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 March 31, 2009

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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	(I.R.S. Employer Identification No.)
organization)


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

(303) 455-2550
(Telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant 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 [ ] No [ X ]

As of April 29, 2009, there were 41,995,802 shares of the registrant’s Common Stock issued and outstanding

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

		Page
		No.
Item 1.	Unaudited Condensed Consolidated Financial Statements	4

	Condensed consolidated balance sheets as of March 31, 2009 and June 30, 2008	5

	Condensed consolidated statements of operations for the three and nine months ended March 31, 2009 and 2008	6

	Condensed consolidated statements of stockholders equity (deficit) for the year ended June 30, 2008 and nine months ended March 31, 2009	7

	Condensed consolidated statements of cash flows for the nine months ended March 31, 2009 and 2008	8

	Notes to condensed consolidated financial statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21

Item 4.	Controls and Procedures	21

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults upon Senior Securities	27

Item 4.	Submission of Matters to a Vote of Security Holders	27

Item 5.	Other Information	27

Item 6.	Exhibits	28

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements including, but not limited to the following:

certain statements, including possible or assumed future results of operations, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”
any statements contained herein regarding the prospects for our business or any of our services;
any statements preceded by, followed by or that include the words “may,” “should”, “believes,” “expects,” “anticipates,” “intends,” “continues,” estimates,” “plans,” “targets” “predicts,” “attempts,” “is scheduled,” or similar expressions; and
other statements obtained herein regarding matters that are not historical facts.

Our business and results of operation are subject to risk and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. Important factors that could cause actual results to differ materially from our expectations and may adversely affect our business and results of operations, include, but are not limited to those risk factors set forth in this report in Part II Other Information under the heading “Item 1A. Risk Factors.”

In this Quarterly Report, unless otherwise specified, all dollar amounts are expressed in United Sates 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”, and “HS3,” means HS3 Technologies, Inc., unless the context clearly requires otherwise.

PART 1 – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements.

The interim unaudited condensed consolidated financial statements of HS3 Technologies, Inc. as of and for the three and nine month period ended March 31, 2009 are included herein beginning on the following page. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and related notes for the year ended June 30, 2008, together with our discussion and analysis of financial condition and results of operations, included in our Amended Annual Report on Form 10-K/A filed on February 13, 2009 with the Securities and Exchange Commission (File No. 001-32289). Our financial statements are stated in United States dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.

The unaudited condensed consolidated financial statements include the accounts of HS3 Technologies, Inc. and our wholly-owned subsidiary, ip-Colo , Inc.. All inter-company balances and transactions have been eliminated.

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.

HS3 Technologies, Inc.
Condensed consolidated balance sheets

		March 31,			June 30,
		2009			2008
ASSETS

Current Assets:
Cash and cash equivalents	$	184,988		$	130,318
Trade accounts receivable		55,069			215,499
Other receivables		56,427			-
Inventory		148,590			92,885
		445,074			438,702
Furniture, fixtures and equipment, net of accumulated
depreciation of $76,482 and $54,454 respectively		71,758			80,880
Other assets, net		17,500			24,500
	$	534,332		$	544,082



LIABILITIES AND EQUITY


Current Liabilities:
Trade accounts payable	$	61,182		$	215,890
Other accrued liabilities		416,087			290,926
Convertible notes payable		1,098,000			212,000
Long-term debt, current portion		127,761			113,237
		1,703,030			832,053

Long-term debt		144,293			242,010
Other long-term liabilities		28,000			28,000
Total Liabilities		1,875,323			1,102,063


Stockholders’ Equity (Deficit):
Preferred stock, $0.0001 par value, 2,500,000 shares
authorized, none issued or outstanding		-			-
Common Stock, $0.001 par value, 50,000,000 authorized,
issued and outstanding 41,995,802 and 39,945,802 shares
at March 31, 2009 and June 30, 2008, respectively		41,996			39,946
Additional paid-in capital		4,385,001			4,333,459
Accumulated deficit		(5,767,988	)		(4,931,386	)
		(1,340,991	)		(557,981	)
	$	534,332		$	544,082

See accompanying notes to condensed consolidated financial statements

HS3 Technologies, Inc.
Condensed consolidated statement of operations

		Three months ended March 31,						Nine months ended March 31,
		2009			2008			2009			2008


