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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number: 000-18980





HQ SUSTAINABLE MARITIME
INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)







|                                                         |  |                                                      |  |                         
|-------------------------------------------------------- |  | ---------------------------------------------------- |  | ------------------------
|Delaware                                                 |  | 000-18980                                            |  | 62-1407522              
|(State or jurisdiction of Incorporation or organization) |  | (Primary Std. Industrial Classification Code Number) |  | (IRS Employer ID Number)



|                                                  |  |           
|------------------------------------------------- |  | ----------
|1511 Third Avenue, Suite 788, Seattle, Washington |  | 98101     
|(Address of principal executive offices)          |  | (Zip Code)

Registrants telephone number, including area code: (206) 621-9888

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.001 par value per share

(Title of Class)





Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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:    Yes  x    No   ̈

Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a nonaccelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange
Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                               |  |                              
|------------------------------ |  | -----------------------------
|Class                          |  | Outstanding at March 31, 2009
|Common stock, $0.001 par value |  | 12,146,656                   









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|                               |  |                                                                                     |  |             
|------------------------------ |  | ----------------------------------------------------------------------------------- |  | ------------
|                               |  |                                                                                     |  | Page Numbers
|PART I - FINANCIAL INFORMATION |  |                                                                                    
|Item 1.                        |  | Condensed Consolidated Financial Statements                                         |  | 3           
|Item 2.                        |  | Management Discussion and Analysis of Financial Condition and Results of Operations |  | 12          
|Item 3                         |  | Quantitative and Qualitative Disclosures about Market Risk                          |  | 15          
|Item 4.                        |  | Control and Procedures                                                              |  | 15          
|PART II - OTHER INFORMATION    |  |                                                                                    
|Item 1.                        |  | Legal Proceedings                                                                   |  | 16          
|Item 1A                        |  | Risk Factors                                                                        |  | 16          
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                         |  | 17          
|Item 3.                        |  | Defaults its Upon Senior Securities                                                 |  | 17          
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                 |  | 17          
|Item 5                         |  | Other Information                                                                   |  | 17          
|Item 6.                        |  | Exhibits                                                                            |  | 17          
|                               | 
|SIGNATURES                     |  | 18                                                                                 

|                                      |  | 
|------------------------------------- |  | 
|                                      | 
|CERTIFICATIONS                        |  | 
|                                      | 
|Exhibit 31  Management certification |  | 
|                                      | 
|Exhibit 32  Sarbanes-Oxley Act       |  | 



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                     |  |                           |            |                            |   |            
|------------------------------------ |  | ------------------------- | ---------- | -------------------------- | - | -----------
|                                     |  | March 31, 2009(Unaudited) |            | December 31, 2008(Audited)
|ASSETS                               |  |                           |            |                            |   |            
|CURRENT ASSETS:                      |  |                           |            |                            |   |            
|Cash and cash equivalents            |  | $                         | 54,829,017 |                            | $ | 54,920,548 
|Trade receivables, net of provisions |  |                           | 24,009,228 |                            |   | 27,689,410 
|Inventories                          |  |                           | 1,602,061  |                            |   | 1,041,628  
|Prepayments                          |  |                           | 429,152    |                            |   | 464,919    
|                                     |  |                           |            |                            |   |            
|TOTAL CURRENT ASSETS                 |  |                           | 80,869,458 |                            |   | 84,116,505 
|                                     |  |                           |            |                            |   |            
|PROPERTY, PLANT AND EQUIPMENT, NET   |  |                           | 7,984,622  |                            |   | 8,315,593  
|CONSTRUCTION IN PROGRESS             |  |                           | 8,725,589  |                            |   | 6,622,501  
|INTANGIBLE ASSETS                    |  |                           | 1,059,333  |                            |   | 1,112,904  
|OTHER ASSETS                         |  |                           |            |                            |   |            
|Deferred expense                     |  |                           | 13,145     |                            |   | 18,770     
|                                     |  |                           |            |                            |   |            
|TOTAL ASSETS                         |  | $                         | 98,652,147 |                            | $ | 100,186,273
|                                     |  |                           |            |                            |   |            

The accompanying notes are an integral part of the consolidated financial statements.



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                               |  |                           |            |                            |   |            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ---------- | -------------------------- | - | -----------
|                                                                                                                                                                               |  | March 31, 2009(Unaudited) |            | December 31, 2008(Audited)
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                           |  |                           |            |                            |   |            
|CURRENT LIABILITIES:                                                                                                                                                           |  |                           |            |                            |   |            
|Accounts payable and accrued expenses                                                                                                                                          |  | $                         | 4,684,288  |                            | $ | 5,787,514  
|Tax payable                                                                                                                                                                    |  |                           | 246,907    |                            |   | 823,382    
|Due to directors                                                                                                                                                               |  |                           | 7,079      |                            |   | 698,429    
|Derivative liabilities                                                                                                                                                         |  |                           | 3,942,819  |                            |   |           
|Current portion of promissory notes                                                                                                                                            |  |                           | 4,722,741  |                            |   | 4,603,920  
|                                                                                                                                                                               |  |                           |            |                            |   |            
|TOTAL CURRENT LIABILITIES                                                                                                                                                      |  |                           | 13,603,834 |                            |   | 11,913,245 
|                                                                                                                                                                               |  |                           |            |                            |   |            
|SHAREHOLDERS EQUITY                                                                                                                                                           |  |                           |            |                            |   |            
|Preferred stock, $0.001 par value, 10,000,000 shares authorized, 100,000 shares issued and outstanding                                                                         |  |                           | 100        |                            |   | 100        
|Common stock, $0.001 par value, 200,000,000 shares authorized, 12,146,656 and 12,085,846 shares issued and outstanding as of March 31,
2009 and December 31, 2008 respectively |  |                           | 12,147     |                            |   | 12,086     
|Additional paid-in capital                                                                                                                                                     |  |                           | 59,396,767 |                            |   | 61,572,410 
|Accumulated other comprehensive income                                                                                                                                         |  |                           | 9,405,210  |                            |   | 9,615,956  
|Retained earnings                                                                                                                                                              |  |                           | 9,520,371  |                            |   | 10,510,961 
|Appropriation of retained earnings (Reserves)                                                                                                                                  |  |                           | 6.713,718  |                            |   | 6,561,515  
|                                                                                                                                                                               |  |                           |            |                            |   |            
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                     |  |                           | 85,048,313 |                            |   | 88,273,028 
|                                                                                                                                                                               |  |                           |            |                            |   |            
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  | $                         | 98,652,147 |                            | $ | 100,186,273
|                                                                                                                                                                               |  |                           |            |                            |   |            

The accompanying notes are an integral part of the consolidated financial statements.



