e10vq
 
 
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.
 
(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.)
9640 Medical Center Drive
Rockville, Maryland
 
(Address of principal executive offices)
20850
 
(Zip code)
(240) 864-2600
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES  þ       NO  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  o       NO  þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the most recent practicable date.
     
Class   Outstanding at October 31, 2008
Common Stock $.01 Par Value
  88,603,643
 
 

 


 

ENTREMED, INC.
Table of Contents
             
        PAGE  
PART I. FINANCIAL INFORMATION        
 
           
Item 1 —
  Financial Statements        
Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007     3  
Consolidated Statements of Operations for the Nine Months Ended September 30, 2008 and 2007     4  
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007     5  
 
           
Notes to Consolidated Financial Statements     6  
Item 2 —   Management’s Discussion and Analysis of Financial Condition and Results of Operations     12  
Item 3 —   Quantitative and Qualitative Disclosures About Market Risk     22  
Item 4 —
  Controls and Procedures     22  
 
           
Part II. OTHER INFORMATION        
Item 1 —
  Legal Proceedings     23  
Item 1A —
  Risk Factors     23  
Item 2 —   Unregistered Sales of Equity Securities and Use of Proceeds     23  
Item 3 —
  Defaults upon Senior Securities     23  
Item 4 —
  Submission of Matters to a Vote of Security Holders     23  
Item 5 —
  Other Information     23  
Item 6 —
  Exhibits     24  
 
           
SIGNATURES     25  
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements also may be included in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements. These statements can generally be identified by the use of forward-looking terminology such as “believes,” “expects,” “intends,” “may,” “will,” “should,” or “anticipates” or similar terminology. These forward-looking statements include, among others, statements regarding the timing of our clinical trials, our cash position and future expenses, and our future revenues.
Our forward-looking statements are based on information available to us today, and we will not update these statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date thereof, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to the early stage of our product candidates under development, operating losses and anticipated future losses; variations in sales of Thalomid; the market volatility of our common stock; the possibility of our delisting from the NASDAQ Capital Market in July 2009; our need for additional capital and the continued impact of the current economic downturn on our ability to access the capital markets; our ability to pay our indebtedness as it becomes due and our ability to comply with the terms and conditions of our loan agreement; intense competition and rapid technological change in the biopharmaceutical industry; uncertainties relating to our patent and proprietary rights; uncertainties relating to clinical trials, estimated clinical trial commencement dates, government regulation and uncertainties of obtaining regulatory approval on a timely basis or at all. Additional information on the factors and risks that could affect our business, financial condition and results of operations, are contained in our filings with the U.S. Securities and Exchange Commission (SEC), which are available at www.sec.gov.


 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EntreMed, Inc.
Consolidated Balance Sheets
                 
    September 30, 2008     December 31, 2007  
    (Unaudited)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 11,103,720     $ 29,675,899  
Short-term investments
    16,768,169       18,072,292  
Accounts receivable
    3,526,782       3,901,554  
Interest receivable
    38,555       144,191  
Prepaid expenses and other
    393,154       464,083  
 
           
Total current assets
    31,830,380       52,258,019  
 
               
Property and equipment, net
    508,150       620,456  
Other assets
    83,146       136,433  
 
           
Total assets
  $ 32,421,676     $ 53,014,908  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 3,990,743     $ 4,550,892  
Accrued liabilities
    1,588,164       1,675,814  
Current portion of loan payable
    7,510,153       2,982,117  
Current portion of deferred rent
    51,907       119,594  
 
           
Total current liabilities
    13,140,967       9,328,417  
 
               
Loan payable, less current portion
    11,163,794       16,768,749  
Deferred rent, less current portion
          20,764  
 
           
Total liabilities
    24,304,761       26,117,930  
 
           
 
               
Stockholders’ 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       3,350,000  
Common 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       857,125  
Additional paid-in capital
    367,353,037       364,705,150  
Treasury 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 )     66,954  
Accumulated deficit
    (355,362,483 )     (334,048,007 )
 
           
Total stockholders’ equity
    8,116,915       26,896,978  
 
           
Total liabilities and stockholders’ equity
  $ 32,421,676     $ 53,014,908  
 
           
See accompanying notes.

3


 

EntreMed, Inc.
Consolidated Statements of Operations
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2008     2007     2008     2007  
Revenues:
                               
Royalties
  $ 3,500,000     $ 3,518,071     $ 3,500,000     $ 3,518,071  
Other
    1,307       2,188       1,307       2,188  
 
                       
 
  $ 3,501,307     $ 3,520,259     $ 3,501,307     $ 3,520,259  
 
                               
Costs and expenses:
                               
Research and development
    4,957,067       5,109,257       16,629,127       18,089,240  
General and administrative
    1,551,900       1,706,451       5,274,585       5,407,588  
In-Process R&D
                2,000,000        
 
                       
 
    6,508,967       6,815,708       23,903,712       23,496,828  
 
                               
Investment income
    168,444       428,980       796,682       1,539,615  
Interest 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  
See accompanying notes.

