**UNITED STATES**

**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 SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended September 30, 2002**

 

**OR**

 
| **o**   **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------------------------------|

 

**For thetransition periodfrom                   to**

 

**Commissionfile number: 0-21130**

 

| **Enchira  Biotechnology Corporation**                           |
|------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)          |
|                                                             |   |   |
| **Delaware**                                                     |   | **04-3078857** |
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS 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 markwhether 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 November 6, 2002,there were outstanding 15,310,771 shares of Common Stock, par value $.01 pershare, of the registrant.

 

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

 

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

 

**INDEX**

 
| Factors  Affecting Forward-Looking Statements |
|-----------------------------------------------|
|                                          |   |
| PART I.                                       | FINANCIAL INFORMATION |
|                                          |   |
| Item 1.                                       | Financial Statements |
|                                          |   |
|                                          | Balance Sheets as of September 30, 2002  (Unaudited) and December 31, 2001 |
|                                          |   |
|                                          | Statements  of Operations for the Three and Nine Months Ended September 30, 2002 and 2001  (Unaudited) |
|                                          |   |
|                                          | Statements  of Cash Flows for the Nine Months Ended September 30, 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  5.                                      | Other  Information |
|                                          |   |
| Item 6.                                       | Exhibits and  Reports on Form 8-K |
|                                          |   |
|                                          | SIGNATURES |

 

2

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**FACTORS AFFECTING FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report onForm 10-Q includes “forward-looking statements” within the meaning of Section27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. The words “anticipate”, “believe”, “expect”, “estimate”, “project” andsimilar expressions 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, or shouldunderlying assumptions prove incorrect, actual results may vary materially fromthose anticipated, believed, expected, estimated or projected.  These include risks and uncertaintiesassociated with the approval by the Company’s stockholders of the forthcomingliquidation and dissolution of the Company and other factors described in theCompany’s filings with the Securities and Exchange Commission.  For additional discussion of such risks,uncertainties and 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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**Part I.  FINANCIALINFORMATION**

 

**Item1.  *Financial Statements***

 

The following unauditedfinancial statements have been prepared pursuant to the rules and regulationsof the Securities and Exchange Commission. Certain information and note disclosures normally included in annualfinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to those rules andregulations, although the Company believes that the disclosures made herein areadequate to make the information presented not misleading.  These financial statements should be read inconjunction with the 2001 Form 10-K.

 

The information presentedin the accompanying financial statements is unaudited, but in the opinion ofmanagement, reflects all adjustments (which include only normal recurringadjustments) necessary to present fairly such information.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

 

## **BALANCE SHEETS**

 
|                                                                                                                                                                               |   | **September  30,  2002** |    | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                                                                                                                                               |   | **(Unaudited)**          |    |                    |   |
| ASSETS                                                                                                                                                                             |   |                     |    |                    |   |
| Current  assets:                                                                                                                                                                   |   |                     |    |                    |   |
| Cash  and cash equivalents                                                                                                                                                         |   | $                        | 254,340 |                    | $      | 3,031,806 |   |
| Short-term  investments                                                                                                                                                            |   | —                   |    | 775,941                 |   |
| Prepaid  expenses and other current assets                                                                                                                                         |   | 369,813                  |    | 221,833                 |   |
| Total  current assets                                                                                                                                                              |   | 624,154                  |    | 4,029,580               |   |
|                                                                                                                                                                               |   |                     |    |                    |   |
| Furniture,  equipment and leasehold improvements, net                                                                                                                              |   | —                   |    | 373,279                 |   |
| Intangible  and other assets, net                                                                                                                                                  |   | 1,679                    |    | 814,716                 |   |
| Total  assets                                                                                                                                                                      |   | $                        | 625,833 |                    | $      | 5,217,575 |   |
|                                                                                                                                                                               |   |                     |    |                    |   |
| LIABILITIES  & STOCKHOLDERS’ EQUITY                                                                                                                                       |   |                     |    |                    |   |
|                                                                                                                                                                               |   |                     |    |                    |   |
| Current  liabilities:                                                                                                                                                              |   |                     |    |                    |   |
| Accounts  payable and accrued liabilities                                                                                                                                          |   | $                        | 208,802 |                    | $      | 589,372 |   |
| Capital  lease, short-term                                                                                                                                                         |   | —                   |    | 13,644                  |   |
| Deferred  revenue                                                                                                                                                                  |   | —                   |    | 180,000                 |   |
| Total  current liabilities                                                                                                                                                         |   | 208,802                  |    | 783,016                 |   |
|                                                                                                                                                                               |   |                     |    |                    |   |
| Capital  lease, long-term                                                                                                                                                          |   | —                   |    | 43,170                  |   |
|                                                                                                                                                                               |   |                     |    |                    |   |
| Stockholders’  equity:                                                                                                                                                        |   |                     |    |                    |   |
| Series  B Convertible Preferred Stock, $0.01 par value (liquidation value $3,889,236;  760,000 shares authorized, 51,200 and 94,700 shares, respectively, issued and  outstanding) |   | 3,889,236                |    | 6,398,799               |   |
| Common  Stock, $0.01 par value (30,000,000 shares authorized, 14,310,771 shares, and  9,763,300 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                                                                                                                                                               |   | (95,462,426              | )       | (91,286,217             | )      |
| Total  stockholders’ equity                                                                                                                                                   |   | 417,031                  |    | 4,391,389               |   |
| Total  liabilities and stockholders’ equity                                                                                                                                   |   | $                        | 625,833 |                    | $      | 5,217,575 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