Revenue	$	56,837		$	37,087		$	174,142		$	1,246,988
Cost of goods sold		13,921			25,810			58,929			710,151
Gross profit		42,916			11,277			115,213			536,837

Operating Expenses:
Selling, general and administrative		272,851			406,983			835,252			1,577,020
Depreciation and amortization		10,120			5,139			29,029			21,351
Total operating expenses		282,971			412,122			864,281			1,598,371

Loss from operations		(240,055	)		(400,845	)		(749,068	)		(1,061,534	)

Other income (expense):
Interest expense, net		(44,798	)		(27,772	)		(87,534	)		(39,180	)
Total other income (expense)		(44,798	)		(27,772	)		(87,534	)		(39,180	)

Net loss	$	(284,853	)	$	(428,617	)	$	(836,602	)	$	(1,100,714	)

Net loss per share-basic and diluted	$	(0.007	)	$	(0.013	)	$	(0.020	)	$	(0.034	)

Weighted average number of common
shares outstanding		41,787,469			33,810,417			40,858,028			32,735,566

See accompanying notes to condensed consolidated financial statements

HS3 Technologies, Inc.
Condensed consolidated statement of stockholders’ equity (deficit)

								Unamortized
								Cost						Total
					Additional			Stock/Warrants			Retained			Stockholders
	Common Stock				Paid-in			Issued for			Earnings			Equity
	Shares		Amount		Capital			Service			(Deficit)			(Deficit)
Balances as of June 30, 2007	31,470,802	$	31,471	$	3,658,713		$	(281,920	)	$	(3,374,938	)	$	33,326
Shares issued for cash	5,300,000		5,300		524,700			-			-			530,000
Shares issued for services	3,175,000		3,175		204,875			165,920			-			373,970
Warrants issued for services	-		-		16,135			116,000			-			132,135
Purchase of warrants	-		-		(70,964	)		-			-			(70,964	)
Net loss	-		-		-			-			(1,556,448	)		(1,556,448	)
Balances as of June 30, 2008	39,945,802	$	39,946	$	4,333,459		$	-		$	(4,931,386	)	$	(557,981	)
Shares issued for cash	-		-		-			-			-			-
Shares issued for services/	2,050,000		2,050		51,542			-			-			53,592
cancellation of debt
Net loss	-		-		-			-			(836,602	)		(836,602	)
Balances as of March 31, 2009	41,995,802	$	41,996	$	4,385,001		$	-		$	(5,767,988	)	$	(1,340,991	)

See accompanying notes to condensed consolidated financial statements

HS3 Technologies, Inc.
Condensed consolidated statement of cash flows

		Nine months ended March 31,
		2009			2008


Cash flows from operating activities:
Net loss	$	(836,602	)	$	(1,100,714	)

Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization		29,029			21,351
Accretion of interest		4,035			-
Warrants, stock, and options issued for service		53,592			437,375
Changes in operating assets and liabilities:
Accounts and other receivables		104,003			(327,597	)
Inventory		(55,705	)		(59,248	)
Deposit on inventory		-			22,885
Accounts payable and accrued liabilities		(29,547	)		408,114
Net cash (used) in operating activities		(731,195	)		(597,834	)

Cash flow from investing activities:
Additions to furniture, fixtures & equipment		(12,907	)		(7,693	)
Net cash (used in) investing activities		(12,907	)		(7,693	)

Cash flow from financing activities:
Sale of common stock		-			280,000
Acquisition of stock warrants		-			(70,964	)
Convertible notes payable issued for cancellation		104,000			-
of accrued liabilities
Proceeds from convertible notes payable		782,000			46,000
Borrowings (repayments) long-term debt		(87,228	)		386,865
Net cash flow provided by financing activities		798,772			641,901

Increase (decrease) in cash and cash equivalents		54,670			36,374
Cash and cash equivalents, beginning of period		130,318			984
Cash and cash equivalents, end of period	$	184,988		$	37,358


Supplemental cash flow information:
Interest paid	$	36,341		$	-
Income taxes paid	$	-		$	-

Non cash financing activities:
Stock issued for services	$	53,592		$	135,250

See accompanying notes to condensed consolidated financial statements

HS3 Technologies, Inc.