4


 

EntreMed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
                 
    NINE MONTH PERIOD ENDED  
    SEPTEMBER 30,  
    2008     2007  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net loss
  $ (21,314,476 )   $ (18,643,625 )
Adjustments to reconcile net loss to net cash used by operating activities:
               
Depreciation
    246,371       255,877  
Write-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       1,009,664  
Non-cash interest
    153,123        
Changes in operating assets and liabilities:
               
Accounts receivable
    374,772       325,349  
Interest 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 ACTIVITIES
               
Purchases of short term investments
    (44,075,859 )     (30,958,532 )
Maturities of short term investments
    45,775,000       40,041,000  
Purchases of furniture and equipment
    (134,065 )     (55,286 )
 
           
Net cash provided by investing activities
    1,565,076       9,027,182  
 
               
CASH FLOWS FROM FINANCING ACTIVITIES
               
Stock issuance costs
    (71,955 )      
Repayment of loan
    (1,177,156 )     (751,093 )
Proceeds from loan, net of discount
          19,900,000  
Deferred financing costs
          (110,720 )
Net proceeds from sale of common stock
          81,750  
 
           
Net cash (used in) provided by financing activities
    (1,249,111 )     19,119,937  
 
               
Net decrease in cash and cash equivalents
    (18,572,179 )     8,274,012  
Cash and cash equivalents at beginning of period
    29,675,899       20,896,141  
 
           
Cash and cash equivalents at end of period
  $ 11,103,720     $ 29,170,153  
 
           
 
               
Supplemental disclosure of cash flow information:
               
Cash paid during the period for interest
  $ 1,555,630     $ 206,671  
Non-cash investing activity:
               
Stock issued in connection with milestone payment related to the Miikana acquisition
  $ 2,000,000     $  
See accompanying notes.

5


 

ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008 (unaudited)
1.   Basis of Presentation
          Our accompanying 2008 unaudited consolidated financial information includes the accounts of our controlled subsidiary, Miikana Therapeutics, Inc. (Miikana). All intercompany balances and transactions have been eliminated in consolidation. At September 30, 2007, the unaudited consolidated financial statements also included the accounts of Cytokine Sciences, Inc., whose operations were immaterial, and dissolved as of November 2007.
          The accompanying unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such consolidated financial statements do not include all of the information and disclosures required by U. S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to our audited consolidated financial statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2007.
2.   Short-Term Investments
          The Company accounts for short-term investments in accordance with Statement of Financial Accounting Standards, No. 115, Accounting for Certain Investments in Debt and Equity Securities. Short-term investments consist primarily of corporate debt securities, all of which mature within one year. The Company has classified these investments as available for sale. Such securities are carried at fair market value. The cost of securities sold is calculated using the specific identification method. Unrealized gains and losses on these securities, if any, are reported as accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity. Net unrealized losses of $140,579 and $35,060 were recorded for the nine months ended September 30, 2008 and September 30, 2007, respectively. Realized gains and losses and declines in value judged to be other than temporary on securities available for sale, if any, are included in operations. There were no realized gains or losses for the nine months ended September 30, 2008 or 2007. Short-term investments are principally uninsured and subject to normal credit risk.
3.   Loan Payable
          On September 12, 2007, EntreMed, Inc. and Miikana Therapeutics, Inc., its wholly owned subsidiary, entered into a Loan and Security Agreement (“Loan Agreement”) with General Electric Capital Corporation (“GECC”), as agent, Merrill Lynch Capital and Oxford Finance Corporation (collectively, “the Lenders”). The Loan Agreement provided for (i) a term loan (“Term Loan”) issued by the Lenders to the Company in the aggregate amount of $20,000,000 and (ii) the issuance and sale to the Lenders of stock purchase warrants evidencing the Lenders’ right to acquire their respective pro rata share of 250,000 shares of common stock of the Company (“Warrants”).

6


 

          The Term Loan has been used for general corporate purposes and is secured by the personal property owned by the Company, except for any intellectual property owned by the Company. Notwithstanding the foregoing, the collateral for the Term Loan includes (i) all cash, royalty fees and other proceeds that consist of rights of payment or proceeds from the sale, licensing or other disposition of all or any part of, or rights in, the intellectual property and the Thalidomide Royalty Agreement and (ii) the Company’s rights under the Thalidomide Royalty Agreement.
          The Term Loan accrues interest in arrears at a fixed annual interest rate of 10.47% until the Term Loan is fully repaid. The Company paid interest of $1,555,630 and $508,630 in the nine and three months ended September 30, 2008, respectively.
          The Warrants are exercisable by the Lenders until September 12, 2012 at an exercise price of $2.00 per share. The fair value of the Warrants issued was $190,000, calculated using a Black-Scholes value of $.76 with an expected and contractual life of 5 years, an assumed volatility of 98%, and a risk-free interest rate of 4.11%. The value of the Warrants, and an upfront underwriting fee of $100,000 paid to one of the Lenders, are recorded as a discount on the loan and are amortized as interest expense over the life of the loan. The Company also incurred certain debt issuance costs that were deferred and are included in other assets in the Company’s balance sheet as of September 30, 2008 and December 31, 2007. Amortization of these fees and the discount results in an effective interest rate of 11.40%. Non-cash interest expense related to the amortization of debt issuance costs and debt discount for the nine and three months ended September 30, 2008 was $153,123 and $50,031, respectively.
          The carrying value and estimated fair value of debt, before discount, were $20,000,000 and approximately $20,451,000, respectively, at September 30, 2008. The fair value was estimated based on the quoted market price.
          The Loan Agreement contains customary affirmative and negative covenants. The Company was in compliance with such covenants as of September 30, 2008.
4.   Fair Value Measurement
          The Company adopted FAS Statement No. 157, “Fair Value Measurements” (“SFAS 157”) effective January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“the exit price”) in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company primarily use prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company has determined that our fair value measurements are in accordance with the requirements of SFAS 157, therefore, the implementation of SFAS 157 did not have any impact on our consolidated financial condition or results of operations. The implementation of SFAS 157 resulted in expanded disclosures about securities measured at fair value, as discussed below.