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



|                                                      |  |                    |            |   |               |   |            |  
|----------------------------------------------------- |  | ------------------ | ---------- | - | ------------- | - | ---------- | -
|                                                      |  | Three Months Ended |           
|                                                      |  | March 31,2009      |            |   | March 31,2008 |  
|SALES                                                 |  | $                  | 10,840,821 |   |               | $ | 9,210,490  |  
|COST OF SALES                                         |  |                    | 6,087,507  |   |               |   | 5,310,702  |  
|                                                      |  |                    |            |   |               |   |            |  
|GROSS PROFIT                                          |  |                    | 4,753,314  |   |               |   | 3,899,788  |  
|SELLING AND DISTRIBUTION EXPENSES                     |  |                    | 254,152    |   |               |   | 229,176    |  
|MARKETING AND ADVERTISING                             |  |                    | 1,426,625  |   |               |   | 1,164,518  |  
|GENERAL AND ADMINISTRATIVE EXPENSES                   |  |                    | 1,606,372  |   |               |   | 1,452,800  |  
|DEPRECIATION AND AMORTIZATION                         |  |                    | 427,111    |   |               |   | 339,755    |  
|DOUBTFUL ACCOUNTS (RECOVERY)                          |  |                    | 31,566     |   |               |   | (10,538    | )
|                                                      |  |                    |            |   |               |   |            |  
|INCOME FROM OPERATIONS                                |  |                    | 1,007,488  |   |               |   | 724,077    |  
|FINANCE COSTS                                         |  |                    | 518,445    |   |               |   | 1,639,405  |  
|FAIR VALUE CHANGE IN DERIVATIVE FINANCIAL INSTRUMENTS |  |                    | (825,871   | ) |               |   |           |  
|OTHER (INCOME)/EXPENSES                               |  |                    | (27,011    | ) |               |   | 1,765      |  
|                                                      |  |                    |            |   |               |   |            |  
|INCOME / (LOSS) BEFORE INCOME TAXES                   |  |                    | 1,341,925  |   |               |   | (917,093   | )
|INCOME TAXES                                          |  |                    |            |   |               |   |            |  
|CURRENT                                               |  |                    | 226,569    |   |               |   | 112,350    |  
|DEFERRED                                              |  |                    |           |   |               |   |           |  
|                                                      |  |                    |            |   |               |   |            |  
|NET INCOME/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS        |  |                    | 1,115,356  |   |               |   | (1,029,443 | )
|OTHER COMPREHENSIVE INCOME                            |  |                    |            |   |               |   |            |  
|Foreign currency translation (loss)/gain              |  |                    | (210,746   | ) |               |   | 2,763,843  |  
|                                                      |  |                    |            |   |               |   |            |  
|COMPREHENSIVE INCOME                                  |  | $                  | 904,610    |   |               | $ | 1,734,400  |  
|                                                      |  |                    |            |   |               |   |            |  
|NET INCOME/(LOSS) PER SHARE                           |  |                    |            |   |               |   |            |  
|BASIC                                                 |  | $                  | 0.0919     |   |               | $ | (0.089     | )
|                                                      |  |                    |            |   |               |   |            |  
|DILUTED                                               |  | $                  | 0.0891     |   |               | $ | (0.089     | )
|                                                      |  |                    |            |   |               |   |            |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING            |  |                    |            |   |               |   |            |  
|BASIC                                                 |  |                    | 12,137,999 |   |               |   | 11,572,458 |  
|                                                      |  |                    |            |   |               |   |            |  
|DILUTED                                               |  |                    | 13,424,809 |   |               |   | 11,572,458 |  
|                                                      |  |                    |            |   |               |   |            |  

The accompanying notes are an integral part of the consolidated financial statements.



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND
2008



|                                                                        |  |      |            |   |      |   |            |  
|----------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                        |  | 2009 |            |   | 2008 |  
|OPERATING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Net income/(loss)                                                       |  | $    | 1,115,356  |   |      | $ | (1,029,443 | )
|Non-cash items:                                                         |  |      |            |   |      |   |            |  
|Depreciation and amortization                                           |  |      | 427,111    |   |      |   | 339,755    |  
|Loss of disposal of fixed assets                                        |  |      |           |   |      |   | 1,765      |  
|Fair value change in derivative financial instruments                   |  |      | (825,871   | ) |      |   |           |  
|Financial and other non-cash services                                   |  |      | 785,679    |   |      |   | 1,908,580  |  
|                                                                        |  |     
|Change in noncash working capital items:                               |  |      |            |   |      |   |            |  
|Inventories                                                             |  |      | (561,878   | ) |      |   | (591,275   | )
|Trade receivables, net of provisions                                    |  |      | 3,646,355  |   |      |   | (180,872   | )
|Prepayments                                                             |  |      | 35,188     |   |      |   | (65,448    | )
|Accounts payables and accrued expenses                                  |  |      | (922,645   | ) |      |   | (1,541,200 | )
|Tax payable                                                             |  |      | (575,767   | ) |      |   | (841,598   | )
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow generated from/(used in) operating activities                 |  |      | 3,123,528  |   |      |   | (1,999,736 | )
|                                                                        |  |      |            |   |      |   |            |  
|INVESTING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Acquisition of property, plant and equipment                            |  |      | (54,611    | ) |      |   | (142,307   | )
|Sales proceeds of disposal of fixed assets                              |  |      |           |   |      |   | 2,375      |  
|Construction in progress                                                |  |      | (2,288,983 | ) |      |   | (1,917,782 | )
|Acquisition of intangible assets                                        |  |      |           |   |      |   | (76,958    | )
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow used in investing activities                                  |  |      | (2,343,594 | ) |      |   | (2,134,672 | )
|                                                                        |  |      |            |   |      |   |            |  
|FINANCING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Cash proceeds from issuance of common stock                             |  |      |           |   |      |   | 137,536    |  
|Due to directors                                                        |  |      | (691,520   | ) |      |   | (392,416   | )
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow used in financing activities                                  |  |      | (691,520   | ) |      |   | (254,880   | )
|                                                                        |  |      |            |   |      |   |            |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |  |      | 88,414     |   |      |   | (4,389,288 | )
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  |      | (179,945   | ) |      |   | 2,151,363  |  
|Cash and cash equivalents, beginning of period                          |  |      | 54,920,548 |   |      |   | 46,959,908 |  
|                                                                        |  |      |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                |  | $    | 54,829,017 |   |      | $ | 44,721,983 |  
|                                                                        |  |      |            |   |      |   |            |  
|SUPPLEMENTARY CASH FLOWS DISCLOSURES                                    |  |      |            |   |      |   |            |  
|Interest paid                                                           |  | $    |           |   |      | $ |           |  
|                                                                        |  |      |            |   |      |   |            |  
|Taxes paid                                                              |  | $    | 803,044    |   |      | $ | 975,806    |  
|                                                                        |  |      |            |   |      |   |            |  
|SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |  |      |            |   |      |   |            |  
|Common shares issued for services                                       |  | $    | 295,784    |   |      | $ | 3,673,349  |  
|                                                                        |  |      |            |   |      |   |            |  

