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FORM 10-Q
 SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20459
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 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.
  Delaware
    
    58-1959440(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
  Rockville, Maryland
  20850
  (240) 864-2600
   þ o
  þ o
  Class
    
    Outstanding at August 08, 2005Common Stock $.01 Par Value
    
    49,820,244




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PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets as of
June 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations for the
Three Months Ended June 30, 2005 and 2004,
and the Six Months Ended June 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2   Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    9Item 3   Quantitative and Qualitative Disclosures
About Market Risk
    
    
    16Item 4     Controls and Procedures
    
    
    16Part II. OTHER INFORMATIONItem 1   Legal Proceedings
    
    
    17Item 2   Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3   Defaults upon Senior Securities
    
    
    17Item 4   Submission of Matters to Vote of Security Holders
    
    
    17Item 5   Other Information
    
    
    17Item 6   Exhibits
    
    
    17SIGNATURES
    
    
    18
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   2




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June 30, 2005
    
    December 31, 2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,415,242
    
    
    $
    20,425,495Short-term investments
    
    
    29,246,366
    
    
    
    14,114,021Accounts receivable
    
    
    129,137
    
    
    
    3,250,783Interest receivable
    
    
    70,033
    
    
    
    85,089Prepaid expenses and other
    
    
    125,266
    
    
    
    367,222Total current assets
    
    
    37,986,044
    
    
    
    38,242,610Property and equipment, net
    
    
    1,035,577
    
    
    
    1,150,087Other assets
    
    
    20,306
    
    
    
    11,305Total assets
    
    $
    39,041,927
    
    
    $
    39,404,002LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,910,267
    
    
    $
    1,550,413Payable to related parties
    
    
    263,557
    
    
    
    200,321Accrued liabilities
    
    
    688,389
    
    
    
    1,416,444Current portion of deferred revenue
    
    
    
    
    
    
    95,496Total current liabilities
    
    
    2,862,213
    
    
    
    3,262,674Deferred revenue, less current portion
    
    
    
    
    
    
    95,496Deferred rent
    
    
    309,920
    
    
    
    324,106Minority interest
    
    
    17,014
    
    
    
    16,972Stockholders equity:Convertible preferred stock, $1.00 par and $1.50 liquidation
value:5,000,000 shares authorized, 3,350,000 issued and
outstanding at June 30, 2005 and December 31, 2004, respectively
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:90,000,000 shares authorized, 50,695,243 and 43,628,173 shares
issued and outstanding at June 30, 2005 and December 31, 2004,
respectively
    
    
    506,953
    
    
    
    436,282Additional paid-in capital
    
    
    295,221,321
    
    
    
    285,387,288Treasury stock, at cost: 874,999 shares held at June 30, 2005 and
December 31, 2004, respectively
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated deficit
    
    
    (255,191,250
    )
    
    
    (245,434,572
    )Total stockholders equity
    
    
    35,852,780
    
    
    
    35,704,754Total liabilities and stockholders equity
    
    $
    39,041,927
    
    
    $
    39,404,002
  3




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Three Months Ended
    
    
    Six Months EndedJune 30, 2005

    
    June 30, 2004

    
    June 30, 2005

    
    June 30, 2004Revenues:Licensing
    
    $
    567,118
    
    
    $
    132,966
    
    
    $
    590,992
    
    
    $
    229,568Royalties
    
    
    
    
    
    
    2,163
    
    
    
    1,375
    
    
    
    3,528Other
    
    
    12,343
    
    
    
    4,251
    
    
    
    12,343
    
    
    
    4,251579,461
    
    
    
    139,380
    
    
    
    604,710
    
    
    
    237,347Costs and expenses:Research and development
    
    
    3,812,353
    
    
    
    2,484,426
    
    
    
    8,191,709
    
    
    
    5,541,396General and administrative
    
    
    1,339,150
    
    
    
    1,963,410
    
    
    
    2,599,972
    
    
    
    4,056,3515,151,503
    
    
    
    4,447,836
    
    
    
    10,791,681
    
    
    
    9,597,747Investment income
    
    
    271,832
    
    
    
    60,733
    
    
    
    430,293
    
    
    
    145,327Net Loss
    
    
    (4,300,210
    )
    
    
    (4,247,723
    )
    
    
    (9,756,678
    )
    
    
    (9,215,073
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (502,500
    )
    