7


 

          SFAS 157 established a three-level hierarchy for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy, defined as follows:
          Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
          Level 2 — Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted pries that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
          Level 3 — Unobservable inputs that reflect our own assumptions, based on the best information available, including our own data.
          In accordance with the fair value hierarchy described above, the following table shows the fair value of our financial assets and liabilities that are required to be measured at fair value as of September 30, 2008:
                                 
            Fair Value Measurements at September 30, 2008
    Total Carrying   Quoted prices in   Significant other   Significant
    Value at   active markets   observable inputs   unobservable inputs
    September 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 Company’s Level 1 assets include money market instruments and equity securities with quoted prices in active markets. Level 2 assets include government-sponsored enterprise securities, commercial paper and mortgage-backed securities. The Level 2 securities are valued using matrix pricing, which is an acceptable, practical expedient under SFAS 157 for inputs.
          Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value (the “fair value option”). The guidance in SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company did not elect the fair value option for any financial assets or liabilities and, therefore, adoption of the provisions of SFAS No. 159 did not have a material effect on its consolidated financial statements.

8


 

5.   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. The Company’s 2008 and 2007 revenues of $3,500,000 and $3,518,000, respectively, resulted from royalties on Celgene’s sale of Thalomid ®. The Company began to recognize revenue in the third quarters of both years.
6.   Share-Based Compensation
          The Company has adopted incentive and nonqualified stock option plans whereby 13,983,333 shares of the Company’s common stock were reserved for grants to various executive, scientific and administrative personnel of the Company as well as outside directors and consultants, of which 855,896 shares remain available for grant under the Company’s 2001 Long-Term Incentive Plan as of September 30, 2008. Options granted under the plan vest over periods varying from immediately to three years, are not transferable and generally expire ten years from the date of grant.
          Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”) and interpretative literature within SEC Staff Accounting Bulletin No. 107, Share-Based Payment, (SAB 107), using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, share-based compensation expense for the nine months ended September 30, 2008 and September 30, 2007 includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the original grant date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Share-based compensation expense for all share-based compensation awards granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs for stock options granted prior to January 1, 2006 on an accelerated method, and for stock options granted after January 1, 2006 the compensation costs are recognized based on a straight-line method over the requisite service period, which is generally the option vesting term of three years.
          As a result of the adoption of SFAS 123R, the Company’s net loss for the nine months ended September 30, 2008 and September 30, 2007 includes compensation expense of $746,946 and $1,009,664, respectively, related to the Company’s share-based compensation awards. The compensation expense related to the Company’s share-based compensation arrangements is recorded as components of general and administrative expense and research and development expense, as follows:
                 
    NINE MONTHS ENDED  
    SEPTEMBER 30,  
    2008     2007  
Research and development
  $ 186,438     $ 141,686  
General and administrative
    560,508       867,978  
 
           
Share-based compensation expense
  $ 746,946     $ 1,009,664  
 
           
Net share-based compensation expense, per common share:
               
Basic and diluted
  $ 0.009     $ 0.012  
 
           

9


 

The Company uses the Black-Scholes-Merton valuation model to estimate the fair value of stock options granted to employees. Option valuation models, including Black-Scholes-Merton, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant date fair value of an award.
          Following are the weighted-average assumptions used in valuing the stock options granted to employees during the nine-month periods ended September 30, 2008 and 2007:
                 
    NINE MONTH PERIOD ENDED
    SEPTEMBER 30,
    2008   2007
Expected volatility
    72.84 %     100.33 %
Risk-free interest rate
    4.69 %     4.89 %
Expected term of option
  5 years   5 years
Forfeiture 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.
          The weighted average fair value of stock options granted during the nine-month period ended September 30, 2008 was $0.46. There were no options granted in the three-month period ended September 30, 2008. The weighted average fair value of stock options granted during the nine and three-month periods ended September 30, 2007 were $1.26 and $1.08, respectively.
          A summary of the Company’s stock option plans and of changes in options outstanding under the plans for the nine months ended September 30, 2008, is as follows:
                 
            Weighted
            Average
    Number of   Exercise
    Options   Price
Outstanding at January 1, 2008
    8,671,308     $ 6.81  
Granted
    626,664     $ 0.74  
Exercised
           
Expired
    (437,846 )   $ 9.56  
Forfeited
    (48,023 )   $ 1.41  
 
               
Outstanding at September 30, 2008
    8,812,103     $ 6.27  
 
               
Vested and expected to vest at September 30, 2008
    8,740,395     $ 6.32  
 
               
Exercisable at September 30, 2008
    7,377,951     $ 7.24  
 
               
          There were no options exercised in the nine months ended September 30, 2008. Cash received from option exercises under all share-based payment arrangements for the nine months ended September 30, 2007 was $81,750. Due to the availability of net operating loss carryforwards and research tax credits, tax deductions for option exercises were not recognized.

