** **

** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

(Mark One)

 
| **ý****QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934** |
|-------------------------------------------------------------------------------------------------------|
|                                                                                                  |   |   |
|                                                                                                  | **For the quarterly period ended June  30, 2002** |   |
|                                                                                                  |   |   |
| **OR**                                                                                                |
|                                                                                                  |   |   |
| **o****TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |
|                                                                                                  |   |   |
|                                                                                                  | **For the transition period from                 to**                 |   |
|                                                                                                  |   |   |
| **Commission  file number: 0-21130**                                                                  |
|                                                                                                       |  |  |  |

 

 

**Enchira Biotechnology Corporation**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                               |   | **04-3078857**      |
|------------------------------------------------------------|--------|---------------------|
| (State or other  jurisdiction of                           |   | (I.R.S. Employer    |
| incorporation or  organization)                            |   | Identification No.) |
|                                                       |   |                |
| **4200  Research Forest Drive**                            |   |                |
| **The  Woodlands, Texas**                                  |   | **77381**           |
| (address of principal  executive offices)                  |   | (zip code)          |
|                                                       |   |                |
| **281-419-7000**                                           |
| (Registrant’s telephone  number, including area code) |

 

                Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  ý  No  o

 

 

                As of August 1,2002, there were outstanding 15,310,771 shares of Common Stock, par value $.01per share, of the registrant.

 

 

 

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**ENCHIRABIOTECHNOLOGY COPORATION**

 

 

**Form 10-Q for the Quarter Ended June 30, 2002**

 

**INDEX**

 

 

 
| Factors  Affecting Forward-Looking Statements |
|-----------------------------------------------|
|                                          |   |
| PART I.                                       | FINANCIAL INFORMATION |
|                                          |   |
| Item 1.                                       | Financial Statements |
|                                          |   |
|                                          | Balance Sheets as of June 30, 2002  (Unaudited) |
|                                          | and December 31, 2001 |
|                                          |   |
|                                          | Statements of Operations for  the Three and Six Months |
|                                          | Ended June 30, 2002 and 2001  (Unaudited) |
|                                          |   |
|                                          | Statements of Cash Flows for  the Six Months Ended |
|                                          | June 30, 2002 and 2001  (Unaudited) |
|                                          |   |
|                                          | Notes  to Financial Statements |
|                                          |   |
| Item  2.                                      | Management’s  Discussion and Analysis of Financial |
|                                          | Condition  and Results of Operations |
|                                          |   |
| PART II.                                      | OTHER INFORMATION |
|                                          |   |
| Item 1.                                       | Legal Proceedings |
|                                          |   |
| Item 4.                                       | Changes in Registrant’s Certifying Accountant |
|                                          |   |
| Item 6.                                       | Exhibits and  Reports on Form 8-K |
|                                          |   |
| SIGNATURES                                    |   |

 

 

2

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**FACTORS AFFECTING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Q includes“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  The words “anticipate”,“believe”, “expect”, “estimate”, “project” and similar expressions are intendedto identify forward-looking statements. Such statements are subject to certain risks, uncertainties andassumptions.  Should one or more ofthese risks or uncertainties materialize, or should underlying assumptionsprove incorrect, actual results may vary materially from those anticipated,believed, expected, estimated or projected. These include risks and uncertainties associated with the substantialdoubt for the Company’s ability to continue operations as a going concern, theCompany’s ability to sell its assets for sufficient value to wind up itsaffairs and to satisfy its creditors (not including the liquidation preferencepayable to holders of Series B Preferred Stock upon a liquidation of theCompany)  and other risks anduncertainties, including those related to the Company’s technology, describedin the Company’s filings with the Securities and Exchange Commission.  For additional discussion of such risks, uncertaintiesand assumptions (“Cautionary Statements”), see “Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations - Liquidity and CapitalResources” included elsewhere in this report and “Item 1.  Business - Risk Factors” in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2001 (“2001 Form10-K”).

