Edgar Filing: HS3 TECHNOLOGIES INC.

Filed by sedaredgar.com - HS3 Technologies, Inc. - Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number 001-32289

HS3 TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Nevada	20-3598613
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1800 Boulder Street, Suite 600, Denver, CO	80211-6400
(Address of principal executive offices)	(Zip Code)

303.455.2550
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 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.
[X] YES [ ] NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

Large accelerated filer [ ]		Accelerated filer [ ]
Non-accelerated filer [ ]	(Do not check if a smaller reporting company)	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
[ ] YES [X] NO

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
[ ] YES [ ] NO

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
39,945,802 common shares issued and outstanding as of November 11, 2008

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements.

Our unaudited interim consolidated financial statements for the nine month period ended September 30, 2008 form part of this quarterly report. They are stated in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles.

HS3 Technologies, Inc.

		(Unaudited)			(Audited)
Condensed Consolidated Balance Sheet		September 30, 2008			June 30, 2008

ASSETS
Current Assets
Cash and cash equivalents	$	4,134		$	130,318
Accounts receivable		21,668			215,499
Inventory		103,916			92,885
Total current assets		129,718			438,702

Furniture, fixtures and equipment, net of accumulated depreciation of		-			-
$61,542 and $26,014 respectively		73,792			80,880

Other assets		22,166			24,500
Total Assets	$	225,676		$	544,082



LIABILITIES
Current Liabilities
Accounts payable	$	123,240		$	215,890
Accrued liabilities		111,651			104,377
Accrued liabilities, related party		220,669			168,717
Accrued convertible board fees		58,332			45,832
Convertible notes payable, related party		224,000			212,000
Value of stock owed not issued		12,000			-
Long-term debt, current portion		118,893			113,237
Total current liabilities		868,785			860,053
Long-term debt		209,735			242,010

Total Liabilities		1,078,520			1,102,063
Commitments and contingencies		-			-
STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred stock, $0.001 par value, 2,500,000 shares authorized		-			-
None issued or outstanding
Common Stock, $0.001 par value, 50,000,000 authorized,
Issued and outstanding 39,945,802 shares at September 30, 2008
And June 30, 2008		39,946			39,946
Additional paid-in capital		4,333,459			4,333,459
Accumulated deficit		(5,226,249	)		(4,931,386	)
Total Stockholders' Equity (Deficit)		(852,844	)		(557,981	)

Total Liabilities and Stockholders' Equity (Deficit)	$	225,676		$	544,082

The accompanying notes are an integral part of these condensed consolidated financial statements

HS3 Technologies, Inc.

		Three Months			Three Months
		Ended			Ended
Condensed Consolidated Statement of Operations (Unaudited)		September 30, 2008			September 30, 2007
Net Sales	$	83,380		$	153,628
Cost of goods sold		33,275			39,931
Gross profit		50,105			113,697
Operating Expenses:
Sales & marketing		50,875			46,594
Professional and consulting		57,570			118,256
Stock option expense		-			224,443
Payroll expense		122,212			125,371
General and administrative		82,337			99,072
Depreciation		7,088			8,115
Total operating expenses		320,082			621,851

Income (loss) from operations		(269,977	)		(508,154	)
Other income (expense)
Interest expense		(24,886	)		(5,350	)
Total other income (expense)		(24,886	)		(5,350	)

Net loss	$	(294,863	)	$	(513,504	)

Net loss per share-basic and diluted	$	(0.01	)	$	(0.02	)
Weighted average number of common shares outstanding		39,945,802			32,195,701

The accompanying notes are an integral part of these condensed consolidated financial statements

HS3 Technologies, Inc.

		Three Months			Three Months
		Ended			Ended
Condensed Consolidated Statement of Cash Flows (Unaudited)		September 30, 2008			September 30, 2007

Cash flows from operating activities:
Net (loss)	$	(294,863	)	$	(513,504	)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operations:
Depreciation and amortization		9,422			8,115
Accretion of interest		1,345			-
Warrants, stock, and options issued for service		12,000			314,693
Changes in operating assets and liabilities
Accounts receivable		193,831			(32,088	)
Inventory		(11,031	)		(27,757	)
Deposit on inventory		-			22,885
Accounts payable		(92,650	)		167,388
Accrued expenses		71,726			-
Net cash (used in) operating activities		(110,220	)		(60,268	)

Cash flow from investing activities
Purchase of fixed assets		-			(772	)
Net cash (used in) investing activities		-			(772	)

Cash flow from financing activities
Payments on convertible and long-term debt		(27,964	)		-
Stock issued for cash		-			25,000
Proceeds from convertible note payable		12,000			45,000
Net cash flow provided by (used in) financing activities		(15,964	)		70,000


Increase (decrease ) in cash and cash equivalents		(126,184	)		8,960

Cash and cash equivalents, beginning of period		130,318			984

Cash and cash equivalents, end of period	$	4,134		$	9,944


Supplemental cash flow information:

