10-Q 1 f10q0612_integrated.htm QUARTERLY REPORT f10q0612_integrated.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-26309

INTEGRATED ENVIRONMENTAL TECHNOLOGIES, LTD.
(Exact name of registrant as specified in its charter)

Nevada
 
98-0200471
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

4235 Commerce Street
   
Little River, South Carolina
 
29566
(Address of principal executive offices)
 
(Zip Code)
 
(843) 390-2500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨
Accelerated filer  ¨
   
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨     No x

As of August 10, 2012, there were 137,230,165 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
 
 
 

 
 
 
INTEGRATED ENVIRONMENTAL TECHNOLOGIES, LTD.

INDEX TO FORM 10-Q
 
   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
1
     
 
Consolidated Balance Sheets (unaudited) as of June 30, 2012 and December 31, 2011
2
     
 
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2012 and 2011
3
     
 
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2012 and 2011
4
     
 
Notes to the Unaudited Consolidated Financial Statements
5
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
22
     
Item 4.
Controls and Procedures
22
     
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
23
     
Item 1A.
Risk Factors
24
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
24
     
Item 3.
Defaults upon Senior Securities
25
     
Item 4.
Mine Safety Disclosures
25
     
Item 5.
Other Information
25
     
Item 6.
Exhibits
25
     
Signatures
 
26
     
Index of Exhibits
E-1
 
 
 

 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information included in this quarterly report on Form 10-Q and other filings of the registrant under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as information communicated orally or in writing between the dates of such filings, contains or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act.  All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.

Forward-looking statements may include the words “may”, “could”, “estimate”, “intend”, “continue”, “believe”, “expect” or “anticipate” or other similar words.  These forward-looking statements present our estimates and assumptions only as of the date of this report.  Except as may be required under applicable securities laws, we do not intend, and undertake no obligation, to update any of the forward-looking statements.  Additionally, the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 most likely do not apply to our forward-looking statements because we are considered a penny stock issuer.  You should, however, consult further disclosures we make in future filings of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.  The registrant is under no duty to update any of the forward-looking statements contained herein after the date this quarterly report on Form 10-Q is submitted to the Securities and Exchange Commission (the “SEC”).
 
 
 

 
 
PART I – FINANCIAL INFORMATION

Item1.
Financial Statements
 
The consolidated balance sheet as of June 30, 2012 and the related consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 and cash flows for the six months ended June 30, 2012 and 2011 for Integrated Environmental Technologies, Ltd. and its wholly-owned subsidiary IET, Inc. (collectively referred to herein as “IET” or the “Company”) included in Item 1, have been prepared by us, without audit, pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted from the following consolidated financial statements pursuant to the rules and regulations of the SEC.  The consolidated financial statements include our wholly-owned subsidiary and all significant inter-company transactions and balances have been eliminated.  In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our financial position and results of operations.  Certain reclassifications have been made to prior periods to conform to current presentations.

It is suggested that the following consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.  The Company does not believe there are any recently issued, but not yet effective, accounting standards that would have a significant impact on the Company’s financial position or results of operations as of and for the three and six months ended June 30, 2012.

The results of operations for the three and six months ended June 30, 2012 and 2011 are not necessarily indicative of the results of the entire fiscal year or for any other period.

 
1

 
 
Integrated Environmental Technologies, Ltd.
Consolidated Balance Sheets
(Unaudited)
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Assets
           
Current assets:
           
Cash
  $ 446,274     $ 145,993  
Accounts receivable
    16,239       7,872  
Prepaid expenses
    25,435       10,927  
Lease receivable
    10,535       14,296  
Inventory
    205,014       219,209  
Note receivable
    14,598       16,364  
Other receivable
    --       12,081  
                 
  Total current assets
    718,095       426,742  
                 
Property and equipment, net
    178,897       239,605  
                 
Lease receivable, long-term
    --       19,700  
Note receivable, long-term
    5,462       10,848  
                 
  Total assets
  $ 902,454     $ 696,895  
                 
Liabilities  and Stockholders’ Deficiency
               
Current liabilities:
               
Accounts payable
  $ 239,211     $ 229,086  
Accrued expenses
    230,938       166,136  
Customer deposits
    36,109       41,529  
Convertible debentures
    25,000       25,000  
                 
  Total current liabilities
    531,258       461,751  
                 
Convertible debentures
    526,125       526,125  
Convertible promissory notes
    500,000       500,000  
                 
  Total liabilities
    1,557,383       1,487,876  
                 
Commitments and contingencies
               
                 
Stockholders’ deficiency:
               
Common stock, $.001 par value; 400,000,000 shares authorized; 137,230,165 and 122,735,165 shares issued and outstanding, respectively
    137,230       122,735  
Additional paid-in capital
    15,950,228       14,810,185  
Accumulated deficit
    (16,742,387 )     (15,723,901 )
                 
  Total stockholders' deficiency
    (654,929 )     (790,981 )
                 
  Total liabilities and stockholders' deficiency
  $ 902,454     $ 696,895  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
2

 
 
Integrated Environmental Technologies, Ltd.
Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues:
                       
Sales
  $ 23,753     $ 176,642     $ 48,011     $ 204,152  
Leasing and licensing fees
    13,500       14,177       35,041       26,177  
      37,253       190,819       83,052       230,329  
Cost of sales
    10,105       72,342       16,707       92,157  
                                 
Gross profit
    27,148       118,477       66,345       138,172  
                                 
Operating expenses:
                               
General and administrative
    337,904       559,456       636,109       889,387  
Sales and marketing
    120,808       126,262       247,036       248,977  
Research and development
    96,818       38,297       159,283       112,986  
      555,530       724,015       1,042,428       1,251,350  
                                 
Loss from operations
    (528,382 )     (605,538 )     (976,083 )     (1,113,178 )
                                 
Other income (expense):
                               
Interest income
    229       483       1,067       589  
Finance fees
    --       (122 )     --       (9,538 )
Interest expense
    (21,562 )     (18,238 )     (43,470 )     (45,713 )
Total other income (expense)
    (21,333 )     (17,877 )     (42,403 )     (54,662 )
                                 
Net loss
  $ (549,715 )   $ (623,415 )   $ (1,018,486 )   $ (1,167,840 )
                                 
Net loss per share, basic and diluted
  $ (0.00 )   $ (0.01 )   $ (0.01 )   $ (0.01 )
                                 
Weighted average shares outstanding, basic and diluted
    135,602,418       118,182,132       133,454,368       114,786,584  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
 
Integrated Environmental Technologies, Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
 
   
Six Months Ended
June 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (1,018,486 )   $ (1,167,840 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    60,708       5,438  
Stock-based compensation expense
    88,638       378,055  
Write-down of lease receivable
    20,113       --  
Accretion of interest on convertible notes
    --       9,682  
Changes in operating assets and liabilities:
               
Accounts receivable
    (8,367 )     (58,642 )
Lease receivable
    3,348       8,758  
Note receivable
    7,152       --  
Inventory
    14,195       (60,588 )
Other receivable
    12,081       --  
Prepaid expenses
    (14,508 )     11,531  
Accounts payable
    46,125       56,936  
Accrued expenses
    64,802       (12,101 )
Customer deposits
    (5,420 )     8,000  
                 
Net cash used in operating activities
    (729,619 )     (820,771 )
                 
Cash flows from financing activities:
               
Proceeds from sale of common stock, net of offering costs
    1,029,900       661,500  
Proceeds from issuance of note payable
    --       200,000  
Repayment of convertible debentures
    --       (25,000 )
Deposit – note purchase
    --       150,000  
Stock subscription receivable
    --       (30,000 )
                 
Net cash provided by financing activities
    1,029,900       956,500  
                 
Increase in cash
    300,281       135,729  
Cash  - beginning of period
    145,993       65,660  
                 
