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EX-32.2 - SECTION 906 CERTIFICATION - HS3 TECHNOLOGIES INC.exhibit32-1.htm
EX-31.1 - SECTION 302 CERTIFICATION - HS3 TECHNOLOGIES INC.exhibit31-1.htm

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, 2009

OR

[           ] 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 ]

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[           ] YES [           ] NO

As of November 16, 2009, there were 46,495,802 shares of the registrant’s Common Stock issued and outstanding

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

    Page
    No.
Item 1. Unaudited Condensed Consolidated Financial Statements 4
  Condensed consolidated balance sheets as of September 30, 2009 and June 30, 2009 5
Condensed consolidated statements of operations for the three months ended September 30, 2009 and 2008 6
Condensed consolidated statements of stockholders equity (deficit) for the years ended June 30, 2008 and 2009 and three months ended September 30, 2009 7
Condensed consolidated statements of cash flows for the three months ended September 30, 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 22
Item 4. Controls and Procedures 22

PART II – OTHER INFORMATION

Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits 29

2


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.

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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 month period ended September 30, 2009 are included herein beginning on the following page. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related notes for the year ended June 30, 2009, together with our discussion and analysis of financial condition and results of operations, included in our Annual Report on Form 10-K filed on September 21, 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.

4



HS3 Technologies, Inc.
Condensed consolidated balance sheets

    September 30,     June 30,  
    2009     2009  
                                                                                                                                                                   ASSETS            
             
Current Assets:            
 Cash and cash equivalents $  3,574   $  38,592  
 Trade accounts receivable   19,967     18,396  
 Other receivables   56,427     56,427  
 Inventory   136,320     147,012  
    216,288     260,427  
Furniture, fixtures and equipment, net of accumulated depreciation of            
   $93,515 and $84,650 respectively   78,312     76,493  
             
Other assets, net   12,833     15,167  
  $  307,433   $  352,087  
             
             
             
                                                                                                                                               LIABILITIES AND EQUITY            
             
             
Current Liabilities:            
 Trade accounts payable $  143.,146   $  75,323  
 Other accrued liabilities   648,714     514,562  
 Convertible notes payable   1,273,000     1,173,000  
 Subordinated note payable   25,000     -  
 Long-term debt, current portion   138,417     132,986  
    2,228,277     1,895,871  
             
Long-term debt   72,318     109,024  
Other long-term liabilities   28,000     28,000  
                                                     Total Liabilities   2,328,595     2,032,895  
             
             
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 at September 30, 2009 and            
         June 30, 2009   41,996     41,996  
 Additional paid-in capital   4,385,001     4,385,001  
   Accumulated deficit   (6,448,159 )   (6,107,805 )
    (2,021,162 )   (1,680,808 )
  $  307,433   $  352,087  

See accompanying notes to condensed consolidated financial statements

5



HS3 Technologies, Inc.
Condensed consolidated statement of operations

    Three months ended September 30,  
    2009     2008  
             
             
Revenue $  26,656   $  83,380  
Cost of goods sold   4,617     33,275  
   Gross profit   22,039     50,105  
             
Operating Expenses:            
   Selling, general and administrative   295,239     312,994  
   Depreciation and amortization   11,198     7,088  
           Total operating expenses   306,437     320,082  
             
Loss from operations $  (284,398 ) $  (269,977 )
             
Other income (expense):            
   Interest expense, net   (55,956 )   (24,886 )
           Total other income (expense)   (55,956 )   (24,886 )
             
                  Net loss $  (340,354 ) $  (294,863 )
             
Net loss per share-basic and diluted $  (0.008 ) $  (0.007 )
             
Weighted average number of common            
   shares outstanding   41,995,802     39,945,802  

