In addition to the existing farm, we plan to take advantage of the massive, yet
pristine, quarry lakes spread throughout Florida which will provide an ideal
environment for fish production. Management has focused its efforts on
further research and development of the various components of the Aqua-Sphere®
system technology, while fine tuning production methods for use in quarry
lake aqua farms. Among the many technological developments tested during
this period have been a solar powered, programmable, automated, feeding system
which allows controlled amounts of feed to be distributed at specific times of
the day. This insures a more rapid growth rate, with less waste than other
common productions methods in the industry. Through the development and
operation of three previous pilot farms, we improved our technology, and
production techniques to effectuate the efficient and economical production of
seafood in large, open bodies of water. Through Aqua Biologics, we are now
operating a test farm in a quarry lake in Florida City, Florida, at which we
are now growing Everglades Striped Bass in the Aqua-Sphere®, collecting the
fish waste from the Aqua-Sphere® system on a continuous basis, and transferring
the waste to an aerobic digestive system, which converts the waste into methane
gas and a nitrogen rich solution which is then used in hydroponic farming at
the site. The applications of the Aqua-Sphere® system now extend to an open,
worldwide market. In addition, we have successfully raised and marketed three
commercially viable species (hybrid striped bass, redfish and tilapia).
Currently, we distribute our products through wholesale distributors who pick
up the fresh fish at our Florida City, Florida fish farm and distribute the
product nationwide. In addition, some local Florida customers pick up the
product themselves at the farm site. We do not currently distribute any
product ourselves, although our business plan is to expand our capabilities
into both production and distribution, through growth and acquisitions.
Suppliers
We purchase fingerling fish stock for our farming operations primarily from two
suppliers that actually work cooperatively together. There are a number of
sources for fingerling stock which we can use to maintain our current
production and to expand as we open additional acreage to production. However,
we have built a strong relationship with our suppliers, and they are the
largest producer of hybrid striped bass fingerlings in the world. The quality
of fish they produce is greater than various other suppliers. In 2007, our
two suppliers had production difficulties that were the result of personnel
issues in one of the companies. The one farm was allowed to run down, and
production was severely compromised. Although this farm is currently under
new management, the lack of available fingerlings had, and continues to have,
a significant impact on our farm production. The impact of this fingerling
shortage affected not only Neptune’s production, but hybrid striped production
in general in the U.S. Both fingerling farms are now ‘over-producing’
fingerling stock in order to avoid this issue in the future. It is also part
of our business plan to acquire one or more fingerling production farms in the
future, so that we can grow our own fingerlings and control the quality, price
and availability of feed stock.
Competition
Competition for our products derives from two industries as well as for two
distinctly different products. Our involvement in fresh seafood production
operations, and the development of disruptive technologies for controlled
production systems are addressed in different capacities later in this report.

14

 Seafood
The competition for seafood products in the United States is significant.
With over 84 percent (at a cost of over $9 billion) of all seafood consumed in
the U.S. being imported, the competition for our U.S. market is worldwide. More
reasonable labor and land costs in foreign countries has a significant impact
on the cost of production, and in many instances offsets the costs of freight.
Our market penetration has focused on eco-friendly production, sustainable
species, and providing our customers the freshest product available. This
focus has allowed us to compete and grow in a market that is dominated by
companies that are better financed, have longer operating histories, and a
more diversified product line.
We currently produce a single species, hybrid striped bass, due in part to the
enormous market growth potential. Annual U.S. production of hybrid striped bass
was 11,240,000 lbs in 2007, and market growth is limited only by current
production capacity and methods. There are approximately 55 farms in the U.S.
producing hybrid striped bass as per the 2007 industry census; however four
large farms produce roughly 60 percent of the annual production. These
producers include both pond and re-circulating farms, although the pond
producers have a lower cost of production due to the extensive nature of those
farms. Over the past year, several of the larger farms have begun to expand
their operations, which will inevitably place more available product into the
marketplace. In addition to other producers of hybrid striped bass, further
competition for our products comes from wild-caught seafood. Wild striped bass,
as well as species such as yellowtail snapper, grouper, halibut, flounder, and
others all compete against our product at the retail level. Competition for
fresh fish products is generally narrowed down to quality, price, availability,
and shelf life. As a higher priced product, we have been relatively successful
in the marketplace due to our excellent quality, availability and shelf-life.
The seasonality of wild striped bass affects the market in the respect that
seafood wholesalers that buy primarily on price tend to migrate to this product
during season. We have avoided these customers and have catered to those that
focus on quality, sustainability, year-round availability and freshness. We
recognize the need to progressively diversify our product line, and toward that
end have investigated numerous opportunities over the last year. We established
our Canadian subsidiary, Aqua Biologics of Canada, Ltd. to explore and develop
coldwater marine opportunities in both eastern and western Canada. We are
currently working on a collaborative grant opportunity in western Canada to
utilize Aqua-Sphere® to demonstrate closed containment production of salmon,
renewable energy, and waste utilization. In eastern Canada, we are
investigating an opportunity to utilize Aqua-Sphere® for the production of
halibut and cod. We will continue to explore these opportunities to demonstrate
and use our technologies in various environments worldwide.
With almost 40 percent of commercial fish species threatened, and commercial
harvests fairly level since the late 1980s, the future will inevitably be
reliant upon controlled commercial production. In addition, increased concerns
over adverse environmental impact of traditional; fish farming methods will
have a major impact on the industry, one which we feel Neptune is in a unique
position to meet. Recent adverse publicity for open net pen farming methods
has led to a proposed ban on this method in British Columbia, Canada’s salmon
farming industry, with a recommended change to closed containment systems,
such as Aqua-Sphere®. We formed Aqua-Biologics of Canada, Ltd. as a subsidiary
of Aqua Biologics, Inc., to explore this new opportunity and have already been
in contact with a salmon farming operation in British Columbia interested in a
joint venture test of the Aqua-Sphere® for salmon production.

15

 We believe that the market for our current product, as well as future products,
will continue to grow in accordance with production.
Research and Development
The aquaculture, or fish farming, industry has in recent years seen a
significant increase in the introduction of new technologies. Most of
the advances are in land-based and re-circulating systems that conserve
water use. Many of the companies introducing these technologies have longer
operating histories and are better financed than us. Further, many of
these companies have received government grants to advance their
technologies, and others have cooperating relationships with universities.
Both avenues have significant advantages in the time-to-market of the final
products. Some companies have obtained either design or operating patents for
all or part of their systems, as well.
We acquired the exclusive worldwide rights to the Aqua-Sphere® system
technology. On behalf of Chief Executive Officer, Ernest Papadoyianis, and
Chief Operating Officer, Xavier (Sal) Cherch, we filed a provisional patent
in February, 2005, and obtained a patent pending status on the Aqua-Sphere®
and the major component of the Aqua-Sphere® system, the Aqua-Cell’, formerly
referred to as the Eco-tank, and in January 2006 we applied for full patent
status. There is no guaranty that full patent status will be granted.
In addition, we filed for a trademark on the Aqua-Sphere® and the Aqua-Cell’
names in July, 2006 and have received registered trademark status for both
names. In August, 2007, we filed a PCT application as a precursor for filing
European patents. In July, 2008 we filed our foreign patent in Canada.
We consider the Aqua-Sphere® system to be disruptive technology which may
displace the antiquated equipment used to cultivate fish in large lakes,
bays, inshore, and offshore environments. The technology used for 2000 years
is in the form of floating net pens and cages that contain fish in large
bodies of water for production purposes. While our technology has many
advantages over net pens, it may be more expensive to purchase and operate.
We will be heavily relying upon increasingly stringent environmental
regulations to market our system, and believe these regulations are already
well underway. There can be no assurance that the pollution/contamination
caused by the older net pens systems will be curtailed by regulatory action.
Additionally, there are a number of other companies that are in the testing
phases of other containment systems that will compete against the Aqua-Sphere®.
As stated above, most of these companies are better funded, have university
affiliations, and longer operating histories.
Currently, we are in the process of performing final testing on the AquaSphere’ System. Some of our competitors are already producing and are selling
their products. This places us at a disadvantage in the marketplace unless we
can prove our system is superior to some of the newer technologies. Many of
our competitors claim their products obtain similar results to the AquaSphere’ System.
In June, 2006, we transferred our technology research and development to a
subsidiary, Aquaculture Specialties, Inc., which we renamed Aqua Biologics,
Inc., to oversee the complete development of the Aqua-Sphere® system,
sales and marketing. Aqua Biologics, Inc. holds the exclusive license to the
Aqua-Sphere® system under the exclusive worldwide license agreement, and also
Owns the rights to the Ento-Protein® technology.

16

 During the past two fiscal years, we have incurred direct costs related to our
research and development activities of $21,830 and $35,625 for the years ended
June 30, 2008 and 2007 respectively, most of which related to pending matters,
and deferred development costs of $83,580 and $44,483 for the years ended June
30, 2008 and 2007 respectively. Additional costs relating to research and
development activities have not been maintained as separate items and are
incorporated in our normal operating expenses.
Geographic Expansion
In July, 2006, we began the process of contacting various cities, counties and
states which suffer from high unemployment rates. The purpose of this effort is
and will be, to locate those areas and governmental agencies with economic
development commissions which may be receptive to offering incentives, grants,
abatements or tax relief as an inducement for Neptune to build expansion
facilities and diversify its operations and product line. As we continue this
effort, we will focus on sites and areas that would provide competitive
advantages in terms of production, market penetration, new species/products,
etc. This includes quarry lakes for the deployment of our Aqua-Sphere® system
and the pending opportunity in Pennsylvania, where we have already discussed
the potential of developing integrated ‘green’ agribusiness opportunities
there. Our executive officers toured the area and the State Capital, and were
hosted by state officials in Economic Development, Technology Advancement,
International Export, and Environmental Protection. The State representatives
reviewed many programs available in grants, loans, tax abatements, employment
incentives, and land, that could apply to such integrated aquaculture
operations. A list of site requirements was developed by the executive
officers for distribution by the State to over 250 county economic development
offices. Several potential sites were identified, and others are anticipated
in the near future. The initial project would involve the development of
integrated fish farming facilities that could utilize the waste heat from an
existing adjacent business, which may include co-generation plants, energy
plants, ethanol/bio-diesel plants, produce processing plants, etc.
Preliminary investigations and discussions have already verified the viability
of this concept. In addition, members of the management team have experience in
the successful development of similar projects. This previous experience and
current discussions leads us to believe that we may incur significant tax
savings; benefit from labor incentives; achieve reduced building costs for new
facilities; and receive long term low interest rate loans backed through local
municipal bond issues. Several states, including, but certainly not limited
to, New Jersey, Michigan, Virginia, Ohio, North Carolina and Louisiana have
active economic development programs. Furthermore, in keeping with our
business model, opening facilities in other areas will enable us to raise
locally popular species while reducing shipping costs. We may in the near
future create a new subsidiary whose purpose will be to find, negotiate and
acquire appropriate sites.
Organic Seafood
Currently, there are no approved standards for organic certification of
seafood production in the United States, although there are some seafood
producers or distributors who claim to have ‘organic’ seafood. These producers
or distributors either rely on a non-U.S. certification process, or purchase
seafood that is said to be ‘raised under organic conditions’. This often
places the consumer in a position of purchasing seafood that they believe is

17

 organic, but, in fact, may not be.
In May, 2007, the National Organic Standards Group delivered its
recommendations for organic standards for seafood for adoption by the U.S.
Department of Agriculture, the only valid certifying body for organic products
in the U.S. These proposals, which have caused considerable controversy in
parts of the U.S. seafood industry, could result in or may include:
-

Excluding all fish raised in open net pens (which includes almost all
farm-raised salmon)
Excluding all wild caught fish
Excluding all carnivorous fish fed on diets containing fishmeal.

