INTEGRATED ENVIRONMENTAL TECHNOLOGIES, LTD. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - INTEGRATED ENVIRONMENTAL TECHNOLOGIES, LTD.	Financial_Report.xls
EX-31.1 - SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER. - INTEGRATED ENVIRONMENTAL TECHNOLOGIES, LTD.	f10q0912ex31i_integrated.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350. - INTEGRATED ENVIRONMENTAL TECHNOLOGIES, LTD.	f10q0912ex32i_integrated.htm
EX-31.2 - SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER. - INTEGRATED ENVIRONMENTAL TECHNOLOGIES, LTD.	f10q0912ex31ii_integrated.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350. - INTEGRATED ENVIRONMENTAL TECHNOLOGIES, LTD.	f10q0912ex32ii_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 September 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 o		Accelerated filer o

Non-accelerated filer o	(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 o No x

As of November 9, 2012, there were 150,268,500 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 September 30, 2012 and December 31, 2011	2

	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011	3

	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 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	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

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 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 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 contained herein after the date this quarterly report on Form 10-Q is submitted to the Securities and Exchange Commission (the “SEC”). 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

Item1.

Financial Statements

The consolidated balance sheet as of September 30, 2012 and the related consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 and cash flows for the nine months ended September 30, 2012 and 2011 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 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 nine months ended September 30, 2012.

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

Integrated Environmental Technologies, Ltd.

Consolidated Balance Sheets

(Unaudited)

	September 30,			December 31,
	2012			2011
Assets
Current assets:
Cash	$	462,913		$	145,993
Accounts receivable		13,119			7,872
Prepaid expenses and other		23,553			10,927
Lease receivable		--			14,296
Inventory		203,898			219,209
Note receivable		14,707			16,364
Other receivable		--			12,081

Total current assets		718,190			426,742

Property and equipment, net		149,929			239,605

Lease receivable, long-term		--			19,700
Note receivable, long-term		1,745			10,848

Total assets	$	869,864		$	696,895

Liabilities and Stockholders’ Equity (Deficiency)
Current liabilities:
Accounts payable	$	147,119		$	229,086
Accrued expenses		135,606			166,136
Customer deposits		36,109			41,529
Convertible debentures		25,000			25,000

Total current liabilities		343,834			461,751

Convertible debentures		476,125			526,125
Convertible promissory notes		--			500,000

Total liabilities		819,959			1,487,876
Commitments and contingencies
Stockholders’ equity (deficiency):
Common stock, $.001 par value; 400,000,000 shares authorized; 150,268,500 and 122,735,165 shares issued and outstanding, respectively		150,269			122,735
Additional paid-in capital		17,114,735			14,810,185
Accumulated deficit		(17,215,099	)		(15,723,901	)
Total stockholders' equity (deficiency)		49,905			(790,981	)

Total liabilities and stockholders' equity (deficiency)	$	869,864		$	696,895

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

Integrated Environmental Technologies, Ltd.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011

Revenues:
Sales	$	23,049		$	69,289		$	71,060		$	273,441
Leasing and licensing fees		13,854			13,500			48,895			39,677
		36,903			82,789			119,955			313,118
Cost of sales		36,425			30,113			53,131			122,269

Gross profit		478			52,676			66,824			190,849

Operating expenses:
General and administrative		252,169			392,408			888,278			1,281,796
Sales and marketing		129,657			151,623			376,693			400,600
Research and development		75,573			50,401			234,857			163,386
Gain on settlement of accounts payable		--			(21,040	)		--			(21,040	)
		457,399			573,392			1,499,828			1,824,742

Loss from operations		(456,921	)		(520,716	)		(1,433,004	)		(1,633,893	)

Other income (expense):
Interest income		141			248			1,208			837
Finance fees		--			--			--			(9,539	)
Interest expense		(15,932	)		(20,794	)		(59,402	)		(66,507	)
Total other income (expense)		(15,791	)		(20,546	)		(58,194	)		(75,209	)