See accompanying notes to condensed consolidated financial statements

6



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   -     -     -     -   $  (1,176,419 ) $  ((1,176,419 )
Balances as of June 30, 2009   41,995,802   $  41,996   $  4,385,001   $  -   $ (6,107,805 ) $  (1,680,808 )
 Shares issued for cash   -     -     -     -     -     -  
 Shares issued for services/   -     -     -     -     -     -  
 Net loss   -     -     -     -     (340,354 )   (340,354 )
Balances as of September 30, 2009   41,995,802   $  41,996   $  4,385,001   $     $  (6,448,159 ) $  (2,021,162 )

See accompanying notes to condensed consolidated financial statements

7



HS3 Technologies, Inc.
Condensed consolidated statement of cash flows

    Three months ended September 30,  
    2009     2008  
             
             
Cash flows from operating activities:            
Net loss $  (340,354 ) $  (294,863 )
             
Adjustments to reconcile net loss to net cash            
provided by (used in) operations:            
   Depreciation and amortization   11,198     9,422  
   Accretion of interest   1,345     1,345  
   Warrants, stock, and options issued for service   -     12,000  
Changes in operating assets and liabilities:            
   Accounts and other receivables   (1,571 )   193,831  
   Inventory   10,692     (11,031 )
   Accounts payable and accrued liabilities   201,975     (20,924 )
Net cash (used in) operating activities   (116,715 )   (110,220 )
             
Cash flow from investing activities:            
   Additions to furniture, fixtures & equipment   (10,683 )   -  
Net cash (used in) investing activities   (10,683 )   -  
             
Cash flow from financing activities:            
             
 Sale of common stock   -     -  
 Proceeds from convertible/subordinated notes payable   125,000     12,000  
 Borrowings (repayments) long-term debt   (32,620 )   (27,964 )
Net cash flow provided by (used in)financing activities   92,380     (15,964 )
             
Increase (decrease) in cash and cash equivalents   (35,018 )   (126,184 )
Cash and cash equivalents, beginning of period   38,592     130,318  
Cash and cash equivalents, end of period $  3,574   $  4,134  
             
             
Supplemental cash flow information:            
   Interest paid $  9,272   $  13,928  
   Income taxes paid $  -   $  -  
             
Non cash financing activities:            
   Stock issued for services $  -   $  -  

See accompanying notes to condensed consolidated financial statements

8


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.

     The Company provides 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, agricultural, governmental, and residential customer security needs.

(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, 2009, together with our discussion and analysis of financial condition and results of operations, included in our Amended Annual Report on Form 10-K filed on September 21, 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.

9


(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.

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(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 September 30, 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:

    September 30,     June 30,  
    2009     2009  
             
Accrued board fees $ 108,332   $  95,832  
Accrued salaries, officers   353,542     293,542  
Accrued interest   161,001     115,662  
Payroll liabilities   25,730     9,372  
Sales tax payable   109     154  
  $ 648,714   $  514,562  

     Board fees to the two independent board of directors are $25,000 annually which is being deferred until the Company has the ability to pay at which time the board members have the option to receive cash or convert into common stock at the rate of $0.12 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 $17,406 for the three ended September 30, 2009

     Accrued interest represents interest on the convertible notes payable.

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4. CONVERTIBLE AND SUBORDINATED NOTES PAYABLE

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. The loans bear interest from 12 to 15% and are convertible at a conversion price/share between $.08 to $.12. 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  
    September 30,     June 30,  
Officers and Directors:   2009     2009  
   William S. Dickey $  825,000   $  725,000  
   Robert A. Morrison   300,000     300,000  
   Mark L. Lana   27,000     27,000  
   Charles F. Ferris   10,000     10,000  
   Mike Yinger   1,000     1,000  
    1,163,000     1,063,000  
Private Investor   110,000     110,000  
  $  1,273,000     1,173,000  

     On July 31, 2009 and September 7, 2009, we entered into two $50,000 loans with William S. Dickey pursuant to debt conversion agreements. The loan proceeds were used for general working capital requirements.