These recommendations, if finally adopted, will accelerate the demand for
closed containment systems, such as the Aqua-Sphere®, and will position our
farms for organic certification. Our current production facilities operated
by Blue Heron and Aqua Biologics currently use no antibiotics, growth hormones
or similar non-organic methods, use no net pen methods, and, with the
introduction of the Ento-Protein® feed, our farm raised fish will be fed only
with a sustainable, all natural protein source from the insect meal. The
Ento-Protein® product is currently in development through a cooperative
research relationship with Mississippi State University’s Departments of
Entomology; Fisheries & Wildlife; and Food Science.
The demand for organically produced products has skyrocketed over the last five
years. National organic supermarket chains such as Whole Foods Market and Wild
Oats, have become very successful focusing entirely on organic products. Even
main line chains like Publix, Stop & Shop and others have jumped on the
organic bandwagon and created, or significantly expanded, organic departments.
Organic products often sell for 2 to 4 times a comparable non-organic
product. The significantly greater retail price warrants the greater cost of
production in most cases.
U.S. organic food sales reached $17 billion in 2006, growing at over 20%
annually. Once USDA organic seafood guidelines are in place, organic seafood
is expected to grow at a similar rate. While there are a wide variety of
organically farmed seafood products available in Europe through certification
by the European Union, the U.S. has lagged behind in establishing organic
certification guidelines for seafood. Most organic retailers have strongly
opposed labeling any wild-caught seafood products as organic due to their
unknown origins and diet (Supermarket News, March, 2005).
Although all other sources of farmed protein are abundantly produced
organically to meet this rapidly expanding market, the seafood industry for
the most part has been left behind. This temporary exclusion again stems from
the fact that seafood is still predominantly harvested from wild sources
which are not controlled.
The Company believes that controlled production or organic hybrid
striped bass and other products will create a premium market. Management is
desirous of producing organic products at certain sites once U.S. guidelines
are in place.
Environmental Regulations
Our operations involve the production, handling, and packaging of consumable
seafood products and are subject to environmental and food regulation at the

18

 Federal and state level.
In addition, our production facility, Blue Heron Aqua Farms, LLC, requires
operating permits that are subject to renewal or modification by the State of
Florida Division of Aquaculture. Violations of environmental laws or permits
may result in restrictions being imposed on operating activities, substantial
fines, penalties, damages or other costs, any of which could have a material
adverse effect on our business, financial condition, results of operations or
cash flows. We currently adhere to the Best Management Practices of the State
of Florida, Division of Aquaculture, which regulates waste discharge, water
usage, fish species, and general facility issues. We also maintain a Food
Permit and must comply with Florida Department of Agriculture guidelines for
seafood handling, and farm and employee cleanliness.
Our Blue Heron subsidiary also maintains a water use permit for 41,000,000
gallons per day, held under the name of South Florida Aquaculture, Inc.
Currently, we use less than 50 percent of our allowance; however future plans
are for massive expansion into other areas of our site, which will inevitably
utilize most if not all of this permitted amount. There can be no assurance
that we will be able to maintain this permit in the future, however this permit
was renewed for the remainder of the lease term, through March, 2016. Blue
Heron utilized the services of a water resource and environmental consulting
firm, to complete the permit renewal.
We do not separately account for costs directly related to compliance with
environmental regulations, since these costs are inherent in our methods of
operations and are included in our normal operating costs. We do, however,
incur separate charges for environmental insurance, and incurred $1,500 and
$1,003 in premiums for the years ended June 30, 2008 and 2007, respectively.
The production of seafood and aquaculture is also regulated at the Federal
level by the FDA. The FDA has strict laws prohibiting the use of antibiotics
(only three are approved for use in aquaculture), hormones, chemicals, certain
coloring agents, and other chemicals that may affect the quality of the
consumable products. These laws severely limit our abilities to combat
diseases if and when they arise. The FDA is now in the process of completing
further regulation on the Origin of Nation labeling program to identify the
source of all seafood. At this stage in our development, all of our product is
sold whole, in-the-round, and packaged on ice. In the future, however, our
business plan will incorporate vertical integration of processing, distribution
and value-added processes of seafood products, which will have to comply with
Origin of Nation labeling.
Further, once we develop the processing and distribution entities, we will
be required to comply with stringent HACCP (Hazard Analysis Critical Control
Points) regulations that pertain to all food processing procedures, site
cleanliness, disinfection standards, temperature control, etc. Processing
facilities must pass regular inspections.
Capital Needs
In order to carry out our business plan, on April 18, 2006, we signed a
Placement Agent Agreement with Dawson James Securities, Inc. to raise
$2,000,000 in funds for working capital and expansion of the existing
aquaculture farm operation. The Placement Agent Agreement provided for a
total compensation to Dawson James Securities, Inc. of 13 percent of the
funds raised, plus Neptune common stock and warrants to purchase additional

19

 common stock. The Private Placement Memorandum for this offering described
the proposed Use of Proceeds by Neptune in the following language:

USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units being
$435,000 if the Minimum Amount is sold, and $1,740,000 if the
Maximum Amount is sold. See ‘Plan of Distribution.’ We intend to
use the net proceeds of the Offering to (i) develop the first
commercial scale prototype of the S.A.F.E.™ System floating
production technology and commence several pilot/demonstration
operations, (ii) complete the first of three expansion phases on
the Blue Heron farm, (iii) begin development of the first
commercial scale quarry lake aqua-farm utilizing the S.A.F.E.™
System, and (iv) for working capital.
If we raise the Minimum Amount, we believe that the net proceeds
from the Offering, together with our existing capital resources
and revenue or cash flows from operations, if any, will be adequate
to satisfy our working capital requirements only for a period of
approximately four to five months. If we raise the Maximum Amount,
we expect the proceeds would last approximately 12-18 months from
the date of the final closing (depending upon expansion and
investor relations requirements). However, if we continue to incur
operating losses or if unforeseen events occur that would require
additional funding, we may need to raise additional capital or
incur debt to fund our operations. Furthermore, we may need to
raise additional capital to fund the expansion of our business
into complementary areas, including one or more strategic
acquisitions. We cannot assure you that our estimates are accurate
or that unforeseen events will not occur that would require us to
seek additional funding to meet our needs for working capital. We
expect to seek such capital, if needed, through sales of additional
equity or through debt securities, but there can be no assurance
that such funding will be available on acceptable terms, if at all.
Our estimate of the use of proceeds from this Offering is as
follows:
Minimum
Amount
Description
S.A.F.E.™ System prototype(1)
S.A.F.E.™ System farm site(2)
Expansion of Blue Heron farm(3)
Notes/Bridge Payable(4)
Working capital (5)
Net Proceeds of Offering

$

$

175,000
0
0
0
260,000
435,000

Maximum
Amount
$

350,000
450,000
400,000
200,000
340,000
$ 1,740,000

The total amount of the offering was $2,000,000, which would result in net
proceeds to Neptune of $1,740,000 after paying the Dawson James compensation
of $360,000. As noted in the description above from the Private Placement
Memorandum, the Use of Proceeds was based on the assumption that the full
amount of the offering would be raised within a relatively short time after
it began on April 18, 2006, since raising the minimum net amount would only

20

 meet capital requirements for 4 to 5 months, and 12 to 18 months if the
maximum amount was raised (‘depending upon expansion and investor relations
requirements’).
The first funds raised in the offering were not raised until May 10,
2006, in the total amount of $500,000, with net proceeds to Neptune of
$435,000, which was, coincidentally, the minimum offering amount described
in the Use of Proceeds. These proceeds were used approximately as
suggested in the Use of Proceeds above, including Working Capital for the
general operations of Neptune.
The next funds raised in the offering did not come until six months
after the offering began, or not until October 16, 2006. That was, of
course, beyond the 4 to 5 month period of available funds described in the
Use of Proceeds for the minimum offering amount. The October 16, 2006 net
proceeds was only $26,100 and did not permit Neptune to do anything other
than pay some payables (i.e., working capital). In addition, at the
insistence of Dawson James, Neptune was required to retain the first of
several investor relations firms, at the cost of stock plus $2,000 per month
in fees.
On November 22, 2006, another $180,000 in net proceeds was received by
Neptune in the continuing offering, which once again, provided only enough
working capital to cover the, to date, 7 month delay in funding the offering
beyond the minimum amount. No part of the funds could be allocated to any
substantial expansion of the farm or the technology, to the considerable
frustration of management. Most of the funds instead had to be allocated to
the current operations of the farm and to the cost of stocking the existing
operation.
On January 22, 2007, another $113,000 in net proceeds was received by
Neptune, which did not even cover the cost of existing operations for the
additional two month funding delay.
After another two month delay, Neptune received another $282,750 in net
proceeds, which covered in part the working capital needs due to the delay in
funding, beyond the original estimate of 4 to 5 months after the offering
commenced in April, 2006, but allowed some patent and trademark work to be
done on the technology.
On March 20, 2007, Neptune finally received enough net proceeds of the
offering to begin to apply to the Use of Proceeds, a total net amount of
$1,322,988. The Use of Proceeds from that investment was used as follows:

Description
S.A.F.E. System prototype
S.A.F.E. System farm site
Expansion of Blue Heron farm
Notes payable
Ento-Protein® research
Working capital
Net proceeds

Estimated
Use of Proceeds
$
264,600
344,000
304,500
152,000
0
257,888
$ 1,322,988

Approximate Actual
Use of Proceeds
$
264,928
120,500
340,318
55,000
300,000
342,242
$

1,322,988

The Estimated Use of Proceeds is derived from the Use of Proceeds in the

21

 Offering Memorandum if the Maximum Amount was raised, and applying the
same relative percentages for each item to the actual net amount finally
raised in March 2007 of $1,322,988. The Approximate Amount of Actual
Use of Proceeds is based on a review of the expenditures of Neptune and its
subsidiaries over the period from March 2007 through May 31, 2008, and
includes expenditures for the development of the Ento-Protein® technology
and the S.A.F.E. expenditures. S.A.F.E. is now referred to as the AquaSphere’. It should be noted that Ento-Protein® was not yet conceptualized
when this offering began. Patent searches and provisional patent filings
did not occur until April, 2007. Therefore, no proceeds from the offering
had been allocated for this research, legal expenses, outside services, etc.
Based upon the current market, demand, and price, Ento-Protein® may have
the potential to become the largest revenue stream for the company. Also,
the original Use of Proceeds did not include any significant amounts for
‘investor relations’, but when Dawson James was unable to complete the
offering itself on a timely basis, it insisted that Neptune retain another
placement agent to assist in the offering, at additional cost and also that
it retain, on a serial basis, a number of ‘investor relations experts’
recommended by it, again at an additional cost in cash and in common stock,
although little benefit was achieved for the Company. The total cost of
this investor relations effort was $98,980 in the fiscal year ended June 30,
2008 and $114,823 for the fiscal year ended June 30, 2007.
Furthermore, the three specific goals for use of the net proceeds:
‘to (i) develop the first commercial scale prototype of the S.A.F.E.™ system
floating production technology and commence several pilot/demonstration
operations, (ii) complete the first of three expansion phases on the Blue
Heron farm, (iii) begin development of the first commercial scale quarry
lake aqua-farm utilizing the S.A.F.E.’ system, and (iv) for working capital’
have all been accomplished and more.
Dawson James Securities received a fee equal to ten percent of
the amount raised in the offering and an unaccountable expense allowance of
three percent of the amount raised. In addition, Dawson James received
warrants to acquire common shares on each closing of the sale of the Units
in the offering equal to twenty percent (20%) of the Units sold in the
Offering. These warrants are exercisable at any time during the five (5)
years from the date of the closing at an exercise price equal to $.50 per
share for the warrants based on the original sale of units, and $.30 per share
for the warrants based on conversion of the Debentures to common stock.
Each of the units offered (individually a Unit, and collectively the
Units) consisted of (i) a $1,000.00 Convertible Debenture (the Debenture)
with a 24% coupon, payable in kind with common stock, and (ii) one thousand
redeemable common stock purchase warrants ("Warrant"). Each Warrant entitles
the holder to purchase one share of Common Stock at an exercise price of
$0.50 per share over a term of five years from the initial closing date of
the Offering. The Warrants are redeemable by the Company upon 30 days written
notice at a purchase price of $0.01 per Warrant, subject to our common stock
having a closing bid price of at least $1.25 per share for a period of ten
(10) consecutive trading days. The term of each Debenture is for 24 months
from the date of issue. During the term, holders of the Debenture may convert
their note to common stock at a price of $0.30 per share. The 24% PIK (Paid
in Kind) Coupon is to be paid out on a quarterly basis in cash or stock, at
the election of the Company. If the Company elects to pay in common stock, the
market price valuation will be established by the average closing bid price
of the common stock for the last twenty (20) trading days of the calendar
quarter for which the interest due is being paid in common stock (the

