##### 



FORM 10-Q SECURITIES AND EXCHANGE COMMISSION  [x]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 [   ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________. Commission file number 0-20713 ENTREMED, INC. 
  Delaware
    
    58-1959440(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 9640 Medical Center Drive
Rockville, Maryland 
  20850 
  (240) 864-2600 
  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    [X]    NO    [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES    [X]    NO    [   ] 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 August 06, 2004Common Stock $.01 Par Value
    
    37,054,030
 1




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##### 



ENTREMED, INC.
Table of Contents PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets
as of June 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of
Operations for the Three Months Ended
June 30, 2004 and 2003, and the Six Months Ended
June 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash
Flows for the Six Months Ended June 30, 2004
and 2003
    
    
    5Notes to Consolidated Financial
Statements
    
    
    6Item 2  Managements Discussion and Analysis
of Financial Condition and Results of
Operations
    
    
    8Item 3  Quantitative and Qualitative Disclosures
About Market Risk
    
    
    14Item 4    Disclosure Controls and Procedures
    
    
    14Part II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    15Item 2
 Changes in Securities
    
    
    15Item 3
 Defaults upon Senior Securities
    
    
    15Item 4
 Submission of Matters to Vote of
Security Holders
    
    
    15Item 5
 Other Information
    
    
    16Item 6
 Exhibits and Reports on Form 8-K
    
    
    16SIGNATURES
    
    
    17
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains and incorporates by reference certain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These statements may be identified by forward-looking words
such as may, will, expect, anticipate or similar words. These
forward-looking statements include, among others, statements regarding the
timing of our clinical trials and the expected increases in our expenses. Our forward-looking statements are based on information available to us today,
and we will not update these statements. Our actual results may differ
significantly from those discussed in our forward-looking statements due to,
among other factors, operating losses and anticipation of future losses; the
value of our common stock; uncertainties relating to our technological
approach; uncertainty of our product candidate development; our need for
additional capital and uncertainty of additional funding; our dependence on
collaborators and licensees; intense competition and rapid technological change
in the biopharmaceutical industry; uncertainties relating to our patent and
proprietary rights; uncertainties relating to clinical trials, our success in
further clinical development of Panzem®, government regulation
and uncertainties of obtaining regulatory approval on a timely basis or at all;
our dependence on key personnel, research collaborators and scientific
advisors; uncertainties relating to health care reform measures and third-party
reimbursement; risks associated with product liability; and other factors
discussed in our other filings with the Securities and Exchange Commission. 2




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EntreMed, Inc.
Consolidated Balance Sheets June 30, 2004
    
    December 31, 2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,564,928
    
    
    $
    34,811,847Short-term investments
    
    
    12,852,425
    
    
    
    2,129,583Accounts receivable
    
    
    106,472
    
    
    
    428,979Interest receivable
    
    
    152,010
    
    
    
    262,192Prepaid expenses and other
    
    
    165,778
    
    
    
    528,190Total current assets
    
    
    26,841,613
    
    
    
    38,160,791Furniture and equipment, net
    
    
    1,666,858
    
    
    
    1,991,516Other assets
    
    
    5,786
    
    
    
    1,457Total assets
    
    $
    28,514,257
    
    
    $
    40,153,764LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,183,739
    
    
    $
    3,952,517Accrued liabilities
    
    
    708,605
    
    
    
    706,961Current portion of deferred revenue
    
    
    265,932
    
    
    
    95,495Total current liabilities
    
    
    2,158,276
    
    
    
    4,754,973Deferred revenue, less current portion
    
    
    190,988
    
    
    
    192,993Deferred rent
    
    
    329,174
    
    
    
    329,815Minority interest
    
    
    17,010
    
    
    
    17,100Stockholders 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, 2004 and December 31, 2003, respectively
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:90,000,000 shares authorized, 37,929,029 shares issued and
outstanding at June 30, 2004 and December 31, 2003,
respectively
    