     On October 19, 2009 we issued 4,500,000 shares of our common stock to William S. Dickey for $225,000. Proceeds from this equity offering were used to repay $125,000 of his convertible notes payable and $25,000 of his subordinated notes payable with the remaining $75,000 available for working capital requirements. 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.

Subordinated Notes Payable

     On September 23, 2009, we entered into a $25,000 unsecured subordinated note payable with William S. Dickey. The note was repaid on October19, 2009 from the proceeds of an equity offering to Mr. Dickey.

5. LONG-TERM DEBT

     In February and March 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 months ended September 30, 2009, we recorded $10,617 as interest expense pursuant to the notes.

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     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 three-months ended September 30, 2009, we expensed $2,334.

     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 the three months ended September 30, 2009 we recorded $1,345 respectively as additional interest expense. At September 30, 2009 we had $6,722 discount remaining to be amortized into interest. The value of the loans at September 30, 2009 was $217,457. The current portion of the debt was $138,417 after discount ($143,795 principal owed) and the long term portion of the debt was $72,318 after discount ($73,662 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 15th of each month with payments accruing until the Company raises in excess of $500,000 or becomes cash flow positive. As of September 30, 2009, $26,125 has been accrued and included in trade accounts payable pursuant to this agreement.

     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 and the parties have rescinded the transaction and we have recorded a receivable back for the money. The matter of collecting the money is now subject to litigation as we are awaiting a summary judgment against the shareholder.

     On February 1, 2009, we entered into a eleven (11) month Financial Consulting Agreement with William S. Dickey party. We issued 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 on 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.

     On October 19, 2009 we issued 4,500,000 shares of our common stock to William S. Dickey for $225,000. Proceeds from this equity offering were used to repay $125,000 of his convertible notes payable and $25,000 of his subordinated notes payable with the remaining $75,000 available for working capital requirements. 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.

     Pursuant to the 2005 Stock Option Plan, the Board of Directors had granted 2,500,000 options under the plan. At September 30, 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.

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7. SUBSEQUENT EVENTS

     The Company has evaluated all subsequent events through November 16, 2009, the date the financial statements were issued and except for the following subsequent events no additional items were noted that needed to be disclosed.

     On October 19, 2009 we issued 4,500,000 shares of our common stock to William S. Dickey for $225,000. Proceeds from this equity offering were used to repay $125,000 of his convertible notes payable and $25,000 of his subordinated notes payable with the remaining $75,000 available for working capital requirements. 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 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, 2009, included in our Annual Report on Form 10-K filed on September 21, 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.

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     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.

     During fiscal year ended June 30, 2009, we: (a) issued 2,050,000 shares of our common stock for services rendered to us or cancellation of various trade payables and (b) entered into $857,000 of convertible notes payable with officers and private investors.

     On November 4, at the annual and special meeting of stockholders of the Company, our authorized capital increased to 200,000,000 shares of common stock with a par value of $0.001.

Company Business/Mission

     Currently we are primarily focused in the security and animal welfare 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), video monitoring centers, biometric access control, personal biometric identification units, cellular and 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 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, and video products.

     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 various 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 and equipment licensing 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.

     We are foundationally an intellectual capital company. Our Company both develops HS3 proprietary technology, and acquires and integrates appropriate industry technology to provide surveillance solutions customized to the requirements of our customers. Our established mission is to be:

The trusted security architect providing vision when it matters.”

