HNO International, Inc. 10-Q/A

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Quarterly Report on Form 10-Q. For further information, see “Note Regarding Forward-Looking Statements.” Results of Operations Three months ended April 30, 2010 and 2009 Our results of operations for the subject three-month periods are summarized as follows: Three Months Ended April 30, 2010 2009 Revenue $ Nil $ Nil Operating expenses 5,419,513 53,965 Net loss (5,515,361 ) (53,965 ) Revenues We did not recognize any revenues for the three months ended April 30, 2010 (the "2010 Second Quarter") and 2009 (the "2009 Second Quarter"). Expenses General and administrative expenses for the three months ended April 30, 2010 increased by $5,365,548 as compared to the 2009 Second Quarter, primarily as a result of share-based compensation totaling $4,615,802, as compared to $0 incurred in the 2009 Second Quarter. The remaining general and administrative expenses reflect increases in travel, legal, and professional fees, incurred, in part, in connection with our efforts to migrate from the advanced development stage to an operating company. Six months ended April 30, 2010 and 2009 Our results of operations for the subject six-month periods are summarized as follows: Six Months Ended April 30, 2010 2009 Revenue $ Nil $ Nil Operating expenses 6,846,225 58,568 Net loss (6,942,073 ) (58,568 ) Revenues We did not recognize any revenues for the six months ended April 30, 2010 (the "2010 Six Month Period") and 2009 (the "2009 Six Month Period"). Subsequent to April 30, 2010, we migrated from a development stage company to an operating company as a result of our acquisition of a biomass energy plant in Salem, India on June 2, 2010. We expect to generate revenues as a result of plant operations, commencing with our fiscal quarter ending October 2010. We also entered into an agreement in July 2010 to acquire a turnkey 18 MW/e biomass power plant located near Chennai, India. We expect to consummate the Chennai acquisition in our current fiscal year. 10 Expenses General and administrative expenses for the six months ended April 30, 2010, increased by $6,787,657 as compared to the six months ending April 30, 2009, primarily as a result of the establishment of field offices in Chennai and the Philippines in the 2010 Six Month Period totaling $1,129,786, development of project sites near Salem and Chennai in the 2010 Six Month Period in anticipation of our acquiring biomass power plants associated such sites totaling $391,332 and share-based compensation totaling $5,116,651. Other significant expenses incurred during the six month period include travel, legal, and professional fees, reflecting, in part, our efforts to migrate from the advanced development stage to an operating company. We expect operating expenses to increase as we place on-line and expand the capacity of power plants we acquire, as well as operating expenses relating to our plantations as more acreage is devoted to growing biomass feedstock for our power plants and for sale to third parties. We do not anticipate compensating our officers, directors, employees and consultants with shares of our common stock during the next six months at the same or similar rate as incurred in the 2010 Six Month Period, although we do intend to grant warrants at exercise prices equal to or greater than the market price of our common stock on the dates of such warrant grants, as well as implementing a stock option program, so as to provide incentives to our officers, directors, employees and consultants. We expect to commence generating revenue in the second half of our current fiscal year, with growth in revenue as operations expand. We also expect that expenditures will increase due to our further acquisition of and expansion of generating capacity at our power plants; but anticipate that that such costs will be offset by the revenue generated from such power plants. Liquidity and Financial Condition Working Capital As of April 30 2010, we had working capital of $24,081, calculated as follows. At April 30, 2010 At October 31, 2009 Percentage Increase/Decrease Current assets $ 2,753,506 $ 16,511 16,676.80 % Current liabilities 2,729,425 551,257 495.13 % Working capital $ 24,081 $ (534,746 ) Our working capital has increased over the six month period ending April 30, 2010 by $558,827. Our current assets have increased by $2,736,995 since October 31, 2009 while our current liabilities have increased by $2,178,168 for the same period. During the six months, we increased our current assets by virtue of prepaid expenses, capital from stock subscriptions, and proceeds from short-term notes payable. Prepaid Expenses We retained Vastani Company SA (“Vastani”) as an advisor pursuant to a Letter of Agreement, dated March 15, 2010. As of April 30, 2010, we are reporting a balance of $699,643 in subscriptions receivable. This represents the balance of monies held in escrow for completed subscriptions. This balance was received from our escrow agent during May 2010. Subscriptions Receivable We have entered into various consulting agreements whereby consultants have been issued shares as compensation for services. We are amortizing the value of the compensation over the terms of the individual agreements and is carrying the unearned portion as prepaid expense. As of April 30, 2010, the value of prepaid consulting is $1,544,105. 