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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 JUNE 30, 2010

Commission file number: 001-33473





HQ
SUSTAINABLE MARITIME INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)







|                                                         |  |            |  |                         
|-------------------------------------------------------- |  | ---------- |  | ------------------------
|Delaware                                                 |  |            |  | 62-1407522              
|(State or jurisdiction of
Incorporation or organization) |  |            |  | (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





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, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | 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 July 30, 2010
|Common stock, $0.001 par value |  | 14,681,002                  









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|                                      |  |                                                                                     |  |             
|------------------------------------- |  | ----------------------------------------------------------------------------------- |  | ------------
|                                      |  |                                                                                     |  | Page Numbers
|PART I - FINANCIAL INFORMATION        |  |                                                                                    
|Item 1.                               |  | Financial Statements                                                                |  | 3           
|Item 2.                               |  | Management Discussion and Analysis of Financial Condition and Results of Operations |  | 16          
|Item 3                                |  | Quantitative and Qualitative Disclosures about Market Risk                          |  | 23          
|Item 4.                               |  | Control and Procedures                                                              |  | 23          
|PART II - OTHER INFORMATION           |  |                                                                                    
|Item 1.                               |  | Legal Proceedings                                                                   |  | 23          
|Item 1A                               |  | Risk Factors                                                                        |  | 23          
|Item 2.                               |  | Unregistered Sales of Equity Securities and Use of Proceeds                         |  | 28          
|Item 3.                               |  | Defaults Upon Senior Securities                                                     |  | 28          
|Item 4.                               |  | [Reserved]                                                                          |  | 29          
|Item 5                                |  | Other Information                                                                   |  | 29          
|Item 6.                               |  | Exhibits                                                                            |  | 29          
|                                      | 
|SIGNATURES                            |  | 30                                                                                 
|                                      | 
|CERTIFICATIONS                        |  |                                                                                    
|                                      | 
|Exhibit 31  Management certification |  |                                                                                    
|                                      | 
|Exhibit 32  Sarbanes-Oxley Act       |  |                                                                                    



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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                              |  |                          |             |                             |   |            
|--------------------------------------------- |  | ------------------------ | ----------- | --------------------------- | - | -----------
|                                              |  | June 30,
2010(Unaudited) |             | December 31, 
2009(Audited)
|ASSETS                                        |  |                          |             |                             |   |            
|CURRENT ASSETS:                               |  |                          |             |                             |   |            
|Cash and cash equivalents                     |  | $                        | 43,839,971  |                             | $ | 36,957,303 
|Trade receivables, net of provisions (Note 6) |  |                          | 51,735,680  |                             |   | 58,186,055 
|Inventories (Note 7)                          |  |                          | 2,792,630   |                             |   | 2,204,931  
|Prepaid expenses                              |  |                          | 1,810,485   |                             |   | 1,194,910  
|                                              |  |                          |             |                             |   |            
|TOTAL CURRENT ASSETS                          |  |                          | 100,178,766 |                             |   | 98,543,199 
|                                              |  |                          |             |                             |   |            
|PROPERTY, PLANT AND EQUIPMENT, NET            |  |                          | 20,164,864  |                             |   | 20,150,568 
|CONSTRUCTION IN PROGRESS                      |  |                          |            |                             |   | 21,384     
|INTANGIBLE ASSETS                             |  |                          | 969,605     |                             |   | 979,738    
|OTHER ASSETS                                  |  |                          |             |                             |   |            
|Deferred taxes (Note 9)                       |  |                          | 111,252     |                             |   | 110,936    
|Deferred expenses (Note 10)                   |  |                          | 279,573     |                             |   |           
|                                              |  |                          |             |                             |   |            
|                                              |  |                          | 390,825     |                             |   | 110,936    
|                                              |  |                          |             |                             |   |            
|TOTAL ASSETS                                  |  | $                        | 121,704,060 |                             | $ | 119,805,825
|                                              |  |                          |             |                             |   |            

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



|                                                                                                                                                  |  |                          |             |                             |   |            
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | --------------------------- | - | -----------
|                                                                                                                                                  |  | June 30,
2010(Unaudited) |             | December 31, 
2009(Audited)
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                              |  |                          |             |                             |   |            
|CURRENT LIABILITIES:                                                                                                                              |  |                          |             |                             |   |            
|Accounts payable and accrued expenses                                                                                                             |  | $                        | 5,244,161   |                             | $ | 6,770,470  
|Tax payable                                                                                                                                       |  |                          | 632,096     |                             |   | 566,054    
|Due to directors                                                                                                                                  |  |                          | 552,799     |                             |   |           
|Derivative liabilities (Note 12)                                                                                                                  |  |                          | 80,988      |                             |   | 445,694    
|                                                                                                                                                  |  |                          |             |                             |   |            
|TOTAL CURRENT LIABILITIES                                                                                                                         |  |                          | 6,510,044   |                             |   | 7,782,218  
|                                                                                                                                                  |  |                          |             |                             |   |            
|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, 14,681,002 shares issued and outstanding as of June 30, 2010
and December 31, 2009 |  |                          | 14,681      |                             |   | 14,681     
|Additional paid-in capital                                                                                                                        |  |                          | 79,329,349  |                             |   | 79,281,209 
|Accumulated other comprehensive income                                                                                                            |  |                          | 9,791,334   |                             |   | 9,508,756  
|Retained earnings                                                                                                                                 |  |                          | 18,418,397  |                             |   | 15,737,809 
|Appropriation of retained earnings (Reserves)                                                                                                     |  |                          | 7,640,155   |                             |   | 7,481,052  
|                                                                                                                                                  |  |                          |             |                             |   |            
|TOTAL SHAREHOLDERS EQUITY                                                                                                                        |  |                          | 115,194,016 |                             |   | 112,023,607
|                                                                                                                                                  |  |                          |             |                             |   |            
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                        |  | $                        | 121,704,060 |                             | $ | 119,805,825
|                                                                                                                                                  |  |                          |             |                             |   |            

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 |            |   | Six Months Ended |  
|                                                      |  | June 30,2010       |            |   | June 30,2009     |   |            | June 30,2010 |  |   | June 30,2009 |  
|SALES                                                 |  | $                  | 20,656,174 |   |                  | $ | 16,009,757 |              |  | $ | 35,032,082   |   |  | $ | 26,850,578 |  
|COST OF SALES                                         |  |                    | 14,130,062 |   |                  |   | 9,447,275  |              |  |   | 24,127,930   |   |  |   | 15,785,079 |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|GROSS PROFIT                                          |  |                    | 6,526,112  |   |                  |   | 6,562,482  |              |  |   | 10,904,152   |   |  |   | 11,065,499 |  
|SELLING AND DISTRIBUTION EXPENSES                     |  |                    | 426,798    |   |                  |   | 290,150    |              |  |   | 788,882      |   |  |   | 544,302    |  
|MARKETING AND ADVERTISING                             |  |                    | 1,100,349  |   |                  |   | 1,338,860  |              |  |   | 2,078,330    |   |  |   | 2,765,486  |  
|GENERAL AND ADMINISTRATIVE EXPENSES                   |  |                    | 1,924,045  |   |                  |   | 2,023,593  |              |  |   | 3,912,860    |   |  |   | 3,629,965  |  
|DEPRECIATION AND AMORTIZATION                         |  |                    | 108,072    |   |                  |   | 90,726     |              |  |   | 204,404      |   |  |   | 267,540    |  
|DOUBTFUL ACCOUNTS (RECOVERY OF)                       |  |                    | 546,551    |   |                  |   | (12,379    | )            |  |   | (125,662     | ) |  |   | 19,187     |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|INCOME FROM OPERATIONS                                |  |                    | 2,420,297  |   |                  |   | 2,831,532  |              |  |   | 4,045,338    |   |  |   | 3,839,019  |  
|FINANCE (INCOME) / COSTS                              |  |                    | (23,998    | ) |                  |   | 166,780    |              |  |   | (23,460      | ) |  |   | 685,225    |  
|FAIR VALUE CHANGE IN DERIVATIVE FINANCIAL INSTRUMENTS |  |                    | (226,751   | ) |                  |   | 1,055,869  |              |  |   | (364,706     | ) |  |   | 229,998    |  
|OTHER INCOME                                          |  |                    | (2,133     | ) |                  |   | (11,754    | )            |  |   | (6,924       | ) |  |   | (38,765    | )
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|INCOME/(LOSS) BEFORE INCOME TAXES                     |  |                    | 2,673,179  |   |                  |   | 1,620,637  |              |  |   | 4,440,428    |   |  |   | 2,962,561  |  
|INCOME TAXES                                          |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|CURRENT                                               |  |                    | 1,343,440  |   |                  |   | 535,901    |              |  |   | 1,607,494    |   |  |   | 762,470    |  
|DEFERRED                                              |  |                    |           |   |                  |   |           |              |  |   |             |   |  |   |           |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|NET INCOME/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS        |  |                    | 1,329,739  |   |                  |   | 1,084,736  |              |  |   | 2,832,934    |   |  |   | 2,200,091  |  
|OTHER COMPREHENSIVE INCOME                            |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|FOREIGN CURRENCY TRANSLATION GAIN/(LOSS)              |  |                    | 274,061    |   |                  |   | 158,346    |              |  |   | 282,578      |   |  |   | (52,400    | )
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|COMPREHENSIVE INCOME                                  |  | $                  | 1,603,800  |   |                  | $ | 1,243,082  |              |  | $ | 3,115,512    |   |  | $ | 2,147,691  |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|NET INCOME/(LOSS) PER SHARE (Note 4)                  |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|BASIC                                                 |  | $                  | 0.091      |   |                  | $ | 0.088      |              |  | $ | 0.193        |   |  | $ | 0.180      |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|DILUTED                                               |  | $                  | 0.074      |   |                  | $ | 0.086      |              |  | $ | 0.166        |   |  | $ | 0.176      |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|WEIGHTED AVERAGE COMMON SHARE OUTSTANDING             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|BASIC                                                 |  |                    | 14,681,002 |   |                  |   | 12,357,334 |              |  |   | 14,681,002   |   |  |   | 12,248,272 |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|DILUTED                                               |  |                    | 14,883,267 |   |                  |   | 12,613,361 |              |  |   | 14,893,193   |   |  |   | 12,491,289 |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  