The accompanying notes are an integral part of the financial statements.



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HQ SUSTAINABLE MARTIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

MARCH 31, 2009

NOTE
1BASIS OF PRESENTATION

The consolidated financial statements include the accounts of HQS and all its subsidiaries (The
Group). All material inter-company accounts and transactions have been eliminated. The consolidated financial statements are prepared in accordance with generally accepted accounting principles used in the United States of America.

NOTE 2ORGANIZATION AND PRINCIPAL ACTIVITIES

Our company was initially incorporated on September 21, 1989 under the laws of the State of Nevada. On March 17, 2004, Process Equipment, Inc., Process Equipment Acquisition Corporation, a Nevada corporation and wholly-owned
subsidiary of Process Equipment, Inc., or PEAC, and Jade Profit Investment Limited, or Jade, a British Virgin Islands limited liability corporation, entered into an agreement and plan of merger with us. Pursuant to that agreement, Process Equipment,
Inc., through PEAC, acquired Jade, and 84.42 percent ownership in Jades subsidiary Hainan Quebec Ocean Fishing Co. Ltd, a Peoples Republic of China, limited liability corporation, which we refer to as HQOF. As a result of that
transaction, HQOF became our main operating subsidiary. In April of 2004, pursuant to the above agreement and plan of merger, the board of directors of Process Equipment, Inc. and a majority of the stockholders approved a name change and change of
domicile of that company to Delaware via a merger with the newly formed wholly-owned Delaware subsidiary, HQS. The name change, change of domicile and merger became effective on May 19, 2004, with HQS being the surviving entity in the merger
and acquiring all the assets and liabilities of Process Equipment, Inc. On August 17, 2004, we entered into a Purchase Agreement with Sino-Sult Canada (S.S.C.) Limited, a Canadian limited liability corporation (SSC), whereby we
acquired Sealink Wealth Limited (Sealink), SSCs wholly owned subsidiary incorporated in the British Virgin Islands. Sealink is the sole owner of Hainan Jiahua Marine Bio-Products Co. Ltd., a limited liability company existing in
China (Jiahua Marine) which is primarily engaged in the production and sales of marine bio-products and healthcare products in the PRC.

Further, effective August 17, 2004, HQS caused Jade Profit Investment Limited, its wholly-owned subsidiary, to acquire the minority equity interest equal to 15.58 percent that Jade did not already own in Hainan Quebec Ocean Fishing
Company Limited, HQSs principal operating subsidiary. This purchase was effected by Jade pursuant to the Purchase Agreement, dated as of August 17, 2004, between Jade and Hainan Fuyuan Investment Company Limited, the holder of the
minority equity interest of HQOF being acquired by Jade. Jade has previously obtained all requisite governmental approvals in the PRC in order to consummate this transaction.

The Group is principally engaged in the vertically integrated business of aquaculture through cooperative supply agreements, ocean product harvesting,
and processing and sales of farm-bred and ocean harvested aquatic products. The principal products of HQOF are cross-bred hybrid of tilapia and white-legged shrimp, which are exported, directly and indirectly, to the United States, Canada, Japan and
European countries. The major market is for export.

The Group is also engaged in the production and sales of marine bio-products and
healthcare products in the PRC. The principal products of Jiahua Marine Bio-Product Company Limited (100 percent held subsidiary of Sealink) are Shark Cartilage Capsule, Shark Liver Oil and Shark Liver (Soft gel). The major market is domestic in the
PRC.



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NOTE 3USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results when ultimately realized
could differ from those estimates.

NOTE 4EARNINGS PER SHARE

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed similar
to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were diluted.

NOTE 5FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of certain financial instruments, including cash and cash equivalents, receivables, accounts payable and accrued expenses and debt, approximates their fair value at March 31, 2009 and
December 31, 2008 due to the relatively short-term maturity of these instruments

NOTE 6INVENTORIES

Inventories are stated at the lower of cost and net realizable value. Cost is calculated on the weighted average basis and includes all costs to acquire
and other costs incurred in bringing the inventories to their present location and condition. We evaluate the net realizable value of inventories on a regular basis and record a provision for loss to reduce the computed weighted average cost if it
exceeds the net realizable value.

The inventories at March 31, 2009 and December 31, 2008 are summarized as follows:



|                 |  |               |           |                  |   |          
|---------------- |  | ------------- | --------- | ---------------- | - | ---------
|                 |  | March 31,2009 |           | December 31,2008
|Raw materials    |  | $             | 157,312   |                  | $ | 183,232  
|Work-in-progress |  |               | 119,683   |                  |   | 156,416  
|Finished goods   |  |               | 1,325,066 |                  |   | 701,980  
|                 |  |               |           |                  |   |          
|                 |  | $             | 1,602,061 |                  | $ | 1,041,628
|                 |  |               |           |                  |   |          

NOTE 7FOREIGN CURRENCY TRANSLATION

We follow SFAS No. 52,Foreign Currency Translation, for both the translation and re-measurement of balance sheet and income statement
items into U.S. dollars. Resulting translation adjustments are reported as a separate component of accumulated comprehensive income (loss) in stockholders equity.

