##### 



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, 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.
 (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)
 (Address of principal executive offices)
 (Zip code)
 (Registrants telephone number, including area code)
  þ o
  o þ o
  o þ
  Class
    
    Outstanding at May 5, 2006Common Stock $.01 Par Value
    
    74,051,323




---



##### 



PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of
March 31, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations for the
Three Months Ended March 31, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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
    
    
    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




---



##### 



March 31, 2006
    
    
    December 31, 2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,803,773
    
    
    $
    11,407,652Short-term investments
    
    
    29,320,615
    
    
    
    18,674,736Accounts receivable
    
    
    89,615
    
    
    
    3,723,433Note receivable
    
    
    
    
    
    
    1,000,000Interest receivable
    
    
    68,203
    
    
    
    181,231Prepaid expenses and other
    
    
    379,877
    
    
    
    338,462Total current assets
    
    
    50,662,083
    
    
    
    35,325,514Property and equipment, net
    
    
    976,032
    
    
    
    915,337Other assets
    
    
    9,812
    
    
    
    191,034Total assets
    
    $
    51,647,927
    
    
    $
    36,431,885LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,986,836
    
    
    $
    5,487,014Payable to related parties
    
    
    188,827
    
    
    
    228,380Accrued liabilities
    
    
    1,921,235
    
    
    
    1,038,975Current portion of loan payable
    
    
    793,431
    
    
    
    Current portion of deferred rent
    
    
    68,083
    
    
    
    60,969Total current liabilities
    
    
    5,958,412
    
    
    
    6,815,338Deferred rent, less current portion
    
    
    211,372
    
    
    
    230,206Loan payable, less current portion
    
    
    542,686
    
    
    
    Total liabilities
    
    
    6,712,470
    
    
    
    7,045,544Minority interest
    
    
    17,242
    
    
    
    17,151Stockholders equity:Convertible preferred stock, $1.00 par value;
5,000,000 shares authorized and 3,350,000 shares issued and
outstanding at March 31, 2006 and December 31, 2005, respectively
(liquidation value  $43,715,500 and $33,500,000, respectively)
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:120,000,000 shares authorized, 74,051,323 and 51,106,857 shares
issued and outstanding at March 31, 2006 and December 31, 2005,
respectively
    
    
    740,513
    
    
    
    511,069Additional paid-in capital
    
    
    345,320,478
    
    
    
    295,392,194Deferred stock-based compensation
    
    
    
    
    
    
    (102,000
    )Treasury stock, at cost: 874,999 shares held at March 31, 2006 andDecember 31, 2005, respectively
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated deficit
    
    
    (296,458,532
    )
    
    
    (261,747,829
    )Total stockholders equity
    
    
    44,918,215
    
    
    
    29,369,190Total liabilities and stockholders equity
    
    $
    51,647,927
    
    
    $
    36,431,885
  3




---



##### 



Three Months EndedMarch 31, 2006
    
    
    March 31, 2005Revenues:Licensing
    
    $
    
    
    
    $
    23,874Royalties
    
    
    
    
    
    
    1,375
    
    
    
    25,249Costs and expenses:Research and development
    
    
    4,011,100
    
    
    
    4,379,356General and administrative
    
    
    1,816,694
    
    
    
    1,260,822Acquired In-Process R&D
    
    
    29,128,061
    
    
    
    34,955,855
    
    
    
    5,640,178Investment income
    
    
    278,465
    
    
    
    158,461Interest expense
    
    
    (48,713
    )
    
    
    Gain on sale of assets
    
    
    15,400
    
    
    
    Net loss
    
    $
    (34,710,703
    )
    
    $
    (5,456,468
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )Net loss attributable to common shareholders
    
    $
    (34,961,953
    )
    
    $
    (5,707,718
    )Net loss per share (basic and diluted)
    
    $
    (0.53
    )
    
    $
    (0.13
    )Weighted average number of common shares outstanding (basic
and diluted)
    
    
    66,297,950
    
    
    
    43,345,118
  4




---



##### 



THREE MONTH PERIOD ENDEDMARCH 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (34,710,703
    )
    
    $
    (5,456,468
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    121,375
    
