SOURCE: HQ Sustainable Maritime Industries, Inc.

November 10, 2008 16:01 ET

HQ Sustainable Maritime Reports Results for the Third Quarter of 2008

Sales Up 42% Year-Over-Year, and Up 55% Sequentially; Gross Profit Up 23% to $9.5 Million Year-Over-Year; Net Income Up 62% Year-Over-Year to $5.6 Million

SEATTLE, WA--(Marketwire - November 10, 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 September 30, 2008.

Third Quarter 2008 Results

For the quarter ended September 30, 2008, sales increased 42% to $22.5 million, compared to $15.8 million in the third quarter of 2007. On a sequential basis, sales increased 55% from $14.5 million in the second quarter of 2008. The Company's Aquaculture Production and Processing segment accounted for $15.1 million in sales for the three months ended September 30, 2008, up 47% from $10.3 million reported for the same period last year. Sales from the Company's Marine Bio and Healthcare segment were $7.4 million for the third quarter of 2008, up 34% from $5.5 million in the third quarter of 2007.

The gross profit for the third quarter of 2008 increased 23% to $9.5 million, compared to the same period of 2007. On a sequential basis, gross profit increased 92% from $4.9 million in the second quarter of 2008 and the gross profit ratio increased from 34% in the second quarter of 2008 to 42% in the current quarter. While gross profit increased in the third quarter of 2008, the overall gross profit ratio decreased to 42% in the current quarter, compared to 49% for the three month period ended in September 30, 2007. The reduction in the gross profit ratio for the current three months period ended in September 2008 compared to the same period of 2007 was primarily due to increased manufacturing costs in the aquatic product segment combined with a different sales mix in the healthcare products segment.

"I am very pleased with our performance during the third quarter, which represents the best third quarter in the Company's history. Our success is a direct result of the expanded capacity of our aquaculture plant, which has increased from 20,000 metric tons live weight flow through to 30,000 metric tons, and the significant progress we have made in establishing solid relationships in the fast food industry during the quarter. We intend to double our current production capacity by the end of the next calendar year, and are confident that doing so will help us to take advantage of what we see as a strong growth opportunity for the production of ready-to-eat meal products with tilapia as the main protein component," said Norbert Sporns, CEO of HQ Sustainable Maritime Industries, Inc.

"The current turbulence in the global financial markets, while not necessarily good for consumer based companies, provides us with an opportunity to separate ourselves from our competitors. Unlike many companies that are currently reducing their marketing budget, we are expanding our branding efforts and pushing into new regions. In essence, the Company is poised to benefit from the current recessionary conditions. Our Tilapia products offer consumers an affordable, high-quality alternative to low-quality, fast food, and more expensive and less convenient family style restaurants. HQ Sustainable offers an appealing middle ground during the current downturn," continued Mr. Sporns

Operating Income for the quarter increased to $6.5 million in third quarter 2008 from $5.2 million in third quarter of 2007, mostly due to an increase of sales and related gross profit. EBITDA was $7.1 million in the third quarter of 2008, up from $5.5 million in the third quarter of 2007. Finance costs decreased to $60 thousand from $897 thousand for the three months ended September 30, 2008 as compared to the corresponding period of the previous year. The decrease is due to the phasing out of non-cash costs related to warrants amortization costs and embedded conversion option of promissory notes issued in 2006.

Net income in the third quarter of 2008 was $5.6 million or $0.43 per diluted share, compared to net income of $3.5 million or $0.38 per diluted share in the third quarter of 2007. The Company had minimal foreign currency gain in the third quarter of 2008, compared to a foreign currency gain of $713 thousand in the third quarter of 2007. This minimal foreign currency gain was due to the stable currency exchange rate between the USD and CNY during the third quarter of 2008 versus the declining value of the USD in the third quarter of 2007.

Nine Month Financial Results

For the nine-months period ended September 30, 2008, sales reached $46.2 million, up 24% from sales of $37.2 million in the first nine months of 2007. Approximately 73% of the increase in sales came from increased sales for the aquaculture product segment. Gross profit was $18.4 million for the first nine months of 2008, compared to $16.9 million for the first nine months of 2007. The gross profit ratio for the first nine months of 2008 was 40%, down from 45% for the same period of 2007. The reduction in the gross profit ratio for the nine months period ended in September 2008 was primarily due to increased manufacturing costs in the aquatic product segment combined to a different sales mix in the healthcare products segment.