22

 Average Closing Price). The right of the Company to make any interest
payment in shares of common stock on a particular date is subject to the
satisfaction (or waiver by the Holder) of the following additional conditions
on such date: (1) there is then an effective registration statement covering
the common shares to be issued on such date, for which no stop order is in
effect; (2) no defined event of default exists on such date; (3) the Average
Closing Price is equal to or greater than $.15 per share (as appropriately
adjusted for any stock split, stock dividend or other similar corporate
action); and (4) the Company has sufficient authorized but un-issued shares
of common stock to provide for the issuance of the interest shares to the
Holders of the Debentures.
As part of the Offering, the Company also entered into a Registration Rights
Agreement with the debenture purchasers, under which the Company agreed to file
a registration statement for the shares into which the Debentures could be
converted, and any common shares issued as PIK interest, as well as maintain an
effective registration statement for any shares underlying the accompanying
warrants issued with the Debentures. Under the terms of the Registration Rights
Agreement, the first registration statement was required to be filed within 120
days from receipt of notice from the investors, in the form provided. When it
was discovered that Dawson James had failed to provide the required notice form
to its investor clients, the Company itself provided a notice form to the
Debenture Holders, and the first notice was then received by the Company in
October, 2007. Within 120 days thereafter, in December, 2007, the Company filed
a Form S-3 registration statement with the SEC, seeking to register the common
shares into which the Debentures may be converted, the interest shares and the
warrant shares. Subsequently, the SEC amended its Rule 144 requirements in
February, 2008, so that now, all of the shares underlying the Debentures
already qualify under Rule 144 and all shares issued as interest payments have
also qualified under Rule 144 after a six month holding period. Under the
terms of the Registration Rights Agreement, any shares that meet the
qualification requirements of Rule 144 do not need to be included in the
registration statement. Neptune has received comments from the SEC on the filed
registration statement which will be addressed as soon as this annual report is
filed.
Due to a number of unresolved issues, Neptune has now terminated its
relationship with Dawson James Securities. Due to subsequent activities which
were disclosed to Neptune by some of its shareholders (who also were Debenture
Holders, Neptune has filed a complaint with the Financial Industry Regulatory
Association (FINRA)regarding Dawson James, a principal of that company and
another investment bank. The Company also has received information that Dawson
James and certain principals and employees have begun shorting its common
stock, which appears to be at least a major contributing factor in the decline
of the trading price of the common stock over the past several months. Neptune
has not yet retained a new investment banking advisor to assist it in the
needed additional capital funding efforts, but expects to do so in the near
future.
There currently are no limitations on our ability to borrow funds to carry out
our business plan, except to the extent that we propose to secure any future
loans by assets of Neptune itself. The debenture bonds issued during 2006 and
2007 fiscal years contain a provision giving the debenture holders prior
consent rights to any senior secured debt of Neptune, since the debentures are
unsecured. This same limitation does not apply to any secured loans made to a
subsidiary company; however, the Company’s limited resources and operating
history may make it difficult to borrow funds. The amount and nature of any

23

 borrowings will depend on numerous considerations, including our capital
requirements, potential lenders evaluation of our ability to meet debt service
on borrowings and the then prevailing conditions in the financial markets, as
well as general economic conditions. We have no present arrangements with any
bank or financial institution to secure additional financing and there can be
no assurance that such arrangements if required or otherwise sought, would be
available on terms commercially acceptable or otherwise in our best interests.
Our inability to borrow funds required to implement our business plan, or to
provide equity funds for an additional infusion of capital into the Company,
may have a material adverse effect on our financial condition and future
prospects, and any borrowings may subject the Company to various risks
traditionally associated with indebtedness, including the risks of interest
rate fluctuations and insufficiency of cash flow to pay principal and
interest. In addition, the current balance on the Debentures of approximately
$2.3 million, begins to come due in December 2008 and the balance in
early 2009, and it is not likely that the Holders will agree to a conversion of
the Debentures into common stock at the current contractual conversion price of
$0.30 per share, given the current trading price of the common stock. As noted,
the Company has reason to believe that the current stock price has been the
subject of price manipulation and shorting by Dawson James and others, which
has driven the trading price below the contract conversion price, and this
belief is a part of the basis for the pending FINRA matter.
EMPLOYEES
As of June 30, 2008, we had four employees in the Company, and an additional
six employees in Blue Heron.
ITEM 2. DESCRIPTION OF PROPERTY.
We currently do not maintain separate offices, and our current address is only
a mail box address used for that purpose. Our officers currently work from
home offices in order to conserve capital. They do not charge us for such use,
and have not done so for the eight and a half years the Company has been in
business.
Our subsidiary, Blue Heron, operates a fish farm under a management agreement
with South Florida Aquaculture, Inc., which holds a lease on a forty eight acre
parcel of land owned by the South Florida Water Management District with a
remaining term of seven years. The management agreement also has seven years
remaining. South Florida Aquaculture, Inc. is owned 85 percent by Blue Heron
Aqua Farms, LLC, as of January 1, 2008.
Our subsidiary Aqua Biologics, Inc. operates a test facility for the AquaSphere’ System at a quarry lake in Florida City, Florida on a two year lease
at a monthly rent of $ 1,000.
ITEM 3. LEGAL PROCEEDINGS.
We are not a named defendant in any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of securities holders of the Company
during the Fourth Quarter of the fiscal year ended June 30, 2008.

24

 PART II
ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

As of June 30, 2008, our common shares traded under the symbol NPDI on the OTC
Bulletin Board and on The Pink Sheets. Activity in our common stock is
Reflected in the following table:
FISCAL YEAR 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
FISCAL YEAR 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

$

$

HIGH
0.55
0.45
0.38
0.30

LOW
$ 0.30
0.20
0.17
0.14

HIGH
0.70
0.48
0.48
0.45

LOW
$ 0.29
0.15
0.16
0.22

These quotations reflect inter-dealer prices, without mark-up, mark-down or
commission, as reported through CBS MarketWatch.com and may not represent
actual transactions.
As of June 30, 2008, we had 25,351,631 shares of our common stock
outstanding. This includes 6 million shares of common stock issued on the
conversion of 5 million shares of Class A Convertible Preferred Stock which
had been outstanding. Our shares of common stock are held by approximately 163
stockholders of record. The number of record holders was determined from the
records of our transfer agent and does not include beneficial owners of common
stock whose shares are held in the names of various security brokers, dealers,
and registered clearing agencies. A recent NOBO list indicated an additional
1,051 beneficial shareholders in addition to those listed by the transfer
agent.
There were also 582,500 shares of our preferred stock outstanding, which are
convertible into a total of 5,158,333 million additional shares of our common
stock.
SECTION 15(g)OF THE EXCHANGE ACT
The shares of our common stock are covered by Section 15(g) of the
Exchange Act, and SEC Rules 15g-1 through 15g-6, which impose additional
sales practice requirements on broker-dealers who sell our securities to
persons other than established customers and accredited investors.
Rule 15g-2 declares unlawful any broker-dealer transactions in
penny stocks unless the broker-dealer has first provided to the
customer a standardized disclosure document.
Rule 15g-3 provides that it is unlawful for a broker-dealer to engage in
a penny stock transaction unless the broker-dealer first discloses and
subsequently confirms to the customer the current quotation prices or
similar market information concerning the penny stock in question.
Rule 15g-4 prohibits broker-dealers from completing penny stock
transactions for a customer unless the broker-dealer first discloses to

25

 the customer the amount of compensation or other remuneration received as a
result of the penny stock transaction.
Rule 15g-5 requires that a broker-dealer executing a penny
stock transaction, other than one exempt under Rule 15g-1, disclose to its
customer, at the time of or prior to the transaction, information about the
sales persons compensation.
Our common stock may be subject to the foregoing rules. The application
of the penny stock rules may affect our stockholders ability to sell
their shares because some broker-dealers may not be willing to make a market
in our common stock because of the burdens imposed upon them by the
penny stock rules.
There were no purchases of common stock by the Company or by any affiliates
of the Company during the fourth quarter of our fiscal year ended June 30,
2008.
SHAREHOLDERS
There were approximately 163 holders of record our common stock as of June 30,
2008. An additional 1,051 beneficial stockholders were disclosed in a current
NOBO listing.
DIVIDENDS
We have not paid any cash dividends to date and do not anticipate
paying dividends on our common stock in the foreseeable future. Future
dividends, if any, will depend upon our earnings.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended June 30, 2008, the Company issued securities as
follows:
Common
Common
Common
Common
Common
Common

shares
shares
shares
shares
shares
shares

outstanding at June 30, 2007:
issued as payment of interest
issued for consulting services
issued as compensation
issued on conversion of debentures
issued for acquisition

Total common shares outstanding at June 30, 2008:

19,966,199
1,453,308
500,000
942,500
2,365,624
124,000
-----------25,351,631

All of the shares were issued in private transactions in reliance on
Section 4(2) of the Securities Act of 1933, and all of the certificates
representing the shares bear legends restricting any transfer of the shares
unless subsequently registered by the holder, or pursuant to an exemption
from such registration.
The Company also issued 482,500 shares of Series A Convertible Preferred
Stock in cancellation of $482,500 in accrued compensation due to our officers
and a consultant. A total of 200,000 shares were issued to each of Mr. Cherch
and Mr. Papadoyianis, and 82,500 shares to CF Consulting, LLC. The shares are
convertible in 10 common shares for each preferred share. The Company also
issued 100,000 shares of Series B Preferred Stock to an outside investor for

26

 a cash investment of $100,000.
TRANSFER AGENT AND REGISTRAR
Our transfer agent on June 30, 2008 was InterWest Transfer Co., Inc., P.O. Box
17136, Salt Lake City, Utah 84117.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
We were incorporated in the State of Florida on May 8, 1998. We operate on a
June 30 fiscal year. Our common shares are traded on the Pink Sheets and on
the OTC Bulletin Board under the symbol NPDI. Since our inception, we have
been engaged in aquaculture (fish farming) through our subsidiary, Blue Heron
Aqua Farms, LLC, in Florida City, Florida and in the development of new
technologies for aquaculture and related marine uses. On June 9, 2005, we
merged with Move Films, Inc., a Texas corporation, with the Company as the
surviving entity. As a result of that merger, we succeeded to the filing and
reporting obligations of Move Films, Inc. under Section 12(g) of the Securities
Exchange Act of 1934.
Our mission is to become a leading supplier of sustainable seafood products
through the development of a vertically integrated production and distribution
enterprise, encompassing fish farms, processing facilities, wholesale
distribution, and value-added product lines. The catalyst to our business model
is the patent-pending Aqua-Sphere® technology which provides a highly
efficient, environmentally friendly solution to current seafood production
requirements, while opening up new areas of the world to commercial farming.
The Company has already received interest from around the world to license,
purchase, and distribute the technology. Licensing, sales and joint venture
activities will further expedite and enhance our business model. The final
strategic phase of our mission involves the utilization of our publicly traded
vehicle to conduct a roll-up of the highly fragmented aquaculture and
distribution industries. The acquisition of other seafood related businesses
should allow us to expand, diversify, and integrate our technology in the most
efficient manner.
The founders of the Company, Messrs. Ernest D. Papadoyianis and Xavier T.
(Sal) Cherch began designing and testing what today is known as the AquaSphere’ System over 10 years ago. The Aqua-Sphere® System is designed to
address and resolve the concerns of environmentalists. Today, through a
contractual arrangement, Neptune itself and its subsidiary, Aqua Biologics,
Inc., have spent over 7 years and more than three million dollars in the
development of the Aqua-Sphere® System, perfecting production methods,
performing market analyses, acquiring lease sites, and creating a cornerstone
production facility through our subsidiary, Blue Heron Aqua Farms, LLC (Blue
Heron). Blue Heron operates a forty eight acre fish farm in Florida City,
Florida that incorporates a one-of-a-kind flow-through environment which is
virtually extinct in the U.S. today. In October, 2004, the Company completed a
state of the art nursery expansion in order to increase production capacity of
its sashimi quality hybrid striped bass (branded as Everglades Striped Bass)by
over 25%. The market for all seafood, particularly fresh farm-raised product,
has grown to tremendous proportions, warranting immediate and extensive
expansion of production and diversification to other popular species. With only
four acres of the 48 acre site under production at this time, the Company has
the capability of producing close to two million pounds of fish per year from
this site alone when the site is fully developed, which development is well
underway.

27

 Management focused its efforts on further research and development of the
various components of the Aqua-Sphere® system technology, while fine tuning
production methods for use in quarry lake aqua-farms. Among the many
technological developments tested during this period was a solar powered
programmable, automated, feeding system which allows controlled amounts of
feed to be fed at specific times of the day. This insures a more rapid growth
rate, with less waste. Through the development and operation of three previous
pilot farms, Neptune and Aqua Biologics have improved this technology, and
production techniques to effectuate the efficient and economical production of
seafood in large, open bodies of water. The applications now extend to an open
worldwide market. In addition, we successfully raised and marketed three
commercially viable species (hybrid striped bass, redfish and tilapia). Our
farms purchase fingerling fish, raise the product to market size(1.25 to 2+
pounds), and then harvest and distribute it to wholesalers, processors, market
chains, etc. throughout the U.S., Canada, and the Caribbean. Management
believes that our unique, low-cost production strategy, technology, and
existing distribution through independent wholesalers and distributors allow us
to bring our products to market faster and cheaper than the competition.
DEVELOPMENT STRATEGY
With a strong distribution network for our fresh farm raised seafood products
throughout the United States, Canada and the Caribbean, we are now focused on
a three phase expansion program at our Florida City site in order to meet
market demand. In addition, we have moved into the final stages of preparation
for the commercial production of the Aqua-Sphere® System with the
establishment of the test facility at a quarry lake in Florida City, Florida by
Aqua Biologics.
We also plan to integrate our operations by locating and attempting to acquire
our own distribution network, as well as processing capabilities and nursery
operations to raise and control our own fingerling production.
Farming Operations
We are well underway in the process to expand our facilities, diversify our
production, and vertically integrate our operations. We expect to increase
capacity to produce over two million pounds of hybrid striped bass and other
species; operate the only hybrid striped bass nursery in South Florida; and
utilize our effluent wastewater to produce a diversity of hydroponic
vegetables and herbs. The combination of our commercial aquaculture expertise,
management and technology, teamed with the expansive forty eight acre fish
farm facility, have created one of the premier commercial aquaculture
operations on the East Coast and perhaps the U.S.
In addition to the Florida City site, we have identified and have had
preliminary discussions for lease options on a number of prime quarry lake
sites in South Florida. Historically, management has focused its production and
technology on developing these vast man-made impoundments which are abundant
in South Florida and offer tremendous opportunity for development. Quarry sites
will be developed by Aqua Biologics, Inc., utilizing the Aqua-Sphere® System
technology which was designed and engineered from years of practical experience
in commercial production in South Florida quarries. Quarry lake development
presents an ideal opportunity to establish multiple farm locations with minimal
capital outlay.

