UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 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 number0-20713
 ENTREMED, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    58-1959440(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 (Address of principal executive offices)
 (Zip code)
 (Registrants telephone number, including area code)
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
  Class
    
    Outstanding at November 6, 2009Common Stock $.01 Par Value
    
    88,655,518




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##### 



PAGEPART I. FINANCIAL INFORMATIONItem 1   Financial StatementsConsolidated Balance Sheets as of September 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the Nine Months Ended September 30, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2   Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3   Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4    Controls and Procedures
    
    
    25Part II. OTHER INFORMATIONItem 1   Legal Proceedings
    
    
    26Item 1A   Risk Factors
    
    
    26Item 2   Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3   Defaults upon Senior Securities
    
    
    26Item 4   Submission of Matters to a Vote of Security Holders
    
    
    26Item 5   Other Information
    
    
    26Item 6   Exhibits
    
    
    26SIGNATURES
    
    
    27
  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  www.sec.gov
 2




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September 30, 2009
    
    
    December 31, 2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,973,516
    
    
    $
    16,743,129Short-term investments
    
    
    1,054,051
    
    
    
    7,548,044Accounts receivable, net of allowance for doubtful accounts of
$72,145 at September 30, 2009 and $54,145 at December 31, 2008
    
    
    3,299,883
    
    
    
    3,880,108Interest receivable
    
    
    185
    
    
    
    37,402Prepaid expenses and other
    
    
    300,959
    
    
    
    383,538Total current assets
    
    
    13,628,594
    
    
    
    28,592,221Property and equipment, net
    
    
    188,162
    
    
    
    263,715Other assets
    
    
    30,378
    
    
    
    67,459Total assets
    
    $
    13,847,134
    
    
    $
    28,923,395LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,229,562
    
    
    $
    3,496,198Accrued liabilities
    
    
    655,943
    
    
    
    2,584,327Current portion of loan payable
    
    
    8,335,318
    
    
    
    7,708,451Current portion of deferred rent
    
    
    
    
    
    
    20,763Total current liabilities
    
    
    11,220,823
    
    
    
    13,809,739Loan payable, less current portion
    
    
    2,929,888
    
    
    
    9,191,490Total liabilities
    
    
    14,150,711
    
    
    
    23,001,229Stockholders (deficit) equity:Convertible preferred stock, $1.00 par value;
5,000,000 shares authorized and 3,350,000 shares issued and
outstanding at September 30, 2009 and December 31, 2008
(liquidation value  $33,500,000 at September 30, 2009 and December
31, 2008
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par
value: 170,000,000 shares authorized at September 30, 2009
and December 31,
2008: 88,655,518 and 88,489,278 shares issued and outstanding
at September 30, 2009 and December 31, 2008, respectively
    
    
    886,555
    
    
    
    884,893Additional paid-in capital
    
    
    367,957,984
    
    
    
    367,689,943Treasury stock, at cost: 874,999 shares held at September 30, 2009 and
December 31, 2008
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated other comprehensive income
    
    
    (70,803
    )
    
    
    (58,391
    )Accumulated deficit
    
    
    (364,393,069
    )
    
    
    (357,910,035
    )Total stockholders (deficit) equity
    
    
    (303,577
    )
    
    
    5,922,166Total liabilities and stockholders deficit equity
    
    $
    13,847,134
    
    
    $
    28,923,395
  3




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Royalties
    
    $
    3,300,000
    
    
    $
    3,500,000
    
    
    $
    3,300,000
    
    
    $
    3,500,000Other
    
    
    368,333
    
    
    
    1,307
    
    
    
    368,333
    
    
    
    1,307$
    3,668,333
    
    
    $
    3,501,307
    
    
    $
    3,668,333
    
    
    $
    3,501,307Costs and expenses:Research and development
    
    
    2,326,969
    
    
    
    4,957,067
    
    
    
    5,939,903
    
    
    
    16,629,127General and administrative
    
    
    911,816
    
    
    
    1,551,900
    
    
    
    3,082,270
    
    
    
    5,274,585In-Process R&D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,0003,238,785
    
    
    
    6,508,967
    
    
    
    9,022,173
    
    
    
    23,903,712Investment income
    
    
    
    
    
    
    168,444
    
    
    
    68,931
    
    
    
    796,682Interest expense
    
    
    (344,634
    )
    
    
    (558,661
    )
    
    
    (1,198,125
    )
    
    
    (1,708,753
    )Net Income (Loss)
    
    
    84,914
    
    
    
    (3,397,877
    )
    
    
    (6,483,034
    )
    
    
    (21,314,476
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (753,750
    )
    
    
    (753,750
    )Net loss attributable to common shareholders
    
    $
    (166,336
    )
    
