##### 



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, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 Commission file number 0-20713
 ENTREMED, INC.
  Delaware
    
    58-1959440(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 (Address of principal executive offices)
 (Zip code)
 (Registrants telephone number, including area code)
  þ o
  o þ o
  o þ
  Class
    
    Outstanding at November 1, 2006Common Stock $.01 Par Value
    
    74,163,498




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##### 



PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of
September 30, 2006 and December 31, 2005
    
    3Consolidated Statements of Operations for the
Three Months Ended September 30, 2006 and 2005
and the Nine Months Ended September 30, 2006 and 2005
    
    4Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2006 and 2005
    
    5Notes to Consolidated Financial Statements
    
    6Item 2
 Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    11Item 3
 Quantitative and Qualitative Disclosures
About Market Risk
    
    20Item 4   Controls and Procedures
    
    20Part II. OTHER INFORMATIONItem 1
 Legal Proceedings
    
    20Item 1A
 Risk Factors
    
    20Item 2
 Unregistered Sales of Equity Securities and Use of Proceeds
    
    21Item 3
 Defaults upon Senior Securities
    
    21Item 4
 Submission of Matters to a Vote of Security Holders
    
    21Item 5
 Other Information
    
    21Item 6
 Exhibits
    
    21SIGNATURES
    
    22
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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##### 



September 30, 2006
    
    
    December 31, 2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,242,050
    
    
    $
    11,407,652Short-term investments
    
    
    17,186,568
    
    
    
    18,674,736Accounts receivable
    
    
    3,013,657
    
    
    
    3,723,433Note receivable
    
    
    
    
    
    
    1,000,000Interest receivable
    
    
    75,753
    
    
    
    181,231Prepaid expenses and other
    
    
    406,611
    
    
    
    338,462Total current assets
    
    
    42,924,639
    
    
    
    35,325,514Property and equipment, net
    
    
    879,170
    
    
    
    915,337Other assets
    
    
    5,526
    
    
    
    191,034Total assets
    
    $
    43,809,335
    
    
    $
    36,431,885LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,732,259
    
    
    $
    5,487,014Payable to related parties
    
    
    189,147
    
    
    
    228,380Accrued liabilities
    
    
    2,519,915
    
    
    
    1,038,975Current portion of loan payable
    
    
    848,258
    
    
    
    Current portion of deferred rent
    
    
    82,593
    
    
    
    60,969Total current liabilities
    
    
    7,372,172
    
    
    
    6,815,338Deferred rent, less current portion
    
    
    164,030
    
    
    
    230,206Loan payable, less current portion
    
    
    104,393
    
    
    
    Total liabilities
    
    
    7,640,595
    
    
    
    7,045,544Minority interest
    
    
    17,493
    
    
    
    17,151Stockholders equity:Convertible preferred stock, $1.00 par value;
5,000,000 shares authorized and 3,350,000 shares issued and
outstanding at September 30, 2006 and December 31, 2005,
respectively
(liquidation value  $31,155,000 and $33,500,000, respectively)
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value: 170,000,000 shares authorized, 74,163,498 and 51,106,857 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively
    
    
    740,842
    
    
    
    511,069Additional paid-in capital
    
    
    346,103,903
    
    
    
    295,392,194Deferred stock-based compensation
    
    
    
    
    
    
    (102,000
    )Treasury stock, at cost: 874,999 shares held at September 30,
2006 and
December 31, 2005, respectively
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated deficit
    
    
    (306,009,254
    )
    
    
    (261,747,829
    )Total stockholders equity
    
    
    36,151,247
    
    
    
    29,369,190Total liabilities and stockholders equity
    
    $
    43,809,335
    
    
    $
    36,431,885
  3




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Licensing
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    590,992Royalties
    
    
    3,010,626
    
    
    
    1,249,600
    
    
    
    3,010,626
    
    
    
    1,250,975Other
    
    
    12,559
    
    
    
    
    
    
    
    12,559
    
    
    
    12,3433,023,185
    
    
    
    1,249,600
    
    
    
