SOURCE: HQ Sustainable Maritime Industries, Inc.

August 13, 2008 06:08 ET

HQ Sustainable Maritime Reports Results for the Second Quarter of 2008

SEATTLE, WA--(Marketwire - August 13, 2008) - HQ Sustainable Maritime Industries, Inc. (AMEX: HQS) ("HQS" or the "Company"), a vertically integrated aquaculture producer, processor and distributor of toxin free and organic tilapia, and processor and distributor of marine-bio products with operations in the People's Republic of China ("PRC"), today announced its financial results for the quarter ended June 30, 2008.

Second Quarter 2008 Highlights

--  HQS sales were $14.5 million, up 6.4% from the second quarter of 2007,
    and up 57.8% from the first quarter of 2008
    
--  Gross profit was $5.0 million, a decrease of 24.0% from the second
    quarter of 2007
    
--  EBITDA was $511,348, compared to $3.4 million in the second quarter of
    2007
    
--  Net loss to shareholders was $993,438 compared to net income of
    $832,081 in the second quarter of 2007
    

Second Quarter 2008 Results

Our sales in the second quarter of 2008 were $14.5 million, an increase of 6.4% year-over-year from $13.7 million in the second quarter of 2007, and an increase of 57.8% from $9.2 million in the first quarter of 2008. Revenue from the aquaculture segment was $9.6 million for the three months ended June 30, 2008, up 8.6% from $8.8 million in the second quarter of 2007. Revenue from the Company's marine bio segment was $4.9 million for the three months ended June, 2008, up 2.2% from $4.8 million in the second quarter of 2007.

Gross profit in the second quarter of 2008 decreased 24.0% to $5.0 million (34.1% of sales) from $6.5 million (47.8% of sales) in the second quarter of 2007. Gross profit declined due to increased prices for live tilapia as a result of shortages caused by severe winter weather in China, as well as increases in labor and energy costs and a continued softening of the US Dollar. Gross profit margin for the aquaculture segment was 15.0% for the second quarter of 2008, compared to 28.0% in the second quarter of 2007. Gross profit margin for our nutraceutical and personal health care products (marine bio) segment was 72.0% for the second quarter of 2008, compared to 86.0% in the second quarter of 2007.

"HQS' sales rebounded in the second quarter of 2008 from our traditionally slow first quarter. But, while we did not directly suffer from the severe winter storms that hit mainland China beginning of 2008, we were subsequently impacted by dramatic cost increases due to decreased tilapia supplies and increased cost of feed, fuel and labor. Although through the avoidance of long term fixed price contracts we are usually able to pass along price increases to our customers, the rapid rate and scope of cost increases outpaced our price increases. The situation has since stabilized and current prices reflect expected profitability," said Norbert Sporns, CEO of HQ Sustainable Maritime Industries, Inc.

"HQS sales were below our expectations as many buyers delayed or reduced purchases due to expected substantial price corrections at the end of the summer," continued Mr. Sporns, "however, our direct sales increased markedly during the quarter. The benefits of these sales is being felt now as costs stabilize and new, higher margin products are introduced to more buyers directly in touch with new consumer preferences. This relationship led to the declaration of our 'Tilapia Bill of Rights,' which allowed our more direct buyers to address consumers' food safety, environmental and health concerns, building further the relationship and the reliance on HQS quality. Health product sales were also affected by increased costs as some raw material costs experienced substantial increases. A new price structure reflecting these increases and continuing historic profitability has been announced for September 1 of this year," continued Mr. Sporns.

Operating income in the second quarter of 2008 was $148,840, compared to operating income of $3.1 million in the second quarter of 2007, including an increase in doubtful accounts for both business segments of more than $600,000 in 2008. EBITDA was $511,348 in the second quarter of 2008, down from $3.4 million in the second quarter of 2007. Finance costs during the second quarter of 2008 were $803,219, down from $1.5 million in the second quarter of 2007 and $1.6 million in the first quarter of 2008. The decline resulted from gradually phasing out the non-cash costs relating to warrant amortization costs and the embedded conversion option on the promissory notes issued in 2006. Included in the finance costs for the second quarter of 2008 is a non-recurring legal settlement of about $702,000. Financing costs are expected to remain in the range of $200,000 per quarter for the rest of fiscal year 2008. Net loss available to shareholders in the second quarter of 2008 was $993,438, compared to net income of $832,081 in the second quarter of 2007. The Company had foreign currency gains of $1.6 million in the second quarter of 2008, compared to a foreign currency loss of $9,019 in the second quarter of 2007. Loss per diluted share in the second quarter of 2008 was $0.083, compared to earnings per share of $0.09 in the second quarter of 2007.