The Group maintains its books and accounting records in Renminbi (RMB), the PRCs currency, being the functional currency. Transactions denominated in foreign currencies are translated into the
functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date. Any
translation gains (losses) are recorded in exchange reserve as a component of shareholders equity. Income and expenditures are translated at the average exchange rate of the year



|                                    |  |        |  |       
|----------------------------------- |  | ------ |  | ------
|                                    |  | 2009   |  | 2008  
|Quarter-end RMB : US$ exchange rate |  | 6.8330 |  | 6.8240
|Average RMB : US$ exchange rate     |  | 6.8285 |  | 7.0643

On January 1, 1994, the PRC government introduced a single rate of exchange as quoted daily
by the Peoples Bank of China (the Unified Exchange Rate). The quotation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either
through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the Peoples Bank of China. Approval of foreign currency payments by the Bank of China or other institutions requires
submitting a payment application form together with suppliers invoices, shipping documents and signed contracts.

Commencing from
July 21, 2005, China has adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. The exchange rate of the US dollar against the RMB was adjusted from approximately RMB
8.28 per US dollar to approximately RMB 8.11 per US dollar on July 21, 2005. Since then, the PBOC administers and regulates the exchange rate of US dollar against RMB taking into account demand and supply of RMB, as well as domestic
and foreign economic and financial conditions.



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NOTE 8INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

The Companys subsidiaries registered in the PRC are subject to state and local income taxes within the PRC at the applicable tax
rates on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign enterprises. On March 17, 2007, a new PRC Enterprise Income Tax Law (EIT) was promulgated
and introduced a new uniform tax regime in the PRC. The EIT became effective on January 1, 2008. That new Law provides, amongst other issues, that income derived from processing of fishery products and processing of agricultural products will
be exempt from the EIT tax rate. Starting in 2008, HQOF benefits from a 0 percent tax rate. Jiahua Marine was subject to a tax rate under the new law, which increased by 2 percent in 2009 and will increase gradually until it reaches a
maximum of 25 percent in 2012.

The statutory income tax rate in the PRC for 2009, for our segments, is as follows:



|                             |  |      |   |  |               |  
|---------------------------- |  | ---- | - |  | ------------- | -
|                             |  | HQOF |   |  | Jiahua Marine |  
|Statutory tax rate           |  | 0    | % |  | 20            | %
|Tax holidays and concessions |  |     |   |  |              |  
|                             |  |      |   |  |               |  
|Effective tax rate           |  | 0    | % |  | 20            | %

Income taxes are calculated on a separate entity basis. Currently there is no tax benefit or
burden recorded for the United States.

NOTE 9CONVERTIBLE PROMISSORY NOTES AND WARRANTS

Effective January 25, 2006, the Company completed a financing transaction with a group of private investors for an amount of $5,225,000, bearing an
annual interest rate of 8%. After deducting commissions and other costs of the offering of $522,500, the Company received net proceeds of $4,702,500. The Notes were due and totally repaid on January 25, 2008. The Notes were convertible into
shares of the Companys Common Stock at a per share conversion price at the rate of $6.00 per share of Common Stock. The Company followed EITF 0027, the issue 985 model in recording the convertible notes and warrants in its
financial statements.

One Class A Warrant and one Class B Warrant were issued for each two shares of Common Stock which would be
issued on the Closing Date assuming the complete conversion of the Notes issued on the Closing Date at the rate of $6.00 per share of Common Stock. The exercise price to acquire a share of Common Stock upon exercise of a Class A or B Warrants
was established at $6.00. The final portion of the Class A Warrants were exercised in January 2009. The Class B Warrants shall be exercisable until January 25, 2011 (five (5) years after the closing of the financing). The offer
and sale of these securities were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act of 1933, as amended (the Securities Act) and
in Section 4(2) and Section 4(6) of the Securities Act and/or Rule 506 of Regulation D The Company evaluated the convertible debt and warrants under the guide EITF 00-19, Accounting for Derivative Financial Instruments Indexed to,
and potentially Settled in, a Companys Own Stock, with regards to the control over the form of ultimate settlement of the instruments. The Company classified the warrants as equity under the guide EITF 00-19. The related registration
statement became effective on June 15, 2006.

Furthermore, effective November 8, 2006, the Company completed another financing
transaction with a group of private investors for an amount of $5,000,000, bearing interest at 6.5% per annum. The financing consisted of two components: (a) promissory notes of the Company, in the principal aggregate amount of $5,000,000
due November 1, 2009 and (b) warrants registered in the name of each Investor to purchase an aggregate of up to 200,000 shares of our Common Stock. The Notes are convertible into shares of the Companys $0.001 par value Common Stock
at a conversion price of $5.00 per share. The Warrants expire on the fifth anniversary of the effective date of the reverse stock split. The exercise price to acquire a share of Common Stock is equal to the Conversion Price under the Notes,
currently at the rate of $5.00 per share of Common Stock. At March 31, 2009, there were 30,000 such warrants still unexercised,



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NOTE 10SEGMENTS

No geographical segment analysis is provided for the three months ended March 31, 2009 and 2008, respectively, as less than 10% of consolidated revenues and less than 10% of consolidated income from operations is
attributable to the segment other than the Mainland China.

Business segment for the three months ended March 31, 2009



|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  
|----------------------------------------------------- |  | ------------------ | - |  | --------------------- | - |  | ---------------- | - |  | ------------- | -
|                                                      |  | AquacultureProduct |   |  | Health andBio-product |   |  | UnallocatedItems |   |  | Consolidation |  
|Sales to external customers                           |  | 7,310,236          |   |  | 3,530,585             |   |  |                 |   |  | 10,840,821    |  
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Selling and distribution expenses                     |  | 153,660            |   |  | 100,492               |   |  |                 |   |  | 254,152       |  
|Marketing and advertising                             |  |                   |   |  | 1,425,020             |   |  | 1,605            |   |  | 1,426,625     |  
|General and administrative expenses                   |  | 139,615            |   |  | 169,542               |   |  | 1,297,215        |   |  | 1,606,372     |  
|Depreciation and amortization                         |  | 213,641            |   |  | 147,232               |   |  | 66,238           |   |  | 427,111       |  
|Doubtful accounts                                     |  | 30,157             |   |  | 1,409                 |   |  |                 |   |  | 31,566        |  
|Finance costs                                         |  | (13,516            | ) |  | (18,450               | ) |  | 550,411          |   |  | 518,445       |  
|Fair value change in derivative financial instruments |  |                   |   |  |                      |   |  | (825,871         | ) |  | (825,871      | )
|Income/(loss) before income taxes                     |  | 1,541,766          |   |  | 884,254               |   |  | (1,084,095       | ) |  | 1,341,925     |  
|Income taxes                                          |  |                   |   |  | 226,569               |   |  |                 |   |  | 226,569       |  
|Net Income/(loss) for the period                      |  | 1,541,766          |   |  | 657,685               |   |  | (1,084,095       | ) |  | 1,115,356     |  
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment assets                                        |  | 49,556,810         |   |  | 35,655,452            |   |  | 13,439,885       |   |  | 98,652,147    |  
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment liabilities                                   |  | 1,720,340          |   |  | 1,283,485             |   |  | 10,600,009       |   |  | 13,603,834    |  
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  

