UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from:______________ to ______________
Commission File Number: 000-27825
Hydro Environmental Resources, Inc.
(Exact name of registrant as specified in its charter)
Nevada 73-1552304
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.)
5725 S. Valley View, Suite 3, Las Vegas, NV 89118
(Address of principal executive offices) (Zip code)
(702) 597-9070
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report.)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Common 20,038,124
Class Number of shares outstanding at May 17, 2002
This document is comprised of 12 pages.
1
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed balance sheet March 31, 2002 (Unaudited) 3
Condensed statements of operations - Three months
ended March 31, 2002 (Unaudited), and November 10,
1998 (inception) through March 31, 2002 (Unaudited) 4
Condensed statements of cash flows - Three months ended
March 31, 2002 (Unaudited) and 2001 (Unaudited), and
November 10, 1998 (inception) through March 31, 2002
(Unaudited) 5
Notes to condensed financial statements (Unaudited) 6
Item 2. Plan of operation 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Securities Holders 10
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
HYDRO ENVIRONMENTAL RESOURCES, INC.
(A Development Stage Company)
Condensed Balance Sheet
March 31, 2002
(Unaudited)
<Table>
<s> <c>
Assets
Cash............................................... $ 93
Computer equipment, net............................ 2,922
Intangible assets, net (Note 3).................... 6,750
---------
$ 9,765
=========
Liabilities and Shareholders' Deficit
Liabilities:
Accounts payable and accrued expenses........... $ 165,397
Due to officer (Note 2)......................... 213,427
Due to shareholders (Note 2).................... 401,907
Notes payable, convertible into common
stock (Note 4)................................. 25,000
Accrued interest, notes payable (Note 4)........ 2,250
Notes payable to shareholders, convertible
into common stock (Note 2)..................... 150,000
----------
Total liabilities 957,981
----------
Shareholders' deficit (Note 5):
Preferred stock................................. -
Common stock.................................... 19,088
Additional paid-in capital...................... 2,879,510
Deficit accumulated during development stage.... (3,846,814)
-----------
Total shareholders' deficit (948,216)
-----------
$ 9,765
===========
</Table>
The accompanying notes are an integral part of the condensed
financial statements.
3
HYDRO ENVIRONMENTAL RESOURCES, INC.
(A Developmental Stage Company)
Condensed Statements of Operations
(Unaudited)
<Table> <c> <c> <c>
<s>
November 10,
For the Three Months 1998
Ended (Inception)
March 31, through
----------------------- March 31,
2002 2001 2002
---------- --------- -----------
Operating expenses:
Research and development..................... $ - $ - $ 114,196
General and administrative:
Stock-based compensation................. 1,292,500 62,600 2,710,813
Related parties (Note 2)................. 1,500 3,000 38,500
Payroll.................................. - 14,141 129,352
Professional and consulting fees......... 37,341 85,429 377,194
Depreciation and amortization............ 1,144 980 10,055
Other.................................... 17,556 115,355 448,214
--------- --------- -----------
Total operating expenses 1,350,041 281,505 3,828,324
--------- --------- -----------
Operating loss (1,350,041) (281,505) (3,828,324)
Non-operating income:
Gain on extinguishment of debt (Note __)..... 43,363 - 43,363
Rental income................................ 300 - 1,300
Interest expense:
Related parties (Note 2)..................... (2,848) (2,789) (23,590)
Amortization of debt issue costs............. - - (26,250)
Other........................................ (500) (250) (13,313)
---------- ---------- -----------
Loss before income taxes (1,309,726) (284,544) (3,846,814)
Income taxes (Note 6)......................... - - -
---------- ---------- ------------
Net loss $(1,309,726) $(284,544) $(3,846,814)
========== ========== ============
Basic and diluted loss per share.............. $ (0.09) $ (0.04)
========== ==========
Basic and diluted weighted average
number of common shares
outstanding.................................. 15,313,882 6,472,000
========== ==========
</Table>
The accompanying notes are an integral part of the condensed
financial statements.