    
    379,290
    
    
    
    378,480Additional paid-in capital
    
    
    272,151,510
    
    
    
    271,977,321Treasury stock, at cost: 874,999 shares held at June 30, 2004 and
December 31, 2003, respectively
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated deficit
    
    
    (242,027,747
    )
    
    
    (232,812,674
    )Total stockholders equity
    
    
    25,818,809
    
    
    
    34,858,883Total liabilities and stockholders equity
    
    $
    28,514,257
    
    
    $
    40,153,764
 See accompanying notes. 3




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##### 



EntreMed, Inc.
Consolidated Statements of Operations
(Unaudited) Three Months Ended
        
        Six Months EndedJune 30, 2004
        
        June 30, 2003
        
        June 30, 2004
        
        June 30, 2003Revenues:Collaborative research
            and development
        
        $
        
        
        
        $
        230,000
        
        
        $
        
        
        
        $
        418,000Licensing
        
        
        132,966
        
        
        
        23,874
        
        
        
        229,568
        
        
        
        47,748Grants
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        300,000Royalties
        
        
        2,163
        
        
        
        1,958
        
        
        
        3,528
        
        
        
        3,631Other
        
        
        4,251
        
        
        
        30,156
        
        
        
        4,251
        
        
        
        30,156139,380
        
        
        
        285,988
        
        
        
        237,347
        
        
        
        799,535Costs and expenses:Research and development
        
        
        2,484,426
        
        
        
        3,918,915
        
        
        
        5,541,396
        
        
        
        6,549,521General and administrative
        
        
        1,963,410
        
        
        
        1,674,517
        
        
        
        4,056,351
        
        
        
        3,301,7214,447,836
        
        
        
        5,593,432
        
        
        
        9,597,747
        
        
        
        9,851,242Interest expense
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Investment income
        
        
        60,733
        
        
        
        48,546
        
        
        
        145,327
        
        
        
        102,193Net Loss
        
        
        (4,247,723
        )
        
        
        (5,258,898
        )
        
        
        (9,215,073
        )
        
        
        (8,949,514
        )Dividends on Series A
            convertible preferred stock
        
        
        (251,250
        )
        
        
        (251,250
        )
        
        
        (502,500
        )
        
        
        (502,500
        )Net loss attributable
            to common shareholders
        
        $
        (4,498,973
        )
        
        $
        (5,510,148
        )
        
        $
        (9,717,573
        )
        
        $
        (9,452,014
        )Net loss per share
            (basic and diluted)
        
        $
        (0.12
        )
        
        $
        (0.19
        )
        
        $
        (0.26
        )
        
        $
        (0.36
        )Weighted average
            number of shares outstanding (basic and diluted)
        
        
        36,985,476
        
        
        
        28,583,985
        
        
        
        36,979,244
        
        
        
        26,506,440
 See accompanying notes. 4




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EntreMed, Inc.
Consolidated Statements of Cash Flows
(Unaudited) SIX MONTH PERIOD ENDEDJUNE 30,2004
        
        2003CASH FLOWS FROM OPERATING
            ACTIVITIESNet loss
        
        $
        (9,215,073
        )
        
        $
        (8,949,515
        )Adjustments to reconcile
            net loss to net cash used by operating activities:Depreciation and
            amortization
        
        
        448,158
        
        
        
        710,514Recognition of non-cash
            stock compensation
        
        
        174,999
        
        
        
        33,000Gain on sale of asset
        
        
        (500
        )
        
        
        Minority interest
        
        
        (89
        )
        
        
        (60
        )Changes in operating
            assets and liabilities:Accounts receivable
        
        
        322,507
        
        
        
        (115,407
        )Interest receivable
        
        
        110,182
        
        
        
        (144,059
        )Prepaid expenses
            and other
        
        
        358,083
        
        
        
        96,955Deferred rent
        
        
        (641
        )
        