Business segment for the three months ended March 31, 2008



|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|----------------------------------- |  | ------------------ | - |  | --------------------- | - |  | ---------------- | - |  | ------------- | -
|                                    |  | AquacultureProduct |   |  | Health andBio-product |   |  | UnallocatedItems |   |  | Consolidation |  
|Sales to external customers         |  | 6,527,467          |   |  | 2,683,023             |   |  |                 |   |  | 9,210,490     |  
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Selling and distribution expenses   |  | 122,911            |   |  | 106,265               |   |  |                 |   |  | 229,176       |  
|Marketing and advertising           |  |                   |   |  | 1,164,518             |   |  |                 |   |  | 1,164,518     |  
|General and administrative expenses |  | 146,286            |   |  | 142,472               |   |  | 1,164,042        |   |  | 1,452,800     |  
|Depreciation and amortization       |  | 173,877            |   |  | 103,240               |   |  | 62,638           |   |  | 339,755       |  
|Doubtful accounts (Recovery )       |  | 7,076              |   |  | (17,614               | ) |  |                 |   |  | (10,538       | )
|Finance costs                       |  | (18,514            | ) |  | (18,040               | ) |  | 1,675,959        |   |  | 1,639,405     |  
|Income/(loss) before income taxes   |  | 1,319,393          |   |  | 549,250               |   |  | (2,785,736       | ) |  | (917,093      | )
|Income taxes                        |  |                   |   |  | 112,350               |   |  |                 |   |  | 112,350       |  
|Net income (loss) for the period    |  | 1,319,393          |   |  | 436,900               |   |  | (2,785,736       | ) |  | (1,029,443    | )
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment assets                      |  | 38,580,333         |   |  | 25,695,929            |   |  | 20,941,916       |   |  | 85,218,178    |  
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment liabilities                 |  | 2,206,654          |   |  | 1,152,301             |   |  | 7,600,688        |   |  | 10,959,643    |  
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  



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NOTE 11: CAPITAL COMMITMENT

A. CAPITAL COMMITMENTS

As of March 31, 2009, there were capital commitments amounting to $2,033,194, mostly related to the
construction work of the feed mill.

B. LEASE COMMITMENTS

The Company has entered into operating leases, for rental of office space and other services, which expire on different dates. The minimum future payments under these commitments for the next five years are as
follows:



|           |  |   |        
|---------- |  | - | -------
|2009       |  | $ | 85,713 
|2010       |  |   | 124,432
|2011       |  |   | 41,032 
|2012       |  |   | 41,032 
|2013       |  |   | 41,032 
|Thereafter |  |   | 430,832
|           |  |   |        
|Total      |  | $ | 764,073
|           |  |   |        

NOTE 12RECENT PRONOUNCEMENTS

Effective January 1, 2009, the Company adopted the provisions of Emerging Issues Task Force (EITF) EITF 07-05, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entitys Own Stock, (EITF 07-05). EITF 07-05 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and to any freestanding financial instruments that are potentially settled in an entitys own common stock. As of January 1, 2009, as a result of adopting EITF 07-05,
warrants to purchase 409,358 shares of our common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. As such, effective January 1, 2009, the Company reclassified the fair value
of these warrants to purchase common stock, which had exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue. Furthermore, since the promissory notes in
the liabilities carry an embedded conversion feature, these notes were also recognized as derivative instruments under EITF 07-05. On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment,
$1,953,746 to beginning retained earnings and $4,403,239 to common stock warrant liability to recognize the fair value of such warrants on such date and the embedded conversion feature of the outstanding notes. The fair value of these financial
instruments decreased to $3,942,819 as of March 31, 2009. As such, we recognized a $825,871 non-cash credit to operations from the change in fair value of these warrants for the three months ended March 31, 2009.

NOTE 13LEGAL PROCEEDINGS

We are currently not
involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our
companys or our companys subsidiaries officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.



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In this Quarterly Report on Form 10-Q, Company, our company, us, and our
refer to HQ Sustainable Maritimes Industries, Inc., a Delaware corporation, and our subsidiaries, unless the context requires otherwise.

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is managements
discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of
our current management. This report includes forward-looking statements. Generally, the words believes, anticipates, may, will, should, expect, intend,
estimate, continue, and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the
matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not
be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.

GENERAL OVERVIEW

We are a leader in
toxin free vertically integrated aquaculture and aquatic product processing, with processing facilities located in Hainan, PRC. We market our products in Asia, America and Europe. We have two processing plants in Hainan, one that processes aquatic
products providing toxin-free tilapia and other aquatic products, and the other processes marine bio and healthcare products. We seek to expand our operations through providing additional processing facilities (e.g. the construction of our third
facility in early 2009, which will process extruded feed) in China and marketing efforts throughout North America and Europe.

In addition,
you should consider the following information as you read the below results of operations discussion and our financial statements and related notes included elsewhere in this report. From the first quarter of 2004, following our reverse merger with
Process Equipment, Inc., we have been operating under the name of HQS. At that time, we owned 84.4 percent of HQOF, currently our principal operating subsidiary that processes our seafood products; in August 2004 we acquired the remaining ownership
interest that we did not already own in HQOF. The fiscal year-end of Process Equipment was changed from April 30, to December 31 following the reverse merger. In August 2004, we acquired a 100 percent interest in our current subsidiary
Jiahua Marine which operates a marine bio and healthcare plant, including nutraceuticals, in Hainan Province, China.

Our business
operations consist of two segments, the marine bio and healthcare product segment and the aquaculture product segment. Since the acquisition of Jiahua Marine, which represents the marine bio and healthcare product segment, that segment represented a
significant contribution to our net income and currently provides higher profit margins than our aquaculture products segment. Our management expects, but cannot guarantee, the sales and contribution to net income to continue during the next year in
similar proportions. However, as the marketing efforts increase in connection with the aquaculture product segment and the investment in the feed mill plant and equipment for new processing capacity of extruded feed are completed in 2009, our
management expects that the aquaculture product segment will begin to contribute a greater portion of net income in 2009 and beyond.

