PART III, SECTION 1 – HYDRO ENVIRONMENTAL RESOURCES, INC. (OTCBB: HYER) – A HYER CALLING?
June 23, 2001
As we have been pointing out, it’s a good time to be in the energy business. (See Profiting From the Energy Crisis – A Stock Patrol Special Report: Part I - All Aboard and Part II - Greenvolting Developments). But energy is not the only issue in the headlines. Lately, it has been sharing top billing with the environment, as politicians and the public seek ways to balance these two countervailing concerns. Can alternative energy sources be developed without unduly sacrificing the environment?
In this atmosphere it should probably come as no surprise to find a company that says it is “dedicated to the research and development of alternative energy sources to protect and safeguard the environment from future damage.” That apparently summarizes the bold ambitions of Hydro Environmental Resources, Inc., an OTC Bulletin Board company that claims it has a “unique process” for producing electricity, heat, hydrogen gas and distilled water.
Hydro Environmental claims that its device, called the ElectroChem Hydrogen Fuel Reactor (ECHFR) “produces a clean burning hydrogen gas at low pressure from any source of water.” According to its website, the Company is “presently finalizing a commercial pilot powerplant, capable of supplying electricity, gas, and clean potable water. The Company intends to apply this technology to areas requiring back-up energy as well as daily nonpolluting energy needs.”
Hydro Environmental is not the first company to say it wants to harness hydrogen as an alternative energy source. (See Greenvolting Developments). So far, however, the Company has no revenues, limited operations, and, as of March 31, 2001, had incurred losses exceeding $588,000. Does Hydro Environmental have what it takes to compete with other hydrogen-based energy companies? Does it have any exclusive process that can result in revenues? Despite a series of recent press releases, questions, and concerns, abound.
The Patent Truth
Does Hydro Environmental own any proprietary, patented process to produce an alternative energy source? Here’s what the Company said in its recent Form 10-K Annual Statement, filed on April 17th:The ECHFR and the chemical formula for producing hydrogen are both covered by pending patents. The pending patents were filed in Australia and cover 96 international jurisdictions, including the United States.
The Company claims that it obtained the rights to ECHFR on June 16,1999 from its inventor, an individual named James Pelto, in exchange for 15 million shares of Hydro Environmental common stock. The Form 10-K states that Pelto is also to receive a 5% royalty. The public filings offer no further details of the assignment. In fact, the Assignment Agreement, which was filed as an Exhibit to the Company’s Form 10SB on October 26, 1999, indicates that Pelto assigned the rights to ECHFR for $10. It makes no mention of the 15 million shares or the 5% royalty.
The Assignment Agreement does, however, refer to “certain Australian and International Patent Applications covering the [ECHFR].” Are these the patent applications that the Company now claims “were filed in Australia and cover 96 international jurisdictions, including the United States?” We searched the records of the Australian Patent Office and found two “provisional” patent applications that appear to apply to the ECHFR. The first, filed by James Pelto on June 16, 1998, relates to an invention called the “Electro-chem hydrogen fuel reactor.” That application has now “lapsed.” In other words, it is no longer pending.
We discovered that a second “provisional” patent application was filed in Australia on April 20, 2000 by Hydro Environmental Resources, of 14 Kel Nagle Court, Parkwood, Australia. This application pertained to something called the “Electro-chem hydrogen fuel reactor II.” It has also “lapsed.”
Under Australian law, provisional patent applications differ from “complete” patent applications because they do not have to include any “claims” that define the invention the patent is to cover. But provisional applications automatically lapse after 12 months unless a complete application or an international application is filed within that 12-month period. We found nothing that would indicate that either James Pelto or Hydro Environmental filed those additional documents within the requisite period.
Nor did we find anything that would support the Company’s claim that its patent applications cover “96 international jurisdictions including the United States.” We could find no record indicating that either Pelto or the Company has filed a patent application with the United States Patent and Trademark Office. We were also unable to find any evidence of an “international” application. Indeed, even if an international patent application had been filed, the applicant would still have been required to comply with the requirements of each country in which the patent is to take effect. The Company has provided no indication that it, or anyone acting on its behalf, has complied with these conditions.
The apparent absence of any patents puts a decidedly different spin on some of the claims by Hydro Environmental. For example, after describing the ECHFR process on its web site, the Company asserts “ [r]esearch shows that there have been numerous attempts worldwide to develop the technology that we have produced but because of our patents it cannot be duplicated.” Later, in a section entitled “Finance,” it states that the “Company’s assets are valued mainly in patented technologies, rights and future global revenues.” With the Company placing so much value on “patented technologies,” investors are left to wonder whether the absence of those patents renders the process and the Company valueless.
And what does this say about the Company’s other claims?
You Don’t Say
Take, for instance, Hydro Environmental’s statement (again on its website) that “an independent gas analysis was conducted in Brisbane, Australia proving the effectiveness of the ECHFR system, and confirming that the product burns free of smell, fumes, or smoke and that the gas produced is 99.4% pure hydrogen.” Who conducted that “independent” study? Is there a detailed report of the results? What does it mean for the viability of the device? The Company offers no further details.Perhaps even more troubling are some of the statements made by the company in its recent press releases. On May 17th Hydro Environmental announced that it had “conducted a private viewing of the ECHFR System … for Pete Konesky, Energy Commissioner for the State of Nevada, Frank Tussing, Executive Director of Nevada Alliance and James Brandmueller, Ph.D., Principal of Clean Energy Concepts.” The Company went on to say that Mr. Konesky
was impressed with the new technology and said that there was an immediate need for an ECHFR System coupled with a 300-watt fuel cell, for use in remote areas in the State of Nevada. He also stated that in his opinion, there was a market for over 300,000 units, which could not be satisfied by other systems with the effectiveness of the ECHFR.
Now that sounded promising – until we spoke with Mr. Konesky who told us that he was quoted out of context, and pointed out that he is not the Nevada Energy Commissioner. Mr. Konesky, who serves as Program Director for a project known as Rebuild America, told Stock Patrol that while 300,000 fuel cell units could be used for water pumping in rural Nevada, Hydro Environmental did not demonstrate either that its device could fill that bill, or that it could operate on a cost effective basis. He noted that the Company does not even produce its own fuel cells, it purchases them elsewhere. While Mr. Konesky acknowledged that he and the other two men mentioned in the May 17th press release did attend the meeting, he said that the Company declined to provide any details of the costs involved with deployment of its system. Without such information, it is impossible to determine whether the process is practical – even if it works.
Since May 17th, Hydro Environmental has reiterated portions of that May 17th press release. A proxy filed by the Company with the Securities and Exchange Commission on June 18th advised shareholders that “[t]he Company was advised by the Nevada Energy Commission that they could see a market for 300,000 units coupled to a 300-watt fuel cell in the State of Nevada alone.” But was it “The Nevada Energy Commission” that made that statement, and did it apply to the company’s product?
The proxy goes on to say the Company has had “many inquiries involving not only power plants, but various residential and industrial companies, as well as a major automotive company showing interest in our revolutionary and unique technology.” None of those “interested” entities are identified. And, of course, the Company does not indicate what is “revolutionary” or “unique” about its unpatented technology.
And, believe it or not, these are not the most striking questions raised by the proxy. We will look at some other issues, as well as the Company’s most recent projects and announcements, in Section 2 of this series.
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