        
        Accounts payable
        
        
        (2,768,778
        )
        
        
        (7,395,097
        )Accrued liabilities
        
        
        1,644
        
        
        
        (1,362,926
        )Deferred revenue
        
        
        168,432
        
        
        
        (47,748
        )Net cash used in
            operating activities
        
        
        (10,401,076
        )
        
        
        (17,174,343
        )CASH FLOWS FROM INVESTING
            ACTIVITIESPurchases of short
            term investments
        
        
        (10,722,842
        )
        
        
        (6,829,009
        )Reduction in ownership
            of MaxCytes Cash
        
        
        
        
        
        
        (418,108
        )Purchases of furniture
            and equipment
        
        
        (123,501
        )
        
        
        (23,842
        )Proceeds from sale
            of asset, net
        
        
        500
        
        
        
        Net cash used in
            investing activities
        
        
        (10,845,843
        )
        
        
        (7,270,959
        )CASH FLOWS FROM FINANCING
            ACTIVITIESNet proceeds from
            sale of common stock
        
        
        
        
        
        
        18,291,905Payment of principle
            on note payable
        
        
        
        
        
        
        (37,469
        )Net cash provided
            by financing activities
        
        
        
        
        
        
        18,254,436Net decrease in cash
            and cash equivalents
        
        
        (21,246,919
        )
        
        
        (6,190,866
        )Cash and cash equivalents
            at beginning of period
        
        
        34,811,847
        
        
        
        24,067,045Cash and cash equivalents
            at end of period
        
        $
        13,564,928
        
        
        $
        17,876,179
 See accompanying notes. 5




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ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 (unaudited) 1. Basis of Presentation Our accompanying 2004 unaudited consolidated financial information
includes the accounts of our controlled subsidiary, 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 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 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 six-month period ended June 30, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. This report on Form 10-Q should be read in
conjunction with our audited consolidated financial statements and footnotes
thereto included in our Form 10-K for the year ended December 31, 2003. 2. Recent Accounting Standards In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46).
FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 applies immediately to variable interest entities created after
January 31, 2003. The Company has evaluated its equity investments, loans,
leases, service and management contracts and other instruments whose value may
change with changes in the other parties net assets and has concluded the
adoption of FIN 46 will not have a significant impact on its financial
condition, results of operations or liquidity. 3. Short-Term Investments Short-term investments consist of corporate debt securities, all of which
mature within one year. We classify these investments as available for sale.
Such securities are stated at market value. The unrealized gains and losses are
nominal as of June 30, 2004. 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. The cost of securities sold is calculated using the
specific identification method. As of June 30, 2004, the cost of the
investments was $12,852,425. Realized gains and losses have been
insignificant. 6




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4. Stock-Based Compensation The Company recognizes expense for stock-based compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost is recognized for the excess of the estimated
fair value of the stock at the grant date over the exercise price, if any. The
Company accounts for equity instruments issued to non-employees in accordance
with EITF 96-18, Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring Or in Conjunction with Selling, Goods, or
Services. The following table illustrates the effect on net loss if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation(SFAS No.
123) , to stock-based compensation: Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (4,247,725
    )
    
    $
    (5,258,898
    )
    
    $
    (9,215,073
    )
    
    $
    (8,949,514
    )Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (1,449,933
    )
    
    
    (2,475,105
    )
    
    
    (2,745,846
    )
    
    
    (4,784,235
    )Add: Stock-based non-employee
compensation included in net loss
    
    
    174,999
    
    
    
    
    
    
    
    174,999
    
    
    
    33,000Dividend on Series A
convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (502,500
    )
    
    
    (502,500
    )Pro forma net loss
attributable to common
shareholders
    
    $
    (5,773,909
    )
    
    $
    (7,985,253
    )
    
    $
    (12,288,420
    )
    
    $
    (14,203,249
    )Net loss per share:Basic and
diluted  as reported
    
    $
    (0.12
    )
    