     As a security architect, we provide professional architectural, design and engineering to develop system solutions for our customers as desired by our customers. This concept is the foundation of our intellectual capital and core competencies. We use intellectual capital of our employees and the surveillance industry to architect and design solutions that provide customers vision and situational awareness. This acquired knowledge is transformed to innovations that are proprietary to the Company. This occurs in part, through:

  • Increased knowledge of new solutions and industry advancements
  • Developing new systems
  • Product and application enhancements
  • Applications of new components
  • Designing new, proprietary software

     We have a sustainable competitive advantage in our ability to merge existing technology with the latest innovations in satellite broadband service, IP hardware, proprietary software, and access control security products. We have the expertise, capacity, staff, and ability to monitor sites located anywhere in the United States and Canada. Our Denver monitoring facility has access to 1.7 Terabytes per second of ground-based internet capability for interfacing purposes. We developed the technologies, proved the concepts, and started implementation, and market penetration. We

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have focused on the rural and farm animal/production market to date. There are five primary markets where our technology can excel in providing greater access, better performance and lower cost:

  • Producers of Animal Products
  • Homeland Security
  • Hospitality
  • Petroleum Industry
  • Educational Facilities

PRODUCERS OF ANIMAL PRODUCTS:

     It is estimated that 27 million farmed animals are killed in the United States alone per day. Globally, the figure grows to approximately 19,000 per minute or a total of 10 billion animals per year. According to the USDA, during 2007, the retail equivalent of U.S. beef industry was $74 billion and total U.S. beef consumption was 28.1 billion pounds, with 2008 expected production to be slightly lower at 26.6 billion pounds. U.S. commercial pork production in 2008 is expected to be 23.5 billion pounds and broilers (chicken) production is expected to be 36.9 billion. In aggregate, total red meat and poultry 2008 production is expected to be 94.0 billion pounds. The meat, beef, and poultry processing industry, which accounted for 30% of the food manufacturing sector, reported 2007 revenues of $152.7 billion.

     As the developer and architect of a video monitoring system (VMS) and surveillance program, we have refined the capabilities of our satellite video product and other surveillance technologies including their implementation. We also have the ability to provide service to remote areas underserved by high speed internet or cable providers.

     Within a climate of increasing concerns over food safety, security and animal welfare a tremendous market is evolving. We have developed surveillance products primarily video, to address these issues in the livestock production industry and to a lesser extent the food processing industry. Our solutions are developed to convey to consumers a sense of confidence in the quality of the food they eat, and that the producer has incorporated appropriate stewardship in animal production processes. For the producer this provides risk mitigation, enhanced production and value added branding.

     Through the combined use of proprietary technology, including innovations, video analytics, and digital video recorders (DVR) the Company has developed state-of-the-art wireless, internet linked cellular, and satellite linked surveillance systems. HS3 is in a unique position to be the first company with national surveillance capabilities, to provide an independent 3rd party monitoring verification system to the public that increases their level of confidence in fundamentally important industries. HS3’s surveillance and monitoring provides these assurances with a “certified humane” brand, whether acquired or created and generated in house. HS3 registered the trademarked MONIPRO for this purpose.

     Animal protein producers desiring increased market share and greater margins require value in programs they utilize. The true measures of value can be assessed through increased profits and the realization of risk mitigation.

     HS3’s surveillance program allows:

  • Producers to demonstrate stewardship with archived video.
  • Producers to employ HS3 as a third party verifier of video for the establishment and “certification” labeling of food products at the market shelf, i.e. the logo/brand assures consumer that the food they purchased for their family has been raised humanely and handled safely.
  • Producers to monitor animal behavior at remote locations and improve production efficiencies including herd disease awareness..
  • Management to assure employees work within standards required to maintain the highest levels of risk mitigation and animal stewardship.
  • Rebuttal to undercover video by animal activist groups.

     The Company‘s VMS and surveillance program provide the above criteria and was modeled after a typical cable TV system. We offer a very low cost of entry. The equipment is provided to the Producers who pay a monthly equipment license fee with requisite subscription fees for monitoring services. To further lower barriers of entry, HS3’s program

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removes the high front end equipment costs to the producers.

     HS3 intends to enter and penetrate into the animal welfare, protein and production business by entering into contracts with various producers, associations, and/or companies that can use HS3’s surveillance services as a part of any value-added welfare/stewardship and production brand that they choose. As the architect of the surveillance system, HS3 is able to provide specific elements (as designed & tailored by the producer/company) of our monitoring services to customers while maintaining ownership of the proprietary VMS system.

