HNO International, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview HNO International focuses on systems engineering design, integration, and product development to generate green hydrogen-based clean energy solutions to help businesses and communities decarbonize in the near term. HNO stands for Hydrogen and Oxygen and our experienced management team has over 13 years of expertise in the green hydrogen production industry. HNO International provides green hydrogen systems engineering design, integration, and products to multiple markets, which include: (i) the zero-emission vehicle and mobile equipment market consisting of hydrogen fuel cell electric passenger vehicles, material handling equipment such as forklifts and airport ground support equipment, as well as the medium and heavy-duty truck market; (ii) the current and emerging hydrogen gas markets encompassing ammonia, fertilizer, steel, mining, electronics, semiconductors, and fuel cell electric vehicles; (iii) and the gasoline and diesel engine emissions and maintenance reduction product and services market. On May 16, 2023, the Company began accepting subscription agreements from investors as part of a $75 million offering under Regulation A. As of January 31, 2024, the Company has issued 2,118,033 shares of common stock under the Regulation A offering. Results of Operations For the Three Months Ended January 31, 2024 and 2023 Revenues. For the three months ended January 31, 2024, we generated no revenue compared to $13,000 for the three months ended January 31, 2023. Revenue generated was from hydrogen engineering services and combustion solutions. Operating Expenses. Operating expenses for the three months ended January 31, 2024 were $523,084 compared to $217,376 for the same period in 2023, an increase of $305,708. This is attributable to the Company’s efforts to expand operations, which resulted in increased costs related to contract labor and general and administrative expenses. As 2024 progressed, we experienced a significant increase in hiring contract labor to support our Research and Development program. We also expanded our staff to support increased sales and marketing efforts. General and Administrative, and Contract Labor Expenses. General and administrative, and contract labor expenses were $222,997 for the three months ended January 31, 2024, as compared to $110,337 during the same period in 2023. Operating expenses changed due to the Company’s efforts to expand operations, resulting in increased costs related to contract labor and general and administrative expenses. Net Loss . We incurred a net loss of $522,717 for the three months ended January 31, 2024, compared to a net loss of $204,374 for the three months ended January 31, 2023. Management will continue to make an effort to lower operating expenses and increase revenue. Forward-Looking Considerations The Company recognizes the possibility of future increases in labor or material costs. Factors such as evolving market conditions, potential inflation, and global economic dynamics are considered. We are actively monitoring these aspects to anticipate and navigate any forthcoming rises in labor or material expenses. Cost-to-Revenue - The Company is assessing alterations in the relationship between cost of sales and revenue. We are examining the factors influencing these changes, including shifts in prices and fluctuations in the volume of services sold. Understanding the impact of these elements is crucial for maintaining a balanced and effective cost-to-revenue structure. Liquidity and Capital Resources We incurred a net loss for the three months ended January 31, 2024 and had an accumulated deficit of $42,132,662 at January 31, 2024. At January 31, 2024, we had a cash balance of $68,869, compared to a cash balance of $235,159 at October 31, 2023. At January 31, 2024, working capital was $980,507, compared to a working capital deficit of $553,284 at October 31, 2023. Our existing and available capital resources are not expected to be sufficient to satisfy our funding requirements through one year from the date of this filing in the absence of share issuances or other sources of financing. 17 We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. We have raised capital through sales of common stock and debt securities. The effect of existing or probable government regulations on our business is not known at this time. Due to the nature of our business, it is anticipated that there may be increasing government regulation that may cause us to have to take serious corrective actions or make changes to the business plan. There are no external sources of liquidity available to the Company at this time. The Company will need to raise additional capital through equity financings or other means in order to continue operations and meet its obligations. Failure to obtain additional funding could have a material adverse effect on our financial condition and the results of operations. Cash Flow For the Three Months Ended January 31, 2024 and 2023 The following table summarizes our cash flows for the periods indicated below: For the Three Months Ended January 31, 2024 For the Three Months Ended January 31, 2023 Cash Used in Operating Activities (394,086 ) (188,614 ) Cash Provided by Financing Activities 391,085 282,000 Net cash provided by (used in) investing activities (163,289 ) (20,379 ) Cash Used in Operating Activities During the three months ended January 31, 2024, cash used in operating activities of $394,086 primarily reflected our net losses for the period, adjusted by non-cash charges such as depreciation and share based compensation, as well as changes in our working capital accounts, primarily consisting of an increase in accrued interest payable, payroll taxes and accounts payable, and a decrease in security deposit. During the three months ended January 31, 2023, cash used in operating activities of $188,614 primarily reflected our net losses for the period, adjusted by non-cash