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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the Exchange Act) 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 March 31,
2010
|Common stock, $0.001 par value |  | 14,681,002                   









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INDEX



|                               |  |                                                                                        |  |            
|------------------------------ |  | -------------------------------------------------------------------------------------- |  | -----------
|                               |  |                                                                                        |  | PageNumbers
|PART I - FINANCIAL INFORMATION |  |                                                                                       
|Item 1.                        |  | Financial Statements.                                                                  |  | 1          
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations. |  | 10         
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk.                            |  | 13         
|Item 4.                        |  | Controls and Procedures.                                                               |  | 13         
|PART II - OTHER INFORMATION    |  |                                                                                       
|Item 1.                        |  | Legal Proceedings.                                                                     |  | 14         
|Item 1A.                       |  | Risk Factors.                                                                          |  | 14         
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds.                           |  | 14         
|Item 3.                        |  | Defaults Upon Senior Securities.                                                       |  | 14         
|Item 4.                        |  | Reserved.                                                                              |  | 14         
|Item 5.                        |  | Other Information.                                                                     |  | 14         
|Item 6.                        |  | Exhibits.                                                                              |  | 14         
|SIGNATURES                     |  | 15                                                                                    



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##### Table of Contents

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



|                                              |  |                           |             |                            |   |            
|--------------------------------------------- |  | ------------------------- | ----------- | -------------------------- | - | -----------
|                                              |  | March 31, 2010(Unaudited) |             | December 31, 2009(Audited)
|ASSETS                                        |  |                           |             |                            |   |            
|CURRENT ASSETS:                               |  |                           |             |                            |   |            
|Cash and cash equivalents                     |  | $                         | 37,808,214  |                            | $ | 36,957,303 
|Trade receivables, net of provisions (Note 6) |  |                           | 56,972,707  |                            |   | 58,186,055 
|Inventories (Note 7)                          |  |                           | 2,729,583   |                            |   | 2,204,931  
|Prepayments                                   |  |                           | 1,381,688   |                            |   | 1,194,910  
|                                              |  |                           |             |                            |   |            
|TOTAL CURRENT ASSETS                          |  |                           | 98,892,192  |                            |   | 98,543,199 
|                                              |  |                           |             |                            |   |            
|PROPERTY, PLANT AND EQUIPMENT, NET            |  |                           | 19,878,848  |                            |   | 20,150,568 
|CONSTRUCTION IN PROGRESS                      |  |                           | 455,674     |                            |   | 21,384     
|INTANGIBLE ASSETS                             |  |                           | 952,973     |                            |   | 979,738    
|                                              |  |                          
|OTHER ASSETS                                  |  |                           |             |                            |   |            
|Deferred taxes (Note 9)                       |  |                           | 110,954     |                            |   | 110,936    
|Prepaid rent on land use                      |  |                           | 325,294     |                            |   |           
|                                              |  |                           |             |                            |   |            
|                                              |  |                          
|                                              |  |                           | 436,248     |                            |   | 110,936    
|                                              |  |                           |             |                            |   |            
|TOTAL ASSETS                                  |  | $                         | 120,615,935 |                            | $ | 119,805,825
|                                              |  |                           |             |                            |   |            

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



1



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                               |  |                           |             |                            |   |            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ----------- | -------------------------- | - | -----------
|                                                                                                                                                                               |  | March 31, 2010(Unaudited) |             | December 31, 2009(Audited)
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                           |  |                           |             |                            |   |            
|CURRENT LIABILITIES:                                                                                                                                                           |  |                           |             |                            |   |            
|Accounts payable and accrued liabilities                                                                                                                                       |  | $                         | 6,200,375   |                            | $ | 6,770,470  
|Tax payable                                                                                                                                                                    |  |                           | 284,582     |                            |   | 566,054    
|Due to directors                                                                                                                                                               |  |                           | 287,878     |                            |   |           
|Derivative liabilities (Note 11)                                                                                                                                               |  |                           | 307,739     |                            |   | 445,694    
|                                                                                                                                                                               |  |                           |             |                            |   |            
|TOTAL CURRENT LIABILITIES                                                                                                                                                      |  |                           | 7,080,574   |                            |   | 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 and 14,681,002 shares issued and outstanding as of
March 31, 2010 and December 31, 2009 respectively |  |                           | 14,681      |                            |   | 14,681     
|Additional paid-in capital                                                                                                                                                     |  |                           | 79,274,492  |                            |   | 79,281,209 
|Accumulated other comprehensive income                                                                                                                                         |  |                           | 9,517,275   |                            |   | 9,508,756  
|Retained earnings                                                                                                                                                              |  |                           | 17,221,782  |                            |   | 15,737,809 
|Appropriation of retained earnings (Reserves)                                                                                                                                  |  |                           | 7,507,031   |                            |   | 7,481,052  
|                                                                                                                                                                               |  |                           |             |                            |   |            
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                     |  |                           | 113,535,361 |                            |   | 112,023,607
|                                                                                                                                                                               |  |                           |             |                            |   |            
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  | $                         | 120,615,935 |                            | $ | 119,805,825
|                                                                                                                                                                               |  |                           |             |                            |   |            

