##### 



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 March 31, 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
    
    (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 April 23, 2007Common Stock $.01 Par Value
    
    84,890,998




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PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of
March 31, 2007 and December 31, 2006
    
    
    3Consolidated
Statements of Operations for the Three Months Ended March 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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
    
    
    18Item 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
    
    
    19Item 6  Exhibits
    
    
    20SIGNATURES
    
    
    21
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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March 31, 2007
    
    
    December 31, 2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,436,218
    
    
    $
    20,896,141Short-term investments
    
    
    30,796,828
    
    
    
    29,673,956Accounts receivable
    
    
    
    
    
    
    3,845,000Interest receivable
    
    
    54,728
    
    
    
    73,895Prepaid expenses and other
    
    
    286,353
    
    
    
    377,871Total current assets
    
    
    46,574,127
    
    
    
    54,866,863Property and equipment, net
    
    
    768,857
    
    
    
    847,561Other assets
    
    
    4,693
    
    
    
    5,110Total assets
    
    $
    47,347,677
    
    
    $
    55,719,534LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,521,096
    
    
    $
    5,909,317Payable to related parties
    
    
    
    
    
    
    37,535Accrued liabilities
    
    
    1,446,709
    
    
    
    1,810,515Loan payable
    
    
    542,687
    
    
    
    751,093Current portion of deferred rent
    
    
    97,176
    
    
    
    89,849Total current liabilities
    
    
    7,607,668
    
    
    
    8,598,309Deferred rent, less current portion
    
    
    114,196
    
    
    
    140,357Total liabilities
    
    
    7,721,864
    
    
    
    8,738,666Minority interest
    
    
    17,697
    
    
    
    17,649Stockholders equity:Convertible preferred stock, $1.00 par value;5,000,000 shares authorized and 3,350,000 shares issued and
outstanding at March 31, 2007 and December 31, 2006
(liquidation value  $33,500,000 at March 31, 2007 and December
31, 2006)
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:170,000,000 and 120,000 shares authorized:84,867,629 and 84,839,585 shares issued and outstanding
at March 31, 2007 and December 31, 2006, respectively
    
    
    848,682
    
    
    
    848,400Additional paid-in capital
    
    
    362,605,300
    
    
    
    362,318,737Treasury stock, at cost: 874,999 shares held at March 31, 2007 and
December 31, 2006
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated other comprehensive income
    
    
    148,850
    
    
    
    117,212Accumulated deficit
    
    
    (319,310,472
    )
    
    
    (311,636,886
    )Total stockholders equity
    
    
    39,608,116
    
    
    
    46,963,219Total liabilities and stockholders equity
    
    $
    47,347,677
    
    
    $
    55,719,534
  3




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##### 



Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Revenues:Licensing
    
    $
    
    
    
    $
    Royalties
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Costs and expenses:Research and development
    
    
    6,398,696
    
    
    
    4,011,100General and administrative
    
    
    1,831,326
    
    
    
    1,816,694Acquired In-Process R&D
    
    
    
    
    
    
    29,128,0618,230,022
    
    
    
    34,955,855Investment income
    
    
    578,913
    
    
    
    278,465Interest expense
    
    
    (22,477
    )
    
    
    (48,713
    )Gain on sale of assets
    
    
    
    
    
    
    15,400Net Loss
    
    
    (7,673,586
    )
    
    
    (34,710,703
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )Net loss attributable to common shareholders
    
    $
    (7,924,836
    )
    
    $
    (34,961,953
    )Net loss per share (basic and diluted)
    
    $
    (0.09
    )
    
    $
    (0.53
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    84,015,999
    
    
    
    66,297,950
  4




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THREE MONTH PERIOD ENDEDMARCH 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (7,673,586
    )
    
    $
    (34,710,703
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    92,498
    
    
    
    121,375Gain on sale of assets
    
    
    
    
    
    
    (15,400
    )Write-off of acquired in-process R&D
    
    
    
    
    
    
    29,128,061Amortization of premium on short-term investments
    
    
    (401,289
    )
    
    
    (116,513
    )Stock-based compensation expense
    
    
    297,487
    
    
    
    348,909Amortization of deferred stock-based compensation expense
    
    
    
    
    
    
    43,713Minority interest
    
    
    46
    
    
    
    90Changes in operating assets and liabilities:Accounts receivable
    
    
    3,845,045
    
    
    
    3,683,100Interest receivable
    
    
    19,167
    
    
    
    113,028Prepaid expenses and other
    
    
    91,890
    
    
    
    998Deferred rent
    
    
    (18,834
    )
    
    
    (11,720
    )Accounts payable
    
    
    (388,220
    )
    
    
    (2,575,813
    )Payable to related parties
    
    
    (37,535
    )
    
    
    (39,553
    )Accrued liabilities
    
    
    (363,806
    )
    
    
    (1,426,803
    )Net cash used in operating activities
    
    
    (4,537,137
    )
    
    
    (5,457,231
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition, net of cash received
    
    
    
    
    
    
    (2,552,385
    )Proceeds from sale of property and equipment, net
    
    
    
    
    