Net income increased to $3.6 million or $0.29 per diluted share, compared to $2.7 million, or $0.34 per diluted share in the corresponding period of 2007, mostly due to a combination of increased gross profit and reduction of finance costs, offset by increased overhead expenses. The weighted average number of shares increased to 13.2 million for the first nine months of 2008 versus 8.8 million weighted average number of shares for the corresponding nine month period of 2007.

Financial Condition

Cash and cash equivalents increased by $3 million or 6%, to $50 million at September 30, 2008, from $46.9 million at December 31, 2007. The Company had current assets of $79.8 million, up from $73.4 million at the end of 2007. Current liabilities are $8.7 million as of September 30, 2008. As of September 30, 2008, the Company's net long-term debt $4.0 million consists of convertible promissory notes issued in 2006 and maturing in November 2009. Shareholders' equity was $81.2 million as of September 30, 2008, an 18% increase from $68.8 million at the end of December 2007.

Operational Updates

The Company executed on a number of previously stated goals during the third quarter. Sales increased substantially on a sequential basis, and the Company made significant strides in making a complete shift to direct sales. This shift is a result of the strategy to move a majority of sales directly to the customer, as opposed to working through third party purveyors.

Construction of the new feed mill, which experienced additional weather-related delays in the third quarter, is currently on course to be completed in the first quarter of 2009. Once complete, this mill will supply both the Company's cooperative farmers, as well as other regional farmers.

The Company recently retained KCSA Strategic Communications in an effort to deliver on the promise to educate investors and expand the Company's shareholder base.

Two important executive staffing additions were made during the quarter. Bryan Gent was appointed Vice President of Product Development and will oversee the Company's rollout of ready-to-eat meals in club stores in the US and Canada. In addition, Eugene Hill was appointed Vice President of Finance.

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 4:30 p.m. Eastern Time on Monday, November 10, 2008 to discuss financial results for the quarter ended September 30, 2008. The conference call will include Mr. Norbert Sporns, Director 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: (866) 394 - 1757. International callers should call (706) 643 - 3624. The Conference Passcode is 71994434. If you are unable to participate in the call at that time, replay of the conference call will be available from 5:45 p.m. Eastern Time on November 10 through Wednesday, December 10. To access the replay, please call (800) 642-1687. International callers should call (706) 645-9291. The Conference Pass Code is 71994434.

About HQ Sustainable Maritime Industries, Inc.

HQ Sustainable Maritime Industries, Inc. is an integrated aquaculture and aquatic product processing company, with operations based in the environmentally pristine island province of Hainan, in the South China Sea. HQS practices co-operative sustainable aquaculture, using nutraceutically enriched feeds and conducting fish processing and sales. The company is dedicated to sustainable toxin-free methods giving its customers the purest products possible. The Company holds HACCP certification from the U.S. FDA and the EU Code assignment of quality, permitting its products to be sold in these international markets. The Aquaculture Certification Council, Inc. (ACC) certified that tilapia processing standards met Best Aquaculture Practices, and the Chinese government gave organic certification to the Company's tilapia production, processing, labeling, marketing and management system. The Company owns a nutraceuticals and health products company, which is HACCP and GMP certified, and produces and sells products subject to stringent laboratory tests certified by the China Ministry of Health. This GMP certified plant produces nutraceuticals, which enrich feed used by HQS' cooperative aquaculture operations. In addition to headquarters in Seattle, HQ has operational offices in Wenchang, Hainan. The Company's website is: http://www.hqfish.com.

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."