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



2



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



|                                                      |  |                    |            |   |               |   |            |  
|----------------------------------------------------- |  | ------------------ | ---------- | - | ------------- | - | ---------- | -
|                                                      |  | Three Months Ended |           
|                                                      |  | March 31,2010      |            |   | March 31,2009 |  
|SALES                                                 |  | $                  | 14,375,908 |   |               | $ | 10,840,821 |  
|COST OF SALES                                         |  |                    | 9,997,868  |   |               |   | 6,337,804  |  
|                                                      |  |                    |            |   |               |   |            |  
|GROSS PROFIT                                          |  |                    | 4,378,040  |   |               |   | 4,503,017  |  
|SELLING AND DISTRIBUTION EXPENSES                     |  |                    | 362,084    |   |               |   | 254,152    |  
|MARKETING AND ADVERTISING                             |  |                    | 977,981    |   |               |   | 1,426,625  |  
|GENERAL AND ADMINISTRATIVE EXPENSES                   |  |                    | 1,988,814  |   |               |   | 1,606,372  |  
|DEPRECIATION AND AMORTIZATION                         |  |                    | 96,332     |   |               |   | 176,814    |  
|(RECOVERY OF)/DOUBTFUL ACCOUNTS                       |  |                    | (672,213   | ) |               |   | 31,566     |  
|                                                      |  |                    |            |   |               |   |            |  
|INCOME FROM OPERATIONS                                |  |                    | 1,625,042  |   |               |   | 1,007,488  |  
|FINANCE COSTS                                         |  |                    | 538        |   |               |   | 518,445    |  
|FAIR VALUE CHANGE IN DERIVATIVE FINANCIAL INSTRUMENTS |  |                    | (137,955   | ) |               |   | (825,871   | )
|OTHER INCOME                                          |  |                    | (4,791     | ) |               |   | (27,011    | )
|                                                      |  |                    |            |   |               |   |            |  
|INCOME BEFORE INCOME TAXES                            |  |                    | 1,767,250  |   |               |   | 1,341,925  |  
|INCOME TAXES (Note 10)                                |  |                    |            |   |               |   |            |  
|CURRENT                                               |  |                    | 264,054    |   |               |   | 226,569    |  
|DEFERRED                                              |  |                    |           |   |               |   |           |  
|                                                      |  |                    |            |   |               |   |            |  
|NET INCOME ATTRIBUTABLE TO SHAREHOLDERS               |  |                    | 1,503,196  |   |               |   | 1,115,356  |  
|OTHER COMPREHENSIVE INCOME                            |  |                    |            |   |               |   |            |  
|Foreign currency translation gain/(loss)              |  |                    | 8,517      |   |               |   | (210,746   | )
|                                                      |  |                    |            |   |               |   |            |  
|COMPREHENSIVE INCOME                                  |  | $                  | 1,511,713  |   |               | $ | 904,610    |  
|                                                      |  |                    |            |   |               |   |            |  
|NET INCOME PER SHARE                                  |  |                    |            |   |               |   |            |  
|BASIC                                                 |  | $                  | 0.1024     |   |               | $ | 0.0919     |  
|                                                      |  |                    |            |   |               |   |            |  
|DILUTED                                               |  | $                  | 0.0916     |   |               | $ | 0.0891     |  
|                                                      |  |                    |            |   |               |   |            |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING            |  |                    |            |   |               |   |            |  
|BASIC                                                 |  |                    | 14,681,002 |   |               |   | 12,137,999 |  
|                                                      |  |                    |            |   |               |   |            |  
|DILUTED                                               |  |                    | 14,910,901 |   |               |   | 13,424,809 |  
|                                                      |  |                    |            |   |               |   |            |  

