<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14306
INTERCELL CORPORATION
---------------------
(Exact name of small business issuer as specified in its charter)
Colorado 84-0928627
- --------------------------------------------- ----------
(State or other jurisdiction of incorporation (I.R.S. employer
or organization ) identification number)
370 Seventeenth Street, Suite 3580
Denver Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 592-1010
No Change
---------
(Former name, former address or former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has 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 __
-
As of November 16, 1998 there were 39,064,533 shares of the registrant's
sole class of common shares outstanding.
Transitional Small Business Disclosure Format (Check one): Yes__ No X
-
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART 1 - FINANCIAL INFORMATION.................................................................... 1
Item 1. Financial Statements...................................................................... 1
Consolidated Balance Sheet................................................................ 1
Consolidated Statements of Operations..................................................... 2
Consolidated Statements of Cash Flows..................................................... 3
Statement of Changes in Stockholders' Equity.............................................. 4
Computation of Net Loss Per Share......................................................... 5
Intercell Corporation and Subsidiaries Notes to Consolidated Financial Statements......... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 7
General................................................................................... 7
Revenues.................................................................................. 9
Research And Development.................................................................. 9
General And Administrative................................................................ 9
Other Income/Expense...................................................................... 9
Income Taxes.............................................................................. 9
Liquidity And Capital Resources........................................................... 10
PART II - OTHER INFORMATION....................................................................... 11
Item 2. Changes in Securities..................................................................... 11
Item 6. Exhibits and Reports on Form 8-K.......................................................... 12
SIGNATURES........................................................................................ 13
LIST OF EXHIBITS.................................................................................. 14
EXHIBIT 11 COMPUTATION OF NET LOSS PER SHARE
EXHIBIT 27 FINANCIAL DATA SCHEDULE
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Intercell Corporation and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
June 30, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash in banks $ 46,000
Cash in escrow 200,000
Accounts receivable, net of reserves 8,000
Notes receivable 12,000
Land available for sale 1,424,000
Current assets of discontinued operations 235,000
------------
Total current assets 1,925,000
Other assets:
Notes receivable non-currant portion 527,000
Deposits and other assets 52,000
Non current assets of discontinued operations 302,000
-------------
Total other assets 881,000
-------------
Total assets $ 2,806,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, short term $ 2,330,000
Notes payable, related party 80,000
Accounts payable and accrued liabilities 1,940,000
-------------
Total current liabilities 4,350,000
Long-term liabilities:
Convertible debentures 826,000
Long-term debt, less current portion 16,000
------------
Total long-term liabilities 842,000
Stockholders' equity:
Convertible preferred stock; 10,000,000 shares authorized:
Series C; 147 shares issued and outstanding as of
June 30, 1998 1,148,000
(liquidation preference of $1,653,750)
Series D; 1,080 shares issued and outstanding as of
June 30, 1998 2,520,000
(liquidation preference of $2,700,000)
Warrants to acquire common stock 3,075,000
Common stock; no par value; 100,000,000 shares authorized;
36,010,229 shares outstanding as of June 30, 1998 21,327,000
Additional paid in capital 3,690,000
Accumulated deficit (34,146,000)
-------------
Total stockholders' equity (2,386,000)
-------------
Total liabilities and stockholders' equity $ 2,806,000
=============
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
Intercell Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
General and administrative expense 596,000 1,756,000 3,347,000 4,497,000
Research and development expense 0 340,000 0 1,416,000
-------------------------------------------------------------------
Loss from operations (596,000) (2,096,000) (3,347,000) (5,913,000)
Other income (expense) (8,000) 84,000 (200,000) 218,000
-------------------------------------------------------------------
Loss from continuing operations (604,000) (2,012,000) (3,547,000) (5,695,000)
Discontinued operations:
Loss from discontinued operations (825,000) (446,000) (3,414,000) (144,000)
Gain on sale of subsidiaries 544,000 244,000
-------------------------------------------------------------------
Loss from discontinued operations (281,000) (446,000) (3,170,000) (144,000)
-------------------------------------------------------------------
Net loss (885,000) (2,458,000) (6,717,000) (5,839,000)
Deemed dividend on Series B, C and D preferred
stock relating to in-the-money conversion terms (15,000) (306,000) (45,000) (1,023,000)
Accrued dividends Series D preferred stock (37,000) (74,000)
Accretion on Series B and C preferred stock (29,000) (118,000) (93,000) (413,000)
-------------------------------------------------------------------
Net loss applicable to common stockholders ($966,000) ($2,882,000) ($6,929,000) ($7,275,000)
===================================================================
Net loss per share applicable to common stockholders:
Loss from continuing operations ($0.02) ($0.13) ($0.12) ($0.41)
Loss from discontinued operations ($0.01) ($0.02) ($0.10) ($0.01)
