PART III, SECTION 2 – HYDRO ENVIRONMENTAL RESOURCES, INC. (OTCBB: HYER) – WESTWARD HO HYDRO
June 26, 2001
Hydro Environmental Resources, Inc. says that its “unique process” for producing electricity and hydrogen gas already has “impressed” Pete Konesky, the Energy Commissioner of Nevada. But the process has yet to be patented (and no patent applications seem to be pending) and Pete Konesky is not the Energy Commissioner of Nevada. On top of that, Mr. Konesky suggests that the Company has been taking his statements out of context. So where does that leave Hydro Environmental? On the road to Nevada.
Disappearing Act
In a proxy filed on June 18th, the Company is asking its shareholders to elect a slate of directors, ratify the appointment of its auditors, and, most, importantly, approve the Company’s move from Oklahoma to Nevada. Why does Hydro Environmental want to relocate its corporate offices to Nevada? Nevada, as we have seen before, makes it easy for management of a corporation and its controlling shareholders to conduct business without troublesome interference from minority shareholders. A majority of the shareholders can agree to a merger or acquisition without a meeting – even where that transaction involves a business combination between the company and an “interested shareholder.” So, if someone controls a majority of the shares, they can cause the Nevada Corporation to acquire another business that they own – and the rest of the shareholders are stuck with that decision.A majority of the shareholders can also amend the terms of the Certificate of Incorporation in Nevada, which means that they can increase the number of outstanding shares or set the terms of preferred shares. In other words, shareholders can be diluted at almost any time, and preferred shares can be issued which may be converted into shares of common stock, at a rate to be determined by the majority shareholder or shareholders. Readers of Stock Patrol have seen this scenario play out recently at Infotopia, Inc., which utilized the Nevada statutes to expand its authorized shares, and to grant extraordinary rights to preferred shareholders. See Update: Infotopia, Inc. – Clarifications, Contradictions, Or More Confusion?
But shareholders of Hydro Environmental will sacrifice far more than potential voting rights if they agree to the proposed move to Nevada. The Company also intends to reduce their shareholdings – by issuing one share of common stock in the Nevada Corporation for each five shares of the existing Oklahoma Corporation. Each of the Hydro Environmental shareholders would also receive one share of preferred stock in the Nevada Company for each five shares of common stock that they currently hold in the Oklahoma Corporation as part of the exchange. That, however, may offer little solace to current shareholders. The preferred shares would not be registered, have no liquid market, do not pay any dividends, cannot be converted into common stock, and can be called by the Company at 1 cent per share after two years.
In effect, the Company is asking shareholders to permit a 1-for-5 reverse stock split. It maintains that the change will not “materially affect the proportionate equity interest in the Company of any shareholder or the relative rights, preferences, privileges or priorities of any such stockholder.” But, if that is the case, why is the share reduction mentioned for the first time on page 11 of the proxy, where it is likely to be noticed by only the most diligent shareholders.
The switch to Nevada requires approval by a majority of the shareholders in the existing Oklahoma Corporation. Who controls those shares? That seems to depend upon which public document is reviewed. Hydro Environmental’s Amended Form 10-SB12G filing on March 22, 2000 indicated that the “Beneficial Owners of more than 5% of the Company’s Common Stock” were Quantum Development Corporation of Queensland, Australia, which owned 3,055,000 shares (10%); John Wheeler of Queensland, Australia, who owned 2.5 million shares (8.18%; and James Pelto of Queensland, Australia, the inventor who received 15 million shares (49.1%) in exchange for rights to the ECHFR process. Another 650,000 shares were held by the Company’s President, Jack Wynn of Hayward, California.
The Company’s Form 10-K for the year ended December 31, 2000, which was filed on April 17, 2001, told a distinctly different story. It indicated that the only person holding more than 5% of the Company’s common shares is its President, Jack Wynn, who now owns 9.6 million shares. John Wheeler, who once held 2.5 million shares, now owns only 10,000 shares. There is no mention of the 15 million shares issued to one James Pelto.
How did Wynn obtain his shares? What happened to the stock held by Wheeler and Pelto? The Company’s public filings do not provide that information and it does not appear that any of those individuals have filed forms with the SEC disclosing any purchases or sales of Hydro Environmental stock.
Things had changed once again by the time the Company filed its Proxy Statement just two months later on June 18, 2001. This time the Company said that Wynn owned 7.6 million shares, and that Wheeler owned none. What had happened to the balance of the stock held by those two men? The Proxy, and the Company’s other public filings, did not say. What had become of the 15 million shares issued to James Pelto? Again, the Company remained silent. As best we can determine, the Company has never filed a Registration Statement relating to the shares held by Pelto, Wheeler or Wynn, and no Forms 144 have been filed by any of those individuals reflecting such sales. So how were they able to sell or transfer shares without any public disclosure?
The Company says that about 34 million shares had been issued as of June 7, 2001. Who controls those shares?