Interest paid	$	13,928		$	-

Income taxes paid	$	-		$	-


Non cash financing activities

Stock issued for services	$	-		$	90,250

The accompanying notes are an integral part of these condensed consolidated financial statements

HS3 Technologies, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2008

1. ORGANIZATION AND BUSINESS

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of HS3 Technologies, Inc. (the “Company” or “HS3”) have been prepared in accordance with the instructions to quarterly reports on 10-Q. In the opinion of Management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in financial position at September 30, 2008, and for all periods presented have been made. Certain information and footnote data necessary for fair presentation of financial position and results of operations in conformity with accounting principles generally accepted in the United Sates have been condensed or omitted. It is therefore suggested that these unaudited condensed consolidated financial statements be read in conjunction with the summary of significant accounting policies and notes to financial statements included in the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2008.. The results of operations for the interim period are not necessarily indicative of the results to be expected for a full year.

Organization

HS3 Technologies, Inc. was incorporated in Nevada on January 28, 2003, and herein is referred to as “the Company”. Prior to a name change in October 2005, the Company was known as Zeno, Inc. The Company also changed its fiscal year end from March 31 to June 30.

On November 9, 2005, the Company acquired ip-Colo, Inc., in a reorganization, a development stage corporation organized in Colorado on December 24, 2004 (herein referred to as “ip-Colo”). On the date of the reorganization, the Company was a non-operating entity without any assets or liabilities.

Immediately prior to the reorganization, the Company had a total of 77,623,000 shares of issued and outstanding common stock. The reorganization was entered into pursuant to an Asset Purchase Agreement whereby the Company issued 1,612,520 shares of common stock to the shareholders of ip-Colo for all of the previously issued and outstanding common stock of ip-Colo. Concurrently, the Company cancelled 9,269,520 shares of common stock outstanding upon agreement with shareholders.

As a consequence of the reorganization, the former ip-Colo shareholders owned approximately 57.6% of the resultant 69,966,000 outstanding shares of the Company common stock. The reorganization was recorded as a recapitalization effected by a reverse acquisition wherein the Company is treated as the acquiree for accounting purposes, even though it was the legal acquirer. Accordingly, the results of operations included in the financial statements consist solely of the accounting acquirer, ip-Colo since its December 24, 2004 inception and the Company from the date of reorganization. Since the accounting acquiree, the Company, was previously inoperative, goodwill was not recorded.

On September 6, 2006, the Company effected a one (1) new for four (4) old reverse stock split of its authorized, issued and outstanding stock. As a result, its authorized capital decreased to 50,000,000 shares of common stock with a par value of $0.001 each and 2,500,000 preferred stock with a par value of $0.001 each.

Basis of Presentation

The financial statements include our wholly-owned subsidiary. All significant inter-company transactions and balances have been eliminated.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. The Company generated a net loss from operations of $278,806 for the three months ended September 30, 2008 and had a Stockholders deficit of $836,787 as of September 30, 2008. Our ability to continue as a going concern is dependent upon attaining additional working capital to develop our business operations. We intend to use borrowings and security sales to mitigate the affects of our cash position; however, no assurance can be given that debt or equity financing, if and when required, will be available. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should we be unable to continue in existence.

Notes Payable

Our company has been provided with certain loans from related parties, as set forth below. We had agreed to pay 15% interest per year or issue shares at $0.12 for conversion of the loans, at the discretion of the provider of the loan. If we conduct an offering at a lower priced conversion, the below notes may be converted at the lower conversion rate. All principle and interest are due on demand.

From		Amount of Loan

Robert A Morrison	$	186,000.00
Mark L. Lana	$	27,000.00
Charles Ferris	$	10,000.00
Mike Yinger	$	1,000.00

In the year ended June 30, 2008 we sold debentures consisting of a $400,000 debt instrument that matures in 3 years and 1,000,000 warrants at an exercise price of $.12 per share for total proceeds of $400,000. We allocated the proceeds to each instrument based on the fair market value of each. We determined the fair value of the note and interest to be $400,000 and the fair market value of the warrants to be $16,814. We allocated the proceeds to each based on the respective percentages of total value. The value of the notes was $383,865 and the warrants $16,135. The discount on the notes will be amortized into interest expense based on the straight line method over the life of the loan. For the year ended June 30, 2008 and the period ended September 30, 2008 we recorded $2,689 and $1,345, respectively as additional interest expense. At September 30, 2008 we had $12,101 discount remaining to be amortized into interest. The value of the debenture at September 30, 2008 was $340,729. The current portion of the debt was $118,893 after discount ($123,271 principal owed) and long term after discount was $209,735 (total principal owed in fiscal 2009 is $166,718 and in fiscal 2010 $83,359).

