##### 



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, 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 number0-20713
 ENTREMED, INC.
 (Exact
name of registrant as specified in its charter)
 Delaware
    
    58-1959440(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 (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 2, 2007Common Stock $.01 Par Value
    
    85,098,911




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##### 



PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of
September 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations for the
Three Months Ended September 30, 2007 and 2006
and the Nine Months Ended September 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    12Item 3  Quantitative and Qualitative Disclosures
About Market Risk
    
    
    22Item 4  Controls and Procedures
    
    
    22Part II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    22Item 1A  Risk Factors
    
    
    22Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3  Defaults upon Senior Securities
    
    
    23Item 4  Submission of Matters to a Vote of Security Holders
    
    
    23Item 5  Other Information
    
    
    23Item 6  Exhibits
    
    
    24SIGNATURES
    
    
    25
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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##### 



September 30, 2007
    
    
    December 31, 2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29,170,153
    
    
    $
    20,896,141Short-term investments
    
    
    21,474,108
    
    
    
    29,673,956Accounts receivable
    
    
    3,519,651
    
    
    
    3,845,000Interest receivable
    
    
    190,655
    
    
    
    73,895Prepaid expenses and other
    
    
    460,053
    
    
    
    377,871Total current assets
    
    
    54,814,620
    
    
    
    54,866,863Property and equipment, net
    
    
    646,969
    
    
    
    847,561Other assets
    
    
    115,704
    
    
    
    5,110Total assets
    
    $
    55,577,293
    
    
    $
    55,719,534LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,738,591
    
    
    $
    5,909,317Payable to related parties
    
    
    
    
    
    
    37,535Accrued liabilities
    
    
    1,380,667
    
    
    
    1,810,515Current portion of loan payable
    
    
    1,177,326
    
    
    
    751,093Current portion of deferred rent
    
    
    112,122
    
    
    
    89,849Total current liabilities
    
    
    7,408,706
    
    
    
    8,598,309Loan payable, less current portion
    
    
    18,532,674
    
    
    
    Deferred rent, less current portion
    
    
    51,907
    
    
    
    140,357Total liabilities
    
    
    25,993,287
    
    
    
    8,738,666Minority interest
    
    
    18,059
    
    
    
    17,649Stockholders equity:Convertible
preferred stock, $1.00 par value; 
5,000,000 shares authorized and 3,350,000 shares issued and 
outstanding at September 30, 2007 and December 31, 2006
(liquidation value  $33,500,000 at September 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:85,004,764 and 84,839,585 shares issued and outstanding 
at September 30, 2007 and December 31, 2006, respectively
    
    
    850,045
    
    
    
    848,400Additional paid-in capital
    
    
    363,598,505
    
    
    
    362,318,737Treasury stock, at cost: 874,999 shares held at September 30, 2007 and
December 31, 2006
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated other comprehensive income
    
    
    82,152
    
    
    
    117,212Accumulated deficit
    
    
    (330,280,511
    )
    
    
    (311,636,886
    )Total stockholders equity
    
    
    29,565,947
    
    
    
    46,963,219Total liabilities and stockholders equity
    
    $
    55,577,293
    
    
    $
    55,719,534
  3




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Royalties
    
    $
    3,518,071
    
    
    $
    3,010,626
    
    
    $
    3,518,071
    
    
    $
    3,010,626Other
    
    
    2,188
    
    
    
    12,559
    
    
    
    2,188
    
    
    
    12,559$
    3,520,259
    
    
    $
    3,023,185
    
    
    $
    3,520,259
    
    
    $
    3,023,185Costs and expenses:Research and development
    
    
    5,109,257
    
    
    
    5,544,134
    
    
    
    18,089,240
    
    
    
    13,813,440General and administrative
    
    
    1,706,451
    
    
    
    1,497,612
    
    
    
    5,407,588
    
    
    
    5,256,958Acquired In-Process R&D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,481,8946,815,708
    
    
    
    7,041,746
    
    
    
    23,496,828
    
    
    
    48,552,292Investment income
    
    
    428,980
    
    
    
    529,661
    
    
    
    1,539,615
    
    
    
    1,377,743Interest expense
    
    
    (168,877
    )
    
    
    (36,098
    )
    
    
    (206,671
    )
    
    
    (127,386
    )Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,325Net Loss
    
    
    (3,035,346
    )
    
    
    (3,524,998
    )
    
    
    (18,643,625
    )
    
    
    (44,261,425
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (753,750
    )
    
