10QSB/A 1 iic10qa3-05.txt FORM 10-QSB/A AMENDMENT #1 UNITED STATES 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 March 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-14306 INTERCELL INTERNATIONAL CORPORATION ----------- --------------------------- (Exact name of small business issuer as specified in its charter) Nevada 84-0928627 ------ ---------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 370 17th Street, Suite 3640 Denver, Colorado 80202 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (303) 592-1010 Not applicable (Former name, former address or former fiscal year, if changed since last report) Indicate by check mark whether the issuer (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 May 23, 2005 there were 23,836,323 shares of the registrant's sole class of common shares outstanding. Transitional Small Business Disclosure Format Yes No X --- --- PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements Page ---- Report of Independent Registered Public Accounting Firm F-1 Condensed Consolidated Balance Sheet -March 31, 2005 F-2 Condensed Consolidated Statements of Operations and Comprehensive Loss- Three and Six months ended March 31, 2005 and 2004 F-3 Condensed Consolidated Statement of Changes in Stockholders' Deficit - Six months ended March 31, 2005 F-4 Condensed Consolidated Statements of Cash Flows - Three and Six months ended March 31, 2005 and 2004 F-5 Notes to Condensed Consolidated Financial Statements F-7 Item 2. Management's Discussion and Analysis 1 Item 3. Controls and Procedures 3 PART II - OTHER INFORMATION Item 1. Legal Proceedings 3 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - Not Applicable Item 3. Defaults Upon Senior Securities - Not Applicable Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable Item 5. Other Information - Not Applicable Item 6. Exhibits and Reports on Form 8-K 4 SIGNATURES 5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Intercell International Corporation I have reviewed the accompanying condensed consolidated balance sheet of Intercell International Corporation and subsidiary as of March 31, 2005, the related condensed consolidated statements of operations and comprehensive loss for the three-month and six-month periods ended March 31, 2005 and 2004, the condensed consolidated statements of cash flows for the six-month periods ended March 31, 2005 and 2004, and the condensed consolidated statement of changes in stockholders' deficit for the six-month period ended March 31, 2005. These interim condensed consolidated financial statements are the responsibility of the Company's management. I conducted my reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, I do not express such an opinion. Based on our reviews, I am not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. /s/ Larry O'Donnell, CPA, PC Aurora, Colorado Friday, May 20, 2005 F-1
INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Condensed Consolidated Balance Sheet March 31, 2005 (Unaudited) Assets Current assets: Cash and cash equivalents $ 46,167 Restricted cash(Note 6) 35,000 Assets of discontinued operations (Note 3) 9,174 ---------- Total current assets 90,341 ---------- Property and equipment, net 1,688 ---------- Other assets: Investment securities available for sale (Note 4) 31,487 ---------- Total assets $ 123,516 ========== Liabilities and Stockholders' Deficit Liabilities not subject to compromise Current liabilities: Accounts payable and accrued liabilities $ 444 ---------- Total current liabilities 444 ---------- Liabilities subject to compromise (Note 2) Accounts payable 64,166 Accrued