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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 March 31, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number 0-20713
 ENTREMED, INC.
  Delaware
    
    58-1959440(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 Rockville, Maryland
 20850
 (240) 864-2600
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
  Class
    
    Outstanding at April 23, 2008Common Stock $.01 Par Value
    
    85,773,911




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PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of
March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the
Three Months Ended March 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    11Item 3  Quantitative and Qualitative Disclosures
About Market Risk
    
    
    19Item 4  Controls and Procedures
    
    
    19Part II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    20Item 1A  Risk Factors
    
    
    20Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3  Defaults upon Senior Securities
    
    
    20Item 4  Submission of Matters to a Vote of Security Holders
    
    
    20Item 5  Other Information
    
    
    21Item 6  Exhibits
    
    
    21SIGNATURES
    
    
    22
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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March 31, 2008
    
    
    December 31, 2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,893,174
    
    
    $
    29,675,899Short-term investments
    
    
    27,750,446
    
    
    
    18,072,292Accounts receivable
    
    
    483
    
    
    
    3,901,554Interest receivable
    
    
    3,288
    
    
    
    144,191Prepaid expenses and other
    
    
    340,668
    
    
    
    464,083Total current assets
    
    
    43,988,059
    
    
    
    52,258,019Property and equipment, net
    
    
    634,181
    
    
    
    620,456Other assets
    
    
    118,630
    
    
    
    136,433Total assets
    
    $
    44,740,870
    
    
    $
    53,014,908LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,972,098
    
    
    $
    4,550,892Accrued liabilities
    
    
    1,118,710
    
    
    
    1,675,814Current portion of loan payable
    
    
    4,834,562
    
    
    
    2,982,117Current portion of deferred rent
    
    
    114,196
    
    
    
    119,594Total current liabilities
    
    
    11,039,566
    
    
    
    9,328,417Loan payable, less current portion
    
    
    14,950,047
    
    
    
    16,768,749Deferred rent, less current portion
    
    
    
    
    
    
    20,764Total liabilities
    
    
    25,989,613
    
    
    
    26,117,930Stockholders equity:Convertible preferred stock, $1.00 par value;
5,000,000 shares authorized and 3,350,000 shares issued and
outstanding at March 31, 2008 and December 31, 2007
(liquidation value  $33,500,000 at March 31, 2008 and December
31, 2007)
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:
170,000,000 and 170,000,000 shares authorized:
85,746,220 and 85,712,992 shares issued and outstanding
at March 31, 2008 and December 31, 2007, respectively
    
    
    857,455
    
    
    
    857,125Additional paid-in capital
    
    
    364,922,999
    
    
    
    364,705,150Treasury stock, at cost: 874,999 shares held at March 31, 2008 and
December 31, 2007
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated other comprehensive income
    
    
    49,510
    
    
    
    66,954Accumulated deficit
    
    
    (342,394,463
    )
    
    
    (334,048,007
    )Total stockholders equity
    
    
    18,751,257
    
    
    
    26,896,978Total liabilities and stockholders equity
    
    $
    44,740,870
    
    
    $
    53,014,908
  3




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Three Months EndedMarch 31, 2008
    
    
    March 31, 2007Revenues:Licensing
    
    $
    
    
    
    $
    Royalties
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Costs and expenses:Research and development
    
    
    6,187,203
    
    
    
    6,398,696General and administrative
    
    
    1,982,994
    
    
    
    1,831,3268,170,197
    
    
    
    8,230,022Investment income
    
    
    398,787
    
    
    
    578,913Interest expense
    
    
    (575,046
    )
    
    
    (22,477
    )Net Loss
    
    
    (8,346,456
    )
    
    
    (7,673,586
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )Net loss attributable to common shareholders
    
    $
    (8,597,706
    )
    
    $
    (7,924,836
    )Net loss per share (basic and diluted)
    
    $
    (0.10
    )
    
    $
    (0.09
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    84,898,912
    
    
    
    84,015,999
  4




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THREE MONTH PERIOD ENDEDMARCH 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (8,346,456
    )
    
    $
    (7,673,586
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    80,954
    
    
    
    92,498Amortization of discount on short-term investments
    
    
    (259,860
    )
    
    
    (401,289
    )Stock-based compensation expense
    
    
    218,181
    
    
    
    297,487Non-cash interest
    
    
    51,544
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    3,901,071
    
    
    
    3,845,045Interest receivable
    
    
    140,903
    
    
    
    19,167Prepaid expenses and other
    
    
    123,415
    
    
    
    91,890Deferred rent
    
    
    (26,162
    )
    
    
    (18,834
    )Accounts payable
    
    
    421,206
    
    
    
    (425,755
    )Accrued liabilities
    
    
    (557,104
    )
    
    
    (363,760
    )Net cash used in operating activities
    
    
    (4,252,308
    )
    
    
    (4,537,137
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (23,010,738
    )
    
    
    (8,289,946
    )Maturities of short term investments
    
    
    13,575,000
    
    
    
    7,600,000Purchases of furniture and equipment
    
    
    (94,679
    )
    
    
    (13,793
    )Net cash used in investing activities
    
    
    (9,530,417
    )
    
    
    (703,739
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of loan
    
    
    
    
    
    
    (208,406
    )Net costs from sale of common stock
    
    
    
    
    
    
    (10,641
    )Net cash used in financing activities
    
    
    
    
    
    
    (219,047
    )Net decrease in cash and cash equivalents
    
    
    (13,782,725
    )
    
    
    (5,459,923
    )Cash and cash equivalents at beginning of period
    
    
    29,675,899
    
    
    