    $
    (3,649,127
    )
    
    $
    (7,236,784
    )
    
    $
    (22,068,226
    )Net loss per share (basic and diluted)
    
    $
    (0.00
    )
    
    $
    (0.04
    )
    
    $
    (0.08
    )
    
    $
    (0.26
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    87,778,236
    
    
    
    87,728,644
    
    
    
    87,749,168
    
    
    
    86,060,438
  4




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NINE MONTH PERIOD ENDEDSEPTEMBER 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (6,483,034
    )
    
    $
    (21,314,476
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    75,553
    
    
    
    246,371Write-off of in-process R&D
    
    
    
    
    
    
    2,000,000Amortization of discount on short-term investments
    
    
    (21,124
    )
    
    
    (535,597
    )Stock-based compensation expense
    
    
    280,153
    
    
    
    746,946Non-cash interest
    
    
    107,358
    
    
    
    153,123Changes in operating assets and liabilities:Accounts receivable
    
    
    580,225
    
    
    
    374,772Interest receivable
    
    
    37,217
    
    
    
    105,636Prepaid expenses and other
    
    
    82,582
    
    
    
    71,329Deferred rent
    
    
    (20,763
    )
    
    
    (88,451
    )Accounts payable
    
    
    (1,266,637
    )
    
    
    (560,149
    )Accrued liabilities
    
    
    (1,928,385
    )
    
    
    (87,648
    )Net cash used in operating activities
    
    
    (8,556,855
    )
    
    
    (18,888,144
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (7,992,859
    )
    
    
    (44,075,859
    )Maturities of short term investments
    
    
    14,500,000
    
    
    
    45,775,000Unrealized loss on short term investments
    
    
    (4,436
    )
    
    
    Purchases of furniture and equipment
    
    
    
    
    
    
    (134,065
    )Net cash provided by investing activities
    
    
    6,502,705
    
    
    
    1,565,076CASH FLOWS FROM FINANCING ACTIVITIESStock issuance costs
    
    
    (10,450
    )
    
    
    (71,955
    )Repayment of loan
    
    
    (5,705,013
    )
    
    
    (1,177,156
    )Net cash used in financing activities
    
    
    (5,715,463
    )
    
    
    (1,249,111
    )Net decrease in cash and cash equivalents
    
    
    (7,769,613
    )
    
    
    (18,572,179
    )Cash and cash equivalents at beginning of period
    
    
    16,743,129
    
    
    
    29,675,899Cash and cash equivalents at end of period
    
    $
    8,973,516
    
    
    $
    11,103,720Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    1,090,678
    
    
    $
    1,555,630Non-cash investing activity:Stock issued in connection with milestone payment
related to the Miikana acquisition
    
    $
    
    
    
    $
    2,000,000
  5




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ENTREMED, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009 (unaudited)
      6




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Compensation-Nonretirement Post Employment Benefits Exit or Disposal Cost Obligations
  R&D
    
    
    G&AExpenses
    
    
    ExpensesBalance at December 31, 2008
    
    
    
    
    
    
    
    
    
    $
    1,748,634Termination benefits incurred
    
    $
    42,768
    
    
    $
    
    
    
    
    42,768Cash payments
    
    
    (763,358
    )
    
    
    (796,946
    )
    
    
    (1,560,304
    )Balance at September 30, 2009
    
    
    
    
    
    
    
    
    
    $
    231,098
   Derivatives and Hedging
 7




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Business Combinations
 Investments-Debt
and Equity Securities
 Fair Value Measurements and Disclosures
 Subsequent Events
 Financial Instruments Interim Reporting
 8




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The FASB Accounting Standards Codification,
   Investments-Debt and Equity Securities
  Available-for-Sale SecuritiesEstimated FairGross
    
    Gross
    
    Value (NetAmortized
    
    Unrealized
    
    Unrealized
    
    CarryingCost
    
    Gains
    
    Losses
    
    Amount)Commercial Paper
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Government-sponsored
Enterprise
Obligations
    
    
    999,347
    
    
    
    653
    
    
    
    
    
    
    
    1,000,000Equity Securities
    
    
    125,000
    
    
    
    
    
    
    
    (70,949
    )
    
    
    54,051Total
    
    $
    1,124,347
    
    
    $
    653
    
    
    $
    (70,949
    )
    
    $
    1,054,051
 9




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pro rata
      10




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Fair Value Measurements and Disclosures
     11




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Fair Value Measurements at September 30, 2009Total Carrying
    
    
    
    
    
    
    
    
    
    SignificantValue at
    
    Quoted prices in
    
    Significant other
    
    unobservableSeptember 30,
    
    active markets
    
    observable inputs
    
    inputs2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Cash equivalents
    
    $
    7,106,218
    
    
    $
    7,106,218
    
    
    $
    
    
    