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7.   In-Process R&D
          In January 2006, the Company acquired Miikana Therapeutics, a private biotechnology company. Pursuant to the merger agreement, based on the success of the acquired pre-clinical programs, the Company may pay up to an additional $18 million upon the achievement of certain clinical and regulatory milestones. Such additional payments, if any, will be made in cash or shares of stock at our option. The lead molecule in the Aurora Kinase Program, ENMD-2076, advanced into clinical development in 2008. ENMD-2076 is a selective kinase inhibitor with activity against Aurora A and angiogenic kinases linked to promoting cancer and inflammatory diseases. Dosing of the first patient triggered a purchase price adjustment milestone of $2 million, resulting in $16 million of potential future earnout payments remaining as of September 30, 2008. In June 2008, 2,564,104 shares of common stock were issued as consideration for the satisfaction of the milestone payment. The additional payment of $2 million was recorded to expense as in-process research and development since the research and development project related to the Aurora Kinase Program had not reached technical feasibility and has no future alternative use.
8.   Income Taxes
          The Company analyzed its income tax posture using the criteria required by FIN 48, Accounting for Uncertainty in Income Taxes, and concluded that there is no cumulative effect allocable to equity as a result of adopting this standard. At December 31, 2007, there was a $2.96 million unrecognized tax benefit which has no net balance sheet impact.
          During the nine months ended September 30, 2008, there were no material changes to the measurement of unrecognized tax benefits in various taxing jurisdictions. The Company is maintaining its historical method of not accruing interest (net of related tax benefits) and penalties associated with unrecognized income tax benefits as a component of income tax expense.
          The tax returns for all years in our major tax jurisdictions are not settled as of January 1, 2008; no changes in settled tax years have occurred through September 30, 2008. Due to the existence of tax attribute carryforwards (which are currently offset by a full valuation allowance), we treat all years’ tax positions are treated as unsettled due to the taxing authorities’ ability to modify these attributes.
9.   Recent Accounting Pronouncements
          In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”), which will change the accounting for any business combination the Company enters into with an acquisition date after December 31, 2008. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R will have an impact on accounting for business combinations once adopted, but its effect will depend upon the specifics of any business combination with an acquisition date subsequent to December 31, 2008.
          In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51” (“SFAS 160”), which establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.

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SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not expected to have a material impact on the Company’s results of operations or financial position.
          In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements. SFAS 162 is effective sixty days following the Security and Exchange Commission’s approval of Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The adoption of SFAS 162 is not expected to have a material impact on the Company’s results of operations or financial position.
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
          We are a clinical-stage pharmaceutical company developing targeted, multi-mechanism drugs for the treatment of cancer and inflammatory diseases. Our drug candidates target disease cells and the blood vessels that nourish them. We are focused on developing drugs that we believe are safe and convenient, and provide the potential for improved patient outcomes. We currently have a pipeline of orally-active, multi-mechanism drugs with three compounds in clinical development for the treatment of cancer including: MKC-1, a novel cell cycle inhibitor; ENMD-2076, our Aurora A/angiogenesis kinase inhibitor; and ENMD-1198, an antimitotic agent. In addition to these oncology programs, we also initiated clinical investigation of Panzem® (2ME2) for rheumatoid arthritis.
          Our goal is to develop and commercialize therapeutics based on our scientific expertise in angiogenesis, cell cycle regulation, cell signaling, and inflammation — processes vital to the progression of cancer and other diseases. Our expertise has also led to the identification of new molecules, including new chemical entities derived from 2ME2 (2-methoxyestradiol), as well as new chemical entities associated with multi-kinase inhibition and HDAC inhibition, important targets in the treatment of oncology.
          We have discontinued development of 2ME2 (Panzem® NCD) for oncology. While we have seen modest antitumor activity across most of our clinical studies, substantial clinical trial and manufacturing/ process development costs would be required to narrow the oncology indications for larger registration-track randomized studies. These expenditures would require the commitment of a disproportionate amount of resources and limit clinical development efforts on the remainder of our pipeline. Patients still on clinical oncology trials are continuing to receive Panzem® NCD.
          Based on the knowledge gained from the oncology development effort and favorable preclinical research results showing that 2ME2 has disease modifying (“DMARD”) and anti-angiogenic activity, we are continuing development of 2ME2 for rheumatoid arthritis (“RA”). The FDA has accepted EntreMed’s IND for 2ME2 in RA, which included an extensive human safety dossier in 300 patients from the oncology studies. We believe that Panzem® for RA represents a safe, orally-administered, small molecule alternative to current biologicals and a potential “first-in-class” cross-over opportunity from oncology. In 2008, we completed a healthy volunteer clinical

