##### 



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, 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 number0-20713
 ENTREMED, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    58-1959440(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 
 
 
 þ o
  o þ o
 o þ
  Class
    
    Outstanding at August 3, 2006Common Stock $.01 Par Value
    
    74,163,498




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##### 



PAGEPART I. FINANCIAL INFORMATIONItem 1   Financial StatementsConsolidated Balance Sheets as of
June 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations for the
Three Months Ended June 30, 2006 and 2005
and the Six Months Ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows for the
Six Months Ended June 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
    
    
    18Item 4   Controls and Procedures
    
    
    19Part 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
    
    
    20Item 4  Submission of Matters to a Vote of Security Holders
    
    
    20Item 5  Other Information
    
    
    20Item 6  Exhibits
    
    
    21SIGNATURES
    
    
    22
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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##### 



June 30, 2006
    
    
    December 31, 2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,485,394
    
    
    $
    11,407,652Short-term investments
    
    
    31,605,781
    
    
    
    18,674,736Accounts receivable
    
    
    71,368
    
    
    
    3,723,433Note receivable
    
    
    
    
    
    
    1,000,000Interest receivable
    
    
    74,178
    
    
    
    181,231Prepaid expenses and other
    
    
    175,324
    
    
    
    338,462Total current assets
    
    
    45,412,045
    
    
    
    35,325,514Property and equipment, net
    
    
    886,609
    
    
    
    915,337Other assets
    
    
    5,943
    
    
    
    191,034Total assets
    
    $
    46,304,597
    
    
    $
    36,431,885LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,744,010
    
    
    $
    5,487,014Payable to related parties
    
    
    250,861
    
    
    
    228,380Accrued liabilities
    
    
    2,544,967
    
    
    
    1,038,975Current portion of loan payable
    
    
    820,387
    
    
    
    Current portion of deferred rent
    
    
    75,338
    
    
    
    60,969Total current liabilities
    
    
    6,435,563
    
    
    
    6,815,338Deferred rent, less current portion
    
    
    187,701
    
    
    
    230,206Loan payable, less current portion
    
    
    327,200
    
    
    
    Total liabilities
    
    
    6,950,464
    
    
    
    7,045,544Minority interest
    
    
    17,355
    
    
    
    17,151Stockholders equity:Convertible preferred stock, $1.00 par value;5,000,000 shares authorized and 3,350,000 shares issued and
outstanding at June 30, 2006 and December 31, 2005, respectively
(liquidation value  $27,637,500 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 June 30, 2006 and December 31,2005,
Respectively
    
    
    740,560
    
    
    
    511,069Additional paid-in capital
    
    
    345,764,718
    
    
    
    295,392,194Deferred stock-based compensation
    
    
    
    
    
    
    (102,000
    )Treasury stock, at cost: 874,999 shares held at June 30, 2006 and
December 31, 2005, respectively
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated deficit
    
    
    (302,484,256
    )
    
    
    (261,747,829
    )Total stockholders equity
    
    
    39,336,778
    
    
    
    29,369,190Total liabilities and stockholders equity
    
    $
    46,304,597
    
    
    $
    36,431,885
  3




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##### 



Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Revenues:Licensing
    
    $
    
    
    
    $
    567,118
    
    
    $
    
    
    
    $
    590,992Royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,375Other
    
    
    
    
    
    
    12,343
    
    
    
    
    
    
    
    12,343
    
    
    
    579,461
    
    
    
    
    
    
    
    604,710Costs and expenses:Research and development
    
    
    4,258,206
    
    
    
    3,812,353
    
    
    
    8,269,306
    
    
    
    8,191,709General and administrative
    
    
    1,942,652
    
    
    
    1,339,150
    
    
    
    3,759,346
    
    
    
    2,599,972Acquired In-Process R&D
    
    
    353,833
    
    
    
    
    
    
    
    29,481,894
    
    
    
    6,554,691
    
    
    
    5,151,503
    
    
    
    41,510,546
    
    
    
    10,791,681Investment income
    
    
    569,617
    
    
    
    271,832
    
    
    
    848,082
    
    
    
