HNO International, Inc. 10-Q/A

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview HNO International, Inc. 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 14 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. Results of Operations For the three months ended January 31, 2025 and 2024 Revenue For the three months ended January 31, 2025 and January 31, 2024, we generated no revenue. Operating Expenses General and Administrative, and Contract Labor expenses were $5,394,662 for the three months ended January 31, 2025, compared to $464,005 during the same period in 2024, an increase of $4,930,657. The current period included $5,092,557 of stock-based compensation expense. No stock-based compensation was recorded during the same period in 2024. Excluding stock-based compensation, general and administrative expenses decreased by $161,900, primarily due to reduced professional fees, lower consultant costs, and a general reduction in administrative overhead. Depreciation and amortization expense increased by $18,013 to $54,449 for the three months ended January 31, 2025, compared to $36,436 for the same period in 2024, reflecting depreciation on additions to property and equipment. Advertising and marketing expenses were $5,350 for the three months ended January 31, 2025, compared to $0 for the same period in 2024. The increase reflects the Company’s expanded outreach and promotional activities supporting its hydrogen engineering and combustion solutions offerings. Net Loss Net loss for the three months ended January 31, 2025, was $5,461,393 compared to a net loss of $507,073 during the same period in 2024. 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, 2025 of $5,461,393 and had an accumulated deficit of $50,896,087 at January 31, 2025. At January 31, 2025, we had a cash balance of $47,900, compared to a cash balance of $20,255 at October 31, 2024. At January 31, 2025, the working capital deficit was $2,448,140, compared to a working capital deficit of $1,969,965 at October 31, 2024. 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. 22 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, 2025 and 2023 The following table summarizes our cash flows for the periods indicated below: For the Three months Ended January 31, 2025 For the Three months Ended January 31, 2024 Cash Used in Operating Activities $ (168,412 ) $ (496,703 ) Cash Provided by Financing Activities 374,000 491,085 Net cash used in investing activities $ (177,943 ) $ (160,739 ) Cash Used in Operating Activities During the three months ended January 31, 2025, cash used in operating activities amounted to $(168,412), primarily reflecting our net loss of $(5,461,393). This impact was largely offset by non-cash items, primarily $5,092,557 stock-based compensation, along with depreciation and amortization of $54,449. Additionally, there was an increase in accounts payable of $121,146, an increase in accrued payroll of $17,476, and an increase in accrued interest payable of $6,931. During the three months ended January 31, 2024, cash used in operating activities totaled $(496,703), primarily reflecting our net loss of $(507,073). This was offset by non-cash charges such as depreciation and amortization amounting to $36,436. Additionally, there was an increase in accrued interest payable and a decrease in payroll taxes, contributing to the overall cash movements during the period. Cash Used in Financing Activities During the three months ended January 31, 2025, cash provided by financing activities was $374,000, which consisted of proceeds from related party advances of $359,000, proceeds from the sale of common stock and proceeds from the sale of common stock of $15,000. During the three months ended January 31, 2024, cash provided by financing activities was $491,085, which consisted of proceeds from related party advances of $365,585 and proceeds from the sale of common stock of $125,500. Cash Provided by Investing Activities During the three months ended January 31, 2025, cash used in investing activities was $(177,943), which consisted of the purchase of property and equipment and long-term assets. During the three months ended January 31, 2024, cash used in investing activities was $(160,739), which consisted of the purchase of plant and equipment and the purchase long term asset. 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, 2025, the Company incurred a net loss of $5,461,393 and used cash in operating activities of $168,412, and on January 31, 2025, had stockholders’ deficit of $1,751,227. 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. 23 Management is actively seeking additional sources of capital through the sale of equity, advances from related parties, and exploring strategic partnerships. The Company is also focused on attracting suitable investors to support its business plan without relying heavily on existing cash reserves. Additionally, management is implementing cost-saving measures and exploring opportunities to diversify through acquisitions or entering into new markets. However, there can be no assurance that these efforts will result in sufficient funding, and the Company may continue to face substantial uncertainty regarding its ability to achieve profitable operations and sustain its business. 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-based compensation in accordance with Accounting Standards Codification (“ASC”) 718 Compensation - Stock Compensation (“ASC 718”). ASC 718 requires that the cost of equity instrument awards, issued in exchange for services, including those issued to employees and predominantly to consultants, be measured at the grant-date fair value. The Company does not adhere to a formal stock-based compensation plan; rather, it issues stock awards on a discretionary basis as part of compensation agreements with selected consultants and employees. Compensation for stock-based awards is recognized as a non-cash expense on the income statement. The fair value of restricted stock grants is determined using the closing market price on the grant date, adjusted for an appropriate discount to reflect the restrictions on transferability and marketability of the shares. The discount is calculated using a weighted average of comparable restricted stock transactions, which better reflects the economic impact of larger issuances and provides a more accurate representation of fair value under ASC 718. The cost is recognized over the period during which the award recipient is required to perform services, typically known as the vesting period. The total compensation cost related to vested stock-based awards is recognized after adjusting for estimated forfeitures at the time of vesting. The expense related to stock-based compensation is included within the same income statement lines as cash compensation for the consultants and employees who receive the awards. As of the report date, the Company has not established any plans to issue dividends on stock-based awards. Any tax benefits arising from deductions for these awards are recorded in additional paid-in capital, provided they exceed the cumulative compensation cost recognized. 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. 24 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. REVENUE RECOGNITION We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers . The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASC 606 includes provisions within a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. RECENT ACCOUNTING PRONOUNCEMENTS In March 2024, the Financial Accounting Standards Board (FASB) issued ASU No. 2024-01, "Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards." This update clarifies the accounting for profits interest awards by specifying when these awards should be accounted for under ASC 718, Stock Compensation, as opposed to other compensation arrangements like cash bonuses under ASC 710. This clarification is provided through a series of illustrative examples which show how to determine whether profits interest awards meet the conditions of ASC 718, focusing on when such awards should be recognized as equity or liability. The guidance is intended to increase the comparability and consistency of financial reporting by providing clearer criteria for the accounting of profits interest awards. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. For private companies, the amendments are effective for fiscal years beginning after December 15, 2025, and interim periods within fiscal years beginning after December 15, 2026. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its financial statements and will continue to assess its potential effects as the adoption date approaches. 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 Company’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, 2025, the following securities were outstanding: Common stock: 75,592,158 shares Series A Preferred Stock: 5,000,000 Series B Preferred Stock: 360,000 25 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.