Notes to condensed consolidated financial statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

(a) Nature of Business

HS3 Technologies, Inc. (“HS3” or the “Company”) was incorporated in Nevada on January 28, 2003. 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. In November 2005, the Company acquired ip-Colo, Inc., in a reorganization, a development stage corporation (herein referred to as “ip-Colo”). On the date of the reorganization, the Company, a non-operating entity without any assets or liabilities, was to provide advanced wireless technologies integrated with high-speed internet, via satellite, and to provide real-time security and monitoring for many industries.

We provide a diverse 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), 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, governmental, and residential customer security needs.

Effective February 1, 2009, we signed a ten (10) year agreement with the 131-year-old American Humane Association (“AHA"). HS3 and AHA’s relationship is to create a Video Monitoring System (“VMS”) which has been indicated by AHA to become a standard part of the American Humane Certified (“AHC”) program, which is a voluntary fee-based program available to producers, processors and haulers of animals raised for food. The AHC program provides independent third-party verification that those businesses treat and care for their animals humanely. Pursuant to the AHA agreement, we will provide the installation, integration, and monitoring of production facilities and the transportation of animals to ensure the husbandry and transportation of the animals conforms to AHC certification standards. Pursuant to the agreement, we will be paid a recurring monthly monitoring and equipment license fee for all monitoring locations attached to the agreement.

(b) Basis of presentation and use of estimates

The accompanying unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these statements reflect adjustments (consisting only of normal recurring entries), which in our opinion, are necessary for a fair presentation of the financial results for the interim periods presented. Certain information and notes normally included in annual financial statements have been condensed in or omitted from these interim financial statements pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended June 30, 2008, together with our discussion and analysis of financial condition and results of operations, included in our Amended Annual Report on Form 10-K/A filed on February 13, 2009 with Securities and Exchange Commission.

Our accounting and financial reporting policies conform to accounting principles and practices generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of HS3 and its controlled subsidiaries. All significant inter-company accounts and transactions have been eliminated in the preparation of the accompanying condensed consolidated financial statements.

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

(c) Cash and cash equivalents

We consider all short-term investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents.

(d) Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are recorded at historical cost, net of accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives (3-5 years). Expenditures for maintenance and repairs are charged to expense.

(e) Inventory

Inventory consists of finished goods purchased from third-party manufacturers and component parts and is valued at the lower of average cost or market. Average cost is determined using the first-in, first-out method of accounting.

(f) Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No.144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition.

(g) Loss Per Share

Basic and diluted earnings (loss) per share are computed using the weighted average number of shares outstanding during the period. Diluted earnings per share gives effect to all potential diluted common shares outstanding during the period. In periods of net loss, there are no diluted earnings per share since the result would be anti-dilutive.

(h) Financial Instruments

The fair value of financial instruments is determined at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be ascertained with precision. Changes in assumptions can significantly affect estimated fair values.

The carrying value of cash and cash equivalents, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these instruments.

(i) Income Taxes

The Company has adopted SFAS No. 109, Account for Income Taxes, which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements and tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expect to reverse.

(j) Equity-Based Compensation

Common stock, warrants, and options issued for services are accounted for based on the fair market value at the date the services are performed. If the awards are based on a vesting period the fair market value of the awards is determined as vesting is earned. If the services are to be performed over an extended period of time, the value is amortized over the life of the period that services are performed.

(k) Concentration of Credit Risk

We sell products to customers in diversified industries and geographical regions. We continually evaluate the creditworthiness of our customers. We evaluate the collectability of accounts receivable on a combination of factors. Our policies require us to record specific reserve if we become aware of anything that would cause us to question a specific customer’s inability to meet their financial obligations to us. We will record a specific reserve for bad debts to reduce a related receivable when we believe an amount is not collectible. We do not have any reserves for bad debt at March 31, 2009.

(l) Revenue Recognition

We record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

(m) Reclassifications

Certain amounts in the prior periods have been reclassified to conform to the current period’s presentation

2. GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. Our ability to continue as a going concern is dependent upon us obtaining additional working capital to develop our business operations. We intend to use borrowings and/or 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.

