Hydrodynex (HDYX) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2011.
[  ]	Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from _______ to _______.

000-53506

(Commission file number)

HYDRODYNEX, INC.

(Exact name of small business issuer as specified in its charter)

Nevada	20-4903071	702-722-9496
(State or other jurisdiction	(IRS Employer	(Registrant’s telephone number)
of incorporation or organization)	Identification No.)

230 Bethany Rd. #128; Burbank, CA 91504

(Address of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X]  No [  ]

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

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

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

On May 23, 2011, there were 1,973,880 outstanding shares of the registrant's common stock, par value $.001 per share.

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II – OTHER INFORMATION		24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
SIGNATURES		25

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PART I – FINANCIAL INFORMATION

Item1. Financial Statements

Hydrodynex, Inc.

(A Development Stage Company)

March 31, 2011 and 2010

Index to Financial Statements

CONTENTS	Page
Balance Sheets at March 31, 2011 (Unaudited) and June 30, 2010	4
Statements of Operations for the Three and Nine Months Ended March 31, 2011 and 2010 and for the Period from May 12, 2006 (Inception) through March 31, 2011 (Unaudited)	5
Statement of Stockholders’ Equity (Deficit) for the Period from May 12, 2006 (Inception) through March 31, 2011 (Unaudited)	6
Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010 and for the Period from May 12, 2006 (Inception) through March 31, 2011 (Unaudited)	7
Notes to the Financial Statements (Unaudited)	8-18

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Hydrodynex, Inc.
(A Development Stage Company)
Balance Sheets
				March 31, 2011		June 30, 2010
				(Unaudited)
Assets
Current Assets
	Cash		$	170	$	178
		Total Current Assets		170		178
Office Equipment
	Office equipment			1,288		1,288
	Less: Accumulated depreciation			(759)		(565)
Office Equipment, net				529		723
Other Assets
	Prepaid patent application costs			6,997		6,997
		Total Other Assets		6,997		6,997
Total Assets			$	7,696	$	7,898
Liabilities and Stockholders' Deficit
Current Liabilities:
	Accounts payable		$	17,938	$	9,692
	Accrued expenses			2,200		5,200
	Accrued expenses - related party			37,600		37,600
	Advances from officers			7,300		2,000
		Total Current Liabilities		65,038		54,492
License Fees Payable				28,196		24,416
Total Liabilities				93,234		78,908
Stockholders' Deficit
Preferred stock, $.001 par value, 5,000,000 shares authorized:
	none issued or outstanding			-		-
Common stock, $.001 par value, 75,000,000 shares authorized,
	1,973,880 shares issued and outstanding			1,974		1,974
Additional paid-in capital				219,636		219,636
Deficit accumulated during the development stage				(307,148)		(292,620)
Total Stockholders' Deficit				(85,538)		(71,010)
Total Liabilities and Stockholders' Deficit			$	7,696	$	7,898
See accompanying notes to the financial statements

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Hydrodynex, Inc.
(A Development Stage Company)
Statements of Operations
												For the Period from
				For the Three Months		For the Three Months		For the Nine Months		For the Nine Months		May 12, 2006
				Ended		Ended		Ended		Ended		(inception) through
				March 31, 2011		March 31, 2010	��	March 31, 2011		March 31, 2010		March 31, 2011
				(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
OPERATING EXPENSES
	Advertising and promotion		$	-	$	-	$	-	$	-	$	5,429
	Consulting fees - officer			-		-		-		7,500		61,000
	Depreciation			65		64		194		194		759
	Board of directors fees			-		-		-		-		2,750
	General and administrative			173		541		3,004		5,253		24,393
	Travel			-		-		-		-		10,996
	Legal and accounting			1,600		2,693		7,550		19,443		110,142
		Total Operating Expenses		1,838		3,298		10,748		32,390		215,469
LOSS FROM OPERATIONS				(1,838)		(3,298)		(10,748)		(32,390)		(215,469)
OTHER (INCOME) EXPENSES
	Foreign currency transactions (gain) loss			1,690		(1,750)		3,780		(1,186)		1,399
	Forgiveness of debt			-		-		-		(8,621)		(8,621)
	Loss of advance on purchases			-		-		-		-		26,991
	Impairment of deferred license fees			-		-		-		-		68,175
	Interest expense			-		-		-		402		3,735
		Total Other (Income) Expenses		1,690		(1,750)		3,780		(9,405)		91,679
LOSS BEFORE INCOME TAXES				(3,528)		(1,548)		(14,528)		(22,985)		(307,148)
INCOME TAX PROVISION				-		-		-				-
NET LOSS			$	(3,528)	$	(1,548)	$	(14,528)	$	(22,985)	$	(307,148)
NET LOSS PER COMMON SHARE -
	BASIC AND DILUTED:		$	(0.00)	$	(0.00)	$	(0.01)	$	(0.01)
	Weighted Average Common Shares Outstanding -
		basic and diluted		1,973,880		1,973,880		1,973,880		1,890,747
See accompanying notes to the financial statements

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Hydrodynex, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
For the Period from May 12, 2006 (Inception) through March 31, 2011
(Unaudited)
		Common Stock, $0.001 Par Value			Additional		Deficit accumulated		Total
		Number of			Paid-in		During the		Stockholders'
		Shares	Amount		Capital		Development Stage		(Deficit)
Balance, May 12, 2006 (inception)		$ -	$	-	$	-	$	-	$	-
Shares issued to President for cash
	at $0.01 per share upon formation	200,000		200		1,800				2,000
Net loss								(536)		(536)
Balance, June 30, 2006		200,000		200		1,800		(536)		1,464
Shares issued to President for cash
	at $0.01 per share	300,000		300		2,700				3,000
Net loss								(1,296)		(1,296)
Balance, June 30, 2007		500,000		500		4,500		(1,832)		3,168
Shares issued for cash at $0.10 per share		1,000,000		1,000		99,000				100,000
Options issued for director fees						2,750				2,750
Options issued for services						1,500				1,500
Net loss								(84,454)		(84,454)
Balance, June 30, 2008		1,500,000		1,500		107,750		(86,286)		22,964
Common stock issued in connection with sale of security
	units for cash at $0.50 per unit November 25, 2008	15,000		15		4,185				4,200
Warrants issued in connection with sale
	of security units for cash at $0.50 per unit					3,300				3,300
Warrants issued in connection with
	issuance of convertible notes payable					2,640				2,640
Shares issued for cash at $0.20 per share January 23, 2009		250,000		250		49,750				50,000
Net loss								(86,463)		(86,463)
Balance, June 30, 2009		1,765,000		1,765		167,625		(172,749)		(3,359)
Common stock issued for conversion of notes
	payable on July 25, 2009 at $0.25 per share	17,280		17		4,303				4,320
Common stock issued for conversion of notes
	payable on August 23, 2009 at $0.25 per share	21,600		22		5,378				5,400
Common stock issued in connection with sale of security
	units for cash at $0.25 per unit on September 26, 2009	30,000		30		7,470				7,500
Shares issued for cash at $0.25 per share on November 9, 2009		140,000		140		34,860				35,000
Net loss								(119,871)		(119,871)
Balance, June 30, 2010		1,973,880		1,974		219,636		(292,620)		(71,010)
Net loss								(14,528)		(14,528)
Balance, March 31, 2011		$ 1,973,880	$	1,974	$	219,636	$	(307,148)	$	(85,538)
See accompanying notes to the financial statements.