    430,293Interest expense
    
    
    (42,575
    )
    
    
    
    
    
    
    (91,288
    )
    
    
    Gain on sale of assets
    
    
    1,925
    
    
    
    
    
    
    
    17,325
    
    
    
    Net Loss
    
    
    (6,025,724
    )
    
    
    (4,300,210
    )
    
    
    (40,736,427
    )
    
    
    (9,756,678
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (502,500
    )
    
    
    (502,500
    )Net loss attributable to common shareholders
    
    $
    (6,276,974
    )
    
    $
    (4,551,460
    )
    
    $
    (41,238,927
    )
    
    $
    (10,259,178
    )Net loss per share (basic and diluted)
    
    $
    (0.09
    )
    
    $
    (0.09
    )
    
    $
    (0.59
    )
    
    $
    (0.22
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    73,194,814
    
    
    
    49,819,569
    
    
    
    69,765,434
    
    
    
    46,324,989
  4




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##### 



SIX MONTH PERIOD ENDEDJUNE 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (40,736,427
    )
    
    $
    (9,756,678
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    236,513
    
    
    
    251,474Gain on sale of fixed assets
    
    
    (17,325
    )
    
    
    Write-off of acquired in-process R&D
    
    
    29,481,894
    
    
    
    Discount of premium on ST investments
    
    
    (479,351
    )
    
    
    Stock-based compensation expense
    
    
    864,526
    
    
    
    Amortization of deferred stock-based compensation expense
    
    
    43,713
    
    
    
    Minority interest
    
    
    204
    
    
    
    42Changes in operating assets and liabilities, net of acquisition:Accounts receivable
    
    
    3,701,347
    
    
    
    3,121,646Interest receivable
    
    
    107,053
    
    
    
    15,056Prepaid expenses and other
    
    
    209,417
    
    
    
    232,955Deferred rent
    
    
    (28,136
    )
    
    
    (14,186
    )Accounts payable
    
    
    (2,818,638
    )
    
    
    359,854Payable to related parties
    
    
    22,481
    
    
    
    63,236Accrued liabilities
    
    
    (803,071
    )
    
    
    (728,055
    )Deferred revenue
    
    
    
    
    
    
    (190,992
    )Net cash used in operating activities
    
    
    (10,215,800
    )
    
    
    (6,645,648
    )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
    
    
    (34,131,694
    )
    
    
    (15,132,345
    )Maturities of short term investments
    
    
    21,680,000
    
    
    
    Purchases of furniture and equipment
    
    
    (58,314
    )
    
    
    (136,964
    )Net cash used in investing activities
    
    
    (15,398,901
    )
    
    
    (15,269,309
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of loan
    
    
    (300,536
    )
    
    
    Net proceeds from sale of common stock
    
    
    27,992,979
    
    
    
    9,904,704Net cash provided by financing activities
    
    
    27,692,443
    
    
    
    9,904,704Net increase (decrease) in cash and cash equivalents
    
    
    2,077,742
    
    
    
    (12,010,253
    )Cash and cash equivalents at beginning of period
    
    
    11,407,652
    
    
    
    20,425,495Cash and cash equivalents at end of period
    
    $
    13,485,394
    
    
    $
    8,415,242Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    91,288
    
    
    $
    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
June 30, 2006 (unaudited)
        Share-Based Payment Share-Based Payment
 6




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##### 



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




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##### 



SIX MONTH PERIOD ENDEDJUNE 302006
    
    2005Expected volatility
    
    
    102.24
    %
    
    
    107.85
    %Risk-free interest rate
    
    
    5.13
    %
    
    
    3.88
    %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
    
    
    572,336
    
    
    
    1.65Exercised
    
    
    (7,500
    )
    
    
    1.09Expired
    
    
    (138,736
    )
    
    
    15.01Forfeited
    
    
    
    
    
    
    Outstanding at June 30, 2006
    
    
    8,388,117
    
    
    $
    8.47Vested and expected to vest at June 30, 2006
    
    
    8,324,124
    
    
    $
    8.52Exercisable at June 30, 2006
    
    
    7,108,259
    
    
    $
    9.58
    8




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##### 



Six Months EndedJune 30, 2006Research and development
    
    $
    201,800General and administrative
    
    
    706,438Share-based compensation expense
    
    $
    908,238Net share-based compensation expense, per common share:Basic and diluted
    
