10-Q 1 f10q0314_integratedenv.htm QUARTERLY REPORT f10q0314_integratedenv.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 March 31, 2014

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 May 9, 2014, there were 230,778,176 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 March 31, 2014 and December 31, 2013
  2  
         
 
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2014 and 2013
  3  
         
 
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2014 and 2013
  4  
         
 
Notes to the Unaudited Consolidated Financial Statements
  5  
         
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
  13  
         
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
  17  
         
Item 4.
Controls and Procedures
  17  
         
PART II.
OTHER INFORMATION
     
         
Item 1.
Legal Proceedings
  18  
         
Item 1A.
Risk Factors
  18  
         
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  18  
         
Item 3.
Defaults upon Senior Securities
  18  
         
Item 4.
Mine Safety Disclosures
  18  
         
Item 5.
Other Information
  18  
         
Item 6.
Exhibits
  18  
         
Signatures
  19  
         
Index of Exhibits
     
 
 
 

 
 
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 objectives 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 quarterly report on Form 10-Q.  Except as may be required under applicable securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.  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.  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.
 
 
 

 
 
PART I – FINANCIAL INFORMATION

Item 1.                   Financial Statements
 
The consolidated balance sheet as of March 31, 2014 and the related consolidated statements of operations and consolidated statements of cash flows for the three months ended March 31, 2014 and 2013 for Integrated Environmental Technologies, Ltd. and its wholly-owned subsidiary I.E.T., 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 Securities and Exchange Commission (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.  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, 2013.

The results of operations for the three months ended March 31, 2014 and 2013 are not necessarily indicative of the results of the entire fiscal year or of any other period.
 
 
1

 
 
Integrated Environmental Technologies, Ltd.
Consolidated Balance Sheets
(Unaudited)
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
Assets
           
Current assets:
           
Cash
  $ 673,139     $ 1,049,399  
Accounts receivable
    21,271       28,250  
Prepaid expenses
    7,127       26,166  
Inventory
    131,051       126,952  
      Total current assets
    832,588       1,230,767  
                 
Property and equipment, net
    323,530       344,884  
      Total assets
  $ 1,156,118     $ 1,575,651  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 94,355     $ 41,320  
Accrued expenses
    38,836       47,954  
Customer deposits
    38,109       38,109  
Convertible debentures
    25,000       25,000  
Note payable
    76,842       75,513  
      Total current liabilities
    273,142       227,896  
                 
Convertible debentures
    476,125       476,125  
Note payable
    26,829       46,546  
      Total liabilities
    776,096       750,567  
                 
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock, $.001 par value; 400,000,000 shares authorized; 230,778,176 and 229,971,926 shares issued and outstanding, respectively
    230,778       229,972  
Additional paid-in capital
    20,147,095       20,075,764  
Accumulated deficit
    (19,997,851 )     (19,480,652 )
      Total stockholders' equity
    380,022       825,084  
      Total liabilities and stockholders' equity
  $ 1,156,118     $ 1,575,651  

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
March 31,
 
   
2014
   
2013
 
             
Revenues:
           
Sales
  $ 12,061     $ 22,330  
Leasing and licensing fees
    6,000       16,500  
      18,061       38,830  
Cost of sales
    4,245       5,375  
                 
Gross profit
    13,816       33,455  
                 
Operating expenses:
               
General and administrative
    297,477       278,354  
Sales and marketing
    160,367       105,107  
Research and development
    60,890       48,043  
      518,734       431,504  
                 
Loss from operations
    (504,918 )     (398,049 )
                 
Other income (expense):
               
Interest income
    --       37  
Interest expense
    (12,281 )     (10,601 )
Total other income (expense)
    (12,281 )     (10,564 )
                 
Net loss
  $ (517,199 )   $ (408,613 )
                 
Net loss per share, basic and diluted
  $ 0.00     $ 0.00  
                 
Weighted average shares outstanding, basic and diluted
    230,424,912       156,334,611  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 

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

   
Three Months Ended
March 31,
 
   
2014
   
2013
 
             
Cash flows from operating activities:
           
