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 June 30, 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 number0-20713
 ENTREMED, INC.
 (Exact name of registrant as specified in its charter)
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
  o þ
  Class
    
    Outstanding at July 31, 2008Common Stock $.01 Par Value
    
    88,603,643




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##### 



PAGEPART I. FINANCIAL INFORMATIONItem 1 --
    
    Financial StatementsConsolidated Balance Sheets as of
June 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the
Six Months Ended June 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2 --
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    12Item 3 --
    
    Quantitative and Qualitative Disclosures
About Market Risk
    
    
    21Item 4 --
    
    Controls and Procedures
    
    
    22Part II. OTHER INFORMATIONItem 1 --
    
    Legal Proceedings
    
    
    22Item 1A 
    
    Risk Factors
    
    
    22Item 2 --
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3 --
    
    Defaults upon Senior Securities
    
    
    22Item 4 --
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 5 --
    
    Other Information
    
    
    24Item 6 --
    
    Exhibits
    
    
    24SIGNATURES
    
    
    25
  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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##### 



June 30, 2008
    
    
    December 31, 2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,422,626
    
    
    $
    29,675,899Short-term investments
    
    
    19,773,719
    
    
    
    18,072,292Accounts receivable
    
    
    8,554
    
    
    
    3,901,554Interest receivable
    
    
    40,893
    
    
    
    144,191Prepaid expenses and other
    
    
    307,631
    
    
    
    464,083Total current assets
    
    
    36,553,423
    
    
    
    52,258,019Property and equipment, net
    
    
    573,728
    
    
    
    620,456Other assets
    
    
    100,827
    
    
    
    136,433Total assets
    
    $
    37,227,978
    
    
    $
    53,014,908LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,564,218
    
    
    $
    4,550,892Accrued liabilities
    
    
    1,356,116
    
    
    
    1,675,814Current portion of loan payable
    
    
    6,735,919
    
    
    
    2,982,117Current portion of deferred rent
    
    
    83,052
    
    
    
    119,594Total current liabilities
    
    
    12,739,305
    
    
    
    9,328,417Loan payable, less current portion
    
    
    13,082,432
    
    
    
    16,768,749Deferred rent, less current portion
    
    
    
    
    
    
    20,764Total liabilities
    
    
    25,821,737
    
    
    
    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 June 30, 2008 and December 31, 2007
(liquidation value  $33,500,000 at June 30, 2008 and December 31, 2007)
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:170,000,000 and 170,000,000 shares authorized: 88,356,462
and 85,712,992 shares issued and outstanding
at June 30, 2008 and December 31, 2007, respectively
    
    
    883,565
    
    
    
    857,125Additional paid-in capital
    
    
    367,161,498
    
    
    
    364,705,150Treasury stock, at cost: 874,999 shares held at June 30, 2008 and
December 31, 2007
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated other comprehensive income
    
    
    10,028
    
    
    
    66,954Accumulated deficit
    
    
    (351,964,606
    )
    
    
    (334,048,007
    )Total stockholders equity
    
    
    11,406,241
    
    
    
    26,896,978Total liabilities and stockholders equity
    
    $
    37,227,978
    
    
    $
    53,014,908
  3




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##### 



Three Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2007
    
    
    June 30, 2008
    
    
    June 30, 2007Revenues:Licensing
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Costs and expenses:Research and development
    
    
    5,484,857
    
    
    
    6,581,287
    
    
    
    11,672,060
    
    
    
    12,979,983General and administrative
    
    
    1,739,691
    
    
    
    1,869,811
    
    
    
    3,722,685
    
    
    
    3,701,137In-Process R&D
    
    
    2,000,000
    
    
    
    
    
    
    
    2,000,000
    
    
    
    9,224,548
    
    
    
    8,451,098
    
    
    
    17,394,745
    
    
    
    16,681,120Investment income
    
    
    229,451
    
    
    
    531,722
    
    
    
    628,238
    
    
    
    1,110,635Interest expense
    
    
    (575,046
    )
    
    
    (15,317
    )
    
    
    (1,150,092
    )
    
    
    (37,794
    )Net Loss
    
    
    (9,570,143
    )
    
