Promotion Story from Cradle to Grave

[Note: This article was written on April 17, 2017, and all amounts and figures reflect data on that date.]

The story of NexOptic ((OTCQB:NXOPF) (TSXV: NXO)) is all about stock promotion. The Grumpy Bear will establish how aggressive promotion is central to NexOptic’s birth, rise and, we believe, its impending fall. The ride thus far has been rosy with the stock up 250% this year and now with a $300 million pro forma valuation; the Grumpy Bear believes the next leg looks fraught with extreme risk because, in its opinion, the promoters are overselling the technology’s potential. The company’s only asset is an option to acquire Spectrum Optix (“Spectrum”) – a company that is managed out of a house in Calgary. The company appears to be spending relatively little on R&D and does not seem to own any patents or marketable products. Compared to related technologies being developed at Harvard and NASA, NexOptic’s technology looks like a backyard science experiment to the Grumpy Bear. The management team lacks tech expertise, and the Board is run by a chairman who has been actively selling stock. To complete the acquisition of Spectrum, NXO will need to massively dilute shareholders, issuing 36 million shares currently worth $85 million. As early shareholders and insiders dump their stock, the Grumpy Bear believes NXO has 88% downside to $0.52/share.

NexOptic was born with the help of Aaron Hoddinott, Co-founder of Pinnacle Digest

Aaron Hoddinott appears to have been central in consummating the deal that brought Spectrum and NexOptic together (more to come on this relationship) – Hoddinott owned 8% of Spectrum at the time of the transaction, potentially worth $6 million today. It was not disclosed why Hoddinott was granted such a significant stake, but it and this blog post suggests that he played an important role in this story from the very beginning. He was even shown with the Spectrum Optix and NXO management teams in an April 2016 Calgary Herald article.

Hoddinott is a co-founder of Pinnacle Digest, which describes itself as “an online financial newsletter for speculators and small-cap investors.” Pinnacle Digest gets paid by companies for advertising, marketing or similar services and states that “all information we prepare on these companies should be considered biased.” To be clear, Pinnacle Digest is not being paid to promote NXO. However, both Aaron Hoddinott and another co-founder of Pinnacle Digest, Alexander Smith, are connected in various ways to NXO and Spectrum Optix. In addition, as noted below, NXO and Pinnacle Digest share the same office space. Therefore, the Grumpy Bear believes it is important for investors to understand the backgrounds of Hoddinott and Smith and their involvement in NXO.

There also appear to be other connections to Pinnacle Digest. Paul McKenzie, CEO of NXO, is on the board of Challenger Deep (now known as DeepMarkit) and Arnold Armstrong, chairman of NXO, is the chairman of Doxa Energy, two companies that paid Pinnacle Digest for advertising services and have performed very poorly (down an average of 88% – Appendix A).

The Grumpy Bear sent a draft copy of this report to NexOptic management for its comments. Interestingly, we were informed that Pinnacle Digest reviewed a copy of the report as well. Since we did not send this report to Pinnacle Digest, we assume it was sent to it by NXO. So, the relationship between Pinnacle Digest and NXO appears to extend well beyond just sharing office space. Pinnacle Digest threatened to muzzle the Grumpy Bear with “a cease and desist order” in response to certain statements in a previous draft of this article.

NexOptic seems to have ties to at least three promoters involved in this story: Primoris Group, Equity Marketing Strategies, Equedia Investment Research, and Pinnacle Digest – coincidentally, this is almost as many contractors that Spectrum Optix started with (source):

NexOptic and Pinnacle Digest share the same address, suite, and office space (source for Pinnacle, source for NexOptic). The address for Maximus. Strategic Consulting (which owns Pinnacle Digest):

The address for NexOptic:

Paid Promoter Equedia Investment Research

One of the largest fans of NXO is Equedia, which calls itself “The Largest Canadian Investment Newsletter” and reads like a classic, over-the-top stock promotion newsletter. Equedia starts off its articles with some of the most aggressively promotional statements the Grumpy Bear has ever seen:

But when you make the unreal real, you rewrite history.” – (Source)

I believe this technological discovery could even one day place its investors in line for a shot at winning the coveted Millennium Technology Prize and maybe even the Nobel Prize for Physics” – (Source)

Perhaps it is compelled to say such things because NexOptic has paid Equedia $260,000 for advertising coverage. To make matters worse, Equedia owns NXO stock and “intend to sell every share we purchase for our own profit…without notice to our subscribers“. (Source)