28

 Technology
The Aqua-Sphere® System incorporates many features which make it suitable for
all parts of the world. Aqua Biologics continues to be deluged with inquiries.
The Aqua-Sphere® System is a floating, articulating, patent pending containment
system which utilizes alternative energy to power many of its components. The
system can be utilized as a stand-alone single tank (an Aqua-Cell) in a variety
of sizes or several Aqua-Cells can be interconnected into pods to create the
Aqua-Sphere®. In a pod configuration, each Aqua-Cell is connected to another by
an underwater conveyance pipe. This allows the operator to move fish from AquaCell to Aqua-Cell without removing them from the water, or handling. Therefore,
an Aqua-Sphere® system actually becomes a self-contained nursery and grow-out
area. An automated solar powered feeding system and a revolutionary waste
collection system insure rapid growth without contamination of surrounding
waters. Since each Aqua-Cell has solid sides, predators cannot get in, crops
cannot escape, and in the event of contamination of surrounding waters, the
crops can be isolated and protected.
We have already entered into an arrangement with The Redland Company, Inc. of
Homestead, Florida to utilize a 38 acre quarry lake site for testing of the
Aqua-Sphere® prototype. This site is close to our current operations and
provides an ideal environment for these final tests. In addition to testing our
own technology, we will also be selecting and testing several other products
which will be used in conjunction with it. Site operations are fully underway
with the new prototype tank delivered, assembled and launched. Tests of the
prototype are well underway as are the related production of methane from fish
waste and production of herbs and vegetables with the fish waste by-products.
On September 27, 2006, the Company filed a Provisional Process Patent on the
Production and Processing of Select Insects into Protein Meal for Fish and
Animal Diets. This patent and research was born out of the tremendous need for
replacement of fish meal in fish and other livestock diets worldwide. Fish meal
has gone up in price considerably over the last year and the wild species
targeted for fish meal production are growing scarcer over time. In January,
CEO, Ernest Papadoyianis, and COO, Sal Cherch, were invited to Mississippi
State University to meet with members of its Entomology Department to discuss
research activities for the Company. Mississippi State is a world leader in
insect rearing methodology and has been instrumental in developing facilities,
diets, and rearing methods for facilities worldwide. The Company completed the
first phase of its research with very promising results. The initial
nutritional profiles of the selected insect species closely matched those of
fishmeal, with certain elements exceeding those of fishmeal. The second phase
of research is now set to begin with actual feeding trials of the experimental
Ento-Protein® diet on hybrid striped bass in order to assess acceptability, and
flesh flavor.
Our future development plans expand far beyond our South Florida production
base. Management has identified several acquisition candidates that would
allow immediate production benefit and a diversification of our product line.
The Company also intends to diversify its operations to include marine products
such as baitfish for the multi-million dollar sport fishing market; integrated
hydroponic production of herbs and vegetables; wholesale distribution
and live delivery (hybrid striped bass and tilapia) to the Asian and Latin
markets; value added products; and franchise/joint venturing of our AquaSphere technology. Whether land or lake based operations, the Company’s
strategic South Florida location with its twelve month growing season,
tremendous local market, and a select niche market for live products,

29

 provides a significant advantage over competitors. A focus on products
limited in the wild, or by seasonality, further increases market value and
demand.
The Company also has identified and has begun acquisition discussions with a
number of acquisition candidates which will allow the Company to expand its
business plan to develop an operating model which utilizes waste and byproducts from one operation as fuel or feed for other parts of the business
model, with the goal of minimizing or eliminating all adverse environmental
impacts from the Company’s operations. These targets include hatchery
operations, processing and distribution operations, larger aqua-farms, and
operations in other natural and organic food products. The goal of the
Company is to grow to become a manufacturer and distributor of organic and
natural seafood and other food and nutritional products using processes that
eliminate or at least minimize any adverse effect on the environment by
controlling waste and discharge from its operations.
TWELVE MONTHS ENDED JUNE 30, 2008 COMPARED TO THE TWELVE MONTHS ENDED
JUNE 30, 2007.
REVENUE
Revenue for the 12 months ended June 30, 2008 was $638,599, compared to
$851,141 for the 12 months ended June 30, 2007.
Revenues in 2008 were lower than the prior year based upon several factors.
The operational area of the North Farm of the Florida City site is relatively
small, and the production capacity has been maximized for a number of years.
Although we have attempted to cut costs wherever possible, there are simply
very few economies of scale in a four acre operating facility. The cyclical
problem we have faced since 2001, is one where we run low on, or completely
out of, product every 12 to 16 months, causing a significant reduction in, or
complete elimination of revenues for a short period. This period has typically
lasted 4-8 weeks depending upon a multitude of factors. The timing of this
cycle maximized the returns during the fiscal year ended June 30, 2007, which
resulted in gross revenues of $851,141. This compares with the gross revenues
of $638,599 for the year ended June 30, 2008 and the gross revenues of $527,155
for the fiscal year ended June 30, 2006. We feel that we have fine-tuned our
production processes and methodologies to maximize production and minimize
mortality through optimal husbandry; however the operations need the additional
capacity which the expansion into the South Farm will provide in order to avoid
this cycling problem in the future.
Secondly, in 2008 we were faced with a major project replacing one of our main
pumps. An upgraded replacement took almost 10 weeks to be delivered and
installed, and after a very brief period of optimal performance, the pump
volume decreased. We have been working closely with both the manufacturer and
distributor for over three months to determine the cause. The result has been a
decrease in water flow to one side of the farm, which has reduced overall
productivity. We anticipate a resolution to this issue by the end of September,
and look forward to resuming maximum water flow.
Lastly, and most significantly, for an extended period in late 2007 and early
2008, there were no hybrid striped bass fingerlings available for purchase. In
2007, our two suppliers had production difficulties that were the result of
personnel issues in one of the companies. The one farm was allowed to run down,
and production was severely compromised. Although this farm is currently under

30

 new management, the lack of available fingerlings had, and continues to have, a
significant impact on our farm production. The impact of this fingerling
shortage affected not only Blue Heron’s production, but hybrid striped bass
production in general in the U.S. Both fingerling farms are now over-producing
fingerling stock in order to avoid this issue in the future. Unfortunately,
this was not a problem that could have been foreseen. As a result, it is also
part of our business plan to acquire one or more fingerling production farms in
the future, so that we can grow our own fingerlings and control the quality,
price and availability of feed stock.
Fingerling supply, quality, and available size all have a significant effect on
our production. There is a fine balance between fingerling size, cost,
mortality, and time to market. Hybrid striped bass are only spawned twice per
year, with the major spawn occurring around March. As the fingerlings grow,
different sizes become available. The larger the fingerling, the greater the
cost of that fish, and the fewer fish can be loaded onto a truck, but the
time to market is shorter. Each live haul truck costs almost $6,000 in freight
for a delivery, and the number of fish per truck can vary from over 200,000 to
less than 30,000, depending upon size. Additionally, there are times in both
the winter and the summer months that seining these fingerlings at the
fingerling farms are not possible due to ice, cold and/or hot temperatures.
Since the development of our nursery system, we have been reasonably successful
at bringing in very small fingerlings of less than 1 inch and raising them to
3 inches to 5 inches prior to stocking. The difference in total time-to-market
is significant, as is the price. A one inch or less fingerling can take 14 to
16 months to reach market (1.75 lbs), while a 3 inch to 5 inch fish typically
takes 10 to 12 months. This cycle is also dependent upon stocking densities.
In order to maximize the small amount of production capacity of the North Farm,
densities are kept high, which in turn increases the time to market. All
factors being considered, management varies production strategy to suit
fingerling size. During times when only small fingerlings are available, they
are typically stocked at 3 to 4 times the final stocking density, and then
spread out to additional tanks as they grow.
Lastly, the breeding stock each year effects the quality of the fingerlings we
receive. Unlike catfish, trout, tilapia and other species, our fish is a
hybrid, and has parents of two different species, and two different
environments (i.e. a saltwater striped bass and a freshwater white bass). In
contract to the other species, which carefully select their brood fish based
upon size, color, growth, etc., hybrid striped bass fingerling farms collect
most of their brood fish from the wild. This means that the quality of the
genes/offspring is totally unknown, and different every year. As such, in
certain years, some brood stock produce better quality fingerlings with fewer
‘runts’ than in other years. Until we operate our own fingerling farm, this is
not a variable that we can control.
COST OF SALES
Cost of sales was $781,070 for the year ended June 30, 2008, resulting in
gross profit of $(142,471) as compared to $1,025,089 cost of sales for the
twelve months ended June 30,2007, and gross profit of $(173,948).
Inventory Fluctuations
The Company’s hybrid striped bass is produced under the continuous culture
method rather than the batch culture production method. Continuous culture
ensures that product becomes ready for market each week, as opposed to an

31

 entire crop being harvested at a single point in time. Accordingly, certain
tanks are emptied monthly, and subsequently re-stocked with fingerlings
(small, juvenile fish). Due to the very small size of the fingerlings (30 to
800 fish to the pound), tanks can be stocked with a significantly larger number
of fish than can be grown to maturity in a similar sized tank. As the juvenile
fish grow, they are dispersed to multiple tanks to grow to market size.
Therefore, at certain times during the year, the inventory varies significantly
depending upon the ratio of fingerlings to mature fish in stock. We carry over
ten months of inventory due to the ten to twelve month average growth period
for the fish stock and our practice of introducing new fingerlings to the
production base at regular intervals, so that we are able to produce mature
fish for sale every week. This results in an average inventory age of about
ten months.
GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated general and administrative expenses (G&A) were $1,089,837 for
the twelve months ended June 30, 2008, compared to $1,636,646 for the twelve
months ended June 30, 2007 a decrease of $546,809 or approximately 33 percent.
The primary components of G&A during the twelve months ended June 30, 2008
were officer’s salaries and related taxes and benefits ($549,863), outside
services ($181,392), investor relations ($98,980) and professional expenses
($33,705). Not all of these expenses were paid in cash, however, and our
two principal officers, Papadoyianis and Cherch, agreed to receive only 40
percent of the salaries they were entitled to receive, as did CF
Consulting, LLC, which provides CFO consulting services.
We expect G&A expenses to remain substantially the same in the coming
twelve months, after eliminating the one-time items. We intend to focus on
operating efficiencies, increasing revenues, and ensuring profitability
during this period.
NET LOSS
Our net loss before taxes for the twelve months ending June 30, 2008
was ($1,896,031) as compared to ($2,156,740) for the twelve months ended June
30, 2007, a decrease of $260,709 or approximately 12 percent.
Negative Gross Margins
The Company currently has negative gross margins on sales due in part to a
lack of sufficient infrastructure/production facilities to house sufficient
inventory to accommodate the ten to twelve month growth cycle for the
inventory of fish on the farm. Our current fish farming operations are
relatively small in scope, at approximately 275,000 lbs of production per
year. The Company’s operations have experienced a higher relative cost of
sales due to our inability to purchase in larger quantities, overall price
increases for fingerling stock, and operational size limitations. In order
for these conditions to change, our operations must capitalize on the
inherent benefits of economies of scale in significant cost items such as
fingerlings, feed and oxygen. Management has commenced expansion plans to
add further infrastructure to the existing forty-eight acre farm site to
expand our production significantly. Completion of this planned expansion
depends on our ability to raise additional capital for expansion and
working capital.
LIQUIDITY AND CAPITAL RESOURCES

32

 We intend to continue to find ways to expand our business through new
product development and introduction, increase capacity and possibly through
completing planned acquisitions. We believe that revenues and earnings will
increase as we grow. We anticipate that we will incur smaller losses in the
near future if we are able to complete the expansion of our existing farm
business and the marketing of our products and services now under
development. Our operating losses as shown may be perceived as alarming and
possibly indicate a downward spiral leading to the demise of the company;
however, from a management point of view, there is a positive side to the
operating losses. Our net loss decreased by almost 10 percent in 2008, and
the planned expansion of the South Farm will bring the farm operation into
a profitable status. The anticipated commercialization of our technologies
also will bring positive cash flow and profits in the next few years. In order
to accomplish this, we will need to raise additional capital on a timely basis,
and not the extended one year period for the last capital raise which precluded
many of the positive benefits anticipated when the raise began in March 2006.
We anticipate that we will need to raise an additional $5 million in working
capital in the short term to complete the expansion of the South Farm, which
is already underway, and to retire the outstanding debentures. We also
estimate that an additional $5 to $7 million will be needed to complete all
of the current development and testing of the Aqua-Sphere® and Ento-Protein®
technologies and bring them to a marketable state. Without the additional
capital, these requirement steps will not be possible, and the Company may be
unable to retire the debenture bonds when they come due in late 2008 and early
2009.
In addition, the Company has to date not paid the initial license fee required
under the worldwide license for the Aqua-Sphere® in the amount of $200,000 to
the licensors, Papadoyianis and Cherch, which means that the license can be
cancelled on notice and the technology recovered by the licensors. A notice
of default has been given as of September 1, 2008, but the Company hopes
to be able to continue to develop the market potential for the technology.
Loss of the rights to the Aqua-Sphere® technology represents a major loss in
the growth potential of the Company.
During the twelve months ended June 30, 2008 we generated a net loss of
($1,896,031). During the twelve months ended June 30, 2008, we used cash in
operating activities of $1,302,964, cash used in investing activities was
$377,837, and cash provided by financing activities was $487,252.
OFF-BALANCE SHEET ARRANGEMENTS.
We currently do not have any off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS.
We do not believe the adoption of recent accounting pronouncements discussed in
Note 1 to the consolidated financial statements will have a significant impact
on our results of operations, financial position, or cash flows.
ITEM 7.