Cash  - end of period
  $ 446,274     $ 201,389  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 632     $ 28,401  
Cash paid for income taxes
  $ 5,462     $ --  
                 
Non-cash operating activity:
               
Issuance of 360,000 shares of common stock as payment of director fees
  $ 36,000     $ --  
                 
Non-cash financing activity:
               
Issuance of 562,500 shares of common stock as payment of principal and interest due on convertible debentures
  $ --     $ 45,000  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
 
Integrated Environmental Technologies, Ltd.
Notes to Consolidated Financial Statements

1.           Basis of Presentation

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has incurred significant recurring operating losses, negative cash flows from operations and an accumulated deficit of $16,742,387 as of June 30, 2012.  The Company also has no lending relationships with commercial banks and is dependent on the completion of financings with equity and/or debt investors in order to continue operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company does not anticipate establishing any lending relationships with commercial banks in the foreseeable future due to its limited operations and assets.  The Company continues to execute its strategy of selling anolyte and catholyte solutions and leasing its EcaFlo® equipment to fund its operations and is focused on obtaining additional capital through the private placement of its securities.  The Company is pursuing potential equity and/or debt investors and, from time to time, has engaged placement agents to assist it in this initiative.  While the Company is pursuing the opportunities and actions described above, there can be no assurance that it will be successful in its efforts.  If the Company is unable to secure additional capital, it will explore other strategic alternatives, including, but not limited to, the sale of the Company.  Any additional equity financing may result in substantial dilution to the Company’s stockholders.

2.           Inventory

As of June 30, 2012 and December 31, 2011, inventory consisted of the following:

   
June 30,
 2012
   
December 31, 2011
 
Parts and materials
  $ 137,133     $ 133,048  
Finished goods
    67,881       86,161  
    $ 205,014     $ 219,209  

3.           Lease Receivable

The Company entered into a lease arrangement with a customer with respect to certain EcaFlo® equipment which the Company recorded as a sales-type lease.  As of June 30, 2012, the Company collected $44,000 of lease payments under this lease arrangement.  On July 10, 2012, the Company was notified by the customer that it could no longer make any additional lease payments.  On July 12, 2012, as a result of the customer’s default and in accordance with the terms of the lease arrangement, the Company repossessed the equipment.   The Company does not expect to receive any additional lease payments under this lease arrangement.  As of June 30, 2012, the Company recorded a $20,113 write-down of the lease receivable related to this lease arrangement in order to reflect the cost basis of the equipment repossessed by the Company.  During the three and six months ended June 30, 2012, the Company recognized $658 of interest income related to this lease arrangement.
 
 
5

 
 
4.           Note Receivable

The Company has a note receivable with a customer relating to the sale of certain EcaFlo® equipment.  The note payments are $1,250 per month over a 34-month term which commenced on January 15, 2011.  The Company imputed interest on this note receivable at a rate of 3% per annum.  During the three and six months ended June 30, 2012, the Company recognized $168 and $348, respectively, of interest income related to this note receivable.  As of June 30, 2012 and December 31, 2011, the current portion of the note receivable was $14,598 and $16,364, respectively, and the long-term portion was $5,462 and $10,848, respectively.

5.           Property and Equipment

As of June 30, 2012 and December 31, 2011, property and equipment, on a net basis, consisted of the following:

   
June 30,
 2012
   
December 31, 2011
 
Leasehold improvements
  $ 328,977     $ 328,977  
Equipment
    41,240       41,240  
      370,217       370,217  
Less:  Accumulated depreciation
    (191,320 )     (130,612 )
    $ 178,897     $ 239,605  

6.           Accrued Expenses

As of June 30, 2012 and December 31, 2011, accrued expenses consisted of the following:

   
June 30,
 2012
   
December 31, 2011
 
Accrued compensation
  $ 147,482     $ 128,415  
Accrued interest
    78,823       36,103  
Accrued other expenses
    4,633       1,618  
    $ 230,938     $ 166,136  

7.           Customer Deposits

On March 29, 2011, the Company issued a credit in the amount of $36,109 to a consultant to be used to purchase the Company’s products.  This credit was issued as payment to the consultant for consulting services rendered to the Company.  As of June 30, 2012 and December 31, 2011, the Company recorded this amount as a customer deposit.  In addition, as of December 31, 2011, the Company received $5,420 of lease payments related to subsequent periods, which amount was recorded as customer deposits.
 
 
6

 
 
8.           Convertible Debentures

April 2007 Convertible Debenture

On April 26, 2007, in a private placement, the Company issued a convertible debenture to an individual accredited investor in the principal amount of $25,000.  This convertible debenture matured on January 2, 2009.  The convertible debenture currently accrues interest at a rate of 12% per annum and is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.40 per share.  The Company is in default on this convertible debenture and is attempting to restructure the convertible debenture with the holder.

During the three and six months ended June 30, 2012, the Company recorded a total of $748 and $1,496, respectively, of interest expense related to this convertible debenture.  As of June 30, 2012 and December 31, 2011, the outstanding principal on this convertible debenture was $25,000 and the accrued and unpaid interest was $5,938 and $4,442, respectively, which amounts are included as a component of accrued expenses.

Kinsey Convertible Debenture

On July 7, 2011, in a private placement, the Company issued to E. Wayne Kinsey, III, a member of the Company’s board of directors, an 8% convertible debenture in the amount of $150,000 (the “Kinsey Debenture”).  As a result of this private placement, the Company received gross proceeds of $150,000.  The Kinsey Debenture has a three-year term maturing on July 7, 2014, and accrues interest at a rate of 8% per annum.  Interest is payable in annual installments in cash or, at the option of the Company, in shares of the Company’s common stock.  If the Company elects to pay the interest in shares of its common stock, the number of shares issued as payment will be equal to the quotient of the unpaid interest divided by the market price of the Company’s common stock as defined in the Kinsey Debenture.

The entire principal amount of the Kinsey Debenture is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.10 per share, subject to a weighted average adjustment for certain issuances or sales of the Company’s common stock at a price per share less than $0.08.  In addition, at the option of the Company, the entire principal amount of the Kinsey Debenture is convertible into shares of the Company’s common stock at $0.10 per share, subject to a weighted average adjustment for certain issuances or sales of the Company’s common stock at a price per share less than $0.08, upon the occurrence of the merger or acquisition of the Company or if the average closing price of the Company’s common stock for any period of twenty consecutive trading days is greater than or equal to $0.25 per share.  The quoted market price of the Company’s common stock as of July 7, 2011 was $0.08 per share.  An aggregate of 1,500,000 shares of the Company’s common stock can be issued pursuant to the Kinsey Debenture at the current conversion price of $0.10 per share.  The Company has determined that the value attributable to the weighted average adjustment to the conversion price that would result from certain issuances or sales of the Company’s common stock is de minimis.
 
 
7

 
 
For the three and six months ended June 30, 2012, the Company recorded $3,033 and $6,066, respectively, of interest expense related to the Kinsey Debenture.  As of June 30, 2012 and December 31, 2011, the outstanding principal on the Kinsey Debenture was $150,000 and the accrued and unpaid interest on the Kinsey Debenture was $12,000 and $5,933, respectively, which amounts are included as a component of accrued expenses.

Zanett Convertible Debenture

On July 7, 2011, in a private placement, the Company issued to the Zanett Opportunity Fund, Ltd. (“Zanett”) an 8% convertible debenture in the amount of $376,125 (the “Zanett Debenture”).  As a result of this private placement, the Company received gross proceeds of $150,000 and refinanced $200,000 of principal, $11,375 of interest and $14,750 of fees related to a $200,000 promissory note issued to Zanett on January 5, 2011.  As a result of the issuance of the Zanett Debenture, the promissory note issued to Zanett on January 5, 2011 was cancelled.