liabilities 611 Note payable 35,000 Liabilities of discontinued operations (Note 3) 308,683 ---------- Total liabilities subject to compromise 408,460 ---------- Total liabilities 408,904 ---------- Commitments and contingencies (Notes 6 and 8) Stockholders' deficit (Note 7): Convertible preferred stock; $0.001 par value; 20,000,000 shares authorized; no shares issued and outstanding - Common stock; $0.001 par value; 100,000,000 shares authorized; 23,836,323 shares issued and outstanding 23,836 Additional paid-in capital 38,740,834 Accumulated other comprehensive income 31,487 Accumulated deficit (39,081,543) ---------- Total stockholders' deficit ( 285,530) ---------- Total liabilities and stockholders' deficit $ 123,516 ==========
See accompanying notes to condensed consolidated financial statements. F-2
INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2005 2004 2005 2004 ---- ---- ---- ---- General and administrative expense $( 49,014) ( 131,181) ( 144,871) ( 255,708) --------- --------- --------- -------- Other income (loss): Gain on sale and exchange of affiliate stock (Note 4) - - - 259,195 Unrealized gain (loss) on derivative instruments (Note 4) 150 ( 8,850) 1,050 ( 6,930) Interest income 38 1,084 137 3,114 Interest expense ( 555) - ( 718) ( 260) --------- --------- --------- -------- ( 367) ( 7,766) 469 255,119 --------- --------- --------- -------- - Loss from continuing operations ( 49,381) ( 123,415) ( 144,402) ( 589) --------- --------- --------- -------- Discontinued operations; loss from operations of subsidiary (Note 3) ( 3,280) ( 271,299) ( 104,096) ( 504,291) --------- --------- --------- -------- Net loss ( 52,661) ( 394,714) ( 248,498) ( 504,880) --------- --------- --------- -------- Other comprehensive (loss) income; change in unrealized (loss) gain on securities available for sale (Note 4) ( 22,041) 14,838 11,702 56,056 --------- --------- --------- -------- Total comprehensive loss $( 74,702) ( 379,876) ( 236,796) ( 448,824) ========= ========= ========= ======== Basic and diluted loss per share: (Loss) income from continuing operations $ * ( 0.01) ( 0.01) * Loss from discontinued operations * ( 0.01) * ( 0.03) --------- --------- --------- -------- Net loss per share, basic and diluted $ * ( 0.02) $( 0.01) ( 0.03) ========= ========= ========= ======== Weighted average number of common shares outstanding 23,836,323 20,047,038 23,847,655 19,296,682 ========== ========== ========== ========== * Less than $(0.01) per share.
See accompanying notes to condensed consolidated financial statements. F-3
INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Condensed Consolidated Statements of Changes in Stockholders' Deficit Six Months Ended March 31, 2005 (Unaudited) Accumulated Additional Other Total Common Stock Paid-In Comprehensive Accumulated Stockholders' ------------ Shares Amount Capital Income Deficit Deficit ------ ------ ------- ------ ------- ------- Balances, October 1, 2004 23,930,073 $ 23,930 $38,700,045 $ 19,784 $(38,833,045) $( 89,286) Common stock in exchange for marketing rights (Note 7) ( 93,750) ( 94) 94 - - - Contribution of services by officers/stockholders (Note 7) - - 40,695 - - 40,695 Net loss - - - - ( 248,498) ( 248,498) - Other comprehensive income: Change in unrealized gain on securities available for sale (Note 4) - - - 11,703 - 11,703 ---------- ------- ---------- ---------- ---------- ---------- Balances, March 31, 2005 23,836,323 $ 23,836 $38,740,834 $ 31,487 $(39,081,543) $( 285,530) ========== ======= ========== ========== ========== ========= See accompanying notes to condensed consolidated financial statements.