    
    
    127,825Gain on sale of fixed assets
    
    
    (15,400
    )
    
    
    Write-off of acquired in-process R&D
    
    
    29,128,061
    
    
    
    Discount of premium on ST investments
    
    
    (116,513
    )
    
    
    Stock-based compensation expense
    
    
    348,909
    
    
    
    Amortization of deferred stock-based compensation expense
    
    
    43,713
    
    
    
    Minority interest
    
    
    90
    
    
    
    10Changes in operating assets and liabilities, net of acquisition:Accounts receivable
    
    
    3,683,100
    
    
    
    2,937,469Interest receivable
    
    
    113,028
    
    
    
    (44,102
    )Prepaid expenses and other
    
    
    998
    
    
    
    103,500Deferred rent
    
    
    (11,720
    )
    
    
    (4,813
    )Accounts payable
    
    
    (2,575,813
    )
    
    
    744,539Payable to related parties
    
    
    (39,553
    )
    
    
    1,576,679Accrued liabilities
    
    
    (1,426,803
    )
    
    
    (884,209
    )Deferred revenue
    
    
    
    
    
    
    (23,874
    )Net cash used in operating activities
    
    
    (5,457,231
    )
    
    
    (923,444
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition, net of cash received
    
    
    (2,552,385
    )
    
    
    Proceeds from sale of property and equipment, net
    
    
    15,400
    
    
    
    Purchases of short term investments
    
    
    (17,959,367
    )
    
    
    (8,407,078
    )Maturities of short term investments
    
    
    7,430,000
    
    
    
    Purchases of furniture and equipment
    
    
    (32,599
    )
    
    
    (4,457
    )Net cash used in investing activities
    
    
    (13,098,951
    )
    
    
    (8,411,535
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of loan
    
    
    (112,006
    )
    
    
    Net proceeds from sale of common stock
    
    
    28,064,309
    
    
    
    9,978,274Net cash provided by financing activities
    
    
    27,952,303
    
    
    
    9,978,274Net increase in cash and cash equivalents
    
    
    9,396,121
    
    
    
    643,295Cash and cash equivalents at beginning of period
    
    
    11,407,652
    
    
    
    20,425,495Cash and cash equivalents at end of period
    
    $
    20,803,773
    
    
    $
    21,068,790Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    48,713
    
    
    $
    Non-cash investing activity:Stock issued in connection with the acquisition
    
    $
    21,920,801
    
    
    $
    
  5




---



##### 



ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (unaudited)
        Share-Based Payment Share-Based Payment
 6




---



##### 



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




---



##### 



THREE MONTH PERIOD ENDEDMARCH 312006
    
    2005Expected volatility
    
    
    103.40
    %
    
    
    121.00
    %Risk-free interest rate
    
    
    4.75
    %
    
    
    4.00
    %Expected term of option
    
    5 years
    
    5 yearsForfeiture rate
    
    
    5.00
    %
    
    
    0.00
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
  WeightedAverageNumber of
    
    
    ExerciseAll Employee Options
    
    Shares
    
    
    PriceOutstanding at January 1, 2006
    
    
    7,962,017
    
    
    $
    9.04Granted
    
    
    41,640
    
    
    
    2.27Exercised
    
    
    (7,500
    )
    
    
    1.09Expired
    
    
    (66,668
    )
    
    
    15.00Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2006
    
    
    7,929,489
    
    
    $
    8.97Vested and expected to vest at March 31, 2006
    
    
    7,921,104
    
    
    $
    9.25Exercisable at March 31, 2006
    
    
    6,761,613
    
    
    $
    10.07
    Three Months EndedMarch 31, 2006Research and development
    
    
    103,955General and administrative
    
    
    288,667Share-based compensation expense
    
    $
    392,622Net share-based compensation expense, per common share:Basic and diluted
    
    $
    0.006
 8




---



##### 



Three months endedMarch 31, 2005Actual net loss
    
    $
    (5,456,468
    )Deduct: Stock-based employee compensation expense if
SFAS No. 123 had been applied to all awards
    
    
    (692,891
    )Add: Stock-based employee compensation included in reported net loss
    