Options and Warrants

1,250,000 share purchase warrants with an exercise price of $.12 per share expired on September 8, 2008.

At September 30, 2008 we had 2,500,000 options outstanding with an exercise price of $.16 per share that expire on March 22, and April 11, 2012.

We sold debentures in fiscal 2008 consisting of long-term debt and warrants. The number of warrants sold was 1,000,000 with an exercise price of $.12 and a term of 5 years. The warrants were valued based on the Black-Scholes pricing model and the cost was allocated based on the ratio of the fair market value of the warrants and the fair market value of the long-term debt. The total amount allocated to the warrants was $16,135. The assumptions used in valuing the warrants were: stock price $.13; exercise price $.12; life-5 years; volatility101.17%; dividend yield 0% and the yield of a risk free investment 3.08% .

Common Stock

On August 15, 2007 we agreed to issue 720,000 shares of our common stock to Mr. Ferris and Mr. Yinger, Directors of our company, for services that they have rendered. The valued of the services was $86,400 based on the trading price of our stock on the day the shares were approved and this was included as professional fee expense. We also agreed to compensate those directors and they will receive $25,000 annually. They have the option to receive cash or stock at a price of $.12 per share. At September 30, 2008 we have recorded a liability of $58,332 for convertible board fees unpaid and an offsetting professional fee expense.

Related Parties

The Company leases office space from a company owned by a major stockholder. Rent expense under this lease was $13,200 and $12,000 for the three months ended September 30, 2008 and 2007, respectively.

As described in Note 3 in the accompanying footnotes, our company has been provided with certain loans from related parties, as set forth above. We had agreed to pay 15% interest per year or issue shares at $0.12 for conversion of the loans, at the discretion of the provider of the loan. If we conduct an offering at a lower priced conversion, the below notes may be converted at the lower conversion rate. All principle and interest are due on demand.

In addition, the Company owes two of its officers accrued liabilities of $220,669 and -0- as of September 30, 2008 and 2007 respectively. This includes accrued rent of $75,354 and accrued salaries of $145,315.

Subsequent Events

Our company has been provided with certain loans from related parties, as set forth below. We have agreed to pay 15% interest per year or issue shares at $0.12 for conversion of the loans, at the discretion of the provider of the loan.

From	Amount of Loan	Date funds provided
Robert A Morrison	$10,000.00	Received October 1, 2008

On October 24, 2008, our company received a loan in the amount of $200,000 from a private investor . The loan is unsecured and has no fixed repayment terms. We have agreed to pay 15% interest per annum or issue shares at $0.10 for conversion of the loan, at the election of the investor.

On August 15, 2008 the Company entered into a “Financial Communications Consulting Agreement” with Wall Street Resources, Inc. to provide written analytical coverage and consultation in matters concerning corporate finance and investor communications. The Company agreed to issue the Consultant a “Commencement Bonus” payable in the form of 800,000 shares of the Company’s 144 restricted Common Stock and $3,000 in cash.

Additionally, the Company will pay the Consultant at a rate of $2,500 per month during the term of the agreement which is due on the 15^th of each month with payments accruing until the Company raises in excess of $500,000 or becomes cash flow positive. As of September 30, 2008 the shares had not been issued. We valued the 800,000 based on the quoted trade price on August 15, 2008, and recorded $12,000 as a current liability and consulting expense.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Our unaudited financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report.

In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to "CDN$" refer to Canadian dollars and all references to "common shares" refer to the common shares in our capital stock.

As used in this quarterly report, the terms "we", "us", "our", "our company" and “HS3” mean HS3 Technologies, Inc., unless otherwise indicated.

Corporate History

We were incorporated under the laws of the State of Nevada on January 28, 2003 under the name Zeno Inc. Following our incorporation, we focussed our business efforts on establishing our company as an exploration stage mineral exploration company, with claims on properties located in the Thunder Bay Mining District in Ontario, Canada.

We were not successful in implementing our business plan or successful in raising sufficient capital to explore our properties in any material way. As management of our company investigated opportunities and challenges involved with financing and exploring our properties, management realized that the business did not present the best opportunity for our company to realize value for our shareholders. Accordingly, we abandoned our exploration plan and focussed on the identification of suitable businesses with which to enter into a business opportunity or business combination.

On or about October 10, 2005, we changed our name to HS3 Technologies, Inc.

On August 31, 2005, we entered into an asset purchase agreement with IP-Colo, Inc. (IPC). The agreement contemplated acquisition of all of the assets of IPC. IPC was incorporated pursuant to the laws of the State of Colorado on December 24, 2004. IPC was in the development stage of providing advanced wireless technologies, integrated with high-speed internet via satellite to provide real-time security and monitoring for many industries.

The closing of the transactions contemplated in the agreement and the acquisition by our company of all of the assets of IPC occurred on November 9, 2005. In accordance with the closing of the agreement, and effective as of November 9, 2005, we acquired all of the assets of IPC, in exchange for the issuance by our company of 1,612,520 shares of our common stock to the shareholders of IPC.