F-4
INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended March 31, 2005 2004 ---- ---- Cash flows from operating activities: Net loss $ ( 248,948) ( 504,880) Adjustments to reconcile net loss to net cash used in continuing operations: Loss from discontinued operations 104,096 504,291 Amortization expense - 85,690 Depreciation expense 422 352 Amortization of prepaid investor relation services - 47,399 Contribution of services by officer/stockholder 40,695 - Unrealized gain on derivative instruments ( 1,050) 6,930 Gain on sale and exchange of affiliate stock - ( 259,195) Changes in operating assets and liabilities: Increase (decrease) in accounts payable and accrued liabilities 15,855 ( 3,741) --------- --------- Net cash used in operating activities from continuing operations ( 88,480) ( 123,154) --------- --------- Cash flows from investing activities: Proceeds from sale of affiliate stock and warrants to purchase affiliate stock - 259,195 Payment of note receivable - 135,000 Increase in notes receivable - ( 100,000) Purchase of equipment - ( 2,814) --------- --------- Net cash provided by investing activities from continuing operations - 291,381 --------- ---------- Cash flows from financing activities: Proceeds from sale of common stock, options and warrants - 1,279,946 Increase in restricted cash ( 35,000) - Proceeds from note payable 35,000 - Payment on note payable - ( 16,610) ---------- --------- Net cash provided by financing activities from continuing operations - 1,263,336 ---------- --------- Net cash used in discontinued operations ( 29,170) ( 507,893) ---------- --------- Net (decrease) increase in cash and cash equivalents ( 117,650) 352,205 Cash and cash equivalents, beginning of period 163,932 8,301 ---------- ---------- Cash and cash equivalents, end of period $ 46,167 361,205 ========== ==========
(Continued) F-5
INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued) Six Months Ended March 31, 2005 2004 ---- ---- Supplemental disclosure of non-cash investing and financing activities: Common stock returned in exchange for marketing rights $ 94 - Warrant issued in partial satisfaction of note payable - 11,661 Note receivable satisfied in connection with extinguishment of note payable - 20,200 Increase in investment securities available for sale and related unrealized gain 11,703 56,056
See accompanying notes to condensed consolidated financial statements. F-6 INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Notes to Condensed Consolidated Financial Statements Six Months Ended March 31, 2005 and 2004 (Unaudited) 1. BASIS OF PRESENTATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: ---------------------------------------------------------------------- PRESENTATION OF INTERIM INFORMATION The accompanying condensed consolidated financial statements include the accounts of Intercell International Corporation, a Nevada corporation (the Company or Intercell), and beginning in October 2003, a 60% controlling interest in Brunetti DEC, LLC, ("Brunetti") a Colorado limited liability company. On January 30, 2004, the Company acquired the remaining 40% interest in Brunetti. In October 2004, the Company discontinued the operations of Brunetti and implemented steps to liquidate the assets of Brunetti. On March 1, 2005, Brunetti filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 7 of Title 7 of the U.S. Bankruptcy Code (Note 2). All significant intercompany accounts and transactions have been eliminated in consolidation. On March 16, 2005, the Company (the Debtors) filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. Under Chapter 11, certain claims against the Debtor in existence prior to the filing of the petitions for relief under the U.S. Bankruptcy Code are stayed while the Debtor continues business operations as Debtor-in-possession. The claims are reflected in the March 31, 2005 Condensed Consolidated Balance Sheet as "liabilities subject to compromise." Additional claims may arise subsequent to the filing date resulting from rejection of executory contracts, including leases, and from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor's assets are stayed, although the holders of such claims have the right to move the court for relief from the stay (Note 2). In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements include all material adjustments, including all normal and recurring adjustments, considered necessary to present fairly the financial position and operating results of the Company for the periods presented. The consolidated financial statements and notes are presented as permitted by Form 10-QSB, and do not contain certain information included in the Company's last Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004. It is the Company's opinion that when the interim consolidated financial statements are read in conjunction with the September 30, 2004 Annual Report on Form 10-KSB, the disclosures are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results for a full year or any future period. F-7 INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Notes to Condensed Consolidated Financial Statements Six Months Ended March 31, 2005 and 2004 (Unaudited) In the Company's last Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004, the Report of the Independent Registered Public Accounting Firm includes an explanatory paragraph that describes substantial doubt about the Company's ability to continue as a going concern. The Company's financial statements for the three months ended December 31, 2004 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company reported a net loss of $236,796 for the six months ended March 31, 2005, and an accumulated deficit of $39,081,687 as of March 31, 2005. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not contain any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. MANAGEMENT'S PLANS To address its current cash flow concerns, the Company is in discussions with various parties attempting to raise additional funds to support current and future operations. This includes attempting to raise additional working capital through the sale of additional capital stock or through the issuance of debt. However, the Company cannot provide any assurance it will be able to raise funds through a further issuance of debt or equity in the Company. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation, allows companies to choose whether to account for employee stock-based compensation on a fair value method or to continue accounting for such compensation under the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The Company has chosen to continue to account for employee stock-based compensation using APB 25. F-8 INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Notes to Condensed Consolidated Financial Statements Six Months Ended March 31, 2005 and 2004 (Unaudited) Had compensation cost for the Company's stock plans been determined based on fair value at the grant dates for awards under the plans consistent with the method prescribed under SFAS No. 123, the Company's net loss and net loss per share for the six months ended March 31, 2005 and 2004, respectively, would have changed to the pro forma amounts indicated below:
2005 2004 ---- ---- Net loss, as reported $( 248,498) ( 504,880) Total stock-based employee compensation expense determined under fair value based method for all awards - ( 1,667,000) --------- ---------- Net loss, pro forma $( 248,498) ( 2,171,880) ========= ========== Net loss per share, as reported $( 0.01) ( 0.03) Net loss per share, pro forma $( 0.01) ( 0.11)
The fair value of options granted during the three months ended March 31, 2004 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Expected dividend yield 0% Expected stock price volatility 93%-127% Risk-free interest rate 1.28% - 3.73% Expected life of options 6.5 years No options were granted during the three months ended March 31, 2005. LOSS PER SHARE SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (EPS) with a 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. Income (loss) per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock options and warrants are not considered in the calculation of diluted loss per share, as the impact of the potential common shares (12,396,350 shares at March 31, 2005 and 14,163,850 shares at March 31, 2004) would be to decrease loss per share. Therefore, diluted loss per share is equivalent to basic loss per share. F-9 INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Notes to Condensed Consolidated Financial Statements Six Months Ended March 31, 2005 and 2004 (Unaudited) RECENTLY ISSUED ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R) Share-Based Payment, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted and recognized in the statement of operations based on their fair value. SFAS No. 123(R) will be effective for public companies that file as small business issuers as of the first interim or annual reporting period that begins after December 15, 2005. The Company is evaluating the provisions of this standard. Depending upon the number and terms of options that may be granted in future periods, the implementation of this standard could have a material impact on the Company's financial position and results of operations. RECLASSIFICATIONS Certain amounts previously reported in the March 31, 2004 condensed consolidated financial statements have been reclassified to conform to current year presentation. 2 VOLUNTARY REORGANIZATION UNDER CHAPTER 11 ------------------------------------------- On March 16, 2005, the Company (the Debtors) filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On March 1, 2005, the Company's wholly-owned subsidiary, Brunetti filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 7 of Title 7 of the U.S. Bankruptcy Code (Note 3). As consequence of the bankruptcy filing, litigation against the Debtors was stayed. Management, at this time, is developing a plan of reorganization to submit to the Court. LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise reflected in the condensed consolidated balance sheets represent the liabilities of the Debtor incurred prior to the Petition Date. Liabilities subject to compromise consisted of the following: March 31, 2003 Pre-petition accounts payable $ 64,310 Accrued interest 611 Short-term debt 35,000 Liabilities of discontinued