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 SIX MONTHS ENDED JUNE 30, 2010 AND 2009



|                                                                        |  |      |            |   |      |   |            |  
|----------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                        |  | 2010 |            |   | 2009 |  
|OPERATING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Net income                                                              |  | $    | 2,832,934  |   |      | $ | 2,200,091  |  
|Non-cash items:                                                         |  |      |            |   |      |   |            |  
|Depreciation and amortization                                           |  |      | 910,166    |   |      |   | 767,291    |  
|Transfer from construction in progress                                  |  |      | 14,790     |   |      |   |           |  
|Fair value change in derivative financial instruments                   |  |      | (364,706   | ) |      |   | 229,998    |  
|Financial and other non-cash services                                   |  |      |           |   |      |   | 910,125    |  
|Change in noncash working capital items:                               |  |      |            |   |      |   |            |  
|Inventories                                                             |  |      | (646,066   | ) |      |   | (348,076   | )
|Trade receivables, net of provisions                                    |  |      | 6,613,613  |   |      |   | (576,317   | )
|Prepayments                                                             |  |      | (878,649   | ) |      |   | (287,797   | )
|Accounts payables and accrued expenses                                  |  |      | (1,558,545 | ) |      |   | 573,016    |  
|Tax payable                                                             |  |      | 78,355     |   |      |   | (266,927   | )
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow generated from operating activities                           |  |      | 7,001,892  |   |      |   | 3,201,404  |  
|                                                                        |  |      |            |   |      |   |            |  
|INVESTING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Acquisition of property, plant and equipment                            |  |      | (854,324   | ) |      |   | (100,868   | )
|Construction in progress                                                |  |      | 6,625      |   |      |   | (5,385,961 | )
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|Cash flow used in investing activities                                  |  |      | (847,699   | ) |      |   | (5,486,829 | )
|                                                                        |  |      |            |   |      |   |            |  
|FINANCING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Cash proceeds from issuance of common stock                             |  |      |           |   |      |   | 10,850,679 |  
|Due to directors                                                        |  |      | 548,106    |   |      |   | (433,604   | )
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow generated from in financing activities                        |  |      | 548,106    |   |      |   | 10,417,075 |  
|                                                                        |  |      |            |   |      |   |            |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |  |      | 6,702,299  |   |      |   | 8,131,650  |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  |      | 180,369    |   |      |   | 37,200     |  
|Cash and cash equivalents, beginning of period                          |  |      | 36,957,303 |   |      |   | 54,920,548 |  
|                                                                        |  |      |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                |  | $    | 43,839,971 |   |      | $ | 63,089,398 |  
|                                                                        |  |      |            |   |      |   |            |  
|SUPPLEMENTARY CASH FLOWS DISCLOSURES                                    |  |      |            |   |      |   |            |  
|Interest paid                                                           |  | $    |           |   |      | $ |           |  
|                                                                        |  |      |            |   |      |   |            |  
|Taxes paid                                                              |  | $    | 1,543,525  |   |      | $ | 1,220,068  |  
|                                                                        |  |      |            |   |      |   |            |  
|SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |  |      |            |   |      |   |            |  
|Common shares issued for services                                       |  | $    |           |   |      | $ | 295,784    |  
|                                                                        |  |      |            |   |      |   |            |  

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2010

NOTE
1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 % 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 to HQS and change of domicile of that company to Delaware via a merger with the newly formed
wholly-owned Delaware subsidiary. 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 % 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.

Finally, in late 2009, we completed the construction of our feed mill that processes a floating feed formulation. We produce the feed
using grains grown without chemical fertilizers, free of antibiotics and fishmeal, and use feed additives manufactured in our nutraceutical plant.

NOTE 2BASIS OF PRESENTATION

The consolidated financial statements included the accounts of HQS and all its subsidiaries (The Group).

For the three months and six months ended June 30, 2010 and 2009, the accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. Significant inter-company balances and transactions have been eliminated upon consolidation. The unaudited condensed consolidated financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Companys management believes that the disclosures contained in these financial statements are adequate to make the information presented
therein not misleading. For further information, refer to the financial statements and the notes thereto included in the Companys 2009 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. It is suggested that
these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the companys latest Form 10-K.

The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of the Companys management,
contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position, the results of operations and cash flows for the three months and six months ended June 30, 2010 and 2009 respectively.

The consolidated balance sheet as of December 31, 2009 is derived from the Companys audited financial statements.

The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results of operations
to be expected for the full fiscal year ending December 31, 2010.

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 including allowance for doubtful accounts, inventory provision, income taxes, derivative liability and stock-based compensation. 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.

Diluted earnings per common share is computed
by adjusting the weighted average common shares outstanding assuming conversion of all potentially dilutive convertible securities.



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The following is a reconciliation of the numerators and the denominators of the basic and
diluted earnings per share (EPS) computation at June 30, 2010 and 2009.



|                                                                              |  |                              |           |   |                     |            |                  |   |      
|----------------------------------------------------------------------------- |  | ---------------------------- | --------- | - | ------------------- | ---------- | ---------------- | - | -----
|                                                                              |  | June 30, 2010 (Three months)
|                                                                              |  | Income(Numerator)            |           |   | Shares(Denominator) |            | Per 
ShareAmount
|                                                                              |  |                              |          
|Basic EPS                                                                     |  |                              |           |   |                     |            |                  |   |      
|                                                                              |  |                              |          
|Net income available to common shareholders                                   |  | $                            | 1,329,739 |   |                     | 14,681,002 |                  | $ | 0.091
|                                                                              |  |                              |          
|Effect of dilutive securities stock options issued to employees and investors |  |                              | (226,751  | ) |                     | 202,265    |                  |   |     
|                                                                              |  |                              |           |   |                     |            |                  |   |      
|                                                                              |  |                              |          
|Net income available to common stockholders plus assumed conversions          |  | $                            | 1,102,988 |   |                     | 14,883,267 |                  | $ | 0.074
|                                                                              |  |                              |           |   |                     |            |                  |   |      
|                                                                              | 
|                                                                              |  | June 30, 2009 (Three months)
|                                                                              |  | Income(Numerator)            |           |   | Shares(Denominator) |            | Per 
ShareAmount
|                                                                              |  |                              |          
|Basic EPS                                                                     |  |                              |           |   |                     |            |                  |   |      
|                                                                              |  |                              |          
|Net income available to common shareholders                                   |  | $                            | 1,084,736 |   |                     | 12,357,334 |                  | $ | 0.088
|                                                                              |  |                              |          
|Effect of dilutive securities stock options issued to employees and investors |  |                              |           |   |                     | 256,027    |                  |   |     
|                                                                              |  |                              |           |   |                     |            |                  |   |      
|                                                                              |  |                              |          
|Net income available to common stockholders plus assumed conversions          |  | $                            | 1,084,736 |   |                     | 12,613,361 |                  | $ | 0.086
|                                                                              |  |                              |           |   |                     |            |                  |   |      
|                                                                              | 
|                                                                              |  | June 30, 2010 (Six months)  
|                                                                              |  | Income(Numerator)            |           |   | Shares(Denominator) |            | Per 
ShareAmount
|                                                                              |  |                              |          
|Basic EPS                                                                     |  |                              |           |   |                     |            |                  |   |      
|                                                                              |  |                              |          
|Net income available to common shareholders                                   |  | $                            | 2,832,934 |   |                     | 14,681,002 |                  | $ | 0.193
|                                                                              |  |                              |          
|Effect of dilutive securities stock options issued to employees and investors |  |                              | (364,706  | ) |                     | 212,191    |                  |   |     
|                                                                              |  |                              |           |   |                     |            |                  |   |      
|                                                                              |  |                              |          
|Net income available to common stockholders plus assumed conversions          |  | $                            | 2,468,228 |   |                     | 14,893,193 |                  | $ | 0.166
|                                                                              |  |                              |           |   |                     |            |                  |   |      
|                                                                              | 
|                                                                              |  | June 30, 2009 (Six months)  
|                                                                              |  | Income(Numerator)            |           |   | Shares(Denominator) |            | Per 
ShareAmount
|                                                                              |  |                              |          
|Basic EPS                                                                     |  |                              |           |   |                     |            |                  |   |      
|                                                                              |  |                              |          
|Net income available to common shareholders                                   |  | $                            | 2,200,091 |   |                     | 12,248,272 |                  | $ | 0.180
|                                                                              |  |                              |          
|Effect of dilutive securities stock options issued to employees and investors |  |                              |          |   |                     | 243,017    |                  |   |     
|                                                                              |  |                              |           |   |                     |            |                  |   |      
|                                                                              |  |                              |          
|Net income available to common stockholders plus assumed conversions          |  | $                            | 2,200,091 |   |                     | 12,491,289 |                  | $ | 0.176
|                                                                              |  |                              |           |   |                     |            |                  |   |      



8



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##### Table of Contents

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 June 30, 2010 and December 31, 2009 due to the relatively short-term maturity of these instruments.

NOTE 6TRADE RECEIVABLES

The Groups trade receivables at June 30, 2010 and December 31, 2009 are summarized as follows:



|                                      |  |              |            |                   |   |           
|------------------------------------- |  | ------------ | ---------- | ----------------- | - | ----------
|                                      |  | June 30,2010 |            | December 
31,2009
|Trade receivables                     |  | $            | 54,709,951 |                   | $ | 60,736,950
|Other receivables                     |  |              | 297,525    |                   |   | 865,490   
|                                      |  |              |            |                   |   |           
|                                      |  |              | 55,007,476 |                   |   | 61,602,440
|Less: Provision for doubtful accounts |  |              | 3,271,796  |                   |   | 3,416,385 
|                                      |  |              |            |                   |   |           
|                                      |  |             
|Balance at end of period              |  | $            | 51,735,680 |                   | $ | 58,186,055
|                                      |  |              |            |                   |   |           

The activity in the Groups provision for doubtful accounts
during the period ended June 30, 2010 and the year ended December 31, 2009 is summarized as follows:



|                                                  |  |              |           |   |                  |   |          
|------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | ---------
|                                                  |  | June 30,2010 |           |   | December 31,2009
|Balance at beginning of period                    |  | $            | 3,416,385 |   |                  | $ | 299,125  
|Add: (Recovery) /provision during the period, net |  |              | (125,662  | ) |                  |   | 3,114,387
|Exchange difference transfer to exchange reserve  |  |              | (18,927   | ) |                  |   | 2,873    
|                                                  |  |              |           |   |                  |   |          
|Balance at end of period                          |  | $            | 3,271,796 |   |                  | $ | 3,416,385
|                                                  |  |              |           |   |                  |   |          

NOTE 7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 as of June 30, 2010 and December 31, 2009 are
summarized as follows:



|                 |  |              |           |                   |   |          
|---------------- |  | ------------ | --------- | ----------------- | - | ---------
|                 |  | June 30,2010 |           | December 
31,2009
|Raw materials    |  | $            | 300,001   |                   | $ | 521,798  
|Work-in-progress |  |              | 359,945   |                   |   | 303,643  
|Finished goods   |  |              | 2,132,684 |                   |   | 1,379,490
|                 |  |              |           |                   |   |          
|                 |  | $            | 2,792,630 |                   | $ | 2,204,931
|                 |  |              |           |                   |   |          



9



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##### Table of Contents

NOTE 8FOREIGN CURRENCY TRANSLATION

We follow FASB ASC 830-30, 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.



|                                    |  |        |  |       
|----------------------------------- |  | ------ |  | ------
|                                    |  | 2010   |  | 2009  
|Quarter-end RMB : US$ exchange rate |  | 6.8086 |  | 6.8315
|Average RMB : US$ exchange rate     |  | 6.8178 |  | 6.8323

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 Peoples
Bank of China 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.