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         Nine Months Ended
                        ------------------------  -------------------------
                         September    September    September    September
                             30,          30,          30,          30,
                            2008         2007         2008         2007
                        -----------  -----------  ------------ ------------
 SALES                  $22,470,184  $15,779,385  $ 46,212,161 $ 37,289,813
 COST OF SALES           12,936,090    8,039,461    27,819,402   20,434,110
                        -----------  -----------  ------------ ------------
 GROSS PROFIT             9,534,094    7,739,924    18,392,759   16,855,703
 SELLING AND
  DISTRIBUTION EXPENSES     557,763      222,402     1,111,871      567,381
 MARKETING AND
  ADVERTISING               724,511    1,307,498     3,175,561    3,815,475
 GENERAL AND
  ADMINISTRATIVE
  EXPENSES                1,466,174    1,056,224     4,862,649    3,373,154
 DEPRECIATION AND
  AMORTIZATION              554,741      333,300     1,257,004      941,382
 (RECOVERY OF) /
  PROVISION FOR
  DOUBTFUL ACCOUNTS        (296,655)    (414,144)      585,197       92,097
                        -----------  -----------  ------------ ------------
 INCOME FROM OPERATIONS   6,527,560    5,234,644     7,400,477    8,066,214
 FINANCE COSTS               60,240      897,452     2,502,864    3,711,054
 OTHER EXPENSES                   -       25,431         1,765       11,384
                        -----------  -----------  ------------ ------------
INCOME BEFORE INCOME
 TAXES                    6,467,320    4,311,761     4,895,848    4,343,776
 INCOME TAXES
    CURRENT                 852,638      857,955     1,304,047    1,624,384
    DEFERRED                      -            -             -            -
                        -----------  -----------  ------------ ------------
 NET INCOME
  ATTRIBUTABLE TO
  SHAREHOLDERS            5,614,682    3,453,806     3,591,801    2,719,392
 OTHER COMPREHENSIVE
  INCOME
    FOREIGN CURRENCY
     TRANSLATION GAIN        37,053      712,729     4,359,375    1,575,226
                        -----------  -----------  ------------ ------------
 COMPREHENSIVE INCOME   $ 5,651,735  $ 4,166,535  $  7,951,176 $  4,294,618
                        ===========  ===========  ============ ============
 NET INCOME PER SHARE
    BASIC               $    0.4658  $    0.4360  $     0.3032 $     0.3680
                        -----------  -----------  ------------ ------------
    DILUTED             $    0.4268  $    0.3784  $     0.2914 $     0.3376
                        -----------  -----------  ------------ ------------

 WEIGHTED AVERAGE COMMON
  SHARE OUTSTANDING
    BASIC                12,052,075    7,921,034    11,844,792    7,390,169
                        -----------  -----------  ------------ ------------

DILUTED                  13,345,883    9,343,753    13,162,048    8,777,222
                        ===========  ===========  ============ ============




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

                                                September 30,  December 31,
                                                     2008          2007
                                                 (Unaudited)    (Audited)
                                                ------------- -------------
                       ASSETS
 CURRENT ASSETS
    Cash and cash equivalents                   $  49,962,250 $  46,959,908
    Trade receivables, net of provisions           26,823,440    25,234,502
    Inventories                                     2,509,522       877,716
    Prepayments                                       517,242       350,116
    Future income taxes                                26,097        26,097
                                                ------------- -------------
 TOTAL CURRENT ASSETS                              79,838,551    73,448,339
                                                ------------- -------------

 OTHER ASSETS
    Deferred taxes                                    932,390       873,865
    Deferred expenses                                  24,395        84,317
                                                ------------- -------------

                                                      956,785       958,182
                                                ------------- -------------
 PROPERTY, PLANT AND EQUIPMENT, NET                 8,604,107     7,716,615
 CONSTRUCTION IN PROGRESS                           3,145,602       949,728
 INTANGIBLE ASSETS                                  1,433,553     1,254,002
                                                ------------- -------------

 TOTAL ASSETS                                   $  93,978,598 $  84,326,866
                                                ------------- -------------


                                                September 30,  December 31,
                                                     2008          2007
                                                 (Unaudited)    (Audited)
                                                ------------- -------------

                    LIABILITIES
 CURRENT LIABILITIES
    Accounts payable and accrued liabilities    $   5,452,976 $   8,935,928
    Tax payable                                       853,211       956,289
    Due to directors                                1,985,064     1,544,350
    Current portion of promissory notes               475,284       461,284
                                                ------------- -------------
 TOTAL CURRENT LIABILITIES                          8,766,535    11,897,851
                                                ------------- -------------