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



3



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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



|                                                                        |  |                    |            |   |               |   |            |  
|----------------------------------------------------------------------- |  | ------------------ | ---------- | - | ------------- | - | ---------- | -
|                                                                        |  | Three Months Ended |           
|                                                                        |  | March 31,2010      |            |   | March 31,2009 |  
|OPERATING ACTIVITIES                                                    |  |                    |            |   |               |   |            |  
|Net income                                                              |  | $                  | 1,503,196  |   |               | $ | 1,115,356  |  
|Non-cash items:                                                         |  |                    |            |   |               |   |            |  
|Depreciation and amortization                                           |  |                    | 449,162    |   |               |   | 427,111    |  
|Fair value change in derivative financial instruments                   |  |                    | (137,955   | ) |               |   | (825,871   | )
|Financial and other non-cash services                                   |  |                    |           |   |               |   | 785,679    |  
|                                                                        |  |                   
|Change in noncash working capital items:                               |  |                    |            |   |               |   |            |  
|Inventories                                                             |  |                    | (524,701   | ) |               |   | (561,878   | )
|Trade receivables, net of provisions                                    |  |                    | 1,273,365  |   |               |   | 3,646,355  |  
|Prepayments                                                             |  |                    | (498,588   | ) |               |   | 35,188     |  
|Accounts payables and accrued expenses                                  |  |                    | (624,111   | ) |               |   | (922,645   | )
|Tax payable                                                             |  |                    | (301,512   | ) |               |   | (575,767   | )
|                                                                        |  |                    |            |   |               |   |            |  
|Cash flow generated from operating activities                           |  |                    | 1,138,856  |   |               |   | 3,123,528  |  
|                                                                        |  |                    |            |   |               |   |            |  
|INVESTING ACTIVITIES                                                    |  |                    |            |   |               |   |            |  
|Acquisition of property, plant and equipment                            |  |                    | (167,782   | ) |               |   | (54,611    | )
|Construction in progress                                                |  |                    | (434,251   | ) |               |   | (2,288,983 | )
|                                                                        |  |                    |            |   |               |   |            |  
|Cash flow used in investing activities                                  |  |                    | (602,033   | ) |               |   | (2,343,594 | )
|                                                                        |  |                    |            |   |               |   |            |  
|FINANCING ACTIVITIES                                                    |  |                    |            |   |               |   |            |  
|Due to directors                                                        |  |                    | 386,688    |   |               |   | (691,520   | )
|                                                                        |  |                    |            |   |               |   |            |  
|Cash flow generated from/ (used in) financing activities                |  |                    | 386,688    |   |               |   | (691,520   | )
|                                                                        |  |                    |            |   |               |   |            |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |  |                    | 923,511    |   |               |   | 88,414     |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  |                    | (72,600    | ) |               |   | (179,945   | )
|Cash and cash equivalents, beginning of period                          |  |                    | 36,957,303 |   |               |   | 54,920,548 |  
|                                                                        |  |                    |            |   |               |   |            |  
|Cash and cash equivalents, end of period                                |  | $                  | 37,808,214 |   |               | $ | 54,829,017 |  
|                                                                        |  |                    |            |   |               |   |            |  
|SUPPLEMENTARY CASH FLOWS DISCLOSURES                                    |  |                    |            |   |               |   |            |  
|Interest paid                                                           |  | $                  |           |   |               | $ |           |  
|                                                                        |  |                    |            |   |               |   |            |  
|Taxes paid                                                              |  | $                  | 545,590    |   |               | $ | 803,044    |  
|                                                                        |  |                    |            |   |               |   |            |  
|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)

MARCH 31, 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 include the accounts of HQS and all its subsidiaries (The Group). All material
inter-company accounts and transactions have been eliminated. The consolidated financial statements are prepared in accordance with generally accepted accounting principles used in the United States of America.

NOTE 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.



5



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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 March 31, 2010 and 2009.



|                                                                              |  |                   |           |                     |            |                 |   |       
|----------------------------------------------------------------------------- |  | ----------------- | --------- | ------------------- | ---------- | --------------- | - | ------
|                                                                              |  | March 31, 2010   
|                                                                              |  | Income(Numerator) |           | Shares(Denominator) |            | Per ShareAmount
|Basic EPS                                                                     |  |                   |           |                     |            |                 |   |       
|Net income available to common shareholders                                   |  | $                 | 1,503,196 |                     | 14,681,002 |                 | $ | 0.1024
|Effect of dilutive securities stock options issued to employees and investors |  |                   | 137,955   |                     | 229,899    |                 |   |      
|                                                                              |  |                   |           |                     |            |                 |   |       
|Net income available to common stockholders plus assumed conversions          |  | $                 | 1,365,241 |                     | 14,910,901 |                 | $ | 0.0916
|                                                                              |  |                   |           |                     |            |                 |   |       
|                                                                              | 
|                                                                              |  | March 31, 2009   
|                                                                              |  | Income(Numerator) |           | Shares(Denominator) |            | Per ShareAmount
|Basic EPS                                                                     |  |                   |           |                     |            |                 |   |       
|Net income available to common shareholders                                   |  | $                 | 1,115,356 |                     | 12,137,999 |                 | $ | 0.0919
|Effect of dilutive securities stock options issued to employees and investors |  |                   | 80,794    |                     | 1,286,810  |                 |   |      
|                                                                              |  |                   |           |                     |            |                 |   |       
|Net income available to common stockholders plus assumed conversions          |  | $                 | 1,196,150 |                     | 13,424,809 |                 | $ | 0.0891
|                                                                              |  |                   |           |                     |            |                 |   |       

