** **

**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 THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2002**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

 

**For thetransition period from            to          **

 

**Commissionfile number: 0-21130**

 

**Enchira Biotechnology Corporation**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                     |   | **04-3078857**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  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 check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  ý  No o

 

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

 

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

 

**Form 10-Q for the Quarter Ended March 31, 2002**

 

**INDEX**

 
| Factors Affecting  Forward-Looking Statements |
|-----------------------------------------------|
|                                          |   |
| PART I.                                       | FINANCIAL INFORMATION |
|                                          |   |   |
| Item 1.                                       | Financial Statements |
|                                          |   |
|                                          | Balance Sheets as of March 31, 2002  (Unaudited) and December 31, 2001 |
|                                          |   |
|                                          | Statements of Operations for  the Three Months Ended March 31, 2002 and 2001 (Unaudited) |
|                                          |   |
|                                          | Statements of Cash Flows for  the Three Months Ended March 31, 2002 and 2001 (Unaudited) |
|                                          |   |
|                                          | Notes to Financial  Statements |
|                                          |   |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                          |   |
| Item 3.                                       | Quantitative  and Qualitative Disclosures about Market Risk |
|                                          |   |
| PART  II.                                     | OTHER INFORMATION |
|                                          |   |
| Item  1.                                      | Legal Proceedings |
|                                          |   |
| 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 similarexpressions are intended to identify forward-looking statements.  Such statements are subject to certainrisks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results may varymaterially from those anticipated, believed, expected, estimated orprojected.  These risks anduncertainties include technological uncertainty and risks associated with thecommercialization of the Company’s technology, the Company’s limited cashposition and need for additional funds, the Company’s history of operatinglosses and uncertainty of future profitability, manufacturing risks anduncertainties, uncertainty of market acceptance of the Company’s technology,uncertainties as to the protection offered by the Company’s patents andproprietary technology, the Company’s dependence on collaborations, limitedmarketing experience and dependence on key personnel, government regulations,competition and other risks and uncertainties described in the Company’sfilings with the Securities and Exchange Commission.  For additional discussion of such risks, uncertainties andassumptions (“Cautionary Statements”), see “Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations - Liquidity and Capital Resources” included elsewhere inthis report and “Item 1.  Business -Risk Factors” in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001 (“2001 Form 10-K”).

 

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**Part I****.  FINANCIALINFORMATION**

 

**Item 1****.  *FinancialStatements***

 

The following unaudited financial statements have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andnote disclosures normally included in annual financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to those rules and regulations, although the Company believesthat the disclosures made herein are adequate to make the information presentednot misleading.  These financialstatements should be read in conjunction with the 2001 Form 10-K.

 

The information presented in the accompanyingfinancial statements is unaudited, but in the opinion of management, reflectsall adjustments (which include only normal recurring adjustments) necessary topresent fairly such information.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

**BALANCE SHEETS**

 
|                                                                                                                                                                               |   | **March 31,   2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|-----------|-------------------------|--------|
|                                                                                                                                                                               |   | **(Unaudited)**      |      |                    |   |
| ASSETS                                                                                                                                                                             |   |                 |      |                    |   |
| Current assets:                                                                                                                                                                    |   |                 |      |                    |   |
| Cash and cash  equivalents                                                                                                                                                         |   | $                    | 2,211,733 |                    | $      | 3,031,806 |   |
| Short-term  investments                                                                                                                                                            |   | —               |      | 775,941                 |   |
| Prepaid expenses  and other current assets                                                                                                                                         |   | 156,763              |      | 221,833                 |   |
| Total current  assets                                                                                                                                                              |   | 2,368,496            |      | 4,029,580               |   |
|                                                                                                                                                                               |   |                 |      |                    |   |
| Furniture,  equipment and leasehold improvements, net                                                                                                                              |   | 334,783              |      | 373,279                 |   |
| Intangible and  other assets, net                                                                                                                                                  |   | 825,683              |      | 814,716                 |   |
| Total assets                                                                                                                                                                       |   | $                    | 3,528,962 |                    | $      | 5,217,575 |   |
|                                                                                                                                                                               |   |                 |      |                    |   |
| LIABILITIES & STOCKHOLDERS’ EQUITY                                                                                                                                        |   |                 |      |                    |   |
|                                                                                                                                                                               |   |                 |      |                    |   |
| Current  liabilities:                                                                                                                                                              |   |                 |      |                    |   |
| Accounts payable  and accrued liabilities                                                                                                                                          |   | $                    | 359,142   |                    | $      | 589,372 |   |
| Capital lease,  short-term                                                                                                                                                         |   | 14,000               |      | 13,644                  |   |
| Deferred revenue                                                                                                                                                                   |   | —               |      | 180,000                 |   |
| Total current  liabilities                                                                                                                                                         |   | 373,142              |      | 783,016                 |   |
|                                                                                                                                                                               |   |                 |      |                    |   |
| Capital lease,  long-term                                                                                                                                                          |   | 39,219               |      | 43,170                  |   |
|                                                                                                                                                                               |   |                 |      |                    |   |
| Stockholders’  equity:                                                                                                                                                        |   |                 |      |                    |   |
| Series B  Convertible Preferred Stock, $0.01 par value (liquidation value $3,774,036;  760,000 shares authorized, 51,200 and 94,700 shares, respectively, issued and  outstanding) |   | 3,774,036            |      | 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                                                                                                                                                               |   | (92,647,656          | )         | (91,286,217             | )      |
| Total  stockholders’ equity                                                                                                                                                   |   | 3,116,601            |      | 4,391,389               |   |
| Total  liabilities and stockholders’ equity                                                                                                                                   |   | $                    | 3,528,962 |                    | $      | 5,217,575 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