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Hydrodynex, Inc.
(A Development Stage Company)
Statements of Cash Flows
								For the
				For the Nine Months		For the Nine Months		Period from May 12, 2006
				Ended		Ended		(inception) through
				March 31, 2011		March 31, 2010		March 31, 2011
				(Unaudited)		(Unaudited)		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss			$	(14,528)	$	(22,985)	$	(307,148)
Adjustments to reconcile net loss to net cash
	used in operating activities
	Depreciation expense			194		194		759
	Loss of advance on purchases			-		-		26,991
	Impairment of deferred license fees			-		-		68,175
	Stock options issued for services			-		-		4,250
	Amortization of discount on convertible notes payable			-		312		2,640
	Changes in operating assets and liabilities:
		Prepaid expenses		-		-		-
		Advances on purchases		-		-		(26,991)
		Accounts payable and accrued expenses		5,246		(24,918)		20,138
		Interest payable		-		(150)		720
		License fees payable		3,780		(1,186)		28,196
NET CASH USED IN OPERATING ACTIVITIES				(5,308)		(48,733)		(182,270)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of office equipment			-		-		(1,288)
	Prepaid patent applications costs			-		-		(6,997)
	Deferred license fees			-		-		(68,175)
NET CASH USED IN INVESTING ACTIVITIES				-		-		(76,460)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Accrued expenses - related party			-		7,500		37,600
	Advances from officers			5,300		3,440		12,586
	Repayment of advances from officers			-		(440)		(5,286)
	Proceeds from convertible notes payable			-		-		12,000
	Repayment of convertible notes payable			-		(3,000)		(3,000)
	Proceeds from sale of common stock and warrants			-		42,500		205,000
NET CASH PROVIDED BY FINANCING ACTIVITIES				5,300		50,000		258,900
NET CHANGE IN CASH				(8)		1,267		170
Cash, Beginning of Period				178		75		-
Cash, End of Period			$	170	$	1,342	$	170
SUPPLEMENTAL DISCLOSURE OF
	CASH FLOWS INFORMATION:
	Interest paid		$	-	$	402	$	3,680
	Income tax paid		$	-	$	-	$	-
NON-CASH FINANCING AND INVESTING TRANSACTIONS:
	Warrants issued in connection with issuance of convertible debt		$	-		-	$	2,640
	Common shares issued for conversion of convertible notes payable		$	-		9,000	$	9,000
	Common shares issued for conversion of interest payable		$	-		720	$	720
See accompanying notes to the financial statements

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Hydrodynex, Inc.

(A Development Stage Company)

March 31, 2011 and 2010

Notes to the Financial Statements

(Unaudited)

NOTE 1 - ORGANIZATION AND OPERATIONS

Hydrodynex, Inc. (a development stage company) (“Hydrodynex” or the “Company”) was incorporated on May 12, 2006 under the laws of the State of Nevada for the purpose of the marketing and distribution of AO-System (Anodic Oxidation) water treatment units under an exclusive license agreement for the Territory of North America Comprising United States, Canada and Mexico.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  Unaudited interim results are not necessarily indicative of the results for the full year.  These unaudited interim financial statements should be read in conjunction with the financial statements of the Company for the fiscal year ended June 30, 2010 and notes thereto contained in the information as part of the Company’s Annual Report on Form 10-K filed with the SEC on October 13, 2010.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.   These reclassifications had no effect on reported losses.

Development stage company

The Company is a development stage company as defined by section 915-10-20 of the FASB Accounting Standards Codification.  The Company is still devoting substantially all of its efforts on establishing the business and its planned principal operations have not commenced.  All losses accumulated since inception have been considered as part of the Company’s development stage activities.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimated useful life of office equipment and the future manufacturing of AO-System by the Company to recover prepaid patent costs and deferred license fees.  Actual results could differ from those estimates.

Fiscal year

The Company elected June 30 as its fiscal year ending date upon formation.

Cash equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Office equipment

Office equipment is recorded at cost. Expenditures for major additions and betterments are capitalized.  Maintenance and repairs are charged to operations as incurred. Depreciation of office equipment is computed by the straight-line method (after

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taking into account their respective estimated residual values) over the assets estimated useful life of five (5) years.  Upon sale or retirement of office equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in statements of operations.

Prepaid patent application costs

The Company has adopted the guidelines as set out in paragraph 350-30-25-3 and paragraph 350-30-35-6 of the FASB Accounting Standards Codification for prepaid patent application costs.  Under the requirements as set out in paragraph 350-30-25-3 and paragraph 350-30-35-6 of the FASB Accounting Standards Codification, the Company capitalizes and amortizes patent application costs associated with the licensed product the Company intends to sell pursuant to the Exclusive License Agreement, entered into on September 3, 2007, over their remaining legal lives, estimated useful lives, or the term of the contract, whichever is shorter.  All internally developed process costs incurred to the point when a patent application is to be filed are expensed as incurred and classified as research and development costs.  Patent application costs, generally legal costs, thereafter incurred, are capitalized pending disposition of the individual patent application, and are subsequently either amortized based on the initial patent life granted, generally fifteen (15) to twenty (20) years for domestic patents and five (5) to twenty (20) years for foreign patents, or expensed if the patent application is rejected.  The costs of defending and maintaining patents are expensed as incurred.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

Impairment of long-lived assets

The Company follows paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets.  The Company’s long-lived assets, which include office equipment, and prepaid patent application costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts.  Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated or amortized over the newly determined remaining estimated useful lives.  The Company determined that there were no impairments of long-lived assets as of March 31, 2011 or 2010.