    3,023,185
    
    
    
    1,854,310Costs and expenses:Research and development
    
    
    5,544,134
    
    
    
    4,128,756
    
    
    
    13,813,440
    
    
    
    12,320,465General and administrative
    
    
    1,497,612
    
    
    
    1,786,868
    
    
    
    5,256,958
    
    
    
    4,386,840Acquired In-Process R&D
    
    
    
    
    
    
    
    
    
    
    29,481,894
    
    
    
    7,041,746
    
    
    
    5,915,624
    
    
    
    48,552,292
    
    
    
    16,707,305Investment income
    
    
    529,661
    
    
    
    284,195
    
    
    
    1,377,743
    
    
    
    714,488Interest expense
    
    
    (36,098
    )
    
    
    
    
    
    
    (127,386
    )
    
    
    Gain on sale of assets
    
    
    
    
    
    
    2,000
    
    
    
    17,325
    
    
    
    2,000Net Loss
    
    
    (3,524,998
    )
    
    
    (4,379,829
    )
    
    
    (44,261,425
    )
    
    
    (14,136,507
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (753,750
    )
    
    
    (753,750
    )Net loss attributable to common shareholders
    
    $
    (3,776,248
    )
    
    $
    (4,631,079
    )
    
    $
    (45,015,175
    )
    
    $
    (14,890,257
    )Net loss per share (basic and diluted)
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    (0.63
    )
    
    $
    (0.35
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    73,288,499
    
    
    
    49,921,256
    
    
    
    70,952,694
    
    
    
    42,217,854
  4




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##### 



NINE MONTH PERIOD ENDEDSEPTEMBER 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (44,261,425
    )
    
    $
    (14,136,507
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    342,164
    
    
    
    368,271Gain on sale of fixed assets
    
    
    (17,325
    )
    
    
    Write-off of acquired in-process R&D
    
    
    29,481,894
    
    
    
    Amortization of premium on ST investments
    
    
    (809,516
    )
    
    
    Stock-based compensation expense
    
    
    1,160,279
    
    
    
    174,424Amortization of deferred stock-based compensation expense
    
    
    87,426
    
    
    
    Minority interest
    
    
    344
    
    
    
    96Changes in operating assets and liabilities, net of acquisition:Accounts receivable
    
    
    759,058
    
    
    
    1,755,296Interest receivable
    
    
    105,478
    
    
    
    15,721Prepaid expenses and other
    
    
    (21,452
    )
    
    
    37,278Deferred rent
    
    
    (44,552
    )
    
    
    (77,483
    )Accounts payable
    
    
    (1,830,388
    )
    
    
    1,752,083Payable to related parties
    
    
    (39,233
    )
    
    
    21,745Accrued liabilities
    
    
    (828,123
    )
    
    
    (578,927
    )Deferred revenue
    
    
    
    
    
    
    (190,992
    )Net cash used in operating activities
    
    
    (15,915,371
    )
    
    
    (10,858,995
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition, net of cash received
    
    
    (2,906,218
    )
    
    
    Proceeds from sale of property and equipment, net
    
    
    17,325
    
    
    
    Purchases of short term investments
    
    
    (47,880,777
    )
    
    
    (933,250
    )Maturities of short term investments
    
    
    50,178,460
    
    
    
    Purchases of furniture and equipment
    
    
    (156,528
    )
    
    
    (167,819
    )Net cash used in investing activities
    
    
    (747,738
    )
    
    
    (1,101,069
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of loan
    
    
    (495,472
    )
    
    
    Net proceeds from sale of common stock
    
    
    27,992,979
    
    
    
    9,905,269Net cash provided by financing activities
    
    
    27,497,507
    
    
    
    9,905,269Net increase (decrease) in cash and cash equivalents
    
    
    10,834,398
    
    
    
    (2,054,795
    )Cash and cash equivalents at beginning of period
    
    
    11,407,652
    
    
    