**STATEMENT OF OPERATIONS**

**(Unaudited)**

** **
|                                                                         |   | **Three  Months Ended  March 31,** |       |
|------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                         |   | **2002**                           |       | **2001** |   |
|                                                                         |   |                               |       |   |   |
| Sponsored  research revenues                                                 |   | $                                  | 180,000    |   | $ | 256,636 |   |
|                                                                         |   |                               |       |   |   |
| Costs and  expenses:                                                         |   |                               |       |   |   |
| Research and  development                                                    |   | 934,398                            |       | 1,058,238 |   |
| General and  administrative                                                  |   | 532,411                            |       | 967,803 |   |
|                                                                         |   |                               |       |   |   |
| Total costs and  expenses                                                    |   | 1,466,809                          |       | 2,026,041 |   |
|                                                                         |   |                               |       |   |   |
| Interest and  investment income                                              |   | 12,020                             |       | 49,534 |   |
| Net loss                                                                     |   | $                                  | (1,274,789 | ) | $ | (1,719,871 | ) |
|                                                                         |   |                               |       |   |   |
| Net loss per  common share — basic and diluted                          |   | $                                  | (0.12      | ) | $ | (0.25 | ) |
|                                                                         |   |                               |       |   |   |
| Shares used in  computing net loss per common share — basic and diluted |   | 12,531,228                         |       | 9,078,426 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

**STATEMENT OF CASH FLOWS**

**(Unaudited)**

 
|                                                                         |   | **Three Months Ended** |       |
|------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                         |   | **March 31,**          |       |
|                                                                         |   | **2002**               |       | **2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |   |                   |       |   |   |
| Net loss                                                                     |   | $                      | (1,274,789 | ) | $ | (1,719,871 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                   |       |   |   |
| Depreciation and  amortization                                               |   | 49,979                 |       | 80,676 |   |
| Issuance of  common stock for services                                       |   | —                 |       | 50,000 |   |
| Changes in  assets and liabilities:                                          |   |                   |       |   |   |
| Decrease in  prepaid expenses and other current assets                       |   | 65,070                 |       | 415,179 |   |
| Decrease in  accounts payable and accrued liabilities                        |   | (230,230               | )          | (93,833 | ) |
| (Decrease)  increase in deferred revenue                                     |   | (180,000               | )     | 83,333 |   |
| Net cash used in  operating activities                                       |   | (1,569,970             | )          | (1,184,516 | ) |
|                                                                         |   |                   |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |   |                   |       |   |   |
| Capital  expenditures                                                        |   | (2,484                 | )          | (18,050 | ) |
| Patent  expenditures                                                         |   | (19,966                | )          | (24,162 | ) |
| Net sale of  investments held to maturity                                    |   | 775,941                |       | 3,242,341 |   |
| Net cash  provided by investing activities                                   |   | 753,491                |       | 3,200,129 |   |
|                                                                         |   |                   |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |   |                   |       |   |   |
| Capital lease  obligations                                                   |   | (3,594                 | )          | (3,241 | ) |
| Payments on note  payable                                                    |   | —                 |       | (113,718 | ) |
| Issuance of  common stock                                                    |   | —                 |       | 4,073 |   |
| Net cash  provided by (used in) financing activities                         |   | (3,594                 | )          | (112,886 | ) |
|                                                                         |   |                   |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                        |   | (820,073               | )          | 1,902,727 |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                            |   | 3,031,806              |       | 7,524,191 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                  |   | $                      | 2,211,733  |   | $ | 9,426,918 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**NOTES TO FINANCIAL STATEMENTS**

** **

**March31, 2002**

** **

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

 

EnchiraBiotechnology Corporation (“Enchira” or the “Company”), formerly EnergyBioSystems Corporation, was incorporated in the State of Delaware on December20, 1989, and commenced operations in January 1990. Enchira is a drug discoveryand development company that is engaged in the development of therapeuticproteins to inhibit certain cancers.  