Fair value of financial instruments

The Company applies paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments.  Paragraph 820-10-35-37 of the FASB Accounting Standards Codification establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, paragraph 820-10-35-37 of the FASB Accounting Standards Codification establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The three (3) levels of fair value hierarchy defined by paragraph 820-10-35-37 of the FASB Accounting Standards Codification are described below:

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments.

The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at March 31, 2011 or June 30, 2010; no gains or losses are reported in the statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the interim period ended March 31, 2011 or 2010 or for the period from May 12, 2006 (inception) through March 31, 2011.

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Commitments and contingencies

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies.  Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Revenue recognition

The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition.  The Company recognizes revenue when it is realized or realizable and earned less estimated future doubtful accounts.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

The Company will derive its revenue from sales contracts with customers with revenues being generated upon the shipment of goods upon the Company commencing operations.  Persuasive evidence of an arrangement is demonstrated via invoice, product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the trucking company or third party carrier and title transfers upon shipment, based on free on board (“FOB”) warehouse; the sales price to the customer is fixed upon acceptance of the purchase order and there is no separate sales rebate, discount, or volume incentive.

Foreign currency transactions

                The Company applies the guidelines as set out in Section 830-20-35 of the FASB Accounting Standards Codification (Section 830-20-35) for foreign currency transactions.  Pursuant to Section 830-20-35 of the FASB Accounting Standards Codification, foreign currency transactions are transactions denominated in a currency other than U.S. Dollar, the Company’s functional currency.  Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid.  A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction.  That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction generally shall be included in determining net income for the period in which the transaction is settled.  The exceptions to this requirement for inclusion in net income of transaction gains and losses pertain to certain intercompany transactions and to transactions that are designated as, and effective as, economic hedges of net investments and foreign currency commitments.  Pursuant to Section 830-20-25 of the FASB Accounting Standards Codification, the following shall apply to all foreign currency transactions of an enterprise and its investees: (a) At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction shall be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date as defined in section 830-10-20 of the FASB Accounting Standards Codification; and (b) At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity shall be adjusted to reflect the current exchange rate.

.

Stock-based compensation for obtaining employee services

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

· The Company uses historical data to estimate employee termination behavior.  The expected life of options granted is derived from paragraph 718-10-S99-1 of the FASB Accounting Standards Codification and represents the period of time the options are expected to be outstanding.

· The expected volatility is based on a combination of the historical volatility of the comparable companies’ stock over the contractual life of the options.

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· The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option.

· The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option.

The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.

Equity instruments issued to parties other than employees for acquiring goods or services

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification (“FASB ASC Section 505-50-30”).  Pursuant to FASB ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

Income taxes

The Company accounts for income taxes under paragraph 710-10-30-2 of the FASB Accounting Standards Codification.  Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”).  Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.  The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of Section 740-10-25.

Net income (loss) per common share

Net income (loss) per common share is computed pursuant to paragraph of 260-10-45-10 of the FASB Accounting Standards Codification.  Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.  Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through stock options and warrants.

The following table shows number of potentially outstanding dilutive shares excluded from the diluted net income (loss) per share calculation for the interim period ended March 31, 2011 and 2010 as they were anti-dilutive:

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	Number of Potentially outstanding dilutive shares
	For the Interim Period Ended March 31, 2011		For the Interim Period Ended March 31, 2010
Stock options issued on June 30, 2008 under the 2006 Plan		70,000		70,000
Warrants issued in connection with the issuance of convertible notes payable issued between July 24, 2008 and August 23, 2008 with an exercise price of $1.00 per share and expiring three (3) years from the date of issuance		12,000		12,000
Warrants issued in connection with the sale of 15,000 shares of its common stock on November 25, 2008 with an exercise price of $1.00 per share and expiring three (3) years from the date of issuance		15,000		15,000
Total potentially outstanding dilutive shares		97,000		97,000

Cash flows reporting

The Company has adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-24 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments.

Subsequent events

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued.  Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

Recently issued accounting pronouncements

In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements”, which provides amendments to Subtopic 820-10 that requires new disclosures as follows:

1.

Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.

2.

Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).

This Update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows:

1.

Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.

2.

Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.

This Update also includes conforming amendments to the guidance on employers' disclosures about postretirement benefit plan assets (Subtopic 715-20). The conforming amendments to Subtopic 715-20 change the terminology from major

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categories of assets to classes of assets and provide a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

In April 2010, the FASB issued ASU No. 2010-13, “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (“ASU 2010-13”). This update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. 

In August 2010, the FASB issued ASU 2010-21, “Accounting for Technical Amendments to Various SEC Rules and Schedules: Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies” (“ASU 2010-21”), was issued to conform the SEC’s reporting requirements to the terminology and provisions in ASC 805, Business Combinations, and in ASC 810-10, Consolidation.ASU No. 2010-21 was issued to reflect SEC Release No. 33-9026, “Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies,” which was effective April 23, 2009. The ASU also proposes additions or modifications to the XBRL taxonomy as a result of the amendments in the update.

In August 2010, the FASB issued ASU 2010-22, “Accounting for Various Topics: Technical Corrections to SEC Paragraphs” (“ASU 2010-22”), which amends various SEC paragraphs based on external comments received and the issuance of SEC Staff Accounting Bulletin (SAB) No. 112, which amends or rescinds portions of certain SAB topics.  The topics affected include reporting of inventories in condensed financial statements for Form 10-Q, debt issue costs in conjunction with a business combination, sales of  stock by subsidiary, gain recognition on sales of business, business combinations prior to an initial public offering, loss contingent and liability assumed in business combination, divestitures, and oil and gas exchange offers. 

In December 2010, the FASB issued the FASB Accounting Standards Update No. 2010-28 “Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”).Under ASU 2010-28, if the carrying amount of a reporting unit is zero or negative, an entity must assess whether it is more likely than not that goodwill impairment exists. To make that determination, an entity should consider whether there are adverse qualitative factors that could impact the amount of goodwill, including those listed in ASC 350-20-35-30. As a result of the new guidance, an entity can no longer assert that a reporting unit is not required to perform the second step of the goodwill impairment test because the carrying amount of the reporting unit is zero or negative, despite the existence of qualitative factors that indicate goodwill is more likely than not impaired. ASU 2010-28 is effective for public entities for fiscal years, and for interim periods within those years, beginning after December 15, 2010, with early adoption prohibited.

