CASI Pharmaceuticals, Inc (DE) - Quarter Report: 2006 September (Form 10-Q)
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, 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) |
9640 Medical Center Drive
Rockville, Maryland
Rockville, Maryland
(Address of principal executive offices)
20850
(Zip code)
(240) 864-2600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the most recent practicable date.
| Class | Outstanding at November 1, 2006 | |
| Common Stock $.01 Par Value | 74,163,498 |
ENTREMED, INC.
Table of Contents
Table of Contents
| PAGE | ||
PART I. FINANCIAL INFORMATION |
||
Item 1 — Financial Statements |
||
Consolidated Balance Sheets as of
September 30, 2006 and December 31, 2005 |
3 | |
Consolidated Statements of Operations for the
Three Months Ended September 30, 2006 and 2005
and the Nine Months Ended September 30, 2006 and 2005 |
4 | |
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2006 and 2005 |
5 | |
Notes to Consolidated Financial Statements |
6 | |
Item 2
— Management’s Discussion and Analysis of
Financial Condition and Results of Operations |
11 | |
Item 3
— Quantitative and Qualitative Disclosures
About Market Risk |
20 | |
Item 4 — Controls and Procedures |
20 | |
Part II. OTHER INFORMATION |
||
Item 1
— Legal Proceedings |
20 | |
Item 1A
— Risk Factors |
20 | |
Item 2
— Unregistered Sales of Equity Securities and Use of Proceeds |
21 | |
Item 3
— Defaults upon Senior Securities |
21 | |
Item 4
— Submission of Matters to a Vote of Security Holders |
21 | |
Item 5
— Other Information |
21 | |
Item 6
— Exhibits |
21 | |
SIGNATURES |
22 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the
Securities Exchange Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. Forward-looking statements also may be included in other statements that we make. All
statements that are not descriptions of historical facts are forward-looking statements. These
statements can generally be identified by the use of forward-looking terminology such as
“believes,” “expects,” “intends,” “may,” “will,” “should,” or “anticipates” or similar terminology.
These forward-looking statements include, among others, statements regarding the timing of our
clinical trials, our cash position and future expenses, and our future revenues.
Our forward-looking statements are based on information available to us today, and we will not
update these statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable as of the date thereof, actual results could differ
materially from those currently anticipated due to a number of factors, including risks relating to
the early stage of our product candidates under development, operating losses and anticipated
future losses; variations in sales of Thalamid; the value of our common stock; our need for
additional capital; intense competition and rapid technological change in the biopharmaceutical
industry; uncertainties relating to our patent and proprietary rights; uncertainties relating to
clinical trials, estimated clinical trial commencement dates, government regulation and
uncertainties of obtaining regulatory approval on a timely basis or at all. Additional information
on the factors and risks that could affect our business, financial condition and results of
operations, are contained in our filings with the U.S. Securities and Exchange Commission (SEC),
which are available at www.sec.gov.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EntreMed, Inc.
Consolidated Balance Sheets
Consolidated Balance Sheets
| September 30, 2006 | December 31, 2005 | |||||||
| (Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 22,242,050 | $ | 11,407,652 | ||||
Short-term investments |
17,186,568 | 18,674,736 | ||||||
Accounts receivable |
3,013,657 | 3,723,433 | ||||||
Note receivable |
— | 1,000,000 | ||||||
Interest receivable |
75,753 | 181,231 | ||||||
Prepaid expenses and other |
406,611 | 338,462 | ||||||
Total current assets |
42,924,639 | 35,325,514 | ||||||
Property and equipment, net |
879,170 | 915,337 | ||||||
Other assets |
5,526 | 191,034 | ||||||
Total assets |
$ | 43,809,335 | $ | 36,431,885 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 3,732,259 | $ | 5,487,014 | ||||
Payable to related parties |
189,147 | 228,380 | ||||||
Accrued liabilities |
2,519,915 | 1,038,975 | ||||||
Current portion of loan payable |
848,258 | — | ||||||
Current portion of deferred rent |
82,593 | 60,969 | ||||||
Total current liabilities |
7,372,172 | 6,815,338 | ||||||
Deferred rent, less current portion |
164,030 | 230,206 | ||||||
Loan payable, less current portion |
104,393 | — | ||||||
Total liabilities |
7,640,595 | 7,045,544 | ||||||
Minority interest |
17,493 | 17,151 | ||||||
Stockholders’ equity: |
||||||||
Convertible preferred stock, $1.00 par value;
5,000,000 shares authorized and 3,350,000 shares issued and
outstanding at September 30, 2006 and December 31, 2005,
respectively
(liquidation value — $31,155,000 and $33,500,000, respectively) |
3,350,000 | 3,350,000 | ||||||
Common stock, $.01 par value: 170,000,000 shares authorized, 74,163,498 and 51,106,857 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively |
740,842 | 511,069 | ||||||
Additional paid-in capital |
346,103,903 | 295,392,194 | ||||||
Deferred stock-based compensation |
— | (102,000 | ) | |||||
Treasury stock, at cost: 874,999 shares held at September 30,
2006 and
December 31, 2005, respectively |
(8,034,244 | ) | (8,034,244 | ) | ||||
Accumulated deficit |
(306,009,254 | ) | (261,747,829 | ) | ||||
Total stockholders’ equity |
36,151,247 | 29,369,190 | ||||||
Total liabilities and stockholders’ equity |
$ | 43,809,335 | $ | 36,431,885 | ||||
See accompanying notes.
3
EntreMed, Inc.
