HNO International, Inc. 10-Q

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; (iv) decentralized clean power generation through the newly launched EcoFlare Power division, which captures and converts flared natural gas into electricity and hydrogen for data centers, Bitcoin mining, and industrial use; and (v) distributed hydrogen infrastructure through the newly introduced HyGrid™ intelligent microgrid system, a solar-hydrogen hybrid platform enabling off-grid hydrogen production, storage, and refueling. Results of Operations For the three months ended July 31, 2025 and 2024 Revenue For the three months ended July 31, 2025 and 2024, the Company recognized revenue of $0 and $4,241, respectively. Revenue in the prior year was generated from hydrogen engineering services and combustion solutions. Cost of Goods Sold For the three months ended July 31, 2025 and 2024, total cost of sales was $0 and $3,688, respectively. The cost of goods sold in prior year consisted of expenses related to contract labor associated with revenue generation. Gross Profit For the three months ended July 31, 2025 and 2024, gross profit was $0 and $553, respectively. The decrease from the prior year reflects the absence of revenue-generating activities in the current quarter. Operating Expenses General and administrative expenses were $421,940 for the three months ended July 31, 2025, compared to $430,693 during the same period in 2024, a decrease of $8,751. The current period included $241,380 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 $250,133, primarily due to reduced professional fees, lower consultant costs, and a general reduction in administrative overhead. 22 Depreciation and amortization expense increased by $17,815, totaling $66,742 for the three months ended July 31, 2025, compared to $48,927 for the three months ended July 31, 2024, due to depreciation associated with additional property and equipment acquired during recent prior periods. Advertising and marketing expenses were $2,610 for the three months ended July 31, 2025, compared to $9,593 for the same period in 2024. The decrease was due to reduced outreach activities compared to the prior year, which had higher spending to support the Company’s hydrogen engineering and combustion solutions. Other Income (Expenses) Other expenses decreased from $6,924 for the three months ended July 31, 2024 to $6,718 for the period ended July 31, 2025. Net Loss Net loss for the three months ended July 31, 2025, was $498,010 compared to a net loss of $495,584 during the same period in 2024. For the nine months ended July 31, 2025 and 2024 Revenue For the nine months ended July 31, 2025 and 2024, the Company recognized revenue of $43,708 and $4,241, respectively. Revenue in the current period was generated from the facilitation of delivery of hydrogen equipment and related integration support. The Company concluded that it acted as an agent with respect to the equipment component of the arrangement, as it did not take control of the goods and the third-party supplier shipped directly to the customer. As a result, revenue was recognized on a net basis, limited to the Company’s retained margin. Revenue in the prior year was generated from hydrogen engineering services and combustion solutions. Cost of Goods Sold Cost of Goods Sold consists of direct expenses related to hydrogen engineering services and combustion solution projects, including materials, subcontracted labor, and other project-specific implementation costs. For the nine months ended July 31, 2025 and 2024, total cost of sales was $0 and $3,688, respectively. The Company acted as an agent in facilitating delivery of certain hydrogen refueling equipment during the 2025 period and did not generate separate cost of sales. The prior year’s cost of goods sold related to contract labor expenses associated with revenue-generating activities. Gross Profit For the nine months ended July 31, 2025 and 2024, gross profit was $43,708 and $553, respectively. The increase reflects revenue generated from the facilitation of delivery of hydrogen equipment and integration support services. As the Company was acting as an agent with respect to the equipment delivered by a third-party vendor, no cost of goods sold was recognized, and gross profit equaled the margin retained. Operating Expenses General and administrative expenses were $6,130,926 for the nine months ended July 31, 2025, compared to $1,421,333 during the same period in 2024, a decrease of $4,709,593. The current period included $5,333,937 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 $358,842, primarily due to reduced professional fees, lower consultant costs, and a general reduction in administrative overhead. Depreciation and amortization expense increased by $50,736 to $178,730 for the nine months ended July 31, 2025, compared to $127,994 for the same period in 2024, reflecting depreciation on additions to property and equipment. Advertising and marketing expenses were $22,770 for the nine months ended July 31, 2025, compared to $9,593 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. 23 Other Income (Expenses) Other expenses increased from $15,145 for the nine months ended July 31, 2024 to $140,751 for the period ended July 31, 2025, the increase primarily related to $15,000 loss on fair value of convertible note related to the issuance of a convertible note in exchange for legal services and $105,190 loss on the write-off of intangible asset as a result of an out-of-period adjustment due to the incorrect capitalization of costs associated with developed intellectual property. Net Loss Net loss for the nine months ended July 31, 2025, was $6,429,469 compared to a net loss of $1,573,512 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 July 31, 2025 of $498,010 and had an accumulated deficit of $51,864,163 at July 31, 2025. At July 31, 2025, we had a cash balance of $31,984, compared to a cash balance of $20,255 at October 31, 2024. At July 31, 2025, the working capital deficit was $2,424,655, 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. 