NOTE 9DEFERRED 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 deferred tax asset is primarily a result of temporary difference between accounting and tax basis for property, plant and equipment, and other reserves
from the companys operation in the PRC.

At June 30, 2010, the company had estimated U.S. net operating losses
(NOLs) of approximately $15 million. If not utilized, the NOLs will expire at various times between 2024 and 2029. The benefit from these NOLs has been fully offset by a valuation allowance. A valuation allowance for NOLs is provided
when it is more likely than not that NOLs will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of net operating incomes during the periods in which those NOLs become deductible in the U.S. We
consider the history of taxable income in recent years, the projected future taxable income and tax planning strategies to make this assessment.

Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are
expected with reasonable probability to crystallize in the foreseeable future.

NOTE 10DEFERRED EXPENSES

The deferred expenses corresponds to costs incurred in 2010 in relation with the development and maintenance of fish ponds.

NOTE 11INCOME TAXES

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 % tax rate. Our Jiahua Marine and Feedmill operating units were subject to a tax rate under the new law, which increased by 2 % in 2010 and will increase
gradually until it reaches a maximum of 25 % in 2012.

The statutory income tax rate in the PRC for 2010, for our
segments, is as follows:



|                             |  |      |   |  |               |   |  |          |  
|---------------------------- |  | ---- | - |  | ------------- | - |  | -------- | -
|                             |  | HQOF |   |  | Jiahua Marine |   |  | Feedmill |  
|Statutory tax rate           |  | 0    | % |  | 22            | % |  | 22       | %
|Tax holidays and concessions |  |     |   |  |              |   |  |         |  
|                             |  |      |   |  |               |   |  |          |  
|Effective tax rate           |  | 0    | % |  | 22            | % |  | 22       | %
|                             |  |      |   |  |               |   |  |          |  

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



10



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##### Table of Contents

NOTE 12DERIVATIVE LIABILITIES

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, we were
required to reclassify those warrants at their fair value to liabilities. Furthermore, since the promissory notes in the liabilities section carry an embedded conversion feature, this feature was also recognized as a derivative instrument under EITF
07-05. ASC 815 Derivatives and Hedging (pre-Codification SFAS133) requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations. The
difference between the amounts the warrants and the embedded conversion feature were originally recorded in the financials and the fair value of the instruments on January 1, 2009 was considered a cumulative effect of a change in accounting
principle and required adjustment to the opening balance of retained earnings in the amount of $1,953,746.

We estimate fair
values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, we consider, among other
factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton (BSM)
option valuation technique, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, and risk free rates) necessary to fair value these instruments. For complex derivative instruments, such as embedded
conversion options embedded in hybrid debt instruments, we generally use the Monte Carlo Simulation (MCS) valuation technique because it embodies all of the requisite assumptions (including credit risk, interest-rate risk and
exercise/conversion behaviors) that are necessary to fair value these more complex instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to,
change over the duration of the instrument with related changes in internal and external market factors. Since derivative financial instruments are initially and subsequently carried at fair values, our income (loss) will reflect the volatility in
these estimate and assumption changes.

The following tables summarize the components of derivative liabilities as of
June 30, 2010 and December 31, 2009:



|                   |  |               |         |   |                   |   |          |  
|------------------ |  | ------------- | ------- | - | ----------------- | - | -------- | -
|                   |  | June 30, 2010 |         |   | December 31, 2009 |  
|                   |  |              
|Class B Warrants   |  | $             | (46,509 | ) |                   | $ | (321,188 | )
|                   |  |              
|Tail Wind Warrants |  |               | (34,479 | ) |                   |   | (124,506 | )
|                   |  |               |         |   |                   |   |          |  
|                   |  |              
|Fair values        |  | $             | (80,988 | ) |                   | $ | (445,694 | )
|                   |  |               |         |   |                   |   |          |  

ASC 820-10-55-62 Fair Value Measurements and Disclosures (pre Codification FAS No. 157 Fair
Value Measurements) provides that for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, a reconciliation is required of the beginning and ending balances. The
reconciliation of our derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2010 is as follows:



|                                   |  |   |          |  
|---------------------------------- |  | - | -------- | -
|Beginning balance, January 1, 2010 |  | $ | (445,694 | )
|                                   | 
|Total gains included in earnings   |  |   | 364,706  |  
|                                   |  |   |          |  
|                                   | 
|Ending balance, June 30, 2010      |  | $ | (80,988  | )
|                                   |  |   |          |  



11



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##### Table of Contents

NOTE 13SEGMENTS

No geographical segment analysis is provided for the three months ended June 30, 2010 and 2009, 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 June 30, 2010



|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  
|----------------------------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ----------- |  | - | ---------------- | - |  | ------------- | ---------- | - |  | - | ----------- | -
|                                                      |  | AquacultureProduct |            |   | Health andBio-product |   |            | FeedProduct |  |   | UnallocatedItems |   |  | Consolidation |           
|Sales to external customers                           |  | $                  | 10,567,694 |   |                       | $ | 5,828,284  |             |  | $ | 4,260,196        |   |  | $             |           |   |  | $ | 20,656,174  |  
|                                                      |  |                    |            |   |                      
|Cost of sales                                         |  |                    | 8,500,994  |   |                       |   | 1,763,938  |             |  |   | 3,865,130        |   |  |               |           |   |  |   | 14,130,062  |  
|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  
|Gross profit                                          |  |                    | 2,066,700  |   |                       |   | 4,064,346  |             |  |   | 395,066          |   |  |               |           |   |  |   | 6,526,112   |  
|Selling and distribution expenses                     |  |                    | 164,219    |   |                       |   | 198,621    |             |  |   | 17,425           |   |  |               | 46,533     |   |  |   | 426,798     |  
|Marketing and advertising                             |  |                    |           |   |                       |   | 890,405    |             |  |   |                 |   |  |               | 209,944    |   |  |   | 1,100,349   |  
|General and administrative expenses                   |  |                    | 132,486    |   |                       |   | 216,362    |             |  |   | 71,027           |   |  |               | 1,504,170  |   |  |   | 1,924,045   |  
|Depreciation and amortization                         |  |                    | 718        |   |                       |   | 8,654      |             |  |   | 79,317           |   |  |               | 19,383     |   |  |   | 108,072     |  
|Doubtful accounts (Recovery of)                       |  |                    | 540,060    |   |                       |   | 12,487     |             |  |   | (5,996           | ) |  |               |           |   |  |   | 546,551     |  
|Finance income                                        |  |                    | (7,058     | ) |                       |   | (10,833    | )           |  |   | (6,197           | ) |  |               | 90         |   |  |   | (23,998     | )
|Fair value change in derivative financial instruments |  |                    |           |   |                       |   |           |             |  |   |                 |   |  |               | (226,751   | ) |  |   | (226,751    | )
|Income/(loss) before income taxes                     |  |                    | 1,287,334  |   |                       |   | 2,748,856  |             |  |   | 239,489          |   |  |               | (1,602,500 | ) |  |   | 2,673,179   |  
|Income taxes                                          |  |                    |           |   |                       |   | 1,343,440  |             |  |   |                 |   |  |               |           |   |  |   | 1,343,440   |  
|Net Income/(loss) for the period                      |  | $                  | 1,287,334  |   |                       | $ | 1,405,416  |             |  | $ | 239,489          |   |  | $             | (1,602,500 | ) |  |   | 1,329,739   |  
|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  
|                                                      |  |                    |            |   |                      
|Segment assets                                        |  | $                  | 54,562,328 |   |                       | $ | 41,553,679 |             |  | $ | 25,338,153       |   |  | $             | 199,900    |   |  | $ | 121,704,060 |  
|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  
|                                                      |  |                    |            |   |                      
|Segment liabilities                                   |  | $                  | 1,982,615  |   |                       | $ | 1,724,095  |             |  | $ | 81,763           |   |  | $             | 2,721,571  |   |  | $ | 6,510,044   |  
|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  

Business segment for the three months ended June 30, 2009



|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  
|----------------------------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ---------------- |  | - | ------------- | - |  | - | ----------- | -
|                                                      |  | AquacultureProduct |            |   | Health andBio-product |   |            | UnallocatedItems |  |   | Consolidation |  
|Sales to external customers                           |  | $                  | 10,500,483 |   |                       | $ | 5,509,274  |                  |  | $ |              |   |  | $ | 16,009,757  |  
|                                                      |  |                    |            |  
|Cost of sales                                         |  |                    | 8,186,418  |   |                       |   | 1,260,857  |                  |  |   |              |   |  |   | 9,447,275   |  
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  
|Gross profit                                          |  |                    | 2,314,065  |   |                       |   | 4,248,417  |                  |  |   |              |   |  |   | 6,562,482   |  
|Selling and distribution expenses                     |  |                    | 158,632    |   |                       |   | 131,518    |                  |  |   |              |   |  |   | 290,150     |  
|Marketing and advertising                             |  |                    |           |   |                       |   | 1,338,860  |                  |  |   |              |   |  |   | 1,338,860   |  
|General and administrative expenses                   |  |                    | 210,299    |   |                       |   | 313,054    |                  |  |   | 1,500,240     |   |  |   | 2,023,593   |  
|Depreciation and amortization                         |  |                    | 6,981      |   |                       |   | 2,135      |                  |  |   | 81,610        |   |  |   | 90,726      |  
|(Recovery of) Doubtful accounts                       |  |                    | (7,706     | ) |                       |   | (4,673     | )                |  |   |              |   |  |   | (12,379     | )
|Finance (income)/Costs                                |  |                    | (17,920    | ) |                       |   | (20,001    | )                |  |   | 204,701       |   |  |   | 166,780     |  
|Fair value change in derivative financial instruments |  |                    |           |   |                       |   |           |                  |  |   | 1,055,869     |   |  |   | 1,055,869   |  
|Income/(loss) before income taxes                     |  |                    | 2,057,805  |   |                       |   | 2,486,592  |                  |  |   | (2,923,760    | ) |  |   | 1,620,637   |  
|Income taxes                                          |  |                    |           |   |                       |   | 535,901    |                  |  |   |              |   |  |   | 535,901     |  
|Net Income/(loss) for the period                      |  | $                  | 2,057,805  |   |                       | $ | 1,950,691  |                  |  | $ | (2,923,760    | ) |  | $ | 1,084,736   |  
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  
|                                                      |  |                    |            |  
|Segment assets                                        |  | $                  | 51,758,686 |   |                       | $ | 38,021,331 |                  |  | $ | 24,475,126    |   |  | $ | 114,255,143 |  
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  
|                                                      |  |                    |            |  
|Segment liabilities                                   |  | $                  | 1,959,441  |   |                       | $ | 1,679,093  |                  |  | $ | 12,943,607    |   |  | $ | 16,582,141  |  
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  