    
    15,400Purchases of short term investments
    
    
    (8,289,946
    )
    
    
    (17,959,367
    )Maturities of short term investments
    
    
    7,600,000
    
    
    
    7,430,000Purchases of furniture and equipment
    
    
    (13,793
    )
    
    
    (32,599
    )Net cash used in investing activities
    
    
    (703,739
    )
    
    
    (13,098,951
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of loan
    
    
    (208,406
    )
    
    
    (112,006
    )Net (costs) proceeds from sale of common stock
    
    
    (10,641
    )
    
    
    28,064,309Net cash (used in) provided by financing activities
    
    
    (219,047
    )
    
    
    27,952,303Net (decrease) increase in cash and cash equivalents
    
    
    (5,459,923
    )
    
    
    9,396,121Cash and cash equivalents at beginning of period
    
    
    20,896,141
    
    
    
    11,407,652Cash and cash equivalents at end of period
    
    $
    15,436,218
    
    
    $
    20,803,773Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    22,477
    
    
    $
    48,713Non-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
March 31, 2007 (unaudited)
        6




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Share-Based Payment Share-Based Payment Accounting for Stock-Based
Compensation
  THREE MONTHS ENDEDMARCH 31,2007
    
    
    2006Research and development
    
    
    46,432
    
    
    
    103,955General and administrative
    
    
    251,055
    
    
    
    288,667Share-based compensation expense
    
    $
    297,487
    
    
    $
    392,622Net share-based compensation expense,
per common share:Basic and diluted
    
    $
    0.004
    
    
    $
    0.006
   THREE MONTH PERIOD ENDEDMARCH 31,2007
    
    2006Expected volatility
    
    
    101.00
    %
    
    
    103.40
    %Risk-free interest rate
    
    
    4.58
    %
    
    
    4.59
    %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
    
    
    201,216
    
    
    $
    1.70Exercised
    
    
    
    
    
    
    Expired
    
    
    (1,750
    )
    
    $
    13.43Forfeited
    
    
    (3,573
    )
    
    $
    1.74Outstanding at March 31, 2007
    
    
    8,306,979
    
    
    $
    7.72Vested and expected to vest at March 31, 2007
    
    
    8,234,900
    
    
    $
    7.77Exercisable at March 31, 2007
    
    
    6,865,404
    
    
    $
    8.93
    Miikana purchase price allocation
  8




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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 do not expect to receive royalties under this agreement 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 Months Ended March 31, 2007 and March 31, 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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
    
    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 March 31,
2007, we expended
$617,000 on these activities versus $338,000 in 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.
 14




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
    
    Clinical Trial Costs  Clinical trial costs increased to $1,156,000 in the three
months ended March 31, 2007, from $475,000 in the three-month period ended March 31, 2006.
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, encapsulation and fill and finish services, and product
release costs. Contract manufacturing costs for the three months ended March 31, 2007
increased to $1,945,000 from $774,000 during the same period in 2006. 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.
 15




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Interest expense
 Investment income
 Dividends on Series A convertible preferred stock
   16




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® ® ® ®
     17




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




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19




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10.1
    
    Form of Change in Control Agreement (Incorporated by reference to
Exhibit 10.1 of EntreMed Inc.s Current Report on Form 8-K filed on
April 17, 2007)10.2
    
    Amendment to Employment Agreement by and between the Company and
James S. Burns, effective April 16, 2007 (Incorporated by reference
to Exhibit 10.2 of EntreMed Inc.s Current Report on Form 8-K filed
on April 17, 2007)10.3
    
    Amendment to Employment Agreement by and between the Company and Dane
R. Saglio, effective April 16, 2007 (Incorporated by reference to
Exhibit 10.3 of EntreMed Inc.s Current Report on Form 8-K filed on
April 17, 2007)10.4
    
    Amendment to Employment Agreement by and between the Company and
Carolyn F. Sidor, effective April 16, 2007 (Incorporated by
reference to Exhibit 10.4 of EntreMed Inc.s Current Report on Form
8-K filed on April 17, 2007)10.5
    
    Amendment to Employment Agreement by and between the Company and
Cynthia Wong Hu, effective April 16, 2007 (Incorporated by reference
to Exhibit 10.5 of EntreMed Inc.s Current Report on Form 8-K filed
on April 17, 2007)10.6
    
    Amendment to Employment Agreement by and between the Company and Marc
G. Corrado, effective April 16, 2007 (Incorporated by reference to
Exhibit 10.6 of EntreMed Inc.s Current Report on Form 8-K filed on
April 17, 2007)10.7
    
    Form of Non-Qualified Stock Option Grant Agreement (non-employee
directors) (Incorporated by reference to Exhibit 10.7 of EntreMed
Inc.s Current Report on Form 8-K filed on April 17, 2007)10.8
    
    Form of Non-Qualified Stock Option Grant Agreement (employees)
(Incorporated by reference to Exhibit 10.8 of EntreMed Inc.s Current
Report on Form 8-K filed on April 17, 2007)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 20




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SIGNATURES
  ENTREMED, INC.
(Registrant)Date: May 9, 2007
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: May 9, 2007
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer 21




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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
 22