 

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**PartI.  FINANCIAL INFORMATION**

 

**Item1.  *Financial Statements***

 

                The followingunaudited financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and note disclosuresnormally included in annual financial statements prepared in accordance withgenerally accepted accounting principles have been condensed or omittedpursuant to those rules and regulations, although the Company believes that thedisclosures made herein are adequate to make the information presented notmisleading.  These financial statementsshould be read in conjunction with the 2001 Form 10-K.

 

                The informationpresented in the accompanying financial statements is unaudited, but in theopinion of management, reflects all adjustments (which include only normalrecurring adjustments) necessary to present fairly such information.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

**BALANCE SHEETS**

** **

** **
|                                                   |   | **June 30,  2002** |    | **December  31,  2001** |   |
|--------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                   |   | **(Unaudited)**    |    |                    |   |
| ASSETS                                                 |   |               |    |                    |   |
| Current Assets:                                        |   |               |    |                    |   |
| Cash and cash  equivalents                             |   | $                  | 218,178 |                    | $      | 3,031,806 |   |
| Short-term  investments                                |   | —             |    | 775,941                 |   |
| Prepaid expenses  and other current assets             |   | 66,294             |    | 221,833                 |   |
| Total current  assets                                  |   | 284,472            |    | 4,029,580               |   |
|                                                   |   |               |    |                    |   |
| Furniture,  equipment and leasehold improvements, net  |   | 254,029            |    | 373,279                 |   |
| Intangible and  other assets, net                      |   | 251,679            |    | 814,716                 |   |
| Total assets                                           |   | $                  | 790,180 |                    | $      | 5,217,575 |   |
|                                                   |   |               |    |                    |   |
| LIABILITIES  & STOCKHOLDERS’ EQUITY           |   |               |    |                    |   |
|                                                   |   |               |    |                    |   |
| Current  liabilities:                                  |   |               |    |                    |   |
| Accounts payable  and accrued liabilities              |   | $                  | 129,912 |                    | $      | 589,372 |   |
| Capital lease,  short-term                             |   | 14,367             |    | 13,644                  |   |
| Deferred revenue                                       |   | —             |    | 180,000                 |   |
| Total current  liabilities                             |   | 144,279            |    | 783,016                 |   |
|                                                   |   |               |    |                    |   |
| Capital lease,  long-term                              |   | 35,165             |    | 43,170                  |   |
|                                                   |   |               |    |                    |   |
| Stockholders’  equity:                            |   |               |    |                    |   |
| Series B  Convertible Preferred Stock, $0.01 par value |   |               |    |                    |   |
| (liquidation  value $3,831,636; 760,000 shares,        |   |               |    |                    |   |
| authorized,  51,200 and 94,700 shares                  |   |               |    |                    |   |
| respectively,  issued and outstanding)                 |   | 3,831,636          |    | 6,398,799               |   |
| Common Stock,  $0.01 par value (30,000,000 shares      |   |               |    |                    |   |
| authorized,  14,230,771 and 9,763,320 shares,          |   |               |    |                    |   |
| respectively,  issued and outstanding)                 |   | 153,108            |    | 108,433                 |   |
| Treasury stock,  1,080,000 shares, at cost             |   | (21,600            | )       | (21,600                 | )      |
| Additional  paid-in capital                            |   | 91,858,713         |    | 89,191,974              |   |
| Accumulated  deficit                                   |   | (95,211,121        | )       | (91,286,217             | )      |
| Total  stockholders’ equity                       |   | 610,736            |    | 4,391,389               |   |
| Total  liabilities and stockholders’ equity       |   | $                  | 790,180 |                    | $      | 5,217,575 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

**STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

 
|                                                                         |   | **Three  Months Ended** |       | **Six Months  Ended** |   |
|------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------|--------|
|                                                                         |   | **June 30,**            |       | **June 30,**          |   |
|                                                                         |   | **2002**                |       | **2001**              |   | **2002** |   | **2001** |   |
|                                                                         |   |                    |       |                  |   |   |   |   |   |
| Sponsored  research and licensing revenues                                   |   | $                       | —     |                  | $      | 273,965 |   | $ | 180,000 |   | $ | 530,601 |   |
|                                                                         |   |                    |       |                  |   |   |   |   |   |
| Costs and  expenses:                                                         |   |                    |       |                  |   |   |   |   |   |
| Research and  development                                                    |   | 1,701,169               |       | 856,998               |   | 2,635,567 |   | 1,915,236 |   |
| General and  administrative                                                  |   | 840,475                 |       | 1,016,807             |   | 1,372,886 |   | 1,984,610 |   |
|                                                                         |   |                    |       |                  |   |   |   |   |   |
| Total costs and  expenses                                                    |   | 2,541,644               |       | 1,873,805             |   | 4,008,453 |   | 3,899,846 |   |
|                                                                         |   |                    |       |                  |   |   |   |   |   |
| Interest and  investment income                                              |   | 8,827                   |       | 126,401               |   | 20,847 |   | 175,935 |   |
| Gain on disposal  of fixed assets                                            |   | 26,952                  |       | —                |   | 26,952 |   | — |   |
| Net loss                                                                     |   | $                       | (2,505,865 | )                     | $      | (1,473,439 | ) | $ | (3,780,654 | ) | $ | (3,193,310 | ) |
|                                                                         |   |                    |       |                  |   |   |   |   |   |
| Net loss per  share — basic and diluted                                 |   | $                       | (0.17      | )                     | $      | (0.21 | ) | $ | (0.29 | ) | $ | (0.46 | ) |
|                                                                         |   |                    |       |                  |   |   |   |   |   |
| Shares used in  computing net loss per common share — basic and diluted |   | 15,310,771              |       | 9,269,029             |   | 13,928,678 |   | 9,174,254 |

 

 

 

 

 

 

 

 

 

The accompanying notesare an integral part of these financial statements.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

**STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

** **
|                                                 |   | **Six Months Ended** |       |
|------------------------------------------------------|--------|----------------------|------------|
|                                                 |   | **June 30,**         |       |
|                                                 |   | **2002**             |       | **2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:               |   |                 |       |   |   |
| Net loss                                             |   | $                    | (3,780,654 | ) | $ | (3,193,310 | ) |
| Adjustments to  reconcile net loss to net cash       |   |                 |       |   |   |
| used in  operating activities:                       |   |                 |       |   |   |
| Depreciation and  amortization                       |   | 123,185              |       | 165,190 |   |
| Issuance of  common stock for services               |   | —               |       | 50,000 |   |
| Gain on disposal  of fixed assets                    |   | (26,952              | )          | — |   |
| Write-off of  patent costs to net realizable value   |   | 560,188              |       | — |   |
| Changes in  assets and liabilities:                  |   |                 |       |   |   |
| Decrease in  prepaid expenses and other              |   |                 |       |   |   |
| current assets                                       |   | 155,539              |       | 311,456 |   |
| Decrease in  other intangible assets                 |   | 64                   |       | — |   |
| Increase  (decrease) in accounts payable and accrued |   |                 |       |   |   |
| liabilities                                          |   | (459,461             | )          | 21,250 |   |
| Increase  (decrease) in deferred revenue             |   | (180,000             | )          | 83,333 |   |
| Net cash used in  operating activities               |   | (3,608,091           | )          | (2,562,081 | ) |
|                                                 |   |                 |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:               |   |                 |       |   |   |
| Capital  expenditures                                |   | (2,653               | )          | (21,620 | ) |
| Patent  expenditures                                 |   | (15,214              | )          | (61,740 | ) |
| Sales of fixed  assets                               |   | 43,670               |       | — |   |
| Net sale of  investments held to maturity            |   | 775,941              |       | 4,471,572 |   |
| Net cash provided  by investing activities           |   | 801,744              |       | 4,388,212 |   |
|                                                 |   |                 |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:               |   |                 |       |   |   |
| Payments on  capital lease obligations               |   | (7,281               | )          | (6,567 | ) |
| Payments on  notes payable, net                      |   | —               |       | (199,007 | ) |
| Proceeds from  exercise of common stock and warrants |   | —               |       | 4,073 |   |
| Net cash used in  financing activities               |   | (7,281               | )          | (201,501 | ) |
|                                                 |   |                 |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH            |   |                 |       |   |   |
| EQUIVALENTS                                          |   | (2,813,628           | )          | 1,624,630 |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF           |   |                 |       |   |   |
| PERIOD                                               |   | 3,031,806            |       | 7,524,191 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD          |   | $                    | 218,178    |   | $ | 9,148,821 |   |