12



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##### Table of Contents

Business segment for the six months ended June 30, 2010



|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  
|----------------------------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ----------- |  | - | ---------------- | - |  | ------------- | ---------- | - |  | - | ----------- | -
|                                                      |  | AquacultureProduct |            |   | Health andBio-product |   |            | FeedProduct |  |   | UnallocatedItems |   |  | Consolidation |           
|Sales to external customers                           |  | $                  | 18,283,933 |   |                       | $ | 9,425,421  |             |  | $ | 7,322,728        |   |  | $             |           |   |  | $ | 35,032,082  |  
|                                                      |  |                    |            |   |                      
|Cost of sales                                         |  |                    | 14,773,562 |   |                       |   | 2,847,774  |             |  |   | 6,506,594        |   |  |               |           |   |  |   | 24,127,930  |  
|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  
|Gross profit                                          |  |                    | 3,510,371  |   |                       |   | 6,577,647  |             |  |   | 816,134          |   |  |               |           |   |  |   | 10,904,152  |  
|Selling and distribution expenses                     |  |                    | 325,019    |   |                       |   | 336,758    |             |  |   | 34,106           |   |  |               | 92,999     |   |  |   | 788,882     |  
|Marketing and advertising                             |  |                    |           |   |                       |   | 1,868,386  |             |  |   |                 |   |  |               | 209,944    |   |  |   | 2,078,330   |  
|General and administrative expenses                   |  |                    | 293,107    |   |                       |   | 416,475    |             |  |   | 172,250          |   |  |               | 3,031,028  |   |  |   | 3,912,860   |  
|Depreciation and amortization                         |  |                    | 932        |   |                       |   | 29,747     |             |  |   | 146,840          |   |  |               | 26,885     |   |  |   | 204,404     |  
|(Recovery of)/Doubtful accounts                       |  |                    | 1,409,794  |   |                       |   | (1,529,460 | )           |  |   | (5,996           | ) |  |               |           |   |  |   | (125,662    | )
|Finance (income)/Costs                                |  |                    | (13,059    | ) |                       |   | (18,473    | )           |  |   | (9,968           | ) |  |               | 18,040     |   |  |   | (23,460     | )
|Fair value change in derivative financial instruments |  |                    |           |   |                       |   |           |             |  |   |                 |   |  |               | (364,706   | ) |  |   | (364,706    | )
|Income/(loss) before income taxes                     |  |                    | 1,535,601  |   |                       |   | 5,473,594  |             |  |   | 478,901          |   |  |               | (3,047,668 | ) |  |   | 4,440,428   |  
|Income taxes                                          |  |                    |           |   |                       |   | 1,607,494  |             |  |   |                 |   |  |               |           |   |  |   | 1,607,494   |  
|Net Income/(loss) for the period                      |  | $                  | 1,535,601  |   |                       | $ | 3,866,100  |             |  | $ | 478,901          |   |  | $             | (3,047,668 | ) |  | $ | 2,832,934   |  
|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  
|                                                      |  |                    |            |   |                      
|Segment assets                                        |  | $                  | 54,562,328 |   |                       | $ | 41,553,679 |             |  | $ | 25,338,153       |   |  | $             | 199,900    |   |  | $ | 121,704,060 |  
|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  
|                                                      |  |                    |            |   |                      
|Segment liabilities                                   |  | $                  | 1,982,615  |   |                       | $ | 1,724,095  |             |  | $ | 81,763           |   |  | $             | 2,721,571  |   |  | $ | 6,510,044   |  
|                                                      |  |                    |            |   |                       |   |            |             |  |   |                  |   |  |               |            |   |  |   |             |  



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Business segment for the six months ended June 30, 2009



|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            
|----------------------------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ---------------- |  | - | ------------- | - |  | - | -----------
|                                                      |  | AquacultureProduct |            |   | Health andBio-product |   |            | UnallocatedItems |  |   | Consolidation
|Sales to external customers                           |  | $                  | 17,810,719 |   |                       | $ | 9,039,859  |                  |  | $ |              |   |  | $ | 26,850,578 
|                                                      |  |                    |            |  
|Cost of sales                                         |  |                    | 13,659,310 |   |                       |   | 2,125,769  |                  |  |   |              |   |  |   | 15,785,079 
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            
|Gross profit                                          |  |                    | 4,151,409  |   |                       |   | 6,914,090  |                  |  |   |              |   |  |   | 11,065,499 
|Selling and distribution expenses                     |  |                    | 312,292    |   |                       |   | 232,010    |                  |  |   |              |   |  |   | 544,302    
|Marketing and advertising                             |  |                    |           |   |                       |   | 2,763,880  |                  |  |   | 1,606         |   |  |   | 2,765,486  
|General and administrative expenses                   |  |                    | 349,914    |   |                       |   | 482,596    |                  |  |   | 2,797,455     |   |  |   | 3,629,965  
|Depreciation and amortization                         |  |                    | 14,291     |   |                       |   | 105,401    |                  |  |   | 147,848       |   |  |   | 267,540    
|Doubtful accounts (Recovery of)                       |  |                    | 22,451     |   |                       |   | (3,264     | )                |  |   |              |   |  |   | 19,187     
|Finance (income)/Costs                                |  |                    | (31,436    | ) |                       |   | (38,451    | )                |  |   | 755,112       |   |  |   | 685,225    
|Fair value change in derivative financial instruments |  |                    |           |   |                       |   |           |                  |  |   | 229,998       |   |  |   | 229,998    
|Income/(loss) before income taxes                     |  |                    | 3,599,571  |   |                       |   | 3,370,846  |                  |  |   | (4,007,856    | ) |  |   | 2,962,561  
|Income taxes                                          |  |                    |           |   |                       |   | 762,470    |                  |  |   |              |   |  |   | 762,470    
|Net Income/(loss) for the period                      |  | $                  | 3,599,571  |   |                       | $ | 2,608,376  |                  |  | $ | (4,007,856    | ) |  | $ | 2,200,091  
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            
|                                                      |  |                    |            |  
|Segment assets                                        |  | $                  | 51,758,686 |   |                       | $ | 38,021,331 |                  |  | $ | 24,475,126    |   |  | $ | 114,255,143
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            
|                                                      |  |                    |            |  
|Segment liabilities                                   |  | $                  | 1,959,441  |   |                       | $ | 1,679,093  |                  |  | $ | 12,943,607    |   |  | $ | 16,582,141 
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            

NOTE 14CAPITAL COMMITMENT

A. CAPITAL COMMITMENTS

As of
June 30, 2010, there were capital commitments amounting to $1,709,818, mostly related to costs to be incurred in relation to the initial public offering and listing of our Marine Bio and Healthcare Products segment on The Stock Exchange of Hong
Kong Limited.

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:



|           |  |   |          
|---------- |  | - | ---------
|2010       |  | $ | 168,903  
|2011       |  |   | 209,726  
|2012       |  |   | 758,874  
|2013       |  |   | 204,217  
|2014       |  |   | 197,463  
|Thereafter |  |   | 398,175  
|           |  |   |          
|Total      |  | $ | 1,937,358
|           |  |   |          

NOTE 15RECENT PRONOUNCEMENTS

In January 2010, the FASB issued an amendment to ASC 505, Equity, where entities that declare dividends to shareholders that may be paid
in cash or shares at the election of the shareholders are considered to be a share issuance that is reflected prospectively in EPS, and is not accounted for as a stock dividend. This standard is effective for interim and annual periods ending on or
after December 15, 2009 and is to be applied on a retrospective basis. The adoption of this standard is not expected to have a significant impact on the Companys consolidated financial statements.

In January 2010, the FASB issued an amendment to ASC 820, Fair Value Measurements and Disclosure, to require reporting entities to
separately disclose the amounts and business rationale for significant transfers in and out of Level 1 and Level 2 fair value measurements and separately present information regarding purchase, sale, issuance, and settlement of Level 3 fair value
measures on a gross basis. This standard, for which the Company is currently assessing the impact, is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of disclosures regarding the purchase,
sale, issuance, and settlement of Level 3 fair value measures which are effective for fiscal years beginning after December 15, 2010.

ASC 855, Subsequent Events, was amended in February 2010. Under the amended guidance, SEC filers are no longer required to
disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and the Company adopted these new requirements for the period ended March 31,
2010.



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NOTE 16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 (MD&A) 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.

This MD&A is provided as a supplement to,
and should be read in conjunction with, our financial statements and the accompanying notes (Notes) contained elsewhere in this Form 10-Q.

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

GENERAL OVERVIEW

We are a leader in all natural vertically integrated aquaculture and aquatic product processing and we have processing facilities located
in Hainan, PRC. We have three processing plants in Hainan, one that processes aquatic products providing all natural tilapia and other aquatic products, another that processes marine bio and healthcare products, and since December 2009, one
that processes feed products. We market our products in Asia, America and Europe. Our current sales activity is primarily directed to distributors with the PRC, rather than within the U.S. We expanded our operations by completing the construction of
our third facility in late 2009, which processes extruded feed, and we have increased our sales activity primarily directed to distributors within PRC, rather than within the U.S. We also are in the process of constructing a new re-processing plant
and a new breeding and genetics facility, which are discussed in detail below.

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% of Hainan Quebec Ocean Fishing Co. Ltd. (HQOF), currently our principal operating subsidiary that processes our
seafood products. In August 2004, we acquired the remaining ownership interest in HQOF. The fiscal year-end of Process Equipment Inc. was changed from April 30 to December 31 following the reverse merger. In August 2004, we acquired a 100%
interest in our current subsidiary Jiahua Marine, which operates a marine bio and healthcare plant, including nutraceuticals, in Hainan Province, China. In the first half of 2005, our aquatic processing plant stopped production in order to add
production lines and increase its production capacity to properly meet forecasted incremental demand, which affected some of our operating results during that period.

Our business operations consist of three segments, the health and bio-products segment, the aquaculture product segment and the feed
products segment. Since the acquisition of Jiahua Marine, which represents the health and bio-products segment, those product sales have represented a significant contribution to the net income of the Company and currently has higher profit margin
products than our aquaculture products. The Company expects 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 is completed, the Company expects that the aquaculture product segment will begin to contribute a greater portion of income and a higher
profit margin in the future.

Following changes in China legislation on food safety standards, which
became effective on June 1, 2009, distribution of our health products have expanded and our sales have increased. We expect our health and bio-products business to continue to grow in the future as a result of this legislation. Further, Jiahua
Marines health products recently have been rebranded to under the Omojo brand to celebrate its
10thanniversary.

Health and Bio-products Segment

Health Product Store Opportunity

Through laboratory testing and the use of documented and original research, Jiahua Marine has developed a unique range of marine bio and
healthcare products. The products undergo substantial independent laboratory testing in China administered by the Ministry of Health in China and have resulted in a PRC National Certification for these products. These products have various perceived
medicinal and health benefits. As part of the Companys vertical integration plan of tilapia, Jiahua Marine introduced new bio and healthcare products made from tilapia in 2009. These products include calcium supplement tablets made from the
bones of tilapia and collagen facial creams made from the skin and head of the tilapia. Currently, the Company is analyzing a proposal to develop its own flagship health product store in China and ten other stores in tier one cities throughout
China, as well as the opportunity to enter into a franchise license to foster a franchisee founded network of health product stores. The Company believes that this and the creation of larger, superstores will give consumers access to its
award winning marine aquatic-themed health products.