The Form 10-K says that the Company issued 1 million shares of common stock in July 2000 to one or more individuals for $60,000; 11.3 million shares in February 1999 for $9,375; 4.25 million shares to an officer and affiliates on an unspecified date for $4,250; and 750,000 shares on July 10, 1999 in accordance with the terms of a financial advisory agreement. A Form S-8 filed in March 2001 indicates that the Company issued another 200,000 shares to Daniel Chapman and Sean Flanagan, partners in the law firm of Chapman and Flanagan, for legal services. (Stock Patrol readers are already familiar with Messrs. Chapman and Flanagan. In the past we have seen that those two attorneys have received generous helpings of S-8 shares from two other companies profiled in our reports - Infotopia, Inc. and Bach-Hauser, Inc. See Infotopia, Inc. Part III – Bye Bye Shares; Bach-Hauser, Inc. – A Haus Full of Consultants; Bach-Hauser, Inc. – Everyone Makes Misteaks; and Update: Bach-Hauser, Inc. – The First Thing We Do, Let’s Give Stock To All The Lawyers).
Still, those numbers don’t add up to 34 million shares – but they come close once the 15 million shares issued to Pelto are included. So where are they now? And why is Pelto no longer listed as one of the Company’s major shareholders?
Keeping Limber
Are there concrete plans for the Company’s technology? In February of this year Hydro Environmental entered into an agreement with a company called Orini Lumber Processors Limited of New Zealand (actually, the agreement refers to that company as Orini “Limber” Processors). The parties agreed to construct an ECHFR plant, at a cost of $1.5 million, to be used in connection with Orini’s lumber business – provided that Hydro Environmental first satisfied a lengthy list of pre-conditions. The system would have to be suitable for Orini’s existing plant and Hydro Environmental was required to demonstrate, to Orini’s satisfaction, that1. The system is “economical and financially feasible and satisfactory for long term use for the purpose it is designed for;” and
2. “The system is safe and has no hazardous or injurious side effects to the ecology or to the environment and any by-products are capable of being disposed of cheaply and efficiently and there is no unsatisfactory risk to the staff operating the system;”
Orini was entitled to cancel the agreement unless Hydro Environmental provided “sufficient evidence,” within three months, for Orini to assess that these conditions could be satisfied. Only then would Orini be obligated to deliver 25% of the contract price. The balance would be due when the system was successfully installed and operating.
The Orini agreement was signed in February 2001, which means that more than three months have elapsed. Has the Company satisfied the pre-conditions to Orini’s satisfaction? Is the agreement still intact? What would it cost to construct the plant if the project did move forward? What revenues would the Company receive once the plant became operational? Hydro Environmental has not addressed those questions in its recent public filings or press releases.
Scaling Down
In the meantime, the Company has been issuing press releases – but discussing few concrete details of its operations. A May 1st press release claimed that “the Company can produce alternative energy supplies for approximately 80% of the cost of common fossil fuels such as diesel and gasoline.” How had that study been conducted? The Company said that it was based upon “a working model of the ECHFR running at an operating temperature below 150 degrees Fahrenheit and at a pressure below 5 pounds per square inch.” Was the test conducted or monitored by any independent third parties? The Company did not say. How might results differ on a larger scale? Again, those details are not contained in the press release.Between May 8th and June 11th the Company issued four press indicating that the ECHFR system had been tested on an automobile. Are these tests being conducted by independent parties? Hydro Environmental says only that “when the vehicle is performing to the satisfaction of the company, independent press agents and observers will be invited to witness the road trials.
Is this a practical application for the technology? What will it cost to the auto manufacturer and car owner? These questions remain to be answered. It does not seem, however, that the Company has immediate plans for marketing the system for automotive use. As it states in a May 31st press release, “it is not the company’s aim for at least the medium term to venture into the motor vehicle market. The corporation feels that the best interest are to be served in the short and medium term in the alternative energy applications available to it for small to medium size energy generating systems.”
On a much smaller scale, the Company announced on June 18th that it had used the “modified ECHFR system-3” to run a gas-operated refrigerator for 23 hours. Does this mean that the ECHFR system will provide a practical alternative fuel for household appliances? Without significantly more detailed information, like the cost of producing the fuel and operating the equipment, it would be difficult to make any determination.
Most recently, on June 21st, Hydro Environmental announced that its “fourth stage ECHFR system is being adapted to a 100-gallon water source, which will be used to power three, five-kw fuel cells.” When did the Company develop it ECHFR system 3” and “fourth stage ECHFR?” And how has it been paying those researchers and developers? According to its most recent Form 10-Q, filed on May 22, 2001, Hydro Environmental has no revenues, and had about $31,000 in the bank at the end of March 2001. At the same time, it had unspecified general and operating expenses exceeding $215,000 for the quarter ended March 31st. The Company says that a “shareholder” loaned it almost $218,000, at no interest, for working capital during the quarter. It does not identify that shareholder. But the loan is payable on demand – and right now it does not seem that the Company has that kind of money available.
Please Hold
It seems that investors may have to wait a bit longer to learn whether the Company will be moving to Nevada. The shareholder’s meeting had been scheduled for June 29th, but the proxy materials were not mailed to the shareholders. Now Hydro Environmental plans to reschedule its shareholders meeting for early August. Maybe by that time those 15 million shares will show up.IF YOU HAVE QUESTIONS OR COMMENTS FOR STOCKPATROL.COM, CONTACT US AT editor@stockpatrol.com