HNO International, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. As a result of the divesture of Clenergen India and the joint venture and licensing arrangements now in place in Guyana, Ghana Trinidad and Philippines, the Company’s primary income streams will be through the supply of saplings for energy crops, development fees, distributions from the Company’s joint ventures, sales of biomass feedstock from the Company’s plantations and distributions from other projects in which the Company participates. We are exposed to exchange rate fluctuations due to the fact that we are and are planning on operating in multiple foreign jurisdictions, including India, Ghana and Philippines. Since most of the company’s revenues and costs are paid in the local currency of the subject country of operation, variations in the currency exchange rate between the country of operation and the United States impacts both positively and negatively the reporting results. Results of Operations Three Months Ended July 31, 2011 and 2010 Our result of operations for the subject three month periods are summarized below: Three Months Ended July 31, 2011 2010 Revenue $ Nil $ Nil Cost of Services Nil Nil Operating expenses 761,176 6,137,757 Interest 81,590 61,538 Net loss from continuing operations (842,765 ) (6,190,056 ) Net profit / (loss) from discontinued operations 226,743 (477,028 ) Overall net loss (616,022 ) (6,667,084 ) We did not recognize any revenues for the three months ended July 31, 2011 (the “2011 Third Fiscal Quarter”) and 2010 (the “2010 Third Fiscal Quarter”). We generated $1,276,514 in revenues for the three months ended July 31, 2011 from operating an 18.0 MW/h biomass power plant in Tamilnadu, India, which revenues are being accounted for as part of the discontinued operations of the Company. During the three months ended July 31, 2011, we incurred cost of services for our discontinued operations totaling $302,031 relating to various direct expenses incurred in connection with the generation of power at the 18 MW/h plant. Such expenses include supply costs of biomass and other fuels, electricity charges paid to the state electricity board as open access charges for using the state’s power grid to supply power to third party customers and water charges, as well as maintenance costs relating to the plant. Operating expenses relating to our continuing operations for the three months ended July 31, 2011 decreased by $5,376,581 as compared to the comparative period in 2010. The decrease is primarily due to the lack of stock-based compensation charges during our 2011 Third Fiscal Quarter as compared to significant consulting fees, finance costs and stock-based compensation charges of $3,039,000 incurred in our 2010 Third Fiscal Quarter. These expenses were incurred last year in connection with our retention of three consultants to perform business development and capital raising charges. During our 2011 Third Fiscal Quarter, we incurred interest charges relating to our continuing operations in the amount of $81,590 as compared to interest expense of $61,538 in the 2010 Third Fiscal Quarter. However, the Company also incurred interest charges on its discontinued operations, primarily being the interest charges on the IDBI bank loan for the 18 MW/h plant, in the amount of $470,224 and $ 339,434 for the three months period ended July 31, 2011 and 2010, respectively. 13 Nine Months Ended July 31, 2011 and 2010 Our result of operations for the subject nine month periods are summarized below: Nine Months Ended July 31, 2011 2010 Revenue $ Nil $ Nil Cost of Services Nil Nil Operating expenses 1,729,517 12,959,481 Interest 520,937 68,403 Net loss from continuing operations (2,250,454 ) (13,018,347 ) Net loss from discontinued operations (555,284 ) (1,712,491 ) Overall net loss (2,805,738 ) (14,730,838 ) We did not recognize any revenues for the nine months ended July 31, 2011 (the “2011 Nine Month Period”) and 2010 (the “2011 Nine Month Period”). We generated $5,717,705 in revenues for the nine months ended July 31, 2011 from operating the 18.0 MW/h plant, which is accounted for as part of the discontinued operations of the Company. During the nine months ended July 31, 2011, we incurred cost of servicing our discontinued operations totaling $4,059,100 relating to various direct expenses incurred in connection with the generation of power at the 18 MW/h plant. Such expenses include supply costs for biomass and other fuels, open access charges for using the state’s power grid and water charges, as well as maintenance costs relating to the plant. Operating expenses relating to our continuing operations for the nine months ended July 31, 2011 decreased by $11,229,964 as compared to the 2010 Nine Month Period. The decrease is primarily a result of incurring share-based compensation of $9,265,000 and significant commission, consulting and financing costs in the 2010 Nine Month Period. Share-based compensation for the 2011 Ninth Month Period was $249,000. During the nine month period ended July 31, 2011, we incurred interest charges relating to our continuing operations in the amount of $520,937, compared to an interest expense of $68,403 compared to the 2010 Nine Month Period. The interest charges have increased due to the increase in the loans from shareholders and affiliates which were used to fund the working capital requirement of the Company and its subsidiaries. Also, for the 2011 Nine Month Period, we incurred discontinued operations interest charges on the IDBI bank loan for the 18 MW/h plant in the amount of $1,419,587. As of July 31, 2011, we had loans outstanding totaling $4,587,670 in principal amount with an aggregate weighted interest rate of 8.00% per annum. Such loans primarily are due