Proposed Equity Offering and Listing

On June 7, 2010, our board of directors authorized management to plan and prepare for a public offering of equity securities of a
newly formed, wholly owned subsidiary (NewCo) that will hold our health and bio-products segment. Our board also authorized management to plan and prepare for the listing of such equity securities on The Stock Exchange of Hong Kong
Limited (HKEX) or another stock exchange. NewCo will act as a holding company for, and own 100% of the common stock of, Jiahua Marine, our wholly owned subsidiary engaged in the manufacturing and selling of marine bio and healthcare
products in China.



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The offering will be limited to a minority stake of no more than 35% of NewCos equity
securities. Following the completion of the offering, the Company will retain at least 65% of the outstanding shares of NewCo and will continue to be its controlling stockholder. The primary purposes of the offering and the listing are to
(i) unlock the value of Jiahua Marines business by allowing direct public investment in Jiahua Marine; (ii) increase the overall value of the Company by capturing the expected valuation premium given to the Companys marine bio
and healthcare products segment by Asian investors; (iii) create a public market for NewCos common stock; (iv) obtain additional capital for the Company through the net proceeds of the offering; (v) support Jiahua Marines
business growth by providing a vehicle through which it may have future access to the public capital markets; and (vi) improve the Companys competitive position by further strengthening our financial condition.

The offering and stock exchange listing remain subject to a number of conditions, including, among others:



| |  |  | Approval from our board of directors;
| | - |  | -------------------------------------



| |  |  | Regulatory approval from Hong Kong securities regulators and other applicable regulators; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | HKEK approval for listing of NewCos common stock.
| | - |  | --------------------------------------------------

Current Growth Plans

The Company plans to expand production of value added seafood products in a new re-processing production facility in close proximity to
our current production facility. The Company sees increasing demand in China for value added seafood products and believes this new re-processing plant will help the Company expand its production capacity to meet this increased demand. We commenced
construction of this new re-processing plant early this year and expect to complete construction in the first half of 2011.

In addition, the Company has undertaken the development of a fry breeding and genetics facility to target improvements in the growth rate
of Tilapia. The opportunity to improve the genetics of its Tilapia and improve growth rates will help the Company take a leadership position as a low cost producer of high quality Tilapia. We acquired the land for our fry breeding and genetics
facility at the end of 2009 and began construction early this year. We expect to complete construction by the end of the third quarter or early forth quarter of this year.

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 June 30, 2010.

Results of Operations  Three Months Ended June 30, 2010 as Compared to Three Months Ended June 30, 2009

Total sales for the three months ended June 30, 2010 increased by 29%, from $16,009,757 for the three months ended June 30, 2009 to $20,656,174
for the three months period ended June 30, 2010, mostly due to the new feed products segment added in late 2009. The gross profit for the three months period ended June 30, 2010 decreased by 1% to $6,526,112 when compared to the
corresponding period of 2009. That decrease in gross profit in 2010 was the result of a lower gross profit from both the aquaculture and the health and bio-products segments. The overall gross profit ratio deteriorated in the current three months of
2010 to 32% from 41% in the corresponding period of 2009, coming mainly from the health and bio-products segment which saw its gross profit ratio going from 77% in 2009 to 70% in 2010 and the new feed products segments which shows a gross profit
ratio of 9% in 2010. Income from operations for the three months period ended June 30, 2010 decreased by $411,235 when compared to the same period of 2009 mostly as a result of additional bad debts provided in the current period of 2010 from
the aquaculture product segment. Net income for the three months period ended June 30, 2010 increased by $245,003 mostly due to the favorable change in fair value of derivative financial instruments and reduced finance costs which offset the
reduced income from operations described above.

By Segments

Aquatic Products Segment

HQ Ocean
Fishing Co. Ltd (HQOF) is engaged in the manufacturing and selling of aquatic products. The sales contributed by this segment increased to $10,567,694 for the three months period ended June 30, 2010 compared to $10,500,483 for the
corresponding period of 2009, an increase of 1%. That increase is due to a mix of average volume reduction of approximately 7% offset by an average increase in selling prices of shrimps and ocean caught fish in the current quarter of 2010 compared
to the corresponding period of 2009. The related gross profit ratio of this segment was 20% and 22% for the three months period ended June 30, 2010 and 2009 respectively; the increase in costs of raw materials is the main cause of the reduction
in the gross profit ratio during the current quarter of 2010. This segment contributed $1,287,334 and $2,057,805 to net income for the three months period ended June 30, 2010 and 2009 respectively, a deterioration of 37%. That 2010 reduction is
due to the combination of a lesser gross profit as described above, added to an additional provision for doubtful accounts of more than $540,000 in the current period to provide for potential credit losses on our receivables which did not
materialize to date.

Health and Bio-products Segment

Jiahua Marine is engaged in the manufacturing and selling of Marine Bio and Healthcare products. During the three months period ended June 30, 2010
and 2009, Jiahua Marine recorded sales of $5,828,284 and $5,509,274 respectively, an increase of 6%. The increase in sales is related to the new products marketed in recent quarters. The gross profit ratio from this segment was 70% and 77% for the
three months periods ended June 30, 2010 and 2009 respectively. The decrease in the gross profit margin in 2010 was mostly related to an increase in direct materials and labor related to the new OMOJO brand which increased substantially the
costs of products and drove gross margins down. Furthermore, the major expense of this segment continues to be marketing and advertising, corresponding to 15% and 24% of revenues for the three months ended June 30, 2010 and 2009, respectively.
The marketing efforts are being driven in 2010 to a greater extent towards better product presentation to the consumers than media advertising. The net income contributed by this segment was $1,405,416 for the three months period ended June 30,
2010, a reduction of 28% when compared to the net income of $1,950,691 for the three months period ended June 30, 2009. The decrease in net income in 2010 was mostly due to a decrease in gross profit offset by a reduction in marketing and
advertising expenses as described above, added to an increase in income taxes related to the 2009 non deductible marketing expenses triggering additional income taxes of approximately $730,000 in 2010.

Feed Products Segment

Our new
feed mill facility completed in the last quarter in 2009 is engaged in the manufacturing and selling of feed products. During the three months period ended June 30, 2010, this segment recorded sales of $4,260,196 with a profit margin of 9.3%,
or $395,066. It is expected that the gross profit margin from this segment will improve in the coming periods as we should gain efficiencies in ramping up the volumes and absorb fixed costs more favorably.

By Operations

Sales. For the three months period ended June 30, 2010, sales increased by $4,646,417 to $20,656,174 or 29% when compared to the
same period of 2009. This improvement in sales resulted mostly from the newly added feed products segment in late 2009, which contributed to the increase in sales by $4,260,196. The health and bio-product segment contributed to increased sales by
$319,010, or 6% compared to the corresponding period of 2009, mostly due to the new products marketed in 2010. The aquatic products segment increased its sales by $67,211, or 1% in the second quarter of 2010 compared to the same period of 2009
mostly as a result of increased volumes.



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Cost of sales. Cost of sales increased by $4,682,787 or 50% to $14,130,062 from
$9,447,275 for the three months ended June 30, 2010, as compared to the corresponding period of the prior year. Most of the increase in cost of sales was the result of the newly added feed product segment which contributed to the increase by
$3,865,130. The gross profit ratio of the feed product segment in the current period of 2010 was 9.3%, reducing substantially the overall gross profit ratio of the group. The overall gross profit ratio of the Group decreased from 41% for the three
months period ended June 30, 2009 to 32% for the corresponding period of 2010, mostly due to the reduced margins from the feed products segment, compared to the other segments; had it not been for the lower gross profit ratio of the feed
product segment in 2010, the average ratio of the other two segments would have stood at 37% in 2010. The deterioration in the gross profit margin in 2010 for the aquaculture product and the health and bio-products segments was the result of
increased direct materials and labor costs in the current period of 2010 compared to the corresponding period of 2009.

Selling and
distribution expenses. Selling and distribution expenses increased by $136,648 to $426,798 for the three months period ended June 30, 2010, as compared to the corresponding period of the previous year. As a percentage of sales,
the selling and distribution expenses remained relatively stable at approximately 2% of sales in the current quarter of 2010, as compared to the corresponding quarter of 2009.

Marketing and advertising expenses. Marketing and advertising expenses decreased by $238,511 or 18% from $1,338,860 to $1,100,349 as
compared to the corresponding period of the previous year. As a percentage of sales, this expense continues to be the most important expense of the health and bio-product segment, corresponding to 15% of sales in 2010 and 24% in the same period of
2009. Those advertising expenditures for the promotion of our health and bio-products to achieve customer recognition are consistent with industry practices. In the current period of 2010, the marketing and advertising efforts were driven more
towards product presentation to the consumers than media advertising, as in 2009.

General and administrative expenses.
General and administrative expenses decreased by $99,548, or 5%, to $1,924,045 in the current three months period ended June 30, 2010, from $2,023,593 in the corresponding period of 2009. No significant variation occurred in 2010 compared to
2009.

Depreciation and amortization.Depreciation and amortization increased by $17,346 to $108,072 in the current
quarter when compared to the same quarter of 2009. In the three months period ended June 30, 2009, depreciation of newly acquired fixed assets in the second portion of 2009 and the first half of 2010 was offset by the effect of fully
depreciated fixed assets.

(Recovery of)/Doubtful accounts. Doubtful accounts in the current three months period of 2010
amounted to $546,551, compared to a recovery of $12,379 in the corresponding period of 2009. The increase in 2010 originated mostly from the aquaculture product segment as aging of receivables triggered additional provision requirement of $540,060.
The health and bio-products segment showed sufficient amount of provision in June 2010. The amount of provision is to provide for potential risk of losses related to the receivables on hand and no such losses have materialized to date.

Income from operations. Income from operations decreased to $2,420,297 in the current quarter of 2010 from $2,831,532 in the
corresponding quarter of the previous year. Although sales increased by 29% in the current quarterly period, the total gross profit was lower by $36,370 in 2010 compared to 2009. That reduction in gross profit and gross profit ratio was offset by a
reduction in general overheads. Finally, the bad debt increase of $558,930 was the major contributing factor to the reduction in income from operations in the current period of 2010.

Finance (income)/costs. In the second quarter of 2009, financing costs included recognition of the carrying interests on the
promissory notes issued in November 2006 added to the 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. No such expenses were incurred in 2010 as the notes were totally repaid through their conversion attribute in late 2009. In the second quarter of 2010, finance income was related mostly to
interest on cash balances.

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 FASB ASC 815-40 and FAS No.133, we recognized in our income statement the change
in value of those two items included in our current liabilities. In the second quarter of 2009, that change in value of the outstanding warrants and embedded conversion feature on our outstanding notes amounted to $1,055,869, shown as expense. In
the second quarter of 2010, we recognized an income of $226,751 corresponding to the reduction in fair value of the outstanding warrants only, as all the notes have been converted as of December 31, 2009. This fair value change will continue to
be evaluated quarterly in the future until expiration of the warrants, and the corresponding change will be charged or credited to our income in the corresponding period.