Consolidated Statements of Operations
(Unaudited)
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenues: |
||||||||||||||||
Licensing |
$ | — | $ | — | $ | — | $ | 590,992 | ||||||||
Royalties |
3,010,626 | 1,249,600 | 3,010,626 | 1,250,975 | ||||||||||||
Other |
12,559 | — | 12,559 | 12,343 | ||||||||||||
| 3,023,185 | 1,249,600 | 3,023,185 | 1,854,310 | |||||||||||||
Costs and expenses: |
||||||||||||||||
Research and development |
5,544,134 | 4,128,756 | 13,813,440 | 12,320,465 | ||||||||||||
General and administrative |
1,497,612 | 1,786,868 | 5,256,958 | 4,386,840 | ||||||||||||
Acquired In-Process R&D |
— | — | 29,481,894 | — | ||||||||||||
| 7,041,746 | 5,915,624 | 48,552,292 | 16,707,305 | |||||||||||||
Investment income |
529,661 | 284,195 | 1,377,743 | 714,488 | ||||||||||||
Interest expense |
(36,098 | ) | — | (127,386 | ) | — | ||||||||||
Gain on sale of assets |
— | 2,000 | 17,325 | 2,000 | ||||||||||||
Net Loss |
(3,524,998 | ) | (4,379,829 | ) | (44,261,425 | ) | (14,136,507 | ) | ||||||||
Dividends on Series A convertible preferred stock |
(251,250 | ) | (251,250 | ) | (753,750 | ) | (753,750 | ) | ||||||||
Net loss attributable to common shareholders |
$ | (3,776,248 | ) | $ | (4,631,079 | ) | $ | (45,015,175 | ) | $ | (14,890,257 | ) | ||||
Net loss per share (basic and diluted) |
$ | (0.05 | ) | $ | (0.09 | ) | $ | (0.63 | ) | $ | (0.35 | ) | ||||
Weighted average number of common shares
outstanding (basic and diluted) |
73,288,499 | 49,921,256 | 70,952,694 | 42,217,854 | ||||||||||||
See accompanying notes.
4
EntreMed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Consolidated Statements of Cash Flows
(Unaudited)
| NINE MONTH PERIOD ENDED | ||||||||
| SEPTEMBER 30, | ||||||||
| 2006 | 2005 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (44,261,425 | ) | $ | (14,136,507 | ) | ||
Adjustments to reconcile net loss to net cash used by operating
activities: |
||||||||
Depreciation and amortization |
342,164 | 368,271 | ||||||
Gain on sale of fixed assets |
(17,325 | ) | — | |||||
Write-off of acquired in-process R&D |
29,481,894 | — | ||||||
Amortization of premium on ST investments |
(809,516 | ) | — | |||||
Stock-based compensation expense |
1,160,279 | 174,424 | ||||||
Amortization of deferred stock-based compensation expense |
87,426 | — | ||||||
Minority interest |
344 | 96 | ||||||
Changes in operating assets and liabilities, net of acquisition: |
||||||||
Accounts receivable |
759,058 | 1,755,296 | ||||||
Interest receivable |
105,478 | 15,721 | ||||||
Prepaid expenses and other |
(21,452 | ) | 37,278 | |||||
Deferred rent |
(44,552 | ) | (77,483 | ) | ||||
Accounts payable |
(1,830,388 | ) | 1,752,083 | |||||
Payable to related parties |
(39,233 | ) | 21,745 | |||||
Accrued liabilities |
(828,123 | ) | (578,927 | ) | ||||
Deferred revenue |
— | (190,992 | ) | |||||
Net cash used in operating activities |
(15,915,371 | ) | (10,858,995 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Acquisition, net of cash received |
(2,906,218 | ) | — | |||||
Proceeds from sale of property and equipment, net |
17,325 | — | ||||||
Purchases of short term investments |
(47,880,777 | ) | (933,250 | ) | ||||
Maturities of short term investments |
50,178,460 | — | ||||||
Purchases of furniture and equipment |
(156,528 | ) | (167,819 | ) | ||||
Net cash used in investing activities |
(747,738 | ) | (1,101,069 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Repayment of loan |
(495,472 | ) | — | |||||
Net proceeds from sale of common stock |
27,992,979 | 9,905,269 | ||||||
Net cash provided by financing activities |
27,497,507 | 9,905,269 | ||||||
Net increase (decrease) in cash and cash equivalents |
10,834,398 | (2,054,795 | ) | |||||
Cash and cash equivalents at beginning of period |
11,407,652 | 20,425,495 | ||||||
Cash and cash equivalents at end of period |
$ | 22,242,050 | $ | 18,370,700 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for interest |
$ | 127,386 | $ | — | ||||
Non-cash investing activity: |
||||||||
Stock issued in connection with the acquisition |
$ | 21,920,801 | $ | — | ||||
See accompanying notes.
5
ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006 (unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006 (unaudited)
1. Basis of Presentation
Our accompanying 2006 unaudited consolidated financial information includes the accounts of
our controlled subsidiaries, Miikana Therapeutics, Inc. (Miikana) and Cytokine Sciences, Inc.
All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance
with U. S. generally accepted accounting principles for interim financial information and in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such
consolidated financial statements do not include all of the information and disclosures required by
U. S. generally accepted accounting principles for complete financial statements. In the opinion
of our management, all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the nine-month period ended
September 30, 2006 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. For further information, refer to our audited consolidated financial
statements and footnotes thereto included in our Form 10-K for the year ended December 31,
2005.