3. OTHER ACCRUED LIABILITIES

Other accrued liabilities are as follows:

		March 31,		June 30,
		2009		2008

Accrued board fees	$	83,332	$	45,832
Accrued rent, officer		7,184		62,154
Accrued salaries, officers		233,542		106,563
Accrued interest		74,917		38,075
Payroll liabilities		16,177		30,609
Sales tax payable		935		7,693
	$	416,087	$	290,926

Board fees to the two independent board of directors are $25,000 annually and they have the option to receive cash or convert into common stock at $0.12 per share or the rate of the last conversion agreement.

The Company leases office space from a company owned by an officer/director. Rent and operating expenses under this lease was $17,365 and $48,781 for the three and nine months ended March 31, 2009, respectively. On March 31, 2009, the Company issued a $104,000 convertible note payable to the officer/director for cancellation of the accrued rent.

Accrued interest represents interest on the convertible notes payable.

4. CONVERTIBLE NOTES PAYABLE

The Company has been provided with the following unsecured loans from officers and directors or private investors pursuant to debt conversion agreements. All principle and interest are due on demand or are converted 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.

From		Amount of Loans	Interest Rate		Conversion Price/Share
Officers and Directors:
Robert A Morrison	$	300,000	12%;15%	$	.10 & .12
Mark L. Lana		27,000	15%	$	.12
Charles Ferris		10,000	15%	$	.12
Mike Yinger		1,000	15%	$	.12
		234,000
Private Investors		760,000	15%	$	.10
	$	1,098,000

On December 18, 2008 and February 1, 2009, we entered into $760,000 of loans with two private investors pursuant to debt conversion agreements. The loans bear interest at 15% and a conversion price of $.10 per share and is due on demand or converted at the option of the private investors. The loan proceeds will be used primarily to purchase equipment for the roll out of the monitoring locations pursuant to the agreement with AHA and for other general working capital requirements.

On March 31, 2009, we entered into a $104,000 loan with an officer pursuant to a debt conversion agreement for cancellation of accrued rent to such officer

5. LONG-TERM DEBT

During fiscal year ended June 30, 2008 the Company, pursuant to a loan and security agreement, entered into two (2) $200,000 promissory notes. In addition, the Company issued to the lender a warrant for the purchase of one million (1,000,000) shares of common stock at a purchase price of $.12 per share with an expiration date of five (5) years after the commencement date of the first loan.

The notes have an interest rate of 15.499% and mature in three (3) years from the commencement date, and are collateralized with the Company’s personal property as defined in the loan and security agreement. For the three and nine months ended March 31, 2009, we recorded $13,797 and $39,975, respectively as interest expense pursuant to the notes.

Each note also has a final payment fee of $14,000 that is due on the earlier to occur of the maturity date or prepayment. These fees are being amortized over the life of the loans with the obligation reflected in other long-term liabilities. For the nine-months ended March 31, 2009, we expensed $7,000.

The $400,000 proceeds were allocated to each instrument based on the fair market value of each based on the Black-Scholes pricing model. The assumptions used in valuing the warrants were: stock price $.13; exercise price $.12, life – 5 years; volatility 101.17%; dividend yield 0%; and the yield of a risk free investment 3.08% . 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 accreted into interest expense based on the straight line method over the three (3) year life of the loans. For year ended June 30, 2008 and the nine months ended March 31, 2009 we recorded $2,690 and $4,035 respectively as additional interest expense. At March 31, 2009 we had $9,411 discount remaining to be amortized into interest. The value of the loans at March 31, 2009 was $281,465. The current portion of the debt was $127,761 after discount ($133,139 principal owed) and the long term portion of the debt was $144,293 after discount ($148,326 principal owed).

6. COMMON STOCK

During fiscal year ended June 30, 2008 we: (a) sold 5,300,000 shares of our common stock for $.10 per share for total cash proceeds of $530,000; (b) issued 3,175,000 shares of our common stock for services rendered to us; (c) purchased and cancelled 5,000,000 of the outstanding warrants for $70,964 and (d) issued 1,000,000 warrants in conjunction with our long-term debt.

On August 15, 2008 the Company entered into a six (6) month “Financial Communications Consulting Agreement” with Wall Street Resources, Inc. to provide written analytical coverage and consultation 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 which has been accrued for. We valued the 800,000 shares based on the quoted trade price on August 15, 2008 ($0.015) and recorded $12,000 as advertising/promotion/IR expense. In addition, 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 March 31, 2009, $18,000 has been accrued and included in trade accounts payable pursuant to this agreement.