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trial for Panzem and are seeking a development partner to manage larger multi-arm Phase 2 and Phase 3 studies.
          We continue to focus on three principal objectives: 1) to concentrate our resources on fewer programs that provide a more direct path forward to product registration and ultimately to the market; 2) to conserve our cash by funding essential priority program activities and deferring new program initiatives; and 3) to expand our partnering activities across multiple clinical programs. In order to further advance our commercial objectives, we may seek strategic alliances, licensing relationships and co-development partnerships with other companies to develop compounds for both oncology and non-oncology therapeutic areas.
          To date, we have been engaged primarily in research and development activities. As a result, we have incurred operating losses through September 30, 2008 and expect to continue to incur operating losses for the foreseeable future before commercialization of any products. To accomplish our business goals, we, or prospective development partners, will be required to conduct substantial development activities for all proposed products that we intend to pursue to commercialization. We intend to continue to pursue strategic relationships to provide resources for the further development of our product candidates. There can be no assurance, however, that these discussions will result in relationships or additional funding. In addition, we will continue to seek capital through the public or private sale of securities. There can be no assurance that we will be successful in seeking such additional capital.
          On April 4, 2008, we received a letter from The NASDAQ Stock Market LLC (“NASDAQ”) advising that for the previous 30 consecutive business days, the bid price of the Company’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The NASDAQ Global Market. Failure to comply with this minimum bid price requirement, or any other listing standard applicable to issuers listed on The NASDAQ Global Market, by October 1, 2008, would result in our common stock being ineligible for quotation on The NASDAQ Global Market. Our stock price has not closed above $1.00 since the date of the receipt of the letter from NASDAQ.
          On September 22, 2008, we submitted an application to transfer the trading of our common stock to the NASDAQ Capital Market. On October 1, 2008, we received a letter from The NASDAQ Listing Qualifications Department stating that our application had been approved and that our common stock would commence trading on The NASDAQ Capital Market on October 3, 2008. The NASDAQ Capital Market operates in substantially the same manner as The NASDAQ Global Market. Our trading symbol remains as “ENMD” and the trading of our stock was unaffected by the transfer. The transfer to The NASDAQ Capital Market extended the requirement to achieve a minimum $1.00 bid price until March 30, 2009.
          On October 22, 2008, we received notification from The NASDAQ Listing Qualifications Department that we will have until July 6, 2009 to regain compliance with the minimum $1.00 closing bid price requirement. The extension is a result of NASDAQ’s determination to temporarily suspend the minimum $1.00 closing bid price requirement based on the current extraordinary market conditions.
          We can regain compliance with a minimum $1.00 closing bid price for a minimum of 10 consecutive business days. We will continue to pursue partnering opportunities to raise less-dilutive capital and could defer all or a portion of our product candidate development costs. In the event that our common stock continues to trade under $1.00, we will consider all alternatives in order to avoid delisting.

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The delisting of our common stock from a national exchange could significantly affect the ability of investors to trade our securities and could negatively affect the value and liquidity of our common stock. In addition, the delisting of our common stock could materially adversely affect our ability to raise capital on terms acceptable to us or at all.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
          The preparation of our financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Our critical accounting policies, including the items in our financial statements requiring significant estimates and judgments, are as follows:
    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.

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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.
          The determination of fair value of stock-based payment awards on the date of grant using the Black-Scholes model is affected by our stock price, as well as the input of other subjective assumptions. These assumptions include, but are not limited to, the expected term of stock options and our expected stock price volatility over the term of the awards. Changes in the assumptions can materially affect the fair value estimates.
          Any future changes to our share-based compensation strategy or programs would likely affect the amount of compensation expense recognized under SFAS 123R. Share-based compensation expense recognized in the three and nine months ended September 30, 2008 totaled $228,030 and $746,946, respectively. Share-based compensation expense recognized in the comparable periods in 2007 totaled $216,442 and $1,009,664, respectively.
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2008 and September 30, 2007.
          Revenues. For the three and nine-month periods ended September 30, 2008, we have recorded estimated royalty revenues of $3,500,000 and are reporting total revenues of $3,501,000, as compared to $3,518,000 and $3,520,000, respectively, for the same periods in 2007. We recorded no revenue during the first six months of 2008 and 2007. In 2005, we reached certain milestones under our purchase agreement with Royalty Pharma Finance Trust, and began to share in the royalty payments received by Royalty Pharma 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. Thalomid® sales in 2008 and in 2007 surpassed the sharing point in the three-month period ended September 30. We expect to record revenues in excess of $7.0 million in 2008, as was similarly recorded in 2007.