FINANCIAL STATEMENTS.

33

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008 and 2007
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
C O N T E N T S
_______
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-2

FINANCIAL STATEMENTS
Audited Consolidated Balance Sheets

F-4

Audited Consolidated Statements of Operations

F-6

Audited Consolidated Statements of Cash Flows

F-7

Audited Consolidated Statements of Stockholders’
Equity (Deficiency in Assets)

F-7

Notes to Audited Consolidated Financial Statements

F-9

F-1

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Neptune Industries, Inc.
We have audited the accompanying consolidated balance sheets of Neptune
Industries, Inc. and Subsidiaries (the Company) as of June 30, 2008 and
2007, and the related consolidated statements of operations,
stockholders’ equity (deficiency in assets) and cash flows for the years
then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audit.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Neptune Industries, Inc. and Subsidiaries as of June 30, 2008 and 2007,
and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the financial statements, effective July 1,
2007, the Company changed its method of accounting for inventory costs.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a deficiency in assets
which raise substantial doubt about its ability to continue as a going
concern. Management’s plans in regard to these matters are also described
in Note 2 to the consolidated financial statements. The financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Berman Hopkins Wright & LaHam, CPAs and Associates, LLP
October 13, 2008
Winter Park, Florida

F-2

 NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
AUDITED CONSOLIDATED BALANCE SHEET
JUNE 30, 2008 and 2007
ASSETS

June 30,
2008

Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Deposits
Deferred Costs
Total Current Assets
Property and Equipment Net
Other assets
Total Assets

$

287,041
125,876
512,283
21,917
19,754
128,063
--------------1,094,934
693,907
27,709
--------------$ 1,816,550
===============

2007
$ 1,480,590
70,183
444,982
3,218
38,917
44,483
------------2,081,653
387,045
------------$ 2,468,698
=============

LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIENCY IN ASSETS)
Liabilities
Current Liabilities
Accounts payable
Accrued and other current
liabilities
Current portion long term debt
Notes Payable
Notes Payable-Officers
Convertible debentures
Total Current Liabilities
Long-term Liabilities:
Convertible notes
Long term debentures
Stock based compensation
Total Long-Term Liabilities
Total Liabilities

$

203,139

$

90,347

585,888
461,088
89,888
2,291,000
-------------3,631,003

599,331
338
285,000
107,388
------------1,082,404

194,293
------------194,293

229,213
2,713,000
194,293
-------------3,136,506
-------------$ 4,218,910
--------------

$ 3,825,296
--------------

COMMITMENTS AND CONTINGENCIES (NOTES 2, 7 AND 8)

F-3

 Stockholders’ Equity (Deficiency in Assets)
Preferred Stock, $.001 par value,
5,000,0000 shares authorized, 582,500 and 0
shares issued and outstanding, respectively 583
Common Stock, $.001 par value
100,000,000 shares authorized,
25,351,631 and 19,966,199
issued and outstanding, respectively
25,352
Additional Paid-In Capital
7,005,339
Accumulated Deficit
(9,040,020)
-----------Total Stockholders’ Equity
(Deficiency in Assets)
(2,008,746)
-----------Total Liabilities and Stockholders’ Equity
(Deficiency in Assets)
$ 1,816,550
============

See accompanying notes.

F-4

-

19,966
5,183,450
(6,953,628)
------------(1,750,212)
------------2,468,698
=============

 NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
AUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30,
2008
2007
-------------------------Revenues:
Sales
Cost of Sales

$

638,599
781,070
-----------(142,471)
------------

Gross Loss
Expenses:
Advertising and marketing
Automobile and truck
Depreciation & amortization
Insurance
Office
Officers salary, related
taxes and benefits
Other operating expenses
Outside services
Professional fees
Public relations
Repairs
Salaries & wages
Stock based compensation
Utilities

4,319
27,055
2,600
75,826
6,289

$

Interest Expense
Other income
Total other net income
Loss before income taxes
Provision for income taxes
Net loss

$

Net loss per share (basic
and diluted)

$

Weighted average number of common
shares outstanding (basic
and diluted)

851,141
1,025,089
-----------(173,949)
-----------21,199
713
33,991
6,185

549,863
93,034
181,392
33,705
98,980
270
4,512
11,521
----------1,089,366
-----------

Total expenses
Loss before interest and
income taxes

$

354,308
334,622
539,952
26,118
114,823
194,293
10,442
-----------1,636,646
------------

(1,231,837)

$ (1,810,594)

(694,349)
30,155
----------(664,194)
----------(1,896,031)
----------(1,896,031)
===========

(434,380)
88,234
-----------(346,146)
-----------(2,156,740)
-----------$ (2,156,740)
============

(0.08)
===========
23,111,174
===========

See accompanying notes

F-5

$

(0.17)
===========
12,499,548
===========

 NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
June 30,
2008
2007
----------- ---------CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss
$
(1,896,031) $(2,156,740)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization
73,106
68,160
Common stock issued for interest
454,276
305,642
Common stock exchanged for services
62,538
447,526
Stock based compensation
194,293
(Increase) decrease in assets:
Accounts receivable
(55,693)
(1,763)
Inventory
(289,824)
53,506)
Prepaid expenses
(18,699)
(2,113)
Deposits
18,443
(21,817)
Deferred costs
(83,580)
(15,904)
Investment in SFA (lease)
(10,000)
Increase (decrease) in liabilities:
Accounts payable
112,792
(47,976)
Accrued and other current liabilities
534,798
198,312
----------- ---------Net cash used by operating activities
(1,097,874)
(978,874)
----------- ---------CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment
Net cash provided (used) by investing
activities

(377,837)
----------

21,836)
----------

(377,837)
-----------

(21,836)
----------

100,000
200,000
(17,500)
(338)
---------282,162
----------

110,949
(252,500)
17,500
2,213,000
(1,851)
---------2,205,362
----------

CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock
Proceeds from convertible notes
Payments on convertible notes
Proceeds from long-term debt-related party
Proceeds from debentures
Payments on long-term debt
Net Cash provided by financing activities
Net Increase (Decrease) in
cash and equivalents
Cash and equivalents-beginning

(1,193,549)
1,480,590
---------$
287,041 $
==========

Cash and equivalents-ending

F-6

1,204,652
275,938
---------1,480,590
==========

 SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest
Income taxes

$
$

See accompanying notes.

F-7

55,503
-

$
$

40,600
-

 NEPTUNE INDUSTRIES INC.
AND SUBSIDIARIES
AUDITED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED June 30, 2008 AND 2007

Balance 6/30/2006
Shares issued on
conversion of
preferred
Shares issued to
pay interest
Shares issued for
services (net)
Shares issued as
Incentive
Net loss for the
year ended

Common Stock
Preferred Stock
Shares
Amount Shares
Amount
---------- -------- ------- --------11,349,269 $11,349 5,000,000
$5,000

6,000 000

6,000(5,000,000)

(5,000)

Total
Stockholders
Equity
Paid-In Accumulated
(Deficiency)
Capital
Deficit
in Assets
--------- ---------------------$ 4,433,899 $(4,796,888)$ (346,640)

(1,000)

-

-

870,680

871

-

-

304,771

-

305,642

1,600,000

1,600

-

-

445,780

-

447,380

146,250

146

-

-

-

-

146

- (2,156,740)(2,156,740)
==============================================================================
Balance 6/30/2007 19,966,199
19,966
5,183,450 (6,953,628)(1,750,212)
Inventory
Revaluation
Shares issued for
cash
Shares issued on
conversion of
debt
Shares issued as
payment of
interest
Shares issued in
payment for
consulting
Shares issued for
acquisition
Shares issued as
Compensation
Net loss for the
Year 6/30/2008
Balance 6/30/2008

-

-

-

-

-

(190,361)

(190,361)

-

-

100,000

100

99,900

-

100,000

2,365,624

2,366

482,500

483

1,186,902

-

1,189,751

1,453,308

1,453

-

-

454,276

-

455,729

500,000

500

-

-

49,500

-

50,000

124,000

124

-

-

19,716

-

19,840

942,500

943

-

-

11,595

-

12,538

-(1,896,031)(1,896,031)
=============================================================================
25,351,631
25,352
582,500
583
7,005,339 (9,340,020)(2,008,746)

See accompanying notes.

F-8

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007
(AUDITED)
NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Organization and nature of operations
Neptune Industries, Inc. (the Company) is a Florida corporation which conducts
business from its headquarters in Boca Raton, Florida. The Company was
incorporated on May 8, 1998 and in February 2004, changed its name from Neptune
Aquaculture, Inc. to Neptune Industries, Inc. Since that time, the Company’s
main activities have been devoted to raising capital; implementing its business
plan; commencing operations through its subsidiary, Blue Heron Aqua Farms, LLC;
developing, testing and patenting (pending) the Aqua-Sphere® and Aqua-Cell
(formerly known as S.A.F.E. ) technologies; and completing the food science
bio-technology research to discover a suitable protein substitute for fish meal
in animal diets.
In June 2001, the Company acquired the operating rights to a 48 acre
established fish farm in Florida City, Florida to be operated as Blue Heron
Aqua Farms, LLC. The farm maintains a 47,000,000 gallon per day water usage
permit and a twenty year lease from South Florida Water Management District,
with 8 years remaining. This site has become the cornerstone of the Company’s
South Florida operations with its extensive infrastructure and future potential
for hatchery facilities for fingerling production.
Common shares of the Company, are listed on the OTC Bulletin Board and on the
OTC Pink Sheets under the trading symbol NPDI.
Basis of Presentation
The consolidated financial statements include the accounts of Neptune
Industries, Inc. and its wholly-owned subsidiaries, Aqua Biologics, Inc.,
and BH Holdings, Inc., which in turn has two operating subsidiaries whose
accounts are also consolidated, Blue Heron Aquaculture, Inc. and Florida
Aquaponics, Inc. The results of operations of Blue Heron Aqua Farm, LLC, in
which the Company holds a 99+ percent interest, are consolidated through the
period ended December 31, 2007, when it ceased all further operations and
transferred its assets and liabilities to Blue Heron Aquaculture, Inc.
All inter-company balances and transactions have been eliminated at
consolidation.
Cash and Cash Equivalents
The company considers all highly liquid investments with a maturity date of
three months or less at the time of purchase to be cash equivalents.
Property and Equipment
Property and equipment consists of equipment, leasehold improvements, office
furniture and vehicles which are stated at cost. Depreciation is based on the
estimated useful lives of the assets, ranging from five years to fifteen
years, using the straight-line method. Expenditures for maintenance and
repairs are charged to expense as incurred. Major improvements are
capitalized. Gains and losses on disposition of property and equipment are