    $
    0.013
  Six months endedJune 30, 2005Actual net loss
    
    $
    (9,756,678
    )Deduct: Stock-based employee compensation expense if
SFAS No.123 had been applied to all awards
    
    
    (464,029
    )Add: Stock-based employee compensation included in reported net loss
    
    
    Proforma net loss
    
    $
    (10,220,707
    )Dividend on Series A convertible preferred stock
    
    
    (502,500
    )Proforma net loss per share available to common shareholders
    
    $
    (10,723,207
    )Net loss per share:Basic and diluted  as reported
    
    $
    (.22
    )Basic and diluted  pro forma
    
    $
    (.23
    )
   9




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##### 



Miikana purchase price allocation
 
    
    Miikana is a development stage company, accordingly, the acquisition of Miikana is
treated as an asset purchase. In accordance with EITF 98-3 Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Asset or of a Business, the
purchase price was first allocated to the tangible assets acquired and liabilities assumed
based on the estimated fair values at the acquisition date. The balance of the purchase
price was allocated to intangible assets and recorded as in-process research and
development as the research and development projects in Miikanas pipeline, as of the
acquisition date, had not reached technological feasibility and had no alternative use.
    Fair value of net tangible assets acquired
    
    $
    600,000In- process research and development
    
    
    29,500,000Total
    
    $
    30,100,000
  ® ® ®
   10




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##### 



®
  inflammation 
  11




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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 2006 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 2006. 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.
    
    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.
 12




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##### 



For the Three and Six Months Ended June 30, 2006 and June 30, 2005.
 Revenues. ®
 Research and Development Expenses ® ® ® ® Ò
  13




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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.
   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, 2006,
EntreMed expended $801,000 on these activities versus $655,000 in the same 2005 period.
For the six-month period ended June 30, 2006 outside services were $1,139,000, compared to
$1,136,000 for the same 2005 period While the costs for the two periods were essentially
the same, the 2006 expense includes $231,000 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.
 15




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##### 




    
    Collaborative Research Agreements  EntreMed made payments to collaborators of
$26,000 and $327,000 for the three months ended June 30, 2006 and 2005, respectively, and
$142,000 and $432,000 for the six months ended June 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.
    
    Clinical Trial Costs  Clinical trial costs increased to $562,000 in the three months
ended June 30, 2006, from $285,000 in the three-month period ended June 30, 2005. Clinical
trial costs for the six-month period ended June 30, 2006 increased to $1,037,000 from
$487,000 for the comparable 2005 period. The increase reflects the initiation of Phase 2
clinical trials for PanzemÒNCD, in addition to $315,000 related to the
initiation of Phase 2 clinical trials for MKC-1. 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 $758,000 for the three months ended
June 30, 2006 and 2005. For the six-month period ended June 30, 2006 manufacturing costs
decreased to $1,531,000 from $1,636,000 for the comparable 2005 period. Included in the
2006 amount is $177,000 related to the encapsulation of material for the Phase 2 trials for
MKC-1. The 2006 decrease results from the timing of manufacturing activities.
  General and Administrative Expenses
  Investment income
 16




---



##### 



Interest expense
 Dividends on Series A convertible preferred stock
      17




---



##### 



® ®
     18




---



##### 



19




---



##### 



)
 Year TermExpires
    
    Name
    
    Votes For
    
    Votes Withheld2009
    
    Michael M. Tarnow
    
    68,676,660
    
    1,139,7082009
    
    Ronald Cape
    
    68,653,079
    
    1,163,289
       20




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##### 



3.1
    
    Amended and Restated Certificate of Incorporation10.1
    
    2001 Long-Term Incentive Plan, as amended31.1
    
    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: August 9, 2006
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: August 9, 2006
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 22




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##### 



3.1
    
    Amended and Restated Certificate of Incorporation10.1
    
    2001 Long-Term Incentive Plan, as amended31.1
    
    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