Net loss
  $ (517,199 )   $ (408,613 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    21,354       37,836  
Stock-based compensation expense
    30,437       39,876  
Changes in operating assets and liabilities:
               
Accounts receivable
    4,478       5,957  
Inventory
    (4,099 )     (1,921 )
Prepaid expenses
    19,039       10,208  
Accounts payable
    72,035       (9,745 )
Accrued expenses
    (9,118 )     (8,938 )
Net cash used in operating activities
    (383,073 )     (335,340 )
Cash flows from investing activity:
               
Purchase of equipment
    --       (18,176 )
Cash flows from financing activities:
               
Proceeds from sale of common stock, net of offering costs
    25,200       311,750  
Repayment of note payable
    (18,387 )     --  
Net cash provided by financing activities
    6,813       311,750  
Decrease in cash
    (376,260 )     (41,766 )
Cash - beginning of period
    1,049,399       180,489  
Cash - end of period
  $ 673,139     $ 138,723  
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 2,139     $ 550  
Cash paid for income taxes
  $ 700     $ --  
Non-cash operating activity:
               
Issuance of 206,250 and 1,485,714 shares of common stock, respectively, as payment of director fees
  $ 16,500     $ 52,000  

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 and negative cash flows from operations.  The Company had working capital of $559,446 and an accumulated deficit of $19,997,851 as of March 31, 2014.  The Company also has no lending relationships with commercial banks and is dependent on the completion of financings involving the private placement of its securities 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 March 31, 2014 and December 31, 2013, inventory consisted of parts and materials totaling $131,051 and $126,952, respectively.

3.           Property and Equipment

As of March 31, 2014 and December 31, 2013, property and equipment, on a net basis, consisted of the following (see note 7):

   
March 31,
2014
   
December 31,
2013
 
Leasehold improvements
  $ 328,977     $ 328,977  
Equipment
    437,504       437,504  
      766,481       766,481  
Less:  Accumulated depreciation
    (442,951 )     (421,597 )
    $ 323,530     $ 344,884  
 
 
5

 
 
4.           Accrued Expenses

As of March 31, 2014 and December 31, 2013, accrued expenses consisted of the following:

   
March 31,
2014
   
December 31,
2013
 
Accrued interest
  $ 34,453     $ 24,321  
Accrued auditing fees
    2,750       22,000  
Accrued other expenses
    1,633       1,633  
    $ 38,836     $ 47,954  

5.           Customer Deposits

On March 29, 2011, the Company issued a credit to purchase equipment to a consultant in the amount of $36,109 as payment to the consultant for consulting services rendered to the Company.  The Company has recorded this amount as a customer deposit.

Effective January 1, 2013, the Company entered into a license agreement with a third party related to the use by the third party of the Company’s United States Environmental Protection Agency (the “EPA”) registration for its anolyte solution.  The Company received a deposit of $2,000 pursuant to the terms of this agreement.

6.           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 and remains unpaid.  The convertible debenture 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.  An aggregate of 62,500 shares of the Company’s common stock can be issued upon the conversion of the outstanding principal amount due on this convertible debenture at the current conversion price of $0.40 per share.

During each of the three months ended March 31, 2014 and 2013, the Company recorded a total of $740 of interest expense related to this convertible debenture.  As of March 31, 2014 and December 31, 2013, the outstanding principal on this convertible debenture was $25,000 and the accrued and unpaid interest was $11,181 and $10,441, respectively.  The accrued and unpaid interest is included as a component of accrued expenses.

Zanett Convertible Debentures

On August 21, 2012, the Company issued to Zanett Opportunity Fund, Ltd. (“Zanett”) an 8% convertible debenture in the amount of $476,125 (the “Zanett August 2012 Debenture”).  In connection with this private placement, the Company refinanced an 8% convertible debenture, in the principal amount of $376,125, issued to Zanett on July 7, 2011 (the “Zanett July 2011 Debenture”) and refinanced an 8% convertible secured promissory note, in the principal amount of $100,000, issued to Zanett on September 23, 2011 (the “Zanett September 2011 Note”).  As a result of the issuance of the Zanett August 2012 Debenture, the Zanett July 2011 Debenture and the Zanett September 2011 Note were cancelled.
 