Net loss	$	(472,712	)	$	(541,262	)	$	(1,491,198	)	$	(1,709,102	)

Net loss per share, basic and diluted	$	0.00		$	0.00		$	(0.01	)	$	(0.01	)

Weighted average shares outstanding, basic and diluted		143,580,929			118,770,795			136,854,527			116,129,249

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

Integrated Environmental Technologies, Ltd.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(1,491,198	)	$	(1,709,102	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		89,676			8,022
Stock-based compensation expense		132,871			530,447
Write-off of accounts receivable		813			26,174
Write-down of lease receivable		20,113			--
Accretion of interest on convertible notes		--			9,682
Gain on settlement of accounts payable		--			21,040
Changes in operating assets and liabilities:
Accounts receivable		(6,060	)		(3,908	)
Lease receivable		13,883			12,260
Note receivable		10,760			--
Inventory		15,311			(19,094	)
Other receivable		12,081			--
Prepaid expenses and other		(12,626	)		9,298
Accounts payable		(45,967	)		114,920
Accrued expenses		52,783			(47,300	)
Customer deposits		(5,420	)		20,000
Net cash used in operating activities		(1,212,980	)		(1,027,561	)
Cash flows from financing activities:
Proceeds from sale of common stock, net of offering costs		1,529,900			661,500
Repayment of notes payable		--			(250,000	)
Repayment of convertible debentures		--			(55,000	)
Proceeds from issuance of convertible debentures		--			500,000
Proceeds from issuance of convertible promissory notes		--			500,000
Net cash provided by financing activities		1,529,900			1,356,500
Increase in cash		316,920			328,939
Cash - beginning of period		145,993			65,660
Cash - end of period	$	462,913		$	394,599
Supplemental disclosure of cash flow information:
Cash paid for interest	$	891		$	32,436
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 2,185,585 shares of common stock as payment of $150,000 of principal and $47,148 of interest on convertible debentures and issuance of 562,500 shares of common stock as payment of $45,000 principal on convertible debentures	$	197,148		$	45,000
Issuance of 4,602,750 shares of common stock as payment of $400,000 of principal and $36,165 of interest on convertible promissory notes	$	436,165		$	--
Refinance of accrued interest and fees related to notes payable	$	--		$	26,125

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

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 $17,215,099 as of September 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 September 30, 2012 and December 31, 2011, inventory consisted of the following:

	September 30, 2012		December 31, 2011
Parts and materials	$	147,250	$	133,048
Finished goods		56,648		86,161
	$	203,898	$	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. 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. As of the date of the customer’s default, the Company collected $44,000 of lease payments under this lease arrangement. The Company does not expect to receive any additional lease payments under this lease arrangement. 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 nine months ended September 30, 2012, the Company recognized $658 of interest income related to this lease arrangement.

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 nine months ended September 30, 2012, the Company recognized $141 and $490, respectively, of interest income related to this note receivable. As of September 30, 2012 and December 31, 2011, the current portion of the note receivable was $14,707 and $16,364, respectively, and the long-term portion was $1,745 and $10,848, respectively.

5. Property and Equipment

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

	September 30, 2012			December 31, 2011
Leasehold improvements	$	328,977		$	328,977
Equipment		41,240			41,240
		370,217			370,217
Less: Accumulated depreciation		(220,288	)		(130,612	)
	$	149,929		$	239,605

6. Accrued Expenses

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

	September 30, 2012		December 31, 2011
Accrued compensation	$	115,000	$	128,415
Accrued interest		10,973		36,103
Accrued other expenses		9,633		1,618
	$	135,606	$	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 September 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.