    20,425,495Cash and cash equivalents at end of period
    
    $
    22,242,050
    
    
    $
    18,370,700Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    127,386
    
    
    $
    Non-cash investing activity:Stock issued in connection with the acquisition
    
    $
    21,920,801
    
    
    $
    
  5




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##### 



ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006 (unaudited)
       ®
   6




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##### 



Share-Based Payment Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
       7




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##### 



NINE MONTH PERIOD ENDEDSEPTEMBER 302006
    
    
    2005Expected volatility
    
    
    101.37
    %
    
    
    107.81
    %Risk-free interest rate
    
    
    4.50
    %
    
    
    4.25
    %Expected term of option
    
    5 years
    
    5 yearsForfeiture rate
    
    
    5.00
    %
    
    
    N/AExpected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
  WeightedAverageNumber of
    
    
    ExerciseAll Employee Options
    
    Shares
    
    
    PriceOutstanding at January 1, 2006
    
    
    7,962,017
    
    
    $
    9.04Granted
    
    
    601,360
    
    
    
    1.65Exercised
    
    
    (7,500
    )
    
    
    1.09Expired
    
    
    (194,938
    )
    
    
    11.83Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    8,360,939
    
    
    $
    8.47Vested and expected to vest at September 30, 2006
    
    
    8,299,373
    
    
    $
    8.52Exercisable at September 30, 2006
    
    
    7,129,613
    
    
    $
    9.53
    8




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##### 



Nine Months EndedSeptember 30, 2006Research and development
    
    $
    260,459General and administrative
    
    
    987,246Share-based compensation expense
    
    $
    1,247,705Net share-based compensation expense, per common share:Basic and diluted
    
    $
    0.018
  Nine months endedSeptember 30, 2005Actual net loss
    
    $
    (14,136,507
    )Deduct: Stock-based employee compensation expense if
SFAS No.123 had been applied to all awards
    
    
    (822,592
    )Add: Stock-based employee compensation included in reported net loss
    
    
    174,424Proforma net loss
    
    $
    (14,784,675
    )Dividend on Series A convertible preferred stock
    
    
    (753,750
    )Proforma net loss per share available to common shareholders
    
    $
    (15,538,425
    )Net loss per share:Basic and
diluted  as reported
    
    $
    (.35
    )Basic and
diluted  pro forma
    
    $
    (.37
    )
   9




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##### 



Miikana purchase price allocation
     Fair value of net tangible assets acquired
    
    $
    600,000In- process research and development
    
    
    29,500,000Total
    
    $
    30,100,000
  ® ® ®
 10




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##### 



Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109, Accounting for Income Taxes
   ®
 11




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##### 




    
    Revenue Recognition  We recognize revenue in accordance with the provisions of Staff
Accounting Bulletin No. 104, Revenue Recognition, whereby revenue is not recognized until
it is realized or realizable and earned. Revenue is recognized when all of the following
criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the price to the buyer is fixed and determinable and
collectibility is reasonably assured.
 
    
    Royalty Revenue  Royalties from licenses are based on third-party
sales and recorded as earned in accordance with contract terms, when third-party
results are reliably measured and collectibility is reasonably assured. We expect
that the majority of our 2006 revenues will be from royalties on the sale of
Thalomid®, which we began to recognize in the third quarter. In 2004
certain provisions of a purchase agreement dated June 14, 2001 by and between
Bioventure Investments kft (Bioventure) and the Company were satisfied, and, as a
result, beginning in 2005 we became entitled to share in the royalty payments
received by Royalty Pharma Finance Trust, successor to Bioventure, on annual
Thalomid® sales above a certain threshold. Based on the licensing
agreement royalty formula, annual royalty sharing
commences with Thalomid® annual sales of approximately $225 million. The
Company also 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 2006. In
the future, royalty payments, if any, will be recorded as revenue when received
and/or when collectibility is reasonably assured.
 12