4
HYDRO ENVIRONMENTAL RESOURCES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
<Table>
<s> <c> <c> <c>
November 10,
For the Three Months Ended 1998
March 31, through
---------------------------- March 31,
2002 2001 2002
------------ ----------- ------------
Net cash used in operating activities.......... $ (45,828) $ (220,054) $ (923,701)
------------ ----------- ------------
Cash flows from investing activities:
Equipment purchases.................................. - - (4,727)
------------ ----------- ------------
Net cash used in investing activities............. - - (4,727)
------------ ----------- ------------
Cash flows from financing activities:
Capital contributions................................ - - 4,910
Proceeds from officer advances (Note 2).............. - 3,508 233,678
Repayment of officer advances (Note 2)............... - - (23,099)
Proceeds from shareholder advances (Note 2).......... 68,510 217,885 493,967
Repayment of shareholder advances (Note 2)........... (22,900) (1,500) (92,060)
Proceeds from notes and loans convertible
to common stock (Notes 2 and 4).................... 150,000 25,000 358,000
Repayment of loans payable (Note 7).................. (150,000) - (150,000)
Proceeds from the sale of common stock............... - - 105,050
Payment of offering costs............................ - - (1,925)
------------ ----------- ------------
Net cash provided by financing activities...... 45,610 244,893 928,521
------------ ----------- ------------
Net change in cash (218) 24,839 93
Cash at beginning of period............................ 311 6,532 -
------------ ----------- ------------
Cash at end of period $ 93 $ 31,371 $ 93
============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest.......................................... $ - $ - $ -
============ =========== ============
Income taxes...................................... $ - $ - $ -
============ =========== ============
Noncash investing and financing activities:
Common stock issued for patent rights............. $ - $ - $ 15,000
============ =========== ============
</Table>
The accompanying notes are an integral part of the condensed financial
statements.
5
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note 1: Basis of presentation
The financial statements presented herein have been prepared by
the Company in accordance with the accounting policies in its
annual 10-KSB report dated December 31, 2001 and should be read
in conjunction with the notes thereto.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary to provide a
fair presentation of operating results for the interim period
presented have been made. The results of operations for the
three months ended March 31, 2002 are not necessarily indicative
of the results to be expected for the year.
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. The Company is in the development stage in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 7.
As shown in the accompanying financial statements, the Company
has no revenues, a limited history of operations, and a loss of
$3,846,814 since inception. These factors, among others, may
indicate that the Company will be unable to continue as a going
concern for reasonable period of time.
The financial statements do not include any adjustments relating
to the recoverability and classification of liabilities that
might be necessary should the Company be unable to continue as a
going concern. The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis and ultimately to attain
profitability. The Company's management intends to seek
additional funding through future equity offerings and debt
financings to help fund the Company's operation.
Inherent in the Company's business are various risks and
uncertainties, including its limited operating history and
historical operating losses. The Company's future success will
be dependent upon its ability to create and provide effective and
competitive services on a timely and cost-effective basis.
Interim financial data presented herein are unaudited.
Note 2: Related party transactions
During the three months ended March 31, 2002 and 2001, the
President of the Company contributed services and the use of
office equipment to the Company. The services and use of
equipment was valued at $500 per month and such charges are
recognized in the accompanying unaudited, condensed financial
statements as office expense with a corresponding credit to
additional paid-in capital.
Prior to 2002, the president of the Company loaned the Company
$189,837 for working capital. The loans bear interest at six
percent and are due on demand. The $189,837 in outstanding loans
and $23,590 in related accrued interest are included in the
accompanying condensed financial statements as due to officer.
Prior to 2002, shareholders of the Company loaned the Company
$356,297 for working capital. During the three months ended
March 31, 2002, shareholders advanced the Company $68,510 for
working capital. The advances do not carry an interest rate and
are due on demand. The Company repaid $22,900 as of March 31,
2002. The $401,907 balance owed to shareholders at March 31,
2002 is included in the accompanying condensed financial
statements as due to shareholders.
On March 11, 2002, the Company accepted a total of $150,000 from
two shareholders in exchange for two $75,000 promissory notes.
The notes are interest-free and mature on March 11, 2004. The
notes may be converted into shares of the Company's common stock
at the discretion of both parties.
6
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note 3: Intangible assets
Intangible assets consist of patent rights acquired from a
related party. The rights are being amortized at the rate of $250
per month (60 months):
Patent rights $ 15,000
Accumulated amortization (8,250)
--------------
$ 6,750
==============
Note 4: Notes payable
During the year ended December 31, 2001, the Company received
$25,000 in exchange for convertible promissory notes and 125,000
shares of the Company's $.001 par value common stock. Interest
expense of $500 was recognized in the accompanying condensed
financial statements for the three months ended March 31, 2002.
Accrued interest payable on the notes totaled $2,250 as of March
31, 2002.
The notes were in default as of March 31, 2002.
Note 5: Common stock
On February 21, 2002, the Company issued 500,000 shares of its
common stock to its attorney in exchange for legal services. The
market value of the common stock on the transaction date was $.05
per share. Stock-based compensation expense of $25,000 was
recognized in the accompanying financial statements for the three
months ended March 31, 2002.