    $
    Available for sale securities*
    
    
    1,054,051
    
    
    
    54,051
    
    
    
    1,000,000
    
    
    
    
 
 *
    
    Unrealized gains and losses related to available for sale securities are reported as
accumulated other comprehensive income (loss), as disclosed in footnote 4.  Financial Instruments
   Stock Compensation
  12




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NINE MONTHS ENDEDSEPTEMBER 30,2009
    
    
    2008Research and development
    
    $
    94,505
    
    
    $
    186,438General and administrative
    
    
    185,648
    
    
    
    560,508Share-based compensation expense
    
    $
    280,153
    
    
    $
    746,946Net share-based compensation expense,
per common share:Basic and diluted
    
    $
    0.003
    
    
    $
    0.009
   NINE MONTH PERIOD ENDEDSEPTEMBER 30,2009
    
    2008Expected volatility
    
    
    78.02
    %
    
    
    72.84
    %Risk-free interest rate
    
    
    2.08
    %
    
    
    4.69
    %Expected term of option
    
    5 years
    
    5 yearsForfeiture rate*
    
    
    5.00
    %
    
    
    5.00
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
 
 *  -
    
    ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. During the
nine-month periods ended September 30, 2009 and September 30, 2008, forfeitures were estimated at
5%.  13




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WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding at January 1, 2009
    
    
    8,345,928
    
    
    $
    6.60Granted
    
    
    1,313,500
    
    
    $
    0.16Exercised
    
    
    (66,875
    )
    
    $
    0.16Expired
    
    
    (1,830,258
    )
    
    $
    6.89Forfeited
    
    
    (6,050
    )
    
    $
    1.34Outstanding at September 30, 2009
    
    
    7,756,245
    
    
    $
    5.50Vested and expected to vest at September 30, 2009
    
    
    7,705,173
    
    
    $
    5.54Exercisable at September 30, 2009
    
    
    6,734,803
    
    
    $
    6.27
     Income
Taxes ,
  14




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®
  ® ®
 ®
  15




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16




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-
    
    Revenue Recognition  We recognize revenue in accordance with ASC Topic 605, Revenue Recognition (formerly SAB 104), whereby revenue is not recognized until
it is realized or realizable and earned. Revenue is recognized when all of the following
criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the price to the buyer is fixed and determinable and
collectibility is reasonably assured.
 -
    
    Royalty Revenue  Royalties from licenses are based on third-party
sales and recorded as earned in accordance with contract terms, when third-party
results are reliably measured and collectibility is reasonably assured. We expect
that the majority of our 2009 revenues will be from royalties on the sale of
Thalomid®, which we began recognizing in the third quarter. In 2004
certain provisions of a purchase agreement dated June 14, 2001 by and between
Bioventure Investments kft (Bioventure) and the Company were satisfied, and, as a
result, beginning in 2005 we became entitled to share in the royalty payments
received by Royalty Pharma Finance Trust, successor to Bioventure, on annual
Thalomid® sales above a certain threshold. Based on the licensing
agreement royalty formula, annual royalty sharing commences with
Thalomid® annual sales of approximately $225 million.
 -
    
    Research and Development  Research and development expenses consist primarily of
compensation and other expenses related to research and development personnel, research
collaborations, costs associated with pre-clinical testing and clinical trials of our
product candidates, including the costs of manufacturing the product candidates, and
facilities expenses. Research and development costs are expensed as incurred.
 -
    
    Expenses for Clinical Trials  Expenses for clinical trials are incurred from planning
through patient enrollment to reporting of the underlying data. We estimate expenses
incurred for clinical trials that are in process based on patient enrollment and based on
clinical data collection and management. Costs that are associated with patient enrollment
are recognized as each patient in the clinical trial completes enrollment. Estimated
clinical trial costs related to enrollment can vary based on numerous factors, including
expected number of patients in trials, the number of patients that do not complete
participation in a trial, and when a patient drops out of a trial. Information about
patient enrollment can become available significantly after we report our expenses for
clinical trials, in which case we would change our estimate of the remaining cost of a
trial. Costs that are based on clinical data collection and management are recognized based
on estimates of unbilled goods and services received in the reporting period. In the event
of early termination of a clinical trial, we would accrue an amount based on estimates of
the remaining non-cancelable obligations associated with winding down the clinical trial.
 17