Income before income taxes.Income before income taxes increased by $1,057,542 in the current three months of 2010, when compared to
the same period of 2009. Although income from operations showed a deterioration in 2010 as described above, financing income and fair value change in derivative financial instruments created a significant improvement in the income before income tax
in the current three months period of 2010 compared to the same period of 2009.

Current income taxes.In the current
three months period ended June 30, 2010, current income taxes increased by $807,539 to $1,343,440 from $535,901 in the corresponding period of 2009. Current income tax was higher in 2010 due to the application of the new PRC Enterprise Income
Tax Law (EIT), which became effective on January 1, 2008, which increased the tax rates from 20% in 2009 to 22% in 2010 on our bio-product segment and feed product segment. Furthermore, non-deductible marketing and advertising of prior years
for the health and bio-product segment were assessed in 2010 triggering additional income taxes of approximately $730,000 in 2010. The new EIT provides, amongst other issues, that income derived from preliminary processing of fishery products is now
income tax exempt while the tax rate on our bio-product segment is increasing yearly until it reaches 25% in 2012.

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 attributable to shareholders. In the current three months period of 2010, the Company realized a net income of $1,329,739
compared to $1,084,736 in the corresponding period of 2009. The 2010 improvement in income before income taxes described above was offset by additional income taxes from the health and bio-product segment.



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Results of Operations  Six Months Ended June 30, 2010 as Compared to Six Months Ended
June 30, 2009

Total sales for the six months period ended June 30, 2010 increased by 30%, from $26,850,578 in 2009 to
$35,032,082 in 2010. Most of the increase in sales originates from the feed product segment added in late 2009. Gross profit for the six months period ended June 30, 2010 decreased by 1% to $10,904,152 when compared to the same period of 2009.
The gross profit ratio for the six months period ended June 30 decreased from 41% in 2009 to 31% in 2010. That deterioration in the gross profit ratio in the first six months of 2010 compared to the corresponding 2009 period is due to the mix
of reductions in gross profit originating from the aquatic product segment from 26% in 2009 to 19% in 2010, from the health and bio-product segment decreasing from 77% in 2009 to 70% in 2010 and from the new feed product segment showing a gross
profit ratio of 11% in 2010. Higher manufacturing costs was the main driver in the reduction of the gross profit ratio experienced in the first half of 2010 for both the aquaculture product segment and the health and bio-product segments. Although
the gross profit was lower in the first half of 2010 when compared to the corresponding period of 2009, income from operations improved slightly in 2010 mostly due to the reduction of marketing and advertising expenses and additional 2010 gross
profit from the new feed product segment. Net income increased from $2,200,091 in the first six months of 2009 to $2,832,934 in the corresponding period of 2010. The increased net income of 2010 was the result of increased income from operations
described above, added to a substantial reduction of finance costs of $708,685 coupled with the favorable effect of the fair value change in derivative financial instruments of $594,704. In the first six months of 2009, finance costs were relating
to the convertible notes issued in November 2006 which were totally repaid at the end of 2009; such costs did not occur in 2010 accordingly.

Segments

Aquatic Products Segment

Hainan Quebec Ocean Fishing Co. Ltd (HQOF) is engaged in the manufacturing and selling of aquatic products. The revenue
contributed by this segment increased by $473,214 or 2% to $18,283,933 for the six months period ended June 30, 2010 compared to $17,810,719 for the corresponding period of 2009. The increase is due to a mix of 4% reduction in volume offset by
an average increase in prices of approximately 5%. The related gross profit ratio of this segment went from 26% for the six months period ending in June 2009 compared to 19% in the corresponding period of 2010. The decrease in the gross profit ratio
in 2010 originates mostly from an increase in cost of direct materials experienced in 2010, compared to the same period of 2009. This segment contributed $1,535,601 to our net income in the first six months of 2010, as compared to net income of
$3,599,571 for the corresponding period of 2009, a reduction of 57%. That reduction is due mostly to the 7% reduction in the gross profit ratio experienced in the first six months period of 2010 added to a significant increase in bad debts of
$1,387,343 to provide for potential credit losses on our receivables which did not materialize to date.

Health and Bio-products Segment

Jiahua Marine is engaged in the manufacturing and selling of marine bio and health care products. During the six months period ended
June 30, 2010 and 2009, Jiahua Marine realized sales of $9,425,421 and $9,039,859 respectively, an increase of $385,562 or 4%. The increase in sales is related to new products that were marketed in recent quarters. The gross profit ratio from
this segment went from 77% in the six months period ended June 2009 to 70% in the corresponding period of 2010. That decrease in the gross profit ratio experienced in 2010 is due to higher packaging costs related to the new products (OMOJO brand)
marketed in 2010. The major expense of this segment continues to be marketing and advertising, corresponding to 20% and 31% of revenues for the six months ended June 30, 2010 and 2009 respectively. The reduction of such expenses is due to the
company reorienting its media advertising efforts to better product presentation in order to draw more consumers to its products. The net income contributed by this segment was $3,866,100 and $2,608,376 for the six months period ended June 30,
2010 and 2009 respectively, an improvement of 48%. Although this segment showed a reduction of $336,443 in gross profit in the first half of 2010 compared to 2009, that was largely offset by a decrease in marketing and advertising expenses of
$895,494 in 2010 added to an improvement in bad debt recovery amounting to $1,526,196 in the same period.

Feed Products Segment

Our new feed mill facility completed in the last quarter in 2009, is engaged in the manufacturing and selling of feed products. During
the six months period ended June 30, 2010, this segment recorded sales of $7,322,728 with a profit margin of 11% or $816,134. This new segments contribution to net income in the first half of 2010 amounted to $478,901. It is expected that
there will be further improvement in gross margin contributions in the coming quarters, as volumes ramps up.

Operations

Sales. For the six months period ended June 30, 2010, sales increased by $8,181,504 or 30% to $35,032,082. Approximately 91% of
the improvement is due to the new feed product segment added in late 2009. The aquaculture product segment increased it sales by $473,214 in the first half of 2010 (3%) and the health and bio-products segment increased its sales by $385,562
(4%) in the same period, when compared to the corresponding period of 2009.

Cost of sales. Cost of sales increased
by $8,342,850 or 53% to $24,127,930 from $15,785,080 for the six months period ended June 30, 2010, as compared to the corresponding period of the prior year. Approximately 78% of the increase relates to the new feed product segment added in
late 2009. The increase in cost of direct materials in the aquaculture product segment experienced in the first half of 2010 was the major cause of the increase in cost of sales. The gross profit ratio decreased from 41% for the six months period
ended June 30, 2009 to 31% for the same period of 2010. The overall gross profit ratio deterioration in the current six months period of 2010 originates from increase in costs of direct materials from both the aquaculture and health and
bio-products segments.

Selling and distribution expenses. Selling and distribution expenses increased by $244,580 or 45%
from $544,302 to $788,882 for the six months period ended June 30, 2010, as compared to the corresponding period of the prior year. As a percentage of sales, the selling and distribution expenses remained relatively stable at approximately 2%
of sales in the current six months period of 2010, as compared to the corresponding period of 2009.

Marketing and advertising
expenses. Marketing and advertising expenses decreased by $687,156 or 25% from $2,765,486, to $2,078,330, as compared to the corresponding period of prior year. Those expenses correspond to approximately 20% of our bio-product sales
of 2010 compared to 31% of sales in 2009. The advertising expenditures are for the promotion of our health and bio-products to achieve customer recognition and are consistent with industry practices. In the first half of 2010, those marketing
efforts were gradually reoriented to better product presentation to draw more consumers to our products.

General and administrative
expenses. General and administrative expenses increased by $282,895 or 8% to $3,912,860 from $3,629,965 as compared to the corresponding period of the previous year. Approximately 61% of the increase is related to the new feed product
segment. No significant increases occurred in the first half of 2010 compared to 2009.



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Depreciation and amortization. Depreciation and amortization decreased by $63,136 or
24% to $204,404 as compared to the corresponding period of prior year, mainly as a result of reduced amortization of intangible assets in 2010 compared to 2009 and fixed assets coming to the end of their useful lives in 2010.

(Recovery of)/Doubtful accounts. Recovery of doubtful accounts amounted to $125,662 for the six months period ended June 30,
2010 compared to a doubtful account expense of $19,187 for the corresponding period of 2009. The increase of $1,387,343 in the first half of 2010 from the aquaculture product segment was offset by an improved recovery of $1,526,196 in the health and
bio-product segment. This expense corresponds to an estimated amount of potential losses on our receivables that did not occur to date, but might occur in the future. It is based on aging of receivables in each segment individually evaluated as to
its potential risk of loss. Management believes that the provision for doubtful accounts is representative of the risk of potential losses in our receivables at June 30, 2010.

Income from operations. Income from operations for the six months period ending June 2010 increased from $3,839,019 in 2009 to
$4,045,338 in the corresponding period of 2010, an increase of $ 206,319. Although sales increased in the first half of 2010 compared to the first half of 2009 by $8,181,504, the gross profit generated by those sales was reduced by $161,346 in 2010.
That reduction in gross profit was offset by reduced overheads in 2010, mostly marketing and advertising expenses and bad debt recovery as described above.

Finance (income)/ costs. In the first half of 2009, financing costs included recognition of the carrying interests on the promissory
notes issued in November 2006 added to the 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. No such expenses were incurred in 2010 as the notes were totally repaid through their conversion attribute in late 2009. In the second half of 2010, finance income was related mostly to interest on
cash balances.

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 FASB ASC 815-40 and FAS No.133, we recognized in our income statement the change in value of
those two items included in our current liabilities. In the first half of 2009, that change in value of the outstanding warrants and embedded conversion feature on our outstanding notes amounted to $229,998, shown as expense. In the first half of
2010, we recognized an income of $364,706 corresponding to the reduction in fair value of the outstanding warrants only, as all the notes have been converted as of December 31, 2009. This fair value change will continue to be evaluated
quarterly in the future until expiration of the warrants, and the corresponding change will be charged or credited to our income in the corresponding period.

Income before income taxes.Income before income taxes increased by $1,477,867 in the current six months period of 2010, when
compared to the same period of 2009. Although income from operations showed an improvement of $ 206,319 in the first half of 2010 as described above, financing income and fair value change in derivative financial instruments created a significant
improvement in the income before income tax in the current six months period of 2010 compared to the same period of 2009; those two items were also described above.



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Current income taxes. Current income taxes increased by $845,024 to $1,607,494 in the
first half of 2010, from $762,470 in the corresponding period of 2009. The increase in current income taxes is mostly due to the combination of increased taxable income in 2010 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. The health and bio-product segment actual income tax rate will increase yearly until it reaches 25% in year 2012.

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 attributable to shareholders. The net income attributable
to shareholders improved from $2,200,091 for the six months period ended June 30, 2009, to $2,832,934 for the corresponding period of 2010. As indicated above, reductions in financial expenses, and marketing and advertising expenses in the
first half of 2010 are the major factors supporting the improved results of 2010, when compared to the corresponding period of 2009.