Six Month Financial Results

Revenues for the first six months of 2008 were $23.7 million, up 10.4% from revenues of $21.5 million in the first six months of 2007. About 75.0% of this increase in sales revenue came from increased sales for the aquaculture product segment. Gross profit was $8.9 million, down 2.8% from gross profit of $9.1 million for the first six months of 2007. Gross margin was 37.3%, compared to 42.4% for the first six months of 2007. Operating income was $872,917, down 69.2% from $2.8 million for the first six months of 2007. Net loss was $2.0 million, or $0.172 per fully diluted share, compared to a loss of $734,414, or $0.103 per fully diluted share, for the same period a year earlier.

Financial Condition

As of June 30, 2008, cash and cash equivalents totaled $42.9 million, down from $47.0 million as of December 31, 2007. The Company had current assets of $75.0 million, up from $73.4 million at the end of 2007. Current liabilities were $9.2 million as of June 30, 2008, and the Company's long term debt consisted of $3.9 million of convertible promissory notes outstanding, excluding the current portion of that liability. Shareholders' equity was $75.6 million as of June 30, 2008, a 9.9% increase from $68.8 million as of December 31, 2007. There was a net decrease in cash and cash equivalents of $7.9 million during the first six months of 2008 mostly due to $4.6 million being used in operating activities and $3.0 million for the acquisition of plant, property and equipment, and construction.

Outlook for 2008

A new feed mill is being constructed that is scheduled to be completed in 2008. Once fully operational, the new feed mill will be able to produce at least 100,000 metric tons of feed a year. All of the feed mill's planned production will ultimately be used by HQS in its aquaculture business.

Current tilapia processing plant has been expanded from 20,000 metric tons live weight of annual production capability to 30,000 metric tons live weight of annual production capability or an increase of 50%. This expanded production is now operational. A new processing facility is planned that will double processing capability to 60,000 metric tons live weight per year.

Additional expectations moving forward:

--  Sales to increase as cost levels stabilize;
    
--  Increased emphasis on the importance of vertical integration as large
    institutional buyers consolidate their traceability, food safety,
    environmental and social impact standards;
    
--  Total shift to direct sales with 'consumer first' innovations of
    products especially value added and high end organic products to capture
    high end differentiated product opportunities;
    
--  Complete feasibility study of shift to pond ownership to enhance
    vertical integration;
    
--  Expand marketing and branding of fish by-product health products,
    branded under the "Omojo" label;
    
--  Continue to educate investors and increase understanding of the
    roadmap of the Company moving forward
    

Use of Non-GAAP Financial Information

This press release includes certain financial information (EBITDA), which is not presented in accordance with GAAP. EBITDA was derived by taking earnings before financing costs, taxes, depreciation and amortization. The Company's management believes that this non-GAAP measure provides investors with a better understanding of the Company's historical results by focusing on its core business operations. Non-GAAP information is not meant to be considered in isolation or as a substitute for GAAP financials. The non-GAAP financial information that the Company provides also may differ from non-GAAP information provided by other companies. A table included at the end of the attached financial tables provides a reconciliation of the non-GAAP financial information to the nearest GAAP measure.

Conference Call

HQ Sustainable Maritime Industries, Inc. management will host a conference call at 11:00 a.m. Pacific Time on Wednesday, August 13, 2008 to discuss financial results for the quarter ended June 30, 2008. The conference call will include Mr. Norbert Sporns, Chairman and Chief Executive Officer; and Mr. Jean-Pierre Dallaire, CFO. To participate in the live conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: (888) 419-5570. International callers should call (617) 896-9871. The Conference Passcode is 98542138. If you are unable to participate in the call at that time, replay of the conference call will be available from 11:00 a.m. Pacific Time on August 14 through Wednesday, August 27. To access the replay, please call (888) 286-8010. International callers should call (617) 801-6888. The Conference Pass Code is 53198765.

About HQ Sustainable Maritime Industries, Inc.

HQ Sustainable Maritime Industries, Inc. is a U.S. vertically integrated aquaculture and aquatic product producing, processing and distributing company with operations in the province of Hainan, in the South China Sea, the People's Republic of China. The Company is dedicated to environmentally sustainable toxin-free production and processing methods which give its customers the highest-quality products possible. The Company holds HACCP certification from the U.S. FDA and has an EU Code assignment of quality. The processing plant and the Company's operations were certified by the Aquaculture Certification Council (ACC) to meet Best Aquaculture practices (BAP) set by the Global Aquaculture Alliance (GAA). The Company's nutraceutical and healthcare products have passed stringent laboratory tests and are certified by the China Ministry of Health, and also are HACCP and PRC GMP certified. HQS' corporate headquarters is in Seattle.

