##### 



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 June 30, 2007
 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 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 Rockville, Maryland
 20850
 (240) 864-2600
  þ o
  o þ o
  o þ
  Class
    
    Outstanding at August 2, 2007Common Stock $.01 Par Value
    
    85,098,911




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##### 



PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of
June 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations for the
Three Months Ended June 30, 2007 and 2006
and the Six Months Ended June 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3  Quantitative and Qualitative Disclosures
About Market Risk
    
    
    18Item 4  Controls and Procedures
    
    
    18Part II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    19Item 1A  Risk Factors
    
    
    19Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3  Defaults upon Senior Securities
    
    
    19Item 4  Submission of Matters to a Vote of Security Holders
    
    
    19Item 5  Other Information
    
    
    20Item 6  Exhibits
    
    
    21SIGNATURES
    
    
    22
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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##### 



June 30, 2007
    
    
    December 31, 2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,275,418
    
    
    $
    20,896,141Short-term investments
    
    
    26,787,152
    
    
    
    29,673,956Accounts receivable
    
    
    10,352
    
    
    
    3,845,000Interest receivable
    
    
    100,747
    
    
    
    73,895Prepaid expenses and other
    
    
    238,180
    
    
    
    377,871Total current assets
    
    
    38,411,849
    
    
    
    54,866,863Property and equipment, net
    
    
    704,933
    
    
    
    847,561Other assets
    
    
    204,276
    
    
    
    5,110Total assets
    
    $
    39,321,058
    
    
    $
    55,719,534LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,311,782
    
    
    $
    5,909,317Payable to related parties
    
    
    
    
    
    
    37,535Accrued liabilities
    
    
    1,233,216
    
    
    
    1,810,515Loan payable
    
    
    327,200
    
    
    
    751,093Current portion of deferred rent
    
    
    104,649
    
    
    
    89,849Total current liabilities
    
    
    6,976,847
    
    
    
    8,598,309Deferred rent, less current portion
    
    
    83,051
    
    
    
    140,357Total liabilities
    
    
    7,059,898
    
    
    
    8,738,666Minority interest
    
    
    17,927
    
    
    
    17,649Stockholders equity:Convertible preferred stock, $1.00 par value;
5,000,000 shares authorized and 3,350,000 shares issued and
outstanding at June 30, 2007 and December 31, 2006
(liquidation value  $33,500,000 at June 30, 2007 and December 31, 2006)
    
    
    3,350,000
    
    
    
    3,350,000Common
stock, $.01 par value: 170,000,000 and 120,000,000 shares authorized: 84,971,536 and 84,839,585 shares issued and outstanding
at June 30, 2007 and December 31, 2006, respectively
    
    
    849,715
    
    
    
    848,400Additional paid-in capital
    
    
    363,192,393
    
    
    
    362,318,737Treasury stock, at cost: 874,999 shares held at June 30, 2007 and
December 31, 2006
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated other comprehensive income
    
    
    130,534
    
    
    
    117,212Accumulated deficit
    
    
    (327,245,165
    )
    
    
    (311,636,886
    )Total stockholders equity
    
    
    32,243,233
    
    
    
    46,963,219Total liabilities and stockholders equity
    
    $
    39,321,058
    
    
    $
    55,719,534
  3




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##### 



Three Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2006
    
    
    June 30, 2007
    
    
    June 30, 2006Revenues:Licensing
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Costs and expenses:Research and development
    
    
    6,581,287
    
    
    
    4,258,206
    
    
    
    12,979,983
    
    
    
    8,269,306General and administrative
    
    
    1,869,811
    
    
    
    1,942,652
    
    
    
    3,701,137
    
    
    
    3,759,346Acquired In-Process R&D
    
    
    
    
    
    
    353,833
    
    
    
    
    
    
    
    29,481,8948,451,098
    
    
    
    6,554,691
    
    
    
    16,681,120
    
    
    
    41,510,546Investment income
    
    
    531,722
    
    
    
    569,617
    
    
    
    1,110,635
    
    
    
    848,082Interest expense
    
    
    (15,317
    )
    
    
    (42,575
    )
    
    
    (37,794
    )
    
    
    (91,288
    )Gain on sale of assets
    
    
    
    
    
    
    1,925
    
    
    
    
    
    
    
    17,325Net Loss
    
    
    (7,934,693
    )
    
    
    (6,025,724
    )
    
    
    (15,608,279
    )
    
    
    (40,736,427
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (502,500
    )
    
    
    (502,500
    )Net loss attributable to common shareholders
    
    $
    (8,185,943
    )
    
    $
    (6,276,974
    )
    
    $
    (16,110,779
    )
    
    $
    (41,238,927
    )Net loss per share (basic and diluted)
    
    $
    (0.10
    )
    
    $
    (0.09
    )
    