Equedia is a paid promoter with a disclaimer that stresses extreme bias and a track record of pretty dismal performance. Grumpy Bear found another company, ECIG, that Equedia previously called “One of the Most Disruptive Technologies“. Sounds familiar? This is simply an old playbook getting reused. In a December 2013 article, Equedia touted ECIG as a pure-play electronic cigarette company poised to capitalize on the booming industry. The thesis was centered around a strong management team that was going to ink deals and drive momentum for the company. Since publishing that article, ECIG’s share price has gone from $112.65 to less than a penny today.

In its latest article, Equedia tells the story of how the Spectrum founders first tested out their technology in John Daugela’s (Spectrum’s CEO) backyard using a kiddie pool and optical equipment. We were not kidding when we said the technology here was akin to a backyard science experiment. That is literally what it is. Equedia shows this beautiful backyard image with the descriptor “The trees behind John’s house light up. Wow! The light was concentrating! Eureka!” This could not be farther from the truth.

Too bad Equedia ripped off this backyard image from a blogger. Folks – these are the types of people you are dealing with – ones who are willing to say and show anything to feed the hype machine that is currently running this stock. This makes me more sad than grumpy.

See appendix E for more details around Equedia’s role in promoting this stock, including its participation in early financings, which means it could be sitting on large paper profits (assuming it still owns the stock).

Promoters Primoris and Equity Marketing Strategies Don’t Want to be Left Out

In the January 2016 filing statement, NXO disclosed that it expected to enter a consulting agreement with Primoris Group for the provision of media relation services at a cost of $3,500 per month. Primoris also received 125,000 NXO options at a price of $0.15 – these are now worth $280,000! Primoris agreed to provide “a full range of media relations services, including the coordination of editorial coverage through print, radio, TV and online media outlets.” We can still see its coverage for NXO on its website:

This promotion company is run out of Toronto by Joseph Carusone and Nick Boutsalis. Carusone got his start on StockHouse before spreading his wings and founding Primoris (source). From what we can tell, they have been at it for more than 15 years. Familiarly, we see the same terrible performance from companies involved with Primoris. Interestingly, we see Paul McKenzie’s DeepMarkit (OTCQB:MKTDF) as another customer of Primoris. Coincidence? Grumpy Bear thinks not.

Selected Companies Promoted by Primoris

Source: Bloomberg document search, prices split adjusted

Finally, we have Equity Marketing Strategies (“EMS”). From the filing statement, we learn that EMS will receive consulting fees of $6,000 per month plus a one-time grant of 250k options at a strike price of $0.15. In return, EMS agreed to provide “strategic marketing and communications services, focused on introducing the Resulting Issuer to broader investor audience.” In this case, principal of Equity Marketing Strategies, Alexander Smith, is also the Head of Corporate Communications at NXO. It is not clear if Smith’s role with NXO is as a paid employee or if he is paid only through EMS. Smith is also a co-founder of and the Head of Market Research at Pinnacle Digest, so he likely operates out of the same office as NXO and Pinnacle Digest. EMS shows up as an investor in NXO’s September 2015 private placement (source). We know that at the time of the January 2016 filing statement, Smith owned 330,460 shares of NXO, 166,650 warrants and was granted 250,000 options. Today, that stake would be worth $1.7 million!

Fear the Pump and Dump

Pump and dumps with technological blue sky dreams have a recurring pattern of being bad stock market investments. The next big thing is appealing to initial investors – the promise of participating in cutting-edge technology can have a once-in-a-lifetime feel. The pump portion coincides with promotion by various insiders and related parties. Sometimes these are obvious, other times not. This appears to be very clear.

For investors, promoted blue sky tech plays rarely work out the way they hoped for; the entities can be fraught with risk, especially when they have overly promotional management with poor track records and technology that sounds too simple and good to be true – NexOptic appears to exhibit all these red flags within one company. A common page from the playbook is focusing on prototypes and imaginary market sizing over real products and revenues. Another red flag is a limited investment in R&D, which is the hallmark of any real, successful tech company. Investors should be wary of Canadian tech pump and dumps that have included the likes of Sphere 3D (NASDAQ:ANY), Vogogo (OTC:VGGOF) (TSXV: VGO), Redknee Solutions (OTC:RKNEF) (TSXV: RKN), POET Technologies (OTCQX:POETF) (TSXV: PTK), and Peeks Social (OTCQB:KEEKF) (TSXV: PEEK). These companies all experienced periods of hype, but in the end, gravity took its toll, sending them crashing 93% from their peaks, on average, while insiders cashed out at the expense of later shareholders.