The
following Managements Discussion and Analysis (MD&A) is intended to provide the readers with an insight of the Group. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and
the accompanying notes (Notes).

Our principal executive office is located at 1511, Third Avenue, Suite 788, Seattle,
Washington, and our telephone number is (206) 621 9888. The URL for our website is http://www.hqfish.com.

CRITICAL ACCOUNTING POLICIES AND
ESTIMATES

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Companys consolidated
financial statements.

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is calculated on the weighted average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and
condition. The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed weighted average cost if it exceeds the net realizable value.

Income Taxes

Taxes are calculated in
accordance with taxation principles currently effective in the PRC. The Company accounts for income taxes under the provision of Statements of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company accounts for income taxes using the liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that
includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.



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Related Parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational
decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

Revenue Recognition

The Company recognizes revenue when the significant risks and rewards of
ownership have been transferred to the customer, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectibility is probable. The Company recognizes
sales when the merchandise is shipped, title has passed to the customers and collectibility is reasonably assured.

Concentration of Credit Risk

Financial instruments that potentially subject our company to significant concentrations of credit risk consist primarily of trade
accounts receivable. We perform ongoing credit evaluations with respect to the financial condition of its creditors, but do not require collateral. In order to determine the value of our accounts receivable, we record a provision for doubtful
accounts to cover probable credit losses. Our management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable

Recent developments

No significant
development happened during the three months period ended March 31, 2009.

Results of Operations  Three Months Ended March 31, 2009 as
Compared to Three Months Ended March 31, 2008

Total sales for the three months period ended March 31, 2009 increased by 18%, from $9,210,490
for the three months period ended March 31, 2008 to $10,840,821 for the three months period ended March 31, 2009. The gross profit for the three months period ended March 31, 2009 increased by 22% to $4,753,314 when compared to the
corresponding period of 2008. That increase in the gross profit in 2009 was the result of higher sales from both segments in the current quarter when compared to the corresponding quarter of 2008. The overall gross profit ratio improved slightly in
the first three months of 2009 to 43.8% from 42.3% in the first three months of 2008. Income from operations for the three months period ended March 31, 2009 increased by 39% when compared to the same period of 2008 mostly as a result of
improved gross profit realized during the current period. Net income for the three months period ended March 31, 2009 increased by $2,144,799 mostly due to increased activity and related gross profit from both segments, gain on fair value
change in derivative financial instruments of approximately $826,000, added to the significant reduction in financing costs in the amount of $1,120,960 in 2009. In 2008, financing costs were affected by penalties for late filing of the registration
statement of the underlying shares related to those convertible notes issued in November 2006.

By Segments

Manufacturing and Selling of aquatic products

HQ Ocean Fishing
Co. Ltd (HQOF) is engaged in the manufacturing and selling of aquatic products. The sales contributed by this segment increased to $7,310,236 for the three months ended March 31, 2009 compared to $6,527,467 for the corresponding
period of 2008, an improvement of 12%. That increase is mostly related to increased volumes in 2009 as the average market prices of our products reduced in the first quarter of 2009, compared to the corresponding period of 2008. The related gross
profit ratio of this segment was 28% and 29% for the three months period ended March 31, 2009 and 2008 respectively. The decrease in the gross profit ratio was due to a reduction in the sales price of our products in the first quarter of 2009
mostly offset by a comparable decrease in manufacturing costs, including raw materials. This segment contributed $1,541,766 and $1,319,393 to net income for the three months period ended March 31, 2009 and 2008 respectively. Return on sales
from this segment in 2009 remained at approximately 21%, a comparable level to the same period in 2008.

Manufacturing and Selling of Marine Bio and
Healthcare products

Our other wholly-owned subsidiary, Jiahua Marine, is engaged in the manufacturing and selling of Marine Bio and Healthcare
products. During the three months period ended March 31, 2009 and 2008, Jiahua Marine recorded sales of $3,530,585 and $2,683,023 respectively, an increase of 32%. The gross profit ratio from this segment was 77% and 76% for the three months
ended March 31, 2009 and 2008 respectively. Furthermore, the major expense of this segment continues to be marketing and advertising, corresponding to 40% and 43% of revenues for the three months ended March 31, 2009 and 2008,
respectively. The net income contributed by this segment was $657,685 for the three months period ended in March 2009 compared to a net income of $436,900 for the three months ended March 31 2008. The increase in net income in 2009 was
primarily contributed by higher sales and related gross margin, offset by increased marketing and advertising expenses.

By Operations

Sales. For the three months period ended March 31, 2009, sales increased by $1,630,331 to $10,840,821 or 18%. When compared to the same
period in 2008. This improvement in sales resulted from a better performance from both segments in 2009, mostly the health and bio-product segment which contributed an increase in sales of $847,562, or 32% compared to the corresponding period of
2008. The aquatic products segment improved its sales by $782,769, or 12% in the first quarter of 2009 compared to the same period of 2008.

Cost of
sales. Cost of sales increased by $776,805 or 15% to $6,087,507 from $5,310,702 for the three months ended March 31, 2009, as compared to the corresponding period of the prior year. The overall gross profit ratio increased from
42.3% for the three month period ended March 31, 2008 to 43.8% for the corresponding period of 2009. Although volumes increased in both segments, the gross profit ratios remained approximately the same in the first three months of 2009, when
compared to the same period of 2008. The improvement in the gross profit margin was the result of increased volumes from both segments.



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Selling and distribution expenses. Selling and distribution expenses increased by $24,976 to
$254,152 for the three months period ended March 31, 2009, as compared to the corresponding period of the previous year. As a percentage of sales, the selling and distribution expenses remained stable in the first quarter of 2009, as compared
to the corresponding quarter of 2008.The increase in these expenses was the result of higher volume of sales realized in the current period, from both segments.

Marketing and advertising expenses. Marketing and advertising expenses increased by $262,107 or 23% from $1,164,518 to $1,426,625 as compared to the corresponding period of the previous year. New bio-products
penetrating the market during the current period triggered increased advertising expenses in the first three months of 2009. This expense continues to be the most important expense of that segment, corresponding to 40% of sales in 2009 and 43% in
the same period of 2008. Furthermore, significant advertising expenditures for the promotion of our bio-products to achieve customer recognition are consistent with industry practices.