F-9

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007
(AUDITED)
NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

included in income as realized.
Revenue Recognition
Sales revenue is recognized upon the shipment of merchandise to customers
or when a customer picks up product at the Company’s facilities.
Allowances for sales returns are recorded as a component of net sales in the
period the allowances are recognized.
Income Taxes
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement No. 109 (SFAS 109), Accounting for Income
Taxes. SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of the difference in events that have been recognized in the
Company’s financial statements compared to the tax returns.
As of June 30, 2008, the Company has more than $9 million of net operating
loss carry-forwards available to affect taxable income and has established a
valuation allowance equal to the tax benefit of the net operating loss carryforwards as realization of the asset is not assured. The net operating loss
carry-forwards may be limited under the change of control provisions of the
Internal Revenue Code, Section 382.
Advertising and marketing costs
Advertising and marketing costs are expensed as incurred. Advertising and
marketing expense was $4,319 and $0 for the years ending June 30, 2008,
and 2007 respectively.
Fair Value of Financial Instruments
Financial instruments, including cash, receivables, accounts payable, and
notes payable are carried at amounts which reasonably approximate their fair
value due to the short-term nature of these amounts or due to variable rates
of interest which are consistent with market rates.
Concentrations of Credit Risk and Economic Dependence
Financial instruments, which potentially subject the Company to a
concentration of credit risk, are cash and cash equivalents and accounts
receivable. The Company currently maintains its day-to-day operating cash
balances at a single financial institution. At times, cash balances may be in
excess of the FDIC insurance limits. At June 30, 2008, the Company did not
have cash on deposit exceeding the insured limit. The Company operates
domestically and internationally. The ability of the Company to collect the
amounts due from customers may be affected by economic fluctuations in each
of the Company’s customers’ geographic locations. To date, the Company has
had no significant bad debt losses, and therefore does not maintain any

F-10

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007
(AUDITED)
NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

reserve for bad debts.
Recent Accounting Pronouncement
In May, 2008, the Financial Accounting Standards Board (FASB) issued SFAS No.
163, Accounting for Financial Guarantee Insurance Contracts ‘ An interpretation
of FASB Statement No. 60. SFAS No. 163 by its terms applies to insurance
companies and financial guarantee insurance contracts. SFAS No. 163 does
not apply to the Company and will not have any effect on the Company’s
financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board’s amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles. The adoption of this statement is not expected to have
a material effect on the Company’s financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative
Instruments and Hedging Activities ‘ an amendment to FASB Statement No.
133. SFAS No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to
enable investors to better understand their effect’s on an entities’
financial position, financial performance, and cash flows. Entities are
required to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under Statement No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
It is effective for financial statements issued for fiscal years beginning
after November 15, 2008, with early adoption encouraged. The Company
engages in no hedging activities and has no derivative instruments. The
adoption of this statement is not expected to have a material effect on the
Company’s financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations. This statement replaced SFAS No. 141 and defines the acquirer
in a business combination as the entity that obtains control of one or more
businesses in a business combination and establishes the acquisition date as
the date that the acquirer achieves control. SFAS 141 (revised 2007)requires
an acquirer to recognize the assets acquired, the liabilities assumed, and
any non-controlling interest in the acquired entity at the acquisition date,
measured at their fair market values as of that date. SFAS 141 (revised 2007)
also requires the acquirer to recognize contingent consideration at the
acquisition date, measured at its fair value at that date. This statement is
effective for fiscal years, and interim periods within those fiscal years,

F-11

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007
(AUDITED)
NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

beginning on or after December 15, 2008. Earlier adoption is prohibited. The
adoption of this statement is not expected to have a material effect on the
Company’s financial statements.
In December 2007, FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements Liabilities ‘ an Amendment of ARB No. 51.
This statement amends ARB 51 to establish accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation
of a subsidiary. This statement is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. The adoption of this
statement is not expected to have a material effect on the Company’s financial
statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ‘ Including an Amendment of FASB
Statement No. 115. This statement permits entities to choose to measure many
Financial instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities elect the fair value option.
However, the amendment to SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, applies to all entities with available-for-sale
and trading securities. SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007, provided the
entity also elects to apply the provisions of SFAS No. 157, Fair Value
Measurements. The adoption of this statement is not expected to have a
material effect on the Company’s financial statements.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss attributable to
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share takes into
consideration shares of common stock outstanding (computed under basic loss
per share) and potentially dilutive shares of common stock. In periods where
losses are reported, the weighted average number of common shares outstanding
excludes common stock equivalents, because their inclusion would be antidilutive.
Long-Lived and Disposal of Assets
The Company follows FASB Statement No. 144 (SFAS 144), Accounting for the
Impairment of Long-Lived Assets. SFAS 144 requires that long-lived assets
to be held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held and used
are recognized based on the fair value of the asset. Long-lived assets to be
disposed of, if any, are reported at the lower of carrying amount or fair
value less cost to sell.

F-12

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007
(AUDITED)
NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

Stock Compensation for Services Rendered
The Company has issued restricted shares of common stock to non-employees in
exchange for services rendered. Common stock issued to non-employees for
services received are based upon the fair value of the services or equity
instruments issued, whichever is more reliably determined.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market. The inventory consists of seafood, feed, chemicals, and overhead
costs, such as utilities. Overhead is allocated to inventory based on the
number of pounds of fish included in ending inventory. Inventory at June 30,
2008 and 2007 consisted of the following:
2008

2007

Work in process (fish) $
Raw materials

492,529
19,754
----------$
512,283

$

245,758
199,224
----------$ 444,982

Effective July 1, 2007, the beginning of the current fiscal year, the Company
changed its method of accounting for its inventory, by adopting a process
Inventory system. Under this system, all direct costs of production and the
cost of raw materials used each month are allocated to the separate raceways
and tanks on the farms in proportion to the number of pounds in each against
the total pounds of fish on the farm at the end of each month. This results
in a direct cost allocation to each tank and raceway each month, based on the
total actual costs for the month. As fish are harvested, the costs allocated
to each tank or raceway from which fish are harvested are then charged to cost
of sales, on a proportionate basis.
Inventory as reported on the June 30, 2007 audited financial statements
was $420,926, exclusive of raw materials, and there were 135,931 pounds of
growing fish on hand, resulting in a cost per pound of approximately $3.10, an
amount substantially in excess of the average selling price of $2.85 per pound.
This higher cost is a direct result of the several years of double counting of
certain costs in measuring inventory under the previous system. Actual costs
for the inventory in the opinion of management was approximately $2.20 per
pound, based on actual costs incurred as well as general cost information
available for other producers. Accordingly, management has determined that July
1, 2007 inventory should be reduced to $222,523 a reduction of $222,459. This
reduction in value has been charged directly to the accumulated deficit of the
Company, because the Company was unable to determine the period-specific effects
of the accounting change, for lack of information measuring the requisite
amounts in prior periods. This reporting is in conformity with FASB 154,
Accounting Change and Error Corrections, Interpretation No. 1.

F-13

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007
(AUDITED)
NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

Inventory at July 1, 2007 consisted of the following, as a result of this
write down:
Work in process
Raw materials
Total

$
$

198,466
24,057
222,523

No lower of cost or market inventory reduction was necessary at June 30, 2008.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts in
the financial statements. Actual results could differ from those estimates and
assumptions.
Deferred costs
Legal fees and other external costs incurred in securing patents are
capitalized and amortized over the life of the related patents.
NOTE 2.

GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company’s financial
position and operating results raise substantial doubt about the Company’s
ability to continue as a going concern, as reflected by the accumulated
deficit of $9,040,020 and recurring gross and net losses. The ability of the
Company to continue as a going concern is dependent upon expanding operations,
increasing sales and obtaining additional capital and financing. Managements
plan in this regard is to secure additional funds through future equity
financings. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
NOTE 3.

PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:
2008
------------Vehicles
$
-----Computer and office equipment
8,888
Equipment
834,251
Leasehold improvements
351,112
------------1,194,251
Accumulated depreciation
(500,344)
------------Property and equipment, net
$
693,907
=============

F-14

2007
----------$
17,578
8,888
637,210
152,738
-----------816,414
(429,369)
------------$
387,045
=============

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007
(AUDITED)
NOTE 3

PROPERTY AND EQUIPMENT (continued)

Total depreciation expense for the years ended June 30, 2008 and 2007,
amounted to $89,039 and $66,972, respectively. Of these amounts, $88,314
and $66,259 are included in cost of sales and $490 and $468 are
included in expenses for the years ended June 30, 2008 and 2007,
respectively. Amortization expense of $2,131 also was recorded in the
year ended June 30, 2008 representing the investment in South Florida
Aquaculture, Inc., to acquire the remaining term of the lease for the
farm property, which is being amortized over the remaining lease term.
NOTE 4.

ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other liabilities consisted of the following:

Accrued payroll - officers
Accrued interest - officers
Accrued interest - others
Accrued-other

NOTE 5

2008
-----------$
198,316
127,941
181,129
78,502
-----------$
585,888
============

2007
-----------$
487,850
83,467
28,014
-----------$
599,331
============

ACCRUED OFFICERS’ COMPENSATION AND INTEREST

Effective February 8, 2000, the Company entered into five-year employment
agreements (the Agreements) with two key members of management. In April, 2007,
the Board of Directors approved new employment agreements for 5 years and
approved the modification of Paragraph ‘a’ of Schedule ‘A’ whereby Mr.
Cherch and Mr. Papadoyianis would be entitled to an annual bonus of $25,000
each providing that annual gross revenues of the Company exceed $810,000. When
annual revenues exceed $810,000 by more than 10%, then each shall be entitled
to receive 120% of the $25,000 bonus for that year. In the event the annual
gross revenues are 10% less than $810,000 the bonus shall be reduced by 20%.
Furthermore, if the gross revenues are 20% less than the $810,000 then the
bonus shall be reduced by 40%. There would be no bonus paid if the gross
revenue is more than 20% below the $810,000 figure. The Agreements also provide
that the two key members of management are entitled to and automatically
receive a cost of living adjustment calculated in proportion to the upward
change in the consumer price index U.S. Average All Items (1967=100),
published by the U.S. Department of Labor.
On October 1, 2007, the independent members of the Board of Directors approved
new employment agreements for Papadoyianis and Cherch providing for salaries of
$250,000 each, plus the same bonus structure. However, the officers agreed to
initially defer approximately 40 percent of the salaries due until the Company
resources are better. Additionally, the officers met in March, 2008 and
voluntarily agreed to once again defer an additional 40% of their salaries to
help the company until further funding could be raised. The officers are

F-15

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007 (AUDITED)
NOTE 5

ACCRUED OFFICERS’ COMPENSATION AND INTEREST (Continued)

actually receiving salaries substantially less than those they received in 2005
and 2006.
Pursuant to these employment agreements, the Company accrued a total of
$198,316 and $354,399 through the years ended June 30, 2008 and 2007,
respectively. Cash compensation actually paid was $272,260 and $223,804 for
the years ended June 30, 2008 and 2007, respectively. During the quarter
ended June 30, 2008, each officer was entitled to compensation of $62,500,
and actually received $22,020, or approximately one-third of the amount due.
The Agreements also provide for accrued interest of twelve percent (12%) per
annum until the employee’s salary, bonuses and benefits are paid in full.
The Company contracted with CF Consulting LLC to provide principal financial
officer services beginning April 1, 2006, in return for monthly
compensation of $5,500 for six months commencing April 1, 2006, $6,000 for
the next six months and $6,500 for the next six months of the 18 month term
of the agreement, ending September 31, 2007. CF Consulting also received
250,000 shares of stock, valued at $15,000 based on the lack of tradability
of the shares and other factors. On October 1, 2007, the Board of Directors
approved a new consulting contract with CF Consulting, LLC providing for
monthly consulting fees of $16,667. CF Consulting also agreed to receive less
than the full consulting fee due as a result of the financial condition of the
Company. As a result, a total of $78,503 in consulting fees were accrued and
not paid for the fiscal year ended June 30, 2008. For the quarter ended June
30, 2008, CF Consulting was entitled to consulting fees of $50,000, but
received only $18,000, or approximately 36 percent of the amount due. The
Agreements also provide for accrued interest of twelve percent (12%) per annum
until the amount due is paid in full. A total of $78,503 has been accrued as
due under the agreements with CF Consulting, LLC as of June 30, 2008.
NOTE 6.

RELATED PARTY TRANSACTIONS

Notes Payable Officers
During the fiscal year ended June 30, 2002, the Company entered into an
agreement to retire the outstanding preferred stock with Messrs Papadoyianis
and Cherch in exchange for $100,000. The Company paid $30,000 and the
remaining $70,000 was converted to a note payable accruing interest at a rate
of 8%. Accrued interest on this note was later converted to preferred stock.
On February 7, 2006, the Board of Directors resolved to repay the notes
outstanding to Messers. Papadoyianis and Cherch through the issuance of new
notes, which were made retroactive to January 1, 2006, bear interest at the
rate of 15% per annum, and include one warrant for every dollar outstanding,
or 70,000 total warrants. Each warrant to purchase one share of common stock
is at a price of $0.30 per share for a period of three years. The new notes
were in the amount of $44,944 each, include repayment of principal of
$35,000 and accrued interest of $9,944 each, and are included in Notes PayableOfficers.

F-16

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007
(AUDITED)
NOTE 7.