operations 308,683 ------------ Total liabilities subject to compromise $ 408,604 ------------ F-10 INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Notes to Condensed Consolidated Financial Statements Six Months Ended March 31, 2005 and 2004 (Unaudited) 3 DISCONTINUED OPERATIONS: ------------------------- Brunetti is a Denver, Colorado-based limited liability company, and through October 11, 2004, Brunetti provided consulting, design, engineering and construction services designed to enable and enhance voice, data and video communications through fiber and wireless systems. Brunetti provided services primarily to state, municipal and local governments in the United States. On October 11, 2004, the Company discontinued the operations of Brunetti and implemented steps to liquidate the assets of Brunetti. On March 1, 2005, Brunetti filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 7 of Title 7 of the U.S. Bankruptcy Code. At March 31, 2005, the carrying values of Brunetti's assets and liabilities (presented as assets and liabilities of discontinued operations) are as follows: Cash $ 9,174 ----------- Total assets (all current) $ 9,174 =========== Accounts payable $ 179,473 Related party payable 25,035 Line of credit 10,735 Accrued payroll 93,440 ----------- Total liabilities (all current)(1) $ 308,683 =========== (1) Liabilities above do not include payables to Intercell International Corporation of approximately $384,358 at March 31, 2005. Revenues attributable to Brunetti operations for the six months ended March 31, 2005 and 2004, reported in discontinued operations, were $11,546 and $100,644, respectively ($0 and $59,968 for the three months ended March 31, 2005 and 2004, respectively). Operations related to Brunetti resulted in a net loss during the six months ended March 31, 2005 and 2004 of $77,945 and $504,291, respectively ($3,280 and $271,299 during the three months ended March 31, 2005 and 2004, respectively). Brunetti did not incur any income taxes during these periods. F-11 INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Notes to Condensed Consolidated Financial Statements Six Months Ended March 31, 2005 and 2004 (Unaudited) 4 INVESTMENT IN AFFILIATE AND RELATED TRANSACTIONS: --------------------------------------------------- As of March 31, 2005, the Company owns approximately 0.5% of the outstanding common stock of NanoPierce Technologies, Inc. ("NanoPierce"). Through October 20, 2003, the Company accounted for its investment in NanoPierce under the equity method of accounting due to the Company's ability to exercise significant influence over the operating and financial policies of NanoPierce. At March 31, 2005, the Company owns 464,870 shares of NanoPierce common stock, of which 150,000 shares are subject to a warrant agreement, described below. Beginning October 21, 2003, based on factors which indicated that the Company no longer had the ability to exercise significant influence, the Company changed its method of accounting for the NanoPierce shares (except for those which are subject to underlying warrants, which are carried at cost) to the method of accounting prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company has classified its investment in these NanoPierce shares as available for sale securities, in which unrealized gains (losses) are computed on the average cost basis, and are recorded in other comprehensive income (loss). At March 31, 2005, 314,870 shares of NanoPierce were available for sale and had a fair market value of $31,487. The Company reported an increase in the unrealized gain on available for sale securities of $11,703 during the six months ended March 31, 2005. The Company did not sell any available for sale securities during the six months ended March 31, 2005. In December 2003, the Company sold to an unrelated third-party 5,911,894 shares of NanoPierce common stock held by the Company along with an option to purchase 2,000,000 shares of the Company's common stock for cash of $332,301. The closing market price of the NanoPierce common stock on the date of the sale was $0.25 per share. The carrying value of the NanoPierce shares on the transaction date was $0. The sale price was allocated between the estimated fair value of the NanoPierce shares ($272,494) and the option ($59,807), resulting in a gain on the sale of NanoPierce stock of $259,195. As a result of this transaction, the Company's ownership interest in NanoPierce's outstanding common stock decreased from approximately 9.65% at October 1, 2003, to approximately 0.7% at December 31, 2003. Warrants to Purchase NanoPierce Common Stock Prior to October 1 2003, the Company sold 100,000 restricted shares of NanoPierce common stock and granted two warrants to purchase up to 300,000 shares of NanoPierce common stock held by the Company, to a third party for $50,000 cash. Each warrant grants the third party the right to purchase up to 150,000 shares of NanoPierce common stock held by the Company, at an exercise price of $0.50 per share. The warrants are exercisable immediately; one warrant expired in October 2004, and one warrant expires in October 2007. The warrants contain cashless exercise