 

On May 7, 2002,the Company 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 its capitalexpenditures 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 opportunities to license or sell its patentportfolio to third parties for the further development and commercialization ofits therapeutic proteins and biodesulfurization ("BDS")technologies.  As a result, the Companyreleased all but five of its employees and reached settlements with PeterPolicastro, its former President and Chief Executive Officer, and David Carpi,its former Vice President, Business Development, for termination of theiremployment agreements.  Paul G. Brown,III, who had served as the Company’s Vice President, Finance and Administrationand Chief Financial Officer, 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 of the total amountowed them.  In addition, the Companypaid an aggregate of $155,000 in retention payments to the remainingemployees.  As a result of such events,the Company’s cash was reduced to approximately $667,000 as of May 10, 2002.

 

There issubstantial doubt about Enchira's ability to continue as a going concern.  The financial statements do not include anyadjustments relating to recoverability and classification of carrying amounts,including intangible and other assets, or the amount and classification ofliabilities that might result should the Company be unable to continue as agoing concern.

 

On February 14, 2002, the Company received a letterfrom The Nasdaq Stock Market, Inc. (“Nasdaq”) which informed the Company thatit no longer meets certain of Nasdaq’s maintenance requirements for inclusionon The Nasdaq National Market (the “National Market”), including the minimumvalue of publicly held shares and the minimum bid price requirements.  Nasdaq provided the Company 90 days to comeinto compliance with National Market maintenance requirements.  The Company has requested a transfer to theNasdaq SmallCap Market (the “SmallCap Market”), and in the event Nasdaq refusessuch request to transfer, the Company may then elect to request a hearingregarding its delisting from the National 

 

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Market.  Nasdaqhas informed the Company that it will not be permitted to be listed on theSmallCap Market until it comes into compliance with the minimum value ofpublicly held shares requirement of the SmallCap Market.  In addition, Nasdaq has preliminarilyinformed the Company that it will be delisted from the National Market and theCompany is prepared to appeal this decision. A hearing is expected to be held within 45 days of the Company’s requestfor such hearing.  There can be noassurance that the Company will continue to be traded on either the NationalMarket or the SmallCap Market.

 

In the event thatthe Company’s common stock is delisted from Nasdaq altogether, trading in itscommon stock would thereafter be conducted in the over-the-counter markets inthe so-called “pink sheets” or the NASD’s “Electronic Bulletin Board.”  Consequently, the liquidity of the Company’scommon stock could be impaired, not only in the number of shares which could bebought and sold, but also through delays in the timing of the transactions, reductionsin security analysts’ and the news media’s coverage of the Company, and lowerprices for the Company’s common stock than it might otherwise attain.  In the event the Company’s common stock isdelisted from Nasdaq altogether, it also may be required to redeem theremaining outstanding shares of Series B Preferred Stock in cash, at which timethe Company's preferred stock would be reclassified as a liability of theCompany.  The Company does not havesufficient cash for such redemption and may have to cease operations and/orseek legal protection from its creditors if the Company is unable to secureadditional financing on a timely basis.

 

See Note 2. SeriesB Convertible Preferred Stock for a discussion of the effects on the Company’sbusiness of its outstanding Series B Preferred Stock.

 

Enchira hasdevoted 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 of Enchira’sBDS technology in 1998 and there is no assurance of future revenues.  During the first quarter of 2002, Enchiraused $1,569,970 in cash for operating activities.  As of March 31, 2002, Enchira had $2,211,733 in cash, cash equivalentsand short-term investments and $412,361 in liabilities.  The Company has incurred cumulative netlosses since inception and is seeking a transaction to redeploy assets, failingwhich the Company is likely to cease operations in the second quarter of thisyear.  Enchira has an accumulated deficitsince inception of approximately $92.6 million and expects that its existingfinancial resources will fund operations only through mid-2002. 

 

All of thesefactors raise substantial doubt about Enchira’s ability to continue as a goingconcern.

 

The Company’sproperty and equipment and intangible and other assets are unique to theproprietary technology and processes that Enchira has and continues todevelop.  Realization of the Company’sinvestments in these assets is dependent upon the success of future operationsor the sale or licensing of intellectual properties.