11 Current liabilities have increased primarily as a result of expenses payable including, but not limited to, travel and legal and professional fees. We received approximately $220,000 from short term shareholder notes. Over the past six months, we have been transitioning from an advanced development stage entity to an operating company. During the six month period, we have primarily been financed through use of our common stock; through sales to third parties and others and by the issuance of stock as share-based compensation. We currently have 50 highly qualified individuals, located in six different geographic areas, providing services to our company. In part by preserving cash flow through compensating, in whole or part, our services providers, consisting of employees and consultants, through issuances of stock rather than cash payments, we believe that we have acquired assets, including what we hope to be valuable intellectual property rights, and have begun to create the infrastructure required to generate revenues in the near future. While such stock issuances have resulted in dilution to our current shareholders, we note that there are no current liens on any of our assets that could, in the long term, restrict our ability to manage operations and the further implementation of our business model. The following summarizes our cash flows for the six months ending April 30, 2010: Six Months Ended April 30, 2010 2009 Net cash used in operating activities $ (2,471,466 ) $ (58,568 ) Net cash used in investing activities (10,010 ) Nil Net cash provided by financing activities 3,003,115 Nil Effect of exchange rate changes on cash (356,017 ) Nil Net Increase (Decrease) in Cash During the Period $ 165,662 $ (58,568 ) Future Financings We estimate our operating expenses and working capital requirements for the next twelve month period to be as follows: Agronomy field trials $ 800,000 Feasibility studies 600,000 Biomass power plant new build (2.25MW/h) 2,250,000 Biomass power plant acquisitions and upgrade (18MW/h) 1,750,000 Biomass power plant acquisitions and upgrade(1.5MW/h) 5,000,000 Operating expenses 840,000 Management and consulting 612,000 General and administrative 1,234,000 Total $ 13,086,000 We will require additional capital to fund our business and development plan, including our planned acquisition, development, expansion and/or construction of biomass power plants and biomass feedstock plantations. In addition, once the power plants have been constructed, we will need to fund the start-up costs operations of these plants until, if ever, the plants generate sufficient cash flow from their operations to fund the plants' ongoing costs and expenses. We also may encounter unforeseen costs that could also require us to seek additional capital. As a result, our business plan and growth strategy requires that we obtain significant additional financial resources, including resources obtained through debt and/or equity financing. We may not be able to obtain the funding necessary to implement our growth strategy on acceptable terms or at all. An inability to obtain such funding would prevent us from acquiring, developing, expanding and/or constructing any plants or plantations. Furthermore, our business development strategy may not result in significant revenues even if successfully funded. 12 We have not yet identified all of the sources for the additional financing we require, although we do have offers of debt financing from two banks and have, in the past, been able to raise equity capital through the sale of equity interest in our company. Furthermore, we plan to make presentations to major institutions and renewable energy investment funds in June and July 2010 with the view of raising interest for our financing projects. Our ability to obtain additional capital will depend on market conditions, national and global economies, demand for electricity in countries in which we intend to operate power plants, environmental and legal issues affecting power plant operations, weather and other conditions affecting our biomass plantations and other factors beyond our control. The terms of any future debt or equity funding that we may obtain may be unfavorable to us and to our stockholders. Critical Accounting Policies Our significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements included in our amended Annual Report on Form 10-K/A for the year ended October 31, 2009, filed with the Securities and Exchange Commission on March 19, 2010. A discussion of our critical accounting policies and estimates is included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of such Form 10-K/A. There have no material changes to such critical accounting policies or estimates as reported in such amended Annual Report section.