In December 2010, the FASB issued the FASB Accounting Standards Update No. 2010-29 “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amended guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

NOTE 3 – GOING CONCERN

As reflected in the accompanying financial statements, the Company had a deficit accumulated during the development stage of $307,148 at March 31, 2011 and had a net loss of $14,528 and net cash used in operating activities of $5,308 for the interim period then ended, respectively, with no revenues earned since inception.

While the Company is attempting to commence operations and generate revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations.  Management intends to raise additional funds by way of a public or private offering.  Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern.  While the Company believes in the

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viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect.  The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.

The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE 4 – OFFICE EQUIPMENT

Office equipment, stated at cost, less accumulated depreciation at March 31, 2011 and June 30, 2010 consisted of the following:

	Estimated Useful Life (Years)	March 31, 2011			June 30, 2010
Office equipment	5	$	1,288		$	1,288
			1,288			1,288
Less accumulated depreciation			(759	)		(565	)
		$	529		$	723

Depreciation expense for the periods ended March 31, 2011 and 2010 was $194 each.

NOTE 5 – EXCLUSIVE TECHNOLOGY LICENSE

On September 3, 2007 (“Effective Date”), the Company acquired an exclusive technology license (“Agreement”) for the Territory of North America, comprising Canada, the United States and Mexico to manufacture or assemble and market the AO-System water treatment system (AO – Anodic Oxidation) from Hydrosystemtechnik, GmbH (“Grantor”), a German corporation.  The Company has agreed to pay a licensing fee as follows: (i) €10,000 (equivalent to $13,635 at September 3, 2007) within 120 days of the  Effective Date; (ii) €20,000 (equivalent to $27,270 at September 3, 2007) on November 30, 2008; and (iii) €20,000 (equivalent to $27,270 at September 3, 2007) upon AO-System being certified and approved by the United States Environmental Protection Agency (“EPA”) for selling on a commercial basis in the United States, or €50,000 (equivalent to $68,175 at September 3, 2007) in aggregate, all of which are non-refundable and may be recouped from the future Product Royalty in perpetuity at ten percent (10%) of the Net Selling Price on all AO water treatment systems assembled or manufactured by the Company or a subcontract manufacture utilized by the Company and paid for by customers of the Company due and payable quarterly within 30 days from the last day of the quarter provided the Company exercises its right to manufacture or assemble AO-Systems.  In the event the Company does not manufacture or assemble AO-Systems, the Company pays no royalty on finished units purchased from GRANTOR and resold to customers of the Company, the license fees will no longer be considered prepaid royalties   and the Company will amortize prepaid royalties over the remaining legal life of the patent of AO System, or estimated useful life, or the term of the contract, whichever is shorter in the event that the Company decides not to manufacture or assemble AO-System.

The Company’s exclusive license right to sell finished AO Units in the territory is contingent upon the Company achieving minimum annual sales volume as defined in Table 1 of Appendix B of this Agreement among other terms and conditions at the end of each business year, beginning with the third (3^rd) anniversary after the effective date of this Agreement.  In the event the objectives defined in years three (3) through five (5) of Table 1 in Appendix B are not attained at the end of each business year, this agreement shall, at the option of the GRANTOR, automatically revert to a non-exclusive marketing agreement and the Company will no longer have the right in manufacturing or assembling of AO Systems.

The Company determined that the (iii) payment required under the exclusive license agreement upon approval of U.S. EPA is a contractual liability instead of contingent liability as the AO system has been certified and approved by the European Union for selling on a commercial basis in Europe and the United States Environmental Protection Agency’s certification and approval for selling on a commercial basis in the United States is a matter of procedure and recorded deferred license fees and related license fees payable of $68,175, €50,000 measured in U.S. Dollar at September 3, 2007, the transaction date upon signing of the Exclusive License Agreement.

The Company paid the first installment of €10,000 with $14,892 on December 17, 2007 and the second installment of €20,000 due on November 30, 2008 and paid $26,486 on January 26, 2009, respectively.  The due date for the third installment of €20,000 is undeterminable pending on EPA approval.

The Company determined that since it is currently unable to secure EPA approval of the AO-System in order to begin selling in the United States within the time period specified in the agreement, the agreement has reverted to a non-exclusive marketing agreement.  Consequently, the Company has impaired the entire balance of $68,175 of the deferred licensing fee on June 30, 2010.  

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NOTE 6 – STOCKHOLDERS’ EQUITY (DEFICIT)

Issuance of common stock

The Company was incorporated on May 12, 2006.  In May 2006, 200,000 shares of its common stock were sold to the Company’s founder and President at $0.01 per share for $2,000 in cash.

During the fiscal year ended June 30, 2007, the Company sold 300,000 shares of its common stock to the Company’s founder and President at $0.01 per share for $3,000 in cash.

During the fiscal year ended June 30, 2008, the Company sold 1,000,000 shares of its common stock at $0.10 per share for $100,000 in cash.

On November 25, 2008, the Company’s Board of Directors authorized a Regulation D, Rule 504 stock sale and entered into a definitive agreement relating to the private placement of $7,500 of its securities through the sale of 15,000 shares of its common stock at $0.50 per share inclusive of a stock warrant to purchase 15,000 shares of its common stock exercisable at $1.00 expiring three (3) years from the date of issuance with Ryan Edington, the brother of Jerod Edington, the Vice-president and Chief Operating Officer of the Company.  The fair value of these warrants granted, estimated on the date of grant, was $3,300, which has been recorded as additional paid-in capital, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected option life (year)	3
Expected volatility	163.00%
Risk-free interest rate	3.34%
Dividend yield	0.00%

On January 23, 2009, the Company sold 250,000 shares of its common stock at $0.20 per share to Ron Kunisaki, the president of the company, for $50,000 in cash.

On July 25, 2009, pursuant to the Bridge Loan Agreement entered into by Triax Capital Management and Hydrodynex, Inc., dated July 24, 2008, Triax Capital Management exercised the conversion rights of the promissory note at the agreed rate of $0.25 per share. The original loan to the Company was in the amount of $4,000, and the 365 days of interest at 8% per annum of $320, equates to a conversion value of 17,280 shares.

On August 23, 2009, pursuant to the Bridge Loan Agreement entered into by Kyle Drexel and Hydrodynex, Inc., dated August 22, 2008, Mr. Drexel exercised the conversion rights of the promissory note at the agreed rate of $0.25 per share. The original loan to the Company was in the amount of $5,000, and the 365 days of interest at 8% per annum of $400, equates to a conversion value of 21,600 shares.