 

 

 

 

 

 

 

The accompanying notesare an integral part of these financial statements.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

**NOTES TOUNAUDITED FINANCIAL STATEMENTS**

 

 

 

**June 30, 2002**

 

**Note1.  Basis of Presentation andSignificant Accounting Policies**

 

Enchira BiotechnologyCorporation (“Enchira” or the “Company”), formerly Energy BioSystemsCorporation, was incorporated in the State of Delaware on December 20, 1989,and commenced operations in January 1990.

 

On May 7, 2002, theCompany announced that it had engaged Howard Frazier Barker Elliot, aninvestment banking and advisory firm located in Houston, Texas, to assist inredeployment of its assets and that it had significantly reduced itsexpenditures by paring headcount to the minimum necessary to undertake aredeployment of the Company’s assets. The Company is currently seeking to sell the entire Company or itsassets, which consist primarily of tangible fixed assets and opportunities tolicense or sell its patent portfolio to third parties for the furtherdevelopment and commercialization of its therapeutic proteins andbiodesulfurization (“BDS”) technologies. As a result, the Company released all but five of its employees andreached settlements with Peter Policastro, its former President and ChiefExecutive Officer, and David Carpi, its former Vice President, BusinessDevelopment, for termination of their employment agreements.  Paul G. Brown, III, who had served as theCompany’s Vice President, Finance and Administration and Chief FinancialOfficer, was named President following such reduction.  The Company paid as severance to all of theterminated employees and officers an aggregate of $519,697, including lump sumpayments of $160,915 and $107,665 to Dr. Policastro and Mr. Carpi,respectively.  These amounts were insettlement of all amounts owing to such individuals under their existing employmentagreements and represented approximately half the agreed upon severance ifemployment was terminated for something other than cause of the total amountowed to them.  In addition, the Companypaid an aggregate of $155,000 in retention payments to the remaining employees.

 

The Company received aletter from Nasdaq on August 14, 2002 informing the Company that it failed tomeet certain of Nasdaq’s maintenance requirements for inclusion on The NasdaqSmallCap Market (the “SmallCap Market”), including the minimum value ofpublicly held shares and the minimum bid price requirements for the prior 90days and that, as a result, the Company is being delisted from the SmallCapMarket on August 22, 2002.  The Companyanticipates requesting a hearing to appeal this delisting letter, which wouldact to stay the delisting until the hearing is held.  There is a substantial probability that the Company will bedelisted after such hearing unless the Company completes a financing or othertransaction which results in the Company coming into compliance with suchrequirements.

 

        In the event that the Company’s common stock is delisted fromNasdaq altogether, trading in its common stock would thereafter be conducted inthe over-the-counter markets in the so-called “pink sheets” or the NASD’s“Electronic Bulletin Board.” Consequently, the liquidity of the Company’s common stock could beimpaired, not only in the number of shares which could be bought and sold, butalso through delays in the timing of the transactions, reductions in securityanalysts’ and the news media’s coverage of the Company, and lower prices forthe Company’s common stock than it might otherwise attain.  In the event there is a substantialreduction or elimination of a public market for the Company’s common stock as aresult of its delisting, the Company may be required to redeem the remainingoutstanding shares of Series B Preferred Stock in cash, at which time theCompany’s preferred stock would be reclassified as a liability of theCompany.  The Company does not havesufficient cash for such redemption absent 

 

8

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**ENCHIRA BIOTECHNOLOGY CORPORATION**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)**

 

a financing andmay have to cease operations and/or seek legal protection from its creditors inbankruptcy.