2. Short-Term Investments
Short-term investments consist primarily of corporate debt securities, all of which mature
within one year. The Company has classified these investments as available for sale. Such
securities are carried at aggregate cost which approximates market. The cost of securities sold is
calculated using the specific identification method. Unrealized gains and losses on these
securities, if any, are reported as accumulated other comprehensive income (loss), which is a
separate component of stockholders’ equity. There were no unrealized gains or losses as of
September 30, 2006. Realized gains and losses and declines in value judged to be other than
temporary on securities available for sale, if any, are included in operations. Short-term
investments are principally uninsured and subject to normal credit risk.
3. 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. The Company’s 2006 revenues of $3,011,000 resulted from royalties on Celgene’s
sale of Thalomid®, which the Company began to recognize in the third quarter.
4. Stock-Based Compensation
The Company has adopted incentive and nonqualified stock option plans whereby 11,983,333
shares of the Company’s common stock were reserved for grants to various executive, scientific and
administrative personnel of the Company as well as outside directors and consultants, of which
988,869 shares remain available for grant under the Company’s 2001 Long-Term Incentive Plan as
of September 30, 2006. Options granted under the plan generally vest over a period of up to
four years, are not transferable and generally expire ten years from the date of grant.
6
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
Statement 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”) and interpretative literature
within SEC Staff Accounting Bulletin No. 107, Share-Based Payment, (SAB 107), using the modified
prospective transition method and therefore has not restated results for prior periods. Under this
transition method, stock-based compensation expense for the nine months ended September 30, 2006
includes compensation expense for all stock-based compensation awards granted prior to, but not yet
vested as of January 1, 2006, based on the original grant date fair value estimated in accordance
with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).
Stock-based compensation expense for all stock-based compensation awards granted after January 1,
2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS
123R. The Company recognizes these compensation costs for stock options granted prior to January
1, 2006 on an accelerated method, and for stock options granted after January 1, 2006 the
compensation costs are recognized based on a straight-line method over the requisite service
period, which is generally the option vesting term ranging from three to four years. Prior to the
adoption of SFAS 123R, the Company recorded stock-based compensation under Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).
The Company uses the Black-Scholes-Merton valuation model to estimate the fair value of stock
options granted to employees. Option valuation models, including Black-Scholes-Merton, require the
input of highly subjective assumptions, and changes in the assumptions used can materially affect
the grant date fair value of an award. These assumptions include the risk free rate of interest,
expected dividend yield, expected volatility, and the expected life of the award.
Expected Volatility—Volatility is a measure of the amount by which a financial variable such
as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected
volatility) during a period. The Company uses the historical volatility based on the weekly price
observations of its common stock during the period immediately preceding the share-based award
grant that is equal in length to the award’s expected term (up to a maximum of five years).
EntreMed believes that historical volatility within the last five years represents the best
estimate of future long term volatility.
Risk-Free Interest Rate—This is the average interest rate consistent with the yield available
on a U.S. Treasury note (with a term equal to the expected term of the underlying grants) at the
date the option was granted.
Expected Term of Options—This is the period of time that the options granted are expected to
remain outstanding. EntreMed adopted SAB 107’s simplified method for estimating the expected term
of share-based awards granted during the nine months ending September 30, 2006.
Expected Dividend Yield—EntreMed has never declared or paid dividends on its common stock and
does not anticipate paying any dividends in the foreseeable future. As such, the dividend yield
percentage is assumed to be zero.
Forfeiture Rate—This is the estimated percentage of options granted that are expected to be
forfeited or cancelled on an annual basis before becoming fully vested. The Company estimates the
forfeiture rate based on historical forfeiture experience for similar levels of employees to whom
options were granted.
7
Following are the weighted-average assumptions used in valuing the stock options granted to
employees during the nine-month periods ended September 30, 2006 and 2005:
| NINE MONTH PERIOD ENDED | ||||||||
| SEPTEMBER 30 | ||||||||
| 2006 | 2005 | |||||||
Expected volatility |
101.37 | % | 107.81 | % | ||||
Risk-free interest rate |
4.50 | % | 4.25 | % | ||||
Expected term of option |
5 years | 5 years | ||||||
Forfeiture rate |
5.00 | % | N/A | |||||
Expected dividend yield |
0.00 | % | 0.00 | % | ||||
A summary of the Company’s stock options and warrants granted to employees and directors and
related information for the nine months ended September 30, 2006 follows:
| Weighted | ||||||||
| Average | ||||||||
| Number of | Exercise | |||||||
| All Employee Options | Shares | Price | ||||||
Outstanding at January 1, 2006 |
7,962,017 | $ | 9.04 | |||||
Granted |
601,360 | 1.65 | ||||||
Exercised |
(7,500 | ) | 1.09 | |||||
Expired |
(194,938 | ) | 11.83 | |||||
Forfeited |
— | — | ||||||
Outstanding at September 30, 2006 |
8,360,939 | $ | 8.47 | |||||
Vested and expected to vest at September 30, 2006 |
8,299,373 | $ | 8.52 | |||||
Exercisable at September 30, 2006 |
7,129,613 | $ | 9.53 | |||||
The weighted average fair value of stock options granted during the nine and three-month
periods ended September 30, 2006 were $1.28 per share and $1.26 per share, respectively.
As of September 30, 2006, there was approximately $1,200,000 of total unrecognized
compensation cost related to nonvested employee stock options. That cost is expected to be
recognized over a weighted-average period of up to four years.
Cash received from option exercises under all share-based payment arrangements for the nine
months ended September 30, 2006 and 2005, was $11,456 and $151,865, respectively. Due to the
availability of net operating loss carryforwards and research tax credits, tax deductions for
option exercises were not recognized in the nine months ended September 30, 2006.
