Shareholder Update – November 15, 2018

Writtern by Charlotte Luer

November 15, 2018

Aqua Farming Tech Progress Report and Farm Update

Aqua Farming Tech is moving towards its near term goals of retiring fish contracts while returning the farm to full production and strong profitability. Today, the farm has roughly 500,000 fish in grow out and another 700,000 smaller fish in intermediate ponds being grown out for continuous restocking.

I am happy to report that through investment, innovation and hard work we have succeeded in cutting the cost of feed and electric in half and water usage by an estimated 25%; these cost cutting milestones combine to create a huge competitive edge, and we believe also contain advancements of significant value for the fish farming industry. I would like to highlight for you the primary improvements that have been made to support a full level of sustained production:

1) Spawning Ponds and Hatchery Improvement.
The construction and expansion of spawning ponds and hatchery facilities to support increased continuous production. Maximizing production requires a significant supply of fish in the intermediate ponds at all times being grown for continuous restocking of grow out tanks as fish are sold; the new hatchery and spawning pond improvements support increased levels of hatchery operations, so that the supply of fish for grow out is continuous and can keep pace as production ramps. These facilities are now capable of producing a year round supply of fish for stocking our farm and in the future, to be acquired farms.

2) Aeration Systems.
Operating costs are being reduced through the implementation of proprietary aeration systems that improve the level of oxygen in the water, while conserving on electricity and water. The venturi system also improves on worker safety. Improved levels of dissolved oxygen in the water means improved fish health and higher growth rates.

3) Feed Mill Improvement.
We have made significant improvements to our feed mill by mechanizing phases of production including installation of augurs to lift and transport material. This additional tooling better positions the farm to increase and maintain its manufacture of feed volumes necessary for sustained optimum fish production. We have also built a large feed storage facility, which protects the feed and feed ingredients from being contaminated or eaten by birds. During the summer with daytime temperatures reaching 115 to 120, the structure also prevents the feed materials from baking in the sun and losing some of their nutritional value. Many issues solved by housing the materials in the shade structure – plus the volume of shaded paved area greatly improves the work environment and worker productivity (cooler, less flies, no birds, less dust, cleaner, more organized workspace). The ability to manufacture our own feed lowers the cost and gives us the ability to adjust feed blends to match different phases of fish growth and eventually have the option to produce an organic feed. Consumers are becoming ever more informed and health conscious; we understand and support this trend; “you are what you eat, eats!”

4) PV Solar Array Washing System.
Being both located in the desert and adjacent to other parcels that are subject to cultivation, subjects our farm’s solar arrays to the collection of dust. When a thick film of dust collects on the surface of the solar panel, the power generating capacity of the affected panel can be diminished. To solve this problem, we installed a panel washing system that will pay for itself in increased power generation.

5) Technology Platform Improvement.
• Pond Instrumentation: We are working with a leading-edge company ( www.osmobot.com ) that is designing aquaculture specific pond instrumentation that continuously monitors critical water quality values of dissolved oxygen, pH, NH3, nitrites, nitrates, turbidity, temperature, and salinity. The information relays through cell phone service so that values can be displayed on a smart phone, alarms are able to be sent when a parameter is outside a prescribed range, data can be exported, historical data concerning water quality graphed and charted against grow rates and so on. Initial instrumentation is projected to be installed on our farm during Q1 of 2019. We are very excited about working with this company because of the projected performance of their technology and because of the low cost; projected to be $1 per day per pond.

• Aquaculture Management Infrastructure: In concert with improved pond and facility infrastructure, we are preparing to implement a cloud-based aquaculture management system. (www.aquatracker.com ) The system is inexpensive and provides real time data capture that displays on mobile devices. This system will support several aspects of farm management including inventory tracking, tracking of feeding programs, tracking of growth rates etc. The system is designed to generate all kinds of analytics aimed at lowering costs and optimizing farm efficiencies (growth rates, feed consumption, water usage, etc).