On February 21, 2002, the Company issued 1,478,663 shares of its
common stock to unrelated third parties in exchange for
engineering, public relations, marketing and other consulting
services. The market value of the common stock on the
transaction date was $.05 per share. Stock-based compensation
expense of $73,933 was recognized in the accompanying financial
statements for the three months ended March 31, 2002.
On February 21, 2002, the Company issued 1,021,337 shares of its
common stock to a shareholder in exchange for consulting
services. The market value of the common stock on the transaction
date was $.05 per share. Stock-based compensation expense of
$51,067 was recognized in the accompanying financial statements
for the three months ended March 31, 2002.
On March 18, 2002, the Company issued 600,000 shares of its
common stock to its attorney in exchange for legal services. The
market value of the common stock on the transaction date was $.30
per share. Stock-based compensation expense of $180,000 was
recognized in the accompanying financial statements for the three
months ended March 31, 2002.
On March 18, 2002, the Company issued 3,000,000 shares of its
common stock to a shareholder in exchange for consulting
services. The market value of the common stock on the transaction
date was $.30 per share. Stock-based compensation expense of
$900,000 was recognized in the accompanying financial statements
for the three months ended March 31, 2002.
On March 18, 2002, the Company issued 250,000 shares of its
common stock to an unrelated third party in exchange for public
relations and marketing services. The market value of the common
stock on the transaction date was $.25 per share. Stock-based
compensation expense of $62,500 was recognized in the
accompanying financial statements for the three months ended
March 31, 2002.
7
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Following is a statement of changes in shareholders' deficit for
the three months ended March 31, 2002:
<Table>
<s> <c> <c> <c> <c> <c> <c> <c>
Deficit
Accumulated
Preferred Stock Common Stock Additional During the
----------------------- ---------------------- Paid-in Development
Shares Par Value Shares Par Value Capital Stage Total
--------- --------- ---------- --------- -------- ----------- -----------
Balance, January 1, 2002..... - $ - 12,238,124 $ 12,238 $1,592,360 $(2,537,088) $ (932,490)
Shares issued to attorney
in exchange for legal
services.................... - - 1,100,000 1,100 203,900 - 205,000
Shares issued in exchange
for consulting services..... - - 1,728,663 1,729 134,704 - 136,433
Shares issued to shareholder
in exchange for consulting
services.................... - - 4,021,337 4,021 947,046 - 951,067
Equipment and services
constributed by officer..... - - - - 1,500 - 1,500
Net loss for the three months
ended March 31, 2002........ - - - - - (1,309,726) (1,309,726)
--------- --------- ---------- -------- ---------- ------------ -----------
Balance, March 31, 2002 - $ - 19,088,124 $ 19,088 $2,879,510 $(3,846,814) $ (948,216)
========= ========= ========== ======== ========== ============ ===========
</Table>
Note 6: Income taxes
The Company records its income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes". The Company incurred net
operating losses during the three months ended March 31, 2002,
resulting in a deferred tax asset, which was fully allowed for;
therefore, the net benefit and expense result in $-0- income
taxes.
Note 7: Stock purchase agreement
During June of 2001, the Company signed a stock purchase
agreement with PowerTek. PowerTek agreed to purchase shares of
the Company's common stock equal to the number of shares issued
and outstanding, on a fully diluted basis, on the date of closing
for $500,000. Also, PowerTek agreed to expend not less than $2
million on research and development in the field of hydrogen
powered fuel cell technology. The agreement was terminated on
September 1, 2001.
A settlement of the debt was reached among the companies on March
13, 2002. As of March 13, 2002, the Company owed PowerTek
$183,000 for loans advanced during 2001, and $10,363 of accrued
interest related to the loans. In accordance with the settlement
agreement, the Company paid PowerTek $150,000 against the debt
and interest and PowerTek forgave the remaining balance of
$43,363.
Note 8: Subsequent events
Common stock
On April 23, 2002, the Company cancelled 350,000 shares of its
issued and outstanding common stock.
On May 6, 2002, the Company issued 1,300,000 shares of its common
stock to unrelated third parties in exchange for engineering,
public relations, marketing and other consulting services. The
market value of the common stock on the transaction date was $.25
per share resulting in stock-based compensation expense of
$325,000.
8
ITEM 2. PLAN OF OPERATION
Special note regarding forward-looking statements
This report contains forward-looking statements within the
meaning of federal securities laws. These statements plan for or
anticipate the future. Forward-looking statements include
statements about our future business plans and strategies,
statements about our need for working capital, future revenues,
results of operations and most other statements that are not
historical in nature. In this Report, forward-looking statements
are generally identified by the words "intend", "plan",
"believe", "expect", "estimate", "could", "may", "will" and the
like. Investors are cautioned not to put undue reliance on
forward-looking statements. Except as otherwise required by
applicable securities statues or regulations, the Company
disclaims any intent or obligation to update publicly these
forward-looking statements, whether as a result of new
information, future events or otherwise. Because forward-looking
statements involve future risks and uncertainties, these are
factors that could cause actual results to differ materially from
those expressed or implied.