General and administrative expenses. General and administrative expenses increased by $153,572 to $1,606,372 in the current three month period ended March 31, 2009, from $1,452,800 in the
corresponding period of 2008. Most of the increase was the result of branding-related expenses, traveling, investors relations and other U.S. head office expenses

Depreciation and amortization. Depreciation and amortization increased by $87,356 to $427,111 in the current quarter when compared to the same quarter of 2008, mainly as a result of acquisition of
fixed assets in the second portion of 2008 triggering new depreciation charges in the first quarter of 2009.

Doubtful accounts
(Recovery). Doubtful accounts in the first three months of 2009 amounted to $31,566, compared to a recovery of $10,538 in the corresponding period of 2008. The increase in 2009, which originated from the aquaculture product segment,
was the result of providing for potential losses in our receivables which did not materialize to date, in accordance with our accounting policy.

Income from operations. Income from operations increased to $1,007,488 in the first quarter of 2009 from $724,077 in the corresponding quarter of the previous year. Although the gross profit increased in 2009 by
approximately $853,000, increased marketing and advertising costs in the health and bio-product segment to support marketing of new products brought down the income from operations in the current quarter.

Finance costs. Finance costs substantially decreased to $518,445 in the first three months of 2009 from $1,639,405 for the corresponding period of
2008.In the first three months of 2008, the Company recognized penalties on late filing of the registration statement relating to the underlying shares on the convertible notes issued in November 2006. Such one time costs did not occur in 2009. The
2009 financing costs are the result of recognizing the carrying interests on the promissory notes issued in November 2006 added to the continued combination of amortization of the future conversion of warrants (noncash) attributed to investors
on those November 2006 notes of $5,000,000, added to the amortization of the embedded conversion option (noncash) related to the same notes. Those non-cash financing costs were recognized in accordance with FAS 123R and EITF 00-27. Such
amortization will be repeated, on a pro-rata basis, until maturity of the underlying notes. Finally, in the first quarter of 2009, in order to avoid the costs in time and expenses of an arbitration proceeding, the Company reduced the exercise price
of certain warrants convertible into shares of the Companys $0.001 par value Common Stock to a conversion price of $5.00 per share, provided such warrants were immediately exercised; that transaction generated a loss of approximately $365,000
in the first quarter of 2009.

Fair value change in derivative financial instruments.Effective January 01, 2009,
in recognition of new accounting standards related to the fair value of our outstanding warrants and embedded conversion feature of our promissory notes in accordance with EITF No.07-05 and FAS No.133, we recognized in our income statement the
change in value from January 1, 2009 to March 31, 2009 of those two items included in our current liabilities. In the first quarter of 2009, we recognized an income of $825,871 corresponding to the reduction in fair value of those two
financial instruments between January 1, 2009 and March 31,2009. This fair value change will be evaluated quarterly in the future until expiration of the warrants and the promissory notes, and the corresponding change will be charged or
credited to our income in the corresponding period.

Income/ (loss) before income taxes. Income before income taxes showed an
improvement of $2,259,018 in the first three months of 2009, when compared to the same period of 2008. That significant improvement was the result of better income from operations recognized in the first three months of 2009 as indicated above,
added to a reduction of finance costs and the recognition of the fair value change in derivative financial instruments, as described above.

Current
income taxes.In the current three months period ended March 31, 2009, current income taxes increased by $114,219 to $226,569 from $112,350 in the corresponding period of 2008. The increase was mostly due to the combination of
increased taxable income in 2009 added to higher income tax rate in the same period from the health and bio-product segment, since the new tax legislation was promulgated in 2008.

Deferred income taxes. There was no deferred income tax recognized in both periods as there was no material timing differences to justify recognition of such deferred tax expenses.

Net income/ (loss) attributable to shareholders.In the first three months of 2009, the Company realized a net income $1,115,356
compared to a net loss of $1,029,443 in the corresponding period of 2008. As indicated above, increased sales with related gross profit from both our segments, coupled with reduced financing costs and gain on fair value change in derivative
financial instruments resulted in better net income to shareholders in the current quarter then the corresponding period of 2008.

LIQUIDITY AND CAPITAL
RESOURCES

Our cash and cash equivalents remain solid at $54,829,017 at March 31, 2009, as compared to $54,920,548 at December 31, 2008. As of
March 31, 2009, working capital was $67,265,624 compared to $72,203,260 at December 31, 2008. The funds generated by the operating activities during the first quarter of 2009 were used mainly to support our investment in the new feed plant
to be in operation in the coming months.

Total assets decreased by $1,534,126, or 1.5%, to $98,652,147 at March 31, 2009, compared to $100,186,273 as
of December 31, 2008. Shareholders equity decreased by $3,224,715 or 3.7%, to $85,048,313 at March 31, 2009, from $88,273,028 as of December 31, 2008.

To date, we have financed our operations through the combination of our operating revenues, equity and debt financing (in connection with which we have at times incurred significant costs), short-term bank loans, and
the use of shares of our common stock issued as payment for services rendered to us by third parties. In the past, we issued shares of our common stock and warrants in private placement transactions to help finance our operations, and to pay for
professional services (such as financial consulting, market development, legal services and public relations services). We recognized these services on our books as operating or deferred expenses and amortized over their estimated useful life. The
number of shares we issued for these purposes were determined as of the dates of invoices relating to such services, and the shares were valued at their market prices on those respective dates. In addition, as required by PRC laws, we establish
yearly reserves shown in the shareholders equity section of our balance sheet. Those reserves, which are created by a transfer from the retained earnings account, limit our capacity to pay dividends to shareholders until the retained earnings
become positive. As we are in an expansion phase, we do not intend to pay dividends to shareholders in the foreseeable future. To date, we have not paid any dividends.



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We also completed a financing in January 2006, in which we issued to a group of twenty one investors, in a private
placement, (1) convertible secured promissory notes bearing interest at 8% per year which matured on January 25, 2008, in the aggregate principal amount of $5,225,000; (2) Class A warrants, with each warrant giving the right
to the holder to purchase one share of our common stock at the exercise price of $6.00 until January 2009 (totally exercised since that date); and (3) Class B warrants, with each warrant giving the right to the holder to purchase one share of
our common stock at the exercise price of $6.00 until January 2011. The net proceeds of this financing to us were $4,702,500, after deducting commissions and other costs of this transaction equal to $522,500.