     Over the last 12 months, HS3 has determined proof of market and penetration concept of the technology and also of the business model. HS3’s strategy is to attain market penetration with HS3 as a vendor to associations/producers and/or companies desiring various certification programs. HS3 plans to seize the initiative in the livestock arena because there is a significant opportunity to expand our service to meet the needs of additional protein producers in pork, beef, poultry, and dairy industries.

HOMELAND SECURITY:

     We have installed remote video products for the U.S. Coast Guard, enabling the monitoring of and relaying of the physical location of freight trains at ports of entry. The product relays GPS and live video over a cellular network.

     Covert Deployment System has been one of the many technologically advanced products we have developed. The covert deployment products allow for the utilization of cellular technology and provide a very small system for loss prevention operations. These systems utilize SMS messaging for alerting and motion detection or other triggers to activate video and record perpetrators on the enclosed drive and send attached photos to the our secured portal. It is estimated there are 13,000 active train locomotives currently in the United States spread over 7 companies. Homeland Security is concerned about the risk to the public should a locomotive and its cargo become hijacked or compromised. We have developed and deployed a biometric access control system which limits access to the locomotive. In addition, we implemented GPS and video monitoring transmitted real-time over a cellular network to a centralized monitoring center. We have completed beta testing on 28 locomotives with good results and feedback.

HOSPITALITY:

     As in America’s schools, security for the hospitality industry is becoming increasingly important. Hotels are trending toward increasing guest security measures as a result of injury and liability litigation. Additionally hotel operators are becoming more concerned with improving general security for guests. Our internet protocol surveillance system enhances and augments the hotel’s ability to monitor the hotel’s perimeter and access to guest areas.

     We can also provide hotels a reliable source for web hosting. An ancillary advantage of our video monitoring system is the ability for the hotel to offer video on web sites as an inexpensive, effective advertising tool.

PETROLEUM INDUSTRY:

     The petroleum industry spends millions of dollars and man hours monitoring oil and gas wells throughout the country. Many oil and gas wells are in remote areas and, aside from typical maintenance and production monitoring, there is a constant threat of vandalism, sabotage and product theft. Today, all monitoring of wells requires that an employee be physically present at a well to perform necessary inspections. We are working with industry leaders to eliminate this labor-intensive process. After installation of our Petroleum Surveillance Package, our customers can monitor their assets from anywhere in the world using the internet. In addition, we have, and continues to form strategic alliances with providers of complementary monitoring products that mesh with our satellite products and provide well operators with real-time information to enhance well production.

     We have researched, developed and installed a remote monitoring device called “OPIE” an Outdoor Portable Investigative Equipment surveillance vehicle. The device has been used to successfully monitor gas wells in remote Wyoming for three years. The original concept having been proven to the customer, an oil and gas producer, has expressed desire in purchasing additional OPIEs for their expansion to new fields.

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EDUCATIONAL FACILITIES:

     Even in today’s high-speed world, there are numerous school districts - rural and urban - waiting for high-speed internet access and video monitoring. We can provide the services required for maintaining and improving security.

     The Federal Government has mandated schools comply with the Homeland Security Act, which in part requires video surveillance. With our system installed, security information is available via the internet and our secured portal to individuals with the proper security clearance.

     Providing schools with satellite broadband access to the internet at megabytes-per-second speeds, web hosting services, and the ability to observe activities in and around the school with digital cameras make our Company a uniquely positioned provider. Our advanced technology and low cost of entry structure allows us to offer education facilities products meeting requirements of Homeland Security.

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2009 and 2008

Revenue and Cost of goods sold.