The Zanett Debenture has a three-year term maturing on July 7, 2014 and bears interest at a rate of 8% per annum.  Interest is payable in annual installments in cash or, at the option of the Company, in shares of the Company’s common stock.  If the Company elects to pay the interest in shares of its common stock, the number of shares issued as payment will be equal to the quotient of the unpaid interest divided by the market price of the Company’s common stock as defined in the Zanett Debenture.

The entire principal amount of the Zanett Debenture is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.10 per share.  In addition, at the option of the Company, the entire principal amount of the Zanett Debenture is convertible into shares of the Company’s common stock at $0.10 per share upon the occurrence of the merger or acquisition of the Company or if the average closing price of the Company’s common stock for any period of twenty consecutive trading days is greater than or equal to $0.25 per share.  The quoted market price of the Company’s common stock as of July 7, 2011 was $0.08 per share.  An aggregate of 3,761,250 shares of the Company’s common stock can be issued pursuant to the Zanett Debenture at the current conversion price of $0.10 per share.

For the three and six months ended June 30, 2012, the Company recorded $7,606 and $15,212, respectively, of interest expense related to the Zanett Debenture.  As of June 30, 2012 and December 31, 2011, the outstanding principal on the Zanett Debenture was $376,125 and the accrued and unpaid interest was $30,090 and $14,878, respectively, which amounts are included as a component of accrued expenses.

9.           Convertible Promissory Notes

On September 23, 2011 the Company, E. Wayne Kinsey, III and Zanett entered into a note purchase agreement, pursuant to which Mr. Kinsey and Zanett each purchased an 8% convertible secured promissory note from the Company in the principal amount of $400,000 and $100,000, respectively (each a “Secured Note,” and together, the “Secured Notes”).  The Company received gross proceeds of $500,000 in connection with this private placement of the Secured Notes.
 
 
8

 
 
Each of the Secured Notes is secured by all of the assets of the Company, including intangible assets such as intellectual property and trademarks, as detailed in a Security Agreement dated September 23, 2011 between the Company and Mr. Kinsey, as agent for the holders of the Secured Notes.  Each of the Secured Notes has a three-year term maturing on September 23, 2014 and bears interest at a rate of 8% per annum.  Interest is payable in quarterly installments, beginning on October 1, 2011.  Until the first anniversary of the Secured Notes, interest may be paid in cash or in shares of the Company’s common stock at the option of the Company and, thereafter, may be paid in cash or shares of the Company’s common stock at the option of the holder.  If the Company or the holder elects for the interest to be paid in shares of the Company’s common stock, the number of shares issued as payment will be equal to the quotient of the unpaid interest divided by the market price of the Company’s common stock as defined in the Secured Notes.

The entire principal amount of each of the Secured Notes is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.10 per share, subject to a weighted average adjustment for certain issuances or sales of the Company’s common stock at a price per share less than $0.08.  The quoted market price of the Company’s common stock as of September 23, 2011 was $0.08 per share.  The Company is not permitted to prepay the Secured Notes unless it raises a specified amount of additional capital.  The Company has determined that the value attributable to the weighted average adjustment to the conversion price that would result from certain issuances or sales of the Company’s common stock is de minimis.

The occurrence of any of the following events constitutes a default under the Secured Notes, in which case the entire principal amount thereof and all accrued and unpaid interest will immediately become due and payable:  (a)  the Company fails to make any principal or interest payment on a Secured Note when such principal and interest becomes due; (b) a court enters judgment or judgments against the Company for the payment of money aggregating in excess of $500,000 of applicable insurance coverage; or (c) the Company commences a voluntary case or a court enters a decree in respect of the Company relating to bankruptcy, insolvency or reorganization.

The occurrence of any of the following events (as well as the occurrence of certain other standard events of default) also constitutes a default under the Secured Notes, in which case the entire principal amount thereof and all accrued and unpaid interest will become due and payable, at the option of the holder, if the default remains uncured for a period of 30 days after the Company receives written notice of the default from the holder: (a) Mr. Kinsey ceases to be a member of the Company’s board of directors for any reason other than his death, disability or voluntary resignation; or (b) either David R. LaVance, the Company’s President and Chief Executive Officer, or Thomas S. Gifford, the Company’s Executive Vice President, Chief Financial Officer and Secretary, ceases serving in their respective executive management roles with the Company and is no longer involved in the active management of the Company.

In connection with the execution of the note purchase agreement and the issuance of the Secured Notes, the Company provided certain registration rights to the holders of the Secured Notes.  In the event that the Company proposes to register shares of its common stock under the Securities Act, under certain circumstances, Mr. Kinsey and Zanett will be allowed to include shares of the Company’s common stock held by them in such registration.  The Company has determined that the value attributable to these registration rights is de minimis.
 
 
9

 
 
An aggregate of 5,000,000 shares of the Company’s common stock can be issued pursuant to the Secured Notes at the current conversion price of $0.10 per share.  For the three and six months ended June 30, 2012, the Company recorded a total of $9,973 and $19,946, respectively, of interest expense.  As of June 30, 2012 and December 31, 2011, the outstanding principal on the Secured Notes was $500,000 and the accrued and unpaid interest was $30,795 and $10,849, respectively, which amounts are included as a component of accrued expense.

10.           Stockholders’ Deficiency

Common Stock

On June 19, 2012, the Company sold, to an institutional investor, common stock units that in aggregate consisted of 1,875,000 shares of the Company’s common stock and a warrant to purchase 937,500 shares of the Company’s common stock, for an aggregate purchase price of $150,000, or $0.08 per share.  The warrant has a three-year term, is exercisable at $0.20 per share and was fully vested at the date of issuance.  The quoted market price of the Company’s common stock on the date of closing this transaction was $0.07 per share.  The Company incurred offering costs of $10,500 in connection with this transaction.

Stock Options
 
The Company currently has three stock option/stock compensation plans in place:  the 2002 Stock Option Plan, the 2010 Stock Incentive Plan and the 2012 Equity Incentive Plan (collectively, the “Equity Incentive Plans”).  The Equity Incentive Plans are maintained to allow the Company to compensate employees, directors and consultants and other persons providing bona-fide services to the Company or to compensate officers, directors and employees through the award of shares of the Company’s common stock and securities exercisable for shares of the Company’s common stock.  

The 2002 Stock Option Plan was approved by the stockholders in July of 2002.  The Company had reserved for issuance an aggregate of 2,000,000 shares of common stock under the 2002 Stock Option Plan.  As of June 30, 2012, 25,000 shares of the Company’s common stock had been issued under the 2002 Stock Option Plan.  As a result of the adoption of the Company’s 2012 Equity Incentive Plan, no further awards are permitted under the 2002 Stock Option Plan.

The 2010 Stock Incentive Plan was approved by the stockholders in September 2010.  The Company had reserved for issuance an aggregate of 10,000,000 shares of common stock under the 2010 Stock Incentive Plan.  As of June 30, 2012, options to purchase 6,646,920 shares of the Company’s common stock were outstanding under the 2010 Stock Incentive Plan and 90,500 shares of the Company’s common stock had been issued under the 2010 Stock Incentive Plan.  As a result of the adoption of the Company’s 2012 Equity Incentive Plan, no further awards are permitted under the 2010 Stock Incentive Plan.
 
 
10

 
 
The 2012 Equity Incentive Plan was approved by the stockholders in May 2012.  The 2012 Equity Incentive Plan is designed to encourage and enable employees and directors of the Company to acquire or increase their holdings of common stock and other proprietary interests in the Company.  It is intended to promote these individual’s interests in the Company, thereby enhancing the efficiency, soundness, profitability, growth and stockholder value of the Company.  The 2012 Equity Incentive Plan provides for grants and/or awards in the form of incentive and nonqualified stock option grants, stock appreciation rights, restricted stock awards, performance share awards, phantom stock awards and dividend equivalent awards.  As of June 30, 2012, no grants or awards had been made under the 2012 Equity Incentive Plan.