 

See Note 2. Series BConvertible Preferred Stock in these Notes to Financial Statements for adiscussion of the effects on the Company’s business of its outstanding Series BPreferred Stock.

 

Enchira has devotedsubstantially all of its efforts to research and development.  There have been no revenues from operationsother than sponsored research revenues and one site license fee of Enchira’sBDS technology in 1998 and there is no assurance of future revenues.  During the first six months of 2002, Enchiraused $3,608,091 in cash for operating activities.  As of June 30, 2002, Enchira had $218,178 in cash and $179,444 inliabilities.  The Company has incurredcumulative net losses since inception and is seeking to sell all its remainingassets and is likely to cease operations in the third quarter of thisyear.  Please refer to “Part II — Item5.  Other Matters” in this Form 10-Q fora description of the Company’s intentions with respect to these matters.  Enchira has an accumulated deficit sinceinception of approximately $95.2 million and expects that its existingfinancial resources will fund operations only through cessation of operations.

 

The Company’s propertyand equipment and intangible and other assets are unique to the proprietarytechnology and processes that Enchira has developed.  Realization of the Company’s investments in these assets isdependent upon the successful sale or licensing of intellectual properties.  All of the Company’s remaining fixed andintangible assets has been written down to their estimated realizable value.

 

The accompanyingunaudited interim financial statements reflect all adjustments, which, in theopinion of management, are necessary for a fair presentation of the results forthe interim periods presented.  Thesefinancial statements should be read in conjunction with the 2001 Form 10-K.

 

**Note2.  Series B Convertible Preferred Stock**

 

Under the terms of theCompany’s Series B Preferred Stock, the Company was required to redeem alloutstanding shares of Series B Preferred Stock at a price of $50 per share onFebruary 26, 2002.  Additionally, at thetime of redemption, the Company was also required to pay any accumulated butunpaid dividends on the shares of Series B Preferred Stock being redeemed.   At that time, the Company elected to redeemall shares of Series B Preferred Stock with shares of its common stock.  Under the terms of the Series B PreferredStock, the Company is required to provide a firm commitment underwriting of theshares of its common stock being issued in connection with the redemption orthe holder of Series B Preferred Stock may elect to waive this requirement inthe event the Company is unable to timely provide a firm commitmentunderwriting.  As a result, the Companyhas completed the redemption of 41,100 shares of Series B Preferred Stock fromone holder who waived this requirement, which resulted in the issuance of3,425,000 shares of the Company’s common stock for the redemption and anadditional 1,024,075 shares of the Company’s common stock in payment ofaccumulated dividends on the shares. The Company has an additional 51,200 shares of Series B Preferred Stockoutstanding.  If these shares wereredeemed with shares of the Company’s common stock at the closing price ineffect on July 25, 2002, the Company would be required to issue 36,571,428shares of its common stock for the redemption and an additional 18,166,228shares of its common stock in payment of accumulated but unpaid dividends.  The number of shares of common stockissuable upon such redemption is based on the 10-day average of the closingprices of the Company’s 

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**ENCHIRA BIOTECHNOLOGY CORPORATION**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)**

 

common stock atthe time of redemption.  As statedearlier, Enchira may be required to redeem its 51,200 shares of Series BPreferred Stock, which remain outstanding at July 25, 2002, for approximately$3.8 million in cash including accumulated dividends should the events occur asdescried in Note 1 above.  The Companydoes not have sufficient cash to pay such amounts, absent a financing raisingat least the amount of capital necessary to pay this obligation, and may haveto cease operations and/or seek legal protection from its creditors inbankruptcy.

