HQ Sustainable Maritime Clarifies Financing (HQSM)

| About: HQ Sustainable (HQSM)

The Microcap Speculator submits: Earlier this week I posted a critical analysis of HQ Sustainable Maritime's (ticker: HQSM.ob) recent equity financing. At that time I had asked the CEO to clarify several aspects of the financing. Although the company did not respond to my email, the company today issued a press release addressing the financing. To be fair to the company, I have reprinted the text of the release below:

Dear Shareholders:

HQ Sustainable Maritime Industries Inc., enters into the lunar new year delivering on its plans prepared and presented last year. The recently announced funding is in the form of a convertible debenture which provides for immediate funding for the establishment of our new corporate, marketing and sales offices in Seattle. This instrument is a loan which can be converted into equity or repaid as debt at the Company's option within 24 months. The new offices in Seattle will open officially later this month. We will be there next week setting up when the container arrives.

This funding not only allows the Company to execute on its planned establishment of a distributor of our products there, but allows the Company to increase awareness of the importance of our zero-toxin product focus and to reap the benefits of more direct sales, increasing sales, market penetration and profitability. The company will in addition broaden its scope of products to cater to seafood purchasing requirements.

This funding step is also necessary to shift the Company's "centre of gravity" by improving its profile for substantial lenders attracted by the Company's future prospects but preferring a stronger US presence. Finalizing this long-term USD 40 million loan funding can now be completed in the coming weeks. Further expansion of fish farms, production and feedmill will follow immediately in response to unprecedented demand. The benefits of this rapid growth is to seize the opportunity presented by the Company's unique zero-toxin products consolidating its leading position as set out in my December 2005 Chairman's letter.

In management's estimation, 2005 has been our best year yet. We believe that our record sales and profits are only a precursor to the benefits associated with growth management expects in 2006. We have withstood the test of Typhoon Damrey, the worst typhoon on record for Hainan, unseasonably cold weather in early 2005 (which fortunately has not been repeated this year) and the normal challenges of presenting a growth company's change. We are working hard to continue to advance the Company towards the achievement of its objectives and we believe, 2006 will be a landmark year in our growth.

We take this opportunity to wish our investors, clients and friends a happy and prosperous lunar new year.

We welcome any questions or concerns that you, our investors, might have concerning our plans for growth and our partnership with you. Please contact us at hq@hqfish.com.

Lillian Wang, Chairman

My take: (1) I am glad to hear the chairwoman still speaking about record 2005 profits and strong 2006 expectations; (2) I am glad to see the $40M financing is still on the table and should be closed soon; (3) neither of these facts changes my impression of the equity financing -- it was unnecessarily expensive and unduly dilutive.

DISCLOSURE: I am still long a bit of HQSM.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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