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 nine months ended September 30, 2012, the Company recorded a total of $756 and $2,252, respectively, of interest expense related to this convertible debenture. As of September 30, 2012 and December 31, 2011, the outstanding principal on this convertible debenture was $25,000 and the accrued and unpaid interest was $6,695 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 had a three-year term that was due to mature on July 7, 2014, and accrued interest at a rate of 8% per annum. Interest was payable in annual installments in cash or, at the option of the Company, in shares of the Company’s common stock. If the Company elected to pay the interest in shares of its common stock, the number of shares issued as payment would 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 was 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 July 7, 2011 was $0.08 per share. The Company 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 was de minimis.

On August 17, 2012, the Company issued to Mr. Kinsey 1,500,000 shares of the Company’s common stock in connection with Mr. Kinsey’s election to convert the entire outstanding principal amount of the Kinsey Debenture. Pursuant to the terms of the Kinsey Debenture, the outstanding principal was converted into shares of Common Stock at $0.10 per share. As a result of this conversion, the Kinsey Debenture was cancelled.

On August 17, 2012, the Company issued 193,895 shares of the Company’s common stock as payment of $13,348 of accrued interest due on the Kinsey Debenture for the period commencing July 7, 2011 through August 16, 2012. The number of shares of the Company’s common stock issued as payment of the accrued interest was calculated based on the quoted market price of the Company’s common stock ($0.07 per share for the period commencing July 7, 2011 through July 6, 2012 and $0.06 per share for the period commencing July 7, 2012 through August 16, 2012), as defined in the Kinsey Debenture.

For the three and nine months ended September 30, 2012, the Company recorded $1,348 and $7,414, respectively, of interest expense related to the Kinsey Debenture.

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 Debenture”). In connection with this private placement, the Company refinanced the 8% convertible debenture, in the principal amount of $376,125, issued to Zanett on July 7, 2011 (the “Zanett July 2011 Debenture”) and refinanced the 8% convertible secured promissory note, in the principal amount of $100,000, issued to Zanett on September 23, 2011 (see Note 9). As a result of the issuance of the Zanett Debenture, the Zanett July 2011 Debenture and the 8% convertible secured promissory note were cancelled.

The Zanett 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 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 ten consecutive trading days is greater than or equal to $0.15 per share. The quoted market price of the Company’s common stock as of August 21, 2012 was $0.05 per share. An aggregate of 4,761,250 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.

On August 21, 2012, the Company issued 491,690 shares of the Company’s common stock to Zanett as payment of $33,800 of accrued interest due on the Zanett July 2011 Debenture for the period commencing July 7, 2011 through August 21, 2012. 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 ($0.07 per share for the period commencing July 7, 2011 through July 6, 2012 and $0.06 per share for the period commencing July 7, 2012 through August 21, 2012) as defined in the Zanett July 2011 Debenture.

For the three and nine months ended September 30, 2012, the Company recorded $4,279 of interest expense related to the Zanett Debenture. For the three and nine months ended September 30, 2012, the Company recorded $3,710 and $18,922, respectively, of interest expense related to the Zanett July 2011 Debenture. As of September 30, 2012, the outstanding principal on the Zanett Debenture was $476,125 and the accrued and unpaid interest was $4,279, which amount is included as a component of accrued expenses.

9. Convertible Promissory Notes

On September 23, 2011, the Company, Mr. Kinsey 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 amounts 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.

Each of the Secured Notes was 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 had a three-year term maturing on September 23, 2014 and accrued interest at a rate of 8% per annum. Interest was payable in quarterly installments, beginning on October 1, 2011. If the Company or the holder elected for the interest to be paid in shares of the Company’s common stock, the number of shares issued as payment would 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 was 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 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 was de minimis.

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.

On August 17, 2012, the Company issued to Mr. Kinsey 4,000,000 shares of the Company’s common stock in connection with Mr. Kinsey’s election to convert the Secured Note. Pursuant to the terms of the Secured Note, the outstanding principal was convertible into shares of the Company’s common stock at $0.10 per share. As a result of this conversion, the Secured Note issued to Mr. Kinsey was cancelled.