    
    (753,750
    )Net loss attributable to common shareholders
    
    $
    (3,286,596
    )
    
    $
    (3,776,248
    )
    
    $
    (19,397,375
    )
    
    $
    (45,015,175
    )Net loss per share (basic and diluted)
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.23
    )
    
    $
    (0.63
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    84,223,912
    
    
    
    73,288,499
    
    
    
    84,015,999
    
    
    
    70,952,694
  4




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##### 



NINE MONTH PERIOD ENDEDSEPTEMBER 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (18,643,625
    )
    
    $
    (44,261,425
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    255,877
    
    
    
    342,164Gain on sale of assets
    
    
    
    
    
    
    (17,325
    )Write-off of acquired in-process R&D
    
    
    
    
    
    
    29,481,894Amortization of premium on short-term investments
    
    
    (917,680
    )
    
    
    (809,516
    )Stock-based compensation expense
    
    
    1,009,664
    
    
    
    1,160,279Amortization of deferred stock-based compensation expense
    
    
    
    
    
    
    87,426Minority interest
    
    
    410
    
    
    
    344Changes in operating assets and liabilities:Accounts receivable
    
    
    325,349
    
    
    
    759,058Interest receivable
    
    
    (116,760
    )
    
    
    105,478Prepaid expenses and other
    
    
    (82,056
    )
    
    
    (21,452
    )Deferred rent
    
    
    (66,177
    )
    
    
    (44,552
    )Accounts payable
    
    
    (1,170,726
    )
    
    
    (1,830,388
    )Payable to related parties
    
    
    (37,535
    )
    
    
    (39,233
    )Accrued liabilities
    
    
    (429,848
    )
    
    
    (828,123
    )Net cash used in operating activities
    
    
    (19,873,107
    )
    
    
    (15,915,371
    )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
    
    
    (30,958,532
    )
    
    
    (47,880,777
    )Maturities of short term investments
    
    
    40,041,000
    
    
    
    50,178,460Purchases of furniture and equipment
    
    
    (55,286
    )
    
    
    (156,528
    )Net cash provided by (used in) investing activities
    
    
    9,027,182
    
    
    
    (747,738
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of loan
    
    
    (751,093
    )
    
    
    (495,472
    )Proceeds from loan, net of discount
    
    
    19,900,000
    
    
    
    Deferred financing costs
    
    
    (110,720
    )
    
    
    Net proceeds from sale of common stock
    
    
    81,750
    
    
    
    27,992,979Net cash provided by financing activities
    
    
    19,119,937
    
    
    
    27,497,507Net increase in cash and cash equivalents
    
    
    8,274,012
    
    
    
    10,834,398Cash and cash equivalents at beginning of period
    
    
    20,896,141
    
    
    
    11,407,652Cash and cash equivalents at end of period
    
    $
    29,170,153
    
    
    $
    22,242,050Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    206,671
    
    
    $
    127,386Non-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
September 30, 2007 (unaudited)
       ®
   6




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##### 



Share-Based Payment Share-Based Payment Accounting for Stock-Based
Compensation
  NINE MONTHS ENDEDSEPTEMBER 30,2007
    
    
    2006Research and development
    
    $
    141,686
    
    
    $
    260,459General and administrative
    
    
    867,978
    
    
    
    987,246Share-based compensation expense
    
    $
    1,009,664
    
    
    $
    1,247,705Net share-based compensation expense, per
common share:Basic and diluted
    
    $
    0.012
    
    
    $
    0.018
  7




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##### 



NINE MONTH PERIOD ENDEDSEPTEMBER 30,2007
    
    2006Expected volatility
    
    
    100.33
    %
    
    
    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
    %
   WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding at January 1, 2007
    
    
    8,111,086
    
    
    $
    7.87Granted
    
    
    447,016
    
    
    $
    1.64Exercised
    
    
    (75,000
    )
    
    $
    1.09Expired
    
    
    (211,119
    )
    
    $
    10.82Forfeited
    
    
    (23,655
    )
    
    $
    1.81Outstanding at September 30, 2007
    
    
    8,248,328
    
    
    $
    7.54Vested and expected to vest at September 30, 2007
    
    
    8,196,090
    
    
    $
    7.58Exercisable at September 30, 2007
    
    
    7,203,562
    
    
    $
    8.35
  8




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##### 



Miikana Purchase Price Allocation
  Acquired In-Process Research and Development
     9