On February 1, 2009, we entered into a eleven (11) month Financial Consulting Agreement with a third party. We issued the third party 1,000,000 shares of our common stock for services rendered to us. We valued the 1,000,000 shares based on the quoted trade price of February 1, 2009 ($.020) and recorded $20,000 as contract services expense.

On March 1, 2009, we issued 250,000 shares of our common stock to a third party for cancellation of $21,592 of accounts payable due such third party. In addition, we entered into a six (6) month consulting agreement with this third party agreeing to pay the consultant at a rate of $9,000 per month to provide consultation maters concerning marketing and relationships with potential producers under the AHA agreement.

Pursuant to the 2005 Stock Option Plan, the Board of Directors had granted 2,500,000 options under the plan. At March 31, 2009, 1,500,000 options (with an exercise price of $.1667) are outstanding which expire in March 2012. In addition, 1,250,000 and 1,000,000 share purchase warrants with an exercise price of $.12 per share expired on September 8, 2008 and December 4, 2008, respectively.

On January 30, 2009, we entered into a common share purchase agreement wherein we were to acquire 2,821,391 of our common shares from a shareholder for $56,427 in which we advanced money. The agreement did not close as of March 31, 2009, and the parties have rescinded the transaction and we have recorded a receivable back for the money.

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Polices and Estimates

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the accompanying unaudited condensed consolidated financial statements.

A summary of the significant accounting polices that we have adopted and followed in the preparation of our condensed consolidated financial statements is detailed in our consolidated financial statements for the year ended June 30, 2008, included in our Amended Annual Report on Form 10-K/A filed on February 13, 2009.

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.

Corporate History

We were incorporated under the laws of the State of Nevada on January 28, 2003 under the name Zeno, Inc. On November 9, 2005, we closed on an asset purchase agreement with IP-Colo, Inc. (IPC) wherein we acquired all of the assets of IPC. 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. On or about October 10, 2005, we changed our name to HS3 Technologies, Inc.

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.

During fiscal year ended June 30, 2007 we: (a) sold 10,862,500 shares of our common stock for total cash proceeds of $919,000; (b) issued 1,760,000 shares of our common stock for services rendered to us; (c) issued 1,356,811 shares in conversion of notes; and (d) issued 7,250,000 warrants for services rendered to us.

During fiscal year ended June 30, 2009 thus far, we: (a) have issued 2,050,000 shares of our common stock for services rendered to us or cancellation of various trade payables and (b) entered into $782,000 of convertible notes payable with officers and private investors.

Effective February 1, 2009, we signed a ten (10) year agreement with the AHA. HS3 and AHA’s relationship is to create a Video Monitoring System which has been indicated by AHA to become a standard part of the American Humane Certified program, which is a voluntary fee-based program available to producers, processors and haulers of animals raised for food. The AHC program provides independent third-party verification that those businesses treat and care for their animals humanely. Pursuant to the AHA agreement, we will provide the installation, integration, and monitoring of production facilities and the transportation of animals to ensure the husbandry and transportation of the animals conforms to AHC certification standards. Pursuant to the agreement, we will be paid a recurring monthly monitoring and equipment license fee for all monitoring locations attached to the agreement.

Current Business

Currently we are primarily focused in the security industry. 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 by providing a single source portal to our customers with products and services in combinations that complete the security and monitoring matrix. 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. Our monitoring center in Denver, Colorado serves as a single point integrated security solutions portal, integrating our proprietary analytical software, network security, alarm monitoring and video products.

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 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.

In the long-term, our ability to continue as a going concern is dependent upon successful and sufficient acceptance of our current security products, services and solutions by the market. Additionally we expect any new products or services 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.

After successful beta testing of three (3) beta sites and thirteen (13) monitoring locations, we entered into a ten (10) year agreement with the American Humane Association, pursuant to which we are to install and integrate Video Monitoring Systems in production, transportation and slaughter facilities to reflect the animal species and sub groups that the American Human Certified™ certifies allowing AHA to have a system that can provide real-time analytical technology tools and increase observation frequency. We, in conjunction with AHA, will roll out our products and services for those producers and processors as part of the AHC program.