    $
    (0.19
    )
    
    $
    (0.59
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    84,059,149
    
    
    
    73,194,814
    
    
    
    84,015,999
    
    
    
    69,765,434
  4




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##### 



SIX MONTH PERIOD ENDEDJUNE 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (15,608,279
    )
    
    $
    (40,736,427
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    176,935
    
    
    
    236,513Gain on sale of assets
    
    
    
    
    
    
    (17,325
    )Write-off of acquired in-process R&D
    
    
    
    
    
    
    29,481,894Amortization of premium on short-term investments
    
    
    (725,127
    )
    
    
    (479,351
    )Stock-based compensation expense
    
    
    793,222
    
    
    
    864,526Amortization of deferred stock-based compensation expense
    
    
    
    
    
    
    43,713Minority interest
    
    
    277
    
    
    
    204Changes in operating assets and liabilities:Accounts receivable
    
    
    3,834,648
    
    
    
    3,701,347Interest receivable
    
    
    (26,852
    )
    
    
    107,053Prepaid expenses and other
    
    
    (59,475
    )
    
    
    209,417Deferred rent
    
    
    (42,506
    )
    
    
    (28,136
    )Accounts payable
    
    
    (597,535
    )
    
    
    (2,818,638
    )Payable to related parties
    
    
    (37,535
    )
    
    
    22,481Accrued liabilities
    
    
    (577,299
    )
    
    
    (803,071
    )Net cash used in operating activities
    
    
    (12,869,526
    )
    
    
    (10,215,800
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition, net of cash received
    
    
    
    
    
    
    (2,906,218
    )Proceeds from sale of property and equipment, net
    
    
    
    
    
    
    17,325Purchases of short term investments
    
    
    (26,290,747
    )
    
    
    (34,131,694
    )Maturities of short term investments
    
    
    29,916,000
    
    
    
    21,680,000Purchases of furniture and equipment
    
    
    (34,307
    )
    
    
    (58,314
    )Net cash provided by (used in) investing activities
    
    
    3,590,946
    
    
    
    (15,398,901
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of loan
    
    
    (423,893
    )
    
    
    (300,536
    )Net proceeds from sale of common stock
    
    
    81,750
    
    
    
    27,992,979Net cash (used in) provided by financing activities
    
    
    (342,143
    )
    
    
    27,692,443Net (decrease) increase in cash and cash equivalents
    
    
    (9,620,723
    )
    
    
    2,077,742Cash and cash equivalents at beginning of period
    
    
    20,896,141
    
    
    
    11,407,652Cash and cash equivalents at end of period
    
    $
    11,275,418
    
    
    $
    13,485,394Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    37,794
    
    
    $
    91,288Non-cash investing activity:Stock issued in connection with the acquisition of Miikana
    
    $
    
    
    
    $
    21,920,801
  5




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##### 



ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007 (unaudited)
        6




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##### 



Share-Based Payment Share-Based Payment Accounting for Stock-Based
Compensation
  SIX MONTHS ENDEDJUNE 30,2007
    
    
    2006Research and development
    
    $
    100,381
    
    
    $
    201,800General and administrative
    
    
    692,841
    
    
    
    706,438Share-based compensation expense
    
    $
    793,222
    
    
    $
    908,238Net share-based compensation expense, per
common share:Basic and diluted
    
    $
    0.009
    
    
    $
    0.013
   SIX MONTH PERIOD ENDEDJUNE 30,2007
    
    2006Expected volatility
    
    
    100.36
    %
    
    
    102.29
    %Risk-free interest rate
    
    
    4.89
    %
    
    
    4.98
    %Expected term of option
    
    5 years
    
    5 yearsForfeiture rate
    
    
    5.00
    %
    
    
    5.00
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
 7




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##### 



WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding at January 1, 2007
    
    
    8,111,086
    
    
    $
    7.87Granted
    
    
    436,840
    
    
    $
    1.64Exercised
    
    
    (75,000
    )
    
    $
    1.09Expired
    
    
    (12,912
    )
    
    $
    9.37Forfeited
    
    
    (23,655
    )
    
    $
    1.81Outstanding at June 30, 2007
    
    
    8,436,359
    
    
    $
    7.62Vested and expected to vest at June 30, 2007
    
    
    8,381,155
    
    
    $
    7.66Exercisable at June 30, 2007
    
    
    7,332,277
    
    
    $
    8.47
    8




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##### 



Miikana purchase price allocation
     Fair value of tangible assets acquired
    
    $
    600,000In- process research and development
    
    
    29,500,000Total
    
    $
    30,100,000
    FIN 48, Accounting for Uncertainty in Income Taxes FAS 5, Accounting for Contingencies FAS 109, Accounting for Income Taxes
 9




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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.
 10




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##### 




    
    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 2007 revenues will be from royalties on the sale of
Thalomid®, which we expect to begin 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 are also eligible to receive royalties from Oxford Biomedica, PLC from
the net sales of products developed for the treatment of ophthalmic (eye) diseases.
We do not expect to receive royalties under either of these agreements in 2007.
In the future, royalty payments, if any, will be recorded as revenue when received
and/or when collectibility is reasonably assured.
 