Like each of these companies, NexOptic has had a good run (aka aggressive promotion or a “pump”) so far. We caution that the “dump” could be right around the corner. Early shareholders are sitting on potential profits of more than $140 million on initial investments of $3.3 million. Who wouldn’t be itching to sell? We lay out the company’s financing history below:

Management has a Poor Background in Technology

To understand the Grumpy Bear’s skepticism, you must start from the beginning. Until November 2014, Elissa Resources (NXO’s predecessor) was a sleepy, rare earth mining exploration company run by current CEO, Paul McKenzie and current chairman, Arnold Armstrong. The Grumpy Bear is astounded: how can a 90-year old individual with no technical background be overseeing a cutting-edge technology company? Why would he switch his company’s focus from mining to technology if he had absolutely no experience in the industry? We believe that it is no coincidence that the average age of presidents and CEOs at $1 billion VC-backed companies is 42 (source).

If this situation was not obvious enough, neither Armstrong nor McKenzie has any experience in the world of optics or frankly, technology. Armstrong is a Vancouver lawyer with a family investment firm called Armada Investments that invests in mining and energy companies. McKenzie has been involved with various other resource companies, none of which appears to be very successful.

Source: 2014 Management Information Circular (SEDAR)


It appears that Chairman Arnold Armstrong and CEO Paul McKenzie have been involved with various companies together that have yielded limited success, including but not limited to Doxa Energy, International Enexco, and 099279 BC Limited. Here’s the chart for Doxa Energy (OTCPK:DXAEF) over the involvement of NXO’s Chairman and CEO (down 89% over their tenure):

NXO’s CFO Samantha Shorter appears to be a part-time CFO with potentially restricted time for NXO as she is listed as the CFO at another Canadian mining company, Lion One Metals (OTCQX:LOMLF) (TSXV: LIO). She was also involved with Medipure Holdings, which was suspended from trading for not filing financial statements in June 2015 – a big no-no for a CFO, whose job would be to handle exactly that.

Samantha Shorter, CFO – Career History

In November 2014, Elissa Resources entered into an agreement to acquire Spectrum Optix via a multi-stage option agreement. Elissa Resources then changed its name to NexOptic. According to the January 2016 filing statement, Spectrum was incorporated on November 10, 2014, a few days before it coincidentally announced its agreement with Elissa. Spectrum was ~86% owned by brothers John and Darcy Daugela via an entity called 3DB Inc. Darcy owns 95% of 3DB with John owning the other 5%. Prior to the agreement with Elissa Resources, Aaron Hoddinott also owned 8% of Spectrum Optix through a numbered company.

So, who are these individuals that are on the brink of a technological breakthrough that claims to be “a change in the way we understand physics” (source)? One would expect PhDs in physics from the likes of MIT, so Grumpy was quite surprised to find out it is somebody with a background in farm equipment with a commerce degree.

John Daugela, president and CEO of Spectrum, had previous experience co-managing the private firm, International Business and Engineering Corp. (IBEC). The company name suggests that it must have been a high-tech firm, but the company was a manufacturer of agricultural equipment that John ran with his mom (source). His bio indicates that he graduated with a Bachelor of Commerce from the University of Alberta. No optics or tech expertise here, and it is a quantum leap from agricultural equipment to cutting edge optics. Yet, the January 2016 filing statement from Elissa Resources indicates that he is“the mind behind the Technology”.

Darcy Daugela works as a Research Engineer for Syncrude where he leads “projects to develop novel industrial sensors.” He has been in this role since March 2007. He is listed as the inventor for several filed and granted industrial patents. Please note one important detail: the two patents that have been granted (9471971 and 9400196) were assigned to Syncrude Canada, Darcy’s employer.

Patent Problems or Problems with Patent?

As Keubiko pointed out in his article, surprisingly, Darcy is not listed as the inventor in the Blade Optics patent. Instead, his brother John is listed as the inventor:

Source: USPTO

Interestingly, this news clip covering the company says that its recent prototype was a product of 10 years of work (0:20), suggesting this technology has been in progress since 2007. It also says that “Darcy wrote software that ran while he was at work, every day millions of equations were produced…” (0:50) as the genesis for the technology. So, why was the patent application filed under John Daugela’s name?

