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EX-32.1 - CASI Pharmaceuticals, Inc.v178789_ex32-1.htm
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EX-32.2 - CASI Pharmaceuticals, Inc.v178789_ex32-2.htm
EX-23.1 - CASI Pharmaceuticals, Inc.v178789_ex23-1.htm
 

FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C., 20549

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009

Commission file number 0-20713

ENTREMED, INC.

(Exact name of registrant as specified in its charter)

Delaware
 
58-1959440
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
     
9640 Medical Center Drive, Rockville, MD
 
20850
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code:   (240) 864-2600
 
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock, $0.01 par value
 
The NASDAQ Stock Market LLC
(Title of each class)
 
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act. Yes ¨ No x

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  x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K    x

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  ¨
Accelerated filer  ¨
   
Non-accelerated filer  x
Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨ No x

As of June 30, 2009, the aggregate market value of the shares of common stock held by non-affiliates was approximately $38,148,385.

As of March 15, 2010, 95,694,736 shares of the Company’s common stock were outstanding.

Documents Incorporated By Reference

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2009. The proxy statement is incorporated herein by reference into the following parts of the Form 10K:

Part III, Item 10, Directors, Executive Officers and Corporate Governance;
Part III, Item 11, Executive Compensation;
Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters;
Part III, Item 13, Certain Relationships and Related Transactions, and Director Independence; and
Part III, Item 14, Principal Accounting Fees and Services.
 


  
ENTREMED, INC.
FORM 10-K - FISCAL YEAR ENDED DECEMBER 31, 2009

Contents and Cross Reference Sheet

Form 10-K
Part No.
 
Form 10-K
Item No.
 
 
Description
 
Form 10-K
Page No.
I
 
1
 
Business
 
3
 
           
   
1A
 
Risk Factors
 
10
             
   
1B
 
Unresolved Staff Comments
 
19
             
   
2
 
Properties
 
20
             
   
3
 
Legal Proceedings
 
20
             
   
4
 
Reserved
 
20
             
II
 
5
 
Market for Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities
 
20
             
   
6
 
Selected Financial Data
 
23
             
   
7
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
24
             
   
7A
 
Quantitative and Qualitative Disclosures About Market Risk
 
33
             
   
8
 
Financial Statements and Supplementary Data
 
33
             
   
9
 
Changes in and Disagreements with Accountants On Accounting and Financial Disclosure
 
33
             
   
9A
 
Controls and Procedures
 
34
             
   
9B
 
Other Information
 
36
             
III
 
10
 
Directors, Executive Officers and Corporate Governance
 
36
             
   
11
 
Executive Compensation
 
36
             
   
12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
36
           
 
   
13
 
Certain Relationships and Related Transactions, and Director Independence
 
37
             
   
14
 
Principal Accounting Fees and Services
 
37
             
IV
 
15
 
Exhibits and Financial Statement Schedules
 
37
             
       
Signatures
 
42
       
Audited Consolidated Financial Statements
 
F-1

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Exchange 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.

 
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Actual results could differ materially from those currently anticipated due to a number of factors, including  the risk that we may be unable to continue as a going concern as a result of our inability to raise sufficient capital for our operational needs; the possibility that we may be delisted from trading on the Nasdaq Capital Market; the volatility of our common stock; risks relating to the need for additional capital and the uncertainty of securing additional funding on favorable terms; the failure to consummate a transaction to monetize our Thalomid® royalty stream for any reason, including our inability to obtain the required third-party consents; declines in actual sales of Thalomid® resulting in reduced royalty payments; risks associated with our product candidates; the early-stage products under development; results in preclinical models are not necessarily indicative of clinical results; uncertainties relating to preclinical and clinical trials, including delays to the commencement of such trials; success in the clinical development of any products; dependence on third parties; and risks relating to the commercialization, if any, of our  proposed products (such as marketing, safety, regulatory, patent, product liability, supply, competition and other risks).  Additional information about the factors and risks that could affect our business, financial condition and results of operations, are contained in Section 1A, “Risk Factors,” of this Annual Report on Form 10-K and our other filings with the U.S. Securities and Exchange Commission (SEC), which are available at www.sec.gov.

 
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PART I

ITEM 1.     BUSINESS.

ENMD-2076

EntreMed, Inc. (“EntreMed” or “the Company”) (Nasdaq: ENMD) is a clinical-stage pharmaceutical company focused on developing ENMD-2076, an Aurora A and angiogenic kinase inhibitor for the treatment of cancer.  ENMD-2076 is currently in Phase 1 studies in advanced cancers, multiple myeloma and leukemia.  We anticipate the initiation of a Phase 2 study in ovarian cancer during the second quarter of 2010.

ENMD-2076 is a novel orally-active, Aurora A/angiogenic kinase inhibitor with potent activity against Aurora A and multiple tyrosine kinases linked to cancer and inflammatory diseases.  ENMD-2076 is relatively selective for the Aurora A isoform in comparison to Aurora B.  Aurora kinases are key regulators of the process of mitosis, or cell division, and are often over-expressed in human cancers. ENMD-2076 exerts its effects through multiple mechanisms of action, including antiproliferative activity and the inhibition of angiogenesis. ENMD-2076 has demonstrated significant, dose-dependent preclinical activity as a single agent, including tumor regression, in multiple xenograft models (e.g. breast, colon, leukemia), as well as activity towards ex vivo-treated human leukemia patient cells.

ENMD-2076 has received orphan drug designation from the United States Food and Drug Administration (the “FDA”) for the treatment of ovarian cancer, multiple myeloma and acute myeloid leukemia (“AML”).   In the United States, the Orphan Drug Act is intended to encourage companies to develop therapies for the treatment of diseases that affect fewer than 200,000 people in this country.  Orphan drug designation provides us with seven years of market exclusivity that begins once ENMD-2076 receives FDA marketing approval.  It also provides certain financial incentives that can help support the development of ENMD-2076.

The table below illustrates the current status of our product pipeline.


 
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OTHER DRUG CANDIDATES

ENMD-2076 is the only program currently under active clinical evaluation by the Company.  The selection of ENMD-2076 as our lead product allows us to direct the majority of our resources to accelerate its clinical development.  However, we also own the intellectual property of our other early-stage therapeutic candidates.  We do not intend to initiate additional new studies for programs other than ENMD-2076 unless additional significant financing becomes available to us.  Our other therapeutic candidates include MKC-1, an oral cell-cycle inhibitor with activity against the mTOR pathway that has completed multiple Phase 2 clinical trials for cancer, and ENMD-1198, a novel antimitotic agent that has completed a Phase 1 study in advanced cancers.  We also have an approved Investigational New Drug Application (“IND”) for the use of Panzem® in rheumatoid arthritis (“RA”) treatment.  All of our candidates are multi-mechanism in that they target disease cells and the blood vessels that nourish them, which we believe can be developed to be safe and convenient, and provide the potential for improved patient outcomes.

MKC-1 for Oncology.  MKC-1 is an orally-active, small molecule, cell cycle inhibitor with in vitro and in vivo efficacy against a broad range of human solid tumor cell lines, including multi-drug resistant cell lines. MKC-1 acts through multiple mechanisms of action, arresting cellular mitosis and inducing cell death (apoptosis) by binding to a number of different cellular proteins including tubulin and members of the importin β family. MKC-1 also inhibits activation of the oncogenic kinase Akt and the mTOR pathway through a mechanism that is a subject of investigation by EntreMed scientists.

MKC-1 has demonstrated broad antitumor effects in multiple preclinical models, including paclitaxel-resistant models, and was evaluated in several Phase 1 and 2 clinical studies involving nearly 270 patients prior to the licensing of the drug from Hoffman La Roche. These studies have provided extensive pharmacokinetic and safety data. Since acquired by EntreMed, MKC-1 has shown single agent antitumor activity in breast cancer patients and in combination with Alimta® in NSCLC patients.  MKC-1 has completed multiple Phase 2 clinical trials for cancer and has a robust data set.

ENMD-1198 for Oncology.  ENMD-1198 is a potent, orally-active, antimitotic agent that induces cell cycle arrest and apoptosis in tumor cells. ENMD-1198 has shown pronounced antitumor activity as well as substantial synergistic effects in combination with standard of care chemotherapeutic agents in numerous preclinical models.

ENMD-1198 does not exhibit sensitivity to multi-drug resistance mechanisms in preclinical studies. ENMD-1198 also has shown preclinical activity towards taxane and vinca alkaloid resistant tumor cells. Additionally, ENMD-1198 decreases the activity of three oncogenic proteins (HIF-1α, NF-κB and STAT3) that are known to promote tumor growth and progression.  ENMD-1198 has been evaluated in a Phase 1 clinical trial for safety, tolerability, pharmacokinetics, and clinical benefit in advanced cancer patients.

Panzem® (2ME2) for Rheumatoid Arthritis.  Panzem® is an orally active compound that has antiproliferative, antiangiogenic and anti-inflammatory properties. The inhibition of angiogenesis is an important approach to the treatment of both cancer and rheumatoid arthritis. Panzem® has potential as a single agent in rheumatoid arthritis based on its antiangiogenic, anti-inflammatory, and anti-osteoclastic (bone resorption) properties.

An IND to develop Panzem® (2-methoxyestradiol, 2ME2) in rheumatoid arthritis (RA) was accepted based on its safety profile demonstrated throughout the oncology development effort, and preclinical research results showing that 2ME2 has disease modifying or “DMARD” activity in a variety of animal models of RA.  DMARDs are drugs that have the ability to slow down disease progression in rheumatoid arthritis and other autoimmune diseases, in contrast to non-steroidal anti-inflammatory drugs which only treat the immune reaction resulting from tissue damage.  We have generated substantial preclinical data demonstrating the positive effects of 2ME2 treatment on inflammation and disease progression in standard animal models of RA. Radiographic and immunohistochemical staining results from these preclinical studies have shown consistent therapeutic effects on the hallmarks of the disease, including the inhibition of the highly angiogenic pannus, infiltrating cells, cartilage lesions and bone resorption.

 
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PANZEM® NCD (2ME2) for Oncology

           In 2008, we discontinued clinical development of 2ME2 (Panzem® NCD) for oncology.  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 other assets.

PRECLINICAL

Our focus is on clinical development. Accordingly, we are not devoting any significant resources to preclinical activities.

2010 OUTLOOK

In 2010, we will continue to focus on three principal objectives:

 
·
to initiate Phase 2 for ENMD-2076 in the second quarter and to continue to concentrate our resources on ENMD-2076 in order to accelerate clinical objectives so that we can provide a more direct path forward to product registration and ultimately to the market;
 
·
to conserve our cash by deferring new program initiatives and reducing expenses; and
 
·
to be opportunistic in raising capital and in seeking collaborations for our principal assets.

More specifically, in order to further advance our commercial objectives, we may seek strategic alliances, co-development partnerships and other collaborations with other companies to develop our drug candidates.  Our focus will continue to be clinical development and, as such, will not devote any significant resources to preclinical activities.

OPERATING LOSSES

To date, we have been engaged exclusively in research and development activities.  As a result, we have incurred operating losses through December 31, 2009 and expect to continue to incur operating losses for the foreseeable future before commercialization of any products. We spent $7,902,000 on research and development in 2009, which includes costs associated with ENMD-2076 of $5,036,000, with MKC-1 of $449,000, with ENMD-1198 of $177,000 and with Panzem® oncology of $126,000, as compared to $20,069,000 in 2008 and $23,739,000 in 2007.  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 may 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.

MANAGEMENT

EntreMed's management team has aligned the Company's business strategy with its core scientific strengths, while maintaining prudent resource management, fiscal responsibility and accountability.  The team has redirected EntreMed's financial resources and R&D strategy to focus primarily on the development of our Aurora A/angiogenic kinase inhibitor, ENMD-2076.

The current senior management team includes: Carolyn F. Sidor, M.D., Vice President & Chief Medical Officer; Mark R. Bray, Ph.D., Vice President, Research; Cynthia W. Hu, JD, Chief Operating Officer, General Counsel & Secretary; and Kathy R. Wehmeir-Davis, Principal Accounting Officer.  This senior management team reports directly to the Executive Committee of the Board comprised of three directors: Michael M. Tarnow, Dwight L. Bush and Jennie Hunter-Cevera, Ph.D.  Mr. Tarnow serves as our Executive Chairman and Mr. Bush serves as our Vice Chairman.

 
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SCIENTIFIC FOUNDATION

We developed our drug candidates based on comprehensive research into the relationship between malignancy and angiogenesis (the growth of new blood vessels). This research led to a focus on drug candidates that act on the cellular pathways that affect biological processes important in multiple diseases, specifically angiogenesis and cell cycle regulation through the inhibition of key kinases.  Our drug candidate, ENMD-2076, has potential applications in oncology and other diseases that are dependent on the regulation of these processes.

Kinase Inhibition.  Kinases are enzymes that are primary regulators of many essential processes in living cells. There are approximately 500 different kinases encoded in the human genome, and these proteins act together in intricate communication networks and pathways to control virtually every aspect of cellular function. The reliance of the cell on kinases to regulate function can be disastrous when kinase signaling becomes aberrant. Many human diseases have been linked to these enzymes including all forms of cancer, arthritis, inflammation, diabetes, and cardiovascular disease. The inhibition of kinases as a targeted therapeutic approach has now been validated by several drugs that have advanced successfully through clinical trials to the marketplace. The integral role kinases play in angiogenesis and cell cycle regulation has led EntreMed to develop inhibitors to key kinases involved in these processes.