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
    
    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  Issued in December 2004, Statement of Financial Accounting
Standards No. 123R (SFAS 123R) requires public companies to recognize expense associated
with share-based compensation arrangements, including employee stock options and stock
purchase plans, using a fair value-based option pricing model, and eliminates the
alternative to use the intrinsic value method of accounting for share-based payments. SFAS
123R is effective for our fiscal year beginning January 1, 2006. Adoption of the expense
provisions of SFAS 123R have a material impact on our results of operations. We have
applied the modified prospective transition method; accordingly, compensation expense is
reflected in the financial statements beginning January 1, 2006 with no restatement of
prior periods. Compensation expense is recognized for awards that are granted, modified,
repurchased or cancelled on or after January 1, 2006, as well as for the portion of awards
previously granted that have not vested as of January 1, 2006. For the adoption of SFAS
123R, we have selected the straight-line expense attribution method, whereas our previous
expense attribution method was the graded-vesting method, an accelerated method, described
by FIN 28.
   Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109, Accounting for Income Taxes
 13




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##### 



For the Three and Nine Months Ended September 30, 2006 and September 30, 2005.
  Revenues. ® ® ® ® ®
 Research and Development Expenses ® ® ® ® Ò
  14




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®
  ESTIMATEDCOMPLETIONCLINICAL PHASE
    
    PERIODPhase I
    
    1 YearPhase II
    
    1-2 YearsPhase III
    
    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.
   15




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
    
    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,
2006, we expended $846,000 on these activities versus $755,000 in the same 2005 period.
For the nine-month period ended September 30, 2006 outside services were $1,985,000,
compared to $1,892,000 for the same 2005 period While the costs for the two periods were
very similar, the 2006 expense includes $352,000 related to Miikanas outside services. An
offsetting
decrease in expenses resulted from the absence of certain preclinical activities related to
ENMD-1198, which is now in Phase 1 trials.
 16




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##### 




    
    Collaborative Research Agreements  We made payments to collaborators of $53,000 and
$125,000 for the three months ended September 30, 2006 and 2005, respectively, and $195,000
and $557,000 for the nine months ended September 30, 2006 and 2005, respectively. Our
collaborative efforts are primarily directed towards further exploration of 2ME2
mechanism-of-action (MOA) and PanzemÒ non-oncology applications. With our
lead programs in Phase 2 clinical trials, we have reduced our collaborative efforts.
Additionally, as our earlier pre-clinical pipeline matures, we expect that there will be an
increase in our collaborative efforts in collecting pre-clinical data.
    
    Clinical Trial Costs  Clinical trial costs increased to $698,000 in the three months
ended September 30, 2006, from $375,000 in the three-month period ended September 30, 2005.
Clinical trial costs for the nine-month period ended September 30, 2006 increased to
$1,735,000 from $861,000 for the comparable 2005 period. The increase reflects the
initiation of Phase 2 clinical trials for PanzemÒNCD, the initiation of
Phase 2 clinical trials for MKC-1 and the initiation of Phase 1 clinical trials for
ENMD-1198. Costs of such trials include the clinical site fees, monitoring costs and data
management costs.
    
    Contract Manufacturing Costs  The costs of manufacturing the material used in
clinical trials for our product candidates is reflected in contract manufacturing. These
costs include bulk manufacturing, encapsulation and fill and finish services, and product
release costs. Contract manufacturing costs totaled $1,807,000 and $1,413,000 for the three
months ended September 30, 2006 and 2005, respectively. For the nine-month period ended
September 30, 2006 manufacturing costs increased to $3,339,000 from $3,049,000 for the
comparable 2005 period. Included in the 2006 amount is $638,000 related to the bulk
acquisition and encapsulation of material for the Phase 2 trials for MKC-1. We expect
these expenditures to continue to increase as we secure material to support the recently
announced expansion of the clinical programs for our lead compounds
PanzemÒNCD and MKC-1.
  General and Administrative Expenses
  17




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##### 



Investment income
 Interest expense
 Dividends on Series A convertible preferred stock
    18




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##### 



®
   19




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##### 



20




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##### 



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




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##### 



SIGNATURES
  ENTREMED, INC.(Registrant)Date: November 6, 2006
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: November 6, 2006
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 22




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##### 



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
 23