LIQUIDITY AND CAPITAL RESOURCES

Our
cash and cash equivalents remain solid at $43,839,971 at June 30, 2010, as compared to $36,957,303 at December 31, 2009. As of June 30, 2010, working capital was $93,668,722 compared to $90,760,981 at December 31, 2009. The funds
generated by the operating activities during the second quarter of 2010 were used mainly to improve our cash position at June 30, 2010.

Total assets increased by $1,898,235, or 2%, to $121,704,060 at June 30, 2010, compared to $119,805,825 as of December 31, 2009.
Shareholders equity increased by $3,170,409 or 3%, to $115,194,016 at June 30, 2010, from $112,023,607 as of December 31, 2009.

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 stockholders 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 stockholders until the retained earnings become positive. The laws and regulations of the PRC restrict any form of distribution of statutory surplus reserve, whether by cash dividends or for use in the US operations. As
of June 30, 2010, the remaining statutory surplus reserve required is approximately $1.75 million (December 31, 2009: $2.33 million). As we are in an expansion phase, we do not intend to pay dividends to stockholders in the foreseeable future.
To date, we have not paid any dividends.

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. No assurances can
be given that additional debt or equity financing we may require will be available to us or, even if available, that such financing will be on terms favorable to us.

At present, about 42% of our consolidated sales are derived from our five largest clients, and our results of operations therefore depend on a small
number of clients (43% in 2009). As part of our short and mediumterm business plan, including our recent 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. 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 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 from time to time. 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 15.4 times ($100,178,766/$6,510,044) at June 30, 2010, from and 12.7 times
($98,543,199/$7,782,218) at December 31, 2009.



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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.

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. 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.

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 June 30, 2010, 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.

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.

An investment in our securities involves a high degree of risk. You should carefully consider the following information about these
risks, together with the other information contained in this Form 10-Q, before investing in our securities. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely
affected which could result in a decline in the value of our securities, causing you to lose all or part of your investment.

Risks
Relating To Our Business

We rely on cooperative suppliers and any adverse changes in these relationships may adversely affect us.

We have developed a network of aquaculture farmers in Hainan Province for the supply of tilapia and shrimp by
entering into cooperative supply agreements. Pursuant to the cooperative supply agreements, we are assured the necessary supply of aquatic products that meet our quality standards. Smooth continual operation of this cooperative network is essential
in controlling our costs, meeting quality standards and the timely fulfillment of our customer orders. Any adverse change to our cooperative network, including any early termination or non-renewal of any supply agreement or any failure of suppliers
to fulfill their obligations under the supply agreements, could have a material adverse effect on our business model, operations and competitiveness.

We may require additional capital in the future, which may not be available on favorable terms or at all.

Our future capital requirements will depend on many factors, including industry and market conditions, our ability to successfully
implement our branding and marketing initiatives and expansion of our production capabilities. We anticipate that we may need to raise additional funds in order to grow our business and implement our business strategy. We anticipate that any such
additional funds would be raised through equity or debt financings. In addition, we may enter into a revolving credit facility or a term loan facility with one or more syndicates of lenders. Any equity or debt financing, if available at all, may be
on terms that are not favorable to us. Even if we are able to raise capital through equity or debt financings, as to which there can be no assurance, the interest of existing stockholders in our company will be diluted, and the securities we issue
may have rights, preferences and privileges that are senior to those of our common stock or may otherwise materially and adversely affect the holdings or rights of our existing stockholders. If we cannot obtain adequate capital, we may not be able
to fully implement our business strategy, and our business, results of operations and financial condition would be adversely affected. See also Managements Discussion and Analysis of Financial Condition and Results of Operation 
Liquidity and Capital resources. In addition, we have and will continue to raise additional capital through private placements or registered offerings, in which broker-dealers will be engaged. The activities of such broker-dealers are highly
regulated and we cannot assure that the activities of such broker-dealers will not violate relevant regulations and generate liabilities despite our expectation otherwise.



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We depend on the availability of additional human resources for future growth.

We have recently experienced a period of significant growth in our sales volume. We believe that continued expansion is essential for us
to remain competitive and to capitalize on the growth potential of our business. Such expansion may place a significant strain on our management and operations and financial resources. As our operations continue to grow, we will have to continually
improve our management, operational and financial systems, procedures and controls, and other resources infrastructure, and expand our workforce. There can be no assurance that our existing or future management, operating and financial systems,
procedures and controls will be adequate to support our operations, or that we will be able to recruit, retain and motivate our personnel. Further, there can be no assurance that we will be able to establish, develop or maintain the business
relationships beneficial to our operations, or to do so or to implement any of the above activities in a timely manner. Failure to manage our growth effectively could have a material adverse effect on our business and the results of our operations
and financial condition.

We depend on our key management personnel, and the loss of any of their services could materially adversely
affect us.

Our operations are dependent upon the experience and expertise of a small number of key management
personnel, which includes Lillian Wang Li, our Chairman of the Board, Norbert Sporns, our Chief Executive Officer and President, and Harry Wang Hua, our Chief Operating Officer. Lillian Wang Li and Harry Wang Hua are brother and sister, and
Ms. Wang Li is married to Norbert Sporns. Although we have obtained life insurance on Ms. Wang Li and have begun the process of obtaining life insurance on Mr. Sporns, the loss of the services of any of these key personnel for any
reason would likely have a material adverse effect on our business, and the results of our operations and financial condition, or could delay or prevent us from fully implementing our business strategy.

A few of our customers account for a significant portion of our business.

We have derived, and over the near term we expect to continue to derive, a significant portion of our sales from a limited number of
customers. For example, our five largest customers accounted for a total of 40.6% of our consolidated sales for the year ended December 31, 2009, and they are all related to the aquaculture product segment. At June 30, 2010, approximately
42.3% of our trade receivables were from transactions with these five largest customers. The loss of any of these customers or non-payment of outstanding amounts due to the company from these customers could materially and adversely affect our
results of operations, financial position and liquidity.

We may be unable to continue to take advantage of the seasonal pricing
fluctuation in sales of our products, and we may be adversely affected by the seasonal fluctuation in the prices we earn for our products.

We have experienced seasonal fluctuation in the prices we earn for our products, generally in the range of 15 to 20%. Pricing fluctuation
occurs during the winter season when fish farms in the northern part of the PRC suspend production due to cold weather conditions. These weather related disruptions in supply permit us to increase the sales prices of our tilapia products. However,
there can be no assurance that such premium pricing, benefiting our profitability, can be maintained in the future. Other factors, such as an increase in the cost of feed, might also adversely impact on the cost of fish and lessen our margins and
profitability.

Any adverse changes in the supply of our tilapia and other raw materials, including contamination or disease or
increased costs of raw materials, may adversely affect our operations or reduce our margins or profits.

We are
dependent on the availability of raw materials from Hainan Province and the oceans in that region. The supply of these raw materials can be adversely affected by any material change in the climatic or environmental conditions in and around Hainan
Province. In addition, if there is contamination resulting from disease, pollution or other foreign substances, our supply of raw materials could be jeopardized or disrupted. The shortage or lack of raw materials and any consequential change in
their cost would, in turn, have a material adverse effect on the cost on our operations and margins and our ability to provide products to our customers.

Any actual contamination of our products resulting from processing, packaging or transit of our products, or negative press from contamination
experienced by other companies in our industry may adversely affect our operations or reduce our margins or profits.

We actively seek to control the quality of our products and avoid risk of contamination in our processing, packaging and distribution of
such products; however no quality control program is guaranteed to be completely effective. We are dependent on others for the reliable safe transportation of our products to the market place and the quality of our final product as experienced by
the consumer may be impacted by disruptions in the transit process beyond our control. In addition, if our competitors experience problems with contamination of their products, even if we do not concurrently suffer similar adverse events, publicity
of such problems could negatively impact our reputation. Actual contamination or reports of industry problems with contamination or poor quality may have a material adverse effect on our operations, including an increase in product liability claims,
higher quality control and transport costs, reduced margins and decreased consumer interest in our products.

We may be adversely
affected by the fluctuation in raw material prices and selling prices of our products.

Neither our products nor the
raw materials we use have experienced any significant price fluctuations since we began operation, but there is no assurance that they will not be subject to future price fluctuations or pricing control. The products and raw materials we use may
experience price volatility caused by events such as market fluctuations or changes in governmental programs. The market price of these raw materials may also experience significant upward adjustment, if, for instance, there is a material
under-supply or over-demand in the market. These price changes may ultimately result in increases in the selling prices of our products, and may, in turn, adversely affect our sales volume, revenue and operating profit.

We could be adversely affected by the occurrence of natural disasters in Hainan Province.

From time to time, Hainan Province experiences typhoons, particularly from June through September of any given year. Natural disasters
could impede operations, damage infrastructure necessary to our operations or adversely affect the logistical services to and from Hainan Province. Even though we currently have insurance against damages caused by natural disasters, including
typhoons, accidents or similar events, the occurrence of natural disasters in Hainan Province could adversely affect our business, the results of our operations, prospects and financial condition, through business disruptions and/or any losses in
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Intense competition from existing and new entities may adversely affect our revenues and
profitability.

In general, the aquaculture industry is intensely competitive and highly fragmented. We compete with
various companies, many of which are developing or can be expected to develop products similar to ours. For example, 8th SeaThe Organic Seafood Company currently produces and processes tilapia fillets in Brazils Parana state. Many of our
competitors are more established than we are and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors have greater name recognition and a larger customer base. These
competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive
pricing policies. We intend to create greater awareness for our brand name in an attempt to successfully compete with our competitors. We cannot assure you that we will be able to compete effectively or successfully with current or future
competitors or that the competitive pressures we face will not harm our business.

Our operating subsidiaries must comply with
environmental protection laws that could adversely affect our profitability.

We are required to comply with the
environmental protection laws and regulations promulgated by the national and local governments of the PRC. Some of these regulations govern the level of fees payable to government entities providing environmental protection services and the
prescribed standards relating to the discharge of effluent, or liquid waste. Yearly inspections of waste treatment systems require the payment of a license fee which could become a penalty fee if standards are not maintained. Currently, our plant
treats all of its effluent completely to level one, which is consistent with releasing potable water back to the environment, and there is currently no charge being levied. Although our production technologies allow us to efficiently control the
level of pollution resulting from our production process, and notwithstanding the fact that we have received evidence of compliance with environmental protection requirements from government authorities, due to the nature of our business, effluent
wastes are unavoidably generated in the aquaculture production processes. If we fail to comply with any of these environmental laws and regulations in the PRC, depending on the types and seriousness of the violation, we may be subject to, among
other things, warning from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, being ordered to close down our business operations and suspension of relevant permits.

Climate change and related regulatory responses may impact our business.

Climate change as a result of emissions of greenhouse gases is a significant topic of discussion and may generate U.S. federal and other
regulatory responses in the near future, including the imposition of a so-called cap and trade system. It is impracticable to predict with any certainty the impact of climate change on our business or the regulatory responses to it,
although we recognize that they could be significant. The most direct impact is likely to be an increase in energy costs, which would increase slightly our operating costs, primarily through increased utility and transportations costs. However, it
is too soon for us to predict with any certainty the ultimate impact, either directionally or quantitatively, of climate change and related regulatory responses.