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##### 



pro
rata
     10




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##### 



Less than one year
    
    $
    1,177,326One to two years
    
    
    7,510,153Two to three years
    
    
    8,335,318Three to four years
    
    
    2,977,203Total
    
    $
    20,000,000
     FIN 48, Accounting for Uncertainty in Income Taxes FAS 5, Accounting for Contingencies FAS 109, Accounting for Income Taxes
  11




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##### 



Accounting for Nonrefundable Advance Payments for
Goods or Services Received for use in Future Research and Development Activities
   ®
 12




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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 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.
 13




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##### 



-
    
    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.-
    
    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.
   14




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##### 



For the Three and Nine Months Ended September 30, 2007 and September 30, 2006.
 Revenues. ® ® ® ® ®
 Research and Development Expenses ® ® ®
 ®
   15




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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.
    16




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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,
2007, we expended $620,000 on these activities versus $846,000 in the same 2006 period.
For the nine-month period ended September 30, 2007, outside services were $2,642,000
compared to $1,985,000 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-2076 towards an IND for the treatment of cancer and inflammatory
diseases.-
    
    Clinical Trial Costs  Clinical trial costs increased to $907,000 in the three months
ended September 30, 2007, from $698,000 in the three-month period ended September 30, 2006.
Clinical trial costs for the nine-month period ended September 30, 2007 increased to
$3,176,000 from $1,735,000 for the comparable 2006 period. The increase reflects our
expanded clinical base that supports three product candidates in clinical development. In
2006 and 2007 we initiated a series of Phase 1 and Phase 2 trials, with both
Panzem® NCD and MKC-1. A number of these trials remain open, and, along with
the ENMD-1198 Phase 1 trial, have resulted in an overall increase in clinical costs. Costs
of such trials include the clinical site fees, monitoring costs and data management costs.
 17




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##### 



-
    
    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
September 30, 2007 decreased to $1,086,000 from $1,807,000 during the same period in 2006.
For the nine-month period ended September 30, 2007 manufacturing costs increased to
$4,349,000 from $3,339,000 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
  Acquired In-Process R&D.
 18




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##### 



Interest expense
 Investment income
 Dividends on Series A convertible preferred stock
   19




---



##### 



pro rata
     20




---



##### 



® ® ® ®
  .
   21




---



##### 



Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
       22




---



##### 



Our loan agreement contains operating and financial covenants that may restrict our business and
financing activities.
  
    
    incur or guaranty additional indebtedness;
    
    create liens;
    
    sell assets;
    
    consolidate or merge with other entities;
    
    pay dividends or make distributions on, or repurchase, our stock;
    
    make loans or investments
    
    enter into transactions with affiliates; or
    
    amend certain material agreements.
          23




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##### 



4.1
    
    Warrant dated September 12, 2007 issued to General Electric Capital Corporation4.2
    
    Warrant dated September 12, 2007 issued to Merrill Lynch Capital4.3
    
    Warrant dated September 12, 2007 issued to Oxford Finance Corporation10.1
    
    Loan and Security Agreement dated September 12, 2007 among General Electric Capital Corporation, Oxford
Finance Corporation, Merrill Lynch Capital, as the lenders, and EntreMed, Inc. and Miikana Therapeutics, Inc.
as the loan parties10.2
    
    Promissory Note dated September 12, 2007 to General Electric Capital Corporation10.3
    
    Promissory Note dated September 12, 2007 to Merrill Lynch Capital10.4
    
    Promissory Note dated September 12, 2007 to Oxford Finance Corporation31.1
    
    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
 24




---



##### 



SIGNATURES
  ENTREMED, INC.(Registrant)Date: November 8, 2007
    
    
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: November 8, 2007
    
    
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 25




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##### 



4.1
    
    Warrant dated September 12, 2007 issued to General Electric Capital Corporation4.2
    
    Warrant dated September 12, 2007 issued to Merrill Lynch Capital4.3
    
    Warrant dated September 12, 2007 issued to Oxford Finance Corporation10.1
    
    Loan and Security Agreement dated September 12, 2007 among General Electric Capital Corporation,
Oxford Finance Corporation, Merrill Lynch Capital, as the lenders and EntreMed, Inc. and Miikana
Therapeutics, Inc. as the loan parties10.2
    
    Promissory Note dated September 12, 2007 to General Electric Capital Corporation10.3
    
    Promissory Note dated September 12, 2007 to Merrill Lynch Capital10.4
    
    Promissory Note dated September 12, 2007 to Oxford Finance Corporation31.1
    
    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
 26