Our company had 77,623,000 shares of common stock issued and outstanding as of November 9, 2005 immediately prior to the issuance of 1,612,520 shares of common stock in connection with the closing of the agreement and prior to the cancellation of 9,269,520 shares of common stock that were outstanding on closing that have been agreed to be cancelled. At November 9, 2005, the former shareholders of IPC owned 1,612,520 shares of our common stock, which represented approximately 2.30% of the issued and outstanding shares of our common stock on November 9, 2005, and 38,700,480 additional shares of common stock which represented a further 55.31% of our 69,966,000 issued and outstanding shares of common stock as of November 9, 2005.

As the shareholders of IPC held 57.6% of our shares of common stock, and because the business of IPC represents the only business operations of our company, the acquisition of IPC is deemed to be a reverse acquisition for accounting purposes. Starting with the periodic report for the quarter in which the acquisition was consummated, our company has filed quarterly and annual reports based on the June 30, 2005 fiscal year end of IPC. Such financial statements depict the operating results of IPC from its inception (December 24, 2004) and our company from November 9, 2005.

The shares of our common stock issued to the shareholders of IPC pursuant to the agreement and the shares of common stock issued under the subscription agreement will not be registered with the United States Securities Exchange Commission or the securities commission of any state in the United States, and were issued in reliance upon an exemption from registration under the United States Securities Act of 1933, as amended.

On September 6, 2006, we effected a one (1) new for four (4) old reverse stock split of our authorized, issued and outstanding stock. As a result, our authorized capital decreased to 50,000,000 shares of common stock with a par value of $0.001 each and 2,500,000 preferred stock with a par value of $0.001 each.

Current Business

Currently we are primarily focused in the security industry. We are broadening our focus from a premiere satellite security company to a diverse organization that will meet the many needs of the security industry with a rich line of products, integrated solutions, and services that provide customers with a customized approach to meet all levels of the security industry. According to Security Industry Association (SIA) the electronic security business is a business that constitutes more than $30 billion per year. This figure climbs to over $100 billion when factoring in ancillary services and products such as guards, barriers and fences, etc. Many projections forecast sustained industry growth of 10 to 15 percent annually through the year 2020. World events are identifying increased use of security products and services across virtually every segment of society.

We have refocused our company and are pleased to announce that we have expanded our market strategies with a diverse new line of cutting edge products and services to meet the growing needs of the security industry. To meet the ever changing needs of the industry, we have launched a combination of state-of-the art products and services that include digital video recording technology (DVR), biometric access control (door locks), personal biometric identification units, CCTV, video monitoring centers, cellular networks, wireless mesh network units and wireless internet-linked satellite surveillance systems. This combination of products encompasses a total line that we believe will meet many commercial and residential customer security needs.

We understand that market focus is important. We plan on meeting the critical needs through customized integration. By integrating technology, service and people into our programs we can give all of our customers a substantial benefit while being on the leading edge of the industry. This plan will also help HS3 forge stronger relationship with our partners and form better strategic alliances.

We are still in our infancy as a viable commercial entity, and consequently our focus has been on the identification of market needs, the development of our security products and security services to meet these needs, and the branding of our company. We anticipate that the expected growth in revenues will assist us in attracting additional financing to allow us to add the needed resources in order to further support the growth of our operations

On August 14, 2008, we entered into an agreement with the American Humane Association (“AHA”), pursuant to which we plan to engage in the development of a Video Monitoring System under the AHA’s American Human

Certified™. The Video Monitoring System will expand the observations and augment the compliance of the American Human Certified™ for humane care.

We are to install and integrate five Video Monitoring Systems in production and transportation facilities and conduct beta testing to reflect the animal species and sub groups that the American Human Certified™ certifies. Upon successful completion of the beta testing, AHA will have a system that can provide real-time analytical technology tools and increase observation frequency.

In the long-term, our ability to continue as a going concern is dependent upon successful and sufficient acceptance of our current security products and solutions by the market. Additionally we expect any new products or solutions that we may introduce in the future will have positive impact on our success and our ability to continue as a going concern. The continuing successful development and sales of our products and services, and finally, achieving a profitable level of operations will contribute to our ongoing success.

Market Growth Strategy

The Company has recently entered into an exclusive agreement with the AHA to provide third party video audit services. HS3 will deploy a video monitoring system that will expand the observations and augment the compliance with American Humane Certified (AHC) standards for humane care. HS3 will contract with American Human Association’s customers directly for video monitoring services and equipment rentals.

Under the agreement, we are scheduled to install five beta sites within sixty days for three species; Swine, Chicken, and Cattle. We anticipate recurring revenue of $250 per month from monitoring each location.