 
6

 

The Zanett August 2012 Debenture has a three-year term maturing on August 21, 2015 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 August 2012 Debenture.

The entire principal amount of the Zanett August 2012 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 August 2012 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 ten consecutive trading days is greater than or equal to $0.15 per share.  The quoted market price of the Company’s common stock on August 21, 2012 was $0.05 per share.  An aggregate of 4,761,250 shares of the Company’s common stock can be issued upon the conversion of the outstanding principal amount due on the Zanett August 2012 Debenture at the current conversion price of $0.10 per share.

On August 22, 2013, the Company issued 400,947 shares of the Company’s common stock to Zanett as payment of $38,090 of accrued interest due on the Zanett August 2012 Debenture for the period commencing August 21, 2012 through August 20, 2013.  The number of shares of the Company’s common stock issued as payment of the accrued interest was calculated based on the market price of the Company’s common stock ($0.095 per share) as defined in the Zanett August 2012 Debenture.

During the three months ended March 31, 2014 and 2013, the Company recorded $9,392 and $9,523, respectively, of interest expense related to the Zanett August 2012 Debenture.  As of March 31, 2014 and December 31, 2013, the outstanding principal on the Zanett August 2012 Debenture was $476,125 and the accrued and unpaid interest was $23,272 and $13,880, respectively.  The accrued and unpaid interest is included as a component of accrued expenses.

7.           Note Payable

On June 17, 2013, the Company and Benchmark Performance Group, Inc. (“Benchmark”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), whereby the Company purchased nineteen EcaFlo™ machines owned by Benchmark as well as the rights to the Excelyte™ trademark and certain other intangible assets.  The purchase price for the nineteen EcaFlo™ machines, the Excelyte™ trademark and other intangible assets was $190,000.

The Company paid $38,000 in conjunction with the closing of the Asset Purchase Agreement and issued a promissory note with a principal balance of $152,000 (the “Benchmark Note”).  The Benchmark Note bears interest at a rate of 7% per annum and requires the Company to make twenty-four monthly payments of $6,805 commencing August 1, 2013.  The Benchmark Note is secured by the nineteen EcaFlo™ machines.
 
 
7

 

For the three months ended March 31, 2014, the Company recorded $2,029 of interest expense related to the Benchmark Note.  As of March 31, 2014 and December 31, 2013, the outstanding principal on the Benchmark Note was $103,671 (current portion $76,842; long-term portion $26,829) and $122,059 (current portion $75,513; long-term portion $46,546), respectively.

8.           Stockholders’ Equity

Common Stock

On January 8, 2014, the Company sold 350,000 shares of its common stock to an individual investor for an aggregate purchase price of $25,200, or $0.072 per share.

On February 25, 2014, the Company issued an aggregate of 206,250 shares of its common stock, at a per share price of $0.08, as settlement of $16,500 of director fees due certain members of the Company’s board of directors for services rendered for the period commencing September 1, 2013 through December 31, 2013.  The quoted market price of the Company’s common stock on the date the issuance was approved by the Company’s board of directors was $0.08 per share.

On March 14, 2014, the Company issued 250,000 shares of its common stock in connection with a consulting agreement with an unaffiliated third party for marketing services.  The total expense associated with the issuance of these shares was $20,000, representing the fair market value of the shares on the date of issuance ($0.08 per share).

Stock Options
 
The Company currently has two stock option/stock compensation plans in place:  the 2010 Stock Incentive Plan and the 2012 Equity Incentive Plan (collectively, the “Equity Incentive Plans”).

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 March 31, 2014, stock options to purchase 4,980,254 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.

The 2012 Equity Incentive Plan was approved by the stockholders in May 2012.  The Company has reserved for issuance an aggregate of 14,000,000 shares of common stock under the 2012 Stock Incentive Plan.  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 individuals’ 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 non-qualified stock option grants, stock appreciation rights, restricted stock awards, performance share awards, phantom stock awards and dividend equivalent awards.  As of March 31, 2014, no grants or awards had been made under the 2012 Equity Incentive Plan.
 