It sounds like, while working for Syncrude Canada, Darcy Daugela stumbled onto a patentable idea which he then secretly passed onto his brother for safe-keeping.

Why isn’t Darcy listed as the inventor here if he, 1) came up with the idea and 2) owns 19 times more stock of Spectrum than John?

Has anyone asked Syncrude if this intellectual property could rightfully belong to them? If the technology turns out to be revolutionary and patentable, could Syncrude actually have the legal right to claim ownership of the patent?

Excessive stock promotion and poor management histories aside, we can now explore what gave the Grumpy Bear pause on the fundamentals of the company.

The Grumpy Bear Warns Shareholders of Significant Dilution

As of today, NXO does not own Spectrum Optix or its patent pending technology. NexOptic owns a 27% interest in Spectrum, with an option to acquire the remainder as part of a multi-stage option (please refer to appendix A for additional details). This is well described in Keubiko’s article. The key takeaway is that NexOptic’s needs to pay almost $1 million in cash and shares equivalent to over $85 million (35.7 million shares plus 7.5 million warrants) to Spectrum shareholders – this is equivalent to over 1/3 of NexOptic. The Grumpy Bear highlights that today’s valuation is 40 times greater than the implied valuation at signing of this deal in November 2014.

NXO has a pro forma market cap of almost $300 million.

Upon completion of the third option, Darcy Daugela, John Daugela, Aaron Hoddinott, and the rest of Spectrum’s shareholders could receive shares currently worth $85 million. Given the current state (or lack thereof) of the technology, we do not see how this can be remotely justified. Recent investors appear to be lining the pockets of Spectrum shareholders and early investors, with marginal progress to-date and no basis for this valuation in our opinion.

Spectrum Optix: NXO’s Only Asset is Surrounded with Red Flags

Suffice it to say that Spectrum Optix is NXO’s key asset. There are a few notable issues with this asset. As at September 30, 2015, the last known financials the Grumpy Bear has seen for Spectrum Optix, the company operated as a going concern according to its auditors:

“Emphasis of Matter Without qualifying our opinion, we draw attention to note 1 in the financial statements, which describes matters and conditions that indicate the existence of material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern”.

The Grumpy Bear was concerned when it viewed Spectrum Optix’s site and noticed no office – it only noted its partner’s office, that partner in this case being NXO (source).

After some further digging, we were floored as Spectrum Optix’s principal place of business looks likes someone’s house! Any guess on whose? (Google Maps Street View):

How did this unlikely marriage between Spectrum Optix and NexOptic come to be? We circle back to Aaron Hoddinott and Alexander Smith, co-founders of Pinnacle Digest. Recall, Hoddinott was listed as a significant shareholder of Spectrum in the January 2016 filing statement and that Smith received a finder’s fee of up to $520,000 in staged payments. Hoddinott appears to be the common link between Spectrum and NexOptic. It appears to have had a relationship with NexOptic (fka Elissa Resources) for years prior. In September 2011, Elissa Resources entered a marketing agreement with Maximus. Strategic Consulting, the entity that operates Pinnacle Digest. Maximus invested $25k into a prior private placement for Elissa and was to be compensated $55k for its services to the company. See diagram below for a visual representation of the relationships we found thus far.

NexOptic – Does this remind you of the Panama Papers?

R&D Spending Looks Suspiciously Low

The Grumpy Bear believes that NXO has limited likelihood of attaining patents and establishing marketable products, especially given the way the company is spending its limited money. It appears there is limited spending on R&D, even if we give Spectrum Optix the benefit of the doubt.

When a growth business, particularly in the technology space, spends more on other line items than Research and Development, shareholders should be concerned. From what the Grumpy bear can see, NXO is spending $374,000 on stock promoters (Equedia, Equity Marketing Strategies, Primoris) on an annual basis, for advertising coverage and assistance with its launch event. In total, the company spent just over $1 million on non-R&D cash expenses in 2016. By contrast, NXO invested just under $1 million in its key asset, Spectrum Optix. Though we cannot show you exactly how that money was allocated at Spectrum Optix during 2016, we can at least show you figures until September 2015 and use that as a proxy. In any case, R&D spending seems to be limited at NXO, which does not seem to be the logical way to develop purportedly revolutionary technology!