On August 17, 2012, the Company issued 480,733 shares of the Company’s common stock to Mr. Kinsey as payment of $28,844 of accrued interest due on the Secured Note issued to Mr. Kinsey for the period commencing September 23, 2011 through August 16, 2012. The number of shares of the Company’s common stock issued as payment of the accrued interest was calculated based on the quoted market price of the Company’s common stock ($0.06 per share) as defined in the Secured Note.

On August 21, 2012, in connection with the issuance of the Zanett Debenture, the Company refinanced the Secured Note issued to Zanett (see Note 8). As a result, the Secured Note issued to Zanett was cancelled and the collateral securing the Secured Notes was released.

On August 21, 2012, the Company issued 122,017 shares of the Company’s common stock to Zanett as payment of $7,321 of accrued interest due on the Secured Note issued to Zanett for the period commencing September 23, 2011 through August 21, 2012. 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 ($0.06 per share) as defined in the Secured Note.

For the three and nine months ended September 30, 2012, the Company recorded a total of $5,370 and $25,316, respectively, of interest expense related to the Secured Notes.

10. Stockholders’ Deficiency

Common Stock Units

On August 17, 2012, the Company sold to Mr. Kinsey common stock units that in aggregate consisted of 6,250,000 shares of the Company’s common stock and a warrant to purchase 3,125,000 shares of the Company’s common stock, for an aggregate purchase price of $500,000, 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 $0.05 per share.

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 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 September 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 September 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.

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 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 September 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 stock options.

A summary of stock option transactions under the Equity Incentive Plans during the nine months ended September 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		0.18		--
Exercised during the period		--		--		--
Terminated during the period		--		--		--
Outstanding at September 30, 2012		6,646,920	$	0.17	$	--
Available for purchase at September 30, 2012		300,000	$	0.08	$	--
Available for purchase at December 31, 2011		300,000	$	0.08	$	--

Information with respect to outstanding options and options exercisable as of September 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		3,013,586	$	0.10		7.3		--		--		--
$	0.20		1,666,666	$	0.20		9.5		--		--		--
$	0.30		1,666,668	$	0.30		9.5		--		--		--
			6,646,920	$	0.10		8.1		300,000	$	0.08		1.5

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

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

As of September 30, 2012, there was $93,309 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-three months.

Warrants to Purchase Common Stock

On August 17, 2012, the Company issued a warrant to purchase 3,125,000 shares of the Company’s common stock in connection with the sale of common stock units to Mr. Kinsey (see Common Stock Units). The warrant has a three-year term, is exercisable at $0.20 per share and was fully vested at the date of issuance.

On September 21, 2012, the Company, TrueLogix, LLC (“TrueLogix”) and each of the managers of Truelogix, Colby J. Sanders (“Sanders”), Patrick T. Lewis (“Lewis”) and Howard B. Gee (“Gee”), entered into a Mutual Termination of Sales Management Services Agreement, whereby the parties agreed to terminate, effective August 31, 2012, the Sales Management Services Agreement (the “Sales Management Agreement”) entered into on December 6, 2011 between the Company and TrueLogix. In connection with the Sales Management Agreement, the Company issued warrants to purchase an aggregate of 2,000,000 shares of the Company’s common stock to TrueLogix, Sanders, Lewis and Gee. Pursuant to the terms of the warrants, 1,600,000 shares of the Company’s common stock not vested under the warrants automatically expired on the termination date of the Sales Management Agreement.