 

The accompanying unaudited interim financialstatements reflect all adjustments, which, in the opinion of management, arenecessary for a fair presentation of the results for the interim periodspresented.  These financial statementsshould be read in conjunction with the 2001 Form 10-K.  If Enchira is not successful in developingan opportunity to sell the Company or license its patent portfolio, the Companywill report its financial statements on the liquidation basis in futureperiods.

 

**Note2.  Series B Convertible Preferred Stock**

 

Under the terms ofthe Company’s Series B Preferred Stock, the Company is required to redeem alloutstanding shares of Series B Preferred Stock at a price of $50 per share onor after February 26, 2002. Additionally, at the time of redemption, the Company is also required topay any accrued but unpaid dividends on the shares of Series B Preferred Stockbeing redeemed.   The Company haselected to redeem all shares of Series B Preferred Stock with shares of itscommon stock.  Under the terms of theSeries B Preferred Stock, the Company is required to provide a firm commitmentunderwriting of the shares of its common stock being issued in connection withthe redemption or the holder of Series B Preferred Stock may elect to waivethis requirement in the event the Company is unable to timely provide a firmcommitment underwriting.  As a result,the Company has completed the redemption of 41,100 shares of Series B PreferredStock from one holder who waived this requirement, which resulted in theissuance of 3,425,000 shares of the Company’s common stock for the redemptionand an additional 1,024,075 shares of the Company’s common stock in payment ofaccrued dividends on the shares.  TheCompany has an additional 51,200 shares of Series B Preferred Stockoutstanding.  If these shares wereredeemed at the closing price in effect on April 30, 2002, the Company would berequired to issue 1,174,958 shares of its common stock for the redemption andan

 

9

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additional 9,452,019shares of its common stock in payment of accrued 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 common stock at the time of redemption.  As stated earlier, Enchira may be requiredto redeem its 51,200 shares of Series B Preferred Stock, which remainoutstanding at May 1, 2002, for approximately $2.6 million in cash shouldEnchira become delisted from Nasdaq. The Company does not have sufficient cash to pay such amounts, absent afinancing, and may have to cease operations and/or seek legal protection fromits creditors.

 

Dividends on the Series B Preferred Stock arecumulative from February 27, 1997, and are payable, at the Company’s election,in cash or common stock of the Company, or a combination thereof, at an annualrate equal to (i) $4.00 per share to the extent the dividend is paid in cashand (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 of Series B PreferredStock to common stock or upon redemption thereof.  As of April 30, 2002, Enchira has paid common stock dividends of2,423,444 shares of common stock and cash dividends of $2,626,244 on Series BPreferred Stock.

 

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**Item 2****.  *Management’sDiscussion and Analysis of Financial Condition 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 a transaction to redeploy assets, failing which the Company is likelyto cease operations in the second quarter of this year.  Enchira has an accumulated deficit sinceinception of approximately $92.6 million and believes that it has existingfinancial resources to fund operations only through mid-2002.

 

On May 7, 2002, the Companyannounced substantial employee reductions and its engagement of an investmentbanker to assist in redeployment of its assets which are described in “—Subsequent Events” below.

 

There is substantial doubtabout Enchira's ability to continue as a going concern.  The financial statements do not include anyadjustments relating to recoverability and classification of carrying amounts,including intangible and other assets, or the amount and classification ofliabilities that might result should the Company be unable to continue as agoing concern.

 

**Resultsof Operations**

 

The Company had sponsored research revenues of$180,000 during the first three months of 2002 as compared to $256,636 duringthe first three months of 2001.  Thedecrease of  $76,636 in sponsoredresearch revenues resulted primarily from a decrease in sponsored researchrevenues from a Department of Energy (“DOE”) grant completed in May 2001 and aresearch and development agreement with Genencor International, Inc.(“Genencor”) terminated in December 2001 as a result of the ruling in thearbitration with Maxygen.  This decreaseis offset by $180,000 in nonrecurring revenue related to a prior contract forwhich revenue was deferred under SAB No. 101, "Revenue Recognition inFinancial Statements."  TheCompany's redeployment of assets (Note 1) leads the Company to believe that ithas met all obligations under this contract.

 

The Company had research and development expenses forthe three months ended March 31, 2002 and 2001 of $934,398 and $1,058,238,respectively.  The decrease in researchand development expenses of $123,840 for the three months ended March 31, 2002as compared to the corresponding prior year period resulted primarily from adecrease in research and development personnel costs in the first quarter of2002.  The Company expects its researchand development expenses to decrease in 2002, as it has substantially reducedits research and development and personnel costs in the second quarter of 2002.