    
    (502,500
    )Net loss attributable to common shareholders
    
    $
    (4,551,460
    )
    
    $
    (4,498,973
    )
    
    $
    (10,259,178
    )
    
    $
    (9,717,573
    )Net loss per share (basic and diluted)
    
    $
    (0.09
    )
    
    $
    (0.12
    )
    
    $
    (0.22
    )
    
    $
    (0.26
    )Weighted average number of common shares
outstanding (basic and diluted)
    
    
    49,819,569
    
    
    
    36,985,476
    
    
    
    46,324,989
    
    
    
    36,979,244
  4




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SIX MONTH PERIOD ENDEDJUNE 30,2005

    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (9,756,678
    )
    
    $
    (9,215,073
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    251,474
    
    
    
    448,158Recognition of non-cash stock compensation
    
    
    
    
    
    
    174,999Gain on sale of asset
    
    
    
    
    
    
    (500
    )Minority interest
    
    
    42
    
    
    
    (89
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    3,121,646
    
    
    
    322,507Interest receivable
    
    
    15,056
    
    
    
    110,182Prepaid expenses and other
    
    
    232,955
    
    
    
    358,083Deferred rent
    
    
    (14,186
    )
    
    
    (641
    )Accounts payable
    
    
    359,854
    
    
    
    (2,768,778
    )Payable to related parties
    
    
    63,236
    
    
    
    Accrued liabilities
    
    
    (728,055
    )
    
    
    1,644Deferred revenue
    
    
    (190,992
    )
    
    
    168,432Net cash used in operating activities
    
    
    (6,645,648
    )
    
    
    (10,401,076
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (15,132,345
    )
    
    
    (10,722,842
    )Purchases of property and equipment
    
    
    (136,964
    )
    
    
    (123,501
    )Proceeds from sale of asset, net
    
    
    
    
    
    
    500Net cash used in investing activities
    
    
    (15,269,309
    )
    
    
    (10,845,843
    )CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds from sale of common stock
    
    
    9,904,704
    
    
    
    Net cash provided by financing activities
    
    
    9,904,704
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (12,010,253
    )
    
    
    (21,246,919
    )Cash and cash equivalents at beginning of period
    
    
    20,425,495
    
    
    
    34,811,847Cash and cash equivalents at end of period
    
    $
    8,415,242
    
    
    $
    13,564,928
  5




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ENTREMED, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 (unaudited)
       Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring Or in
Conjunction with Selling, Goods, or Services.
 6




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Accounting for Stock-Based
Compensation-Transition and Disclosure Accounting for Stock-Based Compensation
 Accounting for
Stock-Based Compensation
 7




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Three months ended June 30,
    
    
    Six months ended June 30,2005
    2004

    2005
    2004Actual net loss
    
    $
    (4,300,210
    )
    
    $
    (4,247,725
    )
    
    $
    (9,756,678
    )
    
    $
    (9,215,073
    )Deduct: Stock-based employee
compensation expense if SFAS
No.123 had been applied to all
awards
    
    
    (232,015
    )
    
    
    (1,449,933
    )
    
    
    (464,029
    )
    
    
    (2,745,846
    )Add: Stock-based employee
compensation included in
reported net loss
    
    
    
    
    
    
    174,999
    
    
    
    
    
    
    
    174,999Proforma net loss
    
    $
    (4,532,225
    )
    
    $
    (5,522,659
    )
    
    $
    (10,220,707
    )
    
    $
    (11,785,920
    )Dividend on Series A
convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (502,500
    )
    
    
    (502,500
    )Proforma net loss per share
available to common
shareholders
    
    $
    (4,783,475
    )
    
    $
    (5,773,909
    )
    
    $
    (10,723,207
    )
    
    $
    (12,288,420
    )Net loss per share:Basic and
diluted  as reported
    
    $
    (0.09
    )
    
    $
    (0.12
    )
    
    $
    (0.22
    )
    
    $
    (0.26
    )Basic and
diluted  pro forma
    
    $
    (0.10
    )
    
    $
    (0.16
    )
    
    $
    (0.23
    )
    