Cell Cycle Regulation.  Precise regulation of the cell cycle is essential for healthy cell functions including the replication, growth, and differentiation. One specific aspect of cell cycle regulation is the programmed control of cell death (apoptosis). In certain diseases, such as cancer, the balance between cell proliferation and cell death is altered, resulting in inappropriate cell growth. Our compounds impact biochemical pathways in cells that result in their death via apoptosis. We believe that the selective induction of apoptosis through drugs that induce cell cycle arrest can either stabilize or cause the regression of cancer, inflammation and other disease processes characterized by inappropriate cell growth.

Angiogenesis.  Angiogenesis is a multi-step process whereby new blood vessels are formed. This tightly regulated process involves the migration, proliferation and differentiation of endothelial cells. In normal physiology, angiogenesis is a necessary component of the menstrual cycle and wound healing, where the process is regulated through appropriate shifts in the balance of pro-angiogenic and antiangiogenic signals. This tight regulation of angiogenesis in normal physiology is absent or aberrant in multiple disease settings that are characterized by persistent, inappropriate blood vessel development.  Inappropriate angiogenesis occurs in more than 80 diseases, particularly in various cancers where the growth of new blood vessels is necessary to sustain tumor growth.

BUSINESS DEVELOPMENT AND COMMERCIALIZATION STRATEGY

Oncology is our principal clinical and commercial focus.  Based on the compound’s strong preclinical antitumor activity, favorable safety profile and bioavailability, we believe that ENMD-2076 has significant therapeutic potential in a broad range of tumor types and continue to focus our resources on ENMD-2076 as our priority program. We believe that ENMD-2076 represents a potential Phase 2 partnering opportunity.  As a result, our strategy is to pursue the development of ENMD-2076 for oncology, obtain additional clinical data while being selective and opportunistic in exploring strategic alliances for this and other compounds in our pipeline.  We may pursue co-development partners for our other pipeline product candidates to help accelerate their development and strengthen the development program with complementary expertise.  We can also provide our co-development partners with substantial know-how relating to small molecules that inhibit angiogenesis and inflammation, as well as regulate cell cycle pathways.

RELATIONSHIPS RELATING TO CLINICAL PROGRAMS

Contract Manufacturing.  The manufacturing efforts for the production of our clinical trial materials are performed by contract manufacturing organizations. Established relationships, coupled with supply agreements, have secured the necessary resources to ensure adequate supply of clinical materials to support our clinical development program.  We believe that our current strategy of outsourcing manufacturing is cost-effective and allows for the flexibility we require.

 
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Sponsored Research Agreements.  To complement our in-house research and development efforts, we have entered into sponsored research agreements with outside scientists to conduct specific projects.  Under these agreements, we have secured the rights to intellectual property and to develop under exclusive license any discoveries resulting from these collaborations. The funds we provide in accordance with these agreements partially support the scientists’ laboratory, research personnel and research supplies.

Clinical Trial Centers.  As of March 12, 2010, we are conducting clinical trials for ENMD-2076 at the following institutions:

 
-      Dana-Farber Cancer Institute, Boston, MA
 
-      Massachusetts General Hospital, Boston, MA
 
-      Indiana University Cancer Center, Indianapolis, IN
 
-      Princess Margaret Hospital, Toronto, Ontario
 
-      University of Colorado Cancer Center, Aurora, CO

PATENTS, LICENSES AND PROPRIETARY RIGHTS

Our success will depend in part on our ability to obtain patent protection for our products, both in the United States and abroad. The patent position of biotechnology and pharmaceutical companies, in general, is highly uncertain and involves complex legal and factual questions.

All of our programs are backed by strong intellectual property rights.  Each product candidate is covered by issued or pending composition, method and use patents.  With respect to our leading program, ENMD-2076, we directly own patent applications for the lead compound, ENMD-2076, and also for a library of over 600 analogs.  Ownership includes 1 issued US patent, 3 pending US applications, 2 issued foreign patents and 43 pending foreign applications.  Our issued patents for ENMD-2076 expire September 9, 2026, and in the case of the issued US patent, March 5, 2027.  Pending patent applications for ENMD-2076 provide coverage through 2026.  Patent applications pending for the over 600 analogs provide coverage ranging from 2025 to 2028.

With respect to our entire patent estate for all of our product candidates, we directly own 40 U.S. issued patents and patent applications and 48 foreign issued patents and patent applications; and have exclusively in-licensed 9 U.S. issued patents and 135 foreign issued patents and patent applications.  We review and assess our portfolio on a regular basis to ensure protection and to align our patent strategy with our overall business strategy.

We have registered the trademarks ENTREMED, MIIKANA, and PANZEM in the U.S. Patent and Trademark Office and have applications pending for registration of the trademarks in selected foreign countries.

GOVERNMENT REGULATION

Our development, manufacture, and potential sale of therapeutics in the United States are subject to extensive regulations.

In the United States, the FDA regulates our product candidates currently being developed as drugs or biologics.  New drugs are subject to regulation under the Federal Food, Drug, and Cosmetic Act (FFDCA), and biological products, in addition to being subject to certain provisions of that Act, are regulated under the Public Health Service Act (PHSA).  We believe that the FDA is likely to regulate the products currently being developed by us or our collaborators as new drugs.  Both the FFDCA and PHSA and corresponding regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, storage, recordkeeping, advertising and other promotion of biologics or new drugs, as the case may be.  FDA clearances or approvals must be obtained before clinical testing, and before manufacturing and marketing of biologics or drugs.
 
 
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Preparing drug candidates for regulatory approval has historically been a costly and time-consuming process.  Generally, in order to gain FDA permission to test a new agent, a developer first must conduct preclinical studies in the laboratory and in animal model systems to gain preliminary information on an agent's effectiveness and to identify any safety problems.  The results of these studies are submitted as a part of an IND application for a drug or biologic, which the FDA must review before human clinical trials of an investigational drug can begin.  In addition to the known safety and effectiveness data on the drug or biologic, the IND must include a detailed description of the clinical investigations proposed to be undertaken.  Based on the current FDA organizational structure, ENMD-2076 is regulated as a new drug by the FDA’s Center for Drug Evaluation and Research (CDER).  Generally, as new chemical entities like our small molecules are discovered, formal IND-directed toxicology studies are required prior to initiating human testing.  Clinical testing may begin 30 days after submission of an IND to the FDA unless FDA objects to the initiation of the study or has outstanding questions to discuss with the IND sponsor.

In order to commercialize any drug or biological products, we or our collaborators must sponsor and file an IND and conduct clinical studies to demonstrate the safety and effectiveness necessary to obtain FDA approval of such products.  For studies conducted under INDs sponsored by us or our collaborators, we or our collaborators will be required to select qualified investigators (usually physicians within medical institutions) to supervise the administration of the products, test or otherwise assess patient results, and collect and maintain patient data; monitor the investigations to ensure that they are conducted in accordance with applicable requirements, including the requirements set forth in the  general investigational plan and protocols contained in the IND; and comply with applicable reporting and recordkeeping requirements.

Clinical trials of drugs or biologics are normally done in three phases, although the phases may overlap. Phase 1 trials for drug candidates to be used to treat cancer patients are concerned primarily with the safety and preliminary effectiveness of the drug, involve a small group ranging from 15 - 40 subjects, and may take from six months to over one year to complete.  Phase 2 trials normally involve 30 - 200 patients and are designed primarily to demonstrate effectiveness in treating or diagnosing the disease or condition for which the drug is intended, although short-term side effects and risks in people whose health is impaired may also be examined.  Phase 3 trials are expanded clinical trials with larger numbers of patients which are intended to evaluate the overall benefit-risk relationship of the drug and to gather additional information for proper dosage and labeling of the drug.  Phase 3 clinical trials generally take two to five years to complete, but may take longer.  The FDA receives reports on the progress of each phase of clinical testing, as well as reports of unexpected adverse experiences occurring during the trial.  FDA may require the modification, suspension, or termination of clinical trials, if it concludes that an unwarranted risk is presented to patients, or, in Phase 2 and 3, if it concludes that the study protocols are deficient in design to meet their stated objectives.

If clinical trials of a new drug candidate are completed successfully, the sponsor of the product may seek FDA marketing approval.  If the product is classified as a new drug, an applicant must file a New Drug Application (NDA) with the FDA and receive approval before commercial marketing of the drug.  The NDA must include detailed information about the product and its manufacture and the results of product development, preclinical studies and clinical trials.

The testing and approval processes require substantial time and effort and there can be no assurance that any approval will be obtained on a timely basis, if at all.  Although it is the policy of the FDA to complete the review of the initial submission of NDAs within six to twelve months, the entire FDA review process may take several years.  Notwithstanding the submission of relevant data, the FDA may ultimately decide that the NDA does not satisfy its regulatory criteria and deny the approval.  Further, the FDA may require additional clinical studies before making a decision on approval. In addition, the FDA may condition marketing approval on the conduct of specific post-marketing studies to further evaluate safety and effectiveness.  Even if FDA regulatory clearances are obtained, a marketed product is subject to continuing regulatory requirements and review relating to Good Manufacturing Practices, adverse event reporting, promotion and advertising, and other matters.  Discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions.

 
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COMPETITION

Competition in the pharmaceutical, biotechnology and biopharmaceutical industries is intense and based significantly on scientific and technological factors, the availability of patent and other protection for technology and products, the ability and length of time required to obtain governmental approval for testing, manufacturing and marketing and the ability to commercialize products in a timely fashion.  Moreover, the biopharmaceutical industry is characterized by rapidly evolving technology that could result in the technological obsolescence of any products that we develop.

We compete with many specialized biopharmaceutical firms, as well as a growing number of large pharmaceutical companies that are applying biotechnology to their operations.  Many biopharmaceutical companies have focused their development efforts in the human therapeutics area, including oncology and inflammation, and many major pharmaceutical companies have developed or acquired internal biotechnology capabilities or made commercial arrangements with other biopharmaceutical companies. These companies, as well as academic institutions, governmental agencies and private research organizations, also compete with us in recruiting and retaining highly qualified scientific personnel and consultants.

Our competition will be determined in part by the potential indications for which our product candidates may be developed and ultimately approved by regulatory authorities. We may rely on third parties to commercialize our products, and accordingly, the success of these products will depend in significant part on these third parties' efforts and ability to compete in these markets. The success of any collaboration will depend in part upon our collaborative partners' own competitive, marketing and strategic considerations, including the relative advantages of alternative products being developed and marketed by our collaborative partners and our competitors.

Many of our existing or potential competitors have substantially greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market products. In addition, many of these competitors have extensive experience in preclinical testing and human clinical trials and in obtaining regulatory approvals. The existence of competitive products, including products or treatments of which we are not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products that we may develop.

EMPLOYEES

In December 2008, we selected ENMD-2076 as our leading program and accordingly realigned our human resources to directly support and accelerate the clinical development of ENMD-2076.  Our work force currently consists of 13 full-time employees and 1 part-time employee dedicated to the core areas of our operations.  Certain of our activities, such as manufacturing and clinical trial operations, are outsourced at the present time.  We may hire additional personnel, in addition to utilizing part-time or temporary consultants, on an as-needed basis.  None of our employees are represented by a labor union, and we believe our relations with our employees are satisfactory.

CORPORATE HEADQUARTERS

We were incorporated under Delaware law in 1991.  Our principal executive offices are located at 9640 Medical Center Drive, Rockville, Maryland 20850, and our telephone number is (240) 864-2600.  We also lease office space in Durham, North Carolina where our clinical and regulatory operations are based and lease laboratory space in Toronto, Ontario where we conduct correlative research to support our development of ENMD-2076.

AVAILABLE INFORMATION

Through our website at www.entremed.com, we make available, free of charge, our filings with the Securities and Exchange Commission (“SEC”), including our annual proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission.  Our filings are also available through the Securities and Exchange Commission via their website, http://www.sec.gov.  You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The information contained on our website is not incorporated by reference in this annual report on Form 10-K and should not be considered a part of this report.

 
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ITEM 1A. 
RISK FACTORS.

We Have an Immediate Need for Capital and Will Need to Raise Additional Capital in the Future to Continue our Business, and our Independent Registered Public Accounting Firm Has Expressed Substantial Doubt as to our Ability to Continue as a Going Concern

We estimate that our current capital resources will not be sufficient to fund our operations significantly beyond September 2010 without an additional curtailment of operating expenditures or new equity or debt financing. In addition, our financial statements have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, our independent registered public accounting firm’s report on our financial statements as of and for the fiscal year ended December 31, 2009, includes an explanatory paragraph that states that our recurring losses from operations raise substantial doubt about our ability to continue as a going concern.
     
Our ability to continue as a going concern is dependent on our success at raising additional capital sufficient to meet our obligations on a timely basis and to ultimately attain profitability. In the event we are unable to successfully raise additional capital, it is unlikely that we will have sufficient cash flows and liquidity to finance our business operations as currently contemplated. Accordingly, in the event new financing is not obtained, we will likely reduce general and administrative expenses and delay clinical development activity until we are able to obtain sufficient financing to do so. These factors could significantly limit our ability to continue as a going concern.