Common stock grants and stock option awards under the Equity Incentive Plans were issued or granted at prices as determined by the Company’s compensation committee, but such prices were not less than the fair market value of the Company's common stock on the date of grant or issuance.  Stock options granted and outstanding to date consist of both incentive stock options and non-qualified options.
 
A summary of stock option transactions under the Equity Incentive Plans during the six months ended June 30, 2012 is set forth below:

   
Stock
Option Shares
   
Weighted Average Exercise Price Per Common Share
   
Aggregate Intrinsic Value
 
Outstanding at December 31, 2011
    300,000     $ 0.08     $ --  
Granted during the period
    6,346,920       0.10       --  
Exercised during the period
    --       --       --  
Terminated during the period
    --       --       --  
                         
Outstanding at June 30, 2012
    6,646,920     $ 0.10     $ --  
                         
Available for purchase at June 30, 2012
    300,000     $ 0.08     $ --  
                         
Available for purchase at December 31, 2011
    300,000     $ 0.08     $ --  

 
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Information with respect to outstanding options and options exercisable as of June 30, 2012 is as follows:

   
Stock Options Outstanding
   
Stock Options Exercisable
 
Exercise
Price
 
Number of Shares Available Under Outstanding Stock
Options
   
Weighted Average Exercise Price Per Common Share
   
Weighted Average Remaining Contractual Life (Years)
   
Number of Shares Available for Purchase Under Outstanding Stock
Options
   
Weighted Average Exercise Price Per Common Share
   
Weighted Average Remaining Contractual Life (Years)
 
$
      0.08
    300,000     $ 0.08       1.8       300,000     $ 0.08       1.8  
$
      0.10
    6,346,920     $ 0.10       8.7       --       --       --  
      6,646,920     $ 0.10       8.4       300,000     $ 0.08       1.8  

A summary of the non-vested shares subject to options granted under the Equity Incentive Plans as of June 30, 2012 is as follows:

   
Stock
Option Shares
   
Weighted Average Grant Date Fair Value
Per Share
 
Nonvested at December 31, 2011
    --       --  
Granted during the period
    6,346,920     $ 0.05  
Vested during the period
    --       --  
Terminated during the period
    --       --  
Nonvested at June 30, 2012
    6,346,920     $ 0.05  

As of June 30, 2012, there was $105,560 of total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the Equity Incentive Plans.  That cost is expected to be recognized over a weighted average period of twenty-five months.

Warrant to Purchase Common Stock

On June 19, 2012, the Company issued a warrant to purchase 93,750 shares of the Company’s common stock to a third-party service provider as partial consideration for services rendered to the Company in connection with a financing.  The warrant is exercisable at $0.20 per share and has a term of three years.  The warrant vested upon issuance.  The fair value of the warrant on the date of issuance as calculated using the Black-Scholes model was $2,609, using the following weighted average assumptions:  exercise price of $0.20 per share; common stock price of $0.07 per share; volatility of 134%; term of three years; dividend yield of 0%; interest rate of 0.39%; and risk of forfeiture of 35%.

 
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A summary of warrant transactions during the six months ended June 30, 2012 is as follows:
 
   
Warrant Shares
   
Weighted Average Exercise Price Per Common Share
   
Aggregate Intrinsic Value
 
Outstanding at December 31, 2011
    33,381,748     $ 0.18     $ 46,061  
Issued during the period
    11,706,250     $ 0.13       --  
Exercised during the period
    --       --       --  
Terminated during the period
    (625,000 )   $ 0.10       --  
                         
Outstanding at June 30, 2012
    44,462,998     $ 0.17     $ --  
                         
Available for purchase at June 30, 2012
    41,901,884     $ 0.17     $ --  
                         
Available for purchase at December 31, 2011
    29,487,302     $ 0.19     $ 46,061  

Warrants issued by the Company contain exercise prices as determined by the Company’s board of directors, but such exercise prices were not less than the fair market value of the Company's common stock on the date of issuance.  Warrants currently issued may vest over a period of up to three years and have a maximum term of ten years from the date of issuance.

Information with respect to outstanding warrants and warrants exercisable at June 30, 2012 is as follows:
 
   
Warrants Outstanding
   
Warrants Exercisable
 
Range of
Exercise Prices
 
Number of Shares Available Under Outstanding Warrants
   
Weighted Average Remaining Contractual Life (Years)
   
Weighted Average Exercise Price Per Common Share
   
Number of Shares Available for Purchase Under Outstanding Warrants
   
Weighted Average Exercise Price Per Common Share
   
Weighted Average Remaining Contractual Life (Years)
 
$
    0.07 - 0.10
    23,181,061       5.4     $ 0.09       22,319,947     $ 0.09       5.3  
$
    0.20 - 0.35
    18,649,437       2.1     $ 0.23       16,949,437     $ 0.23       2.1  
$
  0.40 & 0.50
    2,632,500       1.5     $ 0.50       2,632,500     $ 0.50       1.5  
      44,462,998       3.8     $ 0.17       41,901,884     $ 0.17       3.8  

 
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A summary of the non-vested shares subject to warrants as of June 30, 2012 is as follows:
 
   
Warrant Shares
   
Weighted Average Grant Date Fair Value Per Share
 
Non-vested at December 31, 2011
    3,894,446     $ 0.08  
Issued during the period
    11,706,250     $ 0.08  
Vested during the period
    (13,039,582 )   $ 0.08  
Terminated during the period
    --       --  
Non-vested at June 30, 2012
    2,561,114     $ 0.08  

As of June 30, 2012, there was $89,941 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements involving warrants.  That cost is expected to be recognized over a weighted average period of sixteen months.

11.           Stock-Based Compensation

During the three and six months ended June 30, 2012 and 2011, the Company recorded stock-based compensation expense as follows:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
General and administrative
  $ 22,842     $ 322,367     $ 38,071     $ 366,516  
Sales and marketing
    16,885       4,000       40,677       4,000  
Research and development
    5,401       --       9,890       --  
Finance fees
    --       123       --       7,539  
    $ 45,128     $ 326,490     $ 88,638     $ 378,055  

For the three and six months ended June 30, 2012, the Company recorded stock-based compensation expense related to stock options and warrants granted to employees and directors of $40,845 and $71,038, respectively.  For the three and six months ended June 30, 2012, the Company recorded stock-based compensation expense related to stock options and warrants granted to non-employees of $4,283 and $17,600, respectively.

For both the three and six months ended June 30, 2011, the Company recorded stock-based compensation expense related to stock options and warrants granted to employees and directors of $248,041.  For the three and six months ended June 30, 2011, the Company recorded stock-based compensation expense related to stock options and warrants granted to non-employees of $78,449 and $130,014, respectively.

12.           Net Loss Per Common Share
 
Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options and warrants and conversion of convertible debt that are not deemed to be anti-dilutive.  The dilutive effect of the outstanding stock options and warrants is computed using the treasury stock method.
 
 
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For the three and six months ended June 30, 2012, diluted net loss per share did not include the effect of 6,646,920 shares of common stock issuable upon the exercise of outstanding options, 44,462,998 shares of common stock issuable upon the exercise of outstanding warrants and 10,323,750 shares of common stock issuable upon the conversion of convertible debt, as their effect would be anti-dilutive.
 