-------------------------------------------------------------------
Net loss ($0.03) ($0.15) ($0.22) ($0.42)
===================================================================
Weighted average number of common shares outstanding 35,848,917 18,710,850 31,291,413 17,169,353
===================================================================
</TABLE>
See notes to the consolidated financial statements
2
<PAGE>
Intercell Corporation and Subsidiaries
Statement of Changes in Stockholders' Equity
For the Nine Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Convertible Warrants to
Preferred Stock Acquire Common Stock
Shares Amount Common Stock Shares Amount
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, October 1, 1997 1,252 $3,658,000 $3,050,000 30,371,075 $21,285,000
Constructive retirement of treasury stock (1,100,000) (385,000)
Warrants issued in connection with convertible debenture 25,000
Shares issued in lieu of interest 1,975,000 185,000
Shares issued for services 516,000 40,000
Common stock issued by subsidiary for services
Amortization of deferred compensation
Amortization of deemed dividend 45,000
Accrual of preferred stock dividend 74,000
Accretion on preferred stock 93,000
Conversion of Series B preferred stock to common stock (5) (40,000) 678,761 40,000
Conversion of Series C preferred stock to common stock (20) (162,000) 3,569,393 162,000
Beneficial conversion feature related to Series A-1 and
A-2 debentures
Net loss
--------------------------------------------------------------------
Balances, June 30, 1998 1,227 $3,668,000 $3,075,000 36,010,229 $21,327,000
====================================================================
<CAPTION>
Additional
Paid-In Deferred Treasury Accumulated
Capital Compensation Stock Deficit
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, October 1, 1997 $2,996,000 ($3,000) ($385,000) ($27,217,000)
Constructive retirement of treasury stock 385,000
Warrants issued in connection with convertible debenture
Shares issued in lieu of interest
Shares issued for services
Common stock issued by subsidiary for services 469,000
Amortization of deferred compensation 3,000
Amortization of deemed dividend (45,000)
Accrual of preferred stock dividend (74,000)
Accretion on preferred stock (93,000)
Conversion of Series B preferred stock to common stock
Conversion of Series C preferred stock to common stock
Beneficial conversion feature related to Series A-1 and 225,000
A-2 debentures
Net loss (6,717,000)
-------------------------------------------------------------
Balances, June 30, 1998 $3,690,000 $ 0 $ 0 ($34,146,000)
=============================================================
<CAPTION>
Total
Stockholders'
Equity
---------------
<S> <C>
Balances, October 1, 1997 3,384,000
Constructive retirement of treasury stock
Warrants issued in connection with convertible debenture 25,000
Shares issued in lieu of interest 185,000
Shares issued for services 40,000
Common stock issued by subsidiary for services 469,000
Amortization of deferred compensation 3,000
Amortization of deemed dividend
Accrual of preferred stock dividend
Accretion on preferred stock
Conversion of Series B preferred stock to common stock
Conversion of Series C preferred stock to common stock
Beneficial conversion feature related to Series A-1 and
A-2 debentures 225,000
Net loss (6,717,000)
---------------
Balances, June 30, 1998 ($2,386,000)
===============
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
Intercell Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net loss ($6,717,000) ($5,839,000)
Adjustments to reconcile net loss to net cash from
continuing operations:
Loss from discontinued operations 3,170,000
Depreciation and amortization 2,000 484,000
Gain on sale of property and equipment (57,000)
Amortization of discount on convertible debenture 225,000
Amortization of deferred compensation 3,000 784,000
Common stock and warrents issued for services and interest 225,000 43,000
Common stock issued by subsidiary for services 469,000
Change in assets and liabilities net of Nanopierce acquisition:
(Increase) decrease in:
Accounts receivable (8,000) (55,000)
Inventory (972,000)
Prepaid expenses and other assets 189,000 (110,000)
Increase in accounts payable and accrued liabilities 686,000 116,000
--------------------------------
Net cash used in operating activities (1,813,000) (5,549,000)
--------------------------------
Cash flows from investing activities:
Purchase of property and equipment (1,150,000)
Proceeds from sales and maturities of short-term investments 2,274,000
Acquisition of other assets 253,000
Payment for purchase of Sigma 7 (550,000)
Advances to Sigma 7 (1,395,000)
Proceeds from sale of assets 2,457,000
Increase in cash in escrow (200,000)
Payment received on notes receivable 4,000
--------------------------------
Net cash provided by investing activities 2,261,000 (568,000)
--------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 150,000
Proceeds from convertible debentures 1,500,000
Proceeds from notes payable 1,591,000
Proceeds from issuance of Series C preferred stock and warrants 4,673,000
Repayments of notes payable and debentures (649,000) (1,198,000)
Repayment of long-term debt (206,000)
--------------------------------
Net cash flows provided by financing activities 2,442,000 3,419,000
--------------------------------
--------------------------------
Net cash used in discontinued operations (2,860,000) 0
--------------------------------
Net increase in cash 30,000 (2,698,000)
Cash, beginning 16,000 4,224,000
--------------------------------
Cash, ending $ 46,000 $1,526,000
================================
Non-cash investing and financing activities
Series B preferred stock converted to common stock $ 40,000 $5,118,000
--------------------------------
Series C preferred stock converted to common stock $ 162,000 $ 811,000
================================
Transfer of stock options from principal shareholders to
Company officer $ 530,000
============
Acquisition of Nanopierce:
Fair value of assets acquired:
Notes receivable $ 43,000
Deposits and other 4,000
Goodwill 53,000
-----------
Liabilities assumed $ 100,000
===========
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 1998
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Intercell Corporation and its wholly-owned subsidiaries (the "Company").