Upon successful completion of the beta testing, the AHA will have a system that can provide expanded, auditable observations that enhances its current system of audits for humane animal handling. If beta testing and solution roll-out proceeds as anticipated, the program eventually will encompass over 9,900locations in North America. Following initial beta testing, HS3 will begin rolling out its video surveillance and monitoring solution stages. Stage I, which is expected to include 30 sites, will take an estimated 15 days to complete. Stage II and III, which are also expected to include 30 sites each, will take an estimated 5 days to complete. For each house, the Company expects to deploy on average 15 cameras, 3 DVRs, and one mobile DVR. Combined, we estimate that each house will require approximately $8,000 in capital for hardware. With between 25-30 growing/processing or slaughter houses per site, the capital cost per site approximates $200,000.

We also plan on aggressively pursuing several acquisition possibilities that will compliment the current product line and business model and strengthen the company.

We plan to target the sale of our security products and security services to three primary customer groups;

Residential
Commercial
Government

Manufacturing

Manufacturing of our products will be contracted to third parties. These contract manufacturers have expertise in the manufacturing of products such as ours. We will rely on these contract manufacturers to produce high quality products for sale to our customers.

Results of Operations

Three month Summary ending September 30, 2008 and 2007

		Three Months Ended
		September 30
		2008			2007
Revenue	$	83,380		$	153,628
Operating Expenses	$	320,082		$	621,851
Net Loss	$	(294,863	)	$	(513,504	)

Expenses

Our operating expenses for the three month periods ended September 30, 2008 and September 30, 2007 are outlined in the table below:

		Three Months Ended
		June 30
		2008		2007
Sales & marketing	$	50,875	$	46,594
Professional and consulting	$	57,570	$	118,256
Stock option expense	$	Nil	$	224,443
Payroll expense	$	122,212	$	125,371
General and administrative	$	82,337	$	99,072
Depreciation	$	7,088	$	8,115

Operating expenses for the three months ended September 30, 2008, decreased by 48% as compared to the comparative period in 2007 primarily as a result of a decrease professional and consulting fees and stock option expenses.

Revenue

We currently anticipate that revenues will commence and increase in the long-term as we increase our sales and marketing activities and introduce new products relating to biometric security products and monitoring services. We expect to keep our operating costs to a minimum until cash is available through operating or financing activities. We are not in a position to predict whether we will be able to generate sufficient sales revenues to meet operating expenses. We plan to expand our sales force and reduce our general and administrative expenses. To date our sales revenues have been minimal.

Liquidity and Financial Condition

Working Capital
		At			At		Percentage
		Sept. 30,			June 30,		Increase/
		2008			2008		Decrease
Current Assets	$	129,718		$	438,702		(70%	)
Current Liabilities	$	868,785		$	860,053		1%
Working Capital (deficit)	$	(739,067	)	$	(421,351	)	75%

Cash Flows
		Three Months			Three Months
		Ended			Ended
		September 30,			September 30,
		2008			2007
Net cash (used in) operating activities	$	(110,220	)	$	(60,268	)
Net cash (used in) by investing activities	$	Nil		$	(772	)
Net cash flow provided by (used in) financing activities	$	(15,964	)	$	70,000
Increase (decrease) in cash and cash equivalents	$	(126,184	)	$	8,960

In the next twelve months we anticipate spending $1,060,000 on research and development, $1,560,000 on sales and marketing and $1,415,000 on administrative expenses. Our cash on hand at September 30, 2008 was $4,134. We plan to raise additional capital required to meet immediate short-term needs and to meet the balance of our estimated funding requirements for the twelve months, primarily through the private placement of our securities.

We are not aware of any known trends, demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way.

Future Financings

We will require additional financing in order to enable us to proceed with our plan of operations, as discussed above, including approximately $5,980,000 over the next 12 months to pay for our ongoing expenses. These expenses include sales and marketing, research and development, manufacturing and engineering, and general and administrative expenses. These cash requirements are in excess of our current cash and working capital resources. Accordingly, we will require additional financing in order to continue operations and to repay our liabilities. There is no assurance that any party will advance additional funds to us in order to enable us to sustain our plan of operations or to repay our liabilities.

We anticipate continuing to rely on equity sales of our common stock in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned business activities.

We presently do not have any arrangements for additional financing for the expansion of our exploration operations, and no potential lines of credit or sources of financing are currently available for the purpose of proceeding with our plan of operations.

Contractual Obligations

As a “smaller reporting company”, we are not required to provide tabular disclosure obligations.

Going Concern

We anticipate that additional funding will be required in the form of equity financing from the sale of our common stock. At this time, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock or through a loan from our directors to meet our obligations over the next twelve months. We do not have any arrangements in place for any future debt or equity financing.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financials.

We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions and other factors. Our significant estimates are related to the valuation of our stock issued for services, warrants and options.

Item 3. Quantitative Disclosures About Market Risks.