A summary of warrant transactions during the nine months ended September 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		14,831,250		$	0.14		--
Exercised during the period		--			--		--
Terminated during the period		(2,350,000	)	$	0.17		--
Outstanding at September 30, 2012		45,862,998		$	0.17	$	--
Available for purchase at September 30, 2012		45,518,550		$	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 September 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		23,056,061		5.2	$	0.09		22,711,613	$	0.09		5.2
$	0.20 - 0.35		20,174,437		2.0	$	0.23		20,174,437	$	0.23		2.0
$	0.40 & 0.50		2,632,500		1.2	$	0.50		2,632,500	$	0.50		1.2
			45,862,998		3.6	$	0.17		45,518,550	$	0.17		3.5

A summary of the non-vested shares subject to warrants as of September 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		14,831,250		$	0.07
Vested during the period		(16,781,248	)	$	0.07
Terminated during the period		(1,600,000	)	$	0.08
Non-vested at September 30, 2012		344,448		$	0.09

As of September 30, 2012, there was $19,417 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 one month.

11. Stock-Based Compensation

During the three and nine months ended September 30, 2012 and 2011, the Company recorded stock-based compensation expense as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
General and administrative	$	23,135	$	101,048	$	61,206	$	467,564
Sales and marketing		15,625		50,324		56,302		54,324
Research and development		5,473		1,020		15,363		1,020
Finance fees		--		--		--		7,539
	$	44,233	$	152,392	$	132,871	$	530,447

For the three and nine months ended September 30, 2012, the Company recorded stock-based compensation expense related to stock options and warrants granted to employees and directors of $41,378 and $112,416, respectively. For the three and nine months ended September 30, 2012, the Company recorded stock-based compensation expense related to stock options and warrants granted to non-employees of $2,855 and $20,455, respectively.

For the three and nine months ended September 30, 2011, the Company recorded stock-based compensation expense related to stock options and warrants granted to employees and directors of $103,688 and $351,729, respectively. For the three and nine months ended September 30, 2011, the Company recorded stock-based compensation expense related to stock options and warrants granted to non-employees of $48,704 and $178,718, 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.

For the three and nine months ended September 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, 45,862,998 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.

For the three and nine months ended September 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 10,573,750 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 September 30, 2012, the future minimum lease payments due under this lease agreement are to be paid as follows: $17,823 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.

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 a stay on these causes of action in the South Carolina State Court until the aforementioned binding arbitration process is complete.

On August 10, 2012, Mr. Prince filed a motion in the South Carolina Court requesting that the South Carolina Court reconsider its earlier order that stayed the causes of action for civil conspiracy, tortious interference and unfair trade practices.

On September 14, 2012, the Company filed its answer in the South Carolina Court to Mr. Prince’s complaint.

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. On August 17, 2012, the Company’s motion to dismiss was denied by the Washington Federal Court.

On September 21, 2012, the Company filed its answer in the Washington Federal Court and on September 27, 2012, the Company and Crystal filed their respective discovery requests.

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

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.

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 September 30, 2012 was $36,903, as compared to $82,789 for the three months ended September 30, 2011. The $45,886, or 55%, decrease in revenue for the three months ended September 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 nine months ended September 30, 2012 was $119,955, as compared to $313,118 for the nine months ended September 30, 2011. The $193,163, or 62%, decrease in revenue for the nine months ended September 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 September 30, 2012 was $36,425, as compared to $30,113 for the three months ended September 30, 2011. The $6,312, or 21%, increase in cost of sales for the three months ended September 30, 2012 was primarily attributable to an increase in costs related to equipment replacement parts.

Cost of sales for the nine months ended September 30, 2012 was $53,131, as compared to $122,269 for the nine months ended September 30, 2011. The $69,138, or 57%, decrease in cost of sales for the nine months ended September 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.

Gross Profit. For the three months ended September 30, 2012 and 2011, gross profit margins were 1% and 64%, respectively. For the nine months ended September 30, 2012 and 2011, gross profit margins were 56% and 61%, respectively.

General and Administrative Expenses. For the three months ended September 30, 2012, general and administrative expenses were $252,169, as compared to $392,408 for the three months ended September 30, 2011. The $140,239, or 36%, decrease in general and administrative expenses for the three months ended September 30, 2012 was primarily the result of a $77,915 reduction in stock-based compensation expense for employees and directors, a $35,499 decrease in employee payroll and related benefit costs, a $29,448 reduction in legal fees primarily related to general corporate activities and SEC filings, a $23,000 decrease in director fees, a $17,726 decrease in consulting fees and an $11,461 decrease in bad debt expense, offset by a $26,384 increase in depreciation expense.