 

The Company had general and administrative expensesfor the three months ended March 31, 2002 and 2001 of $532,411 and of $967,803,respectively. The decrease in general and administrative expenses of $435,392for the three months ended March 31, 2002 as compared to the correspondingprior year period resulted primarily from a decrease in legal expenses relatedto the arbitration with Maxygen.  TheCompany expects its general and administrative expenses to decrease in 2002 asit has substantially reduced its research and development and personnel costsin the second quarter of 2002.

 

The Company had interest and investment income of$12,020 and $49,534 for the first three months of 2002 and 2001,respectively.  The decrease ininvestment income of $37,514 resulted primarily from a decrease in theavailable cash and cash equivalents.

 

**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.

 

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Enchira hasincurred cumulative losses since inception and expects to incur continuedlosses for the remainder of the year. As of March 31, 2002, the Company’s accumulated deficit wasapproximately $92.6 million.

 

As of April 30, 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 April 30, 2002, the Company has issued 2,423,444 shares of commonstock in payment of accrued dividends.

 

Enchira may be requiredto redeem its 51,200 shares of Series B Preferred Stock, which remainoutstanding at May 1, 2002, for approximately $2.6 million in cash shouldEnchira become delisted from NASDAQ. The Company does not have sufficient cash to pay such amounts, absent afinancing, and may have to cease operations and/or seek legal protection fromits creditors.

 

For the three months ended March 31, 2002, the Companyused $1,569,970 in operating activities, incurred $22,450 in capital and patentexpenditures and used $3,594 in financing activities.  At March 31, 2002, the Company had cash, cash equivalents andshort-term investments totaling $2,211,733, and working capital of $1,995,354.

 

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.  Without a successful redeploymenttransaction, the Company believes that its available cash, investments andinterest income only will be adequate to fund its remaining activities throughmid-2002.

 

**SubsequentEvents**

 

On May 7, 2002,the Company announced that it had engaged Howard Frazier Barker Elliot, aHouston based investment advisory firm, to assist in redeployment of its assetsand that it had significantly reduced its expenditures and pared headcount tothe minimum necessary to undertake a redeployment of the Company’s assets.  As a result, the Company released all butfive of its employees and reached settlements with Peter Policastro, its formerPresident and Chief Executive Officer, and David Carpi, its former VicePresident, Business Development, for termination of their employmentagreements.  Paul G. Brown, III, who hadserved as the Company’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 in settlement of allamounts owing to such individuals under their existing employment agreementsand represented approximately half of the total amount owed to them.  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 the aggregate retention payments described above), theCompany has also agreed to place into escrow an identical amount for thebenefit of each, which amount shall 

 

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be disbursed on certainevents, or August 15, 2002, subject to continued employment.  Such amount will also be disbursed in theevent that the Company is placed into bankruptcy or similar proceedings whethervoluntarily or otherwise.

 

**Item 3****.  *Quantitative and Qualitative Disclosure About MarketRisk***

 

None

 

**Part II****.  Other Information**

 

**Item 1****.  *Legal Proceedings***

 

On November 3, 2001, thearbitrator issued a final, binding ruling in the arbitration between MaxygenInc. (“Maxygen”) and the Company.  Theruling states that the Company is enjoined until May 19, 2017 from using,licensing or selling the RACHITTTM technology. This injunction does not prohibit Enchira from independently developingand commercializing other technologies that are not described and claimed inany RACHITTTM applications. Additionally, the Company is enjoined for a period of three years fromusing, licensing or selling Maxygen High Throughput Screening (as defined inthe arbitration award) technology, but this injunction does not prohibit theCompany from independently developing and commercializing different HighThroughput Screening technology.  Thearbitrator’s ruling further declared Maxygen the exclusive owner of RACHITTTMbetween Maxygen and the Company.

 

 

**Item 6****.  *Exhibits and Reports on Form 8-K***

 
|   | a.                  | Exhibits |
|--------|---------------------|----------|
|   |                |     |   |
|   | 10.1                |     | First Amendment to  Employment Agreement between Peter P. Policastro, PhD. And the Company dated  March 22, 2002. |
|   | 10.2                |     | Third Amendment to  Employment Agreement between Daniel J. Monticello, Ph.D. and the Company  dated April 2, 2002. |
|   | 10.3                |     | Second Amendment to  Employment Agreement between Paul G. Brown, III and the Company dated April  2, 2002. |
|   | 10.4                |     | First Amendment to  Employment Agreement between David B. Carpi and the Company dated April 2,  2002. |
|   | 11.1                |     | Statement regarding  Computation of Per Share Earnings. |
|   |                |     |   |
|   | Reports on Form 8-K |
|   |                |     |   |
|   | None.               |

 

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon 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: May 15, 2002 |

 

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