On September 26, 2009, the Company sold 30,000 shares of common stock at $0.25 per share for $7,500 in cash.

On November 9, 2009, the Company sold 140,000 shares of common stock at $0.25 per share for $35,000 in cash.

Stock option plan

On May 19, 2006, the Company’s board of directors approved the adoption of the “2006 Non-Qualified Stock Option and Stock Appreciation Rights Plan” (“2006 Plan”) by unanimous consent.  The 2006 Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock.  A total of 1,000,000 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan.  The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.  Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises.

On June 30, 2008, the Board of Director of the Company approved and granted stock options to purchase an aggregate of 85,000 shares of its common stock, par value $.001 per share (the “Common Stock”) at $0.25 per share expiring on June 30, 2013, five (5) years from the date of issuance, vested upon issuance.

On November 21, 2008, an officer and director of the Company resigned and surrendered his outstanding stock option to purchase 15,000 shares of the Company’s common stock to the Company.

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The fair value of each option grant estimated on the date of grant uses the Black-Scholes option-pricing model with the following weighted-average assumptions:

	June 30, 2008
Expected option life (year)		5
Expected volatility		85.000%
Risk-free interest rate		3.375%
Dividend yield		0.000%

The fair value of the stock options issued in June 2008 under the 2006 Plan using the Black-Scholes Option Pricing Model was $4,250 at the date of grant, all of which have being recognized as stock based compensation and so included in the statements of operations upon issuance.

For the interim period ended March 31, 2011, the Company did not grant any stock options nor record any stock-based compensation.

The table below summarizes the Company’s stock option activity through March 31, 2011:

	Number of  Option Shares			Exercise Price Range  Per Share			Weighted  Average Exercise Price			Fair Value at Date of Grant		Aggregate  Intrinsic  Value
Balance, June 30, 2007		-			$	-		$	-		-		$	-
Granted		85,000				0.25			0.25		4,250			-
Canceled		-				-			-					-
Exercised		-				-			-					-
Expired		-				-			-					-
Balance, June 30, 2008		85,000				0.25			0.25		4,250			-
Granted		-				-			-					-
Canceled		(15,000	)			0.25			0.25		-			-
Exercised		-				-			-					-
Expired		-				-			-					-
Balance, June 30, 2009		70,000			$	0.25		$	0.25		4,250		$	-
Granted		-				-			-					-
Canceled		-				-			-		-			-
Exercised		-				-			-					-
Expired		-				-			-					-
Balance, June 30, 2010		70,000			$	0.25		$	0.25		4,250		$	-
Granted		-				-			-		-			-
Canceled		-				-			-		-			-
Exercised		-				-			-		-			-
Expired		-			$	-		$	-		-		$	-
Balance, March 31, 2011		70,000				0.25			0.25		4250			-
Vested and exercisable, March 31, 2011		70,000			$	0.25		$	0.25		4,250		$	-
Unvested, March 31, 2011		-			$	-		$	-		-		$	-

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The following table summarizes information concerning outstanding and exercisable stock options as of March 31, 2011:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Average Remaining Contractual Life  (in years)		Weighted Average Exercise Price		Number Exercisable		Average Remaining Contractual Life  (in years)		Weighted Average Exercise Price
$0.25		70,000		3.0	$	0.25		70,000		2.0	$	0.25
$0.25		70,000		3.0	$	0.25		70,000		2.0	$	0.25

As of March 31, 2011, there were 930,000 shares of stock options remaining available for issuance under the 2006 Plan.

Warrants

(i) In connection with the issuance of convertible notes payable issued between July 24, 2008 and August 23, 2008, the Company issued warrants to purchase 12,000 shares of its common stock in aggregate to the note holder with an exercise price of $1.00 per share and expiring three (3) years from the date of issuance, all of which have been earned upon issuance. The Company determined the fair value of the warrants issued was $2,640 using the Black-Scholes Option Pricing Model.

(ii) In connection with the sale of 15,000 shares of its common stock on November 25, 2008, the Company issued warrants to purchase 15,000 shares of its common stock to the investor with an exercise price of $1.00 per share and expiring three (3) years from the date of issuance, all of which have been earned upon issuance. Company determined the fair value of the warrants issued was $3,300 using the Black-Scholes Option Pricing Model.

The table below summarizes the Company’s warrants activity though March 31, 2011:

	Number of  Warrant Shares		Exercise Price Range  Per Share			Weighted  Average Exercise Price			Fair Value at Date of Issuance		Aggregate  Intrinsic  Value
Balance, June 30, 2008		-		$	-		$	-	$	-		$	-
Granted		27,000			1.00			1.00		5,940			-
Canceled		-			-			-		-			-
Exercised		-			-			-		-			-
Expired		-			-			-		-			-
Balance, June 30, 2009		27,000		$	1.00		$	1.00	$	5,940		$	-
Granted		-			-			-		-			-
Canceled		-			-			-		-			-
Exercised		-			-			-		-			-
Expired		-			-			-		-			-
Balance, June 30, 2010		27,000		$	1.00		$	1.00	$	5,940		$	-
Granted		-			-			-		-			-
Canceled		-			-			-		-			-
Exercised		-			-			-		-			-
Expired		-		$	-		$	-	$	-		$	-
Balance, March 31, 2011		27,000			1.00			1.00		5940			-
Earned and exercisable, March 31, 2011		27,000		$	1.00		$	1.00	$	5,940		$	-
Unvested, March 31, 2011		-		$	1.00		$	1.00	$	-		$	-

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The following table summarizes information concerning outstanding and exercisable warrants as of March 31, 2011:

	Warrants Outstanding						Warrants Exercisable
Range of Exercise Prices	Number Outstanding		Average Remaining Contractual Life  (in years)		Weighted Average Exercise Price		Number Exercisable		Average Remaining Contractual Life  (in years)		Weighted Average Exercise Price
$1.00		27,000		2.00	$	1.00		27,000		1.00	$	1.00
$1.00		27,000		2.00	$	1.00		27,000		1.00	$	1.00

NOTE 7 – RELATED PARTY TRANSACTIONS

Due to stockholder

The vice president and Chief Operating Officer of the Company advanced $8,740 in aggregate to the Company for working capital purposes and the Company repaid $1,440 in aggregate for the interim period ended March 31, 2011. The remaining balance of advances from the vice president and Chief Operating Officer as of March 31, 2011 was $7,300. Such amounts are unsecured, non-interest bearing and are due on June 30, 2011.