 

Dividends on the Series BPreferred Stock are cumulative from February 27, 1997, and are payable, at theCompany’s election, in cash or common stock of the Company, or a combinationthereof, at an annual rate equal to (i) $4.00 per share to the extent thedividend is paid in cash and (ii) $4.50 per share to the extent the dividend ispaid in common stock.  The Company hasnot declared a dividend payment since November 1998, and since that date, hasnot paid dividends on Series B Preferred Stock except on conversion of Series BPreferred Stock to common stock or upon redemption thereof.  As of July 25, 2002, Enchira has paidcumulative common stock dividends of 2,423,444 shares of common stock and cashdividends of $2,626,244 on Series B Preferred Stock.

 

**Note3.  Cessation of Operations**

 

During the third quarter of 2002, the Company intendsto mail to its stockholders proxy solicitation materials asking itsstockholders to approve a plan of liquidation under which the Company would beliquidated and dissolved unless the Company is able to find a more desirablealternative, such as a source of additional capital or an aquiror.  Such other alternatives are unlikely at thistime.  See “Part II — Item 2. OtherMatters” in this Form 10-Q for a more complete description.  The financial statements include adjustmentsrelating to recoverability and classification of carrying amounts, includingintangible and other assets, however, no such adjustments have been made to theamount and classification of liabilities that might result should the Companybe liquidated.

 

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**Item2.  *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

**Overview**

 

To date, Enchirahas devoted substantially all of its efforts to research and development.  There have been no revenues from operationsother than sponsored research revenues and one site license fee in 1998 andthere is no assurance of future revenues. The Company has incurred cumulative net losses since inception and isseeking to sell all its assets, and is likely to cease operations in the thirdquarter of this year.  Enchira has anaccumulated deficit since inception of approximately $95.2 million and believesthat it has existing financial resources to fund operations through cessationof operations anticipated in the third quarter of 2002.

 

On May 7, 2002, the Company announced that it had engaged HowardFrazier Barker Elliot, a Houston based investment advisory firm, to assist inredeployment of its assets and that it had significantly reduced its capitalexpenditures and pared headcount to the minimum necessary to undertake aredeployment of the Company’s assets. As a result, the Company released all but five of its employees andreached settlements with Peter Policastro, its former President and ChiefExecutive Officer, and David Carpi, its former Vice President, BusinessDevelopment, for termination of their employment agreements.  Paul G. Brown, III, who had served as theCompany’s Vice President, Finance and Administration and Chief FinancialOfficer, was named President following such reduction.  The Company paid as severance to all of theterminated employees and officers an aggregate of $519,697, including lump sumpayments of $160,915 and $107,665 to Dr. Policastro and Mr. Carpi,respectively.  These amounts were insettlement of all amounts owing to such individuals under their existingemployment agreements and represented approximately half the agreed uponseverance if employment was terminated for something other than cause.  In addition, the Company paid an aggregateof $155,000 in retention payments to the remaining employees.

 

Mr. Brown andDaniel Monticello, the Company’s Vice President, Research and Development,agreed to amend their employment agreements with the Company to waive anyrights or claims that they might have had under their agreements up to the dateof such settlement, and accept certain retention payments in replacement ofseverance obligations previously contained in their employment agreements.  In addition to initial retention payments of$75,000 and $80,000 to Mr. Brown and Dr. Monticello, respectively, (whichamounts are included in aggregate retention payments described above), theCompany placed into escrow an identical amount for the benefit of each, whichamounts shall be disbursed on August 15, 2002.

 

During the thirdquarter of 2002, the Company intends to mail to its stockholders proxysolicitation materials asking its stockholders to approve a plan of liquidationunder which the Company would be liquidated and dissolved unless the Company isable to find a more desirable alternative, such as a source of additionalcapital or an acquiror.  Such otheralternatives appear unlikely at this time. See “Part II — Item 5.   OtherMatters” in this Form 10-Q for a more complete description.  The financial statements include adjustmentsrelating to recoverability and classification of carrying amounts, includingintangible and other assets, however, no such adjustments have been made to theamount and classification of liabilities that might result should the Companybe liquidated.

 

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**Resultsof Operations**

 

The Company had sponsoredresearch revenues for the three months ended June 30, 2002 and 2001 of zero and$273,965, respectively.  The decrease of$273,965 in sponsored research revenues resulted from payments received in 2001under a research and development collaboration agreement with Genencor InternationalInc. (“Genencor”) entered into in August 2000 and cancelled in December 2001and the final payment under a U. S. Department of Energy (“DOE”) grant in May2001.