 
8

 

Common stock grants and stock option awards under the Equity Incentive Plans were granted or issued at prices as determined by the Company’s compensation committee; provided, however, that 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 stock options.
 
A summary of stock option transactions under the Equity Incentive Plans during the three months ended March 31, 2014 is set forth below:

   
Stock
Option
Shares
   
Weighted
Average
Exercise
Price Per
Common
Share
   
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2013
    4,980,254     $ 0.18     $ --  
Granted during the period
    --       --       --  
Exercised during the period
    --       --       --  
Terminated during the period
    --       --       --  
Outstanding at March 31, 2014
    4,980,254     $ 0.18     $ --  
Available for purchase at March 31, 2014
    3,313,586     $ 0.12     $ --  
Available for purchase at December 31, 2013
    3,313,586     $ 0.12     $ --  

Information with respect to stock options outstanding and stock options exercisable as of March 31, 2014 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       0.1       300,000     $ 0.08       0.0  
$ 0.10       2,180,253     $ 0.10       4.9       2,180,253     $ 0.10       4.9  
$ 0.20       833,333     $ 0.20       8.0       833,333     $ 0.20       8.0  
$ 0.30       1,666,668     $ 0.30       8.0       --       --       --  
          4,980,254     $ 0.18       6.2       3,313,586     $ 0.12       5.2  
 
 
9

 
 
A summary of the non-vested shares subject to stock options granted under the Equity Incentive Plans as of March 31, 2014 is as follows:

   
Stock
Option
Shares
   
Weighted
Average
Grant
Date Fair
Value
Per Share
 
Non-vested at December 31, 2013
    1,666,668     $ 0.05  
Granted during the period
    --       --  
Vested during the period
    --       --  
Terminated during the period
    --       --  
Non-vested at March 31, 2014
    1,666,668     $ 0.05  

As of March 31, 2014, there was $22,014 of total unrecognized compensation cost related to non-vested, stock-based compensation arrangements granted under the Equity Incentive Plans.  That cost is expected to be recognized over a weighted average period of nine months.

Warrants to Purchase Common Stock

A summary of warrant transactions during the three months ended March 31, 2014 is as follows:
 
   
Warrant
Shares
   
Weighted
Average
Exercise
Price Per
Common
Share
   
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2013
    36,844,565     $ 0.12     $ --  
Issued during the period
    --       --       --  
Exercised during the period
    --       --       --  
Terminated during the period
    --       --       --  
Outstanding at March 31, 2014
    36,844,565     $ 0.12     $ --  
Available for purchase at March 31, 2014
    36,844,565     $ 0.12     $ --  
Available for purchase at December 31, 2013
    36,844,565     $ 0.12     $ --  

Warrants issued by the Company contain exercise prices that were approved by the Company’s board of directors.  Such exercise prices are generally not less than the quoted market price of the Company's common stock on the date of issuance.  Warrants currently issued either vested immediately or over a period of up to three years and have a maximum term of ten years from the date of issuance.
 
 
10

 
 
Information with respect to warrants outstanding and warrants exercisable at March 31, 2014 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
Remaining
Contractual
Life (Years)
   
Weighted
Average
Exercise
Price Per
Common
Share
 
$ 0.03 - 0.04       1,151,567       2.8     $ 0.04       1,151,567       2.8     $ 0.04  
$ 0.07 - 0.10       23,056,061       3.7     $ 0.09       23,056,061       3.7     $ 0.09  
$ 0.20       12,636,937       1.0     $ 0.20       12,636,937       1.0     $ 0.20  
          36,844,565       2.7     $ 0.13       36,844,565       2.7     $ 0.13  

As of March 31, 2014, there were no non-vested shares subject to warrants and no unrecognized compensation cost related to warrants.

9.           Stock-Based Compensation

During the three months ended March 31, 2014 and 2013, the Company recorded stock-based compensation expense as follows:
 
   
Three
Months Ended
March 31,
 
   
2014
   
2013
 
General and administrative
  $ 26,837     $ 36,276  
Sales and marketing
    2,520       2,520  
Research and development
    1,080       1,080  
Total
  $ 30,437     $ 39,876  

For the three months ended March 31, 2014 and 2013, the Company recorded stock-based compensation expense related to stock options granted to employees and directors of $10,437 and $11,985, respectively.  For the three months ended March 31, 2014 and 2013, the Company recorded stock-based compensation expense related to common stock and warrants granted to non-employees of $20,000 and $27,891, respectively.