    $
    (0.19
    )
    
    $
    (0.26
    )
    
    $
    (0.36
    )Basic and
diluted  pro forma
    
    $
    (0.16
    )
    
    $
    (0.28
    )
    
    $
    (0.33
    )
    
    $
    (0.54
    )
 The effect of applying SFAS No. 123 on a pro forma net loss as stated
above is not necessarily representative of the effect on reported net loss for
future years due to, among other things, the vesting period of the stock
options and the fair value of additional stock options in future years. 7




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5. License Agreement In February 2004, we transferred certain rights for our protein-based drug
candidate programs, Endostatin and Angiostatin, in an agreement with Childrens
Medical Center Corporation in Boston (CMCC) and Alchemgen Therapeutics, Inc.
(Alchemgen). Under the agreement, CMCC and Alchemgen are continuing the
development of Endostatin and Angiostatin and bear all expenses associated with
the programs, including costs that we may incur in transferring these
compounds. In exchange, we receive upfront and future cash and royalty
payments. Under the terms of the three-party agreement Alchemgen received
exclusive rights to market Endostatin and Angiostatin in Asia. CMCC holds the
license for the rest of the world, therefore, we have no future milestone
payment obligations. We will receive 20% of all future proceeds (e.g. upfront,
milestone and royalty payments) resulting from any subsequent CMCC license
outside of Asia. ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. OVERVIEW Since our inception in September 1991, we have devoted substantially all
of our efforts and resources to sponsoring and conducting research and
development on our own behalf and through collaborations. Through June 30,
2004, all of our revenues have been generated from license fees, research and
development funding, royalty payments, the sale of royalty rights, and certain
research grants; we have not generated any revenue from direct product sales.
We anticipate our primary revenue sources for the next few years will include
research grants and collaboration payments under current or future
arrangements. The timing and amounts of such revenues, if any, will likely
fluctuate and depend upon the achievement of specified research and development
milestones. Results of operations for any period may be unrelated to the
results of operations for any other period. Historically our research and development efforts are focused on the
identification and development of new compounds utilizing our understanding of
the interrelationships of cell cycle regulation, inflammation, coagulation and
angiogenesis  processes vital to the treatment of multiple diseases, including
cancer. Currently, our main focus is on the reformulation of our lead drug
candidate Panzem® which has been administered in capsule form to oncology
patients in Phase I and Phase II trials. The goal of our reformulation effort
is to increase the level of Panzem® in the patients bloodstream. Based on
preclinical findings and data from healthy human subjects, we have selected a
new Panzem® formulation that is a liquid suspension approach that we believe
will increase the Panzem® bloodstream levels in oncology patents. In July,
we announced that we have entered into a Clinical Supply Agreement with Elan to
produce reformulated Panzem® . We expect to begin clinical trials with this
new Panzem® formulation in early 2005. In addition to our work with Panzem® we are evaluating various analogs
of 2ME2 in preclinical studies. We expect at least one of these compounds to
progress into IND-directed development with the goal of entering clinical
trials in oncology. We have three additional compounds in various stages of
discovery and preclinical research. Our expenses will exceed our revenues as
we continue the development of Panzem® and bring our other drug candidates
through preclinical research to clinical trials. 8