We Have a History of Losses and Anticipate Future Losses

To date, we have been engaged primarily in research and development activities. Although we receive limited revenues on royalties from sales of Thalomid® and in the past have received license fees and research and development funding from a former collaborator and limited revenues from certain research grants, we have not derived significant revenues from operations.

We have experienced losses in each year since inception.  Through December 31, 2009, we had an accumulated deficit of approximately $366 million.   We expect that it will be very difficult to raise capital to continue our operations and our independent registered public accounting firm has issued an opinion with an explanatory paragraph to the effect that there is substantial doubt about our ability to continue as a going concern.  Although we have been successfully funded to date by attracting investors in our equity securities and through royalty payments, there is no assurance that our capital-raising efforts will be able to attract the capital needed to sustain our operations beyond that date or that such royalty payments will continue to provide revenues at historical levels.  If we are unable to obtain additional funding for operations, we may not be able to continue operations as proposed, requiring us to modify our business plan, curtail various aspects of our operations or cease operations. In such event, investors may lose a portion or all of their investment.

Losses have continued since December 31, 2009.  We will also be required to conduct substantial research and development and clinical testing activities for ENMD-2076. We expect that these activities will result in operating losses for the foreseeable future before we commercialize any products, if ever.  In addition, to the extent we rely on others to develop and commercialize our products, our ability to achieve profitability will depend upon the success of these other parties.  To support our research and development of certain product candidates, we may seek and rely on cooperative agreements from governmental and other organizations as a source of support. If a cooperative agreement were to be reduced to any substantial extent, it may impair our ability to continue our research and development efforts.  Even if we do achieve profitability, we may be unable to sustain or increase it.


 
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Our Common Stock May be Delisted From The NASDAQ Capital Market, Which Could Negatively Impact the Price of Our Common Stock and Our Ability to Access the Capital Markets

NASDAQ Minimum $1.00 Closing Bid Price

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.  The letter also advised us that 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 for ten consecutive trading days 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.

 NASDAQ suspended the enforcement of the minimum bid price rule, because of the current extraordinary market conditions, until July 31, 2009.  Upon reinstatement of the rule on August 3, 2009, under NASDAQ rules, we had until January 15, 2010, to regain compliance with the minimum bid price standard.  We did not regain compliance with the minimum bid price standard of the NASDAQ rules by January 15, 2010.

On January 19, 2010, we received a Staff Determination letter from NASDAQ stating that we were not in compliance with the continued listing rules and that our Common Stock would be delisted unless we requested an appeal of such determination.   On January 20, 2010, we filed an appeal of the Staff's determination to a NASDAQ Hearings Panel (the “Panel”), pursuant to the procedures set forth in the NASDAQ Marketplace Rules.  The hearing request stayed the delisting of the Company’s securities pending the Panel's decision.  On February 25, 2010, we met with the Panel providing them a plan of action, with the intention of returning to compliance with NASDAQ’s requirements.  On March 23, 2010, we received a decision letter from the Panel granting our request to extend the compliance date for an additional 180 days or until July 16, 2010.  As a result of this decision by the Panel, our stock will continue to trade on The Nasdaq Capital Market until such date, by which time our minimum bid price must have exceeded $1.00 for ten consecutive trading days.
 
In the event that our common stock continues to trade under $1.00, we will consider all alternatives in order to maintain the public trading status of our stock, including electing to implement a reverse stock split with the approval of our stockholders.  We have not made a final determination as to whether to affect a reverse split, as we continue to have an opportunity to meet the $1.00 minimum closing bid price during the 180-day extension period.  An alternative to not having to meet both the NASDAQ $1.00 minimum closing bid price and the $2.5 million stockholders’ equity is to apply to have our common stock traded on the Over-The-Counter Bulletin Board (the “OTCBB”), an electronic quotation system that displays stock quotes by market makers.  If such course of action is taken, there can be no assurance that our common stock would be timely admitted for trading on that market.  This alternative may result in a less liquid market available for existing and potential shareholders to buy and sell shares of our common stock and could further depress the price of our stock.

 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. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities. 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.
 
 
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NASDAQ Minimum $2.5 Million Stockholders’ Equity

Additionally, we must continually maintain (1) stockholders’ equity of at least $2.5 million or (2) a minimum of $35 million in market value of our listed securities for ten consecutive trading days to be in compliance with the continued listing standards for The NASDAQ Capital Market.  At December 31, 2009, our consolidated stockholders’ deficit was approximately $1.9 million and the market value of our listed securities was $70.9 million.  There can be no assurance that we will be able to meet either of these listing standards in the future.  If we do not meet one of these NASDAQ listing requirements, we will be in a deficiency period and will submit a plan of compliance with NASDAQ.  After the deficiency period, if we are unable to successfully appeal to the NASDAQ Panel for an extension of time to regain compliance, our common stock could be delisted from The NASDAQ Capital Market.

The Current Capital and Credit Market Conditions May Adversely Affect the Company’s Access to Capital, Cost of Capital, and Ability to Execute its Business Plan as Scheduled

Access to capital markets is critical to our ability to operate. Traditionally, biopharmaceutical companies (such as we) have funded their research and development expenditures through raising capital in the equity markets.  Declines and uncertainties in these markets over the past two years have severely restricted raising new capital and have affected our ability to continue to expand or fund existing research and development efforts. We require significant capital for research and development for our product candidates and clinical trials. In recent years, the general economic and capital market conditions in the United States have deteriorated significantly and have adversely affected our access to capital and increased the cost of capital, and there is no certainty that a recovery in the capital and credit markets, enabling us to raise capital in an amount to sufficiently fund our short-term and long-term plans, will occur in 2010.  If these economic conditions continue or become worse, the Company’s future cost of equity or debt capital and access to the capital markets could be adversely affected. In addition, an inability by the Company to access the capital markets on favorable terms because of our low stock price, or upon our delisting from the NASDAQ Stock Market if we fail to satisfy a listing requirement, could affect our ability to execute our business plan as scheduled. Moreover, we rely and intend to rely on third parties, including our clinical research organizations, third party manufacturers, and certain other important vendors and consultants. As a result of the current volatile and unpredictable global economic situation, there may be a disruption or delay in the performance of our third-party contractors and suppliers. If such third parties are unable to adequately satisfy their contractual commitments to us in a timely manner, our business could be adversely affected.

We are Uncertain Whether Additional Funding Will Be Available For Our Future Capital Needs and Commitments, and If We Cannot Raise Additional Funding, or Access the Credit Markets, We May Be Unable to Complete Development of Our Product Candidates

We will require substantial funds in addition to our existing working capital to develop our product candidates and otherwise to meet our business objectives. We have never generated sufficient revenue during any period since our inception to cover our expenses and have spent, and expect to continue to spend, substantial funds to continue our research and development and clinical programs. Any one of the following factors, among others, could cause us to require additional funds or otherwise cause our cash requirements in the future to increase materially:

 
·
results of research and development activities;
 
·
progress of our preclinical studies or clinical trials;
 
·
results of clinical trials;
 
·
changes in or terminations of our relationships with strategic partners;
 
·
changes in the focus, direction, or costs of our research and development programs;
 
·
competitive and technological advances;
 
·
establishment of marketing and sales capabilities;
 
·
manufacturing;
 
·
the regulatory approval process; or
 
·
product launch.

 
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At December 31, 2009, we had cash, cash equivalents and short-term investments of approximately $6,366,253.   During the first quarter of 2010, we raised an additional $4.6 million.  We currently have no commitments or arrangements for any financing.  We may continue to seek additional capital through public or private financing or collaborative agreements. Our operations require significant amounts of cash. We may be required to seek additional capital, whether from sales of equity or debt or additional borrowings, for the future growth and development of our business. We can give no assurance as to the availability of such additional capital or, if available, whether it would be on terms acceptable to us. 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. The current credit environment has negatively affected the economy, and we have considered how it might affect our business. Events affecting credit market liquidity could increase borrowing costs or limit availability of funds, and due to the continued adverse trends in the credit market, it may not be possible to refinance our existing credit facility to take advantage of lower interest rates. Moreover, the covenants of our term loan agreement contain provisions that may restrict the debt we may incur in the future. If we are not successful in obtaining sufficient capital because we are unable to access the capital markets at financially economical interest rates, it could reduce our research and development efforts and may materially adversely affect our future growth, results of operations and financial results, and we may be required to curtail significantly, or eliminate at least temporarily, one or more of our drug development programs.

We Rely Exclusively on the Royalty Payments Based upon Thalomid ® Sales by a Third Party to Produce our Revenues

We entered into a licensing agreement in 2001 regarding royalty payments for Thalomid®, and in 2004, certain provisions of that agreement were satisfied, which then entitled the Company to share in royalty payments received by Royalty Pharma Finance Trust 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. During the year ended December 31, 2009, royalty payments from Thalomid® sales by Celgene Corporation accounted for substantially all of our total revenues.  As Thalomid® is distributed and sold by Celgene and/or its affiliates, we are reliant on a third party for our revenues.  Our royalty payment in the third quarter of 2009 experienced a decline as compared to the same quarter in 2008, and our total revenues earned in 2009 were lower than 2008.   A wide variety of events could cause Thalomid® sales to decline, resulting in a material reduction in our revenues.  For example, if a competing drug gains greater market share or wider acceptance, or if regulatory approvals for certain uses of Thalomid® are withdrawn, such events could adversely affect our royalty revenue.  In the event that Celgene determines to cease selling Thalomid® or target its sales efforts to other proprietary drugs, or unexpected adverse effects are reported by patients or doctors in connection with the use of Thalomid®, patient and physician confidence in Thalomid® as a treatment could be adversely affected. The inability of one of these third parties to perform these functions, or the failure of any of these parties to perform successfully, could cause our revenues to suffer. Additionally, if a competitor to Celgene successfully introduces a generic pharmaceutical product equivalent to Thalomid® at a relatively lower price and bypasses Celgene’s S.T.E.P.S.® proprietary distribution program, such action could have the effect of reducing the market share and profitability of Thalomid®, thus potentially causing a material adverse effect on our revenues and cash flow. Because we are dependent on sales of Thalomid®, any reduction in Thalomid® sales for any reason, including, but not limited to, the reasons described, would cause our results of operations to suffer.

 
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The Market Price of Our Common Stock May Be Highly Volatile or May Decline Regardless of Our Operating Performance

Our common stock price has fluctuated from year-to-year and quarter-to-quarter and will likely continue to be volatile.  Our stock has not traded at the minimum closing bid price of $1.00 for a period of ten or more days in the past twelve months.  The valuations of many biotechnology companies without consistent product revenues and earnings are extraordinarily high based on conventional valuation standards, such as price to earnings and price to sales ratios. These trading prices and valuations may not be sustained. In the future, our operating results in a particular period may not meet the expectations of any securities analysts whose attention we may attract, or those of our investors, which may result in a decline in the market price of our common stock. Any negative change in the public’s perception of the prospects of biotechnology companies could depress our stock price regardless of our results of operations. These factors may materially and adversely affect the market price of our common stock.

Our Existing Term Loan Contains Affirmative and Negative Covenants That May Restrict our Business and Financing Activities

We entered into a $20 million loan agreement with General Electric Capital Corporation, as agent for the lenders party thereto, on September 12, 2007.  The loan agreement is secured by a pledge of all of our assets other than intellectual property, including the shares of the outstanding capital stock, or other equity interests, of each of our subsidiaries, and contains a variety of operational covenants, including limitations on our ability to incur liens or additional debt, make dispositions, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions and transactions with affiliates, among other restrictions. Any future debt financing we enter into may involve similar or more onerous covenants that restrict our operations. Our borrowings under the loan agreement or any future debt financing we do will need to be repaid, which creates additional financial risk for our company, particularly if our business, or prevailing financial market conditions, are not conducive to paying-off or refinancing our outstanding debt obligations. Furthermore, our failure to comply with the covenants in the loan agreement could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt, which could have a material adverse effect on our cash position, business, prospects, financial condition and results of operations.  Our final scheduled payment under the loan agreement is in January 2011.
 
Our Secured Lender and Preferred Stockholder Would Have Priority in Distributions Over our Common Stockholders Following a Liquidation Event Affecting the Company. As a Result, in the Event of a Liquidation Event, our Common Stockholders Would Receive Distributions Only After Priority Distributions Are Paid

In the event of a Liquidation Event (as such term is defined in our Certificate of Designation of Series A Convertible Preferred Stock), our senior lender would be repaid first out of the proceeds received. Celgene, the sole holder of our outstanding Series A Convertible Preferred Stock (“Series A Preferred”), then would be paid an amount equal to the Series A Preferred liquidation preference of $10.00 per share of Series A Preferred, plus all accrued and unpaid dividends on such shares of Series A Preferred, which totals approximately $7 million as of December 31, 2009.  Additionally, unless waived, the holder of the Series A Preferred would be entitled to receive the Series A liquidation preference plus all accrued and unpaid dividends prior to any distributions to our common stockholders upon the occurrence of certain other liquidation events.  As a result, in the event of a Liquidation Event, our common stockholders’ ability to realize value for their shares would be subject to the payment of such priority distributions.