All inter-company transactions have been eliminated.
The consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the
financial position of and operating results for the periods presented. The
consolidated financial statements should be read in conjunction with the
September 30, 1997 audited financial statements of Intercell Corporation and
the notes thereto. The results of operations for the three and nine months
ended June 30, 1998 are not necessarily indicative of the results for the
entire year ended September 30, 1998, or any future period.
2. NET LOSS PER SHARE
Net loss per share of common stock is computed based on the weighted average
number of common shares outstanding during the year. Stock options, warrants
and convertible preferred stock are not considered in the calculation as the
impact of the potential common shares would be to decrease loss per share.
Therefore, diluted loss per share is equivalent to basic loss per share.
The Company adopted SFAS No. 128 Earnings Per Share during the current
fiscal year. This statement replaces the presentation of primary earnings of
loss per share (EPS) with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS for all entities with complex capital
structures and requires reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted
EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
entity. The adoption of SFAS 128 did not result in a change to the
previously presented EPS for the three and nine months ended June 30, 1998.
3. NON-CASH INVESTING AND FINANCING ACTIVITIES
Effective June 6, 1997, the Company purchased 90% of the common stock
outstanding of Sigma 7 Corporation for $550,000. In conjunction with the
purchase, the Company
5
<PAGE>
acquired assets with a fair value of $4,316,000 and assumed liabilities and
minority interests of $3,766,000.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards (SFAS) No. 132, Employer's Disclosures
about Pensions and Other Postretirement Benefits. This statement requires
disclosure only and therefore will not impact the Company's financial
statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Currently, the Company does not have any
derivative financial instruments and does not participate in hedging
activities, therefore management believes SFAS No. 133 will not impact the
Company's financial statements.
5. YEAR 2000 CONVERSION
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of the
operational systems. The Company has established processes for evaluating
and managing the risks and costs associated with this problem. Management
believes the total cost of compliance and its effect on the Company's future
results of operations will be insignificant.
6. CONVERTIBLE DEBENTURES
In December 1997, the Company issued convertible debentures and attached
warrants for $1,500,000, of this total $750,000 is the Series A-1 debenture
and $750,000 is the Series A-2 debenture. The convertible debentures were,
at the time of issue, unsecured obligations of the Company.
The $750,000 Series A-1 debentures requires quarterly interest payments at
9% per annum, beginning March 1, 1998 with the balance due on December 1,
1999. The debenture may be converted at the option of the holder after 60
days from the date of issuance at a conversion price per share equal to the
lessor of 85% of the market price as defined, or $0.75. In connection with
the convertible debt, three warrants were issued each entitling the holder
to purchase 200,000 shares of common stock for $0.17, $0.50 and $1.00,
respectively. The warrants expire three years from the date of issuance.
The $750,000 Series A-2 debentures pays interest quarterly at 9% per annum,
beginning June 1, 1998, with a maturity date, at a conversion price for each
share of common stock at 85% of the market price as defined in the financing
agreement.
6
<PAGE>
A beneficial conversion feature of $225,000, representing the "in the money
portion" of the debentures at the date of issuance, was recognized as a
discount on the debentures and an increase to additional paid in capital.
The discount was amortized to interest expense.