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With reformulated Panzem® moving into the clinic and other pipeline
candidates moving towards IND we are changing from a fundamentally research
organization to that of a product development and commercialization
organization. We intend to de-emphasize early discovery activities and also
reduce non essential operating expenses to devote more resources to key
development activities. We also will seek product acquisitions, co-development
alliances and in-licensing opportunities to build a broader portfolio of late
preclinical and clinical product candidates. RESULTS OF OPERATIONS For the Three and Six Months Ended June 30, 2004 and June 30, 2003. Revenues.Revenues decreased to $139,000 in the three-month period ended
June 30, 2004 compared to $286,000 in the corresponding 2003 period. For the
six-month period ended June 30, 2004, revenues decreased 70% to $237,000 from
$800,000 for the 2003 six-month period. Revenues recorded in 2004 reflect the
amortization of the initial licensing fees received from Allergan and
Alchemgen. The 2003 amount results primarily from two sources: orphan drug
grant revenue of $300,000 received to support our Endostatin Phase II clinical
trial in patients with neuroendocrine tumors and (2) contract revenues of
$418,000 resulting from performance as a subcontractor under an NIH sponsored
Malaria Vaccine program, which contract was completed during 2003. We did not
record any grant or subcontract revenues in the first six months of 2004.
Licensing revenues during the first six month period ended June 30, 2004
increased to $230,000 from $48,000 in the corresponding 2003 period. This
increase is attributable to the recognition of amortized licensing revenues
from a February 2004 agreement with Alchemgen. Research and Development Expenses. We are a clinical-stage biopharmaceutical
company developing therapeutic candidates primarily for the treatment of
cancer. Our research and development programs are designed to identify new
chemical entities by understanding the interrelationships of cell cycle
regulation, inflammation, coagulation and angiogenesis  processes vital to the
treatment of multiple diseases, including cancer. Panzem®, our lead drug
candidate, is currently in clinical trials for cancer, as well as preclinical
development for indications outside of oncology. At June 30, 2004, accumulated
direct project expenses for Panzem® totaled $26,215,000. Reflected in our
2004 R&D expenses totaling $5,541,000 for the six-month period ended June 30,
2004 are direct project expenses for Panzem® of $1,997,000 and $781,000
related to our 2ME2 analog program. Also reflected in our 2004 R&D expenses
are project costs of $378,000 related to the Endostatin and Angiostatin
compounds. Pursuant to the February 2004 Alchemgen licensing agreement we are
no longer responsible for the further development of these two compounds.
Research and development expenses for the corresponding 2003 period were
$6,550,000, including direct project costs for Panzem®, Endostatin and
Angiostatin of $2,706,000, $539,000 and $404,000, respectively. For the
three-month period ended June 30, 2004, research and development expenses
totaled $2,484,000, a decrease from $3,919,000 for the comparable 2003 period.
Included in the 2004 three-month period are expenses related to Panzem® of
$812,000 versus $2,214,000 in 2003. The higher 2003 amounts for Panzem®
include the acquisition of bulk material to support both ongoing clinical
trials and reformulation activities. 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 June 30, 2004, 9




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our proprietary product candidate, Panzem®, is in Phase I and Phase II
clinical trials. 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: ESTIMATEDCOMPLETIONCLINICAL PHASE
    
    PERIODPhase I
    
    1 YearPhase II
    
    1-2 YearsPhase 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. 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 believe our
future capital requirements and our future financial success are 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. 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, 10




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##### 



but subsequently failed to establish sufficient safety and efficacy data to
obtain necessary regulatory approvals. 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 is no assurance
that such additional capital would be available to us if needed. 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. Our 2004
research and development expenses reflect continuing preclinical costs and the
cost of a Phase I clinical trial to test various dosing approaches for
reformulated Panzem®. The 2004 amount also includes increased costs
associated with further development of various drug candidates, including
analogs of 2ME2. These expenses, however, were offset by decreased
expenditures for Endostatin and Angiostatin versus the corresponding 2003
period. The decrease in R&D expenses during the quarter and six months ended
June 30, 2004 was 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 June 30, 2004, we expended
$368,000 on these activities versus $622,000 in the same 2003 period.
For the six-month period ended June 30, 2004 outside services decreased
to $733,000 from $751,000 for the comparable 2003 period. The higher
2003 expenses relate to the procurement of outside services to support
the Panzem® reformulation efforts.-
    