Corporate Strategy

Our Company integrates technology, services and people into solutions that enhance the level of security protection and surveillance services. Our Company’s goal is to become a security portal, with cutting-edge technology applications and solutions specifically tailored to meet the security needs of government, commercial and residential customers.

All of the products and services, including biometric access control, satellite remote monitoring, and DVRS are all security related. Unlike many of the security companies that focus exclusively on the hardware sales side of the business, our Company’s value proposition is to use our proprietary products to generate recurring revenue for our Company in the form of monitoring fees. We view the installation of our hardware products as the entry vehicle into a long-term technological relationship with our customers. We continually enhance our existing products by periodically re-designing them to accommodate to the requirement of our customer needs.

Research indicates that the video surveillance market is poised for explosive growth driven in part by step up security measures according to government mandates in the coming years, a desire for heightened security, the need to replace existing and aging infrastructures as well as the transition from an analog based industry to a digital one.

We intend to focus our attention on our recently signed agreement with AHA which certifies the livestock animal production cycle from “birth-to-death”. There are two primary facilities that are critical in this process; the growing house and the slaughter house. We estimate that the number of large growing houses and slaughter houses suitable for our services and technology to be approximately 10,000 and 300 respectively.

An additional market that we plan to explore with our products and services are (1) the food processing and safety stage of the business which would take the food from “slaughter/death to dinner table” that is critical for ensuring food safety for the consumers. Additionally this can obviate expensive beef and poultry recalls and theft, that cost beef and poultry companies millions of dollars each year.

Results of Operations

Three Months Ended March 31, 2009 and 2008

Revenue and Cost of goods sold.

We derive revenue from our operations by charging monthly fees for providing integrated equipment, monitoring, labor and other technology services as well as equipment sales to our customers. Our revenue and cost of goods sold for the three month period ended March 31, 2009 and 2008 are outlined in the table below:

		Three months ended
		March 31,
		2009			2008

VMS Revenue:
Equipment license/monitoring fees	$	8,775		$	202
Domain/business hosting fees		1,053			2,063
Other		10,000			-
	$	19,828		$	2,265

Other Revenue:
Equipment sales	$	29,489		$	14,030
IT Services		7,520			20,767
Other		0			25
	$	37,009		$	34,822


Revenue	$	56,837		$	37,087

Cost of goods sold		(13,921	)		(25,810	)
	$	42,916		$	11,277

Our VMS revenues for the three month period ended March 31, 2009 increased as compared to the comparative period in 2008 as a result of the start of the roll out of the locations pursuant to the AHA agreement. For the three months ended March 31, 2009, the initial 13 beta monitoring locations were on revenue for the entire quarter.

IT services revenues for the three month period ended March 31, 2009 decreased as compared to 2008 as our staff was focusing on the manufacture of VMS units for the roll-out of the AHA agreement as opposed to selling such services to the market

Our gross profit percent on equipment sales was 53% for the three months ended March 31, 2009. The prior periods gross profit percent is not comparable due to prior period adjustments that occurred during the quarter.

Selling, general and administrative expenses.

Our selling, general and administrative expenses for the three month period ended March 31, 2009 and 2008 are outlined in the table below:

		Three months ended
		March 31,

		2009			2008
Wages & employee benefits	$	159,211		$	211,340
Contract services		29,000			59,144
Computer network services		387			16,379
Accounting, audit and tax expenses		2,720			6,000
Rent		13,200			13,200
Legal		8,962			38,885
Board fees		12,500			12,500
Telephone		12,369			10,541
Travel, meals and entertainment		1,697			7,096
Research & development		414			5,954
Stock transfer/shareholder/proxy fees		(534	)		2,910
Insurance		9,561			4,337
Computer server/other		456			4,767
Utilities		4,165			1,484
Advertising/promotion/IR		12,766			(2,414	)
Other expenses		5,977			14,860
Bad debt expense		-			-
	$	272,851		$	406,983

Selling, general and administrative expenses for the three month period ended March 31, 2009 decreased by 33% as compared to the comparative period in 2008 primarily as a result of our management making a concentrative effort to reduce such costs.