NOTES PAYABLE

During the quarter ended June 30, 2008, the Company renewed three outstanding
promissory notes due to unrelated parties, by executing new notes in the
original principal amounts of the prior notes, plus accrued interest. The
notes were all one year notes, and bear interest at 12 percent per annum. A
total of $261,088 in principal amount is due on these notes. In addition, the
Company borrowed a total of $200,000 from an unrelated lender for one year at
12 percent on April 9, 2008 and issued 200,000 warrants to purchase common
shares of the Company for three years at $0.30 per share.
Also during the fiscal year, a total of $422,000 in convertible debentures
elected to convert to common stock at the contractual conversion price of $0.30
per share, and a total of 1,406,666 common shares were issued as a result. A
total of $2,291,000 in convertible debentures remain outstanding after the
conversions. In May, 2008, four of the debentures, totaling $500,000 came due.
Three of the debenture holders agreed to extend the due date for one year, and
the fourth, in the amount of $250,000, agreed to extend the due date until
December 15, 2008.
NOTE 8.

STOCKHOLDERS' EQUITY

During the fiscal year ending June 30, 2008, the Company issued a total
of 5,385,432 common shares, increasing the total number of common shares
outstanding from 19,966,199 at June 30, 2007 to 25,351,631 common shares at
June 30, 2008. Of these additional common shares, 124,000 shares were issued
for the acquisition of South Florida Aquaculture, Inc., 1,453,308 shares were
issued in payment of accrued interest, 942,500 shares were issued for services,
500,000 shares were issued for outside investor relations services, and
2,365,624 common shares were issued on conversion of convertible debentures
and other liabilities.
NOTE 9.

WARRANTS

The Company issued 200,000 and 2,688,463 warrants in conjunction with the
issuance of its securities and convertible debt during the years ended June 30,
2008 and 2007, respectively. Warrants that were issued did not have a life
that exceeds five years. No options or warrants were issued during the fiscal
year ended June, 2008 except for 200,000 warrants to purchase common shares at
$0.30 per share, issued in connection with a loan of $200,000 to the Company by
an unrelated party.
Information regarding warrants and options to purchase common shares is
summarized below:

F-17

 NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING JUNE 30, 2008 AND 2007
(AUDITED)
NOTE 9.

WARRANTS

(Continued)

Warrants and Options
--------------------Outstanding at July 1, 2006
Granted
Cancelled/Forfeited
Expired
Exercised
Outstanding at June 30, 2007
Granted
Cancelled/Forfeited
Expired
Exercised
Outstanding at June 30, 2008

Number of
Options and
Warrants
-----------8,401,957
2,688,463
-----------11,090,240
200,000
-----------11,290,240

Weighted Average
Exercise Price
Per Share
---------------$
0.35
$
0.47
---------------$
0.38
$
0.30
---------------$
0.38

The following table summarizes information about outstanding warrants and
options for common stock at June 30, 2008:

Range of Exercise
----------------$
0.30 - 0.50

NOTE 10.

Number
Outstanding
----------#
11,290,240

Weighted
Average
Weighted
Remaining Average
Average
Contractual Exercise Number
Exercise
Life (Years) Price
Exercised
Price
----------- -------- --------- --------#
$
#
$
4.92
0.38
-

MAJOR CUSTOMERS

Revenues from two customers comprised approximately 78 percent of revenues
during the period ended June 30, 2007, compared to the same two customers
comprising 86 percent for the prior period ending June 30, 2006.

F-18

 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None
ITEM 8A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer have concluded
that our disclosure controls and procedures as of June 30, 2008 were not
effective, as described below under the heading "Internal Control Over
Financial Reporting"), based on an the evaluation of these controls and
procedures pursuant to Rule 13a-15(b) of the Exchange Act.
Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is a process designed under the supervision of
the Company's Principal Executive Officer and Principal Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company's financial statements for external
purposes in accordance with U.S. generally accepted accounting principles.
As of June 30, 2008, management assessed the effectiveness of the Company's
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal Control’
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO") and SEC guidance on conducting such
assessments. Based on that evaluation, they concluded that, during the period
covered by this report, such internal controls and procedures were not
effective to detect the inappropriate application of US GAAP rules as more
fully described below. This was due to deficiencies that existed in the design
or operation of our internal control over financial reporting that adversely
affected our internal controls and that may be considered to be material
weaknesses.
The matters involving internal controls and procedures that the Company's
management considered to be material weaknesses under COSO and SEC rules were:
(1)
lack of a functioning audit committee, resulting in ineffective
oversight in the establishment and monitoring of required internal controls
and procedures; (2) inadequate segregation of duties consistent with control
objectives; (3) insufficient written policies and procedures for accounting and
financial reporting with respect to the requirements and application of US GAAP
and SEC disclosure requirements; and (4) ineffective controls over period end
financial disclosure and reporting processes. The aforementioned material
weaknesses were identified by the Company's Chief Financial Officer in
connection with the preparation of our financial statements as of June 30,
2008.
Management believes that the material weaknesses set forth in items (2), (3)
and (4) above did not have an effect on the Company's financial results.
However, management believes that the lack of a functioning audit committee,
resulting in ineffective oversight in the establishment and monitoring of
required internal controls and procedures, can impact the Company's financial
statements for the future years.

34

 We are committed to improving our financial organization. As part of this
commitment, we intend to create a position to segregate duties consistent with
control objectives and to increase our personnel resources and technical
accounting expertise within the accounting function when funds are available to
the Company, by: i) appointing one or more outside directors of our board of
directors to an audit committee of the Company resulting in a fully functioning
audit committee who will undertake the oversight in the establishment and
monitoring of required internal controls and procedures; and ii) preparing and
implementing sufficient written policies and checklists which will set forth
procedures for accounting and financial reporting with respect to the
requirements and application of US GAAP and SEC disclosure requirements.
Management believes that the appointment of one or more independent directors
to a fully functioning audit committee, will remedy the lack of a functioning
audit committee. In addition, management believes that preparing and
implementing sufficient written policies and checklists will remedy the
following material weaknesses: (i) insufficient written policies and
procedures for accounting and financial reporting with respect to the
requirements and application of US GAAP and SEC disclosure requirements; and
(ii) ineffective controls over period end financial close and reporting
processes. Further, management believes that the hiring of additional
personnel who have the technical expertise and knowledge will result proper
segregation of duties and provide more checks and balances within the
department. Additional personnel will also provide the cross training needed
to support the Company if personnel turn over issues within the department
occur. Management believes that this, coupled with the appointment of
additional outside directors, will greatly decrease any control and procedure
issues the company may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our internal
controls and procedures and our internal controls over financial reporting on
an ongoing basis and are committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management's report in this annual report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the small
business issuer's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 8B.

OTHER INFORMATION
PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(c) OF THE EXCHANGE ACT.

35

 Management during Fiscal Year Ended June 30, 2008
Names
Ernest D. Papadoyianis
X.T. ‘Sal’ Cherch

Title or Position
President, CEO and Chairman
COO/ Secretary/Treasurer and Director

Ages
49
74

ERNEST D. PAPADOYIANIS, CEO, PRESIDENT and CHAIRMAN
Mr.
Papadoyianis,
age 49, has
been
an active figure in
seafood/aquaculture for over twenty-two years. He has successfully
implemented his production strategies in a diversity of aquaculture
businesses throughout the world. He is the founder of Exotic Reef
Technologies, Inc., and Marcon Development Corporation, and co-founder of
Taurus Investments,
Ltd. And Aquaculture Specialties, Inc. Mr.
Papadoyianis was a former Director in S.M.A.R.T., Inc. and The Watermark
Corporation. He is also a member of the Board of Directors of the Striped
Bass Growers Association, where he represents that sector of the
industry.
He has formulated business plans and management strategies for a number of
prior and on-going businesses. His reputation as a top producer of quality
products is well substantiated in both the aquaculture and seafood
industries. He has appeared in, and has been interviewed for, numerous
industry publications including Fish Farming News, Fish Farming
International and the South Florida Business Journal. In May, 2005, he
appeared on the CNBC World Business Review with General Alexander Haig to
discuss environmentally friendly aquaculture technology.
Over the last 15 years, Mr. Papadoyianis has engaged in the
Development and capitalization of emerging businesses. He had structured
management teams and directed activities for new product development, design
and engineering of new technology applications, website and CD marketing
and promotional development, and international sales.
Mr. Papadoyianis has a Masters Degree in Biology from
Northeastern University. During this time, he was an integral part of a U.S.
Government funded research team which involved the New England Aquarium, and
explored the affects of drilling muds on benthic marine life. Shortly after the
completion of this study, he was invited to join a U.S. Government funded
research team from Harvard University. The team was formed to conduct an
oceanographic and ecological impact study on a U.S. Nuclear Defense testing
island in the South Pacific.
Mr. Papadoyianis has served as a production supervisor for a number
Of aquaculture businesses including S.P. Engineering, Quality Pet Supply,
O’Beirne Wholesale, and Aqualife Research Corporation. In this capacity, he has
initiated hatchery protocol for the breeding, production and sale of over 60
species of freshwater and marine fish and shrimp. Included in these are
certain food species including rainbow trout, coho salmon, tilapia,
freshwater prawns, and bluegills. He also developed his own hatchery business
in 1987 under Quality Pet Supply, where he supplied the bio-assay market with
marine fish and shrimp for environmental testing.
Throughout his career, Mr. Papadoyianis has succeeded in
Overcoming production problems at a diversity of aquaculture operations. His

36

 experience and technological know-how has led to production increases of 100
to 400% at all of his engagements, where dramatic improvements were
realized in survival, growth, coloration, and elimination of disease. His
experience with many fish and shrimp species has allowed him to become a
pioneer in the culture of a number of new species on the commercial level
as well. At the executive level, Mr. Papadoyianis has developed and
written fish farming protocols for the commercial production of marine tropical
fish and livestock.
Mr. Papadoyianis has consulted on a variety of existing and potential
farming businesses throughout the Caribbean, North America, and Europe.
XAVIER T. SAL CHERCH, CHIEF OPERATING OFFICER
Mr. Cherch, age 73, has over 50 years of business experience in
developing, initiating, and operating companies in a broad range of industries.
Over the last eight years, he has devoted himself exclusively to the
Aquaculture industry. He is the co-founder of Taurus Investments, Ltd. and
Aquaculture Specialties, Inc. He has served in an executive capacity for
a number of privately held and public companies including Ford Motor Company.
Mr. Cherch is the President and founder of Landa Financial Group, Inc. This
investment and holding company has interests in the electronic security and
access control industry including Low Voltage Systems, Inc., Holiday
Springs Alarms, and Security Consultants. He is the founder of Quest
International, Inc. and Meter Maid, Inc., and is the former owner of Corporate
Consultants, Inc.
Mr. Cherch has been responsible for the formation and funding of
several private companies, which he brought to the public as IPOs. He founded
and was CEO of National Early Warning Systems, Inc. (N.E.W.S.), OTC, National
Electronics and Design, Inc., OTC, and served as an executive officer of Lancer
Industries, Inc., AMEX. Mr. Cherch was instrumental in the design and patenting
of several products for Lancer Industries and its subsidiary Universal
Fiberglass Industries, Inc. These products were the basis upon which both
companies built manufacturing and distribution networks in the United States
and Europe. In addition, Mr. Cherch owns or has patents pending on several
other products.
Mr. Cherch
Teachers College.

attended Seton Hall University and Montclair State

DIRECTORS DURING FISCAL YEAR ENDED JUNE 30, 2008.
In addition to Mr. Papadoyianis and Mr. Cherch, our directors during the fiscal
year ended June 30, 2007 were:
WILLIAM H. RYAN, DIRECTOR
Mr. Ryan, age 50, is the Chief Executive Officer of Ryan Golf and Bryant
Midwest and President of Ryan Incorporated Southern and Ryan Sales and Service,
which are family owned and operated businesses that specializes in residential,
commercial and industrial site development and construction work, golf course
construction and quarry operations. The Ryan companies are generally ranked in
the top 100 U.S. specialty contractors. Mr. Ryan has BS degree from Boston
College and an MBA from the University of Miami. He has also been Chairman of
the Florida Chapter of the Young Presidents Organization and is a member of