To put it into perspective, NASA had a budget of $18.5 billion in 2016, while Harvard’s John A. Paulson School of Engineering and Applied Sciences had an endowment of $1 billion in 2015. Both entities are actively working on flat lens technology (more on this later). Who is more likely to have a technological breakthrough: the Daugelas who seem to be fooling around in their backyard or academic behemoths like Harvard and NASA?

The Grumpy Bear is skeptical of the R&D spend that is supposedly taking place at Spectrum Optix. The reason this R&D looks skeptical is because the funds meant for R&D are going through a related third-party entity – we don’t know if John Daugela (director of Spectrum Optix, NXO, and other related parties) is paying himself with this or what exactly he is doing with these funds. It is extremely odd that money transferred to Spectrum Optix is then transferred to another related company owned by John Daguela. Why is there a need for another related party? Could Spectrum Optix be hiding something? See appendix D for our sources.

Here is a summary of how money is being spent at Spectrum:

Is the NXO and Spectrum syndicate spending any money on R&D? See appendix D for further details on R&D spend.

Insider Selling and Corporate Governance

Perhaps this is why at least one person doesn’t seem to want to gamble on the outcome of NexOptic’s revolutionary technology: Chairman Arnold Armstrong. The long-time chairman of the company has sold ~$1 million of stock at an average price of $1.94 since January 2017. After selling 490k shares, Arnold is left with ~3.4m shares in his coffers. I bet we will see more selling soon! What does Arnold know that his investors don’t? Paul McKenzie has also sold shares recently, getting rid of 30k shares at $2.27 on April 6. Will more of his 930k shares find their way onto the market in short order?

Aside from Armstrong dumping his shares, there are numerous corporate governance concerns at the company. Paul McKenzie, CEO of NXO, is also a director of Spectrum. Conversely, John Daugela, Co-founder and CEO of Spectrum sits on the board of NexOptic. This cross-board member situation could result in transactions between the two companies not taking place at fair value – and this red flag could come at the cost to NexOptic shareholders. Like the lens at NexOptic, the line between these two companies has become blurred which opens the door to conflicts of interest – shareholders should be on high alert.

NexOptic has an auditor Smythe Ratcliffe that has a tendency of being used for Vancouver entities that are OTC listed and generate no value. Many examples exist with Giant Resources, Abzu Gold (OTCPK:ABZUD), Cadan Resources, 37 Capital (OTCQB:HHHEF), Doxa Energy (also noted above), Breathtec Biomedical (OTCQB:BTHCF) (also noted above) that have been down over 70% from initial share prices at time of listing! Smythe has also had its share of audit issues as identified by the PCAOB (source).

The Grumpy Bear Removes the Veil on NXO’s Overhyped Technology

Now that we have provided some background to this company, let’s find out what all the excitement is about. Note, we do not claim to be experts in this field, but we have consulted with a world-renowned optics expert to help formulate our opinions. When it comes to the technology, the Grumpy Bear strongly suggests that other investors do their own independent diligence without relying solely on company disclosure, management or related parties (e.g. Equedia, Pinnacle Digest, or Larry McNish). We asked the expert if the tech was worth $100 million; ironically, he said it’s not worth a dollar.

Blade Optics is a patent pending technology that NexOptic claims will disrupt the optics market for telescopes, cameras, and mobile phones. Indeed, on the very first page of NXO’s marketing materials, we see this bold claim: “Imagery will never be the same”.

We find this a bit presumptuous for a company that has not yet had a single patent issued (currently pending), is pre-revenue, and has given the investing community little in the way of proof that its technology is revolutionary.

The goal of this article isn’t to debunk the technology, but the Grumpy Bear’s discussions with an expert raised some interesting questions about the feasibility of Blade Optics (note: if you do not understand the following questions, perhaps you should not be in the stock)

  • Is the technology prone to ghosting images that cannot easily be fixed with software?
  • How bad are the lateral chromatic aberrations and how will these be fixed?
  • Has the company considered astigmatism arising from the manufacturing process?
  • How difficult is it to cost effectively manufacture the irregular, wedge-shaped prism in the lens system?
  • How much of a deal-breaker is the narrow field of view that is associated with prism systems?
  • Is the patent specific enough to be granted or already covered by prior art (e.g. Littrow configuration)?

