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, 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 number 0-20713
 ENTREMED, INC.
  Delaware
    
    58-1959440(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 (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 April 15, 2009Common Stock $.01 Par Value
    
    
    
    88,603,643




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PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of
March 31, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the
Three Months Ended March 31, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2009 and 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    13Item 3  Quantitative and Qualitative Disclosures
About Market Risk
    
    
    22Item 4   Controls and Procedures
    
    
    22Part II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    23Item 1A  Risk Factors
    
    
    23Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3  Defaults upon Senior Securities
    
    
    23Item 4  Submission of Matters to a Vote of Security Holders
    
    
    23Item 5  Other Information
    
    
    23Item 6  Exhibits
    
    
    23SIGNATURES
    
    
    24
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  www.sec.gov
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March 31, 2009
    
    
    December 31, 2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,302,807
    
    
    $
    16,743,129Short-term investments
    
    
    8,524,103
    
    
    
    7,548,044Accounts receivable, net of allowance for doubtful accounts of
$72,145 at March 31, 2009 and $54,145 at December 31, 2008
    
    
    
    
    
    
    3,880,108Interest receivable
    
    
    25,896
    
    
    
    37,402Prepaid expenses and other
    
    
    260,301
    
    
    
    383,538Total current assets
    
    
    21,113,107
    
    
    
    28,592,221Property and equipment, net
    
    
    228,293
    
    
    
    263,715Other assets
    
    
    53,406
    
    
    
    67,459Total assets
    
    $
    21,394,806
    
    
    $
    28,923,395LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,195,894
    
    
    $
    3,496,198Accrued liabilities
    
    
    1,587,736
    
    
    
    2,584,327Current portion of loan payable
    
    
    7,911,985
    
    
    
    7,708,451Current portion of deferred rent
    
    
    
    
    
    
    20,763Total current liabilities
    
    
    11,695,615
    
    
    
    13,809,739Loan payable, less current portion
    
    
    7,161,819
    
    
    
    9,191,490Total liabilities
    
    
    18,857,434
    
    
    
    23,001,229Stockholders equity:Convertible preferred stock, $1.00 par value;
5,000,000 shares authorized and 3,350,000 shares issued and
outstanding at March 31, 2009 and December 31, 2008
(liquidation value  $33,500,000 at March 31, 2008 and
December 31, 2008)
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:170,000,000 shares authorized at March 31, 2009 and December 31, 2008:88,555,686 and 88,489,278 shares issued and outstanding
at March 31, 2009 and December 31, 2008, respectively
    
    
    885,558
    
    
    
    884,893Additional paid-in capital
    
    
    367,844,411
    
    
    
    367,689,943Treasury stock, at cost: 874,999 shares held at March 31, 2009 and
December 31, 2008
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated other comprehensive income
    
    
    (81,562
    )
    
    
    (58,391
    )Accumulated deficit
    
    
    (361,426,791
    )
    
    
    (357,910,035
    )Total stockholders equity
    
    
    2,537,372
    
    
    
    5,922,166Total liabilities and stockholders equity
    
    $
    21,394,806
    
    
    $
    28,923,395
  3




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Three Months EndedMarch 31, 2009
    
    
    March 31, 2008Revenues:Royalties
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Costs and expenses:Research and development
    
    
    1,953,460
    
    
    
    6,187,203General and administrative
    
    
    1,159,721
    
    
    
    1,982,9943,113,181
    
    
    
    8,170,197Investment income
    
    
    50,187
    
    
    
    398,787Interest expense
    
    
    (453,761
    )
    
    
    (575,046
    )Net Loss
    
    
    (3,516,755
    )
    
    
    (8,346,456
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )Net loss attributable to common shareholders
    
    $
    (3,768,005
    )
    
    $
    (8,597,706
    )Net loss per share (basic and diluted)
    
    $
    (0.04
    )
    
    $
    (0.10
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    87,728,644
    
    
    
    84,898,912
  4




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THREE MONTH PERIOD ENDEDMARCH 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (3,516,755
    )
    
    $
    (8,346,456
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    35,422
    
    
    
    80,954Amortization of discount on short-term investments
    
    
    (26,777
    )
    
    
    (259,860
    )Stock-based compensation expense
    
    
    155,133
    
    
    
    218,181Non-cash interest
    
    
    40,687
    
    
    
    51,544Changes in operating assets and liabilities:Accounts receivable
    
    
    3,880,108
    
    
    
    3,901,071Interest receivable
    
    
    11,506
    
    
    
    140,903Prepaid expenses and other
    
    
    123,237
    
    
    
    123,415Deferred rent
    
    
    (20,763
    )
    
    
    (26,162
    )Accounts payable
    
    
    (1,300,305
    )
    
    
    421,206Accrued liabilities
    
    
    (996,591
    )
    
    
    (557,104
    )Net cash used in operating activities
    
    
    (1,615,098
    )
    
    
    (4,252,308
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (4,967,793
    )
    
    
    (23,010,738
    )Maturities of short term investments
    
    
    4,000,000
    
    
    
    13,575,000Unrealized loss on short term investments
    
    
    (4,660
    )
    
    
    Purchases of furniture and equipment
    
    
    
    
    
    
    (94,679
    )Net cash used in investing activities
    
    
    (972,453
    )
    
    
    (9,530,417
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of loan
    
    
    (1,852,771
    )
    
    
    Net cash used in financing activities
    
    
    (1,852,771
    )
    
    
    Net decrease in cash and cash equivalents
    
    
    (4,440,322
    )
    