NOTE 5FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of certain financial instruments, including cash and cash equivalents, receivables, accounts payable and accrued
expenses and debt, approximates their fair value at March 31, 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 March 31, 2010 and December 31, 2009 are summarized as follows:



|                                      |  |               |            |                   |   |           
|------------------------------------- |  | ------------- | ---------- | ----------------- | - | ----------
|                                      |  | March 31,2010 |            | December 
31,2009
|Trade receivables                     |  | $             | 59,264,858 |                   | $ | 60,736,950
|Other receivables                     |  |               | 445,538    |                   |   | 865,490   
|                                      |  |               |            |                   |   |           
|                                      |  |               | 59,710,396 |                   |   | 61,602,440
|Less: Provision for doubtful accounts |  |               | 2,737,689  |                   |   | 3,416,385 
|                                      |  |               |            |                   |   |           
|                                      |  |              
|Balance at end of period              |  | $             | 56,972,707 |                   | $ | 58,186,055
|                                      |  |               |            |                   |   |           

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



|                                                  |  |               |           |   |                  |   |          
|------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | ---------
|                                                  |  | March 31,2010 |           |   | December 31,2009
|Balance at beginning of period                    |  | $             | 3,416,385 |   |                  | $ | 299,125  
|Add: (Recovery) /provision during the period, net |  |               | (672,213  | ) |                  |   | 3,114,387
|Exchange difference transfer to exchange reserve  |  |               | (6,483    | ) |                  |   | 2,873    
|                                                  |  |               |           |   |                  |   |          
|Balance at end of period                          |  | $             | 2,737,689 |   |                  | $ | 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 at March 31, 2010 and December 31, 2009 are
summarized as follows:



|                 |  |               |           |                  |   |          
|---------------- |  | ------------- | --------- | ---------------- | - | ---------
|                 |  | March 31,2010 |           | December 31,2009
|Raw materials    |  | $             | 413,397   |                  | $ | 521,798  
|Work-in-progress |  |               | 310,513   |                  |   | 303,643  
|Finished goods   |  |               | 2,005,673 |                  |   | 1,379,490
|                 |  |               |           |                  |   |          
|                 |  | $             | 2,729,583 |                  | $ | 2,204,931
|                 |  |               |           |                  |   |          

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



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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 |  | 6.8269 |  | 6.8330
|Average RMB : US$ exchange rate     |  | 6.8275 |  | 6.8285

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 March 31, 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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. Jiahua Marine was 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 |  
|Statutory tax rate           |  | 0    | % |  | 22            | %
|Tax holidays and concessions |  |     |   |  |              |  
|                             |  |      |   |  |               |  
|Effective tax rate           |  | 0    | % |  | 22            | %
|                             |  |      |   |  |               |  

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

NOTE 11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



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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 March 31, 2010 and December 31, 2009:



|                   |  |                |          |   |                   |   |          |  
|------------------ |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                   |  | March 31, 2010 |          |   | December 31, 2009 |  
|Class B Warrants   |  | $              | (209,813 | ) |                   | $ | (321,188 | )
|Tail Wind Warrants |  |                | (97,926  | ) |                   |   | (124,506 | )
|                   |  |                |          |   |                   |   |          |  
|Fair values        |  | $              | (307,739 | ) |                   | $ | (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 March 31, 2010 is as follows:



|                                   |  |   |          |  
|---------------------------------- |  | - | -------- | -
|Beginning balance, January 1, 2010 |  | $ | (445,694 | )
|Total gains included in earnings   |  |   | 137,955  |  
|                                   |  |   |          |  
|Ending balance, March 31, 2010     |  | $ | (307,739 | )
|                                   |  |   |          |  