    Collaborative Research Agreements We made payments to our
collaborators of $122,000 and $56,000 for the three months ended June
30, 2004 and 2003 respectively, and $387,000 and $123,000 for the six
months ended June 30, 2004 and 2003, respectively. Sponsored research
payments to academic collaborators include payments to Childrens
Hospital, Boston of $150,000 in 2004. Our 2004 collaborative efforts are
primarily directed towards further exploration of Panzem®
mechanism-of-action (MOA) and non-oncology applications. 11




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-
    
    Clinical Trial CostsClinical trial costs decreased to $164,000 in
the three months ended June 30, 2004, from $250,000 in the three-month
period ended June 30, 2003. Clinical trial costs for the six-month
period ended June 30, 2004 decreased to $618,000 from $739,000 for the
comparable 2003 period. The decrease reflects less overall clinical
activity as we secure reformulated Panzem® liquid clinical material
for use in new clinical trials. We are maintaining the ongoing trials
using the solid dosage format including the supply of clinical material
under our Collaborative Research and Development Agreement (CRADA) with
the NCI. Costs of EntreMed sponsored clinical trials include clinical
investigator 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, fill
and finish services, and product release costs. Contract manufacturing

costs for the three months ended June 30, 2004 decreased to $265,000
from $1,110,000 during the same period in 2003. For the six-month period
ended June 30, 2004 manufacturing costs have decreased to $560,000 from
$1,266,000 for the comparable 2003 period. The decrease reflects the
2003 acquisition of bulk material to support both ongoing clinical
trials and reformulation activities. Also reflected in our 2004 research and development expenses for the
three-month period ended June 30, 2004 are personnel costs of $789,000, patent
costs of $110,000 and facility and related expenses of $351,000. In the
corresponding 2003 period, these expenses totaled $763,000, $205,000 and
$442,000, respectively. For the six-month period ended June 30, 2004, personnel
costs were $1,608,000, patent costs were $222,000 and facility and related
expenses were $458,000. In the corresponding 2003 period, these expenses
totaled $1,599,000, $440,000 and $444,000, respectively. The decrease in 2004
patent costs reflects our shift in focus to small molecules, which resulted in
the elimination of some programs including the associated patent coverage. General and Administrative Expenses. General and administrative expenses
increased to $1,963,000 in the three-month period ended June 30, 2004 from
$1,674,000 in the corresponding 2003 period. For the six-month period general
and administrative expenses increased in 2004 to $4,056,000 from $3,302,000 for
the corresponding 2003 period. The 2004 increase results from increased costs
for professional services related to Sarbanes-Oxley, Nasdaq and SEC compliance,
executive management changes and costs associated with settling certain
disputes. Investment income. Investment income increased by 42% in the six-month
period ended June 30, 2004 to $145,000 from $102,000 in the corresponding 2003
period as a result of higher invested balances in interest bearing cash
accounts and investments during the 2004 period. Dividends on Series A convertible preferred stock. The Consolidated
Statement of Operations for the six-month periods ended June 30, 2004 and 2003
reflect a dividend of $502,500 relating to Series A Convertible Preferred Stock
held by Celgene pursuant to a Securities Purchase Agreement dated December 31,
2002. The Series A Preferred Stock will accumulate dividends at a rate of 6%
and will participate in dividends declared and paid on the common stock, if
any. All accrued dividends must be paid before any dividends may be declared or
paid on the Common Stock. 12