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-
    
    Stock-Based Compensation  Authoritative guidance under the scope of ASC Topic 718
requires companies to recognize expense associated with share-based compensation
arrangements, including employee stock options and stock purchase plans, using a fair
value-based option pricing model, and eliminates the alternative to use the intrinsic value
method of accounting for share-based payments. ASC Topic 718 was effective beginning
January 1, 2006. Adoption of the expense provisions of ASC Topic 718 has a material impact
on our results of operations. We have applied the modified prospective transition method;
accordingly, compensation expense is reflected in the financial statements beginning
January 1, 2006 with no restatement of prior periods. Compensation expense is recognized
for awards that are granted, modified, repurchased or cancelled on or after January 1,
2006, as well as for the portion of awards previously granted that have not vested as of
January 1, 2006. Our results of operations are impacted by the recognition of non-cash
expense related to the fair value of our share-based compensation awards.
    For the Three and Nine Months Ended September 30, 2009 and September 30, 2008.
 Revenues. ® ® ®
 Research and Development Expenses ® ®
 18




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®
 ® ®
  ®
 ®
 19




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ESTIMATEDCOMPLETIONCLINICAL PHASE
    
    PERIODPhase I
    
    1 YearPhase II
    
    1-2 YearsPhase III
    
    2-4 Years
  -
    
    the number of patients that ultimately participate in the trial;-
    
    the duration of patient participation in the study and follow-up that seems
appropriate in view of the results;-
    
    the number of clinical sites included in the trials; and-
    
    the length of time required to enroll suitable patient subjects.
     20




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-
    
    Outside Services  We utilize outsourcing to conduct our product development
activities. Larger-scale small molecule synthesis, in vivotesting and data analysis are
examples of the services that we outsource. In the three-month period ended September 30,
2009, we expended $80,000 on these activities versus $451,000 in the same 2008 period. For
the nine-month period ended September 30, 2009 outside services were $401,000 compared to
$1,224,000 for the same 2008 period. The decrease primarily reflects the absence in 2009
of analytical testing and preclinical support services in 2ME2 (2-methoxyestradiol) and
ENMD-1198 studies.
 -
    
    Clinical Trial Costs  Clinical trial costs decreased to $992,000 in the three
months ended September 30, 2009 from $1,180,000 in the three-month period ended September
30, 2008. Clinical trial costs for the nine-month period ended September 30, 2009
decreased to $2,000,000 from $4,018,000 for the comparable 2008 period. The decrease is
primarily related to the Companys restructuring and the recent reprioritization of our
clinical programs, focusing on the clinical development of ENMD-2076. The nine-month
period ended September 30, 2008 included expenses associated with expansion of our MKC-1
clinical program and also the initial clinical expenses related to ENMD-2076. Costs of
such trials include the clinical site fees, monitoring costs and data management costs.
 -
    
    Contract Manufacturing Costs  The costs of manufacturing the material used in
clinical trials for our product candidates is reflected in contract manufacturing. These
costs include bulk manufacturing, encapsulation and fill and finish services, and product
release costs. Contract manufacturing costs for the three months ended September 30, 2009
decreased to $364,000 from $764,000 during the same period in 2008. For the nine-month
period ended September 30, 2009, manufacturing costs decreased to $586,000 from $3,559,000
for the comparable 2008 period. The decrease reflects the absence of contract
manufacturing activities for ENMD-1198 and Panzem®NCD. Fluctuations
in our contract manufacturing costs from period to period result from the timing of
manufacturing activities.
  21




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General and Administrative Expenses
  Interest expense
 Investment income
 Dividends on Series A convertible preferred stock
   22




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® ®
 23




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® ® ® ®
   
    
    out-licensing technologies or product candidates to one or more corporate partners;
 
    
    completing an outright sale of assets;
 
    
    securing additional debt financing, and/or
 
    
    selling additional equity securities.
   24




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.
   
   
  Evaluation of Disclosure Controls and Procedures
   25




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Changes in Internal Control Over Financial Reporting
  
  
   
   
   
   
   
   
  31.1
    
    Rule 13a-14(a)/ 15d-14(a) Certification of Executive Chairman31.2
    
    Rule 13a-14(a)/ 15d-14(a) Certification of Principal Accounting Officer32.1
    
    Section 1350 Certification of Executive Chairman32.2
    
    Section 1350 Certification of Principal Accounting Officer
 26




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SIGNATURES
  ENTREMED, INC.
(Registrant)Date: November 16, 2009
    /s/ Michael M. TarnowMichael M. TarnowExecutive ChairmanDate: November 16, 2009
    /s/ Kathy R. Wehmeir-DavisKathy R. Wehmeir-DavisPrincipal Accounting Officer 27




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31.1
    
    Rule 13a-14(a)/ 15d-14(a) Certification of Executive Chairman31.2
    
    Rule 13a-14(a)/ 15d-14(a) Certification of Principal Accounting Officer32.1
    
    Section 1350 Certification of Executive Chairman32.2
    
    Section 1350 Certification of Principal Accounting Officer
 28