Safe Harbor Statement

Certain statements in this press release that are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by the use of words such as "anticipate," "believe," "expect," "future," "may," "will," "would," "should," "plan," "projected," "intend," and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of HQ Sustainable Maritime Industries, Inc. (the Company) to be materially different from those expressed or implied by such forward-looking statements. The Company's future operating results are dependent upon many factors, including but not limited to the Company's ability to: (i) obtain sufficient capital or a strategic business arrangement to fund its expansion plans; (ii) build the management and human resources and infrastructure necessary to support the growth of its business; (iii) competitive factors and developments beyond the Company's control; and (iv) other risk factors discussed in the Company's periodic filings with the Securities and Exchange Commission, which are available for review at www.sec.gov under "Search for Company Filings."

Financial Tables Follow

        HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
      (INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
   CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


                          Three Months Ended         Six Months Ended
                       ------------------------  -------------------------
                         June 30      June 30      June 30       June 30
                           2008         2007         2008          2007
                       -----------  -----------  ------------  -----------
Sales                  $14,531,487  $13,660,698  $ 23,741,977  $21,510,428
  Cost of Sales          9,572,610    7,135,365    14,883,312   12,394,649
                       -----------  -----------  ------------  -----------
  Gross Profit           4,958,877    6,525,333     8,858,665    9,115,779

  Selling and
   Distribution
   Expenses                324,932      246,366       554,108      344,979
  Marketing and
   Advertising           1,286,532    1,263,891     2,451,050    2,507,977
  General and
   Administrative
   Expenses              1,943,675    1,343,993     3,396,475    2,316,930
  Depreciation and
   Amortization            362,508      313,397       702,263      608,082
  (Recovery) /
   Provision for
   Doubtful                892,390      284,441       881,852      506,241
                       -----------  -----------  ------------  -----------

  Income/(Loss) from
   Operations              148,840    3,073,245       872,917    2,831,570
  Finance Costs            803,219    1,545,397     2,442,624    2,813,602
  Other Expenses /
   (Income)                      0       -4,850         1,765      -14,047
                       -----------  -----------  ------------  -----------

  Loss Before Income
   Taxes                  (654,379)   1,532,698    (1,571,472)      32,015
  Income Taxes
    Current                339,059      700,617       451,409      766,429
    Deferred                    --           --            --           --

                       -----------  -----------  ------------  -----------

Net Income (Loss)
 Attributable to
 Shareholders          $  (993,438) $   832,081  $ (2,022,881) $  (734,414)
                       -----------  -----------  ------------  -----------


Other Comprehensive Income
  Foreign Currency
   Translation Gain
   (Loss)                1,632,587       (9,019)    4,396,430      (14,626)
                       -----------  -----------  ------------  -----------

Comprehensive Income   $   639,149  $   823,062  $  2,373,549  $  (749,040)
                       ===========  ===========  ============  ===========

  Net Income (Loss)
   Per Share
    Basic (After
     Reverse Split)    $    (0.083) $     0.110  $     (0.172) $    (0.103)
    Diluted (After
     Reverse Split)    $    (0.083) $     0.090  $     (0.172) $    (0.103)
                       ===========  ===========  ============  ===========
Weighted Average Common
 Shares
    Basic               11,908,183    7,556,129    11,740,012    7,120,337
                       ===========  ===========  ============  ===========
    Diluted (After
     Reverse Split)     11,908,183    8,792,712    11,740,012    7,120,337
                       ===========  ===========  ============  ===========




        HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
      (INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
                  CONDENSED CONSOLIDATED BALANCE SHEETS


                                                    June 30    December 31
                                                  ------------ ------------
                                                      2008         2007
                                                   Unaudited     Audited
                                                  ------------ ------------
ASSETS
Current Assets
   Cash and Cash Equivalents                      $ 42,862,543 $ 46,959,908
   Trade Receivables, Net of Provisions             29,078,328   25,234,502
   Inventories                                       2,559,245      877,716
   Prepayments                                         525,096      350,116
   Future Income Taxes                                  26,097       26,097
                                                  ------------ ------------

Total Current Assets                                75,051,309   73,448,339
                                                  ------------ ------------

Other Assets
   Deferred Taxes                                      931,138      873,865
   Deferred Expenses                                    30,020       84,317
                                                  ------------ ------------
                                                       961,158      958,182

Property, Plant and Equipment, Net                   8,746,439    7,716,615
Construction in Progress                             2,485,291      949,728
Intangible Assets                                    1,415,434    1,254,002
                                                  ------------ ------------

TOTAL ASSETS                                      $ 88,659,631 $ 84,326,866
                                                  ============ ============