Free office space from its stockholder and Chief Operating Officer

The Company has been provided office space by its stockholder and Chief Operating Officer at no cost.  The management determined that such cost is nominal and did not recognize the rent expense in its financial statements.

NOTE 8 – SUBSEQUENT EVENTS

The Company has evaluated all events that occur after the balance sheet date through the date when the financial statements were issued to determine if they must be reported.  The Management of the Company determined that there were certain reportable subsequent events to be disclosed as follows:

On May 4. 2011, the Chief Operating Officer of the Company advanced $2,000 to the Company for a period of 180 days with no interest payable.

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

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND INVOLVE A HIGH DEGREE OF RISK AND UNCERTAINTY. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN OR INCORPORATED BY REFERENCE INTO THIS FORM 10-Q ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN THIS DOCUMENT, THE WORDS “ANTICIPATE,” “ESTIMATE,” “PROJECT,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS DUE TO RISKS AND UNCERTAINTIES THAT EXIST IN OUR OPERATIONS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS INCLUDING AMONG OTHERS, THE RISK THAT OUR PRODUCT DEVELOPMENT PROGRAMS WILL NOT PROVE SUCCESSFUL, THAT WE WILL NOT BE ABLE TO OBTAIN FINANCING TO COMPLETE ANY FUTURE PRODUCT DEVELOPMENT, THAT OUR PRODUCTS WILL NOT PROVE COMPETITVE IN THEIR MARKETS. THESE RISKS AND OTHERS ARE MORE FULLY DESCRIBED IN OUR ANNUAL REPORT ON FORM 10-K. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.

ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS INCLUDED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GIVE ANY ASSURANCES THAT THESE EXPECTATIONS WILL PROVE TO BE CORRECT. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO SUCH FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

The following discussion and analysis should be read in conjunction with our financial statements and the notes thereto appearing in Part I, Item 1.

General

Hydrodynex, Inc. was organized under the laws of the state of Nevada on May 12, 2006 and is doing business as a marketer of the AO-Systems^® water treatment units.  We intend to sell, manufacture or assemble, and distribute the AO-Systems products in North America under the terms of our License agreement with Hydrosystemtechnik GmbH.  Since commencement of operations in 2006, substantially all of our efforts to date have been devoted to and limited primarily to organization, initial capitalization, market research, producing marketing materials and a website, securing a marketing agreement, preparing a comprehensive business and operating plan, evaluating the regulatory requirements to sell water treatment systems in the U.S., Canada and Mexico, and undertaking a marketing feasibility study.   Extensive research has been done on competing technologies and the water contaminants that most adversely affect water systems at the present time.  Legionella protection is the strongest market opportunity identified by Hydrodynex to date.  We will make Legionella our primary target market because of its wide prevalence and the high percentage of death resulting from infection.

Under our license agreement with our licensor Hydrosystemtechnik, we paid a non-refundable license fee creditable to royalty payments in the amount of €10,000 in 2007.  We were previously obligated to make a second non-refundable license fee in the amount of €20,000 on June 1, 2008.  Under the terms of the amended license agreement, Hydrosystemtechnik agreed in writing to an extension of the due date for the second license payment from June 1, 2008 to January 31 2009, and the second license payment was paid in full by that deadline.  A third license fee in the amount of €20,000 will be due upon certification and approval of the AO-Systems^® by the US Environmental Protection Agency for commercial sales in the United States

We are currently organizing our distribution/dealer and direct marketing programs, which consists of defining targets for placing our products in commercial buildings, retirement homes, cooling towers, and military installations. Our market focus will be on establishing the defined sales channels and supporting them with meaningful marketing programs to the extent that funds are available.  We have not sold any products to date and have generated no revenues from operations.

Our plan of operation for the next 12 months will be the execution of our strategic business plan.  Hydrodynex intends to operate in three phases as follows:

Phase 1: Finalization of the Strategic Marketing Plan, initial start-up capital realization through a second private stock offering, undertaking independent testing, securing EPA and State certification, and hiring/training sales and technical personnel.

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Phase 2: Initiation of marketing and sales activities in selected markets in North America (U.S., Canada, and Mexico).  Full scale commercialization of the AO-System^®, including industrialization and after-sale service agreements, for the markets covered by Hydrodynex.  As part of its effort to commercialize the AO-System^®, Hydrodynex plans to offer mobile systems which may use a film pouch packaging system.

Phase 3:  Set-up manufacturing in the U.S. when it becomes a viable, profit-increasing option.

We need to raise a minimum of $400,000 to complete the first phase of our plan of operations and $2,000,000 to complete the second phase, for a total of $2,400,000 to implement both phases of our business plan.

Subject to raising additional capital, our projected monthly rate of expenditure is estimated at $4,000 for general and administrative costs.  We anticipate that supporting our operations and implementing Phase I of our business plan for the next 12 months will require a minimum of $400,000.  This includes approximately $30,000 for accounting, legal and auditing fees.  The balance of the funds would be utilized for independent testing, purchase of equipment for testing, marketing materials, advertising, insurance, employee training, travel, office lease, licenses, shipping and import costs, employee salary, and other budget costs.

Hydrodynex’ Exclusive Technology License Agreement

We entered into a Marketing, Distribution and License Agreement with Hydrosystemtechnik GmbH September 3, 2007.  On August 30, 2008, we entered into an Amended Marketing, Distribution and License Agreement, or amended license agreement, with Hydrosystemtechnik, which has the same effective date as the original license agreement, September 3, 2007, and supersedes the original license agreement.  Under the amended license agreement, we were granted the right to sell water disinfection systems based on the AO-System^® technology in all markets (except the dental market) in Canada, the United States, and Mexico on an exclusive basis for a period of three years after the effective date of the license agreement.  The license was to remain exclusive subject to Hydrodynex (a) leasing or purchasing an AO-System^® prior to November 30, 2009, as extended by the licensor, and (b) obtaining, by March 3, 2010, verification and certification of the AO-System^® technology by the U.S. EPA necessary for commercialization and selling water disinfection systems in whole or in part within the United States, and could be changed to a non-exclusive license at the choosing of the licensor if those items were not satisfied.  Those items were not satisfied, but the licensor has not as of this time reduced the exclusive license to a non-exclusive status.  In the event the licensor reverts our license to non-exclusivity, the licensor must keep Hydrodynex’ non-exclusive license status until September 3, 2011, and can cancel the license at any point beyond that if the terms of the license agreement are not met.  Specifically, if we do not perform a minimum annual sales volume of 100.000 EUR in each business year subsequent to the third anniversary year after the effective date (Sept. 3, 2007).  In addition, in order to maintain the exclusivity of the license, we are obligated to (a) make application to six states in the Western U.S. for certification of the AO-System^® technology within 90 days after receiving the NSF and EPA verification, (b) sell, deliver and install at least one AO-System^® in the U.S. in the two year exclusivity period following technology verification, and (c) we are required to demonstrate financial responsibility in the form of a bank credit line or equity funding of not less than $500,000 to accomplish the objectives necessary to retain the exclusivity of the license.  None of these criteria has been met and most likely will not be met due to the time that is needed for NSF and EPA verification and the lack of capital currently available to the company.