For the three and six months ended June 30, 2011, diluted net loss per share did not include the effect of 1,350,000 shares of common stock issuable upon the exercise of outstanding options, 36,805,643 shares of common stock issuable upon the exercise of outstanding warrants and 312,500 shares of common stock issuable upon the conversion of convertible debt, as their effect would be anti-dilutive.
 
13.           Commitments and Contingencies

Lease Agreement – South Carolina

The Company entered into a lease agreement for its premises located in Little River, South Carolina on January 1, 2006.  The lease agreement had an original term of three years.  In January 2009, the Company agreed to renew the lease agreement for a term of five years at $71,291 per year.  The renewal term contained the same covenants, conditions, and provisions as provided in the original lease agreement.  As of June 30, 2012, the future minimum lease payments due under this lease agreement are to be paid as follows:  $35,646 during the remainder of fiscal 2012 and $71,291 in fiscal 2013.

Litigation with Former Chief Executive Officer

On September 23, 2011, a civil complaint was filed against the Company and one of its directors, E. Wayne Kinsey, III, in the Court of Common Pleas, County of Horry, State of South Carolina (the “South Carolina State Court”), by William E. Prince, the Company’s former President and Chief Executive Officer.  In his complaint, Mr. Prince alleges breach of contract and fraudulent inducement by the Company against him with regard to his employment agreement and the termination of his employment.  Mr. Prince claims that he is owed additional compensation under his terminated employment agreement, and is seeking the recovery of such compensation as well as attorney’s fees and punitive damages.

On December 28, 2011, the Company filed a motion to dismiss this action in the South Carolina State Court due to the binding arbitration clause contained in Mr. Prince’s employment agreement.

On February 10, 2012, Mr. Prince filed a motion to amend his complaint in the South Carolina Court.  The amended complaint included additional causes of action for civil conspiracy, tortious interference and unfair trade practices.  This motion was granted by the South Carolina Court on March 19, 2012.
 
 
15

 
 
On April 26, 2012, the Company filed a motion to dismiss the amended complaint in the South Carolina State Court due to the binding arbitration clause contained in Mr. Prince’s employment contract.

On July 11, 2012, the South Carolina State Court entered an order that: (a) granted the Company’s motion to dismiss the breach of contract and fraudulent inducement claims in the South Carolina State Court and compelled binding arbitration as to such claims; and (b) denied the Company’s motion to dismiss the causes of action for civil conspiracy, tortious interference and unfair trade practices but issued stay on these causes of action in the South Carolina State Court until the aforementioned binding arbitration process is complete.

The Company does not believe there is any merit to Mr. Prince’s allegations and will continue to vigorously defend this action.  In addition, the Company is reviewing the actions, if any, it will institute against Mr. Prince relating to his conduct while an executive officer and director of the Company.

Litigation with Crystal Enterprises

On January 12, 2012, a civil complaint was filed against the Company in the United States District Court for the Western District of Washington (the “Washington Federal Court”) by Crystal Enterprises, Inc. (“Crystal”).  In its complaint, Crystal alleges interference with prospective advantage or business expectancy, tortious interference with contract, breach of fiduciary duty, breach of non-disclosure agreement and breach of contact.  Crystal’s allegations center on discussions among the Company, Crystal, Pendred, Inc. (an affiliate of Crystal’s) and Biolize Products, LLC, regarding the establishment of a business relationship involving the distribution of the Company’s anolyte and catholyte solutions.  Crystal is seeking monetary damages as well as attorney fees.

On April 2, 2012, Crystal filed an amended complaint in the Washington Federal Court.  The amended complaint added a request for an accounting of the proceeds that the Company has received or may receive related to the sale of the Company’s anolyte and catholyte solutions.

On April 19, 2012, the Company filed a motion in the Washington Federal Court to dismiss the amended complaint asserting, among other things, that all of Crystal’s claims are based on a phantom joint venture or contract.

On May 7, 2012, Crystal filed a response to the Company’s motion to dismiss in which it attempts to refute the assertions made by the Company in its motion to dismiss filing.

On May 11, 2012, the Company filed a response to Crystal’s May 7, 2012 filing in which the Company further supported its motion to dismiss dated April 19, 2012.  The Company’s motion to dismiss is currently pending.

The Company does not believe there is any merit to Crystal’s allegations and will continue to vigorously defend this action.
 
 
16

 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

IET was originally incorporated in Delaware on February 2, 1999 and is currently a Nevada corporation.  The Company is headquartered in Little River, South Carolina and operates through its wholly-owned subsidiary, I.E.T., Inc., a Nevada corporation incorporated on January 11, 2002.

IET produces and sells hypochlorous acid (“Anolyte”) as well as an anti-oxidizing, mildly alkaline solution (“Catholyte” and, together with Anolyte, the “Solutions”), that provide an environmentally friendly alternative for cleaning, sanitizing and disinfecting as compared to the hazardous chemicals traditionally prevalent in commercial use.  The Company manufactures proprietary EcaFlo® equipment that is used to produce the Solutions for distribution by the Company and, under certain circumstances, such equipment is leased by the Company to customers for use at a customer’s facility.

Products

We produce Anolyte that is effective as a disinfectant without leaving a harmful residue.  Our Anolyte contains an active killing agent that is produced with a pH of 6.5 and contains a ratio of free available chlorine of approximately 98% hypochlorous acid to 2% hypochlorite.  Our Anolyte kills various pathogens including, but not limited to, Salmonella, Pseudomonas aeruginosa, Staphylococcus aureus, Staphylococcus aureus MRSA, swine influenza virus H1N1, Escherichia coli, anthrax and Listeria moncytogenes.  We also produce Catholyte that is effective as a degreaser and cleaner.  Catholyte is an anti-oxidizing, mild alkaline solution with a pH range of 10.5 to 12.0.

The Company markets and sells Anolyte under the brand name Excelyte®, as trademarked by Benchmark Energy Products, LLC, and under the brand name EcaFlo®.  We sell Catholyte under the brand name Catholyte Zero.  The Solutions provide an environmentally friendly alternative for cleaning, sanitizing and disinfecting as compared to the hazardous chemicals traditionally prevalent in commercial use.  Our Anolyte is registered with the U.S. Environmental Protection Agency (the “EPA”) as a hospital-level surface disinfectant and can be used safely anywhere there is a need to control pathogens, bacteria, viruses, and germs.  Our Catholyte is an anti-oxidizing, mildly alkaline solution ideal for use as a degreaser, cleaner, and detergent.

The Company also leases EcaFlo® equipment to a customer when the customer’s business model or required volume of Solutions warrants such an arrangement.  Under these agreements, we lease equipment and service support for a fixed monthly price and, in certain agreements, we receive ongoing payments (royalties) for the Solutions produced under the agreement.  We sometimes license to certain customers the right to utilize our EPA registration pursuant to which the customer is required to pay us a monthly fee based on the number of gallons of Solutions produced by our EcaFlo® equipment.
 
 
17

 
 
Our business model is focused on selling Solutions directly to customers.  In situations where a customer desires to have EcaFlo® equipment on-site, we lease the equipment and maintain ownership as opposed to selling the EcaFlo® equipment outright.
 
Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the interim consolidated financial statements contained elsewhere herein, which have been prepared in accordance with U.S. GAAP.  The preparation of these consolidated financial statements required 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.  On an on-going basis, we evaluate our estimates, including those related to bad debts, income taxes, contingencies and litigation.  We based 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 value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting estimates that we believe affect the more significant judgments and estimates used in preparation of the consolidated financial statements contained elsewhere herein are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.  There have been no material changes to the critical accounting policies.

Results of Operations

Revenue.  Total revenue for the three months ended June 30, 2012 was $37,253, as compared to $190,819 for the three months ended June 30, 2011.  The $153,566, or 80%, decrease in revenue for the three months ended June 30, 2012 was primarily due to a decrease in sales of our EcaFlo® equipment as our focus has migrated from the sale of EcaFlo® equipment to the sale of Solutions.