    20,896,141Cash and cash equivalents at end of period
    
    $
    15,893,174
    
    
    $
    15,436,218Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    523,500
    
    
    $
    22,477
  5




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ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008 (unaudited)
     Accounting for Certain Investments in Debt and Equity Securities
  pro rata
 6




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Fair Value Measurements
  7




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Fair Value Measurements at March 31, 2008Total Carrying
    
    Quoted prices in
    
    Significant other
    
    SignificantValue at
    
    active markets
    
    observable inputs
    
    unobservable inputsMarch 31, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Cash equivalents
    
    $
    12,030,547
    
    
    $
    12,030,547
    
    
    $
    
    
    
    $
    Available for sale securities*
    
    
    27,750,446
    
    
    
    27,750,446
    
    
    
    
    
    
    
    
 
 *
    
    Unrealized gains and losses related to available for sale securities are reported as accumulated
other comprehensive income (loss), as disclosed in footnote 2. The Fair Value Option for
Financial Assets and Financial Liabilities
   Share-Based Payment Share-Based Payment Accounting for Stock-Based
Compensation
 8




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THREE MONTHS ENDEDMARCH 31,2008
    
    
    2007Research and development
    
    
    56,357
    
    
    
    46,432General and administrative
    
    
    161,824
    
    
    
    251,055Share-based compensation expense
    
    $
    218,181
    
    
    $
    297,487Net share-based compensation expense, per
common share:Basic and diluted
    
    $
    0.003
    
    
    $
    0.004
   THREE MONTH PERIOD ENDEDMARCH 31,2008
    
    2007Expected volatility
    
    
    87.90
    %
    
    
    101.00
    %Risk-free interest rate
    
    
    3.62
    %
    
    
    4.58
    %Expected term of option
    
    5 years
    
    5 yearsForfeiture rate*
    
    
    18.00
    %
    
    
    5.00
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
 
 *
    
    - SFAS 123R 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
three-month period ended March 31, 2008, the Company accounted for forfeitures as they occurred. 9




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WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding at January 1, 2008
    
    
    8,671,308
    
    
    $
    6.81Granted
    
    
    130,000
    
    
    $
    1.22Exercised
    
    
    
    
    
    
    Expired
    
    
    (160,525
    )
    
    $
    3.63Forfeited
    
    
    (32,025
    )
    
    $
    1.42Outstanding at March 31, 2008
    
    
    8,608,758
    
    
    $
    6.80Vested and expected to vest at March 31, 2008
    
    
    8,538,583
    
    
    $
    6.85Exercisable at March 31, 2008
    
    
    7,205,256
    
    
    $
    7.84
   Accounting for
Uncertainty in Income Taxes,
   10




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®
  ® ®
 ®
   11




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
    
    Revenue Recognition  We recognize revenue in accordance with the provisions of Staff
Accounting Bulletin No. 104, Revenue Recognition, 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 2008 revenues will be from royalties on the sale of
Thalomid®, which we expect to begin to recognize 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.
 12




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
    
    Stock-Based Compensation  Issued in December 2004, Statement of Financial Accounting
Standards No. 123R (SFAS 123R) 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. SFAS 123R was effective
beginning January 1, 2006. Adoption of the expense provisions of SFAS 123R 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. For the adoption of SFAS 123R, we have selected the
straight-line expense attribution method, whereas our previous expense attribution method
was the graded-vesting method, an accelerated method, described by FIN 28. 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 Months Ended March 31, 2008 and March 31, 2007.
 Revenues. ®
 Research and Development Expenses ® ® ®
 13




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®
 ® ®
  CLINICAL PHASE
    
    ESTIMATED COMPLETION PERIODPhase I
    
    1 YearPhase II
    
    1-2 YearsPhase III
    
    2-4 Years
 14




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
    
    the number of patients that ultimately participate in the trial;
    
    the duration of patient 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.
      15




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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 March 31,
2008, we expended $394,000 on these activities versus $617,000 in the same 2007 period.
The decrease reflects absence in 2008 of certain IND-directed expenses associated with the
2007 IND submissions for Panzem® NCD for the treatment of rheumatoid arthritis
and for ENMD-2076 in oncology.
    
    Clinical Trial Costs  Clinical trial costs increased to $1,744,000 in the three
months ended March 31, 2008, from $1,156,000 in the three-month period ended March 31,
2007. The increase results primarily from the expanded 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 March 31, 2008
decreased to $1,414,000 from $1,945,000 during the same period in 2007. The most
significant component of the net decrease was our Q1 2007 acquisition of bulk API to
support the Panzem®NCD trials. The absence of Panzem®NCD API costs
in Q1 2008 was partially offset by an increase in contract manufacturing activities for
ENMD-1198. Fluctuations in our contract manufacturing costs from period to period result
from the timing of manufacturing activities.
  General and Administrative Expenses
 16




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Interest expense
 Investment income
 Dividends on Series A convertible preferred stock
   17




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® ®
 ® ®
   18




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.
      Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  19




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Our common stock may be delisted from The NASDAQ Global Market, which could negatively impact the
price of our common stock and our ability to access the capital markets.
        20




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10.1
    
    Employment Agreement by and between the Company and Kenneth W. Bair, PhD, effective
October 16, 2007.31.1
    
    Rule 13a-14(a) Certification of President and Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of President and Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 21




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SIGNATURES
  ENTREMED, INC.
     (Registrant)Date: May 2, 2008
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: May 2, 2008
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer 22




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10.1
    
    Employment Agreement by and between the Company and Kenneth W. Bair, PhD, effective
October 16, 200731.1
    
    Rule 13a-14(a) Certification of President and Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 23