Included for the three months ended March 31, 2009 is $20,000 of stock issued for services (under contract services), $7,500 due Wall Street Resources pursuant to our Financial Communications Consulting Agreement and approximately $4,200 for our website development program (both under advertising/promotion/IR).

Nine Months Ended March 31, 2009 and 2008

Revenue and Cost of goods sold:

We derive revenue from our operations by charging monthly fees for providing integrated equipment, monitoring, labor and other technology services as well as equipment sales to our customers. Our revenue and cost of goods sold for the nine month period ended March 31, 2009 and 2008 are outlined in the table below:

		Nine months ended
		March 31,
		2009			2008

VMS Revenue:
Equipment license/monitoring fees	$	11,864		$	806
Domain/business hosting fees		3,950			7,427
Other		10,000			-
	$	25,814		$	8,233


Other Revenue:
Equipment sales	$	98,683		$	1,035,228
IT Services		49,360			203,369
Other		285			158
	$	148,328		$	1,238,755

Revenue	$	174,142		$	1,246,988

Cost of goods sold		(58,929	)		(710,151	)
	$	115,213		$	536,837

Our revenues for the nine month period ended March 31, 2009 decreased as compared to the comparative period in 2008 as a result of our Company temporarily suspending marketing efforts for our products and services in order to focus exclusively on the American Humane Association beta testing consummation, signing of the agreement and the intended roll-out and implementation.

During the nine months ended March 31, 2008, we had approximately $725,000 of sales to Nickelodeon pursuant to an agreement that failed to develop into a monitoring arrangement for our Company.

Our gross profit percent on equipment sales was 40% and 31% for the nine months ended March 31, 2009 and 2008, respectively.

Selling, general and administrative expenses.

Our selling, general and administrative expenses for the nine month period ended March 31, 2009 and 2008 are outlined in the table below:

		Nine months ended
		March 31,
		2009		2008
Wages & employee benefits	$	450,131	$	589,337
Contract services		97,426		300,294
Computer network services		26,925		81,379
Accounting, audit and tax expenses		30,345		37,055
Rent		39,600		34,000
Legal		7,281		79,837
Board fees		37,500		33,332
Telephone		23,613		27,470
Travel, meals and entertainment		14,163		18,580
Research and development		414		16,032
Stock transfer/shareholder/proxy fees		425		9,925
Insurance		14,738		12,826
Computer server/other		608		15,729
Utilities		9,181		5,653
Advertising/promotion/IR		46,090		501
Other expenses		27,196		315,070
Bad debt expenses		9,616		-
	$	835,252	$	1,577,020

Selling, general and administrative expenses for the nine month period ended March 31, 2009 decreased by 47% as compared to the comparative period in 2008 primarily as a result of our management making a concentrative effort to reduce such costs.

Contract services for the nine months ended March 31, 2009 decreased as compared to the comparative period in 2008 primarily as a result of the inclusion in 2008 of $135,250 of stock issued for services to the independent directors and two third parties and $85,234 to a former officer for services. Included in the nine months ended March 31, 2009 is $20,000 of stock issued for services.

Advertising/promotion/IR expenses for the nine months ended March 31, 2009 increased as compared to the comparative period in 2008 primarily as a result of $30,000 (including stock issued for services, $12,000) to Wall Street Resources, pursuant to our Financial Communications Consulting Agreement and $7,300 for a web site development project.

Other expenses for the nine months ended March 31, 2008 includes $282,000 of amortization cost of warrants issued late in 2006.

Liquidity and Capital Resources

Our primary liquidity needs are to fund our working capital requirements and future capital expenditures. Our ability to continue as a going concern is dependent upon obtaining 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, due to current conditions in the debt and equity markets, no assurance can be given that debt or equity financing, if and when required, will be available.

Working Capital

							Percentage
		March 31,			June 30,		Increase/
		2009			2008		Decrease

Current Assets	$	445,074		$	438,702		1%
Current Liabilities		1,703,030			832,053		105%
Working Capital (deficit)	$	(1,257,956	)	$	(393,351	)	220%

Cash Flows

		Nine months ended
		March 31,			March 31,
		2009			2008

Net cash (used in) operating activities	$	(731,195	)	$	(597,834	)
Net cash (used in) by investing activities		(12,907	)		(7,693	)
Net cash flow provided by (used in) financing activities		798,772			641,901
Increase (decrease) in cash and cash equivalents	$	54,670		$	36,374

Our cash on hand at March 31, 2009 was approximately $185,000. We have made a concentrated effort over the prior twelve months to reduce our selling, general and administrative expenses, which currently have a cash burn rate of approximately $60,000 to $75,000 per month. Until the time period that the initial monitoring locations, pursuant to the AHA contract, are on revenue, we may need to raise additional working capital to fund our current business activities. We will plan to raise the additional capital needed to meet these immediate short-term needs primarily through borrowings from officers, directors or private investors.