For the nine months ended September 30, 2012, general and administrative expenses were $888,278, as compared to $1,281,796 for the nine months ended September 30, 2011. The $393,518, or 31%, decrease in general and administrative expenses for the nine months ended September 30, 2012 was primarily the result of a $283,885 reduction in stock-based compensation expense for employees and directors, a $122,475 reduction in stock-based compensation expense for consultants, an $86,813 decrease in consulting fees, a $32,916 decrease in employee payroll and related benefit costs, a $24,567 decrease in taxes primarily related to a reduction in state taxes and payroll taxes, and an $11,592 decrease in accounting fees, offset by an $81,654 increase in depreciation expense, a $43,978 increase in legal fees primarily related to general corporate activities and SEC filings, a $27,717 increase in costs associated with the annual meeting of stockholders and a $13,586 increase in director and officer liability insurance and employer practice liability insurance.

Sales and Marketing Expenses. For the three months ended September 30, 2012, sales and marketing expenses were $129,657, as compared to $151,623 for the three months ended September 30, 2011. The $21,966, or 14%, decrease in sales and marketing expenses for the three months ended September 30, 2012 was primarily the result of a $45,849 reduction in stock-based compensation for consultants and a $17,896 decrease in travel expenses, offset by a $22,498 increase in consulting fees, an $11,150 increase in stock-based compensation for employees, and an $8,813 increase in employee payroll and related benefit costs.

For the nine months ended September 30, 2012, sales and marketing expenses were $376,693, as compared to $400,600 for the nine months ended September 30, 2011. The $23,907, or 6%, decrease in sales and marketing expenses for the nine months ended September 30, 2012 was primarily the result of a $33,686 reduction in travel expenses, a $12,857 decrease in stock-based compensation expense for consultants and a $6,524 reduction in employee payroll and benefit costs, offset by a $14,835 increase in stock-based compensation for employees, a $9,078 increase in equipment warranty related costs and an $8,937 increase in consulting fees.

Research and Development Expenses. For the three months ended September 30, 2012, research and development expenses were $75,573, as compared to $50,401 for the three months ended September 30, 2011. The $25,172, or 50%, increase in research and development expenses for the three months ended September 30, 2012 was primarily the result of a $19,675 increase in laboratory testing costs attributable to product labeling and a $4,453 increase in stock-based compensation expense for employees.

For the nine months ended September 30, 2012, research and development expenses were $234,857, as compared to $163,386 for the nine months ended September 30, 2011. The $71,471, or 44%, increase in research and development expenses for the nine months ended September 30, 2012 was primarily the result of a $38,126 increase in laboratory testing costs attributable to product labeling, a $14,343 increase in stock-based compensation expense for employees, a $12,675 increase in employee payroll and benefit costs and a $9,929 increase in consulting fees primarily related to regulatory activities.

Loss from Operations. During the three months ended September 30, 2012, the loss from operations was $456,921, as compared to $520,716 for the three months ended September 30, 2011. The $63,795, or 12%, decrease in the loss from operations for the three months ended September 30, 2012 was primarily attributable to a $140,239 decrease in general and administrative expenses and a $21,966 decrease in sales and marketing expenses, offset by a $45,886 decrease in revenue, a $25,172 increase in research and development expense and a $21,040 decrease in gain on settlement of accounts payable.

During the nine months ended September 30, 2012, the loss from operations was $1,433,003, as compared to $1,633,893 for the nine months ended September 30, 2011. The $200,890, or 12%, decrease in the loss from operations for the nine months ended September 30, 2012 was attributable to a $393,518 decrease in general and administrative expenses, a $69,138 decrease in cost of sales and a $23,907 decrease in sales and marketing expenses, offset by a $193,163 decrease in revenue, a $71,471 increase in research and development expense and a $21,040 decrease in gain on settlement of accounts payable.