We plan to undertake to secure technology verification from NSF, an independent third party testing laboratory, accredited by the EPA, to legally sell AO-Systems^® in the United States, but we have not initiated this process because we have yet to pay the remaining balance of €17,625 for the AO-System® test reactor unit that has been built for us by our licensor Hydrosystemtechnik.  Once we have completed our payment for the test reactor unit we will arrange delivery of the unit to NSF in Ann Arbor, Michigan for testing.  When we have sufficient funds to pay the remaining balance of the test unit, arrangements for payment and shipping to the U.S. of the test reactor unit will be made.  

We were also required, beginning year three after the effective date, or September 3, 2009, to meet certain minimum annual sales targets, based on net purchase value, for sales of AO-System^® products in the North American territory, which increase from €30,000 in year three to €500,000 in year six and thereafter, in order to maintain the exclusivity of the license.  We have failed to meet the minimum annual sales targets at in each year and the licensor, Hydrosystemtechnik GmbH, has the option to revert the license agreement to a non-exclusive marketing agreement.  We have paid a non-refundable license fee in the amount of €10,000, and we were previously obligated to make a second non-refundable license fee in the amount of €20,000 on June 1, 2008.  Under the terms of the amended license agreement, Hydrosystemtechnik agreed in writing to an extension of the due date for the second license payment from June 1, 2008 to January 31, 2009, and the second license payment was paid in full by that deadline.  A third license fee in the amount of €20,000 will be due upon certification and approval of the AO-Systems^® by the US Environmental Protection Agency for commercial sales in the United States.  We were also required to attain and maintain minimum annual sales volume of €500,000 in order to have the right to manufacture water disinfection systems based on the AO-System^® technology and sell them in the licensed territory.  If after September 3, 2011 we do not maintain minimum annual sales volume of €500,000 in any two consecutive years, the right to manufacture will expire automatically in the subsequent year.  We are obligated to pay a royalty on the products actually assembled or manufactured and sold to third parties in the amount of 10% of the net selling price

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on all AO-Systems^®.  We are not obligated to pay a royalty on finished AO-Systems^® purchased from Hydrosystemtechnik and resold.  We are also obligated to pay fifty percent of the direct costs related to preparing and prosecution of patents and patent applications in the U.S., Canada or Mexico,, including legal fees, filing fees maintenance fees and transaction costs, so long as the license agreement remains in effect.

The license agreement terminates after ten years, with an option by us to extend the license for an additional ten years on an exclusive basis, as long as the required minimum annual sales volume is maintained.  The licensor, Hydrosystemtechnik GmbH, has the right to terminate the license agreement, after a notice and cure period, if we are in default of any obligation in the agreement, are adjudged bankrupt, become insolvent or similar events, or if we do not maintain a minimum annual sales volume of €30,000 in the third year and €100,000 in each business year subsequent to the third year after the effective date (which means meeting the €100,000 minimum annual sales volume for each year beginning September 3, 2010).

Product Research and Development Plans

We do not plan to engage in any research and development at this time.  The product has been developed by our licensor, Hydrosystemtechnik, GmbH and is ready for sale to the consumer.

Results of Operations

Since Hydrodynex was formed on May 12, 2006, it has not earned any revenues and has incurred a net loss since its inception of $307,148 through March 31, 2011.  The following table provides selected financial data about our company for the period ended March 31, 2011 and June 30, 2010, respectively.

Balance Sheets Data	March  31, 2011		June 30, 2010
Cash	$	170	$	178
Computer equipment, net		529		723
Prepaid patent application costs		6,997		6,997
Total assets	$	7,696	$	7,898
Total liabilities	$	93,234	$	78,908
Stockholders’ equity (deficit)	$	(85,538)	$	(71,010)

For the nine months ended March 31, 2011, our total operating expenses were $10,748 as compared to $32,390 for the nine month period ending March 31, 2010.  The total operating expenses were lower in the current interim period due mainly to a decrease in legal and accounting fees, as well as consulting fees.  We do not presently expect our expenses to increase in next twelve months.

Our cash in the bank at March 31, 2011 was $170.  Net cash used in operating activities during the nine months ended March 31, 2011 was $5,308, compared to net cash used in operating activities during the nine months ended March 31, 2010 of $48,733.  Our operating expenses have decreased between these time periods by $21,642 and until the company receives additional financing, these operating expenses will most likely stay the same as for the three months ended March 31, 2011.  Legal and accounting fees, as well as consulting fees, have decreased for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010, which has reduced operating expenses.  We do not presently expect our expenses to increase in next three months. The nine months ended March 31, 2011 included the following major expenses:  

1.  Legal and Accounting - $7,550

2.  Consulting Fees - $0

3.  General and Administrative Fees - $3,004

4. Depreciation Expenses- $194

Net cash provided by financing activities since inception through March 31, 2011 was $258,900 from the sale of our common stock, proceeds from convertible notes payable, and accrued expenses from a related party.

In its report on our June 30, 2010 audited financial statements, our auditors expressed an opinion that there is substantial doubt about our ability to continue as a going concern.  Our financial statements do not include any adjustments that may result from the outcome of this uncertainty.  We have been in the developmental stage and have had no revenues since inception. Our continuation as a going concern is dependent upon future events, including our ability to raise additional capital and to generate positive cash flows.  There can be no assurances to that effect.

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Liquidity and Capital Resources

Since inception, we have financed our operations from private placements of equity securities and loans from shareholders.  We do not have any available lines of credit.  As of March 31, 2011, we had cash in the amount of $170.  We did not raise any capital during the quarter ended March 31, 2011 from financing activities.  We will need to raise additional capital, take loans, or generate revenue by the end of March or curtail our operations.