    
    (7,934,693
    )
    
    
    (17,916,599
    )
    
    
    (15,608,279
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (502,500
    )
    
    
    (502,500
    )Net loss attributable to common shareholders
    
    $
    (9,821,393
    )
    
    $
    (8,185,943
    )
    
    $
    (18,419,099
    )
    
    $
    (16,110,779
    )Net loss per share (basic and diluted)
    
    $
    (0.11
    )
    
    $
    (0.10
    )
    
    $
    (0.22
    )
    
    $
    (0.19
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    85,535,426
    
    
    
    84,059,149
    
    
    
    85,217,169
    
    
    
    84,015,999
  4




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##### 



SIX MONTH PERIOD ENDEDJUNE 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (17,916,599
    )
    
    $
    (15,608,279
    )Adjustments to reconcile net loss to net cash used by operating activities:
    
    
    
    
    
    
    Depreciation and amortization
    
    
    163,639
    
    
    
    176,935Write-off of in-process R&D
    
    
    2,000,000
    
    
    
    Amortization of discount on short-term investments
    
    
    (433,966
    )
    
    
    (725,127
    )Stock-based compensation expense
    
    
    518,919
    
    
    
    793,222Non-cash interest
    
    
    103,092
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    3,893,000
    
    
    
    3,834,648Interest receivable
    
    
    103,298
    
    
    
    (26,852
    )Prepaid expenses and other
    
    
    156,451
    
    
    
    (59,475
    )Deferred rent
    
    
    (57,306
    )
    
    
    (42,506
    )Accounts payable
    
    
    13,326
    
    
    
    (635,070
    )Accrued liabilities
    
    
    (319,702
    )
    
    
    (577,022
    )Net cash used in operating activities
    
    
    (11,775,848
    )
    
    
    (12,869,526
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (41,599,387
    )
    
    
    (26,290,747
    )Maturities of short term investments
    
    
    40,275,000
    
    
    
    29,916,000Purchases of furniture and equipment
    
    
    (116,910
    )
    
    
    (34,307
    )Net cash (used in) provided by investing activities
    
    
    (1,441,297
    )
    
    
    3,590,946CASH FLOWS FROM FINANCING ACTIVITIESStock issuance costs
    
    
    (36,128
    )
    
    
    Repayment of loan
    
    
    
    
    
    
    (423,893
    )Net proceeds from sale of common stock
    
    
    
    
    
    
    81,750Net cash used in financing activities
    
    
    (36,128
    )
    
    
    (342,143
    )Net decrease in cash and cash equivalents
    
    
    (13,253,273
    )
    
    
    (9,620,723
    )Cash and cash equivalents at beginning of period
    
    
    29,675,899
    
    
    
    20,896,141Cash and cash equivalents at end of period
    
    $
    16,422,626
    
    
    $
    11,275,418Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    1,047,000
    
    
    $
    37,794
  5




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ENTREMED, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 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 June 30, 2008SignificantTotal Carrying
    
    Quoted prices in
    
    Significant other
    
    unobservableValue at
    
    active markets
    
    observable inputs
    
    inputsJune 30, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Cash equivalents
    
    $
    14,138,909
    
    
    $
    14,138,909
    
    
    $
    
    
    
    $
    Available for sale securities*
    
    
    19,773,719
    
    
    
    19,773,719
    
    
    
    
    
    
    
    
 
 *
    
    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.
   8




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Share-Based Payment Share-Based Payment Accounting for Stock-Based Compensation
  SIX MONTHS ENDEDJUNE 30,2008
    
    
    2007Research and development
    
    $
    121,467
    
    
    $
    100,381General and administrative
    
    
    397,449
    
    
    
    692,841Share-based compensation expense
    
    $
    518,916
    
    
    $
    793,222Net share-based compensation expense, per
common share:Basic and diluted
    
    $
    0.006
    
    
    $
    0.009
  9




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SIX MONTH PERIOD ENDEDJUNE 30,2008
    
    2007Expected volatility
    
    
    72.84
    %
    
    
    100.36
    %Risk-free interest rate
    
    
    4.69
    %
    
    
    4.89
    %Expected term of option
    
    5 years
    
    5 yearsForfeiture rate*
    
    
    5.00
    %
    
    
    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.   WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding at January 1, 2008
    