 

**STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                                         |   | **Three  Months Ended  September 30,** |     | **Nine  Months Ended  September 30,** |   |
|------------------------------------------------------------------------------|--------|----------------------------------------|----------|---------------------------------------|--------|
|                                                                         |   | **2002**                               |     | **2001**                              |   | **2002** |   | **2001** |   |
|                                                                         |   |                                   |     |                                  |   |   |   |   |   |
| Sponsored  research and licensing revenues                                   |   | $                                      | —   |                                  | $      | 125,000 |   | $ | 180,000 |   | $ | 655,601 |   |
|                                                                         |   |                                   |     |                                  |   |   |   |   |   |
| Cost  and expense:                                                           |   |                                   |     |                                  |   |   |   |   |   |
| Research  and development                                                    |   | 210,129                                |     | 1,110,283                             |   | 2,845,696 |   | 3,025,519 |   |
| General  and administrative                                                  |   | 166,725                                |     | 1,467,668                             |   | 1,539,611 |   | 3,452,278 |   |
|                                                                         |   |                                   |     |                                  |   |   |   |   |   |
| Total  costs and expenses                                                    |   | 376,854                                |     | 2,577,951                             |   | 4,385,307 |   | 6,477,797 |   |
|                                                                         |   |                                   |     |                                  |   |   |   |   |   |
| Interest  and investment income(loss)                                        |   | 29,385                                 |     | (13,182                               | )      | 50,232 |   | 162,753 |   |
| Gain  on disposal of fixed assets                                            |   | 153,765                                |     | —                                |   | 180,717 |   | — |   |
| Net  loss                                                                    |   | $                                      | (193,704 | )                                     | $      | (2,466,133 | ) | $ | (3,974,358 | ) | $ | (5,659,443 | ) |
|                                                                         |   |                                   |     |                                  |   |   |   |   |   |
| Net  loss per common share – basic and diluted                          |   | $                                      | (0.02    | )                                     | $      | (0.31 | ) | $ | (0.30 | ) | $ | (0.77 | ) |
|                                                                         |   |                                   |     |                                  |   |   |   |   |   |
| Shares  used in computing net loss per common share – basic and diluted |   | 15,310,771                             |     | 9,444,391                             |   | 14,394,438 |   | 9,265,289 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

 

**STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                         |   | **Nine  Months Ended  September 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                         |   | **2002**                              |       | **2001** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                       |   |                                  |       |   |   |
| Net  loss                                                                    |   | $                                     | (3,974,358 | ) | $ | (5,659,443 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                  |       |   |   |
| Depreciation  and amortization                                               |   | 126,825                               |       | 247,726 |   |
| Write-off  of patent costs to net realizable value                           |   | 600,188                               |       | 167,921 |   |
| Gain  on disposal of fixed assets                                            |   | (180,717                              | )          | — |   |
| Issuance  of common stock for services                                       |   | —                                |       | 50,000 |   |
| Changes  in assets and liabilities:                                          |   |                                  |       |   |   |
| Decrease  (increase) in prepaid expense and other current assets             |   | (147,980                              | )          | 656,104 |   |
| Decrease  in intangible assets                                               |   | 64                                    |       | — |   |
| Decrease  in deferred revenue                                                |   | (180,000                              | )          | (466,667 | ) |
| Increase  (decrease) in accounts payable and accrued liabilities             |   | (380,571                              | )          | 1,281,772 |   |
| Net  cash used in operating activities                                       |   | (4,136,550                            | )          | (3,722,587 | ) |
|                                                                         |   |                                  |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                       |   |                                  |       |   |   |
| Capital  expenditures                                                        |   | (23,915                               | )          | (21,319 | ) |
| Patent  expenditures                                                         |   | (15,214                               | )          | (106,947 | ) |
| Sales  of fixed and intangible assets                                        |   | 679,086                               |       | — |   |
| Net  sale (purchase) of investments held to maturity                         |   | 775,941                               |       | 4,474,269 |   |
| Net  cash provided by (used in) investing activities                         |   | 1,415,898                             |       | 4,346,003 |   |
|                                                                         |   |                                  |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                       |   |                                  |       |   |   |
| Payments  on notes payable                                                   |   | —                                |       | (255,867 | ) |
| Payments  on capital lease obligations                                       |   | (56,814                               | )          | (9,979 | ) |
| Proceeds  from exercise of common stock and warrants                         |   | —                                |       | 4,072 |   |
| Net  cash provided by (used in) financing activities                         |   | (56,814                               | )          | (261,774 | ) |
|                                                                         |   |                                  |       |   |   |
| NET  INCREASE IN CASH AND CASH EQUIVALENTS                                   |   | (2,777,466                            | )          | 361,642 |   |
| CASH  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                            |   | 3,031,806                             |       | 7,524,191 |   |
| CASH  AND CASH EQUIVALENTS AT END OF PERIOD                                  |   | $                                     | 254,340    |   | $ | 7,885,833 |   |

 

### **Theaccompanying notes are an integral part of these financial statements.**

 

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**ENCHIRABIOTECHNOLOGY CORPORATION**

**NOTES TO FINANCIAL STATEMENTS**

 

### **September 30, 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.

 

On November 8, 2002, the Company filed a preliminary proxy statementwith the Securities and Exchange Commission pursuant to which it is solicitingproxies from its stockholders to approve a plan of complete liquidation anddissolution of the Company.  The Companyintends to file and mail a definitive proxy statement as soon aspermissible.  The Company’s Board ofDirectors approved the proxy statement based on its belief that all otheralternatives have been thoroughly evaluated and exhausted.

 

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 of Enchira’sBDS technology in 1998 and there is no assurance of future revenues.  During the first nine months of 2002,Enchira used $4,136,550 in cash for operating activities.  As of September 30, 2002, Enchira had$254,340 in cash and $208,802 in liabilities. The Company has incurred cumulative net losses since inception and isseeking to sell all its remaining assets and has ceased operations.  Please refer to “Part II – Item 5.  Other Matters” in this Form 10-Q for adescription of the Company’s intentions with respect to these matters.  Enchira has an accumulated deficit sinceinception of approximately $95.5 million and expects that its existingfinancial resources will fund operations only through cessation of operations.

 

OnAugust 13, 2002, the Company received a letter from Nasdaq informing theCompany that it failed to meet certain of Nasdaq’s maintenance requirements forinclusion on The Nasdaq SmallCap Market (the “SmallCap Market”), including theminimum value of publicly held shares and the minimum bid price requirementsfor the prior 90 days, and that, as a result, the Company would be delistedfrom the SmallCap Market.  The Companyrequested a hearing to appeal this delisting letter, which acted to stay thedelisting until the hearing was held. The Company received notice subsequent to the hearing that effectiveOctober 22, 2002, the Company’s securities would be delisted from the SmallCapMarket effective immediately.