At the request of the Company, the Series A-2 debenture was accelerated to
December 31, 1997. As consideration for the acceleration, the Company
provided collateral to the debenture holders for the entire $1,500,000. The
Company has assigned a first priority secured lien on the assets of Sigma 7,
a first deed of trust on land held for sale in Arizona and an assignment of
the $2,200,000 note from Intercell Technologies Corporation to the Company.
In addition, the Company issued 1,000,000 shares of its common stock to the
debenture holders. The Company issued 2,491,000 shares (of which 1,000,000
shares were issued to the debenture holders) of common stock for services
rendered and in lieu of interest expense during nine months ended June 30,
1998, recognizing $225,000 in general and administrative expense.
7. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. This standard establishes
requirements for disclosure of comprehensive income consisting of certain
items previously not included in the statements of operations including
unrealized gains and losses among others. For the three and nine months
ended June 30, 1998 and 1997, the Company had no items of comprehensive
income.
8. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, was effective for
financial statements for periods beginning after December 15, 1997. This
statement establishes standards for the manner in which public business
enterprises report information about operating segments in interim financial
reports issued to stockholders. As the FASB allows, the Company has not
applied this standard in its interim financial statements for the year
ending September 30, 1998.
9. DISCONTINUED OPERATIONS
In February 1998, the Company entered into a stock purchase agreement to
sell, transfer, assign and deliver all assets, liabilities, rights and
obligations of the Company related to its wholly-owned subsidiary California
Tube Laboratory, Inc. to Jaymark Corporation, in exchange for $1,500,000 in
cash, $500,000 in notes receivable and an escrow account of $200,000 (on
September 16, 1998 Jaymark Corporation received a distribution from the
escrow account in the amount of approximately $185,000). This has been
accounted for as a discontinued operation and the results of operations have
been excluded from continuing operations in the consolidated financial
statements of operations for all periods presented. The Company recognized a
loss on the sale of assets of approximately $300,000. The Company also
recognized losses from discontinued operations as follows:
7
<PAGE>
<TABLE>
<CAPTION>
Three months ending Nine months ending
June 30, June 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $0 1,096,000 $1,583,000 3,498,000
Cost of goods sold 0 985,000 1,589,000 2,604,000
-- --------- --------- ---------
Gross profit (Loss) 0 111,000 (6,000) 894,000
General and administrative expense 0 145,000 209,000 473,000
-- --------- --------- ---------
Income/(Loss) from operations 0 (34,000) (216,000) 421,000
Other income 0 21,000 1,000 37,000
-- --------- --------- ---------
Income/(Loss) from discontinued operations $0 $ (13,000) $ (215,000) $ 458,000
== ========= ========= =========
</TABLE>
In June of 1998 the Company discontinued all operations of its majority owned
subsidiary Sigma 7 Corporation, a manufacturer of memory modules located in San
Diego, CA. The Company will seek protection under U.S. bankruptcy laws. Sigma 7
Corporation has been accounted for as a discontinued operation and the results
of operations have been excluded from continuing operations in the consolidated
financial statements of operations for all periods presented. At June 30, 1998,
the assets of Sigma 7 consist of:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable $ 58,000
Inventories 112,000
Other current assets 65,000
-------
Total current assets 235,000
Property and equipment 302,000
-------
Total $537,000
=======
</TABLE>
The Company anticipates the assets of Sigma 7 will be realized, sold or
otherwise liquidated in connection with the bankruptcy proceedings. At the
current time, the Company believes that no significant gain or loss will be
realized on the disposition of the Sigma 7 assets. The Company has recognized
losses relating to this discontinued operation as follows:
<TABLE>
<CAPTION>
Three months ending Nine months ending
June 30, June 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 315,000 $ 448,000 $ 669,000 $ 448,000
Cost of goods sold 639,000 347,000 1,471,000 347,000
-------- ------- --------- --------
Gross profit/(Loss) (324,000) 101,000 (802,000) 101,000
General and administrative expense 450,000 152,000 1,386,000 152,000
-------- ------- ---------- --------
Income from operations (774,000) (51,000) (2,188,000) (51,000)
Other expense 51,000 0 167,000 0
-------- ------- ---------- --------
Loss from discontinued operations $(825,000) $ (51,000) $(2,355,000) $ (51,000)
======== ======= ========== =========
</TABLE>
In April 1998, the Company entered into a stock purchase agreement to sell 100
shares of common stock of Cellular Magnetics, Inc., a subsidiary of Intercell
Corporation, representing 100% ownership of the common stock of Cellular
Magnetics, Inc., to individuals in exchange for $700,000 in cash. This has been
accounted for as a
8
<PAGE>
discontinued operation and the results of operations have been excluded
from continuing operations in the consolidated financial statements of
operations for all periods presented. The Company has recognized a gain on
the sale of a subsidiary from its investment of approximately $544,000. The
Company also recognized losses from discontinued operations as follows:
<TABLE>
<CAPTION>
Three months ending Nine months ending
June 30, June 30,
------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C>
Net sales $0 $ 434,000 $ 814,000 $1,480,000
Cost of goods sold 0 318,000 639,000 1,039,000
- --------- ------- ----------
Gross profit 0 116,000 175,000 441,000
General and administrative expense 0 174,000 901,000 448,000
- --------- ------- ----------
Loss from operations 0 (58,000) (726,000) (7,000)
Other expense 0 1,000 118,000 58,000
- --------- ------- ----------
Loss from discontinued operations $0 $ (59,000) $(844,000) $ (65,000)
==== ========== ========== ===========
</TABLE>
The Company has not recognized any income tax benefit related to the losses
from discontinued operations due to the uncertainty of the Company to
produce any future net income.