    
    8,671,308
    
    
    $
    6.81Granted
    
    
    626,664
    
    
    $
    0.74Exercised
    
    
    
    
    
    
    Expired
    
    
    (416,478
    )
    
    $
    9.73Forfeited
    
    
    (43,383
    )
    
    $
    1.41Outstanding at June 30, 2008
    
    
    8,838,111
    
    
    $
    6.27Vested and expected to vest at June 30, 2008
    
    
    8,674,663
    
    
    $
    6.37Exercisable at June 30, 2008
    
    
    7,294,697
    
    
    $
    7.32
    10




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Accounting
for Uncertainty in Income Taxes,
    Business Combinations
 Noncontrolling Interests in Consolidated
Financial StatementsAn Amendment of ARB No. 51
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles
 11




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®
  ® ®
 ®
  12




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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.
 13




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
    
    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 US sales of $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.
    
    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.
 14




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##### 



For the Three and Six Months Ended June 30, 2008 and June 30, 2007.
 Revenues. ® ®
 Research and Development Expenses ® ® ®
 ® ®
  15




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®
   ESTIMATEDCOMPLETIONCLINICAL PHASE
    
    PERIODPhase I
    
    1-2 YearsPhase II
    
    1-2 YearsPhase III
    
    2-4 Years
  
    
    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.
  16




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17




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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 June 30, 2008,
we expended $378,000 on these activities versus $1,405,000 in the same 2007 period. For
the six-month period ended June 30, 2008, outside services were $773,000 compared to
$2,022,000 for the same 2007 period. The decrease reflects the 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 decreased to $1,094,000 in the three months
ended June 30, 2008, from $1,113,000 in the three-month period ended June 30, 2007.
Clinical trial costs for the six-month period ended June 30, 2008 increased to $2,838,000
from $2,269,000 for the comparable 2007 period. 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 June 30, 2008
increased to $1,381,000 from $1,318,000 during the same period in 2007. For the six-month
period ended June 30, 2008, manufacturing costs decreased to $2,795,000 from $3,264,000 for
the comparable 2007 period. The most significant component of the net decrease was our
acquisition of bulk API to support the Panzem®NCD trials in 2007. The absence
of Panzem®NCD API costs in 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
  18




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##### 



In-process R&D.
 Interest expense
 Investment income
 Dividends on Series A convertible preferred stock
 19




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##### 



® ®
 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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##### 



)
 Year TermExpires
    
    Name
    
    
    Votes For
    
    
    Votes Withheld2011
    
    James S. Burns
    
    
    85,815,686
    
    
    
    1,979,4642011
    
    Mark C. M. Randall
    
    
    85,350,063
    
    
    
    2,445,0872011
    
    Jennie C. Hunter-Cevera
    
    
    86,174,839
    
    
    
    1,620,311
   VotesFor
    
    
    40,855,364Against
    
    
    6,325,266Abstain
    
    
    143,163Broker Non-Votes
    
    
    40,471,358
  VotesFor
    
    
    86,980,821Against
    
    
    421,564Abstain
    
    
    392,766Broker Non-Votes
    
    
    0
  23




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##### 



Exhibit No.
    
    Description of Document10.1
    
    Letter Agreement by and between the Company and Dane R. Saglio, effective as of April 1, 2008
(incorporated by reference to the Current Report on Form 8-K, filed on April 7, 200810.2
    
    Employment Agreement by and between the Company and Thomas H. Bliss,
Jr., effective June 18, 2008. *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
 
 *
    
    filed herewith 24




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##### 



SIGNATURES
  ENTREMED, INC.(Registrant)Date: August 6, 2008
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: August 6, 2008
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 25




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##### 



Exhibit No.
    
    Description of Document10.1
    
    Letter Agreement by and between the Company and Dane R. Saglio, effective as of April 1, 2008
(incorporated by reference to the Current Report on Form 8-K, filed on April 7, 200810.2
    
    Employment Agreement by and between the Company and Thomas H. Bliss,
Jr., effective June 18, 2008. *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
 
 *
    
    filed herewith 26