    
    (13,782,725
    )Cash and cash equivalents at beginning of period
    
    
    16,743,129
    
    
    
    29,675,899Cash and cash equivalents at end of period
    
    $
    12,302,807
    
    
    $
    15,893,174Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    413,074
    
    
    $
    523,500
  5




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ENTREMED, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009 (unaudited)
     Employers Accounting for Postemployment Benefits Accounting for Costs Associated with Exit or Disposal Activities
  R&D
    
    
    G&AExpenses
    
    
    ExpensesBalance at December 31, 2008
    
    
    
    
    
    
    
    
    
    $
    1,748,634Termination benefits incurred
    
    $
    42,768
    
    
    $
    
    
    
    
    42,768Cash payments
    
    
    (494,223
    )
    
    
    (188,804
    )
    
    
    (683,027
    )Balance at March 31, 2009
    
    
    
    
    
    
    
    
    
    $
    1,108,375
 6




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Accounting for Non-Refundable Advance
Payments for Goods or Services to be Used in Future Research and Development Activities,
  The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
 Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entitys Own Stock
  7




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Accounting for Certain Investments in Debt and Equity Securities
  pro rata
 8




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Fair Value Measurements
 9




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Fair Value Measurements at March 31, 2009SignificantTotal Carrying
    
    Quoted prices in
    
    Significant other
    
    unobservableValue at
    
    active markets
    
    observable inputs
    
    inputsMarch 31, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Cash equivalents
    
    $
    8,582,429
    
    
    $
    8,582,429
    
    
    $
    
    
    
    $
    Available for sale securities*
    
    
    8,524,103
    
    
    
    25,263
    
    
    
    8,498,840
    
    
    
    
 
 *
    
    Unrealized gains and losses related to available for sale securities are reported as accumulated
other comprehensive income (loss), as disclosed in footnote 2.  10




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The Fair Value Option for
Financial Assets and Financial Liabilities.
   Share-Based Payment Share-Based Payment
  THREE MONTHS ENDEDMARCH 31,2009
    
    
    2008Research and development
    
    $
    57,179
    
    
    $
    56,357General and administrative
    
    
    97,954
    
    
    
    161,824Share-based compensation expense
    
    $
    155,133
    
    
    $
    218,181Net share-based compensation expense, per
common share:Basic and diluted
    
    $
    0.002
    
    
    $
    0.003
  11




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THREE MONTH PERIOD ENDEDMARCH 31,2009
    
    2008Expected volatility
    
    
    78.02
    %
    
    
    87.90
    %Risk-free interest rate
    
    
    2.08
    %
    
    
    3.62
    %Expected term of option
    
    5 years
    
    5 yearsForfeiture rate*
    
    
    5.00
    %
    
    
    18.00
    %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, 2009, forfeitures were estimated at 5%; during the three-month
period ended March 31, 2008, the Company accounted for forfeitures as they occurred.   WeightedAverageNumber of
    
    
    ExerciseOptions
    
    
    PriceOutstanding at January 1, 2009
    
    
    8,345,017
    
    
    $
    6.60Granted
    
    
    1,313,500
    
    
    $
    0.16Exercised
    
    
    
    
    
    
    Expired
    
    
    (1,540,533
    )
    
    $
    4.53Forfeited
    
    
    (6,050
    )
    
    $
    1.34Outstanding at March 31, 2009
    
    
    8,112,845
    
    
    $
    5.95Vested and expected to vest at March 31, 2009
    
    
    8,057,814
    
    
    $
    5.99Exercisable at March 31, 2009
    
    
    7,012,229
    
    
    $
    6.81
   Accounting for
Uncertainty in Income Taxes,
  12




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®
  ® ®
 ®
  13




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14




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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 2009 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.
 15




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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, 2009 and March 31, 2008.
 Revenues. ®
 Research and Development Expenses ® ® ® ®
 16




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®
 ®
  ESTIMATEDCOMPLETIONCLINICAL PHASE
    
    PERIODPhase I
    
    1 YearPhase II
    
    1-2 YearsPhase III
    
    2-4 Years
 17




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-
    
    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.
      18




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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,
2009, we expended $185,000 on these activities versus $394,000 in 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 $443,000 in the three months
ended March 31, 2009 from $1,744,000 in the three-month period ended March 31, 2008. 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 three-month period ended March 31, 2008 included expenses associated with
expansion of our MKC-1 clinical program. 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, 2009
decreased to $157,000 from $1,414,000 during the same period in 2008. 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.
  General and Administrative Expenses
  19




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Interest expense
 Investment income
 Dividends on Series A convertible preferred stock
    20




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® ®
 ® ® ® ®
  .
 21




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Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  22




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31.1
    
    Rule 13a-14(a) Certification of Executive Chairman31.2
    
    Rule 13a-14(a) Certification of Principal Accounting Officer32.1
    
    Section 1350 Certification of Executive Chairman32.2
    
    Section 1350 Certification of Principal Accounting Officer
 23




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SIGNATURES
  ENTREMED, INC.
      (Registrant)Date: May 6, 2009
    /s/ Michael M. TarnowMichael M. TarnowExecutive ChairmanDate: May 6, 2009
    /s/ Kathy R. Wehmeir-DavisKathy R. Wehmeir-DavisPrincipal Accounting Officer 24




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31.1
    
    Rule 13a-14(a) Certification of Executive Chairman31.2
    
    Rule 13a-14(a) Certification of Principal Accounting Officer32.1
    
    Section 1350 Certification of Executive Chairman32.2
    
    Section 1350 Certification of Principal Accounting Officer
 25