provisions at the option of the holder. At the date of the transaction, the warrants were valued at $32,000. These warrants are considered derivative financial instruments and are therefore recorded in the balance sheet at fair value. F-12 INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debotor-In-Possession) Notes to Condensed Consolidated Financial Statements Six Months Ended March 31, 2005 and 2004 (Unaudited) Changes in the fair value of these warrants (unrealized gains and losses) are recognized currently in earnings (loss) of the Company. At March 31, 2005, the remaining warrant had not been exercised and the fair value of the derivative was estimated to be $0. An unrealized gain of $1,050 and an unrealized loss of $6,930 was recognized during the six months ended March 31, 2005 and 2004, respectively. 5 NOTES RECEIVABLE: ------------------- In October 2003, the Company loaned $100,000 to NanoPierce in return for a 7% promissory note. In January 2004, the promissory note was paid in full by NanoPierce. The Company also had a $20,200 unsecured, 7% note receivable due from a firm that assists the Company from time to time with its financing efforts. An officer of the firm is related to a member of the Board of Directors of the Company. In October 2003, this note was satisfied in connection with the extinguishment of a note payable (Note 5). 6 NOTES PAYABLE AND CREDIT FACILITIES: -------------------------------------- NOTES PAYABLE, RELATED PARTIES In December 2004, NanoPierce loaned the Company $35,000 in return for an unsecured, 7% promissory note, due in December 2005. The funds were utilized to purchase a six-month certificate of deposit in order to obtain a letter of credit, discussed below. In September 2003, a shareholder loaned the Company $50,000 in return for an unsecured 7% promissory note. In October 2003, the Company paid the note. LETTER OF CREDIT In December 2004, the Company obtained a $35,000 letter of credit in connection with completing certain obligations under a pre-existing Brunetti contract. The letter of credit expires in December 2005 and is collateralized by a 6-month certificate of deposit. As of March 31, 2005, there is no outstanding balance on the letter of credit. 7 STOCKHOLDERS' DEFICIT: ------------------------ COMMON STOCK In December 2004, the Company exchanged certain marketing rights (with a carrying value of $0) for the return of 93,750 shares of the Company's restricted common stock and the extinguishment of $10,488 of accounts payable and accrued expenses owed by Brunetti to this party. The shares were retired by the Company. As a result of this transaction, the Company recognized a gain of $10,488, which is included in discontinued operations. F-13 INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Notes to Condensed Consolidated Financial Statements Six Months Ended March 31, 2005 and 2004 (Unaudited) In November 2003, the Company issued 25,787 shares of its restricted common stock as a result of the cashless exercise of a warrant. In October 2003, the Company issued 10,750,000 shares of its restricted common stock and warrants exercisable into 3,225,000 shares of its restricted common stock for cash of $1,075,000. The 10,750,000 shares of common stock were issued at a price of $0.10 per share. The warrants have an exercise price of $0.10 per share, a term of 5 years and provide for cashless exercise. In October 2003, the Company also issued 200,000 shares of its restricted common stock for cash of $2,000. The 200,000 shares of common stock were issued at a price of $0.01 per share. CAPITAL TRANSACTIONS During the six months ended March 31, 2005, officers of the Company agreed to provide services to the Company without compensation for these services. These services were estimated to be valued at $40,695, which was recorded as expense. The Company has accounted for these contributed services as a capital transaction, which resulted in an increase in additional paid-in capital. STOCK OPTIONS In January 2004, the Company granted options to purchase up to 1,250,000 shares of common stock to officers/directors of the Company and an option to purchase 500,000 shares of common stock to an employee of its subsidiary, Brunetti. These options have an exercise price of $0.41 per share, a term of 10 years, and provide for cashless exercise. In October 2003, the Company granted options to purchase up to 1,500,000 shares of common stock to officers/directors of the Company and options to purchase 800,000 shares of common stock to employees of its subsidiary, Brunetti. The options have an exercise price of $0.51 per share (equivalent to the market value of the Company's common stock at the grant date), a term of 10 years, and provide for cashless exercise. WARRANTS In February 2004, the Company issued warrants exercisable into 700,000 shares of the Company's restricted common stock. The warrants have an exercise price of $0.25 per share and expire in February 2009. Te warrants were purchased by an unrelated third party for $500 cash. In October 2003, the Company issued a warrant to purchase 1,933,926 restricted common shares for cash of $19,339. The warrant was issued for working