 

OnAugust 22, 2002, the Company held an auction at its corporate headquarters atwhich the Company was able to sell all of its fixed assets for a net price(after the expense of the auction) of $193,750.  On September 20, 2002 the Company completed the sale of itsbiodesulfurization technology to a third party for $200,000.  See “Part II – Item 5. Other Matters” inthis Form 10-Q for a more complete description.  The financial statements include adjustments relating torecoverability and classification of carrying amounts, including intangible andother assets, however, no such adjustments have been made to the amount andclassification of liabilities that might result should the Company beliquidated.

 

Sincethe Company’s common stock is delisted from Nasdaq altogether, trading in itscommon stock is now conducted in the over-the-counter markets on the OTCBulletin Board.  Consequently, theliquidity of the Company’s common stock may be impaired, not only in the numberof shares which may be bought and sold, but also

 

8

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through delays in the timing of the transactions, reductions insecurity analysts’ and the news media’s coverage of the Company, and lowerprices for the Company’s common stock than it might otherwise attain.

 

Theaccompanying unaudited interim financial statements reflect all adjustments,which, in the opinion of management, are necessary for a fair presentation ofthe results for the interim periods presented. These financial statements should be read in conjunction with the 2001Form 10-K.

 

**Note 2.  Series BConvertible Preferred Stock**

 

Underthe terms of the Company’s Series B Preferred Stock, the Company is required toredeem all outstanding shares of Series B Preferred Stock at a price of $50 pershare on or 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 was unableto redeem the stock for cash and elected to redeem all shares of Series BPreferred Stock with shares of its common stock.  Under the terms of the Series B Preferred Stock, the Company is requiredto provide a firm commitment underwriting of the shares of its common stockbeing issued in connection with the redemption or the holder of Series BPreferred Stock may elect to waive this requirement in the event the Company isunable to timely provide a firm commitment underwriting.  As a result, the Company has completed theredemption of 41,100 shares of Series B Preferred Stock from one holder whowaived this requirement, which resulted in the issuance of 3,425,000 shares ofthe Company’s common stock for the redemption and an additional 1,024,075shares of the Company’s common stock in payment of accrued dividends on theshares.  The Company has an additional51,200 shares of Series B Preferred Stock outstanding.  If these shares were redeemed at the closingprice in effect on November 6, 2002, the Company would be required to issue64,000,000 shares of its common stock for the redemption and an additional33,230,887 shares of its common stock in payment of accrued but unpaiddividends.  The number of shares ofcommon stock issuable upon such redemption is based on the 10-day average ofthe closing prices of the Company’s common stock at the time ofredemption.  If required to be redeemedfor cash, the Company does not have sufficient funds (approximately $3.9million) and would be required to file for bankruptcy protection.

 

Dividendson the Series B Preferred Stock are cumulative from February 27, 1997, and arepayable, at the Company’s election, in cash or common stock of the Company, ora combination thereof, at an annual rate equal to (i) $4.00 per share to theextent the dividend is paid in cash and (ii) $4.50 per share to the extent thedividend is paid in common stock.  TheCompany has not declared a dividend payment since November 1998, and since thatdate, has not paid dividends on Series B Preferred Stock except on conversionof Series B Preferred Stock to common stock or upon redemption thereof.  As of November 6, 2002, Enchira has paidcommon stock dividends of 2,423,444 shares of common stock and cash dividendsof $2,626,244 on Series B Preferred Stock.

 

9

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**Item 2.  *Management’s Discussion and Analysis of Financial Condition and Resultsof 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.  At September 30, 2002 the Company’s onlyremaining assets are its Anti-Cancer LigandÔtechnology, cash and accounts receivable for the sale of the Company’s fixedand intangible assets.  Enchira has anaccumulated deficit since inception of approximately $95.5 million and believesthat its existing financial resources will fund operations until it completesits liquidation and dissolves.