10. NANOPIERCE ACQUISITION
In February 1998, Intercell Corporation transferred all of the intellectual
property (which had an historical carrying value of zero) of its wholly
owned subsidiary Particle Interconnect Corporation to Nanopierce (formerly
Sunlight Systems, Inc.) for 7,250,000 restricted post split shares of
common stock and 100 Series A, 8%, Voting, Convertible, Cumulative,
Participating, Preferred shares of Nanopierce. The preferred shares are
convertible to 7,250,000 restricted post split shares of Nanopierce
Technologies, Inc.'s common stock. Intercell Corporation has approximately
74% controlling interest in Nanopierce on a fully diluted basis. This
transaction was discussed in detail in Form 8-K dated February 26, 1998 and
as disclosed in Form 8-K the historical financial statement of Sunlight
Systems, Inc. were not included due to their insignificance. The unaudited
results of operations on a pro forma basis as though Nanopierce had been
acquired as of October 1, 1997 and October 1, 1996 are as follows:
For the nine months ended June 30,
1998 1997
---- ----
Revenue $ 1,000 $ 0
Net loss from operations $(3,682,000) $(5,941,000)
Net loss $(7,228,000) $(7,424,000)
Net loss per share $ (0.23) $ (0.43)
============= =============
From March 1, 1998 through June 30, 1998 Nanopierce issued 621,593 shares
of its common stock in exchange for services valued at approximately
$469,000 based on the
9
<PAGE>
quoted market price of the Nanopierce common stock at the date the services
were performed. The shares were issued for the following services:
Employees, compensation $175,000
Third parties, investment related services 294,000
--------
$469,000
========
The $469,000 is recorded as general and administrative expense and as an
increase to additional paid in capital.
11. STOCKHOLDERS' EQUITY
During the nine months ended June 30, 1998, the Company issued 1,975,000
shares of its common stock to debt holders in lieu of interest valued at
approximately $185,000 and 516,000 shares of its common stock to third
parties in exchange for investment management services, valued at
approximately $40,000. The values were based on quoted market price of the
Company's common stock at the date the services were performed.
12. SUBSEQUENT EVENT
In connection with the acquisition of Cellular Magnetics in September 1996,
the Company provided a guarantee to the former shareholders of M.C. Davis
that the 277,778 shares of the Company's restricted common stock issued at
the time of the acquisition would have a value on October 8, 1998 of not
less than $4.00 per share. During this period the value of the Company's
stock declined and certain shareholders made demand on the Company to honor
its guarantee. In November of 1998, the Company agreed to transfer 750,000
and 100,000 restricted common shares of its Nanopierce Technologies, Inc.
common stock and 793,899 and 500,000 restricted shares of the Company's
common stock respectively to certain of these shareholders.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
year ended September 30, 1997. This report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 31E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those anticipated in forward-looking statements.
On February 6, 1998 the Company entered into a stock purchase agreement to
sell, transfer, and deliver all assets, liabilities, rights and obligations of
the Company related to its wholly-owned subsidiary California Tube Laboratory,
Inc. to Jaymark Corporation, in exchange for $1,500,000 in cash, $500,000 in
notes receivable and an escrow cash amount of $200,000.
10
<PAGE>
The company recognized a loss from discontinued operations of approximately
$215,000 for the nine months ended June 30, 1998, based on the disposition. The
Company also recognized a loss on the sale of a subsidiary of approximately
$300,000.