8
Total employee share-based compensation expense recognized for the nine months ended September
30, 2006 are as follows:
| Nine Months Ended | ||||
| September 30, 2006 | ||||
Research and development |
$ | 260,459 | ||
General and administrative |
987,246 | |||
Share-based compensation expense |
$ | 1,247,705 | ||
Net share-based compensation expense, per common share: |
||||
Basic and diluted |
$ | 0.018 | ||
The following table illustrates the effect on net loss and net loss per share if the Company
had applied the fair value recognition provision of Statement 123 using the assumptions noted above
to options granted under the Company’s stock option plans for the nine months ended September 30,
2005. For purposes of this pro-forma disclosure, the value of the options is estimated using a
Black-Scholes Merton option-pricing formula and amortized to expense over the options’ vesting
periods.
| Nine months ended | ||||
| September 30, 2005 | ||||
Actual net loss |
$ | (14,136,507 | ) | |
Deduct: Stock-based employee compensation expense if
SFAS No.123 had been applied to all awards |
(822,592 | ) | ||
Add: Stock-based employee compensation included in reported net loss |
174,424 | |||
Proforma net loss |
$ | (14,784,675 | ) | |
Dividend on Series A convertible preferred stock |
(753,750 | ) | ||
Proforma net loss per share available to common shareholders |
$ | (15,538,425 | ) | |
Net loss per share: |
||||
Basic and
diluted — as reported |
$ | (.35 | ) | |
Basic and
diluted — pro forma |
$ | (.37 | ) | |
5. Acquisition
In January 2006 the Company acquired Miikana Therapeutics, a private biotechnology company.
Pursuant to the Merger Agreement, the Company acquired all of the outstanding capital stock of
Miikana Therapeutics, Inc. in exchange for 9.96 million shares of common stock and the assumption
of certain obligations. In addition, based on the success of the acquired pre-clinical programs,
the Company may pay up to an additional $18 million upon the achievement of certain clinical and
regulatory milestones. Such additional payments will be made in cash or shares of stock at the
Company’s option. The Company expects that the Aurora Kinase pre-clinical program will advance to
a Phase 1 clinical trial in 2007. A dosing of the first patient triggers a purchase price
adjustment milestone of $2 million. Through the acquisition, the Company acquired rights to MKC-1,
a Phase 2 clinical candidate licensed from Hoffman-LaRoche, Inc. (“Roche”) by Miikana in April
2005. Under the terms of the agreement, Roche may be entitled to receive future payments upon
successful completion of developmental milestones. The Company does not anticipate reaching any
of these milestones in 2006. Roche is also eligible to receive royalties on sales and certain
one-time payments based on attainment of annual sales milestones. The Company has also acted as
guarantor on the unpaid balance at September 30, 2006 of approximately $997,000 under a loan
agreement with Venture Lending & Leasing IV, Inc. dated October 1, 2004. The final payment is due
in October 2007.
9
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,” and Statement 141
“Business Combinations” 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.
We believe the fair values assigned to the assets acquired and liabilities assumed are based
upon reasonable assumptions given current available facts and circumstances.
The total purchase price allocated was $30.1 million, consisting of 9,964,000 shares of our
common stock with a fair value of $21.9 million, assumed debt of $1.5 million, assumed current
liabilities of $2.7 million, $1 million loaned to Miikana prior to the closing and acquisition
costs of $3 million. The fair value of common stock was determined using the closing price at the
date of acquisition. The change from the initial allocation is a result of additional incidental
expenses related to the acquisition transaction.
The allocation is as follows:
Fair value of net tangible assets acquired |
$ | 600,000 | ||
In- process research and development |
29,500,000 | |||
Total |
$ | 30,100,000 | ||
6. Licensing Agreement
In January 2006, the Company entered into a License Agreement with Elan Corporation, plc in
which the Company has been granted rights to utilize Elan’s proprietary NanoCrystal Technology to
develop the oncology product candidate, Panzem® NCD. Under the terms of the License
Agreement, Elan is eligible to receive payments upon the achievement of certain clinical,
manufacturing, and regulatory milestones. Milestones related to the initiation of Phase 2 clinical
trials have been paid and there are no additional milestones due at this time. Additionally, Elan
will receive royalty payments based on sales of Panzem® NCD. Under the License
Agreement and corresponding Services Agreement, Elan will manufacture EntreMed’s Panzem®
NCD, a NanoCrystal Technology formulation with improved bioavailability and
absorption.
10
7. Sale of Securities
In February 2006, the Company entered into definitive agreements with institutional investors
for the private placement of units consisting of shares of common stock and warrants at a purchase
price of $2.3125 per unit. In connection with the placement, the Company received gross proceeds
of approximately $30 million, $28 million after issuance costs, and issued approximately 13 million
shares of common stock and warrants to purchase up to 6.5 million additional shares of common stock
at an exercise price of $2.50 per share. The warrants are not exercisable until six months after
the closing. In April 2006, the Company registered the resale of the shares and the shares
underlying the warrants.
8. Related Party Transactions
Until September 2006, the Company received legal services from a law firm with which one of
the Company’s former officers was associated. During the nine months ended September 30, 2006
these services totaled $715,000, the majority representing patent work. These costs are recorded
as research and development expenses of $550,000, general and administrative expenses of $149,000
and costs related to the Miikana acquisition of $16,000. At September 30, 2006 amounts payable to
this party are reflected on our balance sheet as payable to related parties in the amount of
$189,000. The Company completed a sale of common stock and warrants in February 2006. Celgene
Corporation, the Company’s largest shareholder, acquired 864,864 shares of common stock and 432,432
warrants convertible into shares of common stock in the transaction (see footnote 7), on the same
terms and conditions as the other purchasers in the transaction.