    
    Research and Development  Research and development expenses consist primarily of
compensation and other expenses related to research and development personnel, research
collaborations, costs associated with 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.
    
    Expenses for Clinical Trials  Expenses for clinical trials are incurred from planning
through patient enrollment to reporting of the underlying data. We estimate expenses
incurred for clinical trials that are in process based on patient enrollment and based on
clinical data collection and management. Costs that are associated with patient enrollment
are recognized as each patient in the clinical trial completes enrollment. Estimated
clinical trial costs related to enrollment can vary based on numerous factors, including
expected number of patients in trials, the number of patients that do not complete
participation in a trial, and when a patient drops out of a trial. Information about
patient enrollment can become available significantly after we report our expenses for
clinical trials, in which case we would change our estimate of the remaining cost of a
trial. Costs that are based on clinical data collection and management are recognized
based on estimates of unbilled goods and services received in the reporting period. In the
event of early termination of a clinical trial, we would accrue an amount based on
estimates of the remaining non-cancelable obligations associated with winding down the
clinical trial.
 11




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##### 




    
    Stock-Based Compensation  Issued in December 2004, Statement of Financial Accounting
Standards No. 123R (SFAS 123R) requires 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 was effective
beginning January 1, 2006. Adoption of the expense provisions of SFAS 123R has 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. Our results of
operations are impacted by the recognition of non-cash expense related to the fair value of
our share-based compensation awards.
    For the Three and Six Months Ended June 30, 2007 and June 30, 2006.
 Revenues. ®
 Research and Development Expenses ® ® ® ®
 12




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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.
 13




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##### 



14




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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 June 30, 2007,
we expended $1,405,000 on these activities versus $801,000 in the same 2006 period. For
the six-month period ended June 30, 2007, outside services were $2,022,000 compared to
$1,139,000 for the same 2006 period. The increase reflects costs associated with
advancing Panzem® NCD towards an IND filing for the treatment of
rheumatoid arthritis and ENMD-981693 towards an IND in oncology.
    
    Clinical Trial Costs  Clinical trial costs increased to $1,113,000 in the three
months ended June 30, 2007, from $562,000 in the three-month period ended June 30, 2006.
Clinical trial costs for the six-month period ended June 30, 2007 increased to $2,269,000
from $1,037,000 for the comparable 2006 period. The increase reflects our expanded
clinical base that supports three product candidates in clinical development. We initiated
a series of Phase 1 and Phase 2 trials, with both Panzem® NCD and MKC-1,
throughout 2006. These trials, along with the ENMD-1198 Phase 1 trial, continue and have
resulted in an overall increase in clinical costs. 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, formulation, encapsulation and fill and finish services,
and product release costs. Contract manufacturing costs for the three months ended June 30,
2007 increased to $1,318,000 from $758,000 during the same period in 2006. For the
six-month period ended June 30, 2007 manufacturing costs increased to $3,264,000 from
$1,531,000 for the comparable 2006 period. The 2007 increase results from the acquisition
of bulk API and the formulation of drug product to support the Panzem® NCD
trials. Fluctuations in our contract manufacturing costs from period to period result from
the timing of manufacturing activities, although we expect these expenditures to remain at
these levels as we secure material to support the expansion of our clinical programs.
  General and Administrative Expenses
 15




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##### 



Acquired In-Process R&D.
 Interest expense
 Investment income
 Dividends on Series A convertible preferred stock
 16




---



##### 



® ® ® ®
 17




---



##### 



.
      Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  18




---



##### 



19




---



##### 



)
 Year Term Expires
    
    Name
    
    Votes For
    
    Votes Withheld2010
    
    Donald S. Brooks
    
    
    83,282,034
    
    
    
    2,194,1432010
    
    Dwight L. Bush
    
    
    83,287,513
    
    
    
    2,188,6642010
    
    Peter S. Knight
    
    
    83,257,336
    
    
    
    2,218,841
   VotesFor
    
    
    42,542,336Against
    
    
    5,439,931Abstain
    
    
    196,515Broker Non-Votes
    
    
    37,297,385
  VotesFor
    
    
    84,688,761Against
    
    
    724,523Abstain
    
    
    62,892Broker Non-Votes
    
    
    0
    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 President and Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 21




---



##### 



SIGNATURES
  ENTREMED, INC.
(Registrant)Date: August 8, 2007
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: August 8, 2007
    /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