On February 26, 1998 Intercell Corporation transferred all of the
intellectual property (which had an historical carrying value of zero) of its
wholly owned subsidiary Particle Interconnect Corporation to Nanopierce
Technologies, Inc. for 7,250,000 shares of common stock of Nanopierce and 100
Series A 8% Voting, Convertible, Cumulative, Participating, Preferred shares of
Nanopierce. The 100 preferred shares are convertible into 7,250,000 shares of
common stock. Intercell Corporation owns approximately 60% of the outstanding
common stock of Nanopierce Technologies, Inc. and approximately 74% of the
common stock on a diluted basis, considering the voting and conversion rights of
the Series A preferred stock.
Intercell Corporation discontinued all operations of its majority owned
subsidiary Sigma 7 Corporation, a manufacturer of memory modules located in San
Diego, CA, on June 5, 1998. The market for the Sigma 7 Corporation's main
product line of memory modules experienced significant price erosion on a
worldwide basis. The Company did not have the capitalization to continue and
intends to seek protection under U.S. bankruptcy laws. The Company recognized a
loss from discontinued operations of approximately $825,000 for the three months
ended June 30, 1998 and $2,355,000 for the nine months ended June 30, 1998.
On April 9, 1998, the Company entered into a stock purchase agreement to
sell 100 shares or 100% of the common stock of Cellular Magnetics, Inc., a
wholly owned subsidiary of Intercell Technologies Corporation to individuals for
$700,000 in cash. The Company held a secured interest in Cellular Magnetics,
Inc. due to the default on promissory notes totaling $2,575,000 from Intercell
Technologies Corporation to the Company. As soon as Intercell Technologies
Corporation announced that it would default on the notes payable to the Company,
the Company undertook steps to protect is secured interest, including the
peaceable repossession and foreclosure of the primary asset, Cellular Magnetics,
Inc. The Company used the proceeds of the sale of Cellular Magnetics, Inc. to
pay down $700,000 of the outstanding balance due on the convertible debentures.
The Company recognized a gain on the sale of a subsidiary of approximately
$544,000 and recognized a loss on discontinued operations of $844,000 for the
nine months ended June 30, 1998.
The Company is currently engaged in the design, development and licensing
of products using its patented Particle Interconnect Technology, through its
majority owned subsidiary Nanopierce Technologies, Inc.
In December 1997, the Company issued convertible debentures and attached
warrants for $1,500,000 of this total, $750,000 is the Series A-1 debenture and
$750,000 is the Series A-2 debenture. The convertible debentures were, at the
time of issue, unsecured obligations of the Company.
The $750,000 Series A-1 debenture requires quarterly interest payments at
9% per annum, beginning March 1, 1998 with the balance due on December 1, 1999.
The debenture may be converted at the option of the holder after 60 days from
the date of issuance at a conversion price per share equal to the lessor of 85%
of the market price as defined, or $0.75. In
11
<PAGE>
connection with the convertible debt, three warrants were issued, each entitling
the holder to purchase 200,000 shares of common stock for $0.17, $0.50, and
$1.00 respectively. The warrants expire three years from the date of issuance.
The portion of the proceeds of the Series A-1 debenture allocable to the
warrants was $15,000.
The $750,000 Series A-2 debenture pays interest quarterly at 9% per annum,
beginning June 1, 1998, with a maturity date of April 1, 1999. The debt may be
converted at the option of the holder any time at the end of six business days
following the maturity date, at a conversion price for each share of common
stock at 85% of the market price as defined in the financing agreement. The
Company has recognized $225,000 in interest expense relating to the beneficial
conversion terms of the debentures.
At the request of the Company, purchase and payment for the Series A-2
debenture was accelerated to December 31, 1997. As consideration for the
acceleration, the Company provided security to the debenture holders for the
entire $1,500,000. The Company assigned a first priority secured lien on the
assets of Sigma 7 Corporation, a first deed of trust on property held for resale
in Arizona and a $2,200,000 note from Intercell Technologies Corporation to the
Company. In connection with the placement of the convertible debentures, the
Company paid a $180,000 commission to a third-party investment banker and issued
the investment banker warrants to purchase 200,000 shares of common stock at an
exercise price of $0.15 per share. The warrants were valued at $10,000. The
$180,000 and $10,000 have been included in general and administrative expense.
The Company also issued 2,491,000 shares (of which 1,000,000 shares were issued
to the debenture holders) of common stock for services rendered and in lieu of
interest expense during the nine months ended June 30, 1998 recognizing $225,000
in general and administrative expense.