Despite the recent prototype unveiling, we believe many questions remain on both the efficacy, manufacturability, and practicality fronts. Shareholders would be wise to consider these before placing their faith in the technology.

For those interested in learning more, please see Appendix F for our further diligence on the technology.

The Big (Yet Uneventful) Unveiling

For the last several months, the hype surrounding NexOptic revolved around a public launch event which occurred on April 4th at the H.R. MacMillan Space Centre in Vancouver, Canada. It was dubbed an “Exclusive Prototype Unveiling Event”. This event was closed door and difficult for all investors to attend. Also, circling back to the chairman’s stock sales, do shareholders think it’s odd that he sold $1 million of shares prior to the big unveil?

The prototype unveiling event was sponsored by Haywood Securities, Pinnacle Digest, Equedia Investment Research, BTV – Business Television, among others. See some familiar names in there? Equedia plugged the launch in one of its pieces on NexOptic:

Shortly before the event, NXO released the first images from its prototype on its website here. We see some blurry images comparing NXO’s prototype to a more traditional 5-inch Schmidt-Cassegrain. There are more available on the website, but the ones below give you the general idea. The company boasts that it was able to take similar quality images on its much smaller prototype versus a traditional telescope. Note the captions indicate that both images are processed.


NexOptic discloses its image processing technique at the bottom of the webpage:

That’s it? Are we supposed to make our determination on this technology based on a few grey-scale processed images? Why have we not been shown raw images from the prototype? Why have we not been shown color images from the prototype?

We were puzzled that there was not a broader range of images shown. We know for a fact that there were various images taken with the prototype, based on Larry McNish’s account in his evaluation:


So, we know there were daytime shots taken in Tucson – why were those not released? Conveniently, star shots were not taken due to pesky “mechanical problems with the equatorial mount“.

Turns out many others were disappointed by the grand unveiling event for Blade Optics. As Keubiko predicted in his article, this was a sell the news event, sending the stock tumbling >20% in the days following the launch event. Nonetheless, despite the underwhelming “demonstration” of the Blade Optics prototype, NexOptic implied that it would now be taking on the mobile phone market. In the April 4, 2017, news release, John Daugela stated: “The initiation of this new engineering trade study is intended to build and expand upon our current Blade Optics™ telescope proof of concept prototype with the goal of extending the application of our technology to the significantly larger mobile market.” That seems like a giant leap.

Watch Out for the Competition

Since NexOptic is insinuating vast uses for its flat lens technology, investors should also consider other research being done on flat lens technologies. A research team at the Harvard John A. Paulson School of Engineering and Applied Sciences has been working for years on a flat lens using a 600-nanometer metasurface pattern that was named among Science Magazine’s top discoveries of 2016. This group is tackling the issue of handling different colors and the technology should be simple to produce in mass quantities (sources: Harvard, Physics Central). The California Institute of Technology (Caltech) has also been working with NASA, with funding from DARPA, to develop flat optical lenses using silicon nanopillars, which could be manufactured using a similar process to microchips (source). In comparison to these high tech flat lenses, Blade Optics looks like a backyard science experiment.


We thought it would useful to end off this article with a great gem from Paul McKenzie (CEO of NXO) from the news clip we linked to earlier (1:30). Paul is referencing how the Daugela brothers supposedly tested out their technology using mirrors in a kiddie pool in one of their backyards:

When I met John and Darcy, you know after a few minutes or by the end of the meeting, I felt like I had just met maybe Steve Jobs or Steve Wozniak when they were still messing around with computers in their garage.

Doesn’t seem like the next Jobs and Wozniak, does it? Everything about this company raises alarm bells:

  • The company was created from the scraps of a left for dead mining company.
  • There are three different stock promoters involved – Equedia, Equity Marketing Strategies, Primoris – that each has a track record of value destruction.
  • NexOptic shares the same address as Pinnacle Digest.
  • For what is touted to be the next big thing, the company is spending comparatively little on R&D – what is being spent at Spectrum appears to be routed to a third party entity (that is related).
  • Very early stage technology, pre-sales, no issued patents, and little proof to back up the company’s claims that it is disrupting the optics industry.
  • Promotional management team with clearly no experience in tech.
  • Questions around who should have the rightful claim to the patent application.
  • Insider selling and messy corporate governance.
  • Early shareholders sitting on huge returns in a short period, completely disproportionate to the progress of the company.
  • Complex capital structure that implies a much higher valuation than what initially meets the eye – significant dilution expected as company issues 36 million shares worth $85 million to complete the Spectrum option agreement.
  • Going up against potential flat metalens technology being developed at Harvard and NASA.
  • We see 88% downside (with $0.52 target price) as insiders and early shareholders continue to cash out and market participants realize how much risk they are underwriting by owning NexOptic shares.