9. Recent Accounting Pronouncement
In June 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 requires that the Company
recognize in its financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of the position. FIN 48
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning
after December 15, 2006, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The Company is currently evaluating the impact of
adopting FIN 48 on the financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
We are a clinical-stage pharmaceutical company focused on developing next generation
multi-mechanism oncology and anti-inflammatory drugs that target disease cells directly and the
blood vessels that nourish them. We are focused on developing drugs that are safe and convenient,
and provide the potential for improved patient outcomes. Panzem® (2-methoxyestradiol or
2ME2), one of our lead drug candidates, is currently in Phase 2 clinical trials for cancer, as well
as in
preclinical development for rheumatoid arthritis. MKC-1, a novel cell cycle inhibitor, is
also in Phase 2 clinical trials for cancer. ENMD-1198, a novel tubulin binding agent discovered by
EntreMed, is currently in a Phase 1 clinical trial for cancer. As our research and development
efforts have shifted to a more clinical focus, expenditures have increased and will continue to
increase in the fourth quarter of 2006 as we secure material to support on-going and planned trials
for our three clinical-stage candidates.
11
In January 2006, we acquired Miikana Therapeutics, Inc., a clinical-stage biopharmaceutical
company with research laboratories in Toronto, Canada. As a result of the transaction, we enhanced
our pipeline with the addition of a Phase 2 drug candidate, MKC-1, and two preclinical programs,
one in aurora kinase inhibition and one in HDAC inhibition, both for the treatment of cancer.
Our goal is to develop and commercialize drugs based on our scientific expertise in
angiogenesis, cell cycle regulation and inflammation — processes vital to the progression of
cancer and other diseases. Our three product candidates are based on these mechanisms. Our
expertise has also led to the identification of new molecules, including new chemical entities
derived from 2ME2, modulators of fibroblast growth factor-2 (FGF-2) activity, proteinase activated
receptor-2 (PAR-2) antagonists, and tissue factor pathway inhibitor (TFPI) peptides.
In order to further advance our commercial objectives, we may seek strategic alliances,
licensing relationships and co-development partnerships with other companies to develop compounds
for both oncology and non-oncology therapeutic areas.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of our financial statements in conformity with accounting principles generally
accepted in the U.S. requires management to make estimates and assumptions that affect the amounts
reported in our consolidated financial statements and accompanying notes. Actual results could
differ materially from those estimates. Our critical accounting policies, including the items in
our financial statements requiring significant estimates and judgments, are as follows:
| • | 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 2006 revenues will be from royalties on the sale of Thalomid®, which we began 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. |
12
| • | 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. |
Any future changes to our share-based compensation strategy or programs would likely
affect the amount of compensation expense recognized under SFAS 123R and the comparability
to our prior period footnote disclosures of pro forma net earnings and earnings per share.
Share-based compensation expense recognized in the three and nine months ended September 30,
2006 totaled $340,000 and $1,248,000, respectively.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 requires that the Company
recognize in its financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of the position. FIN 48
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning
after December 15, 2006, with the cumulative effect of the change in accounting principle recorded
as an
adjustment to opening retained earnings. The Company is currently evaluating the impact of
adopting FIN 48 on the financial statements.
13
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2006 and September 30, 2005.
• Revenues. Revenues increased to $3,023,000 in the three-month period ended September 30,
2006 compared to $1,250,000 in the corresponding 2005 period. For the nine-month period ended
September 30, 2006, revenues increased 63% to $3,023,000 from $1,854,000 for the 2005 nine-month
period. The increase in revenues for the three and nine-month periods results from the recognition
of royalty revenue earned on sales of Thalomid®. In the third quarter of 2005, we
reached certain milestones under our purchase agreement with Royalty Pharma Finance Trust, and
began to share in the royalty payments received by Royalty Pharma 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.
Thalomid® sales in 2006 and in 2005 surpassed the sharing point in the three-month
period ended September 30, and we recorded royalty revenue of $3,011,000 and $1,249,600 in 2006 and
2005, respectively. There were no licensing revenues recorded in the three and nine-month periods
ended September 30, 2006, compared to $0 and $591,000 in the corresponding 2005 periods. The 2005
revenues represent the accelerated recognition of deferred licensing revenues from the January 2002
agreement with Allergan and the recognition of a $400,000 licensing payment from Alchemgen in May
2005. Our 2006 revenues, for the most part, will result from royalties resulting from Celgene’s
sale of Thalomid®. As previously reported, we continue to earn royalties pursuant to a
2001 agreement with Royalty Pharma, as noted above.
Research and Development Expenses. At September 30, 2006, accumulated direct project expenses
for Panzem® , our lead drug candidate, totaled $39,691,000 and for ENMD-1198, a
tubulin binding agent that recently entered Phase 1 trials for cancer, totaled $6,521,000.
Reflected in our R&D expenses totaling $13,813,000 for the nine-month period ended September 30,
2006 are direct project expenses for Panzem® of $4,397,000, $1,148,000 related
to ENMD-1198, and $1,958,000 related to MKC-1, a Phase 2 clinical candidate acquired with Miikana
in January 2006. Research and development expenses for the corresponding 2005 period were
$12,320,000, which included $4,650,000 direct project expenses for Panzem® and
$2,607,000 related to ENMD-1198. There were no Miikana costs reported in 2005. For the
three-month period ended September 30, 2006, research and development expenses totaled $5,544,000,
an increase from $4,129,000 for the comparable 2005 period. Included in the 2006 three-month period
are expenses related to Panzem® of $1,661,000 versus $1,875,000 in 2005,
expenses related to our 2ME2 analog program of $349,000 versus $1,130,000 in 2005 and expenses
related to MKC-1 of $1,071,000 versus no such expense in 2005. The 2006 research and development
expenses reflect the cost of initiating and supporting multiple Phase 2 trials for
PanzemÒNCD, a multi-site Phase 2 trial for MKC-1 and also a Phase 1 clinical trial
for ENMD-1198. We believe our research and development expenses will increase with additional
patient enrollment and the initiation of additional clinical trials.