As a “smaller reporting company”, we are not required to provide the information required by this Item.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal accounting and financial officer (our chief executive officer) to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2008, the end of the three month period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our president, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 1A. Risk Factors.

Risks Related To Our Business

We will require significant additional financing, the availability of which cannot be assured, and if we are unable to obtain such financing, our business may fail.

Our business plan calls for significant expenses necessary to continue the development of our business and expand our position in the market. There is no assurance that actual cash requirements will not exceed our estimates. We may need to raise additional funds to:

support our planned growth;
develop or enhance new and existing security products;
increase our marketing efforts;
acquire complementary businesses, security products or technologies; and/or
respond to competitive pressures or unanticipated requirements.

We have not yet achieved sustainable positive cash flows. As such, we will depend to a large extent on outside capital over the near-term to fund our capital needs. Such outside capital may be obtained from additional debt or equity financing. We do not currently have any arrangement for financing and there is no assurance that capital will be available to meet our operating costs or, if the capital is available, that it will be on terms acceptable to us. The issuance of additional equity securities by us would result in a dilution in the equity interests of our current shareholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to implement our business and growth strategies, respond to changing business or economic conditions, withstand adverse operating results, consummate desired acquisitions or compete effectively.

We operate in a highly-competitive industry and our failure to compete effectively may adversely affect our ability to generate revenue.

We are aware of similar security products and security services which compete directly with our security products and security services and some of the companies developing these security products and security services have significantly greater financial, technical and marketing resources, larger distribution networks, and generate greater revenue and have greater name recognition than us. These companies may develop security products superior to those of our company. Such competition will potentially affect our chances of achieving profitability, and ultimately adversely affect our ability to continue as a going concern.

Some of our competitors conduct more extensive promotional activities and offer lower prices to customers than we do, which could allow them to gain greater market share or prevent us from increasing our market share. In the future, we may need to decrease our prices if our competitors continue to lower their prices. Our competitors may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. To be successful, we must carry out our business plan, establish and strengthen our brand awareness through marketing, effectively differentiate our product line from those of our competitors and build our distribution network. To achieve this we may have to substantially increase marketing and research and development in order to compete effectively. Such competition will potentially affect our chances of achieving profitability, and ultimately adversely affect our ability to continue as a going concern.

Rapid technological changes in our industry could render our security products or security services non-competitive or obsolete and consequently affect our ability to generate revenues.

We will derive all of our revenues from the sale of security products and security services. Such security products and security services are characterized and affected by rapid technological change, evolving industry standards and regulations and changing client preferences. Our success will depend, in significant part, upon our ability to make timely and cost-effective enhancements and additions to our technology and to introduce new security products and security services that meet customer demands. We expect new security products and security services to be developed and introduced by other companies that compete with our security products and security services. The proliferation of new and established companies offering similar security products and security services may reduce demand for our particular security products and security services. There can be no assurance that we will be successful in responding to these or other technological changes, to evolving industry standards or regulations or to new security products and security services offered by our current and future competitors. In addition, we may not have access to sufficient capital for our research and development needs in order to develop new security products and security services.

We could lose our competitive advantages if we are not able to protect our proprietary technology and intellectual property rights against infringement, and any related litigation could be time-consuming and costly.

Our success and ability to compete depends in part on our proprietary technology incorporated in our security products. If any of our competitors copy or otherwise gain access to our proprietary technology or develop similar technologies independently, we would not be able to compete as effectively. We consider our technologies invaluable to our ability to continue to develop and maintain the goodwill and recognition associated with our brand. The measures we take to protect our technologies, and other intellectual property rights, which presently are based upon registered trade marks in addition to trade secrets, may not be adequate to prevent their unauthorized use. Although we rely, in part, on contractual provisions to protect our trade secrets and proprietary know-how, there is no assurance that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently developed by competitors. Further, the laws of foreign countries may provide inadequate protection of intellectual property rights. We may need to bring legal claims to enforce or protect our intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and a diversion of corporate resources. In addition, notwithstanding any rights we have secured to our intellectual property, other persons may bring claims against us claiming that we have infringed on their intellectual property rights, including claims that our intellectual property rights are not valid. Adverse determinations in litigation in which we may become involved could subject us to significant liabilities to third parties, require us to grant licenses to or seek licenses from third parties and prevent us from manufacturing and selling our security products. Any claims against us, with or without merit, could be time-consuming and costly to defend or litigate, divert our attention and resources, result in the loss of goodwill associated with our trademarks or require us to make changes to our technologies. Furthermore, we cannot assure you that any pending patent application made by us will result in an issued patent, or that, if a patent is issued, it will provide meaningful protection against competitors or competitor technologies.

We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire such personnel in the future, our ability to improve our security products and security services and implement our business objectives could be adversely effected.