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LIQUIDITY AND CAPITAL RESOURCES To date, we have been engaged primarily in research and development
activities. As a result, we have incurred and expect to continue to incur
operating losses for 2004 and the foreseeable future before we commercialize
any products. In addition, under the terms of the Panzem® license agreement,
we must be diligent in bringing potential products to market and may be
required to make future milestone payments of up to $850,000. 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 sponsored
research or license agreements. We have not sold any securities during the first six months of 2004 versus
the comparable period in 2003 when we raised $18.3M in net proceeds from the
sale of common stock and warrants. At June 30, 2004, we had cash and
short-term investments of approximately $26,417,000 with working capital of
approximately $24,683,000. We invest our capital resources with the primary
objective of capital preservation. As a result of increases in investment
yield seen in 2004 we have invested in some securities with maturity dates of
more than 90 days. As such some of our invested balances are classified as
short-term investments rather than cash equivalents in our financial
statements. Increases or decreases in the basis of investments classified as
short-term on the reporting date are reflected on the Consolidated Statements
of Cash Flows as Investing Activities. To accomplish our business plans, we will be required to continue to
conduct substantial development activities for all of our proposed products.
Under our current plans, operating expenditures are expected to be
approximately $20,000,000, net of operating revenues, in 2004. Under our
licensing agreements with Allergan and with Oxford Biomedica, PLC and Oxford
Biomedica (UK) Limited Oxford, we are entitled to receive payments upon the
achievement of certain milestones. We do not control the drug development
efforts of Allergan or 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 2004. 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 through 2005. Our
estimate may change, however, based on our decisions with respect to future
clinical trials related to Panzem®, 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. To address our long-term capital needs we intend to continue to pursue
strategic relationships to 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 likely
will 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. 13




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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 June 30, 2004. ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES Under the supervision and with the participation of the Companys
President and Chief Executive Officer and Chief Financial Officer (its
principal executive officer and principal financial officer), management has
evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based on that evaluation, the President
and Chief Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures are effective as of June 30, 2004.
There were no significant changes in our internal control over financial
reporting during the quarter ended June 30, 2004 that have materially affected,
or are reasonably likely to materially affect, the internal control over
financial reporting. 14




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PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS EntreMed is 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIESNot applicable.Item 3. DEFAULTS UPON SENIOR SECURITIESNot applicable.Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS (a) The Companys annual meeting of stockholders was held on June 16, 2004
(Annual Meeting). (b) Not applicable. (c) At the Annual Meeting, the stockholders considered and approved the
following proposals: (i)Election of Directors. The following sets forth the nominees who were
elected Directors of the Company for the term expiring in the year indicated as
well as the number of votes case for, against, or withheld: Year Term Expires
    
    Name
    
    Votes For
    
    Votes Withheld2007
    
    Donald S. Brooks
    
    
    29,926,274
    
    
    
    2,166,2062007
    
    Dwight L. Bush
    
    
    30,744,806
    
    
    
    1,347,6742007
    
    Peter S. Knight
    
    
    30,683,053
    
    
    
    1,409,427
 (ii) Approve an amendment to the Companys 2001 Long-Term Incentive Plan
increasing from 4,250,000 to 5,250,000 the number shares of Common Stock
reserved for issuance thereunder. This proposal received 6,716,759 votes in
favor, 1,433,535 votes against, 1,890,575 abstentions, and 22,051,611 non-broker
votes. (iii) Ratification of Appointment of Ernst & Young LLP. At the Annual
Meeting, stockholders approved and ratified the selection of Ernst & Young LLP
as the independent auditors. The proposal received 31,863,913 votes in favor,
147,395 votes against, 81,172 abstentions, and 0 non-broker votes. 15




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(iv) As we have previously disclosed, Celgene Corporation has the right to
one vote for each share of Common Stock into which its 3,350,000 shares of
Convertible Preferred Stock are convertible, currently 16,750,000 shares. In
other words, Celgene was allowed to vote at the Annual Meeting as if it owned
16,750,000 shares of our Common Stock. The votes for numbers above include
Celgenes votes. Item 5. OTHER INFORMATION Not applicable Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.51
    
    Employment Agreement between EntreMed and James S.
Burns effective June 15, 200431.1
    
    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
 (b) Reports on Form 8-K None Through its website at www.entremed.com, the Company makes available, free of
charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and all amendments thereto, as soon as reasonably
practicable after such reports are filed with or furnished to the Securities
and Exchange Commission. 16




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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: August 9, 2004
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: August 9, 2004
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 17