    $
    (0.33
    )
   in vitro in vivo in vitro
 8




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®
  9




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
    
    Licensing Revenue  The Company has recognized licensing revenues resulting from the
January 2002 five-year strategic alliance with Allergan, to develop and commercialize small
molecule angiogenic inhibitors for treatment and prevention of diseases and conditions of
the eye. The initial net fee has been amortized to revenue over the five-year license
term. In April 2005, Allergan terminated the license in accordance with its terms, which
resulted in the acceleration of deferred revenue in the three-month period ended June 30,
2005. In February 2004 the Company transferred rights to the proteins, endostatin and
angiostatin, in an agreement with Childrens Medical Center Corporation (CMCC) and
Alchemgen Therapeutics. Under the agreement, Alchemgen received rights to market
endostatin and angiostatin in Asia. In exchange, the Company receives upfront and
potential future cash payments and royalties. The upfront licensing cash payment was fully
amortized in 2004, as the Company had completed its obligations to transfer data and
material. Due to rights negotiations between the licensee and CMCC, the second and final
licensing cash payment in the amount of $400,000, originally due in April 2005, was not
received. In May 2005 the Company received the payment and recorded it as revenue at that
time. The Company is eligible to receive royalty payments under this agreement. The
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  We have stock option plans under which options to purchase
shares of our common stock may be granted to employees, consultants and directors at a
price no less than the fair market value on the date of grant. We account for our
stock-based compensation in accordance with the provisions of APB No. 25, Accounting for
Stock Issued to Employees(APB No. 25). Under APB No. 25, compensation expense is based
on the difference, if any, on the date of the grant between the fair value of the Companys
stock and the exercise price of the option and is recognized ratably over the vesting
period of the option. Because our options must be granted at no less than fair market
value, we recognize no compensation expense in accordance with APB No. 25. If we were to
adopt SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123), we would
recognize compensation expense based upon the fair value at the grant date for awards under
the plans using the fair value method. The Company currently expects to adopt SFAS No.
123R in the quarter ended March 31, 2006, using the modified prospective method, although
the
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Accounting for Equity Instruments that are
issued to other than employees for acquiring, or in conjunction with selling goods or
services
  For the Three and Six Months Ended June 30, 2005 and June 30, 2004.
 Revenues.
 Research and Development Expenses Ò Ò Ò ® th Ò
  11




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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.
    12




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Ò
 
    
    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 June 30, 2005,
we expended $655,000 on these activities versus $368,000 in the same 2004 period. For the
six-month period ended June 30, 2005 outside services increased to $1,136,000 from $733,000
for the comparable 2004 period. The increase results from continued preclinical work on
our 2ME2 analog programs lead candidate ENMD-1198 and our other preclinical pipeline
programs.
    
    Collaborative Research Agreements We made payments to our collaborators of $327,000 and
$122,000 for the three months ended June 30, 2005 and 2004 respectively, and $432,000
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Ò
 
    
    Clinical Trial Costs  Clinical trial costs increased to $285,000 in the three months
ended June 30, 2005, from $164,000 in the three-month period ending June 30, 2004. Clinical
trial costs for the six-month period ended June 30, 2005 decreased to $487,000 from
$618,000 for the comparable 2004 period. The 2005 amount reflects the initiation of two
Phase Ib clinical trials for reformulated PanzemÒNCD. The prior year
amount resulted from a Phase Ia clinical trial to test various dosing approaches for
reformulated Panzem® conducted in the first and second quarters of 2004. Costs of such
trials include the clinical site fees, monitoring costs and data management costs. In
addition, we contribute PanzemÒ clinical material in tablet form under our
Collaborative Research and Development Agreement (CRADA) to the NCI, which is conducting
trials collaboratively with EntreMed.
    
    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 June 30, 2005
increased to $758,000 from $265,000 during the same period in 2004. For the six-month
period ended June 30, 2005 manufacturing costs increased to $1,636,000 from $560,000 for
the comparable 2004 period. The increase reflects the scale-up of manufacturing of the
2ME2 analog, ENMD-1198, for pre-IND tox studies and the purchase of additional bulk 2ME2 to
support future PanzemÒNCD trials in addition to the preparation of
clinical material to supply ongoing and future clinical trials for
PanzemÒNCD and ENMD-1198.
   General and Administrative Expenses
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Investment income
 Dividends on Series A convertible preferred stock
      15




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®
        16




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Exhibits31.1
    
    Rule 13a-14(a) Certification of President and Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    
    Rule 13a-14(b) Certification of Chief Executive Officer32.2
    
    Rule 13a-14(b) Certification of Chief Financial Officer
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SIGNATURES
  ENTREMED, INC.(Registrant)Date: August 9, 2005
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: August 9, 2005
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 18