REVENUES
The Company had no revenue from continuing operations for the nine months
ended June 30, 1997 or 1998.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $0 in the first nine months
of fiscal 1998 compared to $1,416,000 in the first nine months of 1997. For the
third quarter of 1998 the Company had no research and development costs compared
to $340,000 for the third quarter of 1997. The decrease was primarily
attributable to the suspension of the research and development activities
associated with the Company's Particle Interconnect Technology. Research and
development costs relating to the Particle Interconnect Technology were reduced
from $1,416,000 in 1997 to $0 in 1998. The Company has changed its focus from
creating a manufacturing process and facility to licensing its technology to
companies that already have a manufacturing process in place.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by 66% to $596,000 in the
third quarter of the 1998 fiscal year compared to $1,756,000 in the third
quarter of fiscal 1997. For the nine months ended June 30, 1998 general and
administrative expenses decreased by 26% to
12
<PAGE>
$3,347,000 compared to $4,497,000 in the nine months ended June 30, 1997. This
decrease was primarily attributable to the reduction of administrative and labor
costs associated with its Particle Interconnect Technology and a reduction in
professional fees at the Company.
OTHER INCOME/EXPENSE
The Company earned $129,000 in interest income and other income in the
first nine months of the 1998 fiscal year compared to $218,000 for the first
nine months in 1997,while incurring interest and other expenses of $329,000 and
$0 respectively.
INCOME TAXES
As of June 30, 1998 the Company had a net operating loss carryover for
federal and California income tax purposes. The benefit of these net operating
loss carryforwards has not been recorded by the Company, as it is uncertain that
the Company will generate sufficient income in future periods to utilize the
loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The independent auditor's report on Intercell Corporation's financial
statements for the year ended September 30, 1997 included a "going concern"
paragraph, meaning the auditors have expressed substantial doubt about the
Company's ability to continue as a going concern.
The Company has taken several steps regarding future operations including
the following. In February and April 1998, the Company sold its interest in
California Tube Laboratory, Inc. and A.C. Magnetics, Inc. to raise additional
capital for ongoing operations. The Company received $1,500,000 in cash,
$500,000 in a note receivable and $200,000 in escrow for the sale of California
Tube Laboratory, Inc. The Company received $700,000 in cash for the sale of
A.C. Magnetics, Inc. which, it used to pay down its debt on the convertible
debenture.
The Company has also discontinued operations at Sigma 7 Corporation and
Particle Interconnect Corporation during June 1998 and will seek protection
under the U.S. bankruptcy laws for Sigma 7 Corporation. The intellectual
property rights to the Particle Interconnect Technology have been transferred to
Nanopierce Technologies, Inc. resulting in an approximate 74% ownership of that
company on a diluted basis. In July 1998, Nanopierce Technologies, Inc. secured
a two-year credit facility to finance its ongoing operations. This agreement
was to supply Nanopierce with $1,500,000 in capital during the next twelve
months with up to a total of $8,500,000 over a 24-month period. As of November
15, 1998, Nanopierce has received $750,000 under the original agreement. The
agreement has been amended to allow Nanopierce to assign the remaining
commitment to other parties. The Company is still qualifying investors for
additional financing. There is no assurance, however, that Nanopierce will be
able to find an additional investor which could impair its ongoing operations
due to capital requirements. Intercell Corporation has reduced its costs to a
bare minimum and is currently seeking its own financing.
13
<PAGE>
During the nine months ended June 30, 1997 the Company's cash and cash
equivalents increased by $30,000. This increase was due primarily to proceeds
from the issuance of $1,500,000 in convertible debentures in December 1997, the
sale of California Tube Laboratory, Inc. and the sale of A.C. Magnetics, Inc. A
portion of these proceeds was used to pay off debts at Sigma 7 Corporation and
of the Company.
In the 1998 fiscal year, the Company intends to make capital expenditures
of approximately $250,000 if additional financing can be raised for Nanopierce
Technologies, Inc. These expenditures will provide for an office and
application engineering facility. In the first nine months of fiscal 1998 the
Company had no capital expenditures.
The Company believes that if a substitute investor can be found to complete
the entire credit facility of Nanopierce Technologies, Inc., adequate funding is
available to support operations for the next twelve months. The Company also
believes that sales of its Nanopierce Technologies, Inc. products and technology
licenses will provide sufficient funds to meet the Company's capital
requirements for the next two years. This assumption is based on the Company's
belief that it will be successful in entering into a licensing, joint venture,
co-manufacturing or other similar arrangement with connector manufacturers using
the Nanopierce technology. The failure to secure such a relationship could
result in the Company requiring substantial additional capital and resources to
bring Nanopierce products to market.
To the extent the Company's operations are not sufficient to fund the
Company's capital requirements, the Company may enter into a revolving loan
agreement with a financial institution, or attempt to raise additional capital
through the sale of additional capital stock or through the issuance of debt.