We plan to satisfy our cash requirements, over the next twelve
months, through cash infusions from our president and principal
shareholders, in exchange for restricted stock. However, we will
need to raise additional capital in the next twelve months. Our
management is considering the following options:
(a) a private offering and sale of our common stock;
(b) a public offering and sale of our common stock;
(c) a combination of private and public sale of our common stock;
(d) debt financings from officers, shareholders and unrelated third
parties.
As of March 31, 2002, all cash infusions from the president and
principal shareholders have been classified as liabilities and
are disclosed in the accompanying condensed balance sheet as due
to officer and due to shareholders, respectively.
A summary of our product research and development for the term of
the plan is as follows:
We have performed research on the recovery and reconstruction of
compounds used by the ECHFR to produce hydrogen. It is estimated
that over 40 percent of these patented-formula compounds can be
reused, possibly lowering the cost of production by as much as 25
percent. In addition, there are several potentially profitable
by-products created by the ECHFR that we could market worldwide,
such as:
(a) An on-site power plant could possibly be designed for particular
needs where electricity and/or gas are necessary to process cooking
oil; and
(b) In the treatment of wastewater at abandoned mine sites and other
wastewater dumps or quarries, the ECHFR could possibly operate the
process by creating power from the actual wastewater to be treated
Subject to the implementation and success of one or more of the
financing options discussed above, we plan to expand our
capabilities to include commencing production during 2002. Once
we have commenced production, we plan to hire two to three
additional technical personnel.
9
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
No response required.
ITEM 2 - CHANGES IN SECURITIES
On February 21, 2002, the Company issued 500,000 shares of its
common stock to its attorney in exchange for legal services. The
market value of the common stock on the transaction date was $.05
per share. Stock-based compensation expense of $25,000 was
recognized in the accompanying financial statements for the three
months ended March 31, 2002.
On February 21, 2002, the Company issued 1,478,663 shares of its
common stock to unrelated third parties in exchange for
engineering, public relations, marketing and other consulting
services. The market value of the common stock on the
transaction date was $.05 per share. Stock-based compensation
expense of $73,933 was recognized in the accompanying financial
statements for the three months ended March 31, 2002.
On February 21, 2002, the Company issued 1,021,337 shares of its
common stock to a shareholder in exchange for consulting
services. The market value of the common stock on the transaction
date was $.05 per share. Stock-based compensation expense of
$51,067 was recognized in the accompanying financial statements
for the three months ended March 31, 2002.
On March 18, 2002, the Company issued 600,000 shares of its
common stock to its attorney in exchange for legal services. The
market value of the common stock on the transaction date was $.30
per share. Stock-based compensation expense of $180,000 was
recognized in the accompanying financial statements for the three
months ended March 31, 2002.
On March 18, 2002, the Company issued 3,000,000 shares of its
common stock to a shareholder in exchange for consulting
services. The market value of the common stock on the transaction
date was $.30 per share. Stock-based compensation expense of
$900,000 was recognized in the accompanying financial statements
for the three months ended March 31, 2002.
On March 18, 2002, the Company issued 250,000 shares of its
common stock to an unrelated third party in exchange for public
relations and marketing services. The market value of the common
stock on the transaction date was $.25 per share. Stock-based
compensation expense of $62,500 was recognized in the
accompanying financial statements for the three months ended
March 31, 2002.
On April 23, 2002, the Company cancelled 350,000 shares of its
issued and outstanding common stock.
On May 6, 2002, the Company issued 1,300,000 shares of its common
stock to unrelated third parties in exchange for engineering,
public relations, marketing and other consulting services. The
market value of the common stock on the transaction date was $.25
per share resulting in stock-based compensation expense of
$325,000.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
No response required.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No response required.
10
ITEM 5 - OTHER INFORMATION
No response required.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
No response required.
(b) Reports on Form 8-K:
No response required.
11
SIGNATURES
The financial information furnished herein has not been audited by an
independent accountant; however, in the opinion of management, all
adjustments (only consisting of normal recurring accruals) necessary
for a fair presentation of the results of operations for the three
months ended March 31, 2002 have been included.
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Hydro Environmental Resources, Inc.
(Registrant)
DATE: May 17, 2002 BY: /s/ Jack Wynn
Jack Wynn, President
12