We raised a total of $100,000 pursuant to Rule 504 of Regulation D of the Securities Act of 1933 in December 2007.  In July and August 2008, we raised $12,000 and issued a convertible promissory note in that amount and 12,000 three year warrants exercisable at $1 per share to three investors as part of a $50,000 bridge loan.  One investor was repaid $3,000 plus $240 in interest after the year bridge loan was due.  On July 25, 2009, pursuant to the Bridge Loan Agreement entered into by Triax Capital Management and Hydrodynex, Inc., dated July 24, 2008, Triax Capital Management exercised the conversion rights of the promissory note at the agreed rate of $0.25 per share. The original loan to the Company was in the amount of $4,000, and the 365 days of interest at 8% per annum of $320, equates to a conversion value of 17,280 shares.  On August 23, 2009, pursuant to the Bridge Loan Agreement entered into by Kyle Drexel and Hydrodynex, Inc., dated August 22, 2008, Mr. Drexel exercised the conversion rights of the promissory note at the agreed rate of $0.25 per share. The original loan to the Company was in the amount of $5,000, and the 365 days of interest at 8% per annum of $400, equates to a conversion value of 21,600 shares.  On September 26, 2009, we entered into a definitive agreement relating to the private placement of $7,500 of our securities through the sale of 30,000 shares of its common stock at $0.25 per share to a single, accredited investor.  In November 2009, we raised $35,000 and issued 140,000 shares of common stock at $.25 per common share to a single, accredited investor.  

Our Vice President and Chief Operating Officer advanced $5,300 to our company for working capital purposes during the interim period ended December 31, 2010.  Such amount is unsecured, non-interest bearing, and matures on June 30, 2011.

We do not have sufficient capital resources to carry on operations past May 2011.  We cannot assure you that we will generate sufficient additional capital or revenues, if any, to fund our operations beyond May 2011, but we plan to raise additional capital in a private stock offering to secure funds needed to finance our plan of operation for at least the next twelve months, or enter into loans from existing shareholders to support operations.  We are pursuing potential equity financing, sub-licensing and other collaborative arrangements that may generate additional capital for us.  However, these are forward-looking statements, and there may be changes that could consume available resources before such time. Our long term capital requirements and the adequacy of our available funds will depend on many factors, including the reporting company costs, public relations fees, technology verification costs, among others.

If we cannot generate sufficient financing or revenues to continue operations, we will suspend or cease operations.  By virtue of our inability to secure financing or generate revenues over the preceding year, we will begin to seek out other sources of cash, including new investors, joint venture and strategic partners or loans from our officers or directors.  If we cease operations, we do not know what we would do subsequently and we have no plans to do anything in such event.  We have no plans to dissolve statutorily at this time, under any circumstances.  We are engaged in general discussions with multiple companies who may be interested in acquiring us.  As of this date there is no definitive agreement signed and there is no assure that any acquisition will be feasible in the future and in the event there is an acquisition, there is no assurance that it will be in the best interest of our shareholders.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared under accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. All significant accounting policies have been disclosed in Note 2 to the financial statements included in this Form 10-Q.  Our critical accounting policies are:

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

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The Company will derive its revenue from sales contracts with customers with revenues being generated upon the shipment of goods upon the Company commencing operations.  Persuasive evidence of an arrangement is demonstrated via invoice, product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the trucking company or third party carrier and title transfers upon shipment, based on free on board (“FOB”) warehouse; the sales price to the customer is fixed upon acceptance of the purchase order and there is no separate sales rebate, discount, or volume incentive.

Foreign currency transactions

The Company has adopted the guidelines as set out in Statement of Financial Accounting Standards No. 52 “Foreign currency translation” (“SFAS No. 52”) for Foreign currency transactions.  Pursuant to Paragraph 15 of SFAS No. 52, foreign currency transactions are transactions denominated in a currency other than U.S. Dollar, the Company’s functional currency.  Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid.  A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction generally shall be included in determining net income for the period in which the transaction is settled. The exceptions to this requirement for inclusion in net income of transaction gains and losses pertain to certain intercompany transactions and to transactions that are designated as, and effective as, economic hedges of net investments and foreign currency commitments.  Pursuant to Paragraph 16, of SFAS No. 52, for other than forward exchange contracts as defined in paragraphs 17-19 of SFAS No. 52, the following shall apply to all foreign currency transactions of an enterprise and its investees: (a) At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction shall be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date as defined in paragraphs 26-28 of SFAS No. 52; and (b) At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity shall be adjusted to reflect the current exchange rate.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not required

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2010.  Based on that evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were ineffective as of March 31, 2011.  The material weaknesses we identified in our annual report on Form 10-K for our fiscal year ending June 30, 2010 have not been remedied due to our lack of sufficient capital resources.

Changes in Internal Control Over Financial Reporting

As of March 31, 2011, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the period ended March 31, 2011, that materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1.  Legal Proceedings

There have been no material changes from the disclosure provided in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Item 1A.  Risk Factors

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

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

None

Item 3.  Defaults Upon Senior Securities

None.

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

None.

Item 5.  Other Information

None.

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Item 6.  Exhibits 

Exhibit Number	Description of Exhibit
3.1	Articles of Incorporation of Registrant(1)
3.2	Bylaws of Registrant(1)
4.1	Form of  2008 Promissory Notes and Warrant Purchase Agreement (2)
4.2	Form of 2008 Common Stock Warrant Purchase Agreement (2)
4.3	Form of 2009 Stock Purchase Agreement (3)
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).

(1)	Filed with the Securities and Exchange Commission on June 30, 2008 as an exhibit, numbered as indicated above, to the Registrant’s registration statement on Form S-1 (file no. 333-152052), which exhibit is incorporated herein by reference.
(2)	Filed with the Securities and Exchange Commission on April 22, 2009, as an exhibit, numbered as indicated above, to the Registrant’s Annual report on Form 10-K/A2 (file no. 000-53506), which exhibit is incorporated herein by reference.
(3)	Filed with the Securities and Exchange Commission on September 28, 2009, as an exhibit, numbered as indicated above, to the Registrant’s Form 8-K (file no. 000-53506), which exhibit is incorporated herein by reference.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Hydrodynex, Inc.
May 23, 2011	By:	/s/ Ronald Kunisaki
		Ronald Kunisaki President and Chief Executive Officer (Principal Executive Officer)
May 23, 2011	By:	/s/ Richard Kunisaki
		Richard Kunisaki Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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