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 Nine months Ended July 31, 2025 and 2024 The following table summarizes our cash flows for the periods indicated below: For the Nine months Ended July 31, 2025 For the Nine months Ended July 31, 2024 Cash Used in Operating Activities $ (877,827 ) $ (1,382,728 ) Cash Provided by Financing Activities 1,067,500 1,592,612 Net cash used in investing activities $ (177,944 ) $ (366,126 ) 24 Cash Used in Operating Activities During the nine months ended July 31, 2025, cash used in operating activities amounted to $(877,827), primarily reflecting our net loss of $(6,429,469). This impact was largely offset by non-cash items, primarily $5,333,937 in stock-based compensation, along with depreciation and amortization of $178,730, a $105,190 loss on write-off of an intangible asset, and $60,000 related to a convertible note issued for legal services, including $45,000 recognized as legal expense and a $15,000 fair value adjustment. Changes in working capital included a decrease in accounts payable of $(129,137) and a decrease in accrued payroll of $(17,762), partially offset by a $20,569 increase in accrued interest payable. During the nine months ended July 31, 2024, cash used in operating activities totaled $(1,382,728), primarily reflecting our net loss of $(1,573,512). This was offset by non-cash charges such as depreciation and amortization amounting to $127,994. Additionally, there was a decrease in due from related party of $56,392 and an increase in accrued interest payable of $20,643 and a decrease in payroll taxes of $14,802, contributing to the overall cash movements during the period. Cash provided by Financing Activities During the nine months ended July 31, 2025, cash provided by financing activities was $1,067,500, which consisted of net proceeds from related party advances of $131,000 and proceeds from the sale of common stock of $936,500. During the nine months ended July 31, 2024, cash provided by financing activities was $1,592,612, which consisted of proceeds from related party advances of $800,585, $706,429 from the sale of common stock, $14,501 in proceeds from common stock subscription payable, and a $100,000 refund of a security deposit. Cash Used in Investing Activities During the nine months ended July 31, 2025, cash used in investing activities was $(177,944), which consisted of the purchase of property. During the nine months ended July 31, 2024, cash used in investing activities was $(366,126), which consisted of the purchase of property and equipment and purchase long-term assets. 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 nine months ended July 31, 2025, the Company incurred a net loss of $6,429,469 and used cash in operating activities of $877,827, and on July 31, 2025, had stockholders’ deficit of $1,556,423. 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. 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. 25 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 employees and consultants. Compensation for stock-based awards is recognized as a non-cash expense on the statement of operations. 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 expense associated with these awards is recorded based on the fair value on the date of grant, as determined using a pricing model commensurate with the terms of the award. This 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, currently included in general and administrative expenses on the statement of operations as the Company does not allocate compensation costs to Costs of Goods Sold. 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. As of the report date, the Company has not established any plans to issue dividends on stock-based awards. Employee Benefits During the quarter ended July 31, 2025, the Company paid $743 in employer retirement contributions, representing 3% of semi-monthly payroll for one employee over three pay periods. These contributions are made in accordance with the terms of the Company’s state-mandated retirement plan for eligible employees and are recorded as employee benefits expense in the period incurred. Fair Value Measurement of Convertible Instruments The Company evaluates convertible financial instruments in accordance with ASC 480 to determine whether an instrument should be equity classified, or liability classified. The Company issued a $45,000 convertible note in connection with a legal service agreement during the period that allows for a fixed dollar amount to be settled in a variable number of shares which requires liability classification and was measured at fair value on initial recognition. On the issuance date, the Company determined the fair value of the note to be $59,985 and recorded the full amount as a liability. The excess of $14,985 over the $45,000 principal amount was recognized as a loss on fair value of the convertible note in the condensed statements of operations. Fair value is determined in accordance with ASC 820 using available market inputs. Instruments classified as liabilities and measured at fair value are evaluated on a recurring basis, with changes in fair value recognized in the statements of operations. For the three months ended July 31, 2025, the Company recorded an additional $15 loss in connection with the change in fair value of the convertible note. Revenue Recognition We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). 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. 26 In certain arrangements where the Company facilitates the provision of goods or services provided by a third party, and does not take control of those goods or services, revenue is recognized on a net basis, limited to the margin or fee earned, consistent with the Company’s role as an agent under ASC 606-10-55-36 through 55-40. 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 associated with the Company’s financial instruments include credit risk, market risk, and liquidity risk. The Company does not have significant exposure to foreign exchange risk, as all of it operations and transactions are denominated in U.S dollars. Outstanding Share Data As of July 31, 2025, the following securities were outstanding: Common Stock: 95,920,491 shares Series A Preferred Stock: 5,000,000 shares Series B Preferred Stock: 360,000 shares 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.