     We derive revenue from our operations by charging monthly fees for providing integrated equipment, monitoring, hosting, 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 September 30, 2009 and 2008 are outlined in the table below:

    Three months ended  
    September 30,  
    2009     2008  
             
VMS Revenue:            
     Equipment license/monitoring fees $  13,431   $  -  
     Domain/business hosting fees   2,312     1,632  
     Other   1,513     -  
  $  17,2563   $  1,632  
             
Other Revenue:            
     Equipment sales $  6,425     49,263  
     IT Services   2,975     32,200  
   Other   -     285  
  $  9,400   $  81,748  
             
                           Revenue $  26,656   $  83,380  
             
                                   Cost of goods sold   4,617     33,275  
  $  22,039   $  50,105  

     Our VMS revenues for the three month period ended September 30, 2009 increased as compared to the comparative period in 2008 as a result of bringing additional monitoring locations on revenue. At September 30, 2009, we had 23 monitoring locations on revenue.

     IT services revenues for the three month period ended September 30, 2009 decreased as compared to 2008 as our staff was focusing on the manufacture of VMS units as opposed to selling such services to the market.

     Our gross profit percent on equipment sales was 28% for the three months ended September 30, 2009 as compared to 32% for the 2008 comparable three-month period.

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Selling, general and administrative expenses.

     Our selling, general and administrative expenses for the three month period ended September 30, 2009 and 2008 are outlined in the table below:

    Three months ended  
    September 30,  
             
    2009     2008  
Wages & employee benefits $  149,703   $  122,212  
Contract services   52,000     45,341  
Computer network services   387     25,747  
Accounting, audit and tax expenses   22,500     23,375  
Rent   13,200     13,200  
Legal   1,005     7,848  
Board fees   12,500     12,500  
Telephone   12,472     6,050  
Travel, meals and entertainment   3,628     2,991  
Research & development   88     -  
Stock transfer/shareholder/proxy fees   655     75  
Insurance   5,566     4,457  
Computer server/other   770     -  
Utilities   4,206     2,617  
Advertising/promotion/IR   9,281     15,008  
Other expenses   7,278     21,957  
Bad debt expense   -     9,616  
  $  295,239   $  312,994  

     Selling, general and administrative expenses for the three month period ended September 30, 2009 decreased slightly by 6% as compared to the comparative period in 2008 as our management continues to make a concentrative effort to reduce such costs until top-line revenue can support our business operations.

     Contract services for the three months ended September 30, 2009 consisted of $27,000 pursuant to our marketing consulting agreement and $25,000 to two investor advisors that are assisting us in recapitalizing the Company.

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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  
    September 30,     June 30,     Increase/  
    2009     2009     (Decrease)  
                   
       Current Assets $  216,288   $  260,427        
       Current Liabilities   2,228,277     1,895,871        
       Working Capital (deficit) $  (2,011,989 ) $  (1,635,444 )   (23 % )

             Cash Flows   Three months ended  
    September 30,     September 30,  
    2009     2008  
             
Net cash (used in) operating activities $  (116,715 ) $  (110,220 )
Net cash (used in) by investing activities   (10,683 )   -  
Net cash flow provided by (used in) financing activities   92,380     (15,964 )
Increase (decrease) in cash and cash equivalents $  (35,018 ) $  (126,184 )

     Our cash on hand at September 30, 2009 was approximately $3,574. 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 $45,000 to $55,000 per month. Until the time period that additional monitoring locations 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.

     On October 19, 2009 we issued 4,500,000 shares of our common stock to William S. Dickey for $225,000. Proceeds from this equity offering were used to repay $125,000 of his convertible notes payable and $25,000 of his subordinated notes payable with the remaining $75,000 available for working capital requirements. 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.

     Over the long term we will require additional funds in order to acquire equipment, install and monitor additional monitoring locations, as well as any other expansions into newer markets for us, will require additional financing. We anticipate relying on cash flows from operations, equity offerings, 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 new equity offerings and debt financing through a revolving credit facility or term loans.

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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 equity 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 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded as of September 30, 2009 that our disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2009 that have materially 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.