To continue our growth, we will need to recruit additional senior management personnel, including persons with financial and sales experience. In addition, we must hire, train and retain a significant number of other skilled personnel, including persons with experience in sales and marketing. We have encountered competition for these personnel. We may not be able to find or retain qualified personnel, which will have a material adverse impact on our business.

We have a history of losses and negative cash flows, which is likely to continue unless our security products gain sufficient market acceptance to generate a commercially viable level of sales.

Although we anticipate that we will be able to start generating increased revenues during the next six months to 12 months, we also expect an increase in development and operating costs . Consequently, we expect to incur operating

losses and net cash outflows unless and until our existing security products and security services, and or any new security products that we may develop or acquire, gain market acceptance sufficient to generate a commercially viable and sustainable level of sales.

We will be dependent upon third party manufacturers to produce our security products. We could be adversely affected by an increase in our manufacturers services or a significant decline in our manufacturers financial condition. As a result, our business may fail and investors may lose their entire investment.

As a cost efficiency measure, we do not plan to manufacture our own security products but contract such manufacturing to third parties. We could be adversely affected by an increase in our manufacturers prices of manufacturing services or a significant decline in our manufacturers financial condition. If the relationships with any one of our manufacturers is terminated and we are not successful in establishing a relationship with an alternative manufacturer who offers similar services at similar prices, our results of operations could be adversely affected, our business may fail and investors may lose their entire investment.

The limitation of any one of our manufactures available manufacturing capacity due to significant disruption in their manufacturing operation could have a material adverse effect on sales revenue and results of operations and financial condition.

We will be dependent upon third party manufacturers to produce our security products. If production at any one of our manufacturers manufacturing plant is disrupted for any number of reasons, manufacturing yields may be adversely affected and we may be unable to meet our customers requirements. Consequently, our customers may purchase security products from our competitors. This could result in a significant loss of revenues and damage to our customer relationships, which could materially adversely affect our business, results of operations or financial condition.

Unless we can establish significant sales of our current security products and security services, our potential revenues may be significantly reduced.

We expect that a substantial portion, if not all, of our future revenue will be derived from the sale of our security products and security services. We expect that these security product and security services and their extensions and derivatives will account for a majority, if not all, of our revenue for the foreseeable future. The successful introduction and broad market acceptance of our security products - as well as the development, introduction and market acceptance of any future enhancements - are, therefore, critical to our future success and our ability to generate revenues. Unfortunately, there can be no assurance that we will be successful in marketing our current product offerings, or any new product offerings, applications or enhancements. Failure to achieve broad market acceptance of our security products, as a result of competition, technological change, or otherwise, would significantly harm our business.

There is a high risk of business failure due to the fact that we have not commenced commercial operations.

Although we are in the initial stages of developing and implementing the commercialization of our security products and security services, there is no assurance that we will be able to successfully develop sales of our security products and security services. Thus we have no way of evaluating whether we will be able to operate the business successfully, and there is no assurance that we will be able to achieve profitable operations.

Potential investors should be aware of the difficulties normally encountered in developing and commercializing new security products and the high rate of failure of such enterprises. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the commercialization process that we plan to undertake. These potential problems include, but are not limited to, unanticipated problems relating to development, manufacture and financing of our security products. If we are unsuccessful in addressing these risks, our business will most likely fail.

If we fail to effectively manage our growth our future business results could be harmed and our managerial and operational resources may be strained.

As we proceed with the commercialization of our security products and security services, we expect to experience significant and rapid growth in the scope and complexity of our business. We will need to add staff to market our security services, manage operations, handle sales and marketing efforts and perform finance and accounting functions. We will be required to hire a broad range of additional personnel in order to successfully advance our operations. This growth is likely to place a strain on our management and operational resources. The failure to develop and implement effective systems, or to hire and retain sufficient personnel for the performance of all of the functions necessary to effectively service and manage our potential business, or the failure to manage growth effectively, could have a materially adverse effect on our business and financial condition.

Our security products and security services may become obsolete and unmarketable if we are unable to respond adequately to rapidly changing technology and customer demands.

Our industry is characterized by rapid changes in technology and customer demands. As a result, our security products and security services may quickly become obsolete and unmarketable. Our future success will depend on our ability to adapt to technological advances, anticipate customer demands, develop new security products and security services and enhance our current security products and security services on a timely and cost-effective basis. Further, our security products and security services must remain competitive with those of other companies with substantially greater resources. We may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of new security products and security services or enhanced versions of existing security products and security services. Also, we may not be able to adapt new or enhanced security products or security services to emerging industry standards, and our new security products or security services may not be favorably received.

Demand for our security products and security services might be insufficient for us to become profitable.

We cannot predict with certainty the potential consumer demand for our security products or security services or the degree to which we will meet that demand. If demand for our security products or security services does not develop as expected and achieve consumer market acceptance, we might not be able to generate enough revenue to become profitable or to sustain our operations. We plan to target the sale of our security products and security services to three primary customer groups; residential, commercial and government. We have based our strategy to target these consumers on a number of assumptions, some or all of which could prove to be incorrect. Even if markets for our service develop, we could achieve a smaller share of these markets than we currently anticipate.