Over the long term we will require additional funds in order to acquire equipment, install and monitor additional monitoring locations pursuant to the AHA contract, as well as any other expansions into newer markets for us, will require additional financing. We anticipate relying on cash flows from operations and debt financing for such expansion. We presently do not have any arrangements for additional financing for the expansion of our operations, and no potential lines of credit or sources of financing are currently in place for the purpose of proceeding with our plan of operations. We have initiated discussions with third parties to provide either equipment leasing financing or traditional debt financing through a revolving credit facility or term loans.

Contractual Obligations

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

Going Concern

Our ability to continue as a going concern is dependent upon our obtaining additional working capital to develop 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.

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.

Item 3. Quantitative and Qualitative 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 chief executive officer (our principal executive officer, principal financial officer, and principal accounting 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 March 31, 2009, the end of the nine month period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Notwithstanding the foregoing, there can be no assurance that our Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in our Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2009 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 services which compete directly with our security products and services and some of the companies developing these security products and 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 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 services. Such security products and 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 services that meet customer demands. We expect new security products and services to be developed and introduced by other companies that compete with our security products and services. The proliferation of new and established companies offering similar security products and services may reduce demand for our particular security products and 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 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 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 services and implement our business objectives could be adversely effected.

To continue to grow, 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 will encounter 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 to twelve 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 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 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 profitable operations.

Although we are in the initial stages of developing and implementing the commercialization of our security products and services, there is no assurance that we will be able to successfully develop sales of our security products and 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 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 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 services and enhance our current security products and services on a timely and cost-effective basis. Further, our security products and 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 services or enhanced versions of existing security products and services. Also, we may not be able to adapt new or enhanced security products or services to emerging industry standards, and our new security products or services may not be favorably received.

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

We cannot predict with certainty the potential consumer demand for our security products or services or the degree to which we will meet that demand. If demand for our security products or 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 services to three primary customer groups; commercial, government, and residential. 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.

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

On February 1, 2009, we entered into a $500,000 loan with a private investor pursuant to a debt conversion agreement. The loan bears interest at 15% and a conversion price of $0.10 per share and is due on demand or converted at the option of the private investor. The loan was issued to a U.S. person pursuant to the exemption from registration provided for under Rule 506 of Regulation D, promulgated under the United States Securities Act of 1933, as amended.

On February 1, 2009, we entered into an eleven (11) month Financial Consulting Agreement with a third party. We issued the third party 1,000,000 shares of our common stock for services rendered to us. The shares were issued to a U.S. person pursuant to the exemption from registration provided for under Rule 506 of Regulation D, promulgated under the United States Securities Act of 1933, as amended.

On March 1, 2009 we issued 250,000 shares of our common stock to a third party for cancellation of $21,592 of accounts payable due such third party. The shares were issued to a U.S. person pursuant to the exemption from registration provided under Rule 506 of Regulation D, promulgated under the United States Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

In conjunction with the execution of the agreement with AHA, we entered into an additional $500,000 loan with a private investor pursuant to a debt conversion agreement effective February 1, 2009. The loan bears interest at 15% and a conversion price of $0.10 per share and is due on demand or converted at the option of the private investor. The loan proceeds will be used primarily to purchase equipment for the roll out of the monitoring locations pursuant to the agreement with AHA and for other general working capital requirements

On February 1, 2009, we entered into an eleven (11) month Financial Consulting Agreement with a third party. Pursuant to the agreement, we issued the third party 1,000,000 shares of our common stock for services rendered to us.

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).

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).

Exhibit	Description
Number

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: April 29, 2009	/s/ Mark Lana
	Mark Lana
	Chief Executive Officer and Director
	(Principal Executive Officer, Principal Financial
	Officer and Principal Accounting Officer)