10.         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.
 
For the three months ended March 31, 2014, diluted net loss per share did not include the effect of 4,980,254 shares of common stock issuable upon the exercise of outstanding stock options, 36,844,565 shares of common stock issuable upon the exercise of outstanding warrants and 4,823,750 shares of common stock issuable upon the conversion of convertible debt, as their effect would be anti-dilutive.
 
 
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For the three months ended March 31, 2013, diluted net loss per share did not include the effect of 5,813,587 shares of common stock issuable upon the exercise of outstanding stock options, 46,127,998 shares of common stock issuable upon the exercise of outstanding warrants and 4,823,750 shares of common stock issuable upon the conversion of convertible debt, as their effect would be anti-dilutive.
 
11.           Commitments and Contingencies

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, ending on December 31, 2013, at $71,291 per year.  The renewal term contained the same covenants, conditions, and provisions as provided in the original lease agreement.  The Company is currently leasing the premises on a month-to-month basis.
 
 
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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 now a Nevada corporation.  IET 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 markets its products and equipment under the umbrella brand name, EcoTreatments™.  IET produces and sells a hypochlorous acid solution (“Anolyte”) as well as an anti-oxidizing, mildly alkaline solution (“Catholyte” and, together with Anolyte, the “Solutions”), that provide an environmentally friendly and effective alternative for cleaning, sanitizing and disinfecting as compared to the hazardous chemicals traditionally prevalent in commercial use.  IET sells its Anolyte under the brand name, Excelyte™ and sells its Catholyte under the brand name, Catholyte Zero™.  IET manufactures proprietary equipment, which it markets under the brand name EcaFlo™, to produce the Solutions for distribution by IET and, under certain circumstances, such equipment is leased by IET to customers for use at a customer’s facility.

Products

IET produces Anolyte that is effective as a disinfectant, can be used safely anywhere there is a need to control bacteria, viruses, and germs and leaves no harmful residue.  The non-toxic and less-corrosive nature of our Anolyte makes it an excellent replacement for quaternary ammonia, sodium hypochlorite (bleach) and other hazardous chemicals currently being used as disinfectants and sanitizers.  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 92% hypochlorous acid to 8% hypochlorite.  Our Anolyte kills various pathogens including, but not limited to, Mycobacterium bovis (Tuberculosis), Salmonella enterica, Pseudomonas aeruginosa, Staphylococcus aureus, methicillin-resistant Staphylococcus aureus (MRSA), H1NI influenza virus (swine flu) and B. anthracis spores (anthrax).  Our Anolyte also kills hospital-acquired pathogens such as Clostridium difficile spores (C. diff) and vancomycin-resistant enterococci (VRE) as well as two carbapenem-resistant enterobacteriaceae (CRE) known as Klebsiella pneumoniae carbapenemase (KPC) and New Delhi Metallo-beta-lactamase (NDM).  Further, the high-risk blood-borne pathogen human immunodeficiency virus (HIV) and the food-borne pathogens Listeria monocytogenes and Escherichia coli (E. coli) are killed by our Anolyte.  We also produce Catholyte, an anti-oxidizing and mild alkaline solution that is effective as a degreaser and cleaner.
 
 
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Our Anolyte is registered with the EPA as a tuberculocidal hospital-level surface disinfectant and as a biocide for use in oil and gas drilling (EPA Registration No. 82341-1).  In addition, our Anolyte is registered with the EPA (EPA Registration No. 82341-4) as a disinfectant to prevent Canine distemper virus, Canine parvovirus and Bordetella bronchiseptica.  We intend to market the canine product, in conjunction with a third-party partner, as Excelyte™ VET.

IET will also lease EcaFlo™ equipment to a customer when the customer’s business model or required volume of Solutions warrants such an arrangement.  Under this type of arrangement, we would lease our EcaFlo™ equipment and provide service support for a fixed monthly price and, in certain circumstances, we would receive royalty payments for the Solutions produced by the customer.  We also license to certain customers the right to utilize our intellectual property 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.