Total revenue for the six months ended June 30, 2012 was $83,052, as compared to $230,329 for the six months ended June 30, 2011.  The $147,277, or 64%, decrease in revenue for the six months ended June 30, 2012 was primarily due to a decrease in sales of our EcaFlo® equipment as our focus has migrated from the sale of EcaFlo® equipment to the sale of Solutions.

Cost of Sales.  Cost of sales for the three months ended June 30, 2012 was $10,105, as compared to $72,342 for the three months ended June 30, 2011.  The $62,237, or 86%, decrease in cost of sales for the three months ended June 30, 2012 was primarily attributable to the decrease in the sales of our EcaFlo® equipment as our focus has migrated from the sale of EcaFlo® equipment to the sale of Solutions.

Cost of sales for the six months ended June 30, 2012 was $16,707, as compared to $92,157 for the six months ended June 30, 2011.  The $75,450, or 82%, decrease in cost of sales for the six months ended June 30, 2012 was primarily attributable to the decrease in the sales of our EcaFlo® equipment as our focus has migrated from the sale of EcaFlo® equipment to the sale of Solutions.
 
 
18

 
 
Gross Profit.  For the three months ended June 30, 2012 and 2011, gross profit margins were 73% and 62%, respectively.  For the six months ended June 30, 2012 and 2011, gross profit margins were 80% and 60%, respectively.

General and Administrative Expenses.  For the three months ended June 30, 2012, general and administrative expenses were $337,904, as compared to $559,456 for the three months ended June 30, 2011.  The $221,552, or 40%, decrease in general and administrative expenses for the three months ended June 30, 2012 was primarily the result of a $221,199 reduction in stock-based compensation expense for employees and directors, a $78,326 reduction in stock-based compensation expense for consultants, a $27,708 reduction in employee payroll and related benefit costs and a $26,500 decrease in director fees, offset by a $22,177 increase in legal fees primarily related to general corporate activities and SEC filings, a $29,321 increase in depreciation expense, a $28,063 increase in costs associated with the annual meeting of stockholders and a $19,946 increase in bad debt expense primarily associated with a write-down of a lease receivable.

For the six months ended June 30, 2012, general and administrative expenses were $636,109, as compared to $889,387 for the six months ended June 30, 2011.  The $253,278, or 28%, decrease in general and administrative expenses for the six months ended June 30, 2012 was primarily the result of a $205,970 reduction in stock-based compensation expense for employees and directors, a $122,475 reduction in stock-based compensation expense for consultants, a $22,423 decrease in taxes primarily related to a reduction in state taxes and local property taxes, a $33,080 decrease in consulting fees and a $10,000 decrease in director fees, offset by a $45,358 increase in legal fees primarily related to general corporate activities and SEC filings, a $55,270 increase in depreciation expense and a $28,063 increase in costs associated with the annual meeting of stockholders.

Sales and Marketing Expenses. For the three months ended June 30, 2012, sales and marketing expenses were $120,808, as compared to $126,262 for the three months ended June 30, 2011.  The $5,454, or 4%, decrease in sales and marketing expenses for the three months ended June 30, 2012 was primarily the result of an $18,435 reduction in employee payroll and benefit costs, offset by an $8,602 increase in stock-based compensation for employees.

For the six months ended June 30, 2012, sales and marketing expenses were $247,036, as compared to $248,977 for the six months ended June 30, 2011.  The $1,941, or 1%, decrease in sales and marketing expenses for the six months ended June 30, 2012 was primarily the result of a $22,372 reduction in employee payroll and benefit costs, a $15,790 reduction in travel expenses and a $13,562 decrease in consulting fees, offset by a $19,077 increase in stock-based compensation for employees, a $17,600 increase in stock-based compensation expense for consultants and a $7,129 increase in equipment warranty related costs.
 
 
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Research and Development Expenses. For the three months ended June 30, 2012, research and development expenses were $96,818, as compared to $38,297 for the three months ended June 30, 2011.  The $58,521, or 153%, increase in research and development expenses for the three months ended June 30, 2012 was primarily the result of a $30,426 increase in laboratory testing costs attributable to product labeling, a $12,436 increase in employee payroll and benefit costs, a $5,693 increase in consulting fees primarily related to regulatory activities, a $5,401 increase in stock-based compensation expense for employees and a $4,433 increase in research supplies.

For the six months ended June 30, 2012, research and development expenses were $159,283, as compared to $112,986 for the six months ended June 30, 2011.  The $46,297, or 41%, increase in research and development expenses for the six months ended June 30, 2012 was primarily the result of an $18,451 increase in laboratory testing costs attributable to product labeling, an $11,392 increase in consulting fees primarily related to regulatory activities, a $9,890 increase in stock-based compensation expense for employees and a $9,247 increase in employee payroll and benefit costs.

Loss from Operations. During the three months ended June 30, 2012, the loss from operations was $528,382, as compared to $605,538 for the three months ended June 30, 2011.  The $77,156, or 13%, decrease in the loss from operations for the three months ended June 30, 2012 was primarily attributable to a $221,552 decrease in general and administrative expenses and a $62,237 decrease in cost of sales, offset by a $153,566 decrease in revenue and a $58,521 increase in research and development expense.

During the six months ended June 30, 2012, the loss from operations was $976,083, as compared to $1,113,178 for the six months ended June 30, 2011.   The $137,095, or 12%, decrease in the loss from operations for the six months ended June 30, 2012 was primarily attributable to a $253,278 decrease in general and administrative expenses and a $75,450 decrease in cost of sales, offset by a $147,277 decrease in revenue and a $46,297 increase in research and development expense.

Interest Income.  For the three months ended June 30, 2012, interest income was $229, as compared to $483 for the three months ended June 30, 2011.  The decrease in interest income for the three months ended June 30, 2012 relates to the default by a customer on a capital lease agreement.  For the six months ended June 30, 2012, interest income was $1,067, as compared to $589 for the six months ended June 30, 2011.  The increase in interest income for the six months ended June 30, 2012 relates to interest recognized by the Company on its capital lease sales of equipment.

Finance Fees. For the three months ended June 30, 2012, finance fees were $0 as compared to $123 for the three months ended June 30, 2011.  For the six months ended June 30, 2012, finance fees were $0 as compared to $9,539 for the six months ended June 30, 2011.  The decrease in finance fees for the three and six months ended June 30, 2012 was primarily due to a decrease in warrants issued as loan fees related to temporary working capital loans.
 
 
20

 
 
Interest Expense. For the three months ended June 30, 2012, interest expense was $21,562, as compared to $18,238 for the three months ended June 30, 2011.  The $3,324, or 18%, increase in interest expense for the three months ended June 30, 2012 was the primarily the result of interest paid on the Zanett Debenture, the Kinsey Debenture and the issuance of the Secured Notes, offset by the decrease in temporary working capital loans and the related interest.  For the six months ended June 30, 2012, interest expense was $43,470, as compared to $45,713 for the six months ended June 30, 2011.  The $2,243, or 5%, decrease in interest expense for the six months ended June 30, 2012 was the result of a decrease in temporary working capital loans and the related interest, offset by interest paid on the Zanett Debenture, the Kinsey Debenture and the issuance of the Secured Notes.

Net Loss.  For the three months ended June 30, 2012, the Company’s net loss was $549,715, as compared to $623,415 for the three months ended June 30, 2011.  The $73,700, or 12%, decrease in the net loss for the three months ended June 30, 2012 was primarily attributable to a $221,552 decrease in general and administrative expenses and a $62,237 decrease in cost of sales, offset by a $153,566 decrease in revenue and a $58,521 increase in research and development expense.