 

The Company had sponsored research revenues of$180,000 during the first six months of 2002 as compared to $530,601 during thefirst six months of 2001.  The decreaseof $350,601 in sponsored research revenues resulted from the cancellation ofthe collaboration agreement with Genencor in December 2001 and the completionof the DOE grant in May 2001 offset in part by the recognition of deferredrevenue in the first quarter of 2002.

 

The Company had researchand development expenses for the three months ended June 30, 2002 and 2001 of$1,701,169 and $856,998, respectively, and for the six months ended June 30,2002 and 2001 of $2,635,567 and $1,915,236, respectively.  The increase in research and developmentexpenses of $844,171 and $720,331, respectively, for the three and six monthsended June 30, 2002 as compared to the corresponding prior year periodsresulted primarily from the write-off of patent costs to approximate netrealizable value and the retention bonus and severance pay associated with thereduction in workforce in May 2002.  See“Liquidity and Capital Resources” below for additional discussion.

 

The Company had generaland administrative expenses for the three months ended June 30, 2002 and 2001of $840,475 and $1,016,807, respectively, and for the six months ended June 30,2002 and 2001 of $1,372,886 and $1,984,610, respectively.  The decreases of $176,332 and $611,724,respectively, for the three months and six months ended June 30, 2002 ascompared to the corresponding periods in 2001, resulted primarily fromdecreased legal expenses associated with the arbitration with Maxygen offset inpart by the payment of severance and retention payments associated with thereduction in workforce in May 2002.

 

The Company had interestand investment income for the three months ended June 30, 2002 and 2001 of$8,827 and $126,401, respectively and for the six months ended June 30, 2002and 2001 of $20,847 and $175,935, respectively.  The decreases of $117,574 and $155,088, respectively, for thethree and six months ended June 30, 2002 as compared to the corresponding prioryear periods resulted primarily from a decrease in the available cash fromwhich interest and other investment income are generated.

 

**Liquidityand Capital Resources**

 

Since its inception inDecember 1989, Enchira has devoted substantially all of its resources toresearch and development.  To date, allof the Company’s revenues have resulted from interest and investment income andsponsored research payments from collaborative agreements.  Enchira has incurred cumulative losses sinceinception and expects to incur continued losses until the cessation ofoperations.  As of June 30, 2002, theCompany’s accumulated deficit was approximately $95.2 million.

 

On May 7, 2002, theCompany announced that it had engaged Howard Frazier Barker Elliot, aninvestment banking and advisory firm located in Houston, Texas, to assist inredeployment of 

 

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its assets andthat it had significantly reduced its expenditures by paring headcount to theminimum necessary to undertake a redeployment of the Company’s assets.  The Company is currently seeking to sell theentire Company or its assets, which consist primarily of opportunities tolicense or sell its patent portfolio to third parties for the furtherdevelopment and commercialization of its therapeutic proteins andbiodesulfurization (“BDS”) technologies. As a result, the Company released all but five of its employees andreached settlements with Peter Policastro, its former President and Chief ExecutiveOfficer, and David Carpi, its former Vice President, Business Development, fortermination of their employment agreements. Paul G. Brown, III, who had served as the Company’s Vice President,Finance and Administration and Chief Financial Officer, was named Presidentfollowing such reduction.  The Companypaid as severance to all of the terminated employees and officers an aggregateof $519,697, including lump sum payments of $160,915 and $107,665 to Dr.Policastro and Mr. Carpi, respectively. These amounts were in settlement of all amounts owing to suchindividuals under their existing employment agreements and representedapproximately half the agreed upon severance if employment was terminated forsomething other than cause.  Inaddition, the Company paid an aggregate of $155,000 in retention payments tothe remaining employees.