The balance of our R&D expenditures includes facilities costs and other departmental overhead,
and expenditures related to the advancement of our pre-clinical pipeline. These costs totaled
$6,310,000 and $4,063,000 for the nine-month period ended September 30, 2006 and 2005,
respectively, and $2,463,000 and $1,124,000 for the three-month period ended September 30, 2006
and 2005, respectively. The increase for the nine-month period is primarily attributable to
the Miikana acquisition of $1,446,000 and approximately $260,000 additional non-cash stock-based
compensation, pursuant to the adoption of SFAS 123R.
14
The expenditures that will be necessary to execute our business plan are subject to numerous
uncertainties, which may adversely affect our liquidity and capital resources. As of September 30,
2006, we have two product candidates, Panzem® NCD and MKC-1, in Phase 2 clinical trials
for cancer. We expect our R&D expenses to trend higher reflecting the costs of supporting multiple
Phase 2 trials including the costs of securing clinical drug supply. Additionally, in the first
quarter of 2006, ENMD-1198 commenced Phase 1 clinical trials in cancer. Completion of clinical
trials may take several years or more, but the length of time generally varies substantially
according to the type, complexity, novelty and intended use of a product candidate.
We estimate that clinical trials of the type we generally conduct are typically completed over
the following timelines:
| ESTIMATED | ||
| COMPLETION | ||
| CLINICAL PHASE | PERIOD | |
Phase I
|
1 Year | |
Phase II
|
1-2 Years | |
Phase III
|
2-4 Years |
The duration and the cost of clinical trials may vary significantly over the life of a project
as a result of differences arising during the clinical trial protocol, including, among others, the
following:
| • | 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. |
We test our potential product candidates in numerous pre-clinical studies to identify
indications for which they may be product candidates. We may conduct multiple clinical trials to
cover a variety of indications for each product candidate. As we obtain results from trials, we
may elect to discontinue clinical trials for certain product candidates or for certain indications
in order to focus our resources on more promising product candidates or indications.
Our proprietary product candidates also have not yet achieved FDA regulatory approval, which
is required before we can market them as therapeutic products. In order to proceed to subsequent
clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our
clinical data establish safety and efficacy. Historically, the results from pre-clinical testing
and early clinical trials have often not been predictive of results obtained in later clinical
trials. A number of new drugs and biologics have shown promising results in clinical trials, but
subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory
approvals.
15
An important element of our business strategy is to pursue the research and development of a
range of product candidates for a variety of oncology and non-oncology indications. This allows us
to diversify the risks associated with our research and development expenditures. As a result, we
intend to pursue development of our existing product candidates internally or through development
partnerships, as well as through the acquisition and subsequent development of promising
candidates. The goal is to align our future capital requirements with multiple product candidates
and to increase the likelihood that our future financial success is not substantially dependent on
any one product candidate. To the extent we are unable to maintain a broad range of product
candidates, our dependence on the success of one or a few product candidates would increase.
Furthermore, our business strategy includes the option of entering into collaborative
arrangements with third parties to complete the development and commercialization of our products.
In the event that third parties take over the clinical trial process for one of our product
candidates, the estimated completion date would largely be under the control of that third party
rather than us. We cannot forecast with any degree of certainty which proprietary products or
indications, if any, will be subject to future collaborative arrangements, in whole or in part, and
how such arrangements would affect our capital requirements.
As a result of the uncertainties discussed above, among others, we are unable to estimate the
duration and completion costs of our research and development projects. Our inability to complete
our research and development projects in a timely manner or our failure to enter into collaborative
agreements, when appropriate, could significantly increase our capital requirements and could
adversely impact our liquidity. These uncertainties could force us to seek additional, external
sources of financing from time to time in order to continue with our business strategy. There can
be no assurance that we will be able to successfully access external sources of financing in the
future. Our inability to raise additional capital, or to do so on terms reasonably acceptable to
us, would jeopardize the future success of our business.
Research and development expenses consist primarily of compensation and other expenses related
to research and development personnel, research collaborations, costs associated with internal and
contract pre-clinical testing and clinical trials of our product candidates, including the costs of
manufacturing the product candidates, and facilities expenses. Research and development expenses
increased to $13,813,000 in the nine months ended September 30, 2006 from $12,320,000 for the
corresponding period in 2005 and to $5,544,000 for the three months ended September 30, 2006 from
$4,129,000 for the corresponding period in 2005. The 2006 expenses include Miikana research and
development costs of $3,404,000 and $1,606,000 for the nine and three-month periods, respectively.