Business Strategy
 
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.
 
We seek long-term contracts directly with our targeted customers and through a distributor network.  In some circumstances, where the Solutions will be consumed by the customer in its commercial process, we will lease the EcaFlo™ equipment to that customer.  We are currently focused on selling the Solutions in three markets:  oil and gas production, healthcare facilities and food production.
 
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.
 
 
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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, 2013.  There have been no material changes to the critical accounting policies.

Results of Operations

Revenue.  Total revenue for the three months ended March 31, 2014 was $18,061, as compared to $38,830 for the three months ended March 31, 2013.  The $20,769, or 53%, decrease in revenue for the three months ended March 31, 2014 was primarily due to a $13,500 decrease in EcaFlo™ equipment leasing revenue and a $6,713 decrease in sales of EcaFlo™ equipment parts.

Cost of Sales.  Cost of sales for the three months ended March 31, 2014 was $4,245, as compared to $5,375 for the three months ended March 31, 2013.  The $1,130, or 21%, decrease in cost of sales for the three months ended March 31, 2014 was primarily attributable to the decrease in sales of EcaFlo™ equipment parts.
 
Gross Profit.  For the three months ended March 31, 2014 and 2013, gross profit margins were 76% and 86%, respectively.

General and Administrative Expenses.  For the three months ended March 31, 2014, general and administrative expenses were $297,477, as compared to $278,354 for the three months ended March 31, 2013.  The $19,123, or 7%, increase in general and administrative expenses for the three months ended March 31, 2014 was primarily the result of a $23,711 increase in consulting fees related to investor and public relations and a $4,165 increase in investor conference and tradeshow fees, offset by a $7,891 decrease in stock-based compensation expense for consultants.

Sales and Marketing Expenses.  For the three months ended March 31, 2014, sales and marketing expenses were $160,367, as compared to $105,107 for the three months ended March 31, 2013.  The $55,260, or 53%, increase in sales and marketing expenses for the three months ended March 31, 2014 was primarily the result of a $52,318 increase in marketing expenses related to the re-design of the Company’s web-site and new product branding initiatives.

Research and Development Expenses.  For the three months ended March 31, 2014, research and development expenses were $60,890, as compared to $48,043 for the three months ended March 31, 2013.  The $12,847, or 27%, increase in research and development expenses for the three months ended March 31, 2014 was primarily the result of a $8,748 increase in laboratory testing fees and a $2,836 increase in consulting fees primarily related to regulatory and patent consultants.

Loss from Operations. For the three months ended March 31, 2014, the loss from operations was $504,918, as compared to $398,049 for the three months ended March 31, 2013.   The $106,869, or 27%, increase in the loss from operations for the three months ended March 31, 2014 was attributable to a $19,123 increase in general and administrative expenses, a $55,260 increase in sales and marketing expenses and a $12,847 increase in research and development expenses.
 
 
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Interest Expense. For the three months ended March 31, 2014, interest expense was $12,281, as compared to $10,601 for the three months ended March 31, 2013.  The $1,680, or 16%, increase in interest expense for the three months ended March 31, 2014 was primarily attributable to a increase in interest expense on notes payable related to the Benchmark Note.

Net Loss.  For the three months ended March 31, 2014, the Company’s net loss was $517,199, as compared to $408,613 for the three months ended March 31, 2013.  The $108,586, or 27%, increase in the net loss for the three months ended March 31, 2014 was primarily attributable to a $19,123 increase in general and administrative expenses, a $55,260 increase in sales and marketing expenses and a $12,847 increase in research and development expenses.

Liquidity and Capital Resources

As of March 31, 2014, IET had working capital of $559,446 and cash on hand of $673,139.  The $376,260 decrease in cash on hand from December 31, 2013 was primarily due to $18,388 of payments on the Benchmark Note and our continuing operating expenses, offset by the receipt of $25,200 of net proceeds from the sale of our common stock.

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 common stock.

On January 8, 2014, we received $25,200 of net proceeds related to the sale of our common stock.