 

On August 16, 2002and October 15, 2002, respectively, Paul G. Brown, III and Daniel J. Monticelloterminated their full-time employment with the Company and agreed to continueto provide services, on a part-time as needed basis, which are necessary inconnection with the wind up and dissolution of the Company.

 

OnNovember 8, 2002, the Company filed a preliminary proxy statement with theSecurities and Exchange Commission pursuant to which it is soliciting proxiesfrom its stockholders to approve a plan of complete liquidation and dissolutionof the Company.  The Company intends tofile and mail a definitive proxy statement as soon as permissible.  The Company’s Board of Directors approvedthe proxy statement based on its belief that all other alternatives have beenthoroughly evaluated and exhausted.  See“Part II – Item 5.  Other Matters” inthis Form 10-Q for a more complete description.  The financial statements include adjustments relating torecoverability and classification of carrying amounts, including intangible andother assets, however, no such adjustments have been made to the amount andclassification of liabilities that might result should the Company beliquidated.

 

**Results of Operations**

 

The Company had sponsored research revenues for thethree months ended September 30, 2002 and 2001 of zero and $125,000,respectively.  The decrease of $125,000in sponsored research revenues resulted from payments received in 2001 under aresearch and development collaboration agreement with Genencor InternationalInc. (“Genencor”) entered into in August 2000 and cancelled in December 2001.

 

The Company had sponsored research revenues of$180,000 during the first nine months of 2002 as compared to $655,601 duringthe first nine months of 2001.  Thedecrease of $475,601 in sponsored research revenues resulted from thecancellation of the collaboration agreement with Genencor in December 2001 andthe completion of the DOE grant in May 2001 offset in part by the recognitionof deferred revenue in the first quarter of 2002.

 

TheCompany had research and development expenses for the three months endedSeptember 30, 2002 and 2001 of $210,129 and $1,110,283, respectively, and forthe nine months ended September 30, 2002 and 2001 of  $2,845,696 and $3,025,519, respectively.  The decrease in research and developmentexpenses of $900,154 and $179,823, respectively, for the three and nine monthsended September 30, 2002 as compared to the corresponding prior year periodsresulted primarily from the reduction in workforce in the second quarter of2002 and the cessation of continuing operations offset in part by the write-offof patent costs to approximate net realizable value and the retention bonus,severance pay and related wind up expenses associated with the reduction inworkforce in May 2002 and the anticipated liquidation of the Company.  Such expenses were characterized as researchand development expenses in order to be consistent with prior treatment.  See “Liquidity and Capital Resources” belowfor additional discussion.

 

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The Company had general and administrative expensesfor the three months ended September 30, 2002 and 2001 of $166,725 and$1,467,668, respectively, and for the nine months ended September 30, 2002 and2001 of $ 1,539,611 and $3,452,278, respectively. The decrease of $1,300,943 forthe three months ended September 30, 2002 reflects a decrease in legal expensespaid resulting from the settlement of the arbitration with Maxygen.  The decrease of $1,912,667 for the ninemonths ended September 30, 2002 as compared to the corresponding period of 2001resulted from decreased legal expenses associated with the arbitration withMaxygen offset in part by the payment of retention bonuses and severance payassociated with the reduction in workforce in May 2002.

 

TheCompany had interest and investment gains of $29,385 in the third quarter of2002 as compared to a loss of $13,182 in the third quarter of 2001.  The increase of $45,567 in interest andinvestment income resulted primarily from realized capital gains on thematurity of the Company’s short-term investment and interest income compared tolosses on investments in the third quarter of 2001.  The Company had interest and investment income of $50,232 for thefirst nine months of 2002 compared to $162,753 for the first nine months of2001.  The decrease of $112,521 ininterest and investment income resulted primarily from a decrease in interestand investment income on cash equivalents and short-term investments during thefirst nine months of 2002.

 

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**Liquidity and Capital Resources**

 

Sinceits inception in December 1989, Enchira has devoted substantially all of itsresources to research and development. To date, all of the Company’s revenues have resulted from interest andinvestment income and sponsored research payments from collaborativeagreements.  Enchira has incurredcumulative losses since inception and expects to incur continued losses for theremainder of the year.  As of September30, 2002, the Company’s accumulated deficit was approximately $95.5 million.