The increase in 2006 R&D expenses reflects a shift in emphasis to a clinical focus. Expenditures
during the three and nine months ended September 30, 2006 were specifically impacted by the
following:
| • | Outside Services — We utilize outsourcing to conduct our product development activities. Larger-scale small molecule synthesis, in vivo testing and data analysis are examples of the services that we outsource. In the three-month period ended September 30, 2006, we expended $846,000 on these activities versus $755,000 in the same 2005 period. For the nine-month period ended September 30, 2006 outside services were $1,985,000, compared to $1,892,000 for the same 2005 period While the costs for the two periods were very similar, the 2006 expense includes $352,000 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. |
16
| • | Collaborative Research Agreements — We made payments to collaborators of $53,000 and $125,000 for the three months ended September 30, 2006 and 2005, respectively, and $195,000 and $557,000 for the nine months ended September 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. With our lead programs in Phase 2 clinical trials, we have reduced our collaborative efforts. Additionally, as our earlier pre-clinical pipeline matures, we expect that there will be an increase in our collaborative efforts in collecting pre-clinical data. | ||
| • | Clinical Trial Costs — Clinical trial costs increased to $698,000 in the three months ended September 30, 2006, from $375,000 in the three-month period ended September 30, 2005. Clinical trial costs for the nine-month period ended September 30, 2006 increased to $1,735,000 from $861,000 for the comparable 2005 period. The increase reflects the initiation of Phase 2 clinical trials for PanzemÒNCD, the initiation of Phase 2 clinical trials for MKC-1 and the initiation of Phase 1 clinical trials for ENMD-1198. 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 $1,807,000 and $1,413,000 for the three months ended September 30, 2006 and 2005, respectively. For the nine-month period ended September 30, 2006 manufacturing costs increased to $3,339,000 from $3,049,000 for the comparable 2005 period. Included in the 2006 amount is $638,000 related to the bulk acquisition and encapsulation of material for the Phase 2 trials for MKC-1. We expect these expenditures to continue to increase as we secure material to support the recently announced expansion of the clinical programs for our lead compounds PanzemÒNCD and MKC-1. |
Also reflected in our 2006 research and development expenses for the three-month period ended
September 30, 2006 are personnel costs of $1,040,000, patent costs of $170,000 and facility and
related expenses of $381,000, including Miikana’s expenses of $244,000, $32,000 and $34,000,
respectively. In the corresponding 2005 period, these expenses totaled $726,000, $157,000 and
$349,000, respectively. For the nine-month period ended September 30, 2006, personnel costs were
$3,263,000, patent costs were $593,000 and facility and related expenses were $1,129,000, including
Miikana’s expenses of $864,000, $120,000 and $147,000, respectively. In the corresponding 2005
period, these expenses totaled $2,194,000, $483,000 and $1,024,000, respectively.
General and Administrative Expenses. General and administrative expenses include compensation
and other expenses related to finance, business development and administrative personnel,
professional services and facilities.
General and administrative expenses decreased to $1,498,000, including Miikana’s expenses of
$21,000, in the three-month period ended September 30, 2006 from $1,787,000 in the corresponding
2005 period. The 2005 three-month period reflects payments of approximately $300,000 for certain
professional services incurred in evaluating potential product and technology
acquisitions, offset by an increase in the 2006 three-month period of $106,000 relating to the
recording of additional non-cash stock-based compensation, pursuant to the adoption of SFAS 123R.
For the nine-month period, general and administrative expenses increased in 2006 to $5,257,000,
including Miikana’s expenses of $375,000, from $4,387,000 for the corresponding 2005 period. In
addition to Miikana’s general and administrative expenses, the 2006 increase relates to the
recording of additional non-cash stock-based compensation in the amount of $812,000, offset by
decreased professional fees of approximately $300,000 for the nine-month period.
17
Investment income. Investment income increased by 86% in the three-month period ended
September 30, 2006 to $530,000 from $284,000 in the corresponding 2005 period and increased 93% in
the nine-month period ended September 30, 2006 to $1,378,000 from $714,000 in the corresponding
2005 period as a result of higher yields on higher invested balances in interest bearing cash
accounts and investments during the 2006 period.
Interest expense. Interest expense for the three and nine-month periods ended September 30,
2006 was $36,000 and $127,000, respectively. There was no interest expense for the corresponding
2005 periods.
Dividends on Series A convertible preferred stock. The Consolidated Statement of Operations
for the three and nine-month periods ended September 30, 2006 and 2005 reflect a dividend of
$251,250 and $753,750, respectively, relating to Series A Convertible Preferred Stock held by
Celgene pursuant to a Securities Purchase Agreement dated December 31, 2002. The holders of Series
A Preferred Stock will accumulate dividends at a rate of 6% and will participate in dividends
declared and paid on our common stock, if any. All accumulated dividends must be paid before any
dividends may be declared or paid on the common stock. The Company has no plans to pay any
dividends in the foreseeable future.
LIQUIDITY AND CAPITAL
We are primarily engaged in research and development activities. As a result, we have
incurred and expect to continue to incur operating losses for 2006 and the foreseeable future
before we commercialize any products. Under the terms of the license agreements for 2ME2 and
Celgene’s tubulin inhibitor program, we must be diligent in bringing potential products to market
and we may be required to make future milestone payments totaling approximately $850,000 and $25.25
million, respectively. In addition, pursuant to our MKC-1 license agreement with Roche, we may be
required to make payments based upon the attainment of certain clinical, regulatory and
commercialization milestones. As a result of progress in our licensed clinical and preclinical
programs, milestones requiring payments totaling $600,000 could be reached in 2006, and an
additional milestone payment of $1,000,000 would be payable in 2007 if a lead compound under our
license agreement with Celgene reached the IND (Investigational New Drug) stage. If we fail to
comply with the milestones or fail to make any required sponsored research or milestone payment, we
could face the termination of the relevant license agreement.
Pursuant to the terms of the Miikana Merger Agreement, a purchase price adjustment of
$2,000,000 is payable when one of the acquired preclinical programs advances to a Phase 1 clinical
trial. We believe that the Aurora Kinase program could advance to the clinical trial stage in
2007. If this occurs, the $2,000,000 is payable in either cash or common stock, at our option.
18
In February 2006, we raised gross proceeds of approximately $30 million through the sale of
units consisting of warrants and shares of common stock in a private placement. At September 30,
2006, we had cash and short term investments exceeding $39 million with working capital of
approximately $36 million.
