CASI Pharmaceuticals, Inc (DE) - Quarter Report: 2012 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

¨       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)

9640 Medical Center Drive

Rockville, Maryland

(Address of principal executive offices)

20850

(Zip code)

(240) 864-2600

(Registrant’s telephone number, including area code)

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

YES 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 x    NO ¨

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):

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨    NO x

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

ENTREMED, INC.

Table of Contents

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.

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; the difficulty of executing our business strategy in China; our inability to enter into strategic partnerships for the development, commercialization, manufacturing and distribution of our proposed product candidate; risks relating to the need for additional capital and the uncertainty of securing additional funding on favorable terms; declines in actual sales of Thalomid^® resulting in reduced royalty payments; risks associated with our product candidates; any 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; the lack of success in the clinical development of any of our 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). Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. Additional information about the factors and risks that could affect our business, financial condition and results of operations, are contained in our filings with the U.S. Securities and Exchange Commission (“SEC”), which are available at www.sec.gov.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

EntreMed, Inc.

Consolidated Balance Sheets

(Unaudited)

See accompanying notes.

EntreMed, Inc.

Consolidated Statements of Operations

(Unaudited)

See accompanying notes.

EntreMed, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes.

ENTREMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012 (unaudited)

The accompanying consolidated financial statements include the accounts of EntreMed, Inc. (the Company or EntreMed) and its subsidiary, Miikana Therapeutics, Inc. (Miikana). All inter-company balances and transactions have been eliminated in consolidation. The Company refers to EntreMed and its consolidated subsidiary.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such consolidated financial statements do not include all of the information and disclosures required by U. S. generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

Material subsequent events have been considered for disclosure and recognition through the filing date of these consolidated financial statements.

Liquidity Risks and Management’s Plans

The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since inception, the Company has incurred significant losses from operations and has incurred an accumulated deficit of $391.8 million.  The Company expects to continue to incur operating losses, for the foreseeable future due to, among other factors, its continuing clinical activities. The proceeds from the issuance of the Company’s $10 million convertible notes, and warrants to purchase 1,739,132 shares of the Company’s common stock (the “Strategic Financing”) in February 2012 allow the Company to have sufficient cash to meet its cash requirements for at least the next 12 months. At the Company’s 2012 annual stockholders’ meeting on April 30, 2012, the stockholders approved the Strategic Financing transaction, and the convertible notes automatically converted into common stock on May 1, 2012 (See Note 2). The Company will continue to exercise tight controls over operating expenditures. The Company will continue to pursue opportunities, as required, to raise additional capital and will also actively pursue non- or less-dilutive arrangements in China to support the Company’s dual-country approach to drug development.

On November 22, 2011, the Company received a letter from the Listing Qualifications Staff (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”), notifying the Company that it did not comply with Nasdaq Listing Rule 5550(b)(1) (the “Rule”), which requires the Company to maintain a minimum of $2.5 million in stockholders’ equity for continued listing on the Nasdaq Capital Market if it does not otherwise meet the other requirements under the Nasdaq Capital Market continued listing rules.

The Company submitted a plan to regain compliance and, on February 3, 2012, was granted an extension until May 21, 2012 to evidence compliance with the Rule. The extension was contingent on completion and shareholder approval of the Strategic Financing which was obtained on April 30, 2012 (See Note 2). On May 4, 2012, the Company received a letter from the Staff stating that the Company complies with the Rule. Nasdaq will continue to monitor the Company’s ongoing compliance with the stockholder’ equity requirement and, if it fails to evidence compliance with the continued listing rules upon the filing of its periodic report for the quarter ending June 30, 2012, the Company may be subject to delisting, at which time the Company may appeal the Nasdaq Staff’s determination to a Nasdaq Hearings Panel.

As described in Note 1 and in connection with the Strategic Financing, on January 20, 2012, the Company entered into a Convertible Note and Warrant Purchase Agreement (the “Purchase Agreement”) with certain strategic accredited investors (the “Investors”), pursuant to which the Company issued and sold to the Investors, in a private placement, subordinated mandatorily convertible promissory notes (collectively, the “Notes”) with an aggregate principal amount of $10 million. The Company also issued warrants (the “2012 Warrants”) to the Investors to purchase an aggregate of 1,739,132 shares of the Company's common stock, par value $0.01 per share (“Common Stock”). The 2012 Warrants cover a number of shares of common stock equal to 20% of the principal amount of the Notes purchased by each Investor, divided by $1.15.  The 2012 Warrants have an exercise price of $1.40 per share and shall be exercisable on or after July 29, 2012 and expire five years after the exercisable date. The relative fair value of the 2012 Warrants issued is $2,155,527, calculated using the Black-Scholes-Merton valuation model value of $1.58 with an expected and contractual life of 5.5 years, an assumed volatility of 103%, and a risk-free interest rate of 0.71%. In February 2012, the 2012 Warrants were recorded as additional paid-in-capital and a discount on the Notes. For the three and six-month periods ended June 30, 2012, $1,563,013 and $2,155,527, respectively, of the debt discount has been amortized as non-cash interest expense. The debt discount was fully amortized upon conversion of the Notes.

The Strategic Financing was completed on February 2, 2012 (the “Closing”). The Company received net proceeds of approximately $9.3 million. The Company paid one of the investors a fee in the amount of 6% of the aggregate amount invested in the Strategic Financing, for the investor’s due diligence, role in structuring and negotiating the transaction and as reimbursement for the investor’s fees incurred in connection with the Strategic Financing. As of June 30, 2012 and December 31, 2011, the Company incurred $683,955 and $19,733 of debt issuance costs that were deferred and recorded as other current assets. Non-cash interest expense related to the amortization of debt issuance costs, which includes the fee paid to the investor, was $495,948 and $683,955 for the three and six-month periods ended June 30, 2012, respectively. All debt issuance costs have been fully amortized and recorded as interest expense upon conversion of the Notes in the second quarter of 2012.

The Company received approval of the Strategic Financing from the Company's stockholders at the 2012 stockholders meeting on April 30, 2012. On May 1, 2012, the Notes, including accrued interest of $144,658, automatically and immediately converted into 8,821,431 shares of common stock and the 2012 Warrants are exercisable on or after July 29, 2012.  The Notes bore an interest rate of 6% and converted at a conversion price of $1.15 per share.  The conversion price reflects the 10-day average closing sale price of the Company’s Common Stock ending on January 20, 2012.

The Notes were not convertible, and the Warrants were not exercisable, prior to receiving stockholder approval. The Notes contain a contingent beneficial conversion feature as the conversion price of the shares was less than the share price on the date of the Notes issuance. The beneficial conversion feature is valued at $7,057,153 and was recorded as non-cash interest expense and additional paid-in-capital in the second quarter of 2012, upon removal of the contingency and conversion of the Notes on May 1, 2012.

Pursuant to the terms of the Purchase Agreement, the Company has granted registration rights to the Investors. The Company filed a resale registration statement, which became effective on August 8, 2012, covering the shares of Common Stock underlying the Notes and upon exercise of the Warrants.

The Company granted representatives of the Investors, the right to designate one member to the Company’s Board of Directors, or to each designate a board observer (an “Investor Designee”). In the event either representative declines to designate an Investor Designee, the other shall have the right to designate a second Investor Designee. Pursuant to the terms of the Purchase Agreement, the Investors’ board representation rights shall decrease ratably in proportion to their ownership of Common Stock, such that the percentage of the Board of Directors represented by the Investors Designees shall not exceed the Investors’ proportionate percentage equity ownership in the Company at any time.

In connection with the Strategic Financing (see Note 2), and upon stockholder approval of the Strategic Financing at the 2012 annual meeting on April 30, 2012, Celgene has converted all of its preferred stock to an aggregate of 1,522,727 shares of common stock, pursuant to the terms and conditions of the Series A Preferred Stock. As of May 1, 2012, there is no Series A Preferred Stock or any class of preferred stock outstanding. In connection with the stockholder approval of the Strategic Financing, Celgene has waived all accrued dividends on the Series A Preferred Stock, and Celgene is no longer entitled to any liquidation preference on its shares.

The Company has adopted incentive and nonqualified stock option plans for executive, scientific and administrative personnel of the Company as well as outside directors and consultants. In April 2012, the Company’s shareholders approved an amendment to the 2011 Long-Term Incentive Plan, increasing the number of shares reserved for issuance from 835,341 to 1,730,000 shares of common stock to be available for grants and awards. As of June 30, 2012, 930,000 shares remained available for grant under the Company’s 2011 Long-Term Incentive Plan. In April 2012, 150,000 options were granted to the Company’s Chief Executive Officer outside of the Company’s 2011 Long-Term Incentive Plan, as an inducement award material to his employment, in accordance NASDAQ Listing Rule 5635(c)(4). As of June 30, 2012, there are 1,476,802 shares issuable under options previously granted and currently outstanding, with exercise prices ranging from $1.75 to $60.39. Options granted under the plans vest over periods varying from immediately to three years, are not transferable and generally expire ten years from the date of grant.

The Company records compensation expense associated with stock options and other equity-based compensation in accordance with provisions of authoritative guidance. Compensation costs are recognized based on a straight-line method over the requisite service period, which is generally the option vesting term of three years.

The Company’s net loss for the six months ended June 30, 2012 and 2011 includes compensation expense of $468,353 and $533,780, respectively, related to the Company’s share-based compensation awards. The compensation expense related to the Company’s share-based compensation arrangements is recorded as components of general and administrative expense and research and development expense, as follows:

The Company uses the Black-Scholes-Merton valuation model to estimate the fair value of stock options granted to employees. Option valuation models, including Black-Scholes-Merton, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant date fair value of an award.

Following are the weighted-average assumptions used in valuing the stock options granted to employees during the six-month periods ended June 30, 2012 and 2011:

* - Authoritative guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. During the six-month periods ended June 30, 2012 and 2011, forfeitures were estimated at 5%.

The weighted average fair value of stock options granted during the six-month periods ended June 30, 2012 and 2011 was $1.60 and $4.63, respectively.

A summary of the Company’s stock option plans and of changes in options outstanding under the plans for the six months ended June 30, 2012, is as follows:

Cash received from option exercises under all share-based payment arrangements for the three and six months ended June 30, 2012 was $0 and $1,999, respectively. Cash received from option exercises for the three and six months ended June 30, 2011 was $699 and $23,338, respectively.

At December 31, 2011, the Company has a $3.1 million unrecognized tax benefit. The Company has recorded a full valuation allowance on the net deferred tax asset recognized in the consolidated financial statements as of December 31, 2011.

During the six months ended June 30, 2012 there were no material changes to the measurement of unrecognized tax benefits in various taxing jurisdictions. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.

The tax returns for all years in the Company’s major tax jurisdictions are not settled as of January 1, 2012; no changes in settled tax years have occurred through June 30, 2012. Due to the existence of tax attribute carryforwards (which are currently offset by a full valuation allowance), the Company treats all years’ tax positions as unsettled due to the taxing authorities’ ability to modify these attributes.

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

OVERVIEW

We are a clinical-stage pharmaceutical company employing a drug development strategy primarily in the United States and China to develop targeted therapeutics for the global market. Our current lead drug candidate is ENMD-2076, an Aurora A and angiogenic kinase inhibitor for the treatment of cancer. ENMD-2076 has completed Phase 1 studies in patients with advanced solid tumors, multiple myeloma and leukemia and is currently completing data for a multi-center Phase 2 study in patients with platinum resistant ovarian cancer. Additionally, in July 2012, we initiated a dual-institutional Phase 2 study of ENMD-2076 in triple-negative breast cancer.

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 anti-proliferative 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.

Clinical Phase 1 results were published (Clin Cancer Res 2011;17:849-860) and data from the leukemia and myeloma studies were presented during the American Society of Hematology meeting in December 2010. Anti-cancer activity was demonstrated with ENMD-2076 treatment in a variety of solid and hematological cancer patients. Also, as previously reported, at the American Society of Clinical Oncology (ASCO) Annual Meeting in June 2011, Phase 2 data in ovarian cancer patients was presented by the principal investigator conducting the Phase 2 ENMD-2076 study. The data demonstrated ENMD-2076 activity in a population of difficult to treat platinum resistant patients. In October 2011, we announced that the final data for the primary endpoint of progression free survival rate at 6 months was 22 percent.  We believe that this data, together with the Phase 1 results, provide support for additional clinical studies in ovarian cancer and other forms of cancer in combination with other cancer therapeutics. We continue to monitor patients who are receiving ENMD-2076, and are focused on collecting additional data on overall survival and other endpoints. We intend to advance our clinical development of ENMD-2076 and are currently assessing strategies with our clinical trial investigators and consultants and intend to pursue opportunities and leverage our resources in both the United States and China.

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 limited resources to the clinical development of ENMD-2076. With the completion of our recent financing, as discussed above, we will continue to pursue the development of ENMD-2076 and will evaluate other therapeutic drug candidates available internally and externally. We are currently in the planning stages for the next ENMD-2076 trial. In developing drug candidates, we intend to use and leverage resources available to us in both the United States and China. In line with capitalizing on the drug development and capital resources available in China, we are in the process of establishing a subsidiary in China during 2012. We intend to pursue additional financing opportunities as well as opportunities to raise capital through forms of non- or less- dilutive arrangements, such as partnerships and collaborations with organizations that have capabilities and/or products that are complementary to our capabilities and products in order to continue the development of our 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.

We have incurred significant losses from operations, due in large part to expenditures for our research and development activities. At June 30, 2012, we had an accumulated deficit of $391.8 million.  We expect to continue to incur operating losses, for the foreseeable future due to, among other factors, its continuing clinical activities. Based on current plans, due in large part to the $10 million proceeds from our Strategic Financing in February 2012, we expect our current available cash and cash equivalents to meet our cash requirements for at least the next twelve months. The Company will continue to pursue opportunities, as required, to raise additional capital and will also actively pursue non- or less-dilutive arrangements in China to support the Company’s dual-country approach to drug development.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States 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:

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

For the Three and Six Months Ended June 30, 2012 and June 30, 2011.

Revenues. Our 2012 revenues will likely result solely from Celgene’s sales of Thalomid^®. We earn royalties once sales of Thalomid exceed approximately $225 million annually, pursuant to a 2001 agreement with Royalty Pharma, as noted above. Thalomid^® is distributed and sold by Celgene and/or its affiliates, and thus, we have no control over sales of Thalomid^® or the amount, if any, of royalty payments we will receive. We recorded royalty revenue of $8,852 during the three and six month periods ended June 30, 2011. This royalty related to certain sales by Celgene of Thalomid in 2010 that were not reported to Royalty Pharma until the second quarter of 2011, at which time we received our share of the applicable royalty payment. We do not expect to record revenue in fiscal 2012 until the fourth quarter.

Research and Development Expenses. Our research and development expenses for the three and six months ended June 30, 2012 totaled approximately $696,000 and $1,258,000, respectively. Research and development expenses for the corresponding 2011 periods were $950,000 and $2,348,000, respectively.

Reflected in our R&D expenses totaling $696,000 for the three-month period ended June 30, 2012 are direct project costs of $369,000 for ENMD-2076, $35,000 for Panzem^® oncology, $2,000 for ENMD-1198 and $2,000 for MKC-1. The 2011 research and development expenses for the comparable period included $950,000 for ENMD-2076, $18,000 for Panzem^® oncology, $7,000 for ENMD-1198 and $16,000 for MKC-1. Research and development expenses totaling $1,258,000 for the six-month period ended June 30, 2012 include direct project costs of $630,000 related to ENMD-2076, $83,000 related to Panzem^® oncology, $10,000 related to ENMD-1198 and $3,000 for MKC-1. The 2011 research and development expenses for the comparable period included $1,768,000 for ENMD-2076, $43,000 for Panzem^®, $17,000 for ENMD-1198 and $25,000 for MKC-1. The decrease in research and development costs in the three month period ended June 30, 2012, as compared to the same period in 2011, relates to fewer patients remaining on trial during the 2012 period. The overall decrease in research and development costs in the three and six month periods ended June 30, 2012, as compared to same period in 2011, reflects a decrease in costs associated with the clinical development of ENMD -2076 as fewer patients were enrolled in and remained on clinical trials during 2012, compared to the 2011 period when clinical development costs were increased as we were continuing to enroll patients.

At June 30, 2012, accumulated direct project expenses for Panzem^® oncology were $54,505,000; direct ENMD-1198 project expenses totaled $13,257,000; and, since acquired, accumulated direct project expenses for ENMD-2076 totaled $21,307,000 and for MKC-1, accumulated project expenses totaled $10,194,000. Our research and development expenses also include non-cash stock-based compensation totaling $92,000 for the six months ended June 30, 2012 and $96,000 for the corresponding 2011 period. 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.

We expect our research and development expenses in 2012 to be primarily for the ENMD-2076 program. We expect our ENMD-2076 expenses for the remainder of 2012 to increase, depending on the timing of our clinical development plan. Additional financial resources will enable us to accelerate and expand the breadth of our ENMD-2076 Phase 2 program. 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:

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:

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 indications in order to focus our resources on more promising indications.

Our proprietary product candidates have also not yet achieved 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, regulatory agencies 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 includes being opportunistic with collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the clinical trial process for one of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our capital requirements.

As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. There can be no assurance that we will be able to successfully access external sources of financing in the future. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with internal and contract 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 expenses decreased to $696,000 during the three months ended June 30, 2012 from $950,000 for the corresponding period in 2011. Research and development expenses decreased to $1,258,000 during the six months ended June 30, 2012 from $2,348,000 for the corresponding period in 2011. Expenditures during the three and six months ended June 30, 2012 were specifically impacted by the following:

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 $602,000 in the three-month period ended June 30, 2012 from $720,000 in the corresponding 2011 period. For the six-month period, general and administrative expenses decreased in 2012 to $1,698,000 from $1,973,000 for the corresponding 2011 period. This decrease is primarily related to the reduction in salary and facility costs, as well as professional fees compared to the 2011 period, in addition to the continuation of cost savings initiatives during 2012.

Interest Expense. Interest expense for the three and six month periods ended June 30, 2012 was $9,165,000 and $10,041,000, respectively. All of the interest expense was non-cash interest (including $496,000 and $684,000, respectively, related to amortization of deferred financing costs; $1,563,000 and $2,156,000, respectively, related to amortization of debt discount; and $49,000 and $145,000, respectively, related to accrued interest on our Notes payable which was converted to shares of common stock on May 1, 2012). Also included as non-cash interest expense for both the three and six month periods ended June 30, 2012 was $7,057,000, representing the value of the beneficial conversion feature associated with the Notes. There was no interest expense for the three and six-months ended June 30, 2011.

Dividends on Series A Convertible Preferred Stock. The Consolidated Statements of Operations for the six months ended June 30, 2012 and 2011 reflect accrued, but unpaid, dividends of $335,000 and $502,500, respectively relating to Series A Convertible Preferred Stock held by Celgene pursuant to a Securities Purchase Agreement dated December 31, 2002. The holder of Series A Preferred Stock accumulated dividends at a rate of 6% and participated in dividends declared and paid on the common stock, if any. In connection with the stockholder approval of the Strategic Financing on April 30, 2012, Celgene has waived all accrued dividends on the Series A Preferred Stock, and is no longer entitled to any liquidation preference on its shares.

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 2012 and the foreseeable future before we commercialize any products. Based on our current plans and following the consummation of the Strategic Financing in February 2012, we expect our current available cash and cash equivalents to meet our cash requirements for at least the next twelve months.

We will require significant additional funding to fund operations until such time, if ever, we become profitable. We intend to augment our cash balances 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. If we seek strategic alliances, licenses, or other alternative arrangements, such as arrangements with collaborative partners or others, to raise further financing, we may need to relinquish rights to certain of our existing product candidates, or products we would otherwise seek to develop or commercialize on our own, or to license the rights to our product candidates on terms that are not favorable to us.

We will continue to seek to raise additional capital to fund our research and development and advance the clinical development of ENMD-2076. We intend to explore one or more of the following alternatives to raise additional capital:

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, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. 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 June 30, 2012, we had cash of $10,058,935, with working capital of $9,257,380.

We expect that the majority of our 2012 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 2011 and 2010, we earned royalty-sharing revenue in the amount of $1,941,000 and $3,449,000, respectively. There can be no assurance on the future trends of Thalomid^® sales and the amount of revenue we will receive and record in 2012. Based on the trend, we expect annual sales of Thalomid^® in 2012 to continue to decrease, which will result in a reduction in our revenues in 2012.

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 are also eligible to receive milestone payments. No payments were received in 2011 or 2012 to date from this licensing agreement. 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.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without incurring investment market volatility risk. Our investment income is sensitive to the general level of U.S. interest rates. In this regard, changes in the U.S. interest rates affect the interest earned on our cash and cash equivalents. Due to the short-term nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not materially impact on the total fair market value of our portfolio as of June 30, 2012.

ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s Chief Executive Officer and Principal Accounting Officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) were effective as of June 30, 2012 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Principal Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II.      OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

We are subject in the normal course of business to various legal proceedings in which claims for monetary or other damages may be asserted. Management does not believe such legal proceedings, except as otherwise disclosed herein, are material.

ITEM 1A. RISK FACTORS

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of EntreMed’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and the information under “Special Note Regarding Forward-Looking Statements” included in this report. There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

None.

Not applicable.

Not applicable.

ITEM 6. EXHIBITS

* This exhibit is furnished and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

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.

EXHIBIT INDEX

* This exhibit is furnished and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.