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          Research and Development Expenses. Our research and development expenses for the three and nine months ended September 30, 2008 totaled $4,957,000 and $16,629,000, respectively. Research and development expenses for the corresponding 2007 periods were $5,109,000 and $18,089,000, respectively. Reflected in our R&D expenses totaling $4,957,000 for the three-month period ended September 30, 2008 are direct project costs of $807,000 for Panzem®oncology which relate primarily to residual clinical activity, $825,000 for ENMD-1198, $884,000 for MKC-1 and $1,087,000 for ENMD-2076. Research and development expenses for the comparable period in fiscal 2007 included $1,596,000 direct project costs for Panzem® oncology, $457,000 for ENMD-1198, $735,000 for MKC-1 and $864,000 for ENMD-2076.
          R&D expenses totaling $16,629,000 for the nine-month period ended September 30, 2008 include direct project costs of $3,149,000 related to Panzem® oncology, $3,474,000 related to ENMD-1198, $2,853,000 related to MKC-1 and $2,886,000 related to ENMD-2076. The 2007 research and development expenses for the comparable period included $6,533,000 for Panzem® oncology, $1,322,000 for ENMD-1198, $2,187,000 for MKC-1 and $2,898,000 for ENMD-2076.
          The decrease in R&D spending results primarily from lower Panzem® NCD project costs resulting from our decision to discontinue its development in oncology. This cost decrease was largely offset by increased expenditures on MKC-1 clinical programs and ENMD-1198 manufacturing.
          MKC-1 is currently being administered in four Phase 2 and two Phase 1 oncology trials. We have an exclusive worldwide license from Roche to develop and commercialize MKC-1. ENMD-1198, an antimitotic agent, discovered in our laboratories, is nearing completion of a Phase 1b dose-escalation clinical trial in patients with refractory solid tumors. ENMD-2076, an oral selective kinase inhibitor with both antiproliferative and antiangiogenic properties, also discovered in our laboratories, is in early clinical development with a Phase 1b dose-escalation clinical trial in patients with refractory solid tumors. We are currently seeking a partner for ENMD-2076 to help accelerate its development.
          At September 30, 2008, accumulated direct project expenses for Panzem® were $53,924,000, direct ENMD-1198 project expenses totaled $13,141,000; accumulated direct project expenses for MKC-1 totaled $9,094,000, since acquired; and for ENMD-2076, accumulated project expenses totaled $8,301,000. Our R&D expenses also include non-cash stock-based compensation, pursuant to the adoption of SFAS 123R, totaling $65,000 and $186,000, respectively, for the three and nine months ended September 30, 2008 and $41,000 and $142,000 for the respective corresponding 2007 periods. The balance of our R&D expenditures includes facilities costs and other departmental overhead, and expenditures related to the advancement of our pre-clinical programs.
          The expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. As of September 30, 2008, we have four proprietary product candidates in clinical development, which include three candidates in oncology and our candidate for the treatment of rheumatoid arthritis. We expect our 2008 R&D expenses to decline through the fourth quarter of 2008 as the open clinical trials across the three oncology programs complete enrollment. Completion of clinical development for our product candidates may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate.

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          We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:
     
    ESTIMATED
    COMPLETION
CLINICAL PHASE   PERIOD
Phase I
  1-2 Years
Phase II
  1-2 Years
Phase III
  2-4 Years
          The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:
    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.
          We test our potential product candidates in numerous pre-clinical studies to identify indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus our resources on more promising product candidates or indications.
          Our proprietary product candidates have also not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our clinical data establish safety and efficacy. Historically, the results from pre-clinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.
          An important element of our business strategy is to pursue the research and development of a range of product candidates for both oncology and non-oncology indications. This provides us with multiple opportunities for success and also allows us to diversify the risks associated with research and development of oncology drugs. As a result, we intend to pursue development of our existing product candidates both internally and through development partnerships. In parallel, we will selectively add to our pipeline through the acquisition and subsequent development of promising candidates to enhance the value of our pipeline. The goal is to align our future capital requirements with multiple product candidates and to increase the likelihood that our future financial success is not substantially dependent on any one product candidate. To the extent we are unable to maintain the development of product candidates, our dependence on the success of one or a few product candidates would increase.

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          Furthermore, our business strategy now includes entering into collaborative arrangements with third parties to complete the development and commercialization of our products. In the event that third parties take over the clinical trial process for one of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our capital requirements.
          As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. There can be no assurance that we will be able to successfully access external sources of financing in the future. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.
          Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with internal and contract pre-clinical testing and clinical trials of our product candidates, including the costs of manufacturing the product candidates, and facilities expenses. Research and development expenses decreased to $4,957,000 in the three months ended September 30, 2008 from $5,109,000 for the corresponding period in 2007. Research and development expenses decreased to $16,629,000 in the nine months ended September 30, 2008 from $18,089,000 for the corresponding period in 2007. R&D expenses were generally lower due to decreased Panzem® expenses. Expenditures during the three and nine months ended September 30, 2008 were specifically impacted by the following:
    Outside Services — We utilize outsourcing to conduct our product development activities. Larger-scale small molecule synthesis, in vivo testing 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.