NOTE 12SEGMENTS

No geographical segment analysis is provided for the three months ended March 31, 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 March 31, 2010



|                                                      |  |                    |            |   |                       |   |            |              |  |   |                  |   |  |               |             |   |  |   |             |  
|----------------------------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ------------ |  | - | ---------------- | - |  | ------------- | ----------- | - |  | - | ----------- | -
|                                                      |  | AquacultureProduct |            |   | Health andBio-product |   |            | FeedProducts |  |   | UnallocatedItems |   |  | Consolidation |            
|Sales to external customers                           |  | $                  | 7,716,239  |   |                       | $ | 3,597,137  |              |  | $ | 3,062,532        |   |  | $             |            |   |  | $ | 14,375,908  |  
|                                                      |  |                    |            |   |                      
|Cost of sales                                         |  |                    | 6,272,568  |   |                       |   | 1,083,836  |              |  |   | 2,641,464        |   |  |               |            |   |  |   | 9,997,868   |  
|                                                      |  |                    |            |   |                       |   |            |              |  |   |                  |   |  |               |             |   |  |   |             |  
|                                                      |  |                    |            |   |                      
|Gross profit                                          |  |                    | 1,443,671  |   |                       |   | 2,513,301  |              |  |   | 421,068          |   |  |               |            |   |  |   | 4,378,040   |  
|                                                      |  |                    |            |   |                      
|Selling and distribution expenses                     |  |                    | 160,800    |   |                       |   | 138,137    |              |  |   | 16,681           |   |  |               | 46,466      |   |  |   | 362,084     |  
|                                                      |  |                    |            |   |                      
|Marketing and advertising                             |  |                    |           |   |                       |   | 977,981    |              |  |   |                 |   |  |               |            |   |  |   | 977,981     |  
|                                                      |  |                    |            |   |                      
|General and administrative expenses                   |  |                    | 160,621    |   |                       |   | 200,113    |              |  |   | 101,223          |   |  |               | 1,526,857   |   |  |   | 1,988,814   |  
|Depreciation and amortization                         |  |                    | 214        |   |                       |   | 21,093     |              |  |   | 67,523           |   |  |               | 7,502       |   |  |   | 96,332      |  
|(Recovery of)/doubtful accounts                       |  |                    | 869,734    |   |                       |   | (1,541,947 | )            |  |   |                 |   |  |               |            |   |  |   | (672,213    | )
|Finance costs                                         |  |                    | (6,001     | ) |                       |   | (7,640     | )            |  |   | (3,771           | ) |  |               | 17,950      |   |  |   | 538         |  
|Fair value change in derivative financial instruments |  |                    |           |   |                       |   |           |              |  |   |                 |   |  |               | (137,955    | ) |  |   | (137,955    | )
|Income/(loss) before income taxes                     |  |                    | 248,267    |   |                       |   | 2,724,738  |              |  |   | 239,412          |   |  |               | (1,445,167  | ) |  |   | 1,767,250   |  
|Income taxes                                          |  |                    |           |   |                       |   | 264,054    |              |  |   |                 |   |  |               |            |   |  |   | 264,054     |  
|                                                      |  |                    |            |   |                      
|Net Income/(loss) for the year                        |  | $                  | 248,267    |   |                       | $ | 2,460,684  |              |  | $ | 239,412          |   |  | $             | (1,445,167  | ) |  | $ | 1,503,196   |  
|                                                      |  |                    |            |   |                       |   |            |              |  |   |                  |   |  |               |             |   |  |   |             |  
|                                                      |  |                    |            |   |                      
|Segment assets                                        |  | $                  | 53,737,068 |   |                       | $ | 39,536,050 |              |  | $ | 25,229,230       |   |  | $             | 2,113,587   |   |  | $ | 120,615,935 |  
|                                                      |  |                    |            |   |                       |   |            |              |  |   |                  |   |  |               |             |   |  |   |             |  
|                                                      |  |                    |            |   |                      
|Segment liabilities                                   |  | $                  | 2,739,799  |   |                       | $ | 1,694,293  |              |  | $ | 17,783,447       |   |  | $             | (15,136,965 | ) |  | $ | 7,080,574   |  
|                                                      |  |                    |            |   |                       |   |            |              |  |   |                  |   |  |               |             |   |  |   |             |  