 OTHER LIABILITIES
    Convertible promissory notes, net of
     discount                                       4,009,815     3,653,352
                                                ------------- -------------
 TOTAL LIABILITIES                                 12,776,350    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, 12,085,846 and
     11,511,317 shares issued and outstanding
     as of September 30, 2008 and December 31,
     2007 respectively                                 12,086        11,511
    Additional paid-in capital                     61,614,860    57,142,204
    Accumulated other comprehensive income          8,949,435     4,590,060

    Retained earnings                               4,924,553     2,373,825
    Appropriation of retained earnings
     (reserves)                                     5,701,214     4,657,963
                                                ------------- -------------

 TOTAL SHAREHOLDERS’ EQUITY                        81,202,248    68,775,663
                                                ------------- -------------

 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY     $  93,978,598 $  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

                                                    Nine Months Ending
                                                September 30, September 30,
                                                    2008          2007
                                                ------------  ------------
 OPERATING ACTIVITIES
    Net income                                  $  3,591,801  $  2,719,392
    Non-cash items:
    Depreciation and amortization                  1,257,004       941,382
    Loss on disposal of fixed assets                   1,765        41,938
    Financial and other non-cash services          2,981,411     2,833,329
    Change in non-cash working capital items:
      Inventories                                 (1,631,806)     (944,359)
      Trade receivables, net of provisions        (1,588,938)   (4,998,619)
      Prepayments                                   (167,126)      (13,535)
      Accounts payables and accrued liabilities   (1,533,785)    2,863,371
      Taxes (recoverable)/payable                   (103,078)      675,179
                                                ------------  ------------
 Cash flow from operating activities               2,807,248     4,118,078
                                                ------------  ------------

 INVESTING ACTIVITIES
    Acquisition of property, plant and
     equipment                                    (1,286,623)     (851,116)
    Sales proceeds of disposal of fixed assets         2,375
    Construction in progress                      (2,195,874)     (456,784)
                                                ------------  ------------
 Cash flow used in investing activities           (3,480,122)   (1,307,900)
                                                ------------  ------------


                                                    Nine Months Ending
                                                September 30, September 30,
                                                    2008          2007
                                                ------------  ------------
 FINANCING ACTIVITIES
    Cash proceeds from issuance of common stock      137,536     4,075,000
    Advances from directors                          440,714       204,676
    Repayment to related parties                           -      (173,966)
    Bank loan repayments                                   -       (82,808)
    Deferred expenses                                      -       438,261
                                                ------------  ------------
 Cash flow from financing activities                 578,250     4,461,163
                                                ------------  ------------

 NET CHANGE IN CASH AND CASH EQUIVALENTS             (94,624)    7,271,341
 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
  CASH EQUIVALENTS                                 3,096,966       332,586
 Cash and cash equivalents, beginning of period   46,959,908    11,389,375
                                                ------------  ------------
 Cash and cash equivalents, end of period       $ 49,962,250  $ 18,993,302
                                                ============  ============
 SUPPLEMENTARY CASH FLOWS DISCLOSURES
    Interest paid                               $          -  $    141,164
                                                ============  ============
    Taxes paid                                  $  1,009,545  $    959,313
                                                ============  ============
 SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES
    Common shares issued for services           $  4,425,432  $     58,219
                                                ============  ============




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

                           Three Months Ended         Nine Months Ended
                          September    September    September    September
                             30,          30,          30,          30,
                            2008         2007         2008         2007
                        ------------ ------------ ------------ ------------
Net Income/(Loss)
 Attributable to
 Shareholders           $      5,615 $      3,454 $      3,592 $      2,719
Income Tax              $        853 $        858 $      1,304 $      1,624
Finance Costs           $         60 $        897 $      2,503 $      3,711
Deprecation and
 Amortization           $        555 $        333 $      1,257 $        941
                        ------------ ------------ ------------ ------------
EBITDA                  $      7,083 $      5,542 $      8,656 $      8,995
                        ============ ============ ============ ============

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