Risks Related To Our Common Stock

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue our current operations. If the stock price declines, there can be no assurance that we can raise additional capital or generate funds from operations sufficient to meet our obligations. We believe the following factors could cause the market price of our common stock to continue to fluctuate widely and could cause our common stock to trade at a price below the price at which you purchase your shares of common stock:

actual or anticipated variations in our quarterly operating results;
announcements of new services, products, acquisitions or strategic relationships by us or our competitors;

changes in accounting treatments or principles;
changes in earnings estimates by securities analysts and in analyst recommendations; and
general political, economic, regulatory and market conditions.

The market price for our common stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, could materially adversely affect the market price of our common stock.

If we issue additional shares of common stock in the future, it will result in the dilution of our existing shareholders.

Our certificate of incorporation authorizes the issuance of 50,000,000 shares of common stock. Our board of directors has the authority to issue additional shares of common stock up to the authorized capital stated in the certificate of incorporation. Our board of directors may choose to issue some or all of such shares of common stock to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares of common stock will result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares of common stock, such issuance also will cause a reduction in the proportionate ownership and voting power of all other shareholders. Further, any such issuance may result in a change of control of our corporation.

If a market for our shares of common stock does not develop, shareholders may be unable to sell their shares of common stock.

There is currently a limited market for our common stock, which trades through the Over-the-Counter Bulletin Board quotation system. Trading of stock through the Over-the-Counter Bulletin Board is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in the stock, in which case it could be difficult for shareholders to sell their stock.

Trading of our stock may be restricted by the Securities and Exchange Commission’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.

The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of, our common stock.

The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder's ability to buy and sell our stock.

In addition to the "penny stock" rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

Other Risks

Trends, Risks and Uncertainties.

We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of the risk factors before making an investment decision with respect to our common stock.

We may be unable to continue as a going concern in which case our securities will have little or no value.

Our independent auditors have noted in their report concerning our financial statements as of June 30, 2008 that we have incurred substantial losses since inception, which raises substantial doubt about our ability to continue as a going concern. In the event we are not able to continue operations you will likely suffer a complete loss of your investment in our securities.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information

None.

Item 6. Exhibits.

Exhibits required by Item 601 of Regulation S-K

Exhibit	Description
Number

(3)	Articles of Incorporation and Bylaws

3.1	Articles of Incorporation (incorporated by reference from our Registration Statement on Form SB-2 filed on August 2, 2004).

Exhibit	Description
Number

3.2	By-laws (incorporated by reference from our Registration Statement on Form SB-2 filed on August 2, 2004).

(4)	Instruments Defining the Rights of Security Holders, Including Indentures

4.1	2005 Stock Option Plan of HS3 Technologies, Inc. (incorporated by reference from our Current Report on Form 8-K filed on November 10, 2005).

(10)	Material Contracts

10.1	Share Purchase Agreement dated March 5, 2005 among Zeno Inc., Linda Smith, Acropolis Investment Holdings, LLC and Gregory S. Yanke Law Corporation (incorporated by reference from our Current Report on Form 8-K filed on March 10, 2005).

10.2	Asset Purchase Agreement dated August 31, 2005, between Zeno Inc. and IP-Colo, Inc. (incorporated by reference from our Current Report on Form 8-K filed on September 16, 2005).

10.3	Surveillance Installment and Training Agreement dated December 20, 2005 (incorporated by reference from our Current Report on Form 8-K filed December 23, 2005).

10.4	Partnership Agreement with Wright-Hennepin Cooperative Electric Association (incorporated by reference from our Current Report on Form 8-K filed on June 11, 2007).

10.5	Distribution Agreement with Autostar Technology Private Limited (incorporated by reference from our Current Report on Form 8-K filed on April 4, 2007).

10.6	Warrant Purchase Agreement dated November 6, 2007 (incorporated by reference from our Current Report on Form 8-K filed on November 20, 2007).

10.7	Agreement with the American Humane Association (incorporated by reference from our Current Report on Form 8-K filed on August 14, 2008)

(14)	Code of Ethics

14.1	Code of Ethics and Business Conduct (incorporated by reference from our Annual Report on Form 10-KSB filed on October 10, 2007).

(31)	Section 302 Certifications

31.1	Section 302 Certification (filed herewith).

(32)	Section 906 Certification

32.1	Section 906 Certification (filed herewith).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	HS3 TECHNOLOGIES, INC.
	(Registrant)


Dated: November 14, 2008	/s/ Mark Lana
	Mark Lana
	Chief Executive Officer and Director
	(Principal Executive Officer, Principal Financial
	Officer and Principal Accounting Officer)