affiliates and stockholders. We do not anticipate generating operating revenues during our Fiscal Year 2011. In April 2010, we retained four consultants in Ghana to develop projects with the mining companies and local, state and countrywide governments. In November 2009, we retained three consultants in the Philippines to conduct feasibility studies for supplying off-grid electricity on certain islands to a number of mining companies. Additional office staff was retained in the Philippines in April 2010. Significant legal costs and professional fees have been incurred during the nine month ending July 31, 2011 fiscal year as a result of the SEC reporting requirements and public filings. We also incurred significant marketing costs and commission fees in connection with our sales of securities in Germany during the nine month period ending July 31, 2011. We are exposed to exchange rate fluctuations due to the fact that we are operating in and have invested in the Joint Venture Entities that are operating in multiple foreign jurisdictions, including Guyana, Ghana and the Philippines. Since most of our revenues and costs are paid in the local currency of the subject country of operation, variations in the currency exchange rate between the country of operation and the United States can positively or negatively impact the Company’s reporting results. 14 Liquidity and Financial Condition Net cash used in operating activities decreased by $3,163,804 in the nine months period ended July 31, 2011 when compared with the same period in 2010. We incurred a higher net loss in the 2010 Nine Month Period of $14,730,837 as compared to a net loss of $2,805,738 for the 2011 Nine Month Period. For the 2010 Nine Month Period, we incurred significant non-cash expenses, such as share-based compensation of $10,214,632, which has been reduced in the current year. Net cash provided by operating activities of discontinued operations has increased by $1,847,467 primarily due to an increase in inventory and accounts receivable during the third fiscal quarter in 2011. Net cash used in investing activities decreased by $1,395,397 for the nine months ended July 31, 2011 as compared to the 2010 Nine Month Period. In the 2010 Nine Month Period, net cash used in investing activities included an advance of $1,661,520 towards the purchase of a 1.5 MW/h biomass power plant in Tamilnadu, India. The decrease in financing activities between the comparable nine month periods is mainly due to the Company has borrowed less funds from its affiliates and shareholders in 2011 as compared 2010 for working capital purposes. Cash flows from financing activities for the nine months period ended July 31, 2011 was $2,441,262 as compared to $5,356,738 for the similar period in 2010. The effect of the exchange rate adjustment was a loss of $20,106 for the nine months period ended July 31, 2011. The exchange rate adjustment is caused by the differences in the exchange rates from period to period between our functional currency(s) versus our reporting currency and the translation of various items of the financials at different rates depending on their nature. For a comparative period in 2010 , we incurred an exchange rate adjustment of $187,514. We expect to benefit from or incur charges for exchange rate adjustments in all future periods as we will be operating in various countries and exchange rates between the currencies of such countries and the US dollar will continue to fluctuate due to factors beyond our control. We have no current intentions to hedge against currency fluctuations. As of July 31, 2011, our company we had a working capital deficit of approximately $ 4,279,000. We estimate our operating expenses and working capital requirements for the next twelve month period to be as follows: Operating expenses $ 800,000 Management and consulting 1,200,000 General and administrative 1,700,000 Total $ 3,700,000 We anticipate that we will be required to raise funds through private sales of debt and equity securities to fund our operations and execute our business plan. We may also encounter unforeseen costs that could also require us to seek additional capital. Our ability to obtain additional capital will depend on market conditions, national and global economies 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. If we are not successful in raising additional funding on favorable terms, we may be forced to curtail or cease some of all of our operations and/or curtail or elect not to proceed with certain aspects of our business plan. There also are substantial risks regarding to our investment in the Joint Venture Entities, including, but not limited to, those relating to available capital to operate, lack of management control and reliance on Futenco to provide on a timely basis, accurate financial information in order for us to prepare and report our quarterly and annual financial statements and results as required by applicable federal securities laws. Readers should carefully consider such risks, uncertainties and of information with regards to our joint venture and licensing arrangements with Futenco. Critical Accounting Policies Our significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report in form 10K, for our fiscal year ended October 31, 2010, filed with the Securities and Exchange Commission on Febuary 15, 2011. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) in such Annual Report. There have been no material changes to the critical accounting policies or estimates reported in the MD&A section of our audited financial statements for the year ended October 31, 2010 as filed with the SEC. 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk. This item is not applicable to smaller reporting companies.