We see significant short-term downside as management/early investors liquidate and newer investors understand the significant risks they are underwriting by owning shares in NexOptic.

For the record, we sent a draft copy of this report to NexOptic for their comments. The company responded, indicating that there were numerous incorrect and misleading statements in this article. We have asked management to point out any inaccuracies, but have not heard back from them at this time.

Grumpy Bear says it’s as easy as ABC: Always Be Cynical

Appendix A | Selected Companies that have Compensated Pinnacle Digest for Services

Source: Bloomberg, prices adjusted for splits

Note: This list was derived by running a Bloomberg filing search to find companies that had disclosed marketing, advertising or investor relations agreements with Pinnacle Digest or its affiliates.

Appendix B | NXO’s Option Agreement with Spectrum

From the company’s financial statements:

Under the first option, the implied value of Spectrum on a 100% basis was $3 million. That seems to us reasonable given the early stage nature of the technology.

The second option values Spectrum at $9.9 million. Sure, that also seems to make sense.

Here is where things get crazy. The implied value of Spectrum under the third option is directly tied to how well the company does at promoting its story. Based on the most recent MD&A, NXO has 66.3 million shares outstanding and 14 million stock options and warrants. Per the third option, it would need to issue 35.7 million shares and 7.5 million warrants to Spectrum shareholders to acquire the remaining 35%. Under the third option, the implied value of Spectrum on a 100% basis is $244 million. This excludes any value attributed to the warrants issued. However, this was not always the case. When the Spectrum option agreement was announced in 2014, NXO was trading at $0.12 per share. With a historical share count of 32.1 million shares, this translated into 17.3 million shares issued to Spectrum, implying a value of only $6 million on a 100% basis. Today’s valuation is 40x greater than the implied valuation at signing!

As of December 31, 2016, NXO had advanced $1.6 million to Spectrum under the terms of the Agreement. Subsequent to year-end, another $575k was contributed to Spectrum. That puts it in the middle of the Second Option, with ~$837k remaining before it fulfills that tranche. To complete the Third Option, NexOptic needs to issue shares and warrants to Spectrum equal to 35% of shares and warrants on a post-issuance basis. In other words, NXO is giving up 35% of the company to acquire the rest of Spectrum.

Appendix C | Chairman’s Share Sales This Year!

Here is a table of his sales:

Appendix D | Details of R&D Spend at Spectrum Optix

Spectrum spent less than 50% of total operating expenses for financial statements available at period ended September 30, 2015 ($160k R&D of total operating expense of $340k).

100% of this spend was given to a related party for which has no way to know how the money was spent. Talk about scary!

Appendix E | More on Equedia

Equedia acknowledges that it is being paid to write these articles and also own NXO stock, acquired at prices far below the current share price of the company. Here is the company’s disclosure statement from one of its articles:

“Disclosure: We’re biased towards NexOptic because the Company is an advertiser. We currently own shares NexOptic and have participated in every private placement. You can do the math…” (Source).

In its terms of use page, Equedia discloses the following (emphasis added):“Equedia Network Corporation., owner of has been paid $110,000 plus GST for 12 months of advertising coverage for NexOptic Technology Corp. on plus any additional expenses we may incur as a result of additional advertising. NexOptic has since added an additional $150,000 plus GST budget to assist with the marketing of its launch event on April 4, 2017. NexOptic has paid for this service. and its directors may purchase shares of NexOptic without notice and intend to sell every share we purchase for our own profit. We may sell shares in NexOptic without notice to our subscribers. We currently own shares of NexOptic purchased both in the open market and through private placements announced on February 14, 2014, and September 21, 2015, and June 3, 2016.”

Equedia had invested in Elissa Resources PRIOR to its option agreement with Spectrum and subsequent rebranding to becoming NexOptic. Elissa Resources signed the option agreement with Spectrum in November 2014, yet Equedia says it participated in a private placement in February 2014. For the record, the Grumpy Bear can’t find any disclosure about this private placement aside from Equedia’s disclosure.

