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CASI Pharmaceuticals, Inc (DE) - Quarter Report: 2003 March (Form 10-Q)

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20459

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission file number 0-20713

ENTREMED, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   58-1959440
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)

9640 Medical Center Drive
Rockville, Maryland
(Address of principal executive offices)

20850
(Zip code)

(301) 217-9858
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES     X        NO          

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES     X        NO          

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the most recent practicable date.

     
                     Class                        Outstanding at May 7, 2003
Common Stock $.01 Par Value   28,583,566

 


 

ENTREMED, INC.
Table of Contents

         
PART I. FINANCIAL INFORMATION   PAGE
 
 
 
Item 1 — Financial Statements
       
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
    3  
Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2002
    4  
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002
    5  
Notes to Consolidated Financial Statements
    6  
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
    8  
Item 3 — Quantitative and Qualitative Disclosures About Market Risk
    13  
Item 4 –- Disclosure Controls and Procedures
    14  
Part II. OTHER INFORMATION
       
Item 1 — Legal Proceedings
    14  
Item 2 — Changes in Securities
    14  
Item 3 — Defaults upon Senior Securities
    14  
Item 4 — Submission of Matters to Vote of Security Holders
    14  
Item 5 — Other Information
    14  
Item 6 — Exhibits and Reports on Form 8-K
    14  
SIGNATURES
    15  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains and incorporates by reference certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “will,” “expect,” “anticipate” or similar words. These forward-looking statements include, among others, statements regarding the timing of our clinical trials and the expected increases in our expenses.

Our forward-looking statements are based on information available to us today, and we will not update these statements. Our actual results may differ significantly from those discussed in our forward-looking statements due to, among other factors, operating losses and anticipation of future losses; the value of our common stock; uncertainties relating to our technological approach; uncertainty of our product candidate development; our need for additional capital and uncertainty of additional funding; our dependence on collaborators and licensees; intense competition and rapid technological change in the biopharmaceutical industry; uncertainties relating to our patent and proprietary rights; uncertainties relating to clinical trials, government regulation and uncertainties of obtaining regulatory approval on a timely basis or at all; our dependence on key personnel, research collaborators and scientific advisors; uncertainties relating to health care reform measures and third-party reimbursement; risks associated with product liability; and other factors discussed in our other filings with the Securities and Exchange Commission.

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EntreMed, Inc.
Consolidated Balance Sheets

                     
        March 31, 2003   December 31, 2002
       
 
        (Unaudited)  
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 6,553,096     $ 24,067,045  
 
Short-term investment
    8,413,400        
 
Accounts receivable
    244,447       309,292  
 
Interest receivable
    172,962       95  
 
Prepaid expenses and other
    711,296       272,425  
 
   
     
 
Total current assets
    16,095,201       24,648,857  
Furniture and equipment, net
    2,548,876       3,152,072  
Other assets
    9,283       9,283  
 
   
     
 
Total assets
  $ 18,653,360     $ 27,810,212  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 5,053,382     $ 10,065,163  
 
Accrued liabilities
    613,522       1,891,931  
 
Current portion of deferred revenue
    95,496       110,809  
 
Current portion of notes payable
    73,108       4,864,952  
 
Common stock repurchase liability
           
 
   
     
 
Total current liabilities
    5,835,508       16,932,855  
Deferred revenue, less current portion
    262,614       286,488  
Other long-term liabilities
          80,000  
Minority interest
    17,164       17,223  
Stockholders’ equity:
               
 
Convertible preferred stock, $1.00 par and $1.50 liquidation value:
               
 
5,000,000 shares authorized, 3,350,000 issued and outstanding at March 31, 2003 and December 31, 2002, respectively
    3,350,000       3,350,000  
 
Common stock, $.01 par value:
               
   
90,000,000 shares authorized, 24,418,566 and 24,145,700 shares issued and outstanding at March 31, 2003 and December 31 2002, respectively
    252,936       241,457  
 
Additional paid-in capital
    233,978,617       228,316,897  
 
Treasury stock, at cost: 874,999 shares held at March 31, 2003 and December 31, 2002, respectively
    (8,034,244 )     (8,034,244 )
 
Deferred stock compensation
          (61,846 )
 
Accumulated deficit
    (217,009,235 )     (213,318,618 )
 
   
     
 
Total stockholders’ equity
    12,538,074       10,493,646  
 
   
     
 
Total liabilities and stockholders’ equity
  $ 18,653,360     $ 27,810,212  
 
   
     
 

The accompanying notes are an integral part of the consolidated financial statements.

3


 

EntreMed, Inc.
Consolidated Statements of Operations
(Unaudited)

                   
      Three Months Ended
      March 31, 2003   March 31, 2002
     
 
Revenues:
               
 
Collaborative research and development
  $ 188,000     $  
 
Licensing
    23,874       23,874  
 
Grants
    300,000       34,263  
 
Royalties
    1,673       1,793  
 
   
     
 
 
    513,547       59,930  
Costs and expenses:
               
 
Research and development
    2,630,606       10,858,672  
 
General and administrative
    1,627,204       3,791,012  
 
   
     
 
 
    4,257,810       14,649,684  
Interest expense
          (95,376 )
Investment income
    53,647       170,651  
 
   
     
 
Net loss
  $ (3,690,616 )   $ (14,514,479 )
Dividends on Series A convertible preferred stock
    (251,250 )      
Net loss attributable to common shareholders
  $ (3,941,866 )   $ (14,514,479 )
 
   
     
 
Net loss per share (basic and diluted)
  $ (0.16 )   $ (0.67 )
 
   
     
 
Weighted average number of shares outstanding (basic and diluted)
    24,405,812       21,777,087  
 
   
     
 

The accompanying notes are an integral part of the consolidated financial statements.

4


 

EntreMed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

                       
          THREE MONTH PERIOD ENDED
          MARCH 31,
          2003   2002
         
 
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net loss
  $ (3,690,616 )   $ (14,514,479 )
Adjustments to reconcile net loss to net cash used by operating
               
 
Activities:
               
   
Depreciation and amortization
    355,025       366,795  
   
Recognition of non-cash stock compensation
    33,000       23,727  
   
Non-cash interest expenses
          72,369  
   
Common stock repurchase liability
          247,916  
   
Minority interest
    (60 )     (234 )
   
Changes in operating assets and liabilities:
               
     
Accounts receivable
    (25,161 )     109,378  
     
Interest receivable
    (172,867 )     (23,703 )
     
Prepaid expenses and other
    (438,871 )     27,782  
     
Accounts payable
    (4,543,501 )     (6,135,235 )
     
Accrued liabilities
    (1,212,901 )     (1,132,241 )
     
Contingent grant
          80,000  
     
Deferred revenue
    (23,874 )     453,606  
 
   
     
 
Net cash used in operating activities
    (9,719,826 )     (20,424,319 )
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of short term financial instruments
    (8,413,400 )      
Reduction in ownership of MaxCyte’s cash
    (418,108 )      
Purchases of furniture and equipment
    (4,650 )     (206,864 )
 
   
     
 
Net cash used in investing activities
    (8,836,158 )     (206,864 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net proceeds from sale of common stock
    1,060,770       4,940,409  
Proceeds from sale of warrants
          322,520  
Payment of principle on note payable
    (18,735 )     (265,223 )
Proceeds from issuance of long-term debt
          550,000  
 
   
     
 
Net cash provided by financing activities
    1,042,035       5,547,706  
Net decrease in cash and cash equivalents
    (17,513,949 )     (15,083,477 )
Cash and cash equivalents at beginning of year
    24,067,045       41,386,300  
 
   
     
 
Cash and cash equivalents at end of year
  $ 6,553,096     $ 26,302,823  
 
   
     
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Interest paid
  $     $ 23,007  
 
   
     
 

The accompanying notes are an integral part of the unconsolidated financial statements.

5


 

ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (unaudited)

1. Basis of Presentation

     Our accompanying 2003 unaudited consolidated financial information includes the accounts of our 85% owned subsidiary, Cytokine Sciences, Inc. versus the 2002 information which reflects both Cytokine and our previously consolidated subsidiary MaxCyte, Inc. MaxCyte was formed in July 1998 as a wholly owned subsidiary and on April 1, 2000 was capitalized with $40,000 in cash including $1,000 from a MaxCyte officer. All intercompany balances and transactions have been eliminated in consolidation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such consolidated financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to our audited consolidated financial statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2002.

2. Recent Accounting Pronouncement

     In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003. The Company is currently in the process of evaluating what impact, if any, FIN 46 will have on its financial condition, results of operations or liquidity.

3. Change in Basis of MaxCyte

     The Board of Directors of both EntreMed and MaxCyte adopted a plan to recapitalize MaxCyte. As a result of the recapitalization, the Company no longer controls and will no longer consolidate MaxCyte effective the first quarter of 2003. As a result of the recapitalization, EntreMed now owns 45% of MaxCyte. The investment in MaxCyte is accounted for using the equity method. The reduction of EntreMed’s ownership in MaxCyte resulted in a change in EntreMed’s basis in MaxCyte. The change from fully consolidating MaxCyte to reflecting the investment in MaxCyte on the equity method, resulted in a $4.6 million credit to additional paid-in capital.

4. Short-term investments

     Short-term investments consist of corporate debt securities, all of which mature within on year. We classify these investments as available for sales. Such securities are stated at market value. The unrealized gains and losses are nominal as of March 31, 2003. Realized gains and losses

6


 

and declines in value judged to be other than temporary on securities available for sale, if any, are included in operations. The cost of securities sold is calculated using the specific identification method. As of March 31, 2003, the cost of the investment was $8,460,566. Realized gains have been insignificant.

5. Stock-Based Compensation

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (SFAS 148), the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) to stock-based employee compensation is as follows:

                 
    Three months ended March 31,
    2003   2002
   
Net income (loss), as reported
  $ (3,690,616 )   $ (14,514,479 )
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (2,309,130 )     (3,522,215 )
Add: Stock-based non-employee compensation included in net income (loss)
    33,000       23,727  
Dividend on Series A convertible stock preferred stock
    (251,250 )      
Pro forma net (loss) attributable to common shareholders
  $ (6,250,996 )   $ (18,092,967 )
Net income (loss) per share:
               
Basic and diluted – as reported
  $ (0.16 )   $ (0.67 )
Basic and diluted – pro forma
  $ (0.26 )   $ (0.83 )

     The effect of applying SFAS No. 123 on the three month periods ended March 31, 2003 and 2002 pro forma net loss and net loss per share as stated above is not necessarily representative of the effects on reported net loss for future years, due to, among other things, (1) the vesting period of the stock options and (2) the fair value of additional stock options in future years.

6. Contingencies

     With respect to a previously-reported outstanding liability for manufacturing costs, Chiron Corporation filed a complaint against the Company on April 11, 2003 in Alameda County (California) Superior Court, seeking to recover $2,862,388.59 for manufacturing services related to our product candidates pursuant to the Additional Manufacturing Services Agreement between Chiron and the Company dated June 5, 2002. The Company has settled dispute with Chiron and the complaint will be dismissed.

7. Subsequent event

     On April 28, 2003, we completed the sale 4.1 million shares of common stock to institutional investors for approximately $10.25 million in gross proceeds. In connection with the sale, we issued warrants to purchase an additional 1.025 million shares at an exercise price of $3.375 per share. The shares and warrants were offered through a prospectus supplement to our effective shelf registration statement.

7


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

     Since our inception in September 1991, we have devoted substantially all of our efforts and resources to sponsoring and conducting research and development on our own behalf and through collaborations. Through March 31, 2003, all of our revenues have been generated from license fees, research and development funding, royalty payments, the sale of royalty rights, the sale of our interest in a licensing agreement and certain research grants; we have not generated any revenue from direct product sales. We anticipate our primary revenue sources for the next few years to include research grants and collaboration payments under current or future arrangements. The timing and amounts of such revenues, if any, will likely fluctuate and depend upon the achievement of specified research and development milestones. Results of operations for any period may be unrelated to the results of operations for any other period.

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 financial statements and accompanying notes. Actual results could differ materially from those estimates. The items in our financial statements requiring significant estimates and judgments are as follows:

    Grant Revenue — The Company has received government grants for the development of potential malaria vaccines. We have also received a government grant to support financially our Phase II Endostatin clinical trial in patients with neuroendocrine tumors. Grants are funded in specific amounts based on funding requests submitted to the grantor. Grant revenues are recognized and realized at the time that research and development activities are performed.
 
    Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with pre-clinical testing and clinical trials of our product candidates, including the costs of manufacturing the product candidates, and facilities expenses. Research and development costs are expensed as incurred.
 
    We have stock option plans under which options to purchase shares of our common stock may be granted to employees, consultants and directors at a price no less that the fair market value on the date of grant. We account for our stock-based compensation in accordance with the provisions of APB No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant between the fair value of the Company’s stock and the exercise price of the option and is recognized ratably over the vesting period of the option. But, because our options must be granted at fair market value, we recognize no compensation expense in accordance with APB No. 25. If we were to adopt SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), we would recognize compensation expense based upon the fair value at the grant date for awards under the plans using the fair value method. We account for equity instruments issued to nonemployees in accordance with SFAS No. 123 and EITF 96-18, Accounting for Equity Instruments that are issued to other than employees for acquiring, or in conjunction with selling goods or services.

8


 

RESULTS OF OPERATIONS

For the Three Months Ended March 31, 2002 and March 31, 2003.

     Revenues. Revenues increased 757% in the three month period ending March 31, 2003 to $514,000 from $60,000 in the comparable 2002 period. The increase results primarily from a grant received to support our Endostatin Phase II clinical trial in patients with neuroendocrine tumors and contract revenues resulting from performance as a subcontractor under an NIH sponsored Malaria Vaccine program.

     Research and Development Expenses. From inception through March 31, 2003 we have incurred research and development expenses of $210,631,000. Included in this amount are the expenses related to our three product candidates, Panzem®, Endostatin and Angiostatin. At March 31, 2003 the accumulated expenses for each of these development projects are $18,310,000, $70,583,000 and $34,890,000 respectively. Project expenses for Panzem® of $496,000, Endostatin of $391,000 and Angiostatin of $294,000 are reflected in our 2003 R&D expenses for the three month period ending March 31, 2003 of $2,631,000. Research and Development expenses for the comparable 2002 period were $10,859,000. The decrease in 2003 reflects the refocus and elimination of some research and development programs and the associated shift in emphasis from the protein product candidates towards our small molecule programs, including Panzem®. Project costs for Panzem®, Endostatin and Angiostatin were $956,000, $3,048,000 and $1,831,000 respectively for the three month period ending March 31, 2002. In addition to the accumulated expenses attributable to our three product candidates, we have sponsored several research programs at Children’s Hospital, Boston in an aggregate of $18,050,000, and we have recorded $5,931,000 in research and development costs incurred by MaxCyte. Reflected in our research and development expenses are sponsored research payments to Children’s Hospital of $1,000,000 in the period ended March 31, 2002. We did not make any sponsored research payments to Children’s Hospital in the three month period ending March 31, 2003 and have no obligation to make future sponsored research payments to Children’s Hospital. MaxCyte’s research and development costs for the three month period ending March 31, 2002 were $562,000. The balance of our accumulated research and development expenses are attributable to discovery research and preclinical development of additional product candidates and costs associated with the management of research and development operations and facilities.

     The amounts of expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. As of March 31, 2003, three of our proprietary product candidates, Panzem®, Endostatin and Angiostatin, were in the Phase II stage of clinical trials. Completion of clinical trials 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.

9


 

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

         
    ESTIMATED
    COMPLETION
CLINICAL PHASE   PERIOD

 
Phase I
  1 Year
Phase II
  1-2 Years
Phase III
  2-4 Years

     The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:

    the number of patients that ultimately participate in the trial;
 
    the duration of patient follow-up that seems appropriate in view of the results;
 
    the number of clinical sites included in the trials; and
 
    the length of time required to enroll suitable patient subjects.

     We test our potential product candidates in numerous pre-clinical studies to identify indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus our resources on more promising product candidates or indications.

     An important element of our business strategy is to pursue the research and development of a range of product candidates for a variety of oncology and non-oncology indications. This allows us to diversify the risks associated with our research and development expenditures. As a result, we believe our future capital requirements and our future financial success are not substantially dependent on any one product candidate. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

     Our proprietary product candidates have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our clinical data establish safety and efficacy. Historically, the results from pre-clinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

     Furthermore, our business strategy includes the option of 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.

10


 

     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. 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 pre-clinical testing and clinical trials of our product candidates, including the costs of manufacturing the product candidates, and facilities expenses. Research and development expenses decreased to $2,631,000 in 2003 from $10,859,000 for the comparable period in 2002. The decrease in overall research and development costs reflects the shift in emphasis from the protein product candidates towards our small molecule programs including Panzem®. Components of the decrease are broad based including the elimination of some programs and are associated with the following:

    Decreased personnel—Personnel costs decreased to $820,000 for the three month period ended March 31, 2003 from $2,228,000 in 2002. Staffing levels have been reduced by over 60% in 2003 from 2002. The decrease results from the refocus and elimination of some research and development programs and the associated staff reductions.
 
    Collaborative Research Agreements— We have made payments to our collaborators of $67,000 and $1,605,000 for the three months ending March 31, 2003 and 2002 respectively. Sponsored research payments to academic collaborators include payments to Children’s Hospital, Boston of $1,000,000 in 2002.
 
    Clinical Trial Costs—Clinical costs decreased to $489,000 in the three months ending March 31, 2003 from $774,000 in the period ending March 31, 2002. The decrease reflects less clinical activity as result of our decision to focus on small molecule candidates led by Panzem® while we maintain the open trials for Endostatin and Angiostatin. Costs of such trials include the clinical investigator site fees, monitoring costs and data management costs. Contracted regulatory support costs decreased in 2003 to $16,000 from $137,000 in 2002. In addition, we contribute clinical trial product material under our CRADA with the NCI who is conducting trials collaboratively with EntreMed on Endostatin and Panzem®.
 
    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, storage, encapsulation and fill finish services and product release costs. Contract manufacturing costs for the three months ending March 31 decreased to $156,000 in 2003 from $3,158,000 in 2002. The decrease reflects the Company’s decision to stockpile clinical material in 2001 and 2002. The 2003 costs result primarily from Panzem® encapsulation and bulk protein storage costs. We expect that manufacturing costs will increase in future reporting periods as we manufacture additional bulk Panzem® to support ongoing clinical trials and reformulation efforts.

11


 

     General and administrative expense. General and administrative expenses decreased to $1,627,000 in the three month period ending March 31, 2003 from $3,791,000 in the comparable 2002 period. The 2003 period decrease reflects our reduced head count and significantly lower legal expenses as a result of the settlement of the Abbott and BMT litigations in 2002. In 2002 we also recorded costs associated with our Bristol Myers-Squibb stock repurchase obligation.

     Interest expense. In December 2002 we made the final payment on a promissory note secured by the majority of our equipment and therefore we did not record any interest expense during the three month period ending March 31, 2003. For the three month period ending March 31, 2002 interest expense totaled approximately $95,000; the majority of this amount reflects the accrual of interest relating to MaxCyte’s issuance of convertible promissory notes in 2001 and 2002.

     Investment income. Investment income decreased by 68% in 2003 to $54,000 from $171,000 as a result of continued low investment yields and lower balances in interest bearing cash accounts during the three month period ending March 31, 2003 versus the comparable period in 2002.

LIQUIDITY AND CAPITAL RESOURCES

     To date, we have been engaged primarily in research and development activities. As a result we have incurred and expect to continue to incur operating losses for 2003 and the foreseeable future before we commercialize any products. In addition, under the terms of certain licensing agreements, we must be diligent in bringing potential products to market and may be required to make future milestone payments of up to $2,685,000. If we fail to comply with the milestones or fail to make any required milestone payment, we could face the termination of the relevant license agreement.

     To accomplish our business plans, we will be required to continue to conduct substantial development activities for all of our proposed products. Expenditures on these activities are expected to approximate $14,000,000 in 2003. In addition, our results of operations will also reflect additional restructuring charges of approximately $1,000,000 relating to other organizational changes as we complete our transition to small molecule programs.

     We intend to continue to pursue strategic relationships to provide resources for the further development of our product candidates. There can be no assurance, however, that these discussions will result in relationships or additional funding. In addition, we will continue to seek capital through the public or private sale of securities. If we are successful in raising additional funds through the issuance of equity securities, stockholders likely will 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.

     Based on our assessment of the availability of capital and the above described actions, in the absence of new financing, we believe we will have adequate resources to fund operations into 2004. At March 31, 2003, we had cash and short term investments of approximately $14,966,000 with working capital of approximately $10,260,000. In addition we received gross proceeds of $10,250,000 in April 2003 from the sale of our common stock and warrants. As we become more financially stable we may consider other uses of our capital including acquisition of additional intellectual property and other investments in technology and technology companies.

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     The table below sets forth our contractual obligations at March 31, 2003.

                                         
CONTRACTUAL OBLIGATIONS   PAYMENTS DUE BY PERIOD        

            Next twelve                        
    Total   months   1-3 years   4 - 5 years After 5 years  

Debt
  $ 73,000       73,000                          
Operating Leases
    6,046,000       994,000       1,906,000       1,954,000       1,192,000  
Clinical Trial Contracts
    814,000       814,000                          
Collaborative Research Contracts
    75,000       75,000                          
Contract Manufacturing
    2,490,000       2,490,000                          

Total Contractual Obligations
  $ 9,498,000       4,446,000       1,906,000       1,954,000       1,192,000  

     On October 31, 2002 we were notified by the Nasdaq Listing Qualifications Department that EntreMed’s common stock was subject to delisting from the Nasdaq National Market because it was not in compliance with Marketplace Rule 4450(b)(1)(A), which requires that our common stock have a market value of listed securities of $50 million. We subsequently requested an appeal hearing before a Nasdaq Listing Qualifications Panel. At the hearing, held in December 2002, we presented a plan for EntreMed to return to compliance and remain in compliance with the continued listing standards for the Nasdaq National Market.

     In February 2003 we received a determination from the Nasdaq Listing Qualifications Panel to continue the listing of EntreMed’s securities on the Nasdaq National Market. As part of the determination, EntreMed was required to file the Form 10-K for the fiscal year ended December 31, 2002 and must file the Form 10-Q for the quarter ended March 31, 2003 with the SEC and Nasdaq evidencing shareholders’ equity of at least $10,000,000 on or before March 31, 2003 and May 15, 2003, respectively. As of March 31, 2003, our consolidated balance sheet reflects shareholders’ equity of $12,538,000.

     In order to fully comply with the Nasdaq Panel’s continued listing determination, EntreMed must be able to demonstrate compliance with all requirements for continued listing on the Nasdaq National Market and to notify Nasdaq of any significant events that occur until the Form 10-Q is filed. The Nasdaq Panel reserves the right to modify or terminate this exception upon review of the Company’s reported financial results and to reconsider the terms of this exception, if there is a material change in EntreMed’s financial or operational character. In the letter notifying us of its decision, the Nasdaq Panel observed that we had presented a “definitive plan” that will enable us to evidence compliance with all requirements for continued listing on the Nasdaq National Market within a reasonable period of time and to sustain compliance with those requirements over the long term.

INFLATION AND INTEREST RATE CHANGES

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without incurring investment market volatility risk. Our investment income is sensitive to

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the general level of U.S. interest rates. In this regard, changes in the U.S. interest rates affect the interest earned 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 March 31, 2003.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

     Under the supervision and with the participation of the Company’s President and Chief Operating Officer and Chief Financial Officer (its principal executive officer and principal financial officer), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures within 90 days of the filing date of this quarterly report. Based on that evaluation, the President and Chief Operating Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

     
Item 1.   LEGAL PROCEEDINGS
     
    This information as set forth in Note 2 of “Notes to Consolidated Financial Statements” appearing in Item 1 of Part I of this report is incorporated herein by reference.
     
Item 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS
     
      Recent Sales of Unregistered Securities
 
      In December 2002 and January 2003, we issued 2,753,872 shares of our common stock and 675,000 warrants to purchase shares of our common stock to certain of our creditors in partial satisfaction of certain outstanding obligations owed to such creditors. In the aggregate, these securities were issued in satisfaction of approximately $4,968,000 in outstanding indebtedness.
 
      As previously reported, in December 2002 we sold our assets, properties and rights relating to the Company’s thalidomide analog programs. As part of the transaction, we terminated our Analog Agreements and License Agreement with Children’s Medical Center Corporation. In conjunction with such cancellation, we issued Children’s Medical Center Corporation warrants to purchase 900,000 shares of our common stock.
 
      In May 2003 we issued to Ferghana Securities Inc. a warrant to purchase 37,273 shares of our common stock for services as financial advisor.
 
      The securities were sold pursuant to Section 4(2) of the Securities Exchange Act of 1934 as a transaction not involving a public offering.
     
Item 3.   DEFAULTS UPON SENIOR SECURITIES
     
    Not applicable.
     
Item 4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
     
    Not applicable.
     
Item 5.   OTHER INFORMATION
     
    Not applicable.
     
Item 6.   EXHIBITS AND REPORTS ON FORM 8-K
     
    (a) Exhibits
     
         10.49   Employment Agreement between EntreMed and Neil J. Campbell dated April 30, 2003
         99.1    Certification of Chief Executive Officer
         99.2    Certification of Controller
     
    (b) Reports on Form 8-K
     
         Form 8k filed 4/25/03 to announce sale of common stock and warrants to certain institutional investors.
     
         Form 8k filed 1/15/03 to announce the sale of preferred stock and warrants to Celgene Corporation on 12/31/02.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
    ENTREMED, INC.
(Registrant)
Date: March 15, 2003   /s/ Neil J. Campbell
   
    Neil J. Campbell
President and Chief Operating Officer
 
Date: March 15, 2003   /s/ Dane R. Saglio
   
    Dane R. Saglio
Chief Financial Officer

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CERTIFICATIONS

I, Neil J. Campbell, certify that:

1.   I have reviewed this annual report on Form 10-Q of EntreMed, Inc.
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
  c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ Neil J. Campbell
Neil J. Campbell
President

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CERTIFICATIONS

I, Dane R. Saglio, certify that:

1.   I have reviewed this annual report on Form 10-Q of EntreMed, Inc.
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
  c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ Dane R. Saglio
Dane R. Saglio
Principal Financial Officer

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