 

As of July 25, 2002,650,900 aggregate shares of Series B Preferred Stock have been converted orredeemed for 4,659,070 shares of common stock. Dividends on the Series B Preferred Stock are cumulative from the dateof the initial closing, February 27, 1997, and are payable, at the Company’selection, in cash or common stock of the Company, or a combination thereof, atan annual rate equal to (i) $4.00 per share to the extent the dividend is paidin cash and (ii) $4.50 per share to the extent the dividend is paid in commonstock.  The Company has not declared adividend payment since November 1998, and since that date, has not paiddividends on Series B Preferred Stock except on conversion or redemption ofSeries B Preferred Stock to common stock. As of July 25, 2002, the Company has issued 2,423,444 shares of commonstock in payment of accrued dividends.

 

In the event there is a substantial reduction orelimination of a public market for the Company’s Common Stock as a result ofits delisting, the Company may be required to redeem its 51,200 shares ofSeries B Preferred Stock, which remain outstanding at July 25, 2002, forapproximately $3.8 million in cash.  The Company does not have sufficientcash to pay such amounts, absent a financing raising at least the amount ofcapital necessary to pay this obligation, and may have to cease operationsand/or seek legal protection from its creditors in bankruptcy.

 

For the six months ended June 30, 2002, the Companyused $3,608,091 in operating activities, incurred $17,867 in capital and patentexpenditures and used $7,281 in financing activities.  At June 30, 2002, the Company had cash totaling $218,178, andworking capital of $140,193.

 

The Company has experienced negative cash flow fromoperations since its inception and has funded its activities to date primarilyfrom equity financings and sponsored research revenues.  The Company believes that its available cashand sale of existing assets will be adequate to fund its remaining activitiesthrough the cessation of operations anticipated in the third quarter of 2002.

 

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**Item3.  *Quantitative and Qualitative Disclosure About MarketRisk***

 

None

 

**Part II.  Other Information**

 

**Item 5.  Other Matters**

 

        Since prior to the Company’s reduction in force in May 2002,the Company has attempted to obtain additional capital from potential investorsand has searched for potential partners. This search has been unsuccessful to date and, as of June 30, 2002, theCompany had approximately $218,000 in available cash to financeoperations.  The Company has determinedthat it is in the best interests of the stockholders to terminate as much ofits lease for its headquarters as is possible and, accordingly, to sell itsphysical assets located there.  As a result, the Company has scheduled apublic auction of its remaining physical assets at its headquarters in TheWoodlands, Texas on August 22, 2002. The Company anticipates receiving a net amount of approximately $200,000although there is no assurance that it will receive this amount since theauction is being held without reserve. Also during the third quarter of 2002, the Company intends to mail toits stockholders proxy solicitation materials asking its stockholders toapprove a plan of liquidation under which the Company would be liquidated anddissolved unless the Company is able to find a more desirable alternative priorto such mailing, such as a source of additional capital or an acquiror.  Such other alternatives appear unlikely atthis time.

 

**Item6.  Exhibits and Reports on Form 8-K**

 
| a.     | Exhibits                                                                                                                                                                                                                 |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                     |   |   |
|   | 11.1                                                                                                                                                                                                                     |   | Statement regarding Computation of Per Share  Earnings. |
|   |                                                                                                                                                                                                                     |   |   |
|   | 99.1                                                                                                                                                                                                                     |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and  Chief Financial Officer). |
|   |                                                                                                                                                                                                                     |   |   |
| b.     | Reports on Form 8-K                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                     |   |   |
|   | On June 19, 2002, the  Company filed a current report on Form 8-K reporting an event under Item 4  and on May 8 and June 7, 2002, the Company filed current reports on Forms  8-K, each reporting an event under Item 5. |
|        |                                                                                                                                                                                                                          |  |  |  |  |

 

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# **SIGNATURES**

 

        Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

Enchira Biotechnology Corporation

 

 
| By:    | /s/ Paul G. Brown III                 |
|--------|---------------------------------------|
|   | Paul G. Brown III                     |
|   | President and Chief Financial Officer |

 

Date: August 14,2002

 

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