Interest Income. For the three months ended September 30, 2012, interest income was $141, as compared to $248 for the three months ended September 30, 2011. The decrease in interest income for the three months ended September 30, 2012 relates to the default by a customer on a capital lease agreement. For the nine months ended September 30, 2012, interest income was $1,208, as compared to $837 for the nine months ended September 30, 2011. The increase in interest income for the nine months ended September 30, 2012 relates to interest recognized by the Company on its capital lease sales of equipment.

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

Interest Expense. For the three months ended September 30, 2012, interest expense was $15,932, as compared to $20,794 for the three months ended September 30, 2011. The $4,862, or 23%, decrease in interest expense for the three months ended September 30, 2012 was primarily attributable to a decrease in convertible debentures and notes payable. For the nine months ended September 30, 2012, interest expense was $59,402, as compared to $66,507 for the nine months ended September 30, 2011. The $7,105, or 11%, decrease in interest expense for the nine months ended September 30, 2012 was primarily attributable to a decrease in convertible debentures and notes payable.

Net Loss. For the three months ended September 30, 2012, the Company’s net loss was $472,712, as compared to $541,262 for the three months ended September 30, 2011. The $68,550, or 13%, decrease in the net loss for the three months ended September 30, 2012 was primarily attributable to a $140,239 decrease in general and administrative expenses and a $21,966 decrease in sales and marketing expenses, offset by a $45,886 decrease in revenue, a $25,172 increase in research and development expense and a $21,040 decrease in gain on settlement of accounts payable.

For the nine months ended September 30, 2012, the Company’s net loss was $1,491,197, as compared to $1,709,102 for the nine months ended September 30, 2011. The $217,905, or 13%, decrease in the net loss for the nine months ended September 30, 2012 was primarily attributable to a $393,518 decrease in general and administrative expenses, a $69,138 decrease in cost of sales, a $23,907 decrease in sales and marketing expenses and a $16,644 decrease in interest expense and loan fees, offset by a $193,163 decrease in revenue, a $71,471 increase in research and development expense and a $21,040 decrease in gain on settlement of accounts payable.

Liquidity and Capital Resources

As of September 30, 2012, IET had working capital of $374,356 and cash on hand of $462,913. The $316,920 increase in cash on hand from December 31, 2011 was primarily due to the receipt of $1,529,900 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 nine months ended September 30, 2012, we received $1,529,900 of net proceeds related to the sale of common stock units ($630,000 in January 2012, $260,400 in February 2012, $139,500 in June 2012 and $500,000 in August 2012). As of November 9, 2012, our cash position was approximately $354,800. 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.

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.

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 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.

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 a stay on these causes of action in the South Carolina State Court until the aforementioned binding arbitration process is complete.

On September 14, 2012, the Company filed its answer in the South Carolina Court to Mr. Prince’s complaint.

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.

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 September 21, 2012, the Company filed its answer in the Washington Federal Court and on September 27, 2012, the Company and Crystal filed their respective discovery requests.

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

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.

Item 3. Defaults Upon Senior Securities

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See Index of Exhibits Commencing on Page E-1.

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.

November 14, 2012	By:	/s/ David R. LaVance
		David R. LaVance
		President and Chief Executive Officer

November 14, 2012	By:	/s/ Thomas S. Gifford
		Thomas S. Gifford
		Executive Vice President, Chief Financial Officer and Secretary

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 on 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 on 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 on 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 on Form 8-K that was filed with the SEC on October 3, 2011).

E - 1

Exhibit No.		Description
4.8		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).
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		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).
10.7		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).
10.8		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).

E - 2

Exhibit No.		Description
10.9		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).
10.9.1		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)..
10.10		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).
10.11		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).
10.12		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

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