To the extent that climate change increases the risk of natural disasters or other disruptive events in the areas in which we operate, we
could be harmed. While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that can be disruptive to our business, our plans may not fully protect us from all such disasters or events.

Our operations, revenue and profitability could be adversely affected by changes in laws and regulations in the countries where we do
business.

The governments of countries into which we sell our products, including the United States, Canada and the
European Union, from time to time, consider regulatory proposals relating to raw materials, food safety and markets, and environmental regulations, which, if adopted, could lead to disruptions in distribution of our products and increase our
operational costs, which, in turn, could affect our profitability. To the extent that we increase our product prices as a result of such changes, our sales volume and revenues may be adversely affected.

Furthermore, these governments may change import regulations or impose additional taxes or duties on certain Chinese imports from time to
time. For example, in 2004, the United States government imposed heavy tariffs of more than 100% on certain Chinese shrimp exporters. Similar regulations and fees or new regulatory developments may have a material adverse impact on our operations,
revenue and profitability. If one or more of the countries into which we sell our products bars the import or sale of fish or related products from China, our available market would shrink significantly, adversely impacting our results of operations
and growth potential.

Our business could be adversely affected by the recent negative public reports on seafood imported from China.

In June 2007, the U.S. Food and Drug Administration issued an alert report on the sale of five types of farm-raised
seafood from China in the United States because of unapproved chemical residues. The five types of farm-raised seafood are shrimp, catfish, eel, basa and dace. As a result, in order for the seafood to be sold in the United States, importers must
provide independent testing that shows the seafood does not contain the unapproved residues. Although tilapia is not included in the list and we believe our main seafood product, which is tilapia, does not contain any of the unapproved residues, it
is possible that our business may be adversely impacted as a result of the negative public reports on seafood imported from China.

There could be changes in the policies of the PRC government that may adversely affect our business.

The aquaculture industry in the PRC is subject to policies implemented by the PRC government. The PRC government may, for instance,
impose control over aspects of our business such as distribution of raw materials, product pricing and sales. If the raw materials used by us or our products become subject to any form of government control, then depending on the nature and extent
of the control and our ability to make corresponding adjustments, there could be a material adverse effect on our business and operating results.

Separately, our business and operating results also could be adversely affected by changes in policies of the Chinese government such as:
changes in laws, regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion, imports on sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government
has been pursuing economic reform policies for approximately two decades to liberalize the economy and introduce free market aspects, there is no assurance that the government will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting Chinas political, economic and social life.



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Compliance with changing regulation of corporate governance and public disclosure will result in
additional expenses and pose challenges for our management team.

Changing laws, regulations and standards relating to
corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for
public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards
for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

Certain political and economic considerations relating to PRC could adversely affect our company.

The PRC is passing from a planned economy to a market economy. The Chinese government has confirmed that economic development will follow
a model of market economy under socialism. While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans and annual state plans
adopted by the government that set down national economic development goals. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various
industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms are unprecedented or experimental for the PRC government, and are expected to be refined and improved. Other political,
economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating results may be
adversely affected by changes in the PRCs economic and social conditions as well as by changes in the policies of the PRC government, which we may not be able to foresee, such as changes in laws and regulations (or the official interpretation
thereof), measures which may be introduced to control inflation, changes in the rate or method of taxation, and imposition of additional restrictions on currency conversion.

The recent nature and uncertain application of many PRC laws applicable to us create an uncertain environment for business operations and they
could have a negative effect on us.

The PRC legal system is a civil law system. Unlike the common law system, such as
the legal system used in the United States, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, the PRC began to promulgate a comprehensive system of laws and has since introduced
many laws and regulations to provide general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as
corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and
business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

If relations between the United States and China worsen, we may be unable to serve a portion of our customer base, the value of our securities
could decline and we may have difficulty accessing the U.S. capital markets.

At various times during recent years,
the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could adversely affect
our ability to continue to sell to U.S. customers, the value of our securities and our ability to access U.S. capital markets.

Governmental control of currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of
currency out of the PRC. Currently, the Renminbi is not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign
currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of loans and corporate debt obligations denominated in foreign currencies.

The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If
the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.

The fluctuation of the Renminbi may materially and adversely affect your investment.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in
the PRCs political and economic conditions. Any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars into
Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations.

Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making dividend payments on our common or preferred
stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced. Any significant devaluation of Renminbi may reduce our operation costs in U.S. dollars
but may also reduce our earnings in U.S. dollars. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.

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 Peoples
Bank of China 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.

In addition, there can be no assurance that we will be able to obtain sufficient foreign exchange to pay dividends or satisfy other
foreign exchange requirements in the future. We currently do not intend to pay dividends.



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It may be difficult to effect service of process and enforcement of legal judgments upon our company
and our officers and directors because some of them reside outside the United States.

As our operations are presently
based in China and some of our key directors and officers reside outside the United States, service of process on our key directors and officers may be difficult to effect within the United States. Also, substantially all of our assets are located
outside the United States and any judgment obtained in the United States against us may not be enforceable outside the United States. We have appointed Norbert Sporns, our Chief Executive Officer and President, as our agent to receive service of
process in any action against our company in the United States.

Risks Relating to our Common Stock

There are a large number of shares underlying our Series A preferred stock and warrants that may be available for future sale and the sale of these
shares may depress the market price of our common stock.

As of June 30, 2010, we had 14,681,002 shares of common
stock issued and outstanding. We currently have outstanding Class B warrants to purchase up to 114,583 shares of our common stock and stock purchase warrants to purchase up to 30,000 shares of our common stock issued in connection with the November
2006 financing. In addition, we currently have 100,000 shares of Series A preferred stock issued and outstanding, and the holders of our Series A preferred stock have an option right to convert each share of Series A Preferred Stock into 0.1 shares
of our common stock. These shares, including all of the shares issuable upon conversion of our Series A preferred stock and upon exercise of our warrants, may be sold into the market place currently. The sale of these shares may adversely affect the
market price of our common stock.

Our principal stockholders, current executive officers and directors own a significant percentage of
our company and will be able to exercise significant influence over our company.

Our executive officers and directors
and principal stockholders together beneficially own approximately 90.08% of the total voting power of our outstanding voting capital stock, primarily as a result of their ownership of Series A preferred stock of our company which, while convertible
into shares of our common stock on a 0.1-for-1 basis, carries 1,000 votes per Series A preferred share rather than the 1 vote per share of our common stock. The Series A preferred stock and the common stock vote together as one class on all matters
to be voted upon by the stockholders. In particular, our three largest stockholders, Mr. Sporns, Ms. Wang Li and Mr. Wang Hua, are family members who share approximately 90.05% of the total voting power of our company. Ms. Wang
Li is the wife of Mr. Sporns and Mr. Wang Hua is the brother of Ms. Wang Li. These stockholders will be able to determine the composition of our board of directors, will retain the voting power to approve all matters requiring
stockholder approval and will continue to have significant influence over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have a material and adverse effect on the market price of the common stock or prevent our stockholders from realizing a premium over the market prices for their shares of common stock.

Investors may experience dilution from any exercise of warrants.

We currently have outstanding Class B warrants to purchase up to 114,583 shares of our common stock and stock purchase warrants to
purchase up to 30,000 shares of our common stock. The Class B warrants expire on January 25, 2011 and the stock purchase warrants expire on December 28, 2011.

Risks Relating to NewCo and the Expansion of our Health and Bio-products Segment

Our board of directors may decide not to approve the equity offering or stock exchange listing of our health and bio-products segment; even if our
board of directors approves, the consummation of the equity offering and the successful listing of NewCo common stock on a stock exchange will be subject to a number of conditions.

Our board of directors and management are evaluating the proposed equity offering and stock exchange listing of NewCo to determine
whether the transaction is in our best interests as well as those of our stockholders. The board of directors may decide not to approve the proposed equity offering and stock exchange listing of NewCo if at any time it determines, in its sole
discretion, that we are better served by not completing the transaction.

Even if the board of directors approves the equity
offering and stock exchange listing, the transaction will be subject to a number of conditions, including: (i) approval from Hong Kong securities regulators and other applicable regulators; (ii) the receipt of all permits, registrations
and consents required under the securities laws of states or other political subdivisions of the U.S. or of the PRC in connection with the equity offering and stock exchange listing; (iii) HKEKs approval for listing of NewCos common
stock; and (iv) the nonexistence of any order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition that might prevent the consummation of the equity offering and stock exchange listing or
any of the transactions related thereto. If we are not able to meet these conditions, we may not be able to complete the equity offering or successfully list the common stock of NewCo on a stock exchange.

If the equity offering and the stock exchange listing are consummated, our existing stockholders ownership percentage in our health and
bio-products business will be diluted.

In connection with the proposed equity offering and stock exchange listing
described under Managements Discussion and Analysis  General Overview  Health and Bio-products Segment  Proposed Equity Offering and Listing, we would contribute our health and bio-products business to a
newly created subsidiary and sell up to 35% of the equity interests in that subsidiary to Asian investors. If this transaction is consummated, your ownership interest in this business segment would be diluted.

Even if the proposed equity offering and stock exchange listing are successfully completed, we may not achieve the desired results and there is no
guarantee that we will receive any benefits.

In Managements Discussion and Analysis  General
Overview  Health and Bio-products Segment  Proposed Equity Offering and Listing, we describe the purposes and potential benefits to the proposed equity offering and stock exchange listing. However, we may not be able to achieve
some or all of the benefits or such benefits may be delayed or may not occur at all. If we do not achieve these benefits, our revenue and operating profits may be adversely impacted.



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The proposal to open new health product stores in China and our potential franchising opportunities in
connection with such stores may become critical components of our growth and overall business strategy; yet we have no experience operating retail stores or franchises.

Because we have no experience operating retail stores or franchises, it is difficult to forecast accurately our future revenues and
expenses related to these business opportunities. Additionally, our health product stores would be subject to risks inherent in the establishment of a new business, including, among other things, efficiently deploying our capital, developing our
product and service offerings, complying with the Food Safety Laws of China and other applicable regulations, developing and implementing our marketing campaigns and strategies. Our ability to generate future revenues from these operations will be
dependent on a number of factors, many of which are beyond our control. To be successful, we must establish market recognition in this business. This will require us to expend significant resources, including capital and management time.

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

During the period from January 1, 2010 to June 30, 2010, no securities were issued.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

There have been no material defaults.



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ITEM 4 - [RESERVED]

ITEM 5 - OTHER INFORMATION

None.

ITEM 6
- EXHIBITS



|     |  |                                                                             
|---- |  | ----------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).        
|     | 
|31.2 |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).        
|     | 
|32.1 |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
|     | 
|32.2 |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: August 9, 2010



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



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Exhibit Index



|               |  |                                                                             
|-------------- |  | ----------------------------------------------------------------------------
|Exhibit
Number |  | Description                                                                 
|31.1           |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).        
|               | 
|31.2           |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).        
|               | 
|32.1           |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
|               | 
|32.2           |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.



31