For the six months ended June 30, 2012, the Company’s net loss was $1,018,486, as compared to $1,167,840 for the six months ended June 30, 2011.  The $149,354, or 13%, decrease in the net loss for the six months ended June 30, 2012 was primarily attributable to a $253,478 decrease in general and administrative expenses and a $75,450 decrease in cost of sales, offset by a $147,277 decrease in revenue and a $46,297 increase in research and development expense.

Liquidity and Capital Resources

As of June 30, 2012, IET had working capital of $186,837 and cash on hand of $446,274.  The $300,281 increase in cash on hand from December 31, 2011 was primarily due to the receipt of $1,029,900 of net proceeds from the sale of common stock units, offset by our continuing operating expenses.

During the past several years, IET has generally sustained recurring losses and negative cash flows from operations.  We currently do not generate sufficient revenue from the sale of our products to fund our operations and have funded this shortfall through the sale of our convertible debentures, convertible promissory notes and common stock.

During the six months ended June 30, 2012, we received $1,029,900 of net proceeds related to the sale of common stock units ($630,000 in January 2012, $260,400 in February 2012 and $139,500 in June 2012).  As of August 10, 2012, our cash position was approximately $310,700.  If we are not able to generate profitable operations from the sale of our products or we are not able to obtain additional financing, we will only be able to continue our operations for approximately three months from the filing date of this quarterly report on Form 10-Q.  The Company has no lending relationships with commercial banks and is dependent on its ability to attain profitable operations and raise additional capital through one or more equity and/or debt financings in order to continue operations.  While we are working toward attaining profitability for our continuing operations and aggressively pursuing potential equity and/or debt investors, there can be no assurance that we will be successful in our efforts.  From time to time, we engage placement agents to assist us in our financing initiatives.  The current economic slowdown has made financing more difficult to obtain, and, even if obtained, any such equity financing may result in substantial dilution to the Company’s stockholders.  If the Company is unable to attain profitable operations or secure additional capital, it will explore strategic alternatives, including, but not limited to, the possible sale of the Company.
 
 
21

 
 
Our independent registered public accounting firm included an emphasis of a matter paragraph in their report included in our annual report on Form 10-K for the year ended December 31, 2011, which expressed substantial doubt about our ability to continue as a going concern.  Our interim consolidated financial statements included herein do not include any adjustments related to this uncertainty.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
IET is a smaller reporting company and is therefore not required to provide this information.
 
Item 4.
Controls and Procedures

Evaluation of disclosure controls and procedures

As required by Rule 13a-15 under the Exchange Act, as of the end of the Company’s last fiscal quarter, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of the Company’s current management, including the Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer), who concluded that the Company’s disclosure controls and procedures are effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.
 
Changes in internal control over financial reporting.
 
Management reviews the Company’s system of internal control over financial reporting and makes changes to the Company’s processes and systems to improve controls and increase efficiency, while ensuring that the Company maintains an effective internal control environment.  Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes.
 
During the Company’s last fiscal quarter, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
22

 
 
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings

Litigation with Former Chief Executive Officer
 
On September 23, 2011, a civil complaint was filed against the Company and one of its directors, E. Wayne Kinsey, III, in the South Carolina State Court, by William E. Prince, the Company’s former President and Chief Executive Officer.  In his complaint, Mr. Prince alleges breach of contract and fraudulent inducement by the Company against him with regard to his employment agreement and the termination of his employment.  Mr. Prince claims that he is owed additional compensation under his terminated employment agreement, and is seeking the recovery of such compensation as well as attorney’s fees and punitive damages.

On December 28, 2011, the Company filed a motion to dismiss this action in the South Carolina State Court due to the binding arbitration clause contained in Mr. Prince’s employment agreement.

On February 10, 2012, Mr. Prince filed a motion to amend his complaint in the South Carolina Court.  The amended complaint included additional causes of action for civil conspiracy, tortious interference and unfair trade practices.  This motion was granted by the South Carolina Court on March 19, 2012.

On April 26, 2012, the Company filed a motion to dismiss the amended complaint in the South Carolina State Court due to the binding arbitration clause contained in Mr. Prince’s employment contract.  This motion is pending and supersedes the Company’s prior motion to dismiss the original complaint.  In the event the South Carolina Court does not grant this motion, the Company will file an answer to the amended complaint.

Only July 11, 2012, the South Carolina State Court entered an order that: (a) granted the Company’s motion to dismiss the breach of contract and fraudulent inducement claims in the South Carolina State Court and compelled binding arbitration as to such claims; and (b) denied the Company’s motion to dismiss the causes of action for civil conspiracy, tortious interference and unfair trade practices but issued stay on these causes of action in the South Carolina State Court until the aforementioned binding arbitration process is complete.

The Company does not believe there is any merit to Mr. Prince’s allegations and will continue to vigorously defend this action.  In addition, the Company is reviewing the actions, if any, it will institute against Mr. Prince relating to his conduct while an executive officer and director of the Company.

Litigation with Crystal Enterprises
 
On January 12, 2012, a civil complaint was filed against the Company in the Washington Federal Court by Crystal.  In its complaint, Crystal alleges interference with prospective advantage or business expectancy, tortious interference with contract, breach of fiduciary duty, breach of non-disclosure agreement and breach of contact.  Crystal’s allegations center on discussions among the Company, Crystal, Pendred, Inc. (an affiliate of Crystal’s) and Biolize Products, LLC, regarding the establishment of a business relationship involving the distribution of the Company’s anolyte and catholyte solutions.  Crystal is seeking monetary damages as well as attorney fees.
 
 
23

 
 
On April 2, 2012, Crystal filed an amended complaint in the Washington Federal Court.  The amended complaint added a request for an accounting of the proceeds that the Company has received or may receive related to the sale of the Company’s anolyte and catholyte solutions.

On April 19, 2012, the Company filed a motion in the Washington Federal Court to dismiss the amended complaint asserting, among other things, that all of Crystal’s claims are based on a phantom joint venture or contract.

On May 7, 2012, Crystal filed a response to the Company’s motion to dismiss in which it attempts to refute the assertions made by the Company in its motion to dismiss filing.

On May 11, 2012, the Company filed a response to Crystal’s May 7, 2012 filing in which the Company further supported its motion to dismiss dated April 19, 2012.  The Company’s motion to dismiss is currently pending.

The Company does not believe there is any merit to Crystal’s allegations and will continue to vigorously defend this action.
 
Item 1A.
Risk Factors

IET is a smaller reporting company and is therefore not required to provide this information.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Sale of Common Stock Units
 
On June 19, 2012, the Company sold, to an institutional investor, common stock units that in aggregate consisted of 1,875,000 shares of the Company’s common stock and a warrant to purchase 937,500 shares of the Company’s common stock, for an aggregate purchase price of $150,000, or $0.08 per share.  The warrant has a three-year term, is exercisable at $0.20 per share and was fully vested at the date of issuance.  The quoted market price of the Company’s common stock on the date of closing this transaction was $0.08 per share.  The Company incurred offering costs of $10,500 in connection with this transaction.

The Company will use the net proceeds from the aforementioned transaction for working capital purposes, including the continued roll out of its previously disclosed sales and marketing strategy.  In connection with the issuances of the Company’s common stock and the warrants to purchase the Company’s common stock described above, the Company relied on the exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) of the Securities Act.
 
 
24

 
 
Item 3.
Defaults Upon Senior Securities
 
On April 26, 2007, in a private placement, the Company issued a convertible debenture to an individual accredited investor in the principal amount of $25,000.  This convertible debenture matured on January 2, 2009.  The convertible debenture currently accrues interest at a rate of 12% per annum and is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.40 per share.  The Company is in default on this convertible debenture and is attempting to restructure the convertible debenture with the holder.  As of June 30, 2012, the accrued and unpaid interest on this convertible debenture was $5,938.
 