Much of the information included in this report includes or is based upon estimates, projections or other “forward-looking statements”. Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections,

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assumptions, or other future performance suggested herein. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Such estimates, projections or other “forward-looking statements” involve various risks and uncertainties as outlined below. We caution readers of this report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other “forward-looking statements”. In evaluating us, our business and any investment in our business, readers should carefully consider the following factors.

Our new business operations will be subject to a number of risks and uncertainties, including those set forth below:

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, equity financing or factoring (selling) our contracted for revenue stream. 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.

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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, licensing or leasing of our 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 have encountered competition for these personnel. We may not be able to find or retain qualified personnel, which may 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 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.

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We may 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 quality assurance and efficiency measure, we plan to manufacture our own security products and additionally contract some manufacturing to third parties. We could be adversely affected by an increase in our manufacturer’s prices of manufacturing services or a significant decline in our manufacturer’s 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 some of 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 customer’s 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 limited.

We expect that a substantial portion, if not all, of our future revenue will be derived from the licensing of our security products and services. We expect that these security products and 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 with positive cash flow.

Although we are in the early 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

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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 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 do 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 four primary customer groups; agricultural, 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.

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

Subsequent to shareholder approval at our November 4, 2009 annual meeting, our certificate of incorporation authorizes the issuance of 200,000,000 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 limit a stockholder’s ability to buy and sell our shares of common stock.

In addition to the “penny stock” rules described above, the 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.

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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, 2009 that we have incurred substantial losses since inception, which raises substantial doubt abut 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.

Our By-laws contain provisions indemnifying our officers and directors against all costs, charges and expenses incurred by them.

Our By-laws contain provisions with respect to the indemnification of our officers and directors against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by him, including an amount paid to settle an action or satisfy a judgment in a civil, criminal or administrative action or proceeding to which he is made a party by reason of his being or having been one of our directors or officers.

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

     On October 19, 2009 we issued 4,500,000 shares of our common stock to William S. Dickey for $225,000. Proceeds from this equity offering were used to repay $125,000 of his convertible notes payable and $25,000 of his subordinated notes payable with the remaining $75,000 available for working capital requirements. 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

On November 4, 2009 an annual and special meeting of stockholders of HS3 Technologies Inc., a Nevada corporation, was held at Suite 600, 1800 Boulder Street, Denver, Colorado USA 80211. The Meeting was held with the following approved, with 78% of the potential votes voting:

Elect: Mark Lana – Chief Executive Officer, Treasurer, and Director

Elect: Robert A. Morrison – President and Director

Elect: Charles F. Ferris, Ph.D. – Chairman of the Board and Director

Elect: Michael Yinger – Secretary and Director

Stockholder ratification of the appointment of Weaver & Martin, LLC as our independent auditors

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Increase to the number of shares of our common stock from 50,000,000 shares to 200,000,000 shares, par value $0.001.

Item 5. Other Information

     On July 31, 2009, and September 7, 2009, we entered into two $50,000 loans with William S. Dickey pursuant to debt conversion agreements. The loan proceeds will be used for general working capital requirements

     On September 23, 2009, we entered into a $25,000 unsecured subordinated note payable with William S. Dickey. The note was repaid on October 19, 2009 from the proceeds of an equity offering to Mr. Dickey.

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).

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).

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Exhibit Description
Number  
(16) Letter on Change in Certifying Accountant
16.1 Letter from Gordon Hughes & Banks, LLP regarding change in certifying accountant (incorporated by reference from our Form 8-K filed on July 30, 2007).
31 Section 302 Certifications
31.1 Section 302 Certification (filed herewith).
(32) Section 906 Certification
32.1 Section 906 Certification (filed herewith).

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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 16, 2009 /s/ Mark Lana
  Mark Lana
  Chief Executive Officer and Director
  (Principal Executive Officer, Principal Financial
  Officer and Principal Accounting Officer)

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