37

 the Chief Executives Organization and a certified General Contractor in the
State of Florida. Mr. Ryan’s Company, Bridgeview Estates Development
Company, was a joint venture partner with Neptune Industries under Aquaculture
Specialties, Inc. (Aquaculture Specialties, Inc. recently completed a name
change to Aqua Biologics, Inc.), for almost 3 years from 1998 to 2001. The
joint venture designed and operated a 32 pen floating quarry lake farm where
the company successfully raised hybrid striped bass, koi, tilapia, and channel
catfish.
DON C. TEWKSBURY, DIRECTOR
Mr. Tewksbury, age 64, is the founder and President of New England Pet Centers
whose subsidiaries are Debby’s Petland, a twelve store chain of full line pet
stores, and Quality Pet Supply. Quality Pet Supply is a full-line pet and pet
supply distributor representing over 100 manufacturers of pet supplies and a
complete freshwater and saltwater fish, small animal, bird, and reptile holding
and distribution center. In the winter of 1994, Mr. Tewksbury opened The Pet
Club, a 36,000 square foot super store/cash and carry wholesale pet center in
Massachusetts which focuses on tropical fish and supplies. This wholesale and
Retail enterprise is one of the largest in the Northeast in both size and sales
volume.
Mr. Tewksbury is a national pet industry leader and has represented the retail
industry on the Board of Directors of the Pet Industry Joint Advisory Council
(PIJAC) which is a federation of leading pet industry retailers, distributors,
livestock breeders and importers, manufacturers and associations. He was the
state coordinator of PIJAC for Massachusetts and New Hampshire. In 1975, he was
selected as the industry representative to participate in drafting the original
pet store licensing legislation and represents the Massachusetts pet industry
today on a task force updating current pet store regulations.
JAMES M. HARVEY, DIRECTOR
Mr. Harvey, age 62, was the Chairman and CEO of South Florida Aquaculture, Inc.
and has been an active figure in the State of Florida aquaculture and
water resource policy. Mr. Harvey is a consultant for North American
Strategies (formerly Florida Government Strategies), a consulting practice
centered on natural resource management, energy land use, and water supply
planning in Florida and eastern Canada. Clients include numerous groups
interested in environmental water needs of Everglades and Florida Bay, as well
as an important Indian tribe, educational and health care clients. Throughout
his career in South Florida, Mr. Harvey has lobbied hundreds of bills through
the Florida Legislature.
Prior to joining Florida Government Strategies in 1992, Mr. Harvey was the
Planning Department Director for the South Florida Water Management District,
where he was responsible for the development of local government programs to
solve joint water management and land use problems through cooperative
partnerships. He designed and implemented an interdisciplinary planning
department to better plan for South Florida’s water future and worked closely
with the District Governing Board as a senior manager. He was responsible for
the daily operations of the plans to improve Biscayne Bay, Indian River
Lagoon, and Lake Okeechobee. Mr. Harvey served as Executive Director in 1999
and assisted Governor Jeb Bush implement the Everglades Restoration Program
and directed the Agency’s 1800 employees and 900 million dollar budget.
From 1983 to 1985, Mr. Harvey served as Deputy Executive Director for the

38

 Southwest Florida Water Management District where he directed planning,
administration, and management of all facets of the District=s planning,
financial budgetary, public information, land acquisition, and field
operations. He managed a 16 county, 300 employee agency requiring a $30
million annual budget.
Mr. Harvey is, and has been, an advisor to or officer of, numerous government
and environmental organizations including: Chairman, Vice Chairman and
Secretary of the Florida Conservation Association; Advisor to the Governors
Commission for a Sustainable South Florida; Member of the Planning and Resource
Management Committee for the Florida Keys; Member of the Save the Manatee
Committee; and the Florida Aquaculture Review Council, and The Habitat
Advisory Council of the US Department of Commerce South Atlantic Fishery
Management Council. Mr. Harvey has a B.A. in Political Science from Delta
State University, and an M.S. in Urban Planning form Florida State University.
Board Committees
We do not currently maintain committees of the Board of Directors, including
an independent audit committee of the Board of Directors. We also have not
currently identified a financial expert on the Board of Directors.
Code of Ethics
The Company has not yet adopted a Code of Ethics but anticipates doing so
following the election of the new Board of Directors at the Annual Meeting of
the Company.
Other Advisers and Consultants
CF Consulting, LLC, Principal Financial Officer Consulting Services
CF Consulting, LLC provides financial and legal consulting services to the
Company under a Consulting Agreement dated October 1, 2007, including
providing a designated representative to serve as principal financial officer
and corporate counsel for the Company. Robert Hipple, age 64, an attorney
and senior executive with 35 years experience as president and chief
executive officer, chief financial officer and general counsel, as well as a
director, for several public (NYSE, AMEX and NASDAQ) companies, has been the
representative designated by CF Consulting, LLC.
ITEM. 10. EXECUTIVE COMPENSATION.
During the fiscal year ended June 30, 2008, Mr. Cherch and Mr. Papadoyianis
were entitled to compensation in the amount of $232,563 each for the fiscal
year ended June 30, 2008 under the employment agreements signed by each of
them with the Company. A portion of the salaries due have been deferred by
agreement due to the Company’s cash position and have been accrued during the
fiscal year ended June 30, 2008 for future payment. The accrued portion of the
total salaries ($99,158 each) representing 42.6 percent of the amounts due
each, is included in Accrued and Other Current Liabilities on our financial
statements. The Company also agreed with CF Consulting, LLC to defer a portion
of the total consulting fees due of $169,502 for the fiscal year ended June 30,
2008, again due to the cash position of the Company. A total of $78,503 has
been accrued as of June 30, 2008 under this agreement, or 46.3 percent of the
amount actually due.

39

 SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
SUMMARY

COMPENSATION

TABLE

In fiscal years ended June 30, 2008 and 2007, respectively, two of our
officers were entitled to compensation in excess of $100,000, as reflected in
the table below. There were no stock options, warrants or similar grants to
any officer or director, made during the fiscal year ended June 30, 2008,
The following table provides certain summary information concerning
The compensation earned by the named executive officers (determined as of the
end of the last fiscal year) for services rendered in all capacities
to the Company and its subsidiaries:
ANNUAL COMPENSATION
------------------------

NAME AND
PRINCIPAL
POSITION

FISCAL
YEAR
F1

LONG TERM COMPENSATION
-------------------------------AWARDS
PAYOUTS
-------------------------RESTRICTED
SECURITIES
OTHER ANNUAL STOCK UNDERLYING
LTIP
ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS
COMP.
F2
F3
($)

($)
Ernest Papadoyianis
2006 180,250
0
2007 180,250
23,824
2008 235,563
0
X.T. ‘Sal’ Cherch
2006 180,250
0
2007 180,250
23,824
2008 235.563
0

F1
F2
F3

($)

(#)

($)

($)
0
0

0

0
0
0
500,000
200,000

0

0
0
0 500,000
200,000 0

0
0
0
0

0

($)
0
0
0

0
0
0

0
0
0

0

0

Refers to fiscal years ending June 30.
The amounts referred to as salary reflect salaries accrued for each
named officer and do not necessarily reflect amounts actually paid
during the fiscal year.
The amounts listed do not reflect amounts paid or due to CF Consulting,
LLC for its contracted consulting services, through which it provides
principal financial officer and corporate counsel services on a
consulting basis since neither CF Consulting nor any principal or
employee of CF Consulting is an officer, director or employee.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN
PRINCIPAL SHAREHOLDERS.

BENEFICIAL

OWNERS AND

MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of June 30, 2008, based on information
available to us, by (i) each person who is known by us to own more than 5%
of the outstanding Common Stock based upon reports filed by such persons with
the Securities and Exchange Commission; (ii) each of our Company’s directors;
(iii) each of the Named Executive Officers; and (iv) all officers and
directors of our Company as a group.

40

 Name

Shares of
Common Stock
----------------Ernest D. Papadoyianis (O,D)<F2> <F3> 5,260,560
Xavier T. Cherch (O,D)<F2> <F3>
5,224,377
Don C. Tewksbury (D)<F3>
25,000
James Harvey (D)<F3>
25,000
--------------All officers and directors,
as a group <F4>
10,534,937
---------------

Percentage<F1>
---------------20.75%
20.61%
---------------------41.56%
----------------

<F1>
<F2>

Based upon 25,351,660 shares outstanding at June 30, 2008.
Neptune Industries, Inc. had two classes of preferred stock issued
and outstanding at June 30, 20086. The Class A Preferred Stock was a
voting, convertible preferred stock which was issued to Ernest
Papadoyianis (200,000 shares) and X.T. ‘Sal’ Cherch (200,000 shares) in
payment and satisfaction of accrued salaries and expenses totaling
$400,000 owed to them by the company. The Class A Preferred Stock
is convertible into common shares on the basis of ten shares of common to
each share of preferred, or a total of 4,000,000 shares if fully
converted, and votes on a par with the common stock as if converted. On
a fully converted basis, Mr. Papadoyianis has 24.74% of the voting power,
Mr. Cherch has 24,61% of the total voting power.
<F3> The addresses for all officers and directors is care of the Company at
21218 St. Andrews Blvd., Suite 645, Boca Raton, FL 33433.
<F4> CF Consulting, LLC provides contract principal financial officer and
corporate counsel services to the Company, but neither it nor any
representative are an elected officer or a director of the Company.
Robert Hipple serves as the designated representative of CF Consulting,
LLC under the consulting agreement. He owns 2,179 common shares of the
Company directly. Mr. Hipple’s wife owns 16,834 Common shares purchased
in the open market, and CF Consulting, LLC, owns 647,958 common shares
and 82,500 Series A Preferred shares issued in payment of $82,500 in
accrued fees, as to all of which Mr. Hipple disclaims beneficial
interest.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 3, 2008, the Company entered in to a new licensing agreement with Mr.
Cherch and Mr. Papadoyianis to continue the licensing of the Aqua-Sphere®
technology. The prior license had been signed in 1997 and had provided for a
limited use of the technology owned by the two inventors in North America only,
but with a right of first refusal for other geographic territories. Royalties
were deferred for the first 5 years of the license term, but then began to
accrue, and a total of $100,000 was owed to each inventors at June 30, 2008.
By agreement this amount was not accrued and was waived as part of the new
license.
The new license was negotiated and approved by the independent members of the
Board of Directors, acting as an Executive Committee, without the involvement
of Mr. Papadoyianis or Mr. Cherch, and provides for the exclusive worldwide
rights to use, develop, manufacture, market, sell and distribute the AquaSphere’ to Neptune for the license term. The license rights were then
immediately assigned to Neptune’s technology subsidiary, Aqua Biologics, Inc.,
which has continued the previous development and research activities.

41

 The new license provides for an initial advance royalty payment equal to
$200,00, payable $100,000 at signing and the remaining $100,000 in July 2009,
with interest, plus 500,000 shares of Series C Convertible Preferred Stock to
Each of the inventors, convertible into 5,000,000 common shares. Although the
Series C Convertible Preferred Shares were issued on July 3, 2008, the Company
was unable to make the initial advance royalty payment of $100,000 on July 3,
2008. On September 1, 2008, the two inventors, Mr. Papadoyianis and Mr.
Cherch, gave written notice of default to the Company based on the non-payment
in order to preserve their rights as the inventors.
ITEM 13. EXHIBITS.
3.5.*

Articles of Merger of Move Films, Inc. into Neptune
effective June 9, 2005.

Industries,

Inc.

3.6.*

Articles of Incorporation of Neptune Industries, Inc.

3.7.*

By-laws of Neptune Industries, Inc.

10.1

World License Agreement for Aqua-Sphere® technology

10.2

Employment Agreement dated October 1, 2007 with Ernest Papadoyianis

10.3

Employment Agreement dated October 1, 2007 with Xavier T. Cherch

21

List of Subsidiaries

31

Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act

31.1

Certification of principal financial officer pursuant to Section 302
of the Sarbanes-Oxley Act

32

Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act

* Exhibits were previously filed.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following is a summary of the fees billed to us by our current auditors
Berman, Hopkins, Wright & LaHam CPAs and Associates, LLP for professional
services rendered for the year ended June 30, 2008 and 2007:
Service
2008
2007
-------------------------------------------- ---------- ----------Audit Fees
$
17,759
$
6,469
Audit-Related Fees
Tax Fees
All Other Fees
----------- ----------Total
$
17,759
4 6,469
=======================
Audit Fees - Consists of fees billed for professional services rendered for the
audits of our financial statements, reviews of our interim financial statements
included in quarterly reports, services performed in connection with filings

42

 with the Securities & Exchange Commission and related comfort letters and other
services that are normally provided by our auditors in connection with
statutory and regulatory filings or engagements.
Tax Fees - Consists of fees billed for professional services for tax
compliance, tax advice and tax planning. These services include
assistance regarding federal, state and local tax compliance and
consultation in connection with various transactions and acquisitions.
Audit Committee Pre-Approval of Audit and
Of Independent Auditors

Permissible

Non-Audit

Services

The Company currently does not maintain an independent Audit Committee,
but intends to appoint an Audit Committee as soon as possible, given its
current resources.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Neptune Industries, Inc. has duly caused this annual report on
Form 10-KSB to be signed on its behalf by the undersigned, hereunto duly
authorized.
Neptune Industries, Inc.
By: /s/ Ernest Papadoyianis
----------------------Ernest Papadoyianis
President and Chief Executive Officer

Dated:

October 13, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
issuer and in the capacities and on the dates indicated.
/s/ Ernest Papadoyianis
----------------------President and Chief Executive Officer

October 13, 2008

/s/ X. T. ‘Sal’ Cherch
-------------Director and Treasurer

October 13, 2008

/s/ William H. Ryan
----------------Director

October 13, 2008

/s/ James M. Harvey
------------------Director

October 13, 2008

/s/ Don C. Tewksbury
------------------Director

October 13, 2008

/s/ Eric Jager
------------------Director

October 13, 2008

43