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Business segment for the three months ended March 31, 2009



|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|----------------------------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ---------------- |  | - | ------------- | - |  | - | ---------- | -
|                                                      |  | AquacultureProduct |            |   | Health andBio-product |   |            | UnallocatedItems |  |   | Consolidation |  
|Sales to external customers                           |  | $                  | 7,310,236  |   |                       | $ | 3,530,585  |                  |  | $ |              |   |  | $ | 10,840,821 |  
|Cost of sales                                         |  |                    | 5,472,892  |   |                       |   | 864,912    |                  |  |   |               |   |  |   | 6,337,804  |  
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|Gross profit                                          |  |                    | 1,837,344  |   |                       |   | 2,665,673  |                  |  |   |              |   |  |   | 4,503,017  |  
|Selling and distribution expenses                     |  |                    | 153,660    |   |                       |   | 100,492    |                  |  |   |              |   |  |   | 254,152    |  
|Marketing and advertising                             |  |                    |           |   |                       |   | 1,425,020  |                  |  |   | 1,605         |   |  |   | 1,426,625  |  
|General and administrative expenses                   |  |                    | 139,615    |   |                       |   | 169,542    |                  |  |   | 1,297,215     |   |  |   | 1,606,372  |  
|Depreciation and amortization                         |  |                    | 7,310      |   |                       |   | 103,266    |                  |  |   | 66,238        |   |  |   | 176,814    |  
|Doubtful accounts                                     |  |                    | 30,157     |   |                       |   | 1,409      |                  |  |   |              |   |  |   | 31,566     |  
|Finance costs                                         |  |                    | (13,516    | ) |                       |   | (18,450    | )                |  |   | 550,411       |   |  |   | 518,445    |  
|Fair value change in derivative financial instruments |  |                    |           |   |                       |   |           |                  |  |   | (825,871      | ) |  |   | (825,871   | )
|Income/(loss) before income taxes                     |  |                    | 1,541,766  |   |                       |   | 884,254    |                  |  |   | (1,084,095    | ) |  |   | 1,341,925  |  
|Income taxes                                          |  |                    |           |   |                       |   | 226,569    |                  |  |   |              |   |  |   | 226,569    |  
|Net Income/(loss) for the period                      |  | $                  | 1,541,766  |   |                       | $ | 657,685    |                  |  | $ | (1,084,095    | ) |  | $ | 1,115,356  |  
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|Segment assets                                        |  | $                  | 49,556,810 |   |                       | $ | 35,655,452 |                  |  | $ | 13,439,885    |   |  | $ | 98,652,147 |  
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|Segment liabilities                                   |  | $                  | 1,720,340  |   |                       | $ | 1,283,485  |                  |  | $ | 10,600,009    |   |  | $ | 13,603,834 |  
|                                                      |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  

NOTE 13: CAPITAL COMMITMENT

A. CAPITAL COMMITMENTS

As of
March 31, 2010, there were no capital commitments.

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       |  |   | 765,132  
|2011       |  |   | 191,217  
|2012       |  |   | 758,874  
|2013       |  |   | 204,217  
|2014       |  |   | 197,463  
|Thereafter |  |   | 398,175  
|           |  |   |          
|Total      |  | $ | 2,515,078
|           |  |   |          

NOTE 14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.

NOTE 15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S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

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

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

GENERAL OVERVIEW

We are
a leader in 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.

Recently, we announced that we had entered into a
conditional agreement with the government of Tayang Town in the Province of Hainan, PRC in order to work with their cooperative farms, which can produce about 20,000 tonnes of live weight tilapia. We expect this agreement to result in doubling the
farming capacity available to us. Currently, there is no financial commitment for the Company since the agreement with the government of Tayang Town is conditioned upon the Companys investing in the construction of a new feed mill and
processing plant in the immediate vicinity of the cooperative farms in Qionghai City and this has not happened yet.

In
addition, you should consider the following information as you read the below results of operations and our financial statements and related notes included elsewhere within this Report. From the first quarter of 2004, following our reverse merger
with Process Equipment, Inc., we have been operating under the name of HQS. At that time, we owned 84.4% 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 marine bio and healthcare product segment, the aquaculture product segment and the
feed products segment. Since the acquisition of Jiahua Marine, which represents the marine bio and healthcare product 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.

This Managements Discussion and Analysis (MD&A) is provided as a
supplement to, and should be read in conjunction with, our financial statements and the accompanying notes (Notes).

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with generally accepted accounting principles 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



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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.

Related Parties

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

Revenue Recognition

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

Concentration of Credit Risk

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

Recent developments

No significant development happened during the three months period ended March 31, 2010.