 

TheCompany has an additional 51,200 shares of Series B Preferred Stockoutstanding.  If these shares wereredeemed at the closing price in effect on November 6, 2002, the Company wouldbe required to issue 64,000,000 shares of its common stock for the redemptionand an additional 33,230,887 shares of its common stock in payment of accruedbut unpaid dividends.  The number ofshares of common stock issuable upon such redemption is based on the 10-dayaverage of the closing prices of the Company’s common stock at the time ofredemption.  If required to be redeemedfor cash, the Company does not have sufficient funds (approximately $3.9million) and would be required to file for bankruptcy protection.

 

For the nine months endedSeptember 30, 2002, the Company used $4,136,550 in operating activities,incurred $39,129 in capital and patent expenditures and used $56,814 infinancing activities.  At September 30,2002, the Company had cash totaling $254,340, and working capital of $415,352.

 

TheCompany has experienced negative cash flow from operations since its inceptionand has funded its activities to date primarily from equity financings andsponsored research revenues.  TheCompany believes that its available cash will be adequate to fund theanticipated liquidation and dissolution.

 

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

 

Not Applicable

 

**Item 4.  *Controls andProcedures***

 

Within 90 days prior tothe filing date of this report, the Company carried out an evaluation, underthe supervision and with the participation of its President and Chief FinancialOfficer of the effectiveness of the design and operation of its disclosurecontrols and procedures, as defined in Rules 13a-14(c) and 15d-14(c) of theExchange Act.  Based on that evaluation,the Company’s President and CFO have concluded that the Company’s disclosurecontrols and procedures are effective. There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the evaluation.

 

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**PartII.  Other Information**

 

**Item5.  Other Matters**

 

Since prior to theCompany’s reduction in force in May 2002, the Company has attempted to obtainadditional capital from potential investors and has searched for potentialpartners.  This search has beenunsuccessful and, as of September 30, 2002, the Company had approximately$254,000 in available cash to finance operations.  As a result, the Company held a public auction of its remainingphysical assets located at its headquarters in The Woodlands, Texas on August22, 2002 and received approximately $194,000. The Company also sold itsbiodesulfurization technology to a third party on September 20, 2002 for$200,000.  This amount is reflected inthe accounts receivable at September 30, 2002. The cash was received on October 12, 2002.  Also during the last quarter of 2002, the Company intends to mailto its stockholders proxy solicitation materials asking its stockholders toapprove a plan of liquidation under which the Company would be liquidated anddissolved.

 

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

 

a.       Exhibits

 

*10.1 Asset Transfer and Sublicense Agreement datedSeptember 20, 2002

 

10.2 Consulting Agreement dated as of August 16, 2002between the Company and Paul G. Brown, III

 

10.3 Settlement and Release Agreement dated as ofAugust 16, 2002 between the Company and Paul G. Brown, III

 

10.4 Fourth Amendment to Employment Agreement dated asof August 15, 2002 between the Company and Daniel J. Monticello

 

10.5 Settlement and Release Agreement dated as ofAugust 15, 2002 between the Company and Daniel J. Monticello

 

10.6 Letter Agreement dated October 15, 2002 betweenthe Company and Daniel J. Monticello

 

11.1 Statement regarding Computation of Per ShareEarnings.

 

99.1 Certification pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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* Portions of thisexhibit have been omitted based on a request for confidential treatmentpursuant to Rule 24b-2 of the Exchange Act. Such omitted portions have been filed separately with the Commission.

 

b.      Reports on Form 8-K

 

On August 12, the Company filed a current report onForms 8-K, 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 BiotechnologyCorporation

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

 

Date: November 19, 2002

 

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**CERTIFICATION**

 

I, Paul G. Brown, III, certifythat:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of the registrant;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Iam responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and I have:

 

a)             designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b)            evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c)             presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.                                       Ihave disclosed, based on my most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)             all significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)            any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.                                       Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of my most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

 

Date: November 19, 2002

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

 

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