At the present time the Company does not have a revolving loan agreement with
any financial institution nor can the Company provide any assurances that it
will be able to enter into any such agreement in the future or be able to raise
funds through the further issuance of debt or equity in the Company.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are known risks. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of the operational systems.
Management believes the total cost of compliance and its effect on the Company's
future results of operations will be insignificant.
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards (SFAS) No. 132, Employer's disclosures about
Pensions and Other Postretirement Benefits. This statement requires disclosure
only and therefore will not impact the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Currently, the Company does not have any
derivative financial instruments and does not participate in hedging activities,
therefore management believes SFAS No. 133 will not impact the Company's
financial statements.
14
<PAGE>
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
The Company made the following unregistered sales of its securities from
April 1, 1998 through June 30, 1998.
<TABLE>
<CAPTION>
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
<S> <C> <C> <C> <C>
5/8/98 Common Stock 250,000 Settlement Mason Tarkeshian
6/1/98 Option to Purchase 150,000 Employment Kristi J. Kampmann
Common Stock @
$0.05 per share
</TABLE>
EXEMPTION FROM REGISTRATION CLAIMED.
This sale by the Company of its unregistered securities was made in
reliance upon Sections 4(2) and 4(6) of the Securities Act of 1933, as amended.
The individuals listed above that purchased the unregistered securities are
known to the Company and management, through pre-existing business
relationships, as a long standing business associate, friend, employee, relative
or member of the immediate family of management. The purchasers were provided
access to all material information which they requested and all information
necessary to verify such information and were afforded access to management of
the Company in connection with their purchases. The purchaser of the
unregistered securities acquired such securities for investment and not with a
view toward distribution, acknowledging such intent to the Company. All
certificates or agreements representing such securities that were issued
contained restrictive legends, prohibiting further transfer of the certificates
or agreements representing such securities, without such securities either being
first registered or otherwise exempt from registration in any further resale or
disposition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Exhibit 11: Statement of Computation of Earnings Per Share
Exhibit 27: Financial Data Schedule
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERCELL CORPORATION
(Registrant)
Date: November ___, 1998 By /s/ Paul Metzinger
-------------------
Paul Metzinger, President and Chief Executive
Officer
Date: November ___, 1998 By /s/ Thomas Vander Stel
-----------------------
Thomas Vander Stel, Secretary and Chief
Financial Officer
16
<PAGE>
LIST OF EXHIBITS
Exhibit 11: Statement of computation of earnings per share
Exhibit 27: Financial Data Schedule
<PAGE>
Exhibit 11
Intercell Corporation and Subsidiaries
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
1998 1997 1998 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss from continuing operations ($604,000) ($2,012,000) ($3,547,000) ($5,695,000)
Deemed preferred stock dividend relating to
in-the-money conversion terms (15,000) (306,000) (45,000) (1,023,000)
Accrual dividends preferred stock (37,000) (74,000)
Accretion on preferred stock (29,000) (118,000) (93,000) (413,000)
------------------------------------------------------------------
Loss from continuing operations applicable to (685,000) (2,436,000) (3,759,000) (7,131,000)
common shareholders
Discontinued operations
Loss from discontinued operations (825,000) (446,000) (3,414,000) (144,000)
Gain on sale of subsidiaries 544,000 244,000
------------------------------------------------------------------
Loss from discontinued operations (281,000) (446,000) (3,170,000) (144,000)
Net loss applicable to common stockholders ($966,000) ($2,882,000) ($6,929,000) ($7,275,000)
==================================================================
Weighted average number
of common shares outstanding 35,848,917 18,710,850 31,291,413 17,169,353
Net loss per common share:
Loss from continuing operations ($0.02) ($0.13) ($0.12) ($0.41)
Loss from discontinued operations ($0.01) ($0.02) ($0.10) ($0.01)
------------------------------------------------------------------
Net loss per applicable to common stockholders ($0.03) ($0.15) ($0.22) ($0.42)
==================================================================
</TABLE>
Diluted loss per share is not presented as the effect of the potential
conversion of preferred stock to common stock and the exercise of outstanding
warrants and options would decrease loss per share.
See notes to the consolidated financial statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERCELL
CORPORATION'S FINANCIAL STATEMENT AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 246,000
<SECURITIES> 0
<RECEIVABLES> 20,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,925,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,806,000
<CURRENT-LIABILITIES> 4,350,000
<BONDS> 0
0
3,668,000
<COMMON> 21,327,000
<OTHER-SE> (27,381,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,806,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,347,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 328,000
<INCOME-PRETAX> (6,717,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,547,000)
<DISCONTINUED> (3,170,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,929,000)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