We completed another financing in November 2006, in which we issued to two investors, in a private placement, (1) convertible promissory notes bearing interest at
6.5% and maturing in November 1, 2009, in the principal aggregate amount of $5,000,000 with the conversion price of $5.00 after reverse split and (2) warrants registered in the name of each investor to purchase an aggregate of up to
200,000 of our common stock, after reverse split, with each warrant giving the right to the holder to purchase one share of our common stock at the exercise price of $5.00 until the fifth anniversary of the effective date of the reverse stock split
effectuated. The net proceed of this financing to us were $4,932,500, after deducting commissions and other costs of this transaction equal to $67,500. The notes are due on November 1, 2009, and there is still 30,000 such warrants
unesrcised at the date of the present report.

In December 2007, we completed a follow-on offering by issuing 3,450,000 new shares of our common stock to
two underwriters (including the over-allotment of 450,000 shares) for a total gross consideration of $26,910,000 (corresponding to net proceeds of approximately $23,800,000). We have allocated this financing as follows: Completing its new feed plant
expected to be in operation in the first half of 2009; Build a new processing plant expected to be in operation in the second half of 2010 and; Use the balance for general working capital purposes.

At March 31, 2009, about 43% of our consolidated sales are derived from our five largest clients, and our results of operations therefore depend on a small number
of clients. As part of our short and medium-term business plan, including our current efforts to raise funds to support the anticipated expansion of our operations, we intend to invest in our infrastructure to construct a new processing plant and
our own organic feed mill. We expect that this will allow us to meet forecasted incremental demand for our products in the United States and Europe. As a result, we plan to develop and serve new clients, which should reduce our dependence on
individual clients to more acceptable levels.

In order to ensure sufficient funds to meet our future needs for capital, management believes that, from
time to time, we will continue to evaluate opportunities to raise financing through some combination of commercial bank borrowings, the private or public sale of equity, or issuance of debt securities. We are currently in the process of examining
various financing opportunities to obtain additional liquidities to help finance our operations, as well as support our additional cash requirements related to volume increases that we anticipate might occur in the future, specifically in the
inventory and receivables build-up. However, future equity or debt financing may not be available to us at all, or if available, may not be on terms acceptable to us. If we are unable to obtain financing in the future, we will continue to develop
our business on a reduced scale based on our existing capital resources.

The ratio of current assets to current liabilities decreased to 5.9 times
($80,869,458/$13,603,834) at March 31, 2009, from and 7.1 times ($84,116,505/$11,913,245) at December 31, 2008.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not hold any derivative instruments
and do not engage in any hedging activities. Because most of our purchases and sales are made in RMB, any exchange rate change affecting the value of the RMB relative to the U.S. dollar could have an effect on our financial results as reported in
U.S. dollars. If the RMB were to depreciate against the U.S. dollar, amounts reported in U.S. dollars would be correspondingly reduced. If the RMB were to appreciate against the U.S. dollar, amounts reported in U.S. dollars would be correspondingly
increased.

ITEM 4. CONTROL AND PROCEDURES.

a) Evaluation of Disclosure Controls and Procedures.

Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized
control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published inInternal Control-Integrated Framework , is known as the COSO Report. Our Management has chosen the COSO
framework on which to base its assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of March 31, 2009.

The Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q for the period ended March 31, 2009. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q. There were no changes in internal control over
financial reporting (as defined in Rule 13a-15(e) under the Exchange Act) that occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable
and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of
control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

b) Changes in Internal Control over Financial Reporting.

During the Quarter ended March 31, 2009, there was no change
in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

We are
currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of
our companys or our companys subsidiaries officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

ITEM 1A - Risk Factors

We have updated the risk factors previously disclosed in Part I,
Item 1A of our Annual Report on Form 10K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission on March 12, 2009 (the Fiscal 2008 10K). We believe there are no
changes that constitute material changes from the risk factors previously disclosed in the Fiscal 2008 10K.



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ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On January 7, 2009, we issued 32,500 shares of our Common Stock to two investors, namely the Tail Wind Fund Ltd and Solomon Strategic Holdings, Inc in relation to
the payment of interests on the notes issued to those two investors in November 2006. Those shares were issued pursuant to the exemption provided by Section 4(2) under the Securities Act of 1933, for a transaction not involving a public
offering.

On January 7, 2009, we issued 5,256 shares of our Common Stock to our four independent non-executive directors, Andrew Intrater, Fred Bild,
Daniel Too and Joseph I. Emas, to satisfy our obligations to pay each such director an annual bonus in shares of our common stock pursuant to our independent non-executive director agreements with them. All of those shares were issued pursuant to
the exemption provided by Section 4(2) under the Securities Act for a transaction not involving a public offering.

On January 20, 2009, we
issued 16,004 shares of our Common Stock to Lucky Ventures Limited in consideration of financial consulting services rendered to us by that company. All of those shares were issued pursuant to the exemption provided by Section 4(2) under the
Securities Act for a transaction not involving a public offering.

From January 27 through January 29, 2009, we issued a total of 7,050 shares of
our Common Stock to seven investors in our Company in respect of the January 2006 financing. Those shares were issued pursuant the cashless exercise of certain warrants issued to such investors had in connection with the January 2006 financing. All
of these shares were issued pursuant to the exemption provided by Section 4(2) under the Securities Act for a transaction not involving a public offering.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

There have been no material defaults.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters have been submitted to a vote of security holders during the period covered by this report.

ITEM 
5 - OTHER INFORMATION

None.

ITEM 6
 - EXHIBITS



|     |  |                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.                   
|31.2 |  | Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
|32.1 |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.                   
|32.2 |  | Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, Washington.

Dated: May 11, 2009



|                                         |  |                                                                 
|---------------------------------------- |  | ----------------------------------------------------------------
|HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
|                                         | 
|By:                                      |  | /s/ Norbert Sporns                                              
|Name:                                    |  | Norbert Sporns                                                  
|Title:                                   |  | Chief Executive Officer and President                           
|                                        
|                                         | 
|By:                                      |  | /s/ Jean-Pierre Dallaire                                        
|Name: Title:                             |  | Jean-Pierre Dallaire, Principal Financial and
Accounting Officer



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Exhibit Index



|               |  |                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                   
|31.1           |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.                   
|               | 
|31.2           |  | Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
|               | 
|32.1           |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.                   
|               | 
|32.2           |  | Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.



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