Development of Our Products is at an Early Stage and is Uncertain

Our proposed products and research programs are in the early stage of clinical development and require significant, time-consuming and costly research and development, testing and regulatory clearances. In developing our products, we are subject to risks of failure that are inherent in the development of these products and therapeutic procedures. For example, it is possible that any or all of our proposed products will be ineffective or toxic, or otherwise will fail to receive necessary FDA clearances. There is a risk that the proposed products will be uneconomical to manufacture or market or will not achieve market acceptance. There is also a risk that third parties may hold proprietary rights that preclude us from marketing our proposed products or that others will market a superior or equivalent product. Further, our research and development activities might never result in commercially viable products.

 
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A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials even after promising results in earlier trials.
 
In particular, given the current conditions in the financial markets, an unfavorable outcome in our Phase 2 trials for ENMD 2076, or a significant delay in initiating such trials, may require us to delay, reduce the scope of, or eliminate this program and could have a material adverse effect on our company and the value of our common stock.
 
Once a clinical trial has begun, it may be delayed, suspended or terminated due to a number of factors, including:
 
 
·
ongoing discussions with regulatory authorities regarding the scope or design of our clinical trials or requests by them for supplemental information with respect to our clinical trial results;
 
 
·
failure to conduct clinical trials in accordance with regulatory requirements;
 
 
·
lower than anticipated retention rate of patients in clinical trials;
 
 
·
serious adverse events or side effects experienced by participants; and
 
 
·
insufficient supply or deficient quality of product candidates or other materials necessary for the conduct of our clinical trials.

Many of these factors may also ultimately lead to denial of regulatory approval of a current or potential product candidate.  If we experience delays, suspensions or terminations in a clinical trial, the commercial prospects for the related product candidate will be harmed, and our ability to generate product revenues will be delayed.

Our product candidates are at the clinical stage of development. Although several of our product candidates have demonstrated some promising results in early clinical (human) trials and preclinical (animal) studies, they may not prove to be effective in humans. For example, testing on animals may occur under different conditions than testing in humans and therefore the results of animal studies may not accurately predict human experience. Likewise, early clinical studies may not be predictive of eventual safety or effectiveness results in larger-scale pivotal clinical trials.

There are many regulatory steps that must be taken before any of these product candidates will be eligible for FDA approval and subsequent sale, including the completion of preclinical and clinical trials. We do not expect that these product candidates will be commercially available for several years, if ever.

Technological Developments By Competitors May Render Our Products Obsolete

If competitors were to develop superior technologies, our technologies could be rendered noncompetitive or obsolete, resulting in a material adverse effect to our business. Developments in the biotechnology and pharmaceutical industries are expected to continue at a rapid pace. Success depends upon achieving and maintaining a competitive position in the development of products and technologies. Competition from other biotechnology and pharmaceutical companies can be intense. Many competitors have substantially greater research and development capabilities, marketing, financial and managerial resources and experience in the industry. Even if a competitor creates a technology that is not superior, we may not be able to compete with such technology.

We Must Show the Safety and Efficacy of Our Product Candidates Through Clinical Trials, the Results of Which are Uncertain

Before obtaining regulatory approvals for the commercial sale of our products, we must demonstrate, through preclinical studies (animal testing) and clinical trials (human testing), that our proposed products are safe and effective for use in each target indication. Testing of our product candidates will be required, and failure can occur at any stage of testing. Clinical trials may not demonstrate sufficient safety and efficacy to obtain the required regulatory approvals or result in marketable products. The failure to adequately demonstrate the safety and efficacy of a product under development could delay or prevent regulatory approval of the potential product.

 
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Clinical trials for the product candidates we are developing may be delayed by many factors, including that potential patients for testing are limited in number. The failure of any clinical trials to meet applicable regulatory standards could cause such trials to be delayed or terminated, which could further delay the commercialization of any of our product candidates. Newly emerging safety risks observed in animal or human studies also can result in delays of ongoing or proposed clinical trials. Any such delays will increase our product development costs. If such delays are significant, they could negatively affect our financial results and the commercial prospects for our products.

The Independent Clinical Investigators and Contract Research Organizations That We Rely Upon to Assist in the Conduct of Our Clinical Trials May Not Be Diligent, Careful or Timely, and May Make Mistakes, in the Conduct of Our Trials

We depend on independent clinical investigators and contract research organizations, or CROs, to assist in the conduct of our clinical trials under their agreements with us. The investigators are not our employees, and we cannot control the amount or timing of resources that they devote to our programs. If independent investigators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, it will delay the approval of our FDA applications and our introduction of new drugs. The CROs we contract with to assist with the execution of our clinical trials play a significant role in the conduct of the trials and the subsequent collection and analysis of data. Failure of the CROs to meet their obligations could adversely affect clinical development of our products.

The Success of Our Business Depends Upon the Members of Our Senior Management Team, Our Scientific Staff and Our Ability to Continue to Attract and Retain Qualified Scientific, Technical and Business Personnel

We are dependent on the principal members of our reconstituted senior management team and scientific staff for our business success. The loss of any of these people could impede the achievement of our development and business objectives. We do not carry key man life insurance on the lives of any of our key personnel. There is intense competition for human resources, including management, in the scientific fields in which we operate and there can be no assurance that we will be able to attract and retain qualified personnel necessary for the successful development of ENMD-2076, and any expansion into areas and activities requiring additional expertise. In addition, there can be no assurance that such personnel or resources will be available when needed. In addition, we rely on a significant number of consultants to assist us in formulating our clinical strategy and other business activities. All of our consultants may have commitments to, or advisory or consulting agreements with, other entities that may limit their availability to us.

We May Need New Collaborative Partners to Further Develop and Commercialize Products, and if We Enter Into Such Arrangements, We May Give Up Control Over the Development and Approval Process and Decrease our Potential Revenue

We plan to develop and commercialize our product candidates both with and without corporate alliances and partners. Nonetheless, we intend to explore opportunities for new corporate alliances and partners to help us develop, commercialize and market our product candidates. We expect to grant to our partners certain rights to commercialize any products developed under these agreements, and we may rely on our partners to conduct research and development efforts and clinical trials on, obtain regulatory approvals for, and manufacture and market any products licensed to them. Each individual partner will seek to control the amount and timing of resources devoted to these activities generally. We anticipate obtaining revenues from our strategic partners under such relationships in the form of research and development payments and payments upon achievement of certain milestones. Since we generally expect to obtain a royalty for sales or a percentage of profits of products licensed to third parties, our revenues may be less than if we retained all commercialization rights and marketed products directly. In addition, there is a risk that our corporate partners will pursue alternative technologies or develop competitive products as a means for developing treatments for the diseases targeted by our programs.

 
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We may not be successful in establishing any collaborative arrangements. Even if we do establish such collaborations, we may not successfully commercialize any products under or derive any revenues from these arrangements. Our strategy also involves entering into multiple, concurrent strategic alliances to pursue commercialization of our core technologies. There is a risk that we will be unable to manage simultaneous programs successfully. With respect to existing and potential future strategic alliances and collaborative arrangements, we will depend on the expertise and dedication of sufficient resources by these outside parties to develop, manufacture, or market products. If a strategic alliance or collaborative partner fails to develop or commercialize a product to which it has rights, we may not recognize any revenues on that particular product.

We Have No Current Manufacturing or Marketing Capacity and Rely on Only One Supplier For Some of Our Products

We do not expect to manufacture or market products in the near term, but we may try to do so in certain cases. We do not currently have the capacity to manufacture or market products and we have limited experience in these activities. The manufacturing processes for all of the small molecules we are developing have not yet been tested at commercial levels, and it may not be possible to manufacture these materials in a cost-effective manner.  If we elect to perform these functions, we will be required to either develop these capacities, or contract with others to perform some or all of these tasks. We may be dependent to a significant extent on corporate partners, licensees, or other entities for manufacturing and marketing of products. If we engage directly in manufacturing or marketing, we will require substantial additional funds and personnel and will be required to comply with extensive regulations. We may be unable to develop or contract for these capacities when required to do so in connection with our business.

We depend on our third-party manufacturers to perform their obligations effectively and on a timely basis. These third parties may not meet their obligations and any such non-performance may delay clinical development or submission of products for regulatory approval, or otherwise impair our competitive position. Any significant problem experienced by one of our suppliers could result in a delay or interruption in the supply of materials to us until such supplier resolves the problem or an alternative source of supply is located. Any delay or interruption would likely lead to a delay or interruption of manufacturing operations, which could negatively affect our operations. Although we have identified alternative suppliers for our product candidates, we have not entered into contractual or other arrangements with them. If we needed to use an alternate supplier for any product, we would experience delays while we negotiated an agreement with them for the manufacture of such product. In addition, we may be unable to negotiate manufacturing terms with a new supplier as favorable as the terms we have with our current suppliers.

Problems with any manufacturing processes could result in product defects, which could require us to delay shipment of products or recall products previously shipped. In addition, any prolonged interruption in the operations of the manufacturing facilities of one of our sole-source suppliers could result in the cancellation of shipments. A number of factors could cause interruptions, including equipment malfunctions or failures, or damage to a facility due to natural disasters or otherwise. Because our manufacturing processes are or are expected to be highly complex and subject to a lengthy FDA approval process, alternative qualified production capacity may not be available on a timely basis or at all. Difficulties or delays in our manufacturing could increase our costs and damage our reputation.

The manufacture of pharmaceutical products can be an expensive, time consuming, and complex process. Manufacturers often encounter difficulties in scaling-up production of new products, including quality control and assurance and shortages of personnel. Delays in formulation and scale-up to commercial quantities could result in additional expense and delays in our clinical trials, regulatory submissions, and commercialization.

 
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Failure of Manufacturing Facilities Producing Our Product Candidates to Maintain Regulatory Approval Could Delay or Otherwise Hinder Our Ability to Market Our Product Candidates

Any manufacturer of our product candidates will be subject to applicable Good Manufacturing Practices (GMP) prescribed by the FDA or other rules and regulations prescribed by foreign regulatory authorities. We and any of our collaborators may be unable to enter into or maintain relationships either domestically or abroad with manufacturers whose facilities and procedures comply or will continue to comply with GMP and who are able to produce our small molecules in accordance with applicable regulatory standards. Failure by a manufacturer of our products to comply with GMP could result in significant time delays or our inability to obtain marketing approval or, should we have market approval, for such approval to continue. Changes in our manufacturers could require new product testing and facility compliance inspections. In the United States, failure to comply with GMP or other applicable legal requirements can lead to federal seizure of violated products, injunctive actions brought by the federal government, inability to export product, and potential criminal and civil liability on the part of a company and its officers and employees.

We Depend on Patents and Other Proprietary Rights, Some of Which are Uncertain

Our success will depend in part on our ability to obtain patents for our products, both in the United States and abroad. The patent position of biotechnology and pharmaceutical companies in general is highly uncertain and involves complex legal and factual questions. Risks that relate to patenting our products include the following:

 
·
our failure to obtain additional patents;
 
·
challenge, invalidation, or circumvention of patents already issued to us;
 
·
failure of the rights granted under our patents to provide sufficient protection;
 
·
independent development of similar products by third parties; or
 
·
ability of third parties to design around patents issued to our collaborators or us.

Our potential products may conflict with composition, method, and use of patents that have been or may be granted to competitors, universities or others. As the biotechnology industry expands and more patents are issued, the risk increases that our potential products may give rise to claims that may infringe the patents of others. Such other persons could bring legal actions against us claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected products. Any such litigation could result in substantial cost to us and diversion of effort by our management and technical personnel. If any of these actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. We may not prevail in any action and any license required under any needed patent might not be made available on acceptable terms, if at all.

We are a party to license agreements that require us to make milestone payments upon attainment of certain regulatory milestones. Failure to meet such milestones could result in the loss of certain rights to compounds covered under such license agreements.

We also rely on trade secret protection for our confidential and proprietary information. However, trade secrets are difficult to protect and others may independently develop substantially equivalent proprietary information and techniques and gain access to our trade secrets and disclose our technology. We may be unable to meaningfully protect our rights to unpatented trade secrets. We require our employees to complete confidentiality training that specifically addresses trade secrets. All employees, consultants, and advisors are required to execute a confidentiality agreement when beginning an employment or a consulting relationship with us. The agreements generally provide that all trade secrets and inventions conceived by the individual and all confidential information developed or made known to the individual during the term of the relationship automatically become our exclusive property. Employees and consultants must keep such information confidential and may not disclose such information to third parties except in specified circumstances. However, these agreements may not provide meaningful protection for our proprietary information in the event of unauthorized use or disclosure of such information.

 
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To the extent that consultants, key employees, or other third parties apply technological information independently developed by them or by others to our proposed projects, disputes may arise as to the proprietary rights to such information. Any such disputes may not be resolved in our favor. Certain of our consultants are employed by or have consulting agreements with other companies and any inventions discovered by them generally will not become our property.

Our Potential Products Are Subject to Government Regulatory Requirements and an Extensive Approval Process

Our research, development, preclinical and clinical trials, manufacturing, and marketing of most of our product candidates are subject to an extensive regulatory approval process by the FDA and other regulatory agencies in the United States and abroad. The process of obtaining FDA and other required regulatory approvals for drug and biologic products, including required preclinical and clinical testing, is time consuming and expensive. Even after spending time and money, we may not receive regulatory approvals for clinical testing or for the manufacturing or marketing of any products. Our collaborators or we may encounter significant delays or costs in the effort to secure necessary approvals or licenses. Even if we obtain regulatory clearance for a product, that product will be subject to continuing review. Later discovery of previously unknown defects or failure to comply with the applicable regulatory requirements may result in restrictions on a product’s marketing or withdrawal of the product from the market, as well as possible civil or criminal penalties.

Potential Products May Subject Us to Product Liability for Which Insurance May Not Be Available

The use of our potential products in clinical trials and the marketing of any pharmaceutical products may expose us to product liability claims. We have obtained a level of liability insurance coverage that we believe is adequate in scope and coverage for our current stage of development. However, our present insurance coverage may not be adequate to protect us from liabilities we might incur. In addition, our existing coverage will not be adequate as we further develop products and, in the future, adequate insurance coverage and indemnification by collaborative partners may not be available in sufficient amounts or at a reasonable cost. If a product liability claim or series of claims are brought against us for uninsured liabilities, or in excess of our insurance coverage, the payment of such liabilities could have a negative effect on our business and financial condition.

We Acquired Miikana in 2006 in a Strategic Transaction and May Engage in Other Strategic Transactions, Which Could Negatively Affect Our Business and Earnings

In January 2006, we acquired Miikana Therapeutics, Inc., a clinical-stage biopharmaceutical company.   In 2010, we may consider strategic and other corporate transactions as opportunities present themselves.  There are risks associated with such activities. These risks include, among others, incorrectly assessing the quality of a prospective strategic partner, encountering greater than anticipated costs in integration, being unable to profitably deploy assets acquired in the transaction, such as drug candidates, possible dilution to our stockholders, and the loss of key employees due to changes in management. Further, strategic transactions may place additional constraints on our resources by diverting the attention of our management from our business operations. Our newly constituted senior management team does not have substantial experience with acquisitions. To the extent we issue securities in connection with additional transactions, these transactions and related issuances may have a dilutive effect on earnings per share and our ownership. Our earnings, financial condition, and prospects after an acquisition depend in part on our ability to successfully integrate the operations of the acquired business or technologies. We may be unable to integrate operations successfully or to achieve expected cost savings. Any cost savings which are realized may be offset by losses in revenues or other charges to earnings.

ITEM 1B. 
UNRESOLVED STAFF COMMENTS.

None.
 
 
19

 
 
ITEM 2. 
PROPERTIES.
 
As of December 31, 2009, EntreMed leased approximately 8,554 square feet of space in Rockville, Maryland where its headquarters are located.  In addition, as of December 31, 2009, the Company leased office space in Durham, North Carolina where our clinical and regulatory operations are based and laboratory space in Toronto, Ontario where our research facility is currently based.  On March 4, 2010, we amended the Rockville lease to reduce the rented space from 8,554 square feet to 4,367 square feet and accordingly reduced the rent on a proportional basis.

ITEM 3. 
LEGAL PROCEEDINGS.

EntreMed is 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 4. 
RESERVED.

Reserved.

PART II

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market for Common Equity

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.  The letter also advised us that 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.

On September 22, 2008, we submitted an application to transfer the trading of our common stock to The NASDAQ Capital Market and our common stock commenced trading on The NASDAQ Capital Market on October 3, 2008. Our trading symbol remained as “ENMD” and the trading of our stock was unaffected by the transfer.

 NASDAQ suspended the enforcement of the minimum bid price rule, because of the current extraordinary market conditions, until July 31, 2009.  Upon reinstatement of the rule on August 3, 2009, under NASDAQ rules, we had until January 15, 2010, to regain compliance with the minimum bid price standard.  We did not regain compliance with the minimum bid price standard of the NASDAQ rules by January 15, 2010.

On January 19, 2010, we received a Staff Determination letter from NASDAQ stating that we were not in compliance with the continued listing rules and that our Common Stock would be delisted unless we requested an appeal of such determination.   On January 20, 2010, we filed an appeal of the Staff's determination to a NASDAQ Hearings Panel (the “Panel”), pursuant to the procedures set forth in the NASDAQ Marketplace Rules.  The hearing request stayed the delisting of the Company’s securities pending the Panel's decision.  On February 25, 2010, we met with the Panel providing them a plan of action, with the intention of returning to compliance with NASDAQ’s requirements.  On March 23, 2010, we received a decision letter from the Panel granting our request to extend the compliance date for an additional 180 days or until July 16, 2010.

 
20

 

The following table sets forth the high and low closing price for our common stock by quarter, as reported by the Nasdaq Stock Market, for the periods indicated:

   
HIGH
   
LOW
 
2008:
           
First Quarter
  $ 1.25     $ 0.57  
Second Quarter
    0.90       0.55  
Third Quarter
    0.62       0.33  
Fourth Quarter
    0.45       0.16  
2009:
               
First Quarter
  $ 0.49     $ 0.16  
Second Quarter
    0.81       0.39  
Third Quarter
    0.62       0.37  
Fourth Quarter
    1.38       0.46  
2010:
               
First Quarter (through March 25, 2010)
  $ 1.08     $ 0.65  

On March 25, 2010, the closing price of our common stock, as reported by the Nasdaq Capital Market, was $0.71 per share.  As of March 25, 2010 there were approximately 829 holders of record of our common stock.

Dividend Policy

Since our initial public offering in 1996, we have not paid cash dividends on our common stock. We currently anticipate that any earnings will be retained for the continued development of our business and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Our Series A Convertible Preferred Stock (“Series A Preferred”) is held exclusively by Celgene Corporation.  The Series A Preferred accrues dividends on each share of Series A Preferred at 6% per year of the original issue price of the Series A Preferred Stock, which is $5.00 per share.  In the event of any liquidation, dissolution or winding up the Company, or the bankruptcy of the Company, all accrued and unpaid dividends will be added to the liquidation preference of such shares of Series A Preferred.  As of December 31, 2009, accrued Series A Preferred dividends totaled $7,035,000.

 
21

 

STOCK PRICE PERFORMANCE PRESENTATION
 
The following chart compares the cumulative total stockholder return on the Company’s Shares with the cumulative total stockholder return of the NASDAQ Stock Market – U. S. Index, and the NASDAQ Pharmaceuticals Index.


   
12/31/2004
   
12/31/2005
   
12/31/2006
   
12/31/2007
   
12/31/2008
   
12/31/2009
 
ENTREMED, INC.
    100.000       59.877       48.765       37.037       4.938       24.691  
NASDAQ STOCK MARKET - US
    100.000       102.135       112.187       121.681       58.639       84.282  
NASDAQ PHARMACEUTICALS
    100.000       110.123       107.793       113.364       105.476       118.522  
 
(1)
Assumes $100 invested on December 31, 2004 and assumes dividends are reinvested.  Measurement points begin with the date of the assumed investment and include the last day of each of the subsequent 5 years through and including December 31, 2009.  The material in this chart is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, (the “1933 Act”) or the 1934 Act, whether made before or after the date of this proxy statement and irrespective of any general incorporation language in such filing.
 
 
22

 

ITEM 6. 
SELECTED FINANCIAL DATA.

The following selected consolidated financial data set forth below has been derived from our audited consolidated financial statements. The data should be read in conjunction with the consolidated financial statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and other financial information included elsewhere in this annual report on Form 10-K.

          
Year Ended December 31,
       
 
 
2009
   
2008
   
2007
   
2006
   
2005
 
STATEMENTS OF OPERATIONS DATA: 
                             
Revenues
                             
License fees
  $ -     $ -     $ -     $ -     $ 590,992  
Royalty revenues
    4,989,725       7,472,061       7,393,463       6,881,799       5,310,439  
Other
    294,333       5,158       2,188       12,559       16,624  
Total revenues
    5,284,058       7,477,219       7,395,651       6,894,358       5,918,055  
                                         
Expenses:
                                       
Research and development
    7,901,522       20,069,229       23,739,392       21,671,117       17,325,048  
General and administrative
    4,104,287       7,764,532       7,386,570       7,393,722       5,920,455  
Acquired In-Process R&D
    -       2,000,000       -       29,481,894       -  
Interest expense
    1,493,400       2,216,163       793,393       156,787       -  
Fixed asset impairment loss
    -       171,576       -       -       -  
Other expense
    70,929       -       -       -       -  
Investment income
    (69,702 )     (882,253 )     (2,112,583 )     (1,867,204 )     (1,010,771 )
Gain on sale of asset
    -       -       -       (52,901 )     (3,420 )
Net loss
  $ (8,216,378 )   $ (23,862,028 )   $ (22,411,121 )   $ (49,889,057 )   $ (16,313,257 )
Dividends on Series A convertible preferred stock
    ( 1,005,000 )     ( 1,005,000 )     ( 1,005,000 )     ( 1,005,000 )     ( 1,005,000 )
Net loss attributable to common shareholders
  $ ( 9,221,378 )   $ ( 24,867,028 )   $ ( 23,416,121 )   $ ( 50,894,057 )   $ ( 17,318,257 )
Net loss per share
  $ (0.11 )   $ (0.29 )   $ (0.28 )   $ (0.71 )   $ (0.36 )
                                         
Weighted average number of shares outstanding
    87,757,765       86,479,768       84,166,552       71,873,734       48,176,914  
                                         
           
As of December 31,
         
   
2009
   
2008
   
2007
   
2006
   
2005
 
BALANCE SHEET DATA:
                                       
Cash and cash equivalents and short-term investments
  $ 6,366,253     $ 24,291,173     $ 47,748,191     $ 50,570,097     $ 30,082,388  
Working capital
    (1,395,158 )     14,782,482       42,929,602       46,268,554       28,510,176  
Total assets
    10,067,028       28,923,395       53,014,908       55,719,534       36,431,885  
Accumulated deficit
    (366,126,413 )     (357,910,035 )     (334,048,007 )     (311,636,886 )     (261,747,829 )
Total stockholders' (deficit) equity
    (1,925,980 )     5,922,166       26,896,978       46,963,219       29,369,190  
 
 
23

 

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. See also "Risk Factors" in Item 1A of this Annual Report.

OVERVIEW

We are a clinical-stage pharmaceutical company focused on developing ENMD-2076, an Aurora A and angiogenic kinase inhibitor for the treatment of cancer.  ENMD-2076 is currently in Phase 1 studies in advanced cancers, multiple myeloma and leukemia, and we expect the initiation of a Phase 2 study in ovarian cancer in the second quarter of 2010.  ENMD-2076 is a novel orally-active, Aurora A/angiogenic kinase inhibitor with potent activity against Aurora A and multiple tyrosine kinases linked to cancer and inflammatory diseases.  ENMD-2076 is relatively selective for the Aurora A isoform in comparison to Aurora B.  Aurora kinases are key regulators of the process of mitosis, or cell division, and are often over-expressed in human cancers. ENMD-2076 exerts its effects through multiple mechanisms of action, including antiproliferative activity and the inhibition of angiogenesis. ENMD-2076 has demonstrated significant, dose-dependent preclinical activity as a single agent, including tumor regression, in multiple xenograft models (e.g. breast, colon, leukemia), as well as activity towards ex vivo-treated human leukemia patient cells.

ENMD-2076 has received orphan drug designation for the treatment of ovarian cancer, multiple myeloma and acute myeloid leukemia (“AML”).

ENMD-2076 is our only program currently under active clinical evaluation.  This prioritization allows us to direct the majority of our resources to the clinical development of ENMD-2076.  However, we also own intellectual property for our other therapeutic candidates.  So that we can continue to accelerate the development of ENMD-2076, we do not intend to initiate additional new studies for these programs unless additional significant financing becomes available to us.  Our other therapeutic candidates include MKC-1, an oral cell-cycle inhibitor with activity against the mTOR pathway that has completed multiple Phase 2 clinical trials for cancer, and ENMD-1198, a novel antimitotic agent that has completed a Phase 1 study in advanced cancers.  We also have an approved Investigational New Drug Application (IND) for the use of Panzem® in rheumatoid arthritis (RA) treatment.  All of our candidates are multi-mechanism drugs that target disease cells and the blood vessels that nourish them, which we believe can be developed to be safe and convenient, and provide the potential for improved patient outcomes.

We have incurred substantial operating losses since our inception due in large part to expenditures for our research and development activities. At December 31, 2009, we had an accumulated deficit of $366 million. We expect to continue to incur expenses, resulting in operating losses, for the foreseeable future due to, among other factors, our continuing clinical trials, planned future clinical trials, and other anticipated research and development activities. Based on current plans, we expect our current available cash and cash equivalents to meet our cash requirements into the fourth quarter of fiscal 2010. Therefore, there exists substantial doubt about our ability to continue as a going concern. We will require significant additional funding prior to January 1, 2011 to fund operations until such time, if ever, we become profitable. We intend to augment our cash and cash equivalent balances as of December 31, 2009 by pursuing other forms of capital infusion, including strategic alliances or collaborative development opportunities with organizations that have capabilities and/or products that are complementary to our capabilities and products in order to continue the development of our potential product candidate that we intend to pursue to commercialization. However, there can be no assurance that adequate additional financing under such arrangements will be available to us on terms that we deem acceptable, if at all.

On January 11, 2010, we sold 3,125,000 shares of our common stock, par value $0.01 per share, to an institutional investor for an aggregate purchase price of $2,500,000 or $0.80 per share.  On February 3, 2010, we sold 3,846,154 shares of our common stock to the same institutional investor for an aggregate purchase price of $2,500,000, or $0.65 per share.  Our net proceeds from these two offerings were approximately $4.6 million.  Additional funds raised by issuing equity securities, may result in dilution to existing shareholders.  If we fail to obtain additional capital when needed, we may be required to delay, scale back, or eliminate our clinical program.

 
24

 

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:

 
-
Going Concern  -  A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business.  This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent.  In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate.  As a result of our operational losses and the potential that we may be unable to meet our cash requirements for the next twelve months, there is substantial doubt about our ability to continue as a going concern.  While we have prepared our consolidated financial statements on a going concern basis, if we do not receive additional funding, our ability to continue as a going concern may be impacted.  Our consolidated financial statements included in this Annual Report on Form 10-K do not reflect any adjustments that might specifically result from the outcome of this uncertainty.

 
-
Revenue Recognition - We recognize revenue in accordance with the provisions of authoritative guidance issued, 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. The majority of our 2009 revenues were 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 sales of approximately $225 million.

 
-
The Company is also eligible to receive royalties from Oxford Biomedica, PLC based on a portion of the net sales of products developed for the treatment of ophthalmic (eye) diseases based in part on Endostatin.  We received our first royalty in the amount of $386,000 under this agreement in 2009 and have accrued at December 31, 2009 a portion of this payment payable to Children’s Medical Center Corporation under the Company’s original Endostatin license agreement with Children’s.

 
-
In the future, royalty payments, if any, will be recorded as revenue when received and/or when collectibility is reasonably assured.

 
-
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 preclinical testing and clinical trials of our product candidates, including the costs of manufacturing drug substance and drug product, regulatory maintenance costs, and facilities expenses.  Research and development costs are expensed as incurred.
 
25

 
-
Expenses for Clinical Trials – Expenses for clinical trials are incurred from planning through patient enrollment to reporting of the 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 the enrollment process.  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.  Costs that are based on clinical data collection and management are recognized in the reporting period in which services are provided.  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 – All share-based payment transactions are recognized in the financial statements at their fair values.  Using the straight-line expense attribution method over the requisite service period, which is generally the option vesting term of three years, share-based compensation expense recognized in the years ended December 31, 2009, 2008 and 2007 totaled $320,000, $1,090,000 and $1,455,000, respectively.

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 forfeiture rate and 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.

RESULTS OF OPERATIONS

Years Ended December 31, 2009, 2008 and 2007.

Revenues. Revenues decreased 29% in 2009 to $5,284,000 from $7,477,000 in 2008 after increasing slightly in 2008 from $7,396,000 in 2007. The three years presented reflect royalty revenues.  The decrease in 2009 revenues results from decreased royalty revenue earned on sales of Thalomid®.  Beginning in 2005, we became entitled to share in the royalty payments received by Royalty Pharma Finance Trust on annual Thalomid® sales above approximately $225 million.  Thalomid® sales in 2009, 2008 and 2007 surpassed the annual revenue targets in the third quarter of each fiscal year and we recorded royalty revenues of $4,990,000, $7,472,000 and $7,393,000, respectively.

 Research and Development Expenses.  Our 2009 research and development expenses totaled $7,902,000, a 61% decrease from costs incurred in 2008. The 2009 amount reflects direct project costs for ENMD-2076 of $5,036,000, $449,000 for MKC-1, $177,000 for ENMD-1198 and $126,000 for Panzem® oncology.  In 2008, our research and development expenses totaled $20,069,000, reflecting direct project costs for ENMD-2076 of $3,707,000, $3,716,000 for MKC-1, $3,298,000 for ENMD-1198 and $3,343,000 for Panzem® oncology.  Research and development expenses totaled $23,739,000 in 2007, which included direct project costs of $3,958,000 for ENMD-2076, $3,241,000 for MKC-1, $2,200,000 for ENMD-1198 and $7,673,000 for Panzem® oncology.  The significant decrease in 2009 research and development spending as compared to costs incurred in 2008 and in 2007, results primarily from our decision to focus our resources on the clinical development of ENMD-2076.  Our 2008 and 2007 costs reflect clinical and manufacturing activities in our discontinued programs.

At December 31, 2009, accumulated direct project expenses for Panzem® oncology were $54,244,000; direct ENMD-1198 project expenses totaled $13,143,000; and, since acquired, accumulated direct project expenses for ENMD-2076 totaled $14,158,000 and for MKC-1, accumulated project expenses totaled $10,406,000.  Our research and development expenses also include non-cash stock-based compensation totaling $116,000, $233,000 and $353,000, respectively, for 2009, 2008 and 2007.  The decreases in stock-based compensation expense are related to lower fair values on fewer stock options granted in 2009 and 2008. The balance of our research and development expenditures includes facility costs and other departmental overhead, and expenditures related to the non-clinical support of our programs.

 
26

 

We expect our research and development expenses in 2010 to increase as compared to expenses in 2009, as we expand ENMD-2076 into Phase 2 and continue to focus on the clinical development of ENMD-2076 and correlative research.  We will continue to conduct research on ENMD-2076 in order to comply with stipulations made by the FDA, as well as to increase understanding of the mechanism of action and toxicity parameters of ENMD-2076 and its metabolites.  Completion of clinical development 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.

We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

 
CLINICAL PHASE
 
ESTIMATED
COMPLETION
PERIOD
Phase I
 
1-2 Years
Phase II
 
2-3 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 preclinical 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 drug 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 preclinical 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.

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.

 
27

 

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 preclinical testing and clinical trials of our product candidates, including the costs of manufacturing drug substance and drug product, regulatory maintenance costs, and facilities expenses.  Overall research and development expenses decreased to $7,902,000 in 2009 from $20,069,000 in 2008 and from $23,739,000 in 2007.

The fluctuations in research and development expenses 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.  We spent $430,000 in 2009, $1,170,000 in 2008 and $2,871,000 in 2007 on these activities.  The decrease in 2009 as compared to 2008 primarily reflects the absence in 2009 of analytical testing and preclinical support services in 2ME2 (2-methoxyestradiol) and ENMD-1198 studies.  The decrease in 2008 as compared to 2007 reflects the absence in 2008 of certain IND-directed expenses associated with the IND submissions for Panzem® NCD for the treatment of rheumatoid arthritis and for ENMD-2076 in oncology during 2007.

 
-
Clinical Trial Costs – Clinical trial costs decreased to $2,518,000 in 2009, from $5,194,000 in 2008, which increased from $4,282,000 in 2007.  The 2009 decrease relates to the Company’s restructuring and the reprioritization of our clinical programs, focusing on the clinical development of ENMD-2076.  Our increase in 2008 clinical expenses resulted primarily from the initiation of clinical trials for ENMD-2076 and also the expanded MKC-1 clinical program.  Costs of such trials include the clinical site fees, monitoring costs and data management costs.

 
-
Contract Manufacturing Costs – The costs of manufacturing the material used in clinical trials for our product candidates is reflected in contract manufacturing. These costs include bulk manufacturing, encapsulation and fill and finish services, and product release costs. Contract manufacturing costs decreased in 2009 to $965,000 from $3,418,000 in 2008, and from $5,681,000 in 2007.  The 2009 decrease reflects the absence of contract manufacturing activities for ENMD-1198 and Panzem® NCD. The most significant component of the 2008 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.  The 2007 contract manufacturing expenses reflect the costs of supplying finished drug product to support new and ongoing trials for three clinical drug candidates and also the cost of securing clinical material to support Phase 1 trials for ENMD-2076, which started in 2008.

 
-
Personnel Costs — Personnel costs decreased to $2,320,000 in 2009 from $5,751,000 in 2008, which increased from $5,301,000 in 2007.  The 2009 decreased expenses result from our corporate restructuring at the end of 2008, at which time, we eliminated certain management positions and significantly reduced our research and development staff and operations.  The increase in 2008 is attributed primarily to severance costs related to the December 2008 reduction in force, offset by the decision not to accrue bonuses in 2008.
 
 
-
Also reflected in our 2009 research and development expenses are patent costs of $487,000, facility and related expenses of $606,000, laboratory supplies and animal costs of $33,000, consulting fees of $301,000 and travel expenses of $83,000.  In 2008, these expenses totaled $767,000, $1,483,000, $985,000, $451,000 and $193,000, respectively, and in 2007, these expenses totaled $1,251,000, $1,500,000, $1,111,000, $627,000 and $243,000, respectively.  The reduction in expenses in 2009 resulted from the decision to focus our resources on the development of ENMD-2076 and the elimination of costs associated with our other product candidates.
 
 
28

 
 
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 approximately $4,175,000 in 2009 from $7,765,000 in 2008, which increased from $7,387,000 in 2007.  The decrease in 2009 is primarily related to our corporate restructuring, which resulted in reductions in our headcount and the elimination of three executive officer positions in December 2008.  Such executive officer positions have not been opened to date.  The increase in 2008 is primarily related to accrued severance costs associated with the termination of those corporate officers.

In-process R&D. 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 2008, EntreMed initiated a Phase 1 clinical trial with its Aurora A and angiogenic kinase inhibitor, ENMD-2076, in patients with solid tumors.  Dosing of the first patient with ENMD-2076 triggered a purchase price adjustment milestone of $2 million, which we opted to pay in stock. 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.  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 advances to Phase 2, dosing of the first patient in a Phase 2 study will trigger a milestone payment of $3 million, which we expect to occur in the second quarter of 2010 and may be paid in cash or stock at our sole discretion.

Interest Expense.  Interest expense for the year ended December 31, 2009 decreased to approximately $1,493,000 (including $133,000 of non-cash interest) from $2,216,000 (including $199,000 of non-cash interest).  Interest expense increased in 2008 from $793,000 in 2007.  The increase in 2008 results from a financing transaction with General Electric Capital Corporation (GECC) in September 2007 and the related interest expense.  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 in 2009 to $70,000 from $882,000 in 2008 and $2,113,000 in 2007 as a result of lower yields on lower invested balances in interest-bearing cash accounts and investments.

Dividends on Series A Convertible Preferred Stock.  The Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 reflect accrued, but unpaid, dividends of $1,005,000 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 will accumulate dividends at a rate of 6% and will participate in dividends declared and paid on the 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 in 2010 and the foreseeable future before we commercialize any products.  Based on our current plans, we expect our current available cash and cash equivalents to meet our cash requirements into September of fiscal 2010.

Our independent registered public accounting firm, Ernst & Young LLP, has concluded that substantial doubt exists about our ability to continue as a going concern, and has included an explanatory paragraph to describe this uncertainty in its audit report on our consolidated financial statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K.  We did not include any adjustments to the consolidated financial statements included in this Annual Report on Form 10-K to reflect the possible future effects that may result from the uncertainty of our ability to continue as a going concern because we believe that we will continue to be a financially sound and viable business, continuing to conduct clinical trials for, and further development of, ENMD-2076 and provide value to our shareholders.

 
29

 

We will require significant additional funding prior to January 1, 2011 to fund operations until such time, if ever, we become profitable.  We intend to augment our cash and cash equivalent balances as of December 31, 2009 by pursuing other forms of capital infusion, including strategic alliances or collaborative development opportunities with organizations that have capabilities and/or products that are complementary to our capabilities and products in order to continue the development of our potential product candidates that we intend to pursue to commercialization.

We intend to explore one or more of the following alternatives to raise additional capital so that the Company can continue as a going concern through 2010:

 
·
selling additional equity securities;
 
·
out-licensing technologies or product candidates to one or more corporate partners;
 
·
monetizing our Thalomid® royalty payment stream
 
·
completing an outright sale of non-priority assets; and/or
 
·
engaging in one or more strategic transactions.

We also will consider additional actions to reduce our expenses.

There can be no assurance that adequate additional financing under such arrangements will be available to us on terms that we deem acceptable, if at all.  If additional funds are raised by issuing equity securities, dilution to existing shareholders may result.  If we fail to obtain additional capital when needed, we may be required to delay or scale back our Phase 2 plans for ENMD-2076.

At December 31, 2009, we had cash and short-term investments of $6,366,253, with a working capital deficit of ($1,395,158).

In January 2006, we acquired Miikana Therapeutics, a private biotechnology company, in exchange for 9.96 million shares of our common stock and the assumption of certain obligations of Miikana.  We acquired certain drug candidates in connection with the acquisition, including the lead molecule in the Aurora Kinase Program, ENMD-2076, which advanced into clinical development in 2008.  ENMD-2076 is a kinase inhibitor with activity towards Aurora A and multiple other kinases linked to promoting cancer.  Dosing of the first patient in ENMD-2076 trials triggered a milestone payment of $2 million to the former Miikana stockholders payable in stock or cash, at the Company’s discretion.  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, dosing of the first patient in a Phase 2 trial for ENMD-2076 will trigger an additional milestone payment of $3 million, payable in stock or cash, at the Company’s sole discretion.  We expect this milestone to occur during the second quarter of 2010.  Beyond this milestone, the former Miikana stockholders may earn up to an additional $13 million of potential payments upon the satisfaction of additional clinical and regulatory milestones.  Through the Miikana acquisition, we also acquired rights to MKC-1, a Phase 2 clinical candidate licensed from Roche by Miikana in April 2005.  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, ENMD-2076 is the only program currently under active clinical evaluation by the Company, we do not expect to trigger any of these milestone payments during fiscal 2010.
 
 
30

 

FINANCING ACTIVITIES

In September 2007, we entered into a $20 million term loan agreement with General Electric Capital Corporation (“GECC”), as agent, Merrill Lynch Capital and Oxford Finance Corporation (collectively with GECC, the “Lenders”).   The loan accrues interest in arrears at a fixed annual interest rate of 10.47% until fully repaid.  The loan is to be repaid by the Company to GECC, for the ratable benefit of the Lenders, as nine consecutive monthly payments of interest only, each in the amount of $174,500, which commenced on November 1, 2007, and thirty consecutive monthly payments of principal and interest, each in the amount of $760,606, which commenced on August 1, 2008.  In connection with the transaction, we issued warrants with an exercise price of $2.00 per share to the Lenders providing rights to purchase their respective pro rata share of 250,000 shares of common stock of the Company.  The unpaid balance of the loan at December 31, 2009 is approximately $9,311,000.

The Loan Agreement contains customary affirmative and negative operating and financial covenants.  We were in compliance with such covenants as of December 31, 2009.

On August 6, 2009, we filed a Form S-3 registration statement with the SEC utilizing a “shelf” registration process.  On October 9, 2009, the Form S-3 registration statement was declared effective by the SEC.  Pursuant to this shelf registration statement, we may sell debt or equity securities in one or more offerings up to a total public offering price of $30.0 million.  We believe that this shelf registration statement currently provides us additional flexibility with regard to potential financings that we may undertake when market conditions permit or our financial condition may require.  To date, we have completed two offerings under the shelf registration statement.

On January 11, 2010, we sold 3,125,000 shares of our common stock to an institutional investor for an aggregate purchase price of $2,500,000 or $0.80 per share.

On February 3, 2010, we sold 3,846,154 shares of our common stock to the same institutional investor for an aggregate purchase price of $2,500,000, or $0.65 per share.

To accomplish our business plans, we will be required to continue to conduct substantial development activities for ENMD-2076. Under our current operating plans for 2010, we expect to have ENMD-2076, our leading program, under clinical investigation and we expect our 2010 results of operations to reflect a net loss of approximately $8,000,000, including non-cash charges of approximately $1,400,000.  These projections are subject to judgment and estimation and could significantly change.

We expect that the majority of our 2010 revenues will continue to be from royalties on the sales of Thalomid®.  Thalomid® is sold by a third-party and is subject to competition from other products and generic drugs, and we have no control over such party’s sales efforts or the resources devoted to Thalomid® sales.  In 2009 and 2008, we received royalty-sharing revenue in the amount of $4,990,000 and $7,472,000, respectively.  There can be no assurance on the future trends of Thalomid® sales and the amount of revenue we will receive and record in 2010.  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.  In connection with the announced collaboration between Oxford Biomedica and Sanofi Aventis which included certain compounds that are governed by our licensing agreement, we received $368,000 in 2009, representing a share of the upfront payment received by Oxford Biomedica.  Accordingly, a sub-royalty payment of $74,000 to be remitted to Children’s Medical Center Corporation has been accrued at December 31, 2009.  We do not control the drug development efforts of Oxford and have no information or control over when or whether any milestones will be reached that would result in additional payments to us.

INFLATION AND INTEREST RATE CHANGES

Management does not believe that our working capital needs are sensitive to inflation and changes in interest rates.

 
31

 

CONTRACTUAL OBLIGATIONS

The table below sets forth our contractual obligations at December 31, 2009.
 
CONTRACTUAL OBLIGATIONS
 
PAYMENTS DUE BY PERIOD
 
   
Total
   
Less than 1
year
   
1-3 years
   
3 - 5 years
   
More than
5 years
 
Operating Leases Obligations
  $ 74,000     $ 74,000     $     $     $  
Loan Payable, including interest
    9,311,000       8,555,000       756,000                  
Obligations under Licensing and Miikana Merger Agreements (1)
                             
Purchase Obligations
                                       
Clinical Trial Contracts
    2,698,000       1,350,000       1,348,000              
Contract Manufacturing
    505,000       253,000       252,000              
                                         
Total Contractual Cash Obligations
  $ 12,588,000     $ 10,232,000     $ 2,356,000     $     $  

(1)
In the event that we reach certain development milestones for Panzem® and MKC-1, such as initiation of Phase 3 trials and multiple regulatory approvals (US, Europe and Japan), we could be obligated to make future milestone payments of up to $35.75 million under the related license agreements.  Of this amount, up to $10 million could become payable while these product candidates are in clinical development.  We would also be obligated to make annual-sales-based-royalty payments if we successfully commercialize either compound.  Our other development programs are in Phase 1 or earlier stages of development.  Under the terms of the Miikana merger agreement we could be obligated to make additional payments to Miikana’s selling shareholders of $16 million upon the attainment of certain clinical milestones for two acquired preclinical programs.  In addition, under the terms of our license agreement with Celgene, we could make future development and commercialization milestone payments, including payments for approvals in the U.S. and other countries, totaling $25.25 million. Of the milestones, $5.25 million would be payable if a product candidate successfully moves through clinical trials.  We would also be required to pay annual-sales-based-royalties under this agreement.  We cannot forecast with any degree of certainty whether any of our product candidates will reach additional developmental milestones.  We therefore have excluded the milestone amounts and any royalty payments from the above table.
 
OFF-BALANCE-SHEET ARRANGEMENTS
 
We had no material off-balance sheet arrangements during fiscal year 2009.

NEW ACCOUNTING PRONOUNCEMENTS
 
In July 2009, the FASB Accounting Standards Codification (“ASC” or “Codification”) became the authoritative source of accounting principles generally accepted in the United States (“GAAP”) recognized by the FASB. All existing FASB accounting standards and guidance were superseded by the ASC. Instead of issuing new accounting standards in the form of statements, FASB staff positions and Emerging Issues Task Force abstracts, the FASB now issues Accounting Standards Updates that update the Codification. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws continue to be additional sources of authoritative GAAP for SEC registrants.  This Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. There has been no change to our consolidated financial statements due to the implementation of the Codification other than changes in reference to various authoritative accounting pronouncements in the consolidated financial statements.

 
32

 

On June 30, 2009, we adopted authoritative guidance which requires a publicly-traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such disclosures include the fair value of all financial instruments, for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position; the related carrying amount of these financial instruments; and the methods and significant assumptions used to estimate the fair value. Other than the required disclosures (see the Debt note), the adoption of this guidance had no impact on our consolidated financial statements.

In May 2009, the FASB issued authoritative guidance regarding subsequent events which is intended to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Specifically, the guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of this pronouncement, which is effective for financial statements issued for interim and annual financial periods ending after June 15, 2009, did not have a material impact on our financial position and results of operations.

In April 2009, the FASB issued authoritative accounting guidance on how to determine the fair value of assets and liabilities in the current economic environment, which reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. Additional guidance issued in April 2009 modifies the requirements for recognizing other-than-temporarily impaired debt securities and revises the existing impairment model for such securities by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. The FASB also issued guidance to enhance the disclosure of financial instruments for both interim and annual periods. The adoption of this guidance had no material effect on our consolidated results of operations, financial position or liquidity.
 
In June 2008, the FASB issued authoritative guidance which mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock. The adoption of this guidance as of January 1, 2009 had no material effect on our consolidated results of operations, financial position or liquidity.

ITEM 7A. 
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 December 31, 2009.

ITEM 8. 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The response to this item is submitted in a separate section of this report. See Index to Consolidated Financial Statements on Page F-1.

ITEM 9. 
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

 
33

 

ITEM 9A. 
CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Executive Chairman and Principal Accounting Officer (its principal executive officer and principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)).  Our Executive Chairman and Principal Accounting Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management (including our Executive Chairman and Principal Accounting Officer) to allow timely decisions regarding required disclosures.  Based on such evaluation, our Executive Chairman and Principal Accounting Officer have concluded these disclosure controls are effective as of December 31, 2009.
 
Changes in Internal Control Over Financial Reporting
 
There have not been any changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Management's Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f).  Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. Any internal control over financial reporting, no matter how well designed, has inherent limitations.  As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those internal controls determined to be effective can provide only reasonable assurance with respect to reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Under the supervision and with the participation of our management, including our Chief Operating Officer and Principal Accounting Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.  Based on our assessment, we concluded that our internal control over financial reporting was effective as of December 31, 2009.

Ernst & Young LLP, the independent registered public accounting firm that has audited our consolidated financial statements included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2009, a copy of which is included in this Annual Report on Form 10-K.

 
34

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of EntreMed, Inc.

We have audited EntreMed, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). EntreMed, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, EntreMed, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of EntreMed, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 of EntreMed, Inc. and our report dated March 29, 2010 expressed an unqualified opinion thereon that included an explanatory paragraph regarding EntreMed, Inc.’s ability to continue as a going concern.
/s/ Ernst & Young LLP
McLean, Virginia
March 29, 2010

 
35

 

ITEM 9B. 
OTHER INFORMATION

None.

PART III

ITEM 10. 
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2009.  Such information is incorporated herein by reference.

We have adopted a Code of Ethics, as defined in applicable SEC and NASD rules, that applies to directors, officers and employees, including our principal executive officer and principal accounting officer.  The Code of Ethics is available on the Company’s website at www.entremed.com.

ITEM 11. 
EXECUTIVE COMPENSATION

Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2009.  Such information is incorporated herein by reference.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2009.  Such information is incorporated herein by reference.
 
Options under Employee Benefit Plans
 
The following table discloses certain information about the options issued and available for issuance under all outstanding Company option plans, as of December 31, 2009.
 
   
(a)
   
(b)
   
(c)
 
Plan category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
   
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
   
Number of securities
remaining available for
future issuance under
equity compensation
plans [excluding
securities reflected in
column (a)]
 
Equity compensation plans approved by security holders
    6,984,606     $ 5.50       3,135,043  
Equity compensation plans not approved by security holders
    0     $ 0.00       0  
Total
    6,984,606     $ 5.50       3,135,043  

Warrants issued under the unauthorized plans represent compensation for consulting services rendered by the holders.

 
36

 

ITEM 13. 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2009.  Such information is incorporated herein by reference.

ITEM 14. 
PRINCIPAL ACCOUNTING FEES AND SERVICES.

Information required by this item will be contained in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2009.  Such information is incorporated herein by reference.

PART IV

ITEM 15. 
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a) 1. FINANCIAL STATEMENTS - See index to Consolidated Financial Statements.

      2. Schedules

All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the information required is set forth in the financial statements or notes thereto.

      3. Exhibits

2.1(1)
 
Agreement and Plan of Merger, dated as of December 22, 2005 among EntreMed, Inc., E.M.K. Sub, Inc., Miikana Therapeutics, Inc., and Andrew Schwab
     
3.1(2)
 
Amended and Restated Certificate of Incorporation of EntreMed, Inc.
     
3.2(3)
 
By-laws of EntreMed, Inc.
     
4.1(4)
 
Certificate of Designations of the Series A Convertible Preferred Stock
     
4.2(5)
 
Warrant to Purchase Common Stock, dated January 13, 2003, issued by EntreMed, Inc. in favor of Celgene Corporation
     
4.3(6)
 
Warrant to Purchase Common Stock, dated September 12, 2007, issued by EntreMed, Inc. in favor of General Electric Capital Corporation
     
4.4(6)
 
Warrant to Purchase Common Stock, dated September 12, 2007, issued by EntreMed, Inc. in favor of Merrill Lynch Capital
     
4.5(6)
 
Warrant to Purchase Common Stock, dated September 12, 2007, issued by EntreMed, Inc. in favor of Oxford Finance Corporation
     
10.1(7)
 
1992 Stock Incentive Plan*
     
10.2(7)
 
Amended and Restated 1996 Stock Option Plan*
     
10.3(7)
  
Form of Stock Option Agreement, under Amended and Restated 1996 Stock Option Plan*
 
 
37

 

10.4(8)
 
License Agreement between Children's Hospital Medical Center Corporation and EntreMed, Inc. signed December 20, 1996 regarding Estrogenic Compounds as Anti-Mitotic Agents
     
10.5(9)
 
Amendment to the 1996 Stock Option Plan*
     
10.6(10)
 
License Agreement between Celgene Corporation and EntreMed, Inc. signed December 9, 1998 regarding thalidomide intellectual property
     
10.7(10)
 
Lease Agreement between EntreMed, Inc. and Red Gate III Limited Partnership, dated June 10, 1998
     
10.8(11)
 
1999 Long-Term Incentive Plan*
     
10.9(12)
 
 EntreMed, Inc. 2001 Long-Term Incentive Plan*
     
10.10.1(13)
 
Purchase Agreement between Bioventure Investments kft and EntreMed, Inc., dated June 15, 2001+
     
10.10.2(13)
 
Amendment 1 to Purchase Agreement between Bioventure Investments kft and EntreMed, Inc., date July 13, 2001
     
10.10.3(13)
 
Amendment 2 to Purchase Agreement between Bioventure Investments kft and EntreMed, Inc., dated July 30, 2001
     
10.10.4(13)
 
Amendment 3 to Purchase Agreement between Bioventure Investments kft and EntreMed, Inc., dated August 3, 2001
     
10.11(14)
 
Board Service Agreement, dated February 5, 2003, between Michael M. Tarnow and EntreMed, Inc. *
     
10.12(15)
 
Securities Purchase Agreement by and among EntreMed, Inc., and Celgene Corporation, dated as of December 31, 2002
     
10.13(15)
 
Investor and Registration Rights Agreement by and between EntreMed, Inc. and Celgene Corporation, dated as of December 31, 2002
     
10.14(16)
 
Employment Agreement between EntreMed and Carolyn F. Sidor, M.D. effective December 1, 2004, as amended*
     
10.15(17)
 
EntreMed, Inc. 2001 Long Term Incentive Plan Non-Qualified Stock Option Grant Agreement (Director)*
     
10.16(17)
 
EntreMed, Inc. 2001 Long Term Incentive Plan Non-Qualified Stock Option Grant Agreement (Non-Director Employee)*
     
10.17(17)
 
Form of Change in Control Agreement*
     
10.18(17)
 
Amendment to Employment Agreement by and between the Company and Carolyn F. Sidor, effective April 16, 2007*
     
10.19(17)
 
Amendment to Employment Agreement by and between the Company and Cynthia Wong Hu, effective April 16, 2007*
     
10.20(18)
 
Form of Restricted Stock Award under EntreMed, Inc. 2001 Long Term Incentive Plan*
     
10.21(19)
  
License Agreement between EntreMed and Celgene Corporation signed March 24, 2005 regarding the development and commercialization of Celgene’s small molecule tubulin inhibitor compounds for the treatment of cancer+

 
38

 

10.22(20)
 
Employment Agreement by and between EntreMed and Cynthia Wong, dated as of June 1, 2006, as amended*
     
10.23(21)
 
License Agreement, dated January 9, 2006, by and between Elan Pharma International Limited and EntreMed, Inc. +
     
10.24(21)
 
Research, Development and Commercialization Agreement, dated as of April 20, 2005, by and between Hoffman-La Roche Inc. and F. Hoffman La Roche Ltd. (together, “Roche”), and Miikana Therapeutics Inc.+
     
10.25(22)
 
Loan and Security Agreement dated September 12, 2007 among General Electric Capital Corporation, Oxford Finance Corporation, Merrill Lynch Capital, as the lenders and EntreMed, Inc. and Miikana Therapeutics, Inc. as the loan parties
     
10.26(22)
 
Promissory Note dated September 12, 2007 to General Electric Capital Corporation
     
10.27(22)
 
Promissory Note dated September 12, 2007 to Merrill Lynch Capital
     
10.28(22)
 
Promissory Note dated September 12, 2007 to Oxford Finance Corporation
     
10.29(23)
 
Amendment to Lease between EntreMed, Inc. and Red Gate III Limited Partnership, dated January 27, 2009
     
10.30(23)
 
Employment Agreement by and between the Company and Kathy Wehmeir-Davis, dated as January 1, 2009*
     
10.31(23)
 
Employment Agreement by and between the Company and Mark R. Bray, dated as January 1, 2009*
     
23.1
 
Consent of Independent Registered Public Accounting Firm
     
31.1
 
Rule 13a-14(a) Certification of President and CEO
     
31.2
 
Rule 13a-14(a) Certification of Chief Financial Officer
     
32.1
 
Rule 13a-14(b) Certification by President and CEO
     
32.2
 
Rule 13a-14(b) Certification by Chief Financial Officer
     
*
 
Compensatory Plan, Contract or Arrangement.
     
+
 
Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been filed with the Commission pursuant to our application for confidential treatment.
     
(1)
 
Incorporated by reference from our Form 8-K previously filed with the Securities and Exchange Commission on December 29, 2005.
     
(2)
 
Incorporated by reference from our Form 10-Q for the quarter ended June 30, 2006 previously filed with the Securities and Exchange Commission.
     
(3)
  
Incorporated by reference from our Form 8-K previously filed with the Securities and Exchange Commission on December 6, 2007

 
39

 

(4)
 
Incorporated by reference to Exhibit 99.4 of our Form 8-K dated December 31, 2002 previously filed with the Securities and Exchange Commission on January 15, 2003.
     
(5)
 
Incorporated by reference to Exhibit 99.5 of our Form 8-K dated December 31, 2002 previously filed with the Securities and Exchange Commission on January 15, 2003.
     
(6)
 
Incorporated by reference from our Form 10-Q for the quarter ended September 30, 2007 previously filed with the Securities nd Exchange Commission.
     
(7)
 
Incorporated by reference from our Registration Statement on Form S-1 declared effective by the Securities and Exchange Commission on June 11, 1996.
     
(8)
 
Incorporated by reference from our Form 10-K for the year ended December 31, 1996 previously filed with the Securities and Exchange Commission.
     
(9)
 
Incorporated by reference from our Form 10-K for the year ended December 31, 1997 previously filed with the Securities and Exchange Commission.
     
(10)
 
Incorporated by reference from our Form 10-K for the year ended December 31, 1998 previously filed with the Securities and Exchange Commission.
     
(11)
 
Incorporated by reference from our Form 10-Q for the quarter ended June 30, 1999 previously filed with the Securities and Exchange Commission.
     
(12)
 
Incorporated by reference from Exhibit A to our Definitive Proxy Statement filed with the Securities and Exchange Commission on May 12, 2006.
     
(13)
 
Incorporated by reference from our Form 10-Q for the quarter ended June 30, 2001 previously filed with the Securities and Exchange Commission.
     
(14)
 
Incorporated by reference from our Form 10-K/A for the year ended December 31, 2002 previously filed with the Securities and Exchange Commission.
     
(15)
 
Incorporated by reference from our Form 8-K dated December 31, 2002 previously filed with the Securities and Exchange Commission on January 15, 2003.
     
(16)
 
Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on December 6, 2004, as amended on Form 8-K filed on April 17, 2007 with the Securities and Exchange Commission.
     
 (17)
 
 Incorporated by reference from our Form 8-K previously filed with the Securities and Exchange Commission on April 17, 2007.
     
(18)
 
Incorporated by reference from our Form 8-K previously filed with the Securities and Exchange Commission on March 11, 2005.
     
(19)
 
Incorporated by reference from our Form 10-Q for the quarter ended March 31, 2005 previously filed with the Securities and Exchange Commission.
     
(20)
 
Incorporated by reference from our Form 8-K previously filed with the Securities and Exchange Commission on June 6, 2006.
     
(21)
  
Incorporated by reference from our Form 10-Q for the quarter ended March 31, 2006 previously filed with the Securities and Exchange Commission.

 
40

 

(22)
 
Incorporated by reference from our Form 10-Q for the quarter ended September 30, 2007 previously filed with the Securities and Exchange Commission.
     
(23)
  
Incorporated by reference from our Form 10-K for the fiscal year ended December 31, 2008, previously filed with the Securities and Exchange Commission.
 
 
41

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

March 29, 2010
ENTREMED, INC.
   
By:
/s/Michael M. Tarnow
 
 Michael M. Tarnow
 
 Executive Chairman

Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

SIGNATURE
 
TITLE
 
DATE
/s/Michael M. Tarnow
 
Executive Chairman
 
March 29, 2010
Michael M. Tarnow
       
         
/s/ Kathy Wehmeir-Davis
 
Principal Accounting Officer
 
March 29, 2010
Kathy Wehmeir-Davis 
       
         
/s/Donald S. Brooks
 
Director
 
March 25, 2010
Donald S. Brooks
       
         
/s/Dwight L. Bush
 
Director
 
March 25, 2010
Dwight L. Bush
       
         
/s/Jennie C. Hunter-Cevera
 
Director
 
March 29, 2010
Jennie C. Hunter-Cevera
       
         
/s/Mark C. M. Randall
 
Director
 
March 29, 2010
Mark C. M. Randall
       
         
/s/Peter S. Knight
 
Director
 
March 29, 2010
Peter S. Knight
       

 
42

 
  
The following consolidated financial statements of EntreMed, Inc. are included in Item 8:

Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2009 and 2008
F-3
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2009, 2008 and 2007
F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
F-6
Notes to Consolidated Financial Statements
F-7
 
 
F-1

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of EntreMed, Inc.:
 
We have audited the accompanying consolidated balance sheets of EntreMed, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December, 31 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of EntreMed, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
The accompanying consolidated financial statements have been prepared assuming that EntreMed, Inc. will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses and negative cash flows from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The 2009 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), EntreMed, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 29, 2010 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP
McLean, Virginia
March 29, 2010

 
F-2

 

EntreMed, Inc.
Consolidated Balance Sheets

   
DECEMBER 31,
 
   
2009
   
2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 6,312,182     $ 16,743,129  
Short-term investments
    54,071       7,548,044  
Accounts receivable, net of allowance for doubtful accounts of $72,145 at December 31, 2009 and $54,145 at December 31, 2008
    3,286,858       3,880,108  
Prepaid expenses and other
    220,925       420,940  
Total current assets
    9,874,036       28,592,221  
                 
Property and equipment, net
    171,498       263,715  
Other assets
    21,494       67,459  
Total assets
  $ 10,067,028     $ 28,923,395  
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,968,607     $ 3,496,198  
Accrued liabilities
    745,183       2,584,327  
Current portion of loan payable
    8,555,404       7,708,451  
Deferred rent
    -       20,763  
Total current liabilities
    11,269,194       13,809,739  
                 
Loan payable, less current portion
    723,814       9,191,490  
                 
Stockholders' (deficit) equity:
               
                 
Convertible preferred stock, $1.00 par value; 5,000,000 shares authorized and 3,350,000 shares issued and outstanding at December 31, 2009 and 2008 (liquidation  value - $33,500,000 at December 31, 2009 and 2008)
    3,350,000       3,350,000  
Common stock, $.01 par value: 170,000,000 shares authorized at December 31, 2009 and 2008; 88,671,445 and 88,489,278 shares issued and outstanding at December 31, 2009 and 2008, respectively
    886,715       884,893  
Additional paid-in capital
    367,997,962       367,689,943  
Treasury stock, at cost:  874,999  shares held at
               
December 31, 2009 and 2008
    (8,034,244 )     (8,034,244 )
Accumulated other comprehensive income
    -       (58,391 )
Accumulated deficit
    (366,126,413 )     (357,910,035 )
Total stockholders' (deficit) equity
    (1,925,980 )     5,922,166  
Total liabilities and stockholders' (deficit) equity
  $ 10,067,028     $ 28,923,395  

See accompanying notes.

 
F-3

 

EntreMed, Inc.
Consolidated Statements of Operations

   
YEAR ENDED DECEMBER 31,
 
   
2009
   
2008
   
2007
 
Revenues:
                 
Royalties
    4,989,725       7,472,061       7,393,463  
Other
    294,333       5,158       2,188  
      5,284,058       7,477,219       7,395,651  
                         
Costs and expenses:
                       
Research and development
    7,901,522       20,069,229       23,739,392  
General and administrative
    4,104,287       7,764,532       7,386,570  
Acquired In-Process R&D
    -       2,000,000       -  
      12,005,809       29,833,761       31,125,962  
                         
Investment income
    69,702       882,253       2,112,583  
Interest expense
    (1,493,400 )     (2,216,163 )     (793,393 )
Fixed asset impairment loss
    -       (171,576 )     -  
Other expense
    (70,929 )     -       -  
                         
Net loss
    (8,216,378 )     (23,862,028 )     (22,411,121 )
                         
Dividends on Series A convertible preferred stock
    (1,005,000 )     (1,005,000 )     (1,005,000 )
                         
Net loss attributable to common shareholders
  $ (9,221,378 )   $ (24,867,028 )   $ (23,416,121 )
                         
Net loss per share (basic and diluted)
  $ (0.11 )   $ (0.29 )   $ (0.28 )
Weighted average number of shares outstanding (basic and diluted)
    87,757,765       86,479,768       84,166,552  

See accompanying notes.

 
F-4

 

ENTREMED, INC.
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
 
                                             
Accumulated
             
                                 
Additional
   
Deferred
   
Other
             
   
Preferred Stock
   
Common Stock
   
Treasury
   
Paid-in
   
Stock
   
Comprehensive
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Stock
   
Capital
   
Compensation
   
Income (Loss)
   
Deficit
   
Total
 
Balance at December 31, 2006
    3,350,000     $ 3,350,000       83,964,586     $ 848,400     $ (8,034,244 )   $ 362,318,737     $ -     $ 117,212     $ (311,636,886 )   $ 46,963,219  
Issuance of common stock for options exercised
    -       -       75,000       750       -       81,000       -       -       -       81,750  
Issuance of common stock for warrants exercised
    -       -       675,000       6,750       -       666,774       -       -       -       673,523  
Fair value of warrants issued pursuant