charges of share based compensation, as well as changes in our working capital accounts, primarily consisting of an increase in accrued interest payable, and a decrease in security deposit. Cash Provided by Financing Activities During the three months ended January 31, 2024, cash provided by financing activities was $391,085, which consisted of proceeds from related party note payable of $265,585 and $125,500 in proceeds obtained through the Company’s active Regulation A offering sale of common stock. During three months ended January 31, 2023, cash provided by financing activities was $282,000, which consisted of proceeds from sale of common stock of $282,000. Cash Provided by Investing Activities During the three months ended January 31, 2024, cash used in investing activities was $163,289, which consisted of purchase of property and equipment and long term asset. During the three months ended January 31, 2023, cash used in investing activities was $20,379, which consisted of the purchase of plant and equipment. Going Concern The Company’s financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the three months ended January 31, 2024, the Company incurred a net loss of $522,717 and used cash in operating activities of $394,086. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and the classification of liabilities that might result from this uncertainty. 18 Off-Balance Sheet Arrangements There are no off-balance sheet arrangements with any party. Critical Accounting Policies Our discussion and analysis of results of operations and financial condition are based upon our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible accounts receivable, inventories, valuation of intangible assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. STOCK-BASED COMPENSATION The Company accounts for stock incentive awards issued to employees and non-employees in accordance with FASB ASC 718, Stock Compensation. Accordingly, stock-based compensation is measured at the grant date, based on the fair value of the award. Stock-based awards to employees are recognized as an expense over the requisite service period, or upon the occurrence of certain vesting events. Additionally, stock-based awards to non-employees are expensed over the period in which the related services are rendered. DERIVATIVE LIABILITY In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Paragraph 815-15-25-1 the conversion feature and certain other features are considered embedded derivative instruments, such as a conversion reset provision, a penalty provision and redemption option, which are to be recorded at their fair value as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The Company records the resulting discount on debt related to the conversion features at initial transaction and amortizes the discount using the effective interest rate method over the life of the debt instruments. The conversion liability is then marked to market each reporting period with the resulting gains or losses shown in the statements of operations. In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. The Company follows ASC Section 815-40-15 (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity. The Company utilizes the binomial option pricing model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The binomial option pricing model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time equal to the remaining contractual term of the instrument granted. 19 REVENUE RECOGNITION In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services. The provisions of ASC 606 include a five-step process by which we determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which we expect to be entitled in exchange for those goods or services. ASC 606 requires us to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, we satisfy the performance obligation. We recognize revenue for the sale of our products upon delivery to a customer. RECENT ACCOUNTING PRONOUNCEMENTS In August 2020, the FASB issued ASU 2020-06, Debt— Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This update amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity's own equity and improves and amends the related EPS guidance for both Subtopics. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2023, which means it will be effective for our fiscal year beginning January 1, 2014. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of ASU 2020-06 on our financial statements. Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements. RELATED PARTY TRANSACTIONS Notes Payable, Related Party On November 19, 2021, we issued a note payable in the amount of $20,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and had a maturity date of December 19, 2022. The Company agreed to issue 20,000,000 shares of its common stock for settlement of the $20,000 note payable dated November 19, 2021 to HNO Green Fuels. The note matured on December 19, 2022 and was settled in full on December 26, 2022 with the issuance of these shares. The shares are ‘restricted securities’ under Rule 144 and the issuance of the shares was made in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act of 1933, as amended. On December 1, 2021, the Company issued a note payable in the amount of $500,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum. During the year ended October 31, 2023, $65,000 of principal was repaid. At October 31, 2023, there is $435,000 of principal and $19,199 of accrued interest due on this note. This note had a maturity date of January 1, 2023. On May 31, 2022, the Company issued a note payable in the amount of $590,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and has a maturity date of May 31, 2030. On September 29, 2022, the Company issued a note payable in the amount of $50,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and had a maturity date of September 29, 2022. On October 20, 2022, the Company issued a note payable in the amount of $50,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and had a maturity date of October 20, 2023. On March 1, 2023, the Company issued a note payable in the amount of $50,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and had a maturity date of March 1, 2024. On March 8, 2023, the Company issued a note payable in the amount of $50,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and had a maturity date of March 8, 2024. On March 23, 2023, the Company issued a note payable in the amount of $50,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and had a maturity date of March 23, 2024. On April 3, 2023, the Company issued a note payable in the amount of $50,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and had a maturity date of April 3, 2024. 