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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.
          Also reflected in our research and development expenses for the three-month period ended September 30, 2008 are personnel costs of $1,339,000, patent costs of $211,000 and facility and related expenses of $388,000. In the corresponding 2007 period, these expenses totaled $1,184,000, $348,000 and $363,000, respectively. For the nine-month period ended September 30, 2008, personnel costs were $4,359,000, patent costs were $514,000 and facility and related expenses were $1,138,000. In the corresponding 2007 period, these expenses totaled $3,717,000, $1,026,000 and $1,128,000, respectively. The increased personnel costs reflect a larger R&D staff, including the hiring of a Senior Vice President of R&D, while the decrease in patent costs results from the timing of patent prosecution activities and prioritization of our intellectual property portfolio.
          General and Administrative Expenses. General and administrative expenses include compensation and other expenses related to finance, business development and administrative personnel, professional services and facilities.
          General and administrative expenses decreased to $1,552,000 in the three-month period ended September 30, 2008 from $1,706,000 in the corresponding 2007 period. For the nine-month period, general and administrative expenses decreased in 2008 to $5,275,000 from $5,408,000 for the corresponding 2007 period. The net decrease in 2008 spending for the nine-month period ending September 30, 2008 reflects a decrease in stock compensation expense and personnel related costs, and is offset by an increase in the use of professional services, including diligence and recruiting services.
          In-process R&D. In January 2006, we acquired Miikana Therapeutics, a private biotechnology company. Pursuant to the merger agreement, based on the success of the acquired pre-clinical programs, we may be required to pay up to an additional $18 million upon the achievement of certain clinical and regulatory milestones. Such additional payments will be made in cash or shares of stock, at our option. The lead molecule in the Aurora Kinase Program, ENMD-2076, advanced into clinical development in 2008. ENMD-2076 is a selective kinase inhibitor with activity against Aurora A and angiogenic kinases linked to promoting cancer and inflammatory diseases. During the three-month period ending June 30, 2008, dosing of the first patient in ENMD-2076 trials triggered a milestone payment of $2 million. In June 2008, 2,564,104 shares of common stock were issued to the former Miikana stockholders as consideration for the satisfaction of the milestone payment. The additional payment of $2 million was recorded to expense as in-process research and development since the research and development project related to the Aurora Kinase Program had not reached technical feasibility and has no future alternative use. Under the terms of the merger agreement, the former Miikana stockholders may earn up to an additional $16 million of potential payments upon the satisfaction of additional clinical and regulatory milestones. We do not expect to incur any additional milestone payments during the remainder of 2008, but may satisfy the terms triggering a $3 million milestone in 2009, as discussed below.

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          Interest expense. Interest expense increased to approximately $559,000 in the three month period ended September 30, 2008 from approximately $169,000 in the corresponding 2007 period. For the nine-month period, interest expense increased in 2008 to $1,709,000 (including $153,000 of non-cash interest) from $207,000 for the corresponding 2007 period. The increase results from the interest expense related to a financing transaction with General Electric Capital Corporation (GECC) in September, 2007, as further described in note 3 of the Notes to the Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q. The 2007 interest expense primarily related to debt with Venture Lending & Leasing IV, LLC, which was paid in full in September, 2007.
          Investment income. Investment income decreased by 61% in the three-month period ended September 30, 2008 to $168,000 from $429,000 in the corresponding 2007 period. Investment income decreased by 48% in the nine-month period ended September 30, 2008 to $797,000 from $1,540,000 in the corresponding 2007 period, as a result of lower yields on lower invested balances in interest bearing cash accounts and investments during the 2008 period.
          Dividends on Series A convertible preferred stock. The Consolidated Statement of Operations for the three and nine-month periods ended September 30, 2008 and 2007 reflect a dividend of $251,250 and $753,750, respectively, relating to Series A Convertible Preferred Stock held by Celgene pursuant to a Securities Purchase Agreement dated December 31, 2002. The holders of Series A Preferred Stock accumulate dividends at an annual rate of 6% and will participate in dividends declared and paid on our common stock, if any. All accumulated dividends must be paid before any dividends may be declared or paid on the common stock. We have no plans to pay any dividends in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
          To date, we have been engaged primarily in research and development activities. As a result, we have incurred and expect to continue to incur operating losses for 2008 and the foreseeable future before we commercialize any products. In January 2006, we acquired Miikana Therapeutics, a private biotechnology company. Pursuant to the Merger Agreement, we acquired all of the outstanding capital stock of Miikana Therapeutics, Inc. in exchange for 9.96 million shares of common stock and the assumption of certain obligations. In addition, based on the success of the acquired pre-clinical programs, we may pay up to an additional $18 million upon the achievement of certain clinical and regulatory milestones. Such additional payments will be made in cash or shares of stock at our option. The lead molecule in the Aurora Kinase Program, ENMD-2076, has advanced into clinical development in 2008. ENMD-2076 is a selective kinase inhibitor with activity against Aurora A and angiogenic kinases linked to promoting cancer and inflammatory diseases. During the three-month period ending June 30, 2008, dosing of the first patient in ENMD-2076 trials triggered a milestone payment of $2 million. As noted above, in June 2008, 2,564,105 shares of common stock were issued to the former Miikana stockholders as consideration for the satisfaction of the milestone payment. Under the terms of the merger agreement, the former Miikana stockholders may earn up to an additional $16 million of potential payments upon the satisfaction of additional clinical and regulatory milestones. If ENMD-2076 successfully completes Phase 1 clinical trials and advances to Phase 2, the dosing of the first patient will trigger an additional purchase price adjustment milestone of $3 million, which could occur and be paid (in cash or stock at our sole discretion) in 2009. Through the acquisition, we acquired rights to MKC-1, a Phase 2 clinical candidate licensed from Hoffman-LaRoche, Inc. (“Roche”) by Miikana in April 2005.