On February 25, 2014, we issued an aggregate of 206,250 shares of our common stock as settlement of $16,500 of fees due certain members of our board of directors for services rendered for the period commencing September 1, 2013 through December 31, 2013.  On March 14, 2014, we issued 250,000 shares of our common stock in connection with a consulting agreement with an unaffiliated third party for marketing services.  The total expense associated with the issuance of these shares was $20,000, representing the fair market value of the shares on the date of issuance ($0.08 per share).

As of May 9, 2014, our cash position was approximately $446,000.  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 four 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.  Any additional 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.   Our independent registered public accounting firm included an emphasis of a matter paragraph in its report included in our annual report on Form 10-K for the year ended December 31, 2013, which expressed substantial doubt about our ability to continue as a going concern.  Our consolidated financial statements included herein do not include any adjustments related to this uncertainty.
 
 
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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.
 
 
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PART II – OTHER INFORMATION
 
Item 1.          Legal Proceedings
 
None.

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
 
On January 8, 2014, the Company sold 350,000 shares of its common stock to an individual investor for an aggregate purchase price of $25,200, or $0.072 per share.  The Company will use the net proceeds for working capital purposes, including the continued roll out of its previously disclosed sales and marketing strategy.

On February 25, 2014, the Company issued an aggregate of 206,250 shares of its common stock, at a per share price of $0.08, as settlement of $16,500 of director fees due certain members of the Company’s board of directors for services rendered for the period commencing September 1, 2013 through December 31, 2013.

On March 14, 2014, the Company issued 250,000 shares of its common stock in connection with a consulting agreement with an unaffiliated third party for marketing services.

In connection with the issuances of 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(a)(2) of the Securities Act.

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 and remains unpaid.  The convertible debenture 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.  An aggregate of 62,500 shares of the Company’s common stock can be issued upon the conversion of the outstanding principal amount due on this convertible debenture.  As of March 31, 2014, the accrued and unpaid interest on this convertible debenture was $11,181.

Item 4.          Mine Safety Disclosures
 
Not applicable.

Item 5.          Other Information
 
None.

Item 6.          Exhibits
 
See Index of Exhibits Commencing on Page E-1.
 
 
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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.
 
       
May 12, 2014
By:
/s/ David R. LaVance  
   
David R. LaVance
 
   
President and Chief Executive Officer
 
 
May 12, 2014
By:
/s/ Thomas S. Gifford  
   
Thomas S. Gifford
 
   
Executive Vice President,
Chief Financial Officer and Secretary
 
       
 
 
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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, dated as of August 21, 2012, issued to Zanett Opportunity Fund, Ltd. Agreement (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K that was filed with the SEC on August 23, 2012).
4.4
 
7% Secured Promissory Note in the principal amount of $152,000 issued by I.E.T., Inc. to Benchmark Performance Group, Inc. dated June 17, 2013 (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K that was filed with the SEC on June 19, 2013).
10.1
 
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).
10.2
 
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).
10.3
 
2012 Equity Incentive Plan of the Company (incorporated by reference to Exhibit 10.3 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2013 that was filed with the SEC on May 15, 2013).
10.4
 
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).
 
 
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Exhibit No.
 
Description
10.5
 
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).
10.6
 
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).
10.6.1
 
Mutual Termination of Sales Management Services Agreement, dated as of August 31, 2012, among I.E.T., Inc., TrueLogix, LLC, Colby J. Sanders, Patrick T. Lewis and Howard B. Gee (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K that was filed with the SEC on September 25, 2012).
10.7
 
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).
10.8
 
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).
10.9
 
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).
10.10
 
Asset Purchase Agreement, dated as of June 17, 2013, by and between I.E.T., Inc. and Benchmark Performance Group, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K that was filed with the SEC on June 19, 2013).
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.
 
 
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Exhibit No.
 
Description
101*
 
The following materials from the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, formatted in Extensible Business Reporting Language (XBRL):  (i) consolidated balance sheets; (ii) consolidated statements of operations; (iii) consolidated statements of cash flows; and (iv) notes to the consolidated financial statements.
 
* Pursuant to Rule 406T of Regulation S-T, the interactive data files included as Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
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