We invest our capital resources with the primary objective of capital preservation. As a
result of trends in interest rates, we have invested in some securities with maturity dates of more
than 90 days to enhance our investment yields. As such, some of our invested balances are
classified as short-term investments rather than cash equivalents in our unaudited consolidated
financial statements at September 30, 2006.
To accomplish our business plans, we will be required to continue to conduct substantial
development activities for some or all of our proposed products. The acquisition of Miikana
Therapeutics in January 2006 provides an additional product pipeline, including MKC-1, a cell cycle
regulator, which entered Phase 2 oncology trials in January 2006. In conjunction with the
acquisition, we assumed certain separation obligations totaling approximately $500,000. Under our
current operating plans, which include supporting two Phase 2 and one Phase 1 clinical programs for
oncology compounds, we expect our 2006 results of operations to reflect a net loss of approximately
$51 million which includes non-cash charges of approximately $29,500,000 associated with the
Miikana asset acquisition and $1.4 million pursuant to the adoption of SFAS 123R. This projection
is subject to judgment and estimation and could significantly change. We expect that the majority
of our 2006 revenues will continue to be from royalties on the sale of Thalomid®. We
began recording royalty sharing revenues in the third quarter of 2006, and believe the 2006 total
will reach approximately $6 million; however, there can be no assurance in this regard. In
addition, under our licensing agreement with Oxford Biomedica, PLC and Oxford Biomedica (UK)
Limited Oxford, we are entitled to receive payments upon the achievement of certain clinical and
regulatory milestones. However, we do not control the drug development efforts of Oxford and have
no control over when or whether such milestones will be reached. We do not believe that we will
receive any developmental milestone payments under these agreements in 2006.
Based on our assessment of our current capital resources coupled with anticipated inflows, in
the absence of additional financing, we believe that we will have adequate resources to fund
planned operations for at least twelve months. Our estimate may change, however, based on our
decisions with respect to future clinical trials related to our three clinical drug candidates, the
timing of receipt of milestone payments, developments in our business including the acquisition of
additional intellectual property, other investments in new or complementary technology, and our
success in executing our current business plan.
We intend to continue to pursue strategic relationships that would address our long-term needs
and provide resources for the further development of our product candidates. There can be no
assurance, however, that these discussions will result in relationships or additional funding. In
addition, we may continue to seek capital through the public or private sale of securities, if
market conditions are favorable for doing so. If we are successful in raising additional funds
through the issuance of equity securities, stockholders will likely experience substantial
dilution, or the equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock. If we raise funds through the issuance of debt securities, those
securities would have rights, preferences and privileges senior to those of our common stock.
There can be no assurance that we will be successful in seeking additional capital.
19
INFLATION AND INTEREST RATE CHANGES
Management does not believe that our working capital needs are sensitive to inflation and
changes in interest rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve our capital until it is
required to fund operations while at the same time maximizing the income we receive from our
investments without incurring investment market volatility risk. Our investment income is
sensitive to the general level of U.S. interest rates. In this regard, changes in the U.S.
interest rates affect the interest earned on our cash and cash equivalents. Due to the short-term
nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not
materially impact on the total fair market value of our portfolio as of September 30, 2006.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2006, under the supervision and with the participation of the Company’s
Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), management has evaluated
the effectiveness of the design and operation of the Company’s disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on
that evaluation, the CEO and CFO concluded that, as of September 30, 2006, the Company’s disclosure
controls and procedures were effective at the reasonable assurance level in timely alerting them to
material information required to be included in the Company’s periodic SEC reports. Management’s
assessment of the effectiveness of internal control over financial reporting is expressed at the
level of reasonable assurance because a control system, no matter how well designed and operated,
can provide only reasonable, but not absolute, assurance that the control system’s objectives will
be met.
There were no changes in the Company’s internal control over financial reporting that occurred
during the quarter ended September 30, 2006 that has materially affected or is reasonably likely to
materially affect the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject in the normal course of business to various legal proceedings in which claims
for monetary or other damages may be asserted. Management does not believe such legal proceedings,
except as otherwise disclosed herein, are material.
ITEM 1A. RISK FACTORS
For information regarding factors that could affect the Company’s results of operations,
financial condition and liquidity, see the risk factors discussion set forth in Item 1A of
EntreMed’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and the
information
under “Special Note Regarding Forward-Looking Statements” included in this report. There have been
no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K.
20
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
31.1
|
Rule 13a-14(a) Certification of President and Chief Executive Officer | |
31.2
|
Rule 13a-14(a) Certification of Chief Financial Officer | |
32.1
|
Section 1350 Certification of Chief Executive Officer | |
32.2
|
Section 1350 Certification of Chief Financial Officer |
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ENTREMED, INC. | ||||
| (Registrant) | ||||
Date: November 6, 2006
|
/s/ James S. Burns
|
|||
| James S. Burns | ||||
| President and Chief Executive Officer | ||||
Date: November 6, 2006
|
/s/ Dane R. Saglio
|
|||
| Dane R. Saglio | ||||
| Chief Financial Officer |
22
EXHIBIT INDEX
31.1
|
Rule 13a-14(a) Certification of President and Chief Executive Officer | |
31.2
|
Rule 13a-14(a) Certification of Chief Financial Officer | |
32.1
|
Section 1350 Certification of Chief Executive Officer | |
32.2
|
Section 1350 Certification of Chief Financial Officer |
23