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Under the terms of the agreement, Roche may be entitled to receive future payments upon successful attainment of certain clinical, regulatory and commercialization milestones; however, we do not expect to trigger any of these milestone payments in 2008 or 2009. Under the terms of the license agreements for 2ME2 and Celgene’s tubulin inhibitor program, we may be required to make future milestone payments totaling approximately $500,000 and $25.25 million, respectively. We do not expect to reach any milestones under these agreements requiring payments in 2008 or 2009. If we fail to comply with the milestones or fail to make any required sponsored research or milestone payment, we could face the termination of the relevant license agreement.
          In September 2007, we entered into a $20 million term loan agreement with General Electric Capital Corporation (the “Term Loan”). The Term Loan accrues interest in arrears at a fixed annual rate of 10.47%. For additional information on the Term Loan, please see Note 3 of the Notes to the Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.
          At September 30, 2008, we had cash and short-term investments of $27,871,889 with working capital of $18,689,413. We invest our capital resources with the primary objective of capital preservation. As a result of historical trends in interest rates, we have invested in some securities with maturity dates of more than 90 days to enhance our investment yields. As such, some of our invested balances are classified as short-term investments rather than cash equivalents in our consolidated financial statements at September 30, 2008.
          To accomplish our business plans, we will be required to continue to conduct substantial development activities for some or all of our proposed products. Under our current operating plans in 2008 we expect to have four compounds under clinical investigation and we expect our 2008 results of operations to reflect a net loss of approximately $25,000,000, including non-cash charges of approximately $4,300,000. These projections are subject to judgment and estimation and could significantly change. In early 2008, we reached the decision to curtail our development of Panzem® NCD in oncology, although we continue to evaluate the use of this compound for the treatment of rheumatoid arthritis. We plan to complete the open Panzem® NCD oncology trials without the enrollment of additional patients, and will not initiate new trials in oncology. In addition, we plan to continue the clinical development of MKC-1, ENMD-1198 and ENMD-2076 in oncology, although we may delay development beyond the current stage of one or more of these programs if the financial market conditions remain uncertain.
          We expect that the majority of our 2008 revenues will continue to be from royalties on the sales of Thalomid®. Based on historical trends and analyst consensus for Thalomid® sales, we expect to record royalty-sharing revenues in excess of $7.0 million in 2008; however, there can be no assurance in this regard. In addition, under our licensing agreement with Oxford Biomedica, PLC and Oxford Biomedica (UK) Limited Oxford, we are entitled to receive payments upon the achievement of certain milestones with respect to the development of gene therapies for ophthalmic (eye) diseases. However, we do not control the drug development efforts of Oxford and have no control over when or whether such milestones will be reached. We do not believe that we will receive any developmental milestone payments under this agreement in 2008.
          Based on our assessment of our current capital resources coupled with anticipated inflows, in the absence of additional financing, we believe that we will have adequate resources to fund planned operations for at least twelve months from September 30, 2008. Our estimate may change, however, based on our decisions with respect to future clinical trials related to our product candidates, the timing of milestone payments, developments in our business including the acquisition of additional intellectual property, other investments in new or complimentary technology, and our success in executing our current business plan.

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          To address our long-term capital needs, we intend to continue to pursue strategic relationships that will provide resources for the further development of our product candidates. There can be no assurance, however, that these discussions will result in relationships or additional funding. In addition, we may continue to seek capital through the public or private sale of securities, if market conditions are favorable for doing so. If we are successful in raising additional funds through the issuance of equity securities, stockholders will likely experience substantial dilution, or the equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences and privileges senior to those of our common stock. There can be no assurance that we will be successful in seeking additional capital.
INFLATION AND INTEREST RATE CHANGES
          Management does not believe that our working capital needs are sensitive to inflation and changes in interest rates.
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
          The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without incurring investment market volatility risk. Our investment income is sensitive to the general level of U.S. interest rates. In this regard, changes in the U.S. interest rates affect the interest earned on our cash and cash equivalents. Due to the short-term nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not materially impact on the total fair market value of our portfolio as of September 30, 2008.
ITEM 4.   CONTROLS AND PROCEDURES
          Evaluation of Disclosure Controls and Procedures
          As of September 30, 2008, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Management’s assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. Based on that evaluation, the CEO and CFO concluded that, as of September 30, 2008, the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in the Company’s periodic SEC reports.

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          Changes in Internal Control Over Financial Reporting
          There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2008 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II.   OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
          We are subject in the normal course of business to various legal proceedings in which claims for monetary or other damages may be asserted. Management does not believe such legal proceedings, except as otherwise disclosed herein, are material.
ITEM 1A.   RISK FACTORS
          For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of EntreMed’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, Item 1A of EntreMed’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and the information under “Special Note Regarding Forward-Looking Statements” included in this report. There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
          Not applicable.
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
          Not applicable.
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
          Not applicable
ITEM 5.   OTHER INFORMATION
          Not applicable.

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ITEM 6.   EXHIBITS
     
Exhibit No.   Description of Document
 
   
31.1
  Rule 13a-14(a) Certification of President and Chief Executive Officer
31.2
  Rule 13a-14(a) Certification of President and Chief Financial Officer
32.1
  Section 1350 Certification of Chief Executive Officer
32.2
  Section 1350 Certification of Chief Financial Officer

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  ENTREMED, INC.
(Registrant)
 
 
Date: November 7, 2008  /s/ James S. Burns    
  James S. Burns   
  President and Chief Executive Officer   
     
Date: November 7, 2008  /s/ Dane R. Saglio    
  Dane R. Saglio   
  Chief Financial Officer   

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EXHIBIT INDEX
     
Exhibit No.   Description of Document
 
   
31.1
  Rule 13a-14(a) Certification of President and Chief Executive Officer
31.2
  Rule 13a-14(a) Certification of President and Chief Financial Officer
32.1
  Section 1350 Certification of Chief Executive Officer
32.2
  Section 1350 Certification of Chief Financial Officer

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