Equedia appears to have personally profited significantly from participating in early equity offerings. Though Equedia mentions its participation in the September 2015 private placement, we do not know in what capacity. This offering was done at $0.12 (1 share + 1 warrant at $0.25), so we do know that investors in this offering are up ~1,200% on their investment. Through disclosure requirements, we know that Equedia purchased 100,000 units in the June 2016 private placement for consideration of $25,000. With a unit price of $0.25 (1 share + 1 warrant at $0.35), Equedia’s initial $25,000 investment has grown to >$400,000 (assuming warrant exercise). Not a bad return for a nine-month investment, especially when it is your job to promote the stock! When you add in its advertising fee, this has been a deal of a lifetime for Equedia. No wonder it is working so hard to keep this stock on cloud nine!

Equedia has published several articles on NexOptic in recent months:

April 12, 2017: The Big Reveal: The Launch of NexOptic Technologies Flat Lens Telescope Prototype January 15, 2017: NexOptic Technology Corp: A Revolutionary Flat Lens System March 5, 2017: One More Month: The Public Unveiling of Blade Optics March 26, 2017: What Happened to NexOptic Technology Corp.?

Here are some excerpts:

Source: NexOptic Technology Corp: A Revolutionary Flat Lens System

Source: One More Month: The Public Unveiling of Blade Optics

It even posted this highly promotional YouTube video in November 2016 entitled, “Is this the Future of Sight? A Radical Flat Lens Technology.” The opening sequence to the video flashes the following message:“You’re about to witness the technological discovery of a lifetime.”

Appendix F | Technology Background

Blade Optics makes use of a flat lens system with square apertures to achieve more compact devices vs. traditional curved lens technology. See below for another slide from NXO’s IR deck:

Wow! A 27% improvement in light capture you say? This is one of the first claims the company makes, in big bold numbering. Let’s take a step back here and see how it came to this number. Sorry to disappoint, but this was not the product of complex testing or calculations. In fact, it is a basic geometric property:

In the diagram above, we have a circle with diameter “X”, inscribed within a square with width “X”. The ratio of the area of the black square to the area of the red circle is simply 0.25 π. In other words, the square has an area 27% greater than the circle. For the less mathematically inclined, a simple proof is included here:

Boy, I sure am glad that the inventors of this technology know elementary geometry! Right below the big bold numbering, NXO makes its next claim:

More light captured means better image quality“.

The Grumpy Bear hired an optics expert to help make sense of the landscape and opportunity at NXO. After discussions, it appears that this claim is misleading. Yes, squaring the aperture inherently increases the light capture. However, it is an incorrect assessment that you get more light for free. Yes, you get more light, but you get inferior light. The light rays hitting the very corner of the square aperture have the potential to cause chromatic aberration issues which require complex lenses (and increased manufacturing costs) to correct. It is much more challenging to get the light rays hitting the corners of square aperture to be focused on the same location as the light hitting the centre of aperture.

NexOptic retained an astronomer, Larry McNish, to test out its prototype. Larry wrote up an evaluation of his experience here. Unfortunately, since Larry was under an NDA, he was not allowed to divulge much (note: if Larry was under NDA, all investors must take his statements with a grain of salt, because selective disclosure could change the takeaways of his commentary):


All we get from this evaluation are superficial observations (e.g. dimensions, weight, ease of use). How does any of this matter if inner workings of this technology are unknown? His schematic of the prototype does not show any internal detail:

We believe that one of the key fundamental challenges for flat lens technologies is the ability to handle color. Colors of light travel in waves with each having a different amount of energy, which results in a different angle of refraction. This is the reason glass elements in traditional lenses are curved and multiple glass elements are required to ensure that the different color wavelengths hit the image sensor correctly. Flat lenses are extremely prone to chromatic dispersion. The Blade Optics technology appears to compensate for chromatic dispersion with post-processing algorithms to correct the raw image. That is why the Blade Optics lens has to be attached to a laptop. The raw image has to be corrected. NexOptic has yet to demonstrate that the Blade Optics prototype can produce quality color images. Furthermore, we would want to see live color images being produced before believing that this technology can be commercialized, let alone be miniaturized for use in mobile phones.

Disclosure: I am/we are short NXOPF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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