    
    Proforma net loss
    
    $
    (6,149,359
    )Dividend on Series A convertible preferred stock
    
    
    (251,250
    )Proforma net loss per share available to common shareholders
    
    $
    (6,400,609
    )Net loss per share:Basic and
diluted  as reported
    
    $
    (.13
    )Basic and
diluted  pro forma
    
    $
    (.15
    )
   Miikana purchase price allocation
 Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Asset or of a
Business
 9




---



##### 




    
    determining the timing and expected costs to complete the in-process projects,
    
    projecting regulatory approvals,
    
    estimating future cash flows from product sales resulting from in-process projects, and
    
    developing appropriate discount rates and probability rates by project.
    Fair value of assets acquired
    
    $
    600,000In-process research and development
    
    
    29,100,000Total
    
    $
    29,700,000
   ® ® ®
   10




---



##### 



®
    11




---



##### 



-
    
    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 are 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 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
 12




---



##### 



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.
   For the Three Months Ended March 31, 2006 and March 31, 2005.
 - Revenues. ®
 Research and Development Expenses ® ® ®
  ®
 13




---



##### 



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




---



##### 



-
    
    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,
2006, EntreMed expended $338,000 on these activities versus $482,000 in the same 2005
period. The decrease reflects the progression of ENMD-1198 from the preclinical to the
clinical stage of development. The 2006 expense includes $35,000 related to Miikanas
outside services.-
    
    Collaborative Research Agreements  EntreMed made payments to collaborators of $201,000
and $105,000 for the three months ended March 31, 2006 and 2005, respectively. Our
collaborative efforts are primarily directed towards further exploration of 2ME2
mechanism-of-action (MOA) and PanzemÒ non-oncology applications. The 2006
expense includes $85,000 related to Miikanas collaborative efforts in regard to MKC-1.-
    
    Clinical Trial Costs  Clinical trial costs increased to $475,000 in the three months
ended March 31, 2006, from $201,000 in the three-month period ended March 31, 2005. The
increase reflects the initiation of Phase 2 clinical trials for
PanzemÒ
NCD, in addition to $161,000 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.
 15




---



##### 



-
    
    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, 2006
decreased to $774,000 from $879,000 during the same period in 2005. Included in the 2006
amount is $73,000 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
 Dividends on Series A convertible preferred stock
   16




---



##### 



® ®
   17




---



##### 



18




---



##### 



19




---



##### 



Exhibits2.1
    
    Agreement and Plan of Merger By and Among EntreMed Inc., E.M.K. Sub Inc.,
Miikana Therapeutics Inc., and Stockholder Representative, effective December 22,
2005 (filed on December 23, 2005 as Exhibit 2.1 to the Companys Current Report on
Form 8-K and incorporated herein by reference)10.1
    
    License Agreement By and Between Elan Pharma International Ltd., and
EntreMed Inc., effective January 9, 2006*10.2
    
    Research, Development, and Commercialization Agreement By and Between
Hoffmann-La Roche Inc., F. Hoffmann-La Roche Ltd., and Miikana Therapeutics Inc.,
effective April 20, 2005*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
 
 *
    
    Certain portions of this exhibit have been omitted based upon a request for confidential
treatment. The omitted portions have been filed with the Commission pursuant to our application
for confidential treatment. 20




---



##### 



SIGNATURES
  ENTREMED, INC.(Registrant)Date: May 10, 2006
    
    
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: May 10, 2006
    
    
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 21




---



##### 



2.1
    
    Agreement and Plan of Merger By and Among EntreMed Inc., E.M.K. Sub Inc., Miikana
Therapeutics Inc., and Stockholder Representative, effective December 22, 2005 (filed on
December 23, 2005 as Exhibit 2.1 to the Companys Current Report on Form 8-K and incorporated
herein by reference)10.1
    
    License Agreement By and Between Elan Pharma International Ltd., and EntreMed Inc., effective
January 9, 200610.2
    
    Research, Development, and Commercialization Agreement By and Between Hoffmann-La Roche Inc.,
F. Hoffmann-La Roche Ltd., and Miikana Therapeutics Inc., effective April 20, 200531.1
    
    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