##### 



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 March 31, 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
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 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 May 3, 2004Common Stock $.01 Par Value
    
    36,973,012
 1




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##### 



ENTREMED, INC.
Table of Contents PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets
as of March 31, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations for the Three Months Ended
March 31, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004
and 2003
    
    
    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
    
    
    15Item 4   Disclosure Controls and Procedures
    
    
    15Part II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    16Item 2  Changes in Securities
    
    
    16Item 3  Defaults upon Senior Securities
    
    
    16Item 4  Submission of Matters to Vote of
Security Holders
    
    
    16Item 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, 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. 
  March 31, 2004
    
    December 31, 2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,298,859
    
    
    $
    34,811,847Short-term investments
    
    
    4,399,931
    
    
    
    2,129,583Accounts receivable
    
    
    152,786
    
    
    
    428,979Interest receivable
    
    
    66,883
    
    
    
    262,192Prepaid expenses and other
    
    
    344,055
    
    
    
    528,190Total current assets
    
    
    31,262,514
    
    
    
    38,160,791Furniture and equipment, net
    
    
    1,836,075
    
    
    
    1,991,516Other assets
    
    
    5,786
    
    
    
    1,457Total assets
    
    $
    33,104,375
    
    
    $
    40,153,764LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,725,302
    
    
    $
    3,952,517Accrued liabilities
    
    
    548,887
    
    
    
    706,961Current portion of deferred revenue
    
    
    422,767
    
    
    
    95,495Total current liabilities
    
    
    2,696,956
    
    
    
    4,754,973Deferred revenue, less current portion
    
    
    167,119
    
    
    
    192,993Deferred rent
    
    
    331,708
    
    
    
    329,815Minority interest
    
    
    17,057
    
    
    
    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 March 31, 2004 and December 31, 2003, respectively
    
    
    3,350,000
    
    
    
    3,350,000Common stock, $.01 par value:90,000,000 shares authorized, 37,848,011 shares issued and
outstanding at March 31, 2004 and December 31, 2003,
Respectively
    
    
    378,480
    
    
    
    378,480Additional paid-in capital
    
    
    271,977,321
    
    
    
    271,977,321Treasury stock, at cost: 874,999 shares held at March 31, 2004 and
December 31, 2003, respectively
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated deficit
    
    
    (237,780,022
    )
    
    
    (232,812,674
    )Total stockholders equity
    
    
    29,891,535
    
    
    
    34,858,883Total liabilities and stockholders equity
    
    $
    33,104,375
    
    
    $
    40,153,764
 See
accompanying notes. 3




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##### 



EntreMed, Inc. 
   Three Months EndedMarch 31, 2004
    
    March 31, 2003Revenues:Collaborative research and development
    
    $
    
    
    
    $
    188,000Licensing
    
    
    96,602
    
    
    
    23,874Grants
    
    
    
    
    
    
    300,000Royalties
    
    
    1,365
    
    
    
    1,67397,967
    
    
    
    513,547Costs and expenses:Research and development
    
    
    3,056,970
    
    
    
    2,630,606General and administrative
    
    
    2,092,939
    
    
    
    1,627,2045,149,909
    
    
    
    4,257,810Investment income
    
    
    84,594
    
    
    
    53,647Net loss
    
    $
    (4,967,348
    )
    
    $
    (3,690,616
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )Net loss attributable to common shareholders
    
    $
    (5,218,598
    )
    
    $
    (3,941,866
    )Net loss per share (basic and diluted)
    
    $
    (0.14
    )
    
    $
    (0.16
    )Weighted average number of shares outstanding (basic and
diluted)
    
    
    36,973,012
    
    
    
    24,405,812
 See
accompanying notes. 4




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##### 



EntreMed, Inc. 
   THREE MONTH PERIOD ENDEDMARCH 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (4,967,348
    )
    
    $
    (3,690,616
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    248,817
    
    
    
    355,025Recognition of non-cash stock compensation
    
    
    
    
    
    
    33,000Common stock repurchase liability
    
    
    
    
    
    
    Minority interest
    
    
    (43
    )
    
    
    (60
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    276,193
    
    
    
    (25,161
    )Interest receivable
    
    
    195,309
    
    
    
    (172,867
    )Prepaid expenses and other
    
    
    179,807
    
    
    
    (438,871
    )Deferred rent
    
    
    1,893
    
    
    
    Accounts payable
    
    
    (2,227,215
    )
    
    
    (4,543,501
    )Accrued liabilities
    
    
    (158,074
    )
    
    
    (1,212,901
    )Deferred revenue
    
    
    301,398
    
    
    
    (23,874
    )Net cash used in operating activities
    
    
    (6,149,263
    )
    
    
    (9,719,826
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (2,270,348
    )
    
    
    (8,413,400
    )Reduction in ownership of MaxCytes Cash
    
    
    
    
    
    
    (418,108
    )Purchases of furniture and equipment
    
    
    (93,377
    )
    
    
    (4,650
    )Net cash used in investing activities
    
    
    (2,363,725
    )
    
    
    (8,836,158
    )CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds from sale of common stock
    
    
    
    
    
    
    1,060,770Payment of principle on note payable
    
    
    
    
    
    
    (18,735
    )Net cash provided by financing activities
    
    
    
    
    
    
    1,042,035Net decrease in cash and cash equivalents
    
    
    (8,512,988
    )
    
    
    (17,513,949
    )Cash and cash equivalents at beginning of period
    
    
    34,811,847
    
    
    
    24,067,045Cash and cash equivalents at end of period
    
    $
    26,298,859
    
    
    $
    6,553,096
 See
accompanying notes. 5




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##### 



ENTREMED, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 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 three-month period ended March 31,
2004 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2004. 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, 2003. 2. Recent Accounting Standards In April 2002, the Financial Accounting Standards Board issued SAFS No.
145, Recession of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections(SFAS No. 145). Among other things, SFAS No.
145 generally prohibits the classification of gains or losses from the early
extinguishments of debt as an extraordinary item, and therefore rescinds the
previous requirements to do so. Gains and losses from the early debt
extinguishments recorded in prior periods are required to be reclassified. The
Company elected to early adopt SFAS No. 145. There was no impact on the
consolidated financial statements as presented. In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45).
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual 6




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##### 



periods ended after December 31, 2002. The adoption of FIN 45 did not
have a material effect on the Companys financial condition, results of
operations or liquidity. 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 March 31, 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 March 31, 2004, the cost of the
investments was $4,399,931. Realized gains have been insignificant. