##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended September 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from  to .
 Commission
file number0-20713
 ENTREMED, INC.
  Delaware
    
    58-1959440(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 Rockville, Maryland
 20850
 (240) 864-2600
  R £
  R £
  £ R
  Class
    
    Outstanding at November 4, 2005Common Stock $.01 Par Value
    
    50,072,569




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##### 



PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of
September 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations for the
Three Months Ended September 30, 2005 and 2004,
and the Nine Months Ended September 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2
 Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    9Item 3
 Quantitative and Qualitative Disclosures
About Market Risk
    
    
    17Item 4   Controls and Procedures
    
    
    18Part II. OTHER INFORMATIONItem 1
 Legal Proceedings
    
    
    18Item 2
 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3
 Defaults upon Senior Securities
    
    
    18Item 4
 Submission of Matters to a Vote of Security Holders
    
    
    18Item 5
 Other Information
    
    
    19Item 6
 Exhibits
    
    
    19SIGNATURES
    
    
    20
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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##### 



September 30, 2005
    
    
    December 31, 2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,370,700
    
    
    $
    20,425,495Short-term investments
    
    
    15,047,271
    
    
    
    14,114,021Accounts receivable
    
    
    1,495,487
    
    
    
    3,250,783Interest receivable
    
    
    69,368
    
    
    
    85,089Prepaid expenses and other
    
    
    337,444
    
    
    
    367,222Total current assets
    
    
    35,320,270
    
    
    
    38,242,610Property and equipment, net
    
    
    949,635
    
    
    
    1,150,087Other assets
    
    
    3,806
    
    
    
    11,305Total assets
    
    $
    36,273,711
    
    
    $
    39,404,002LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,302,496
    
    
    $
    1,550,413Payable to related parties
    
    
    222,066
    
    
    
    200,321Accrued liabilities
    
    
    837,517
    
    
    
    1,416,444Current portion of deferred revenue
    
    
    
    
    
    
    95,496Total current liabilities
    
    
    4,362,079
    
    
    
    3,262,674Deferred rent
    
    
    246,623
    
    
    
    324,106Deferred revenue, less current portion
    
    
    
    
    
    
    95,496Minority interest
    
    
    17,069
    
    
    
    16,972Stockholders equity:Convertible preferred stock, $1.00 par and $1.50 liquidation
value:5,000,000 shares authorized, 3,350,000 issued and outstanding
at September 30, 2005 and December 31, 2004, respectively
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:90,000,000 shares authorized, 50,947,568 and 43,628,173 shares
issued and outstanding at September 30, 2005 and December 31,2004,
respectively
    
    
    509,476
    
    
    
    436,282Additional paid-in capital
    
    
    295,393,787
    
    
    
    285,387,288Treasury stock, at cost: 874,999 shares held at September 30, 2005 and
December 31, 2004, respectively
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated deficit
    
    
    (259,571,079
    )
    
    
    (245,434,572
    )Total stockholders equity
    
    
    31,647,940
    
    
    
    35,704,754Total liabilities and stockholders equity
    
    $
    36,273,711
    
    
    $
    39,404,002
  3




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    2004Revenues:Licensing
    
    $
    
    
    
    $
    132,966
    
    
    $
    590,992
    
    
    $
    362,534Royalties
    
    
    1,249,600
    
    
    
    1,441
    
    
    
    1,250,975
    
    
    
    4,969Other
    
    
    
    
    
    
    8,331
    
    
    
    12,343
    
    
    
    12,5811,249,600
    
    
    
    142,738
    
    
    
    1,854,310
    
    
    
    380,084Costs and expenses:Research and development
    
    
    4,128,756
    
    
    
    2,553,494
    
    
    
    12,320,465
    
    
    
    8,094,890General and administrative
    
    
    1,786,868
    
    
    
    1,337,922
    
    
    
    4,386,840
    
    
    
    5,394,2735,915,624
    
    
    
    3,891,416
    
    
    
    16,707,305
    
    
    
    13,489,163Investment income
    
    
    284,195
    
    
    
    75,495
    
    
    
    714,488
    
    
    
    220,821Gain on sale of securities
    
    
    
    
    
    
    520,000
    
    
    
    
    
    
    
    520,000Gain on sale of assets
    
    
    2,000
    
    
    
    6,335
    
    
    
    2,000
    
    
    
    6,335Net Loss
    
    
    (4,379,829
    )
    
    
    (3,146,848
    )
    
    
    (14,136,507
    )
    
    
    (12,361,921
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (753,750
    )
    
    
    (753,750
    )Net loss attributable to common shareholders
    
    $
    (4,631,079
    )
    
    $
    (3,398,098
    )
    
    $
    (14,890,257
    )
    
    $
    (13,115,671
    )Net loss per share (basic and diluted)
    
    $
    (0.09
    )
    
    $
    (0.09
    )
    
    $
    (0.35
    )
    
    $
    (0.35
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    49,921,256
    
    
    
    37,054,030
    
    
    
    42,217,854
    
    
    
    37,004,355
  4




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##### 



NINE MONTH PERIOD ENDEDSEPTEMBER 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (14,136,507
    )
    
    $
    (12,361,921
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    368,271
    
    
    
    632,871Recognition of non-cash stock compensation
    
    
    174,424
    
    
    
    174,999Gain on sale of securities
    
    
    
    
    
    
    (520,000
    )Gain on sale of assets
    
    
    
    
    
    
    (6,335
    )Minority interest
    
    
    96
    
    
    
    (118
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,755,296
    
    
    
    416,476Interest receivable
    
    
    15,721
    
    
    
    232,219Prepaid expenses and other
    
    
    37,278
    
    
    
    176,236Deferred rent
    
    
    (77,483
    )
    
    
    (3,175
    )Accounts payable
    
    
    1,752,083
    
    
    
    (2,866,139
    )Payable to related parties
    
    
    21,745
    
    
    
    Accrued liabilities
    
    
    (578,927
    )
    
    
    105,496Deferred revenue
    
    
    (190,992
    )
    
    
    35,466Net cash used in operating activities
    
    
    (10,858,995
    )
    
    
    (13,983,925
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (933,250
    )
    
    
    (12,968,335
    )Purchases of property and equipment
    
    
    (167,819
    )
    
    
    (143,947
    )Proceeds from sale of securities
    
    
    
    
    
    
    520,000Proceeds from sale of asset, net
    
    
    
    
    
    
    67,875Net cash used in investing activities
    
    
    (1,101,069
    )
    
    
    (12,524,407
    )CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds from sale of common stock
    
    
    9,905,269
    
    
    
    Net cash provided by financing activities
    
    
    9,905,269
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (2,054,795
    )
    
    
    (26,508,332
    )Cash and cash equivalents at beginning of period
    
    
    20,425,495
    
    
    
    34,811,847Cash and cash equivalents at end of period
    
    $
    18,370,700
    
    
    $
    8,303,515
  5




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##### 



ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (unaudited)
       Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring Or in
Conjunction with Selling, Goods, or Services.
 6




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##### 



Accounting for Stock-Based Compensation-Transition and Disclosure Accounting for Stock-Based Compensation
 7




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##### 



Accounting for
Stock-Based Compensation
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Actual net loss
    
    $
    (4,379,829
    )
    
    $
    (3,146,848
    )
    
    $
    (14,136,507
    )
    
    $
    (12,361,921
    )Deduct: Stock-based employee
compensation expense if SFAS
No.123 had been applied to all
awards
    
    
    (358,563
    )
    
    
    (1,084,547
    )
    
    
    (822,592
    )
    
    
    (3,830,393
    )Add: Stock-based employee
compensation included in
reported net loss
    
    
    174,424
    
    
    
    
    
    
    
    174,424
    
    
    
    174,999Proforma net loss
    
    $
    (4,563,968
    )
    
    $
    (4,231,395
    )
    
    $
    (14,784,675
    )
    
    $
    (16,017,315
    )Dividend on Series A
convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (753,750
    )
    
    
    (753,750
    )Proforma net loss per share
available to common
shareholders
    
    $
    (4,815,218
    )
    
    $
    (4,482,645
    )
    
    $
    (15,538,425
    )
    
    $
    (16,771,065
    )Net loss per share:Basic and
diluted  as reported
    
    $
    (0.09
    )
    
    $
    (0.09
    )
    
    $
    (0.35
    )
    
    $
    (0.35
    )Basic and
diluted  pro forma
    
    $
    (0.10
    )
    
    $
    (0.12
    )
    
    $
    (0.37
    )
    
    $
    (0.45
    )
   in
vitro in vivo in vitro
 8




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##### 



®
  9




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##### 



®
 ® ®
    
    
    Revenue Recognition  The Company recognizes revenue in accordance with the provisions
of Staff Accounting Bulletin No. 104, Revenue Recognition, whereby revenue is not
recognized until it is realized or realizable and earned. Revenue is recognized when all
of the following criteria are met: persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the price to the buyer is fixed and
determinable and collectibility is reasonably assured.
 
    
    Royalty Revenue  Royalties from licenses are based on third-party
sales and recorded as earned in accordance with contract terms, when third-party
results are reliably measured and collectibility is reasonably assured. We expect
that the majority of our 2005 revenues will be from royalties on the sale of
Thalomid®, which we began to recognize in the third quarter. In 2004
certain provisions of a purchase agreement dated June 14, 2001 by and between
Bioventure Investments kft (Bioventure) and the Company were satisfied, and, as a
result, beginning in 2005 we are 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 $235 million. The Company is
eligible to receive royalty payments under a February 2004 agreement with
Childrens Medical Center Corporation (CMCC) and Alchemgen Therapeutics. Under
the agreement, Alchemgen received rights to market endostatin and angiostatin
in Asia. We do not expect to receive royalties under this agreement in 2005. In
the future royalty payments, if any, will be recorded as revenue when received and/or
when collectibility is reasonably assured.
 10




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##### 




    
    Licensing Revenue  The Company has recognized licensing revenues
resulting from the January 2002 five-year strategic alliance with Allergan to
develop and commercialize small molecule angiogenic inhibitors for treatment and
prevention of diseases and conditions of the eye. The initial net fee was being
amortized to revenue over the five-year license term. In April 2005, Allergan
terminated the license in accordance with its terms, which resulted in the
acceleration of deferred revenue in the three-month period ended June 30, 2005. In
February 2004 the Company transferred rights to the proteins, endostatin and
angiostatin, in an agreement with Childrens Medical Center Corporation (CMCC)
and Alchemgen Therapeutics. Under the agreement, the Company received an upfront
and a second cash payment. The upfront licensing cash payment was fully amortized
in 2004, as the Company had completed its obligations to transfer data and
material. Due to rights negotiations between the licensee and CMCC, the second and
final licensing cash payment in the amount of $400,000 was received in May 2005.
Management concluded collectibility was not reasonably assured until the funds were
received.
 
    
    Research and Development  Research and development expenses consist primarily of
compensation and other expenses related to research and development personnel, research
collaborations, costs associated with pre-clinical testing and clinical trials of our
product candidates, including the costs of manufacturing the product candidates, and
facilities expenses. Research and development costs are expensed as incurred.
    
    Stock-Based Compensation  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 than 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. Because our options must be granted at no less than 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. The Company currently expects to adopt SFAS No.
123R in the quarter ended March 31, 2006, using the modified prospective method, although
the Company continues to review its options for adoption under this new pronouncement.
Please refer to footnote 3 of the footnotes to our unaudited interim financial statements
included elsewhere herein for additional information. We expense equity instruments issued
to nonemployees in accordance with EITF 96-18, Accounting for Equity Instruments that are
issued to other than employees for acquiring, or in conjunction with selling goods or
services.
 11




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##### 



For the Three and Nine Months Ended September 30, 2005 and September 30, 2004.
 Revenues. ® ® ® ® ®
 Research and Development Expenses ® ® ® ®
  12




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##### 



® ®
  ESTIMATEDCOMPLETIONCLINICAL PHASE
    
    PERIODPhase I
Phase II
Phase III
    
    1 Year
1-2 Years
2-4 Years
  
    
    the number of patients that ultimately participate in the trial;
    
    the duration of patient follow-up that seems appropriate in view of the results;
    
    the number of clinical sites included in the trials; and
    
    the length of time required to enroll suitable patient subjects.
   13




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##### 



Ò
 
    
    Outside Services  We utilize outsourcing to conduct our product development
activities. Larger-scale small molecule synthesis, in vivotesting and data analysis are
examples of the services that we outsource. In the three-month period ended September 30,
2005, we expended $755,000 on these activities versus $513,000 in the same 2004 period.
For the nine-month period ended September 30, 2005 outside services increased to $1,892,000
from $1,247,000 for the comparable 2004 period. The increase results from continued
development work on our preclinical pipeline programs, including IND-directed toxicity
studies for ENMD-1198.
 14




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##### 




    
    Collaborative Research Agreements  We made payments to our collaborators of $125,000
and $78,000 for the three months ended September 30, 2005 and 2004 respectively, and
$557,000 and $466,000 for the nine months ended September 30, 2005 and 2004, respectively.
Sponsored research payments to academic collaborators include payments to Childrens
Hospital, Boston of $225,000 in 2005 and in 2004. Our collaborative efforts are primarily
directed towards further exploration of 2ME2 mechanism-of-action (MOA) and
PanzemÒ non-oncology applications.
    
    Clinical Trial Costs  Clinical trial costs increased to $375,000 in the three months
ended September 30, 2005, from $256,000 in the three-month period ended September 30, 2004.
Clinical trial costs for the nine-month period ended September 30, 2005 decreased to
$861,000 from $874,000 for the comparable 2004 period. The 2005 amount reflects the
initiation of two Phase Ib clinical trials for the reformulated
PanzemÒNCD. The prior year amount resulted from a Phase Ia clinical trial
to test various dosing approaches for reformulated PanzemÒ conducted in
the first and second quarters of 2004. Costs of such trials include the clinical site
fees, monitoring costs and data management costs. In addition, we contribute
PanzemÒ clinical material in capsule form under our Collaborative Research
and Development Agreement (CRADA) to the NCI, which is conducting trials collaboratively
with EntreMed.
    
    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 for the three months ended September 30, 2005
increased to $1,413,000 from $366,000 during the same period in 2004. The three-month
increase reflects our recording of expenses related to the production of bulk 2ME2 for use
in PanzemÒNCD Phase II trials. For the nine-month period ended September
30, 2005 manufacturing costs increased to $3,049,000 from $926,000 for the comparable 2004
period. The increase reflects the scale-up of manufacturing of ENMD-1198 for pre-IND
toxicity studies and the purchase of bulk 2ME2 to support future
PanzemÒNCD trials in addition to the preparation of clinical material to
supply ongoing and future clinical trials for PanzemÒNCD and ENMD-1198.
   15




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##### 



General and Administrative Expenses
 Investment income
 Dividends on Series A convertible preferred stock
     16




---



##### 



® ® ® ®
 ®
      17




---



##### 



18




---



##### 



)
 Year TermExpires
    
    Name
    
    Votes For
    
    Votes Withheld2008
    
    James S. Burns
    
    
    58,445,115
    
    
    
    259,4402008
    
    Jennie Hunter-Cevera
    
    
    58,415,618
    
    
    
    288,9372008
    
    Mark C.M. Randall
    
    
    58,430,992
    
    
    
    273,563
         3.1.1
    
    Certificate of Amendment of Amended and Restated Certificate of
Incorporation of EntreMed, Inc.31.1
    
    Rule 13a-14(a) Certification of President and Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 19




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##### 



SIGNATURES
  ENTREMED, INC.(Registrant)Date: November 9, 2005
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: November 9, 2005
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 20




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##### 



3.1.1
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of
EntreMed, Inc.
31.1 Rule 13a-14(a) Certification of President and Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 21