capital and has an exercise price of $0.10 per share, a term of 5 years, and provides for cashless exercise. F-14 INTERCELL INTERNATIONAL CORPORATION AND SUBSIDIARY (Debtor-In-Possession) Notes to Condensed Consolidated Financial Statements Six Months Ended March 31, 2005 and 2004 (Unaudited) In October 2003, the Company also issued warrants to purchase 1,166,074 restricted common shares as partial payment on a $50,000 promissory note. The value of the warrants was estimated to be $11,661. The warrants have an exercise price of $0.10 per share, a term of 5 years, and provide for cashless exercise. In addition, in October 2003, the Company issued warrants to purchase 3,255,000 restricted common shares as part of an equity placement. The warrants have an exercise price of $0.10 per share and a term of 5 years, and provide for cashless exercise. 8 COMMITMENTS AND CONTINGENCIES: ------------------------------- Litigation The filing of the Chapter 11 and 7 cases automatically stayed proceedings in private lawsuits relating to pre-petition claims as to the Debtors. Certain former employees of Brunetti have filed claims for unpaid wages and other expenses against the Company and Brunetti in the Small Claims Court of Denver County, Colorado. On March 2, 2005, the Court found in favor of the employees and found that the claims were the responsibility of the Company. In addition, a claim of approximately $230,000 has been made against Brunetti. The lessor of the premises leased by Brunetti has filed legal action against Brunetti to enforce its rights under the lease after Brunetti ceased operations and vacated the premises. F-15 Item 2. Management's Discussion and Analysis Certain statements contained in this Form 10-QSB contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from the results, financial or otherwise, or other expectations described in such forward-looking statements. Any forward-looking statement or statements speak only as of the date on which such statements were made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statements are made or reflect the occurrence of unanticipated events. Therefore, forward-looking statements should not be relied upon as prediction of actual future results. The Report of Independent Registered Public Accounting Firm on the Company's condensed consolidated financial statements as of September 30, 2004, and for each of the years in the two-year period then ended, includes a "going concern" explanatory paragraph, that describes substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 1 to the quarterly Financial Statements. Management's Plans The Company reported a net loss of $248,498 for the six months ended March 31, 2005 ($52,661 for the three months ended March 31, 2005), and an accumulated deficit of $39,081,543 as of March 31, 2005. On March 16, 2005, the Company (the Debtor) filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. Under Chapter 11, certain claims against the Debtor in existence prior to the filing of the petitions for relief under the U.S. Bankruptcy Code are stayed while the Debtor continues business operations as Debtor-in-possession. The claims are reflected in the March 31, 2005 Condensed Consolidated Balance Sheet as "liabilities subject to compromise." Additional claims may arise subsequent to the filing date resulting from rejection of executory contracts, including leases, and from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor's assets are stayed, although the holders of such claims have the right to move the court for relief from the stay Results of Operations On October 20, 2003, the Company acquired a controlling 60% equity interest in Brunetti for a $700,000 cash contribution to Brunetti. On January 30, 2004, the Company acquired the remaining 40% equity interest in Brunetti for a $300,000 cash contribution to Brunetti. On October 11, 2004, the Company ceased the operations of Brunetti. On March 1, 2005, Brunetti filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 7 of Title 7 of the U.S. Bankruptcy Code. Loss from continuing operations for the six months ended March 31, 2005 was $144,402 compared $589 for the six months ended March 31, 2004 ($49,381 and $123,415 for the three months ended March 31, 2005 and 2004, respectively). The increase of $143,813 for the six months ended March 31, 2005, is explained by the non-recurrence of a $259,195 gain on the sale and exchange of affiliate stock in 2003 and the decrease in general and administrative expenses as explained below. 