LIABILITIES
Current Liabilities
   Accounts Payable and Accrued Expenses          $  7,234,311 $  8,935,928
   Tax Payable                                         342,946      956,289
   Due to Directors                                  1,143,654    1,544,350
   Current Portion of Promissory Notes                 475,284      461,284
                                                  ------------ ------------

Total Current Liabilities                            9,196,195   11,897,851

Other Liabilities
   Convertible Promissory Notes, Net of Discount     3,890,994    3,653,352
                                                  ------------ ------------

                                                  ------------ ------------
TOTAL LIABILITIES                                 $ 13,087,189 $ 15,551,203

SHAREHOLDERS' EQUITY
   Preferred Stock, $0.001 Par Value, 10,000,000
    Shares Authorized, 100,000 Shares Issued and
    Outstanding                                            100          100
   Common Stock, $0.001 Par Value, 200,000,000
    Shares Authorized, 12,033,946 and 11,511,317
    Shares Issued and Outstanding as of June 30,
    2008 and December 31, 2007 Respectively             12,034       11,511
   Additional Paid-In Capital                       61,564,912   57,142,204
   Accumulated Other Comprehensive Income            8,986,488    4,590,060
   Retained Earnings (Deficit)                          27,522    2,373,825
   Appropriation of Retained Earnings (Reserves)     4,981,386    4,657,963
                                                  ------------ ------------

TOTAL SHAREHOLDERS' EQUITY                        $ 75,572,442 $ 68,775,663

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        $ 88,659,631 $ 84,326,866
                                                  ============ ============




        HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
      (INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                     Six Months Ended
                                                --------------------------
                                                  June 30       June 30
                                                    2008          2007
                                                ------------  ------------
OPERATING ACTIVITIES
   Net Loss                                     $ (2,022,881) $   (734,414)

   Non-Cash Items:
      Depreciation and Amortization                  702,263       608,082
      Loss on Disposal of Fixed Assets                 1,765             -
   Financial and Other Non-Cash Services           2,735,109     2,212,508

   Change in Non-Cash Working Capital Items:
      Inventories                                 (1,681,529)       61,661
      Trade Receivables, Net of Provisions        (3,843,826)      607,088
      Prepayments                                   (174,980)       16,217
      Accounts Payable and Accrued Expenses          247,550       734,021
      Taxes (Recoverable)                           (613,343)      544,899
                                                ------------  ------------

Cash Flow Used in Operating Activities            (4,649,872)    4,050,062
                                                ------------  ------------

INVESTING ACTIVITIES
   Acquisition of Property, Plant and Equipment   (1,423,812)     (706,021)
   Sales Proceeds from Disposal of Fixed Assets        2,375             -
   Additions to Construction in Progress          (1,535,563)     (282,671)
   Acquisition of Intangible Assets                        -             -
                                                ------------  ------------

Cash Flow Used in Investing Activities            (2,957,000)     (988,692)
                                                ------------  ------------

FINANCING ACTIVITIES
   Cash Proceeds from Issuance of Common Stock       137,536     4,075,000
   Due (to) / From Directors                        (400,696)      (27,234)
   Receipts / (repayment) From Related Parties             -       (46,063)
   Bank Loan Repayments                                    -       (99,662)
   Deferred Expenses                                       -       122,677
                                                ------------  ------------

Cash Flow (used in) / Generated From Financing
 Activities                                         (263,160)    4,024,718
                                                ------------  ------------

Net Change in Cash and Cash Equivalents           (7,870,032)    7,086,088
Effect of Exchange Rate Changes on Cash and
 Cash Equivalents                                  3,772,667       331,657
Cash and Cash Equivalents, Beginning of Period    46,959,908    11,389,375
                                                ------------  ------------

Cash and Cash Equivalents, End of Period        $ 42,862,543  $ 18,807,120
                                                ============  ============

Supplementary Cash Flows Disclosures
   Interest Paid                                $          -  $    114,758
                                                ============  ============

   Taxes Paid                                   $  1,064,752  $    714,490
                                                ============  ============

Supplementary Disclosure of Non-Cash Investing
 and Financing Activities
  Common Shares Issued for Services                4,375,432       158,000
                                                ============  ============




        HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
      (INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
                                  EBITDA


                               Three Months Ended      Six Months Ended
                               June 30    June 30     June 30     June 30
                                 2008      2007        2008        2007
                               --------  ---------- ----------  ----------

Net Income (Loss) Attributable
              to Shareholders  (993,438)    832,081 (2,022,881)   (734,414)
                  Income Taxes  339,059     700,617    451,409     766,429
                 Finance Costs  803,219   1,545,397  2,442,624   2,813,602
 Depreciation and Amortization  362,508     313,397    702,263     608,082
                               --------  ---------- ----------  ----------
                        EBITDA $511,348  $3,391,492 $1,573,415  $3,453,699

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