RESULTS OF OPERATIONS  THREE MONTHS ENDED MARCH 31, 2010 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2009

Total sales for the three months period ended March 31, 2010 increased by 33%, from $10,840,821 for the three months period ended March 31, 2009
to $14,375,908 for the three months period ended March 31, 2010, mostly due to the new feed products segment added in late 2009. The gross profit for the three months period ended March 31, 2010 decreased by 3% to $4,378,040 when compared
to the corresponding period of 2009. That decrease in gross profit was mostly the result of higher manufacturing costs in 2010 from both the aquaculture product segment and the health and bio-product segment, when compared to the corresponding first
quarter of 2009. The overall gross profit ratio deteriorated in the first three months of 2010 to 30.5% from 41.5% in the first three months of 2009. That reduction in the gross profit ratio originated from all of our segments. For the first three
months of 2010, we experienced a 61% growth in income from operations, corresponding to $617,554, mostly as a result of bad debts recovered added to a reduction in marketing and advertising expenses. Net income for the three months period ended
March 31, 2010 amounted to $1,503,196, a total improvement of $387,840 mostly due to improved bad debt recovery of $703,779 coupled with reduced finance costs of $517,907 offset by fair value change in derivative financial instruments of
$687,916.

By Segments

Aquatic Products Segment

Hainan
Quebec Ocean Fishing Co. Ltd. is engaged in the processing and selling of aquatic products. The sales contributed by this segment increased to $7,716,239 for the three months ended March 31, 2010 compared to $7,310,236 for the corresponding
period of 2009, an improvement of 6%. As average tilapia prices and volumes went down by approximately 10% and 15% respectively during the first quarter of 2010 compared to 2009, the overall increase in sales is mostly related to an increase in
volumes and sales price of processed ocean caught fish by approximately 45% and 25% respectively in the first quarter of 2010, compared to the corresponding period of 2009. The related gross profit ratio of this segment was 19% and 25% for the three
months period ended March 31, 2010 and 2009 respectively. The decrease in the gross profit ratio was mostly due to a reduction in average selling price of tilapia. This segment realized a net income of $248,267 in the first three months of 2010
compared to $1,541,766 in the corresponding period of 2009; that reduction in net income in 2010 was mostly the result of a reduction in gross profit of $393,673, and an increase in doubtful accounts of $839,577.

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 March 31, 2010
and 2009, sales were recorded at $3,597,137 and $3,530,585 respectively, an increase of 2%. All of the increase in sales is resulting from new products marketed in 2010. The gross profit ratio from this segment was 70% and 76% for the three months
ended March 31, 2010 and 2009 respectively. Although volumes remained relatively stable during the first quarter of 2010 compared to 2009, average packaging costs related to the new OMOJO brand increased substantially the costs of our products
and drove gross margins down. Furthermore, marketing and advertising expenses were reduced to 27% of sales from 40% of sales for the three months ended March 31, 2010 and 2009, respectively. The marketing efforts are now driven by lowering
sales prices with better product presentation to the consumers than media advertising. The net income realized by this segment was $2,460,684 for the three months period ended in March 2010 compared to $657,685 for the three months ended
March 31 2009. The 2010 improvement in net income was mostly the result of reduced marketing and advertising expenses of $447,039 in 2010, added to an increase in bad debt recovery of $1,543,356 in the same period.

Feed Products Segment

Our new
feed mill facility was completed in the last quarter in 2009. During the three months period ended March 31, 2010, this segment recorded sales of $3,062,532 with a profit margin of 14% or $421,068. It is expected that the gross profit margin
from this segment will improve in the coming periods as we will gain efficiencies in ramping up the volumes and support fixed cost more favorably.

By Operations

Sales. For the three months period ended March 31, 2010, sales increased by $3,535,087 to $14,375,908 or 33% when compared to
the same period in 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 $3,062,532. The aquatic products segment improved its sales by $406,003, or 6%
in the first quarter of 2010 compared to the same period of 2009, mainly due to an increase in sales of ocean caught fish. The health and bio- products segment improved its sales by $66,552, or 2% in the first quarter of 2010 compared to the same
period of 2009; the reduction in sales of seal and shark products in the first quarter of 2010 was offset by increased sales of newly packaged OMOJO products.



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Cost of sales. Cost of sales increased by $3,660,064 or 58% to $9,997,868 from
$6,337,804 for the three months ended March 31, 2010, as compared to the corresponding period of the prior year. Approximately 72% of the increase in cost of sales is due to the addition of the new feed products segment in 2010. The overall
gross profit ratio decreased to 30.5% for the three month period ended March 31, 2010 from 41.5% for the corresponding period of 2009. Although volumes were relatively stable in comparative periods, increased manufacturing costs from all
segments triggered increased cost of sales. Furthermore, the new feed product segment showing 14% gross margin contributed substantially to the average reduction in gross profit margin in 2010.

Selling and distribution expenses. Selling and distribution expenses increased by $107,932 to $362,084 for the three months period
ended March 31, 2010, as compared to the corresponding period of the previous year. As a percentage of sales, the selling and distribution expenses stood at approximately 2.5% in the first quarter of 2010 and 2009. The slight increase in 2010
was the result of increased sales realized in the current period.