1 General and administrative expenses during the six months ended March 31, 2005 were $144,871, compared to $255,708 for the six months ended March 31, 2004. The decrease of $110,837 is primarily attributable to the decrease in amortization and consulting expenses. During the six months ended March 31, 2005, the Company recognized a net loss of $248,498 compared to a net loss of $504,880 during the six months ended March 31, 2004 (net losses of $74,702 and $379,876 for the three months ended March 31, 2005 and 2004, respectively). The decrease of $256,382 is explained by an approximate $400,195 decrease in the loss from discontinued operations between 2003 and 2004 off set by an increase of $143,813 in loss from continuing operations. Liquidity and Capital Resources During the six months ended March 31, 2005, the Company used $88,480 in operating activities from continuing operations, the Company received $35,000 from a note payable which was used to secure a $35,000 Letter of Credit. The Company had $46,167 of cash and cash equivalents at March 31, 2005, which is being used to support operations. During the six months ended March 31, 2005, $29,170 was used in discontinued operations. Prior to September 30, 2003, the Company entered into an agreement with an unrelated third party, to sell 100,000 shares of the NanoPierce common stock held by the Company along with warrants to purchase up to 300,000 restricted shares of NanoPierce common stock held by the Company. In exchange for the NanoPierce common stock and warrants, the Company received $50,000 cash. The warrants have an exercise price of $0.50 per share. The first warrant of 150,000 shares expired in October 2004. The second warrant of 150,000 shares has a term of 5 years. The remaining warrant provides for cashless exercise and is exercisable immediately. The warrants are considered derivative financial instruments and are therefore recorded in the balance sheet at fair value. Changes in the fair value of the warrants (unrealized gains and losses) are recognized currently in earnings (loss) of the Company. At March 31, 2005, the fair value of the derivative was estimated to be $0. As of March 31, 2005, the Company owns approximately 0.5% of the outstanding common stock of NanoPierce Technologies, Inc. ("NanoPierce"). At March 31, 2005, the Company owns 464,870 shares of NanoPierce common stock, of which 150,000 shares are subject to warrant agreements, described below. Beginning October 21, 2003, based on factors which indicated that the Company no longer has the ability to exercise significant influence, the Company changed its method of accounting for the NanoPierce shares not subject to underlying warrants to the method of accounting prescribed by SFAS No. 115, "Instruments in Debt and Equity Securities". The Company has classified its investment in NanoPierce as available for sale securities in which unrealized gains (losses) are recorded to shareholders' equity. At March 31, 2005, the Company owns 314,870 shares of NanoPierce common stock that are tradeable, and based upon the closing bid price of $0.10 per share, the market value of the NanoPierce common shares at March 31, 2005, was $31,487. 2 Item 3. Controls and Procedures A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report. Based on that review and evaluation, the CEO and CFO have concluded that the Company's current disclosure controls and procedures, as designed and implemented, were effective. There have been no significant changes in the Company's internal controls subsequent to the date of their evaluation. There were no significant material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company. PART II - OTHER INFORMATION Item 1. Legal Proceedings On March 16, 2005, the Company (the Debtor) filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. Under Chapter 11, certain claims against the Debtor in existence prior to the filing of the petitions for relief under the U.S. Bankruptcy Code are stayed while the Debtor continues business operations as Debtor-in-possession. The claims are reflected in the March 31, 2005 Condensed Consolidated Balance Sheet as "liabilities subject to compromise." Additional claims may arise subsequent to the filing date resulting from rejection of executory contracts, including leases, and from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor's assets are stayed, although the holders of such claims have the right to move the court for relief from the stay. 3 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following is a complete list of exhibits field as part of this Form 10-QSB. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-B. Exhibit 11 Computation of Net Loss Per Share Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act Exhibit 32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act (b) Reports on Form 8-K. The registrant filed the following current reports on Form 8-K during the quarter ended March 31, 2005: - Current Report on Form 8-K dated, March 1, 2005, filed with the Securities and Exchange Commission on March 2, 2005(Item 8.01 Other Events, regarding the bankruptcy filing of the wholly-owned subsidiary, Brunetti DEC, LLC). - Current Report on Form 8-K dated, March 11, 2005, filed with the Securities and Exchange Commission on March 15, 2004 (Item 5.02(b) Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers). - Current Report on Form 8-K dated, March 16, 2005, filed with the Securities and Exchange Commission on March 18, 2005 (Item 1.03 Bankruptcy or Receivership). 4 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 INTERNATIONAL CORPORATION (Registrant) Date: May 23, 2005 /s/ R. Mark Richards ----------------------------------- R. Mark Richards, Chief Executive Officer /s/ Kristi J. Kampmann ----------------------------------- Kristi J. Kampmann, Chief Financial Officer 5