Item 4.
Mine Safety Disclosures
 
Not applicable.
 
Item 5.
Other Information
 
None.
 
Item 6.
Exhibits
 
See Index of Exhibits Commencing on Page E-1.
 
 
25

 
 
SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
INTEGRATED ENVIRONMENTAL
TECHNOLOGIES, LTD.
 
       
August 14, 2012  
By:
/s/ David R. LaVance  
    David R. LaVance  
    President and Chief Executive Officer  
       
August 14, 2012 By: /s/ Thomas S. Gifford  
    Thomas S. Gifford  
    Executive Vice President,  
    Chief Financial Officer and Secretary  
 
 
26

 
 

INDEX OF EXHIBITS
 
Exhibit No.
 
Description
3.1
 
Amended and Restated Articles of Incorporation of Integrated Environmental Technologies, Ltd. (the “Company”) (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K that was filed with the Securities and Exchange Commission (the “SEC”) on May 22, 2012).
     
3.2
 
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s current report on Form 8-K that was filed with the SEC on May 22, 2012).
     
4.1
 
Convertible Debenture Unit Purchase Agreement between the Company and L.J. Tichacek dated April 26, 2007 (incorporated by reference to Exhibit 4.1 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
     
4.2
 
10% Convertible Debenture in the principal amount of $25,000 issued to L.J. Tichacek dated April 26, 2007 (incorporated by reference to Exhibit 4.2 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
     
4.3
 
8% Convertible Debenture in the principal amount of $150,000 issued by the Company to E. Wayne Kinsey, III (“Kinsey”) dated July 7, 2011 (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K that was filed with the SEC on July 13, 2011).
     
4.4
 
8% Convertible Debenture in the principal amount of $150,000 issued by the Company to Zanett dated July 7, 2011 (incorporated by reference to Exhibit 4.2 to the Company’s current report Form 8-K that was filed with the SEC on July 13, 2011).
     
4.5
 
Note Purchase Agreement, dated September 23, 2011, among the Company, Kinsey and Zanett (incorporated by reference to Exhibit 10.1 to the Company’s current report Form 8-K that was filed with the SEC on October 3, 2011).
     
4.6
 
Form of 8% Convertible Secured Promissory Note issued by the Company to each of Kinsey ($400,000) and Zanett ($100,000) on September 23, 2011 (incorporated by reference to Exhibit 10.2 to the Company’s current report Form 8-K that was filed with the SEC on October 3, 2011).
     
4.7
 
Security Agreement, dated September 23, 2011, between the Company and Kinsey, as agent for the Secured Note holders.  Upon the request of the SEC, the Company agrees to furnish copies of each of the following schedules and exhibits:  Schedule I – Capital Securities; Schedule II – Grantors; Schedule III – Patents; Schedule IV – Trademarks; Schedule V – Copyrights; Exhibit A – Form of Patent Security Agreement; Exhibit B – Form of Trademark Security Agreement; Exhibit C – Form of Copyright Security Agreement; Annex I – Form of Supplement to Security Agreement (incorporated by reference to Exhibit 10.3 to the Company’s current report Form 8-K that was filed with the SEC on October 3, 2011).
 
 
E-1

 
 
Exhibit No.
 
 
Description
10.1
 
Exclusive License and Distribution Agreement between I.E.T., Inc. and Benchmark Energy Products, L.P. dated June 20, 2007 (incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K that was filed with the SEC on August 21, 2007).
     
10.2
 
Amendment to the Exclusive License and Distribution Agreement between I.E.T., Inc. and Benchmark Energy Products, L.P. dated December 1, 2011 (incorporated by reference to Exhibit 10.3 to the Company’s annual report on Form 10-K for the year ended December 31, 2011 that was filed with the SEC on March 30, 2012).
     
10.3
 
Amended and Restated Registration Rights Agreement between the Company and E. Wayne Kinsey, III and Zanett dated September 23, 2011 (incorporated by reference to Exhibit 10.4 to the Company’s annual report on Form 10-K for the year ended December 31, 2011 that was filed with the SEC on March 30, 2012).
     
10.4
 
2002 Stock Option Plan of the Company (incorporated by reference to Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
     
10.5
 
2010 Stock Incentive Plan of the Company (incorporated by reference to Exhibit 10.5 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
     
10.6
 
Investor Relations Consulting Agreement between the Company and Gary J. Grieco, dba 3GC, Ltd., dated March 1, 2010 (incorporated by reference to Exhibit 10.7 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
     
10.7
 
Addendum dated May 19, 2010 to Investor Relations Consulting Agreement between the Company and Gary J. Grieco, dba 3GC, Ltd., dated March 1, 2010 (incorporated by reference to Exhibit 10.8 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
     
10.8
 
Addendum dated September 1, 2010 to Investor Relations Consulting Agreement between the Company and Gary J. Grieco, dba 3GC, Ltd., dated March 1, 2010 (incorporated by reference to Exhibit 10.9 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
     
10.9
 
Non-Exclusive Independent Sales Representative Agreement between the Company and Gary J. Grieco, dba 3GC, Ltd., dated February 1, 2011 (incorporated by reference to Exhibit 10.10 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
 
 
E-2

 
 
Exhibit No.
 
 
Description
10.10
 
Form of Warrant, dated April 21, 2011, issued by the Company to each of David R. LaVance (for the purchase of 1,818,182 shares of the Company’s common stock), Raymond C. Kubacki (for the purchase of 1,818,182 shares of the Company’s common stock) and Valgene L. Dunham (for the purchase of 969,697 shares of the Company’s common stock) (incorporated by reference to Exhibit 10.12 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
     
10.11
 
Form of Warrant, dated May 23, 2011, issued by the Company to each of David R. LaVance (for the purchase of 3,100,000 shares of the Company’s common stock) and Thomas S. Gifford (for the purchase of 3,100,000 shares of the Company’s common stock) (incorporated by reference to Exhibit 10.13 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 that was filed with the SEC on August 22, 2011).
     
10.12
 
Sales Management Services Agreement, dated as of December 6, 2011, by and between I.E.T., Inc. and TrueLogix, LLC (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K that was filed with the SEC on December 6, 2011).
     
10.13
 
Warrant, dated October 27, 2011, issued by the Company to Raymond C. Kubacki for the purchase of 468,750 shares of the Company’s common stock (incorporated by reference to Exhibit 10.4 to the Company’s annual report on Form 10-K for the year ended December 31, 2011 that was filed with the SEC on March 30, 2012).
     
10.14
 
Form of Incentive Stock Option Agreement, dated March 27, 2012, issued by the Company to each of David R. LaVance (for the purchase of 3,000,000 shares of the Company’s common stock) and Thomas S. Gifford (for the purchase of 2,000,000 shares of the Company’s common stock) (incorporated by reference to Exhibit 10.14 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2012 that was filed with the SEC on May 15, 2012).
     
10.15
 
Form of Non-Qualified Stock Option Agreement, dated March 27, 2012, issued by the Company to each of:  Raymond C. Kubacki (for the purchase of 541,860 shares of the Company’s common stock); David N. Harry (for the purchase of 309,640 shares of the Company’s common stock); Valgene L. Dunham (for the purchase of 340,600 shares of the Company’s common stock); and E. Wayne Kinsey, III  (for the purchase of 154,820 shares of the Company’s common stock) (incorporated by reference to Exhibit 10.15 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2012 that was filed with the SEC on May 15, 2012).
     
31.1
 
Section 302 Certification of Principal Executive Officer.
     
31.2
 
Section 302 Certification of Principal Financial Officer.
     
32.1
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.
     
32.2
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.
 
 
E-3