Marketing and advertising expenses. Marketing and
advertising expenses decreased by $448,644 or 31% from $1,426,625 to $977,981 as compared to the corresponding period of the previous year. Furthermore, marketing and advertising expenses were reduced to 27% of sales from 40% of sales from the
health and bio-products segment. In the first quarter of 2010, the marketing efforts were driven by lowering sales prices to the consumers and better product presentation than media advertising.

General and administrative expenses. General and administrative expenses increased by $382,442 to $1,988,814 in the current three
month period ended March 31, 2010, from $1,606,372 in the corresponding period of 2009. Most of the increase was the result of branding-related expenses, Delaware franchise taxes ($56,000), traveling ($20,000), investors relations
($80,000) and other U.S. head office expenses.

Depreciation and amortization. Depreciation and amortization decreased by
$80,482 to $96,332 in the current quarter when compared to the same quarter of 2009, 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.The recovery of doubtful accounts in the first three months of 2010 amounted to
$672,213, compared to an expenses of $31,566 in the corresponding period of 2009. In the first three months of 2010, we recovered approximately $3 million of the provision estimated at December 2009 and we provided for a new provision of
approximately $2.4 million. Furthermore, at March 31, 2010, and as at December 31, 2009, we evaluated our receivables in each segment, individually and historically as to their potential risk of loss, and believe that the provision for
doubtful accounts is representative of the risk of potential loss at that date.

Income from operations. Income from
operations shows $1,625,042 in the first quarter of 2010, compared to $1,007,488 in the corresponding quarter of the previous year, an improvement of $617,554. Although gross profit remained relatively stable in total in 2010 compared to the
corresponding period of 2009, the increase in income from operations experienced in 2010 was mostly the result of reduced marketing and advertising expenses of $448,644 coupled with an increased recovery of doubtful accounts of $703,799, offset by
increase in general and administrative expenses by $382,442.

Finance costs.In the first 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. Current
2010 finance costs were minimal.

Fair value change in derivative financial instruments. Effective January 1, 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 Derivatives and Hedging (Pre-codification SFAS
133) , we recognized in our income statement the change in value of those two items included in our current liabilities. In the first quarter of 2009, that change in value of the outstanding warrants and embedded conversion feature on our
outstanding notes amounted to $825,871, shown as income. In the first quarter of 2010, we recognized an income of $137,955 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 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. For the three months period ended March 31, 2010, we realized an income before income taxes of
$1,767,250 compared to $1,341,925 in the corresponding period of 2009. That improvement of $425,325 in 2010 was mostly the result of better income from operations of $617,554 described above added to reduced finance costs of $517,907 and offset by a
smaller reduction of $687,916 in the fair value change in derivative financial instruments, also described above.

Current income
taxes. In the current three months period ended March 31, 2010, current income taxes increased by $37,485 to $264,054 from $226,569 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. That new Law provides, among other things, 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. For the first three months
of 2010, the Company realized a net income of $1,503,196 compared to a net income of $1,115,356 in the corresponding period of 2009. The 2010 improvement in net income of $387,840 is described above in the section of Income before income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents remained solid at $37,808,214 at March 31, 2010, as compared to $36,957,303 at December 31, 2009. As of
March 31, 2010, working capital was $91,811,619 compared to $90,760,981 at December 31, 2009. The funds generated by the operating activities during the first quarter of 2010 were used mainly to support our investments in long-term assets
during that period.

Total assets increased by $810,110, or 0.7%, to $120,615,935 at March 31, 2010, compared to $119,805,825 as of
December 31, 2009. Shareholders equity increased by $1,511,754 or 1%, to $113,535,361 at March 31, 2010, from $112,023,607 as of December 31, 2009.



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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 March 31, 2010, the remaining statutory surplus reserve required is approximately $1.88 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 37% 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 increased to 14.0 times ($98,892,192/$7,080,574) at March 31, 2010, from 12.7 times
($98,543,199/$7,782,218) at December 31, 2009.



|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 March 31, 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.



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PART II - OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

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



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

We believe there are no
changes that constitute material changes from the risk factors previously disclosed in the Annual Report on Form 10K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission on March 15, 2010.



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

During the period from January 1, 2010 to March 31, 2010, no securities were issued.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

There
have been no material defaults.



|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: May 10, 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: Title:                             |  | Jean-Pierre Dallaire, Chief
Financial Officer



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Exhibit Index



|              |  |                                                                             
|------------- |  | ----------------------------------------------------------------------------
|ExhibitNumber |  | 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.