20 On April 13, 2023, the Company issued a note payable in the amount of $20,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and had a maturity date of April 13, 2024. On April 17, 2023, the Company issued a note payable in the amount of $30,000 to HNO Green Fuels, of which Donald Owens is Chief Executive Officer. This note bears an interest rate of 2% per annum and had a maturity date of April 17, 2024. As of January 31, 2024 and October 31, 2023, these current and long-term notes payable had an outstanding balance of $1,375,000 and $1,375,000, respectively. As of January 31, 2024 and October 31, 2023, the Company has recorded $48,201 and $41,270, respectively in accrued interest in connection with these notes in the accompanying condensed financial statements. Extension of Promissory Notes: On January 17, 2024, the Company entered into an Extension to Promissory Note (the "1 st Extension") with HNO Green Fuels, pursuant to the terms set forth in the 1 st Extension. The 1 st Extension amends the Promissory Note issued on December 1, 2021, extending the Maturity Date to December 31, 2024. All prior defaults were waived by HNO Green Fuels. On January 17, 2024, the Company entered into an Extension to Promissory Note (the "2 nd Extension") with HNO Green Fuels, pursuant to the terms set forth in the 2 nd Extension. The 2 nd Extension amends the Promissory Note issued on September 29, 2022, extending the Maturity Date to December 31, 2024. All prior defaults were waived by HNO Green Fuels. On January 17, 2024, the Company entered into an Extension to Promissory Note (the "3 rd Extension") with HNO Green Fuels, pursuant to the terms set forth in the 3 rd Extension. The 3 rd Extension amends the Promissory Note issued on October 20, 2022, extending the Maturity Date to December 31, 2024. All prior defaults were waived by HNO Green Fuels. On March 1, 2024, the Company entered into an Extension to Promissory Note (the "4 th Extension") with HNO Green Fuels, pursuant to the terms set forth in the 4 th Extension. The 4 th Extension amends the Promissory Note issued on March 1, 2023, extending the Maturity Date to December 31, 2024. All prior defaults were waived by HNO Green Fuels. On March 1, 2024, the Company entered into an Extension to Promissory Note (the "5 th Extension") with HNO Green Fuels, pursuant to the terms set forth in the 5 th Extension. The 5 th Extension amends the Promissory Note issued on March 8, 2023, extending the Maturity Date to December 31, 2024. All prior defaults were waived by HNO Green Fuels. On March 1, 2024, the Company entered into an Extension to Promissory Note (the "6 th Extension") with HNO Green Fuels, pursuant to the terms set forth in the 6 th Extension. The 6 th Extension amends the Promissory Note issued on March 23, 2023, extending the Maturity Date to December 31, 2024. All prior defaults were waived by HNO Green Fuels. On March 1, 2024, the Company entered into an Extension to Promissory Note (the "7 th Extension") with HNO Green Fuels, pursuant to the terms set forth in the 7 th Extension. The 7 th Extension amends the Promissory Note issued on April 3, 2023, extending the Maturity Date to December 31, 2024. All prior defaults were waived by HNO Green Fuels. On March 1, 2024, the Company entered into an Extension to Promissory Note (the "8 th Extension") with HNO Green Fuels, pursuant to the terms set forth in the 8 th Extension. The 8 th Extension amends the Promissory Note issued on April 13, 2023, extending the Maturity Date to December 31, 2024. All prior defaults were waived by HNO Green Fuels. On March 1, 2024, the Company entered into an Extension to Promissory Note (the "9 th Extension") with HNO Green Fuels, pursuant to the terms set forth in the 9 th Extension. The 9 th Extension amends the Promissory Note issued on April 17, 2023, extending the Maturity Date to December 31, 2024. All prior defaults were waived by HNO Green Fuels. Due from Related Party The Company loaned money to HNO Hydrogen Generators, a related party whose CEO is also the Chairman of the Company's Board of Directors. As of January 31, 2024 and October 31, 2023, the Company had a receivable of $56,392 and $56,392, respectively, from HNO Hydrogen Generators. This receivable is unsecured, non-interest bearing, and due on demand. The Company expects to collect the receivable amount. 21 Advances from Related Party During the quarter ended January 31, 2024, Donald Owens, the Company's Chairman of the Board of Directors, advanced the Company $265,585. These advances are non-interest bearing and due on demand. PROPOSED TRANSACTIONS The Company is not anticipating any transactions. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION There were no recent accounting pronouncements that have or will have a material effect on the Corporation’s financial position or results of operations. FINANCIAL INSTRUMENTS The main risks of the Company’s financial instruments are exposed to are credit risk, market risk, foreign exchange risk, and liquidity risk. OUTSTANDING SHARE DATA As of January 31, 2024, the following securities were outstanding: Common Stock: 419,485,085 shares Series A Preferred Stock: 10,000,000 OFF-BALANCE SHEET TRANSACTIONS We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.