During the summer months, the farm production was steadily improving towards reaching the milestone of 10,000 lbs per week harvested and sold, however early in the morning on October 13, during a violent thunderstorm accompanied by hail and heavy rain, the farm lost power. Our alarm sounded and the back up power generation was implemented. After a time when the power was restored, the back up diesel generators were turned off. Workers went back to bed. Unfortunately, an hour later, the farm suffered a second power outage that went undetected until morning with the result being that 150,000 fish from 3 grow out tanks at the Thermal farm were lost.

This a terrible loss for the farm; never in 20 years of operation has our farm suffered this kind of loss, and it couldn’t have come at a worse time. The usual alarm indicating power outage did not go off; the farm has since installed a redundant battery operated independent system to prevent such an occurrence in the future. Additionally, the new osmobot pond instrumentation to be installed in 2019 (see “Technology Platform Improvement” above) will deliver immediate alarms to management’s cell phones when water quality parameters are outside a prescribed range.

Although economically difficult and emotionally trying to work through, we remain confident in the viability of our plan and the ultimate success of our farm because the fundamentals of our business remain bright, and our production will recover within 90 days. The awful job of cleaning the ponds and burying the fish is complete; the ponds have been restocked. The fundamentals of our business are without question encouraging because first and foremost, we have permanently cut our production costs and restored our operating margin; and secondly, market demand for live fish is higher than ever because the consumer demographic (Asian and Latino) has grown significantly; today California is home to some 4.9 million Asians and an estimated 14.9 million Latinos; Latinos, who love tilapia for the mild taste and affordability, now regularly shop in the Asian food stores. Meanwhile the supply is decreasing, which has led to an increase in the price per pound from $2.90 last year at this time to $3.20 today and we project the price for tilapia to further increase next year. These key factors hold the promise of sustained profitability and success over the long run.

To be sure, the process of improving the farm’s facilities and the subsequent ramping of production has taken longer and cost more than originally projected. Be assured however, that we remain absolutely confident, that our farm is positioned to generate tremendous success, for our shareholders and fish contract holders.

Towards generating profits and delivering on fish contracts from the operation of our Mecca and Thermal farms at full production, we are now working to secure a new round of bridge financing, which will be used as follows: (1) to retire outstanding debt; and (2) provide a new infusion of operating capital to finish ramping fish farming operations to full production. As production ramps, cash flows project to qualify in 2020 for a conventional farm loan financing in the range of $7.5 to $10 million; The conventional farm loan, will then be used to retire the bridge loan, all outstanding obligations and provide additional capital for the farm’s continued plan of expansion, which includes the cultivation of high margin crops that leverage the farm’s sophisticated infrastructure such as shrimp, moringa and most recently, cannabis.

Regarding the matter cannabis cultivation, the Company’s current assessment is that Aqua Farming Tech will be qualified to apply for a license that allows for at least the operation of a 10,000 sq ft mixed light cannabis cultivation facility. The opportunity to cultivate cannabis in unincorporated areas of Riverside County is an emerging opportunity that our farm is especially qualified to capitalize on. One reason is that it appears that the over arching concern at the County level, is the impact of cultivation on the adjacent rural residents; the quality of life concerns call into question to the applicant’s ability to mitigate the operational issues of odor, light, noise, glare, security, traffic and so on. The isolated nature of our Mecca farm easily addresses these issues in that there are no neighbors to offend, but Aqua Farming Tech is uniquely qualified because regarding energy usage, we have solar arrays, and the crop could be both irrigated and fertilized with nutrient rich water discharged from our fish tanks, thereby improving product quality and the sustainability aspects of the operation. Additionally, our farms are already certified organic and we would work to expand the certification to include the cannabis operation. We may consider aligning with a partner for the development, so that we can continue to focus on our core business of fish farming and soon shrimp farming, while benefitting from the cultivation of a new crop the entire Country is talking about: cannabis.

Aquaculture continues to be the fastest growing segment of global agribusiness, and our Southern California market niche is stronger than ever, with considerable barriers to entry. Aqua Farming Tech is steadfast in its commitment to become California’s leading producer of premium quality tilapia, shrimp and moringa.

Sincerely,

Rocky French, President