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, 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.)
 
  
  
   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 October 31, 2008Common Stock $.01 Par Value
    
    88,603,643




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##### 



PAGEPART I. FINANCIAL INFORMATIONItem 1 
    
    Financial StatementsConsolidated Balance Sheets as of
September 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the
Nine Months Ended September 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the
Nine Months Ended September 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
    
    
    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
    
    
    24SIGNATURES
    
    
    25
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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##### 



September 30, 2008
    
    
    December 31, 2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,103,720
    
    
    $
    29,675,899Short-term investments
    
    
    16,768,169
    
    
    
    18,072,292Accounts receivable
    
    
    3,526,782
    
    
    
    3,901,554Interest receivable
    
    
    38,555
    
    
    
    144,191Prepaid expenses and other
    
    
    393,154
    
    
    
    464,083Total current assets
    
    
    31,830,380
    
    
    
    52,258,019Property and equipment, net
    
    
    508,150
    
    
    
    620,456Other assets
    
    
    83,146
    
    
    
    136,433Total assets
    
    $
    32,421,676
    
    
    $
    53,014,908LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,990,743
    
    
    $
    4,550,892Accrued liabilities
    
    
    1,588,164
    
    
    
    1,675,814Current portion of loan payable
    
    
    7,510,153
    
    
    
    2,982,117Current portion of deferred rent
    
    
    51,907
    
    
    
    119,594Total current liabilities
    
    
    13,140,967
    
    
    
    9,328,417Loan payable, less current portion
    
    
    11,163,794
    
    
    
    16,768,749Deferred rent, less current portion
    
    
    
    
    
    
    20,764Total liabilities
    
    
    24,304,761
    
    
    
    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 September 30, 2008 and December 31, 2007
(liquidation value  $33,500,000 at September 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: 88,422,870 and 85,712,992 shares
issued and outstanding
at September 30, 2008 and December 31, 2007, respectively
    
    
    884,230
    
    
    
    857,125Additional paid-in capital
    
    
    367,353,037
    
    
    
    364,705,150Treasury stock, at cost: 874,999 shares held at September 30, 2008 and
December 31, 2007
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated other comprehensive income
    
    
    (73,625
    )
    
    
    66,954Accumulated deficit
    
    
    (355,362,483
    )
    
    
    (334,048,007
    )Total stockholders equity
    
    
    8,116,915
    
    
    
    26,896,978Total liabilities and stockholders equity
    
    $
    32,421,676
    
    
    $
    53,014,908
  3




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Royalties
    
    $
    3,500,000
    
    
    $
    3,518,071
    
    
    $
    3,500,000
    
    
    $
    3,518,071Other
    
    
    1,307
    
    
    
    2,188
    
    
    
    1,307
    
    
    
    2,188$
    3,501,307
    
    
    $
    3,520,259
    
    
    $
    3,501,307
    
    
    $
    3,520,259Costs and expenses:Research and development
    
    
    4,957,067
    
    
    
    5,109,257
    
    
    
    16,629,127
    
    
    
    18,089,240General and administrative
    
    
    1,551,900
    
    
    
    1,706,451
    
    
    
    5,274,585
    
    
    
    5,407,588In-Process R&D
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    6,508,967
    
    
    
    6,815,708
    
    
    
    23,903,712
    
    
    
    23,496,828Investment income
    
    
    168,444
    
    
    
    428,980
    
    
    
    796,682
    
    
    
    1,539,615Interest expense
    
    
    (558,661
    )
    
    
    (168,877
    )
    
    
    (1,708,753
    )
    
    
    (206,671
    )Net Loss
    
    
    (3,397,877
    )
    
    
    (3,035,346
    )
    
    
    (21,314,476
    )
    
    
    (18,643,625
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (753,750
    )
    
    
    (753,750
    )Net loss attributable to common shareholders
    
    $
    (3,649,127
    )
    
    $
    (3,286,596
    )
    
    $
    (22,068,226
    )
    
    $
    (19,397,375
    )Net loss per share (basic and diluted)
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    (0.26
    )
    
    $
    (0.23
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    87,728,644
    
    
    
    84,223,912
    
    
    
    86,060,438
    
    
    
    84,015,999
  4




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##### 



NINE MONTH PERIOD ENDEDSEPTEMBER 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (21,314,476
    )
    
    $
    (18,643,625
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation
    
    
    246,371
    
    
    
    255,877Write-off of in-process R&D
    
    
    2,000,000
    
    
    
    Amortization of discount on short-term investments
    
    
    (535,597
    )
    
    
    (917,680
    )Stock-based compensation expense
    
    
    746,946
    
    
    
    1,009,664Non-cash interest
    
    
    153,123
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    374,772
    
    
    
    325,349Interest receivable
    
    
    105,636
    
    
    
    (116,760
    )Prepaid expenses and other
    
    
    71,329
    
    
    
    (82,056
    )Deferred rent
    
    
    (88,451
    )
    
    
    (66,177
    )Accounts payable
    
    
    (560,149
    )
    
    
    (1,208,261
    )Accrued liabilities
    
    
    (87,648
    )
    
    
    (429,438
    )Net cash used in operating activities
    
    
    (18,888,144
    )
    
    
    (19,873,107
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (44,075,859
    )
    
    
    (30,958,532
    )Maturities of short term investments
    
    
    45,775,000
    
    
    
    40,041,000Purchases of furniture and equipment
    
    
    (134,065
    )
    
    
    (55,286
    )Net cash provided by investing activities
    
    
    1,565,076
    
    
    
    9,027,182CASH FLOWS FROM FINANCING ACTIVITIESStock issuance costs
    
    
    (71,955
    )
    
    
    Repayment of loan
    
    
    (1,177,156
    )
    
    
    (751,093
    )Proceeds from loan, net of discount
    
    
    
    
    
    
    19,900,000Deferred financing costs
    
    
    
    
    
    
    (110,720
    )Net proceeds from sale of common stock
    
    
    
    
    
    
    81,750Net cash (used in) provided by financing activities
    
    
    (1,249,111
    )
    
    
    19,119,937Net decrease in cash and cash equivalents
    
    
    (18,572,179
    )
    
    
    8,274,012Cash and cash equivalents at beginning of period
    
    
    29,675,899
    
    
    
    20,896,141Cash and cash equivalents at end of period
    
    $
    11,103,720
    
    
    $
    29,170,153Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    1,555,630
    
    
    $
    206,671Non-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, 2008 (unaudited)
 1.
    
    Basis of Presentation
   2.
    
    Short-Term Investments
 Accounting for Certain Investments in Debt and Equity Securities
 3.
    
    Loan Payable
 pro rata
 6




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##### 



4.
    
    Fair Value Measurement
 Fair Value Measurements
 7




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##### 



Fair Value Measurements at September 30, 2008Total Carrying
    
    Quoted prices in
    
    Significant other
    
    SignificantValue at
    
    active markets
    
    observable inputs
    
    unobservable inputsSeptember 30, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Cash equivalents
    
    $
    9,216,413
    
    
    $
    9,216,413
    
    
    $
    
    
    
    $
    Available for sale securities*
    
    
    16,768,169
    
    
    
    39,487
    
    
    
    16,728,682
    
    
    
    
 
 *
    
    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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##### 



5.
    
    Royalty Revenue
 ®
 6.
    
    Share-Based Compensation
  Share-Based Payment Share-Based Payment Accounting for Stock-Based
Compensation
  NINE MONTHS ENDEDSEPTEMBER 30,2008
    
    
    2007Research and development
    
    $
    186,438
    
    
    $
    141,686General and administrative
    
    
    560,508
    
    
    
    867,978Share-based compensation expense
    
    $
    746,946
    
    
    $
    1,009,664Net share-based compensation expense, per
common share:Basic and diluted
    
    $
    0.009
    
    
    $
    0.012
 9




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##### 



NINE MONTH PERIOD ENDEDSEPTEMBER 30,2008
    
    2007Expected volatility
    
    
    72.84
    %
    
    
    100.33
    %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
    
    
    (437,846
    )
    
    $
    9.56Forfeited
    
    
    (48,023
    )
    
    $
    1.41Outstanding at September 30, 2008
    
    
    8,812,103
    
    
    $
    6.27Vested and expected to vest at September 30, 2008
    
    
    8,740,395
    
    
    $
    6.32Exercisable at September 30, 2008
    
    
    7,377,951
    
    
    $
    7.24
  10




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##### 



7.
    
    In-Process R&D
  8.
    
    Income Taxes
 Accounting
for Uncertainty in Income Taxes,
   9.
    
    Recent Accounting Pronouncements
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial StatementsAn Amendment of ARB No. 51
 11




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##### 



The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
   ®
  ® ®
 ®
 12




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13




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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 began 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.
 14




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##### 



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.
    For the Three and Nine Months Ended September 30, 2008 and September 30, 2007.
 Revenues. ® ® ®
 15




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##### 



Research and Development Expenses ® ®
 ® ®
 ®
  ®
  16




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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.
    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 September 30,
2008, we expended $451,000 on these activities versus $620,000 in the same 2007 period.
For the nine-month period ended September 30, 2008, outside services were $1,224,000
compared to $2,642,000 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 increased to $1,180,000 in the three
months ended September 30, 2008, from $907,000 in the three-month period ended September
30, 2007. Clinical trial costs for the nine-month period ended September 30, 2008
increased to $4,018,000 from $3,176,000 for the comparable 2007 period. The increase
results primarily from the expanded MKC-1 clinical program and also the initiation of
clinical trials for 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.
 18




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##### 



Contract manufacturing costs for the three months ended September 30, 2008 decreased to
$764,000 from $1,086,000 during the same period in 2007. For the nine-month period ended
September 30, 2008, manufacturing costs decreased to $3,559,000 from $4,349,000 for the
comparable 2007 period. The most significant component of the decrease was our acquisition
of bulk API (Active Pharmaceutical Ingredient) 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
  In-process R&D.
 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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##### 



.
   ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  ITEM 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  22




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##### 



Changes in Internal Control Over Financial Reporting
  PART II.
    
    OTHER INFORMATION
 ITEM 1.
    
    LEGAL PROCEEDINGS
  ITEM 1A.
    
    RISK FACTORS
  ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ITEM 5.
    
    OTHER INFORMATION
  23




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##### 



ITEM 6.
    
    EXHIBITS
 Exhibit No.
    
    Description of Document31.1
    
    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
 24




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##### 



SIGNATURES
  ENTREMED, INC.
(Registrant)Date: November 7, 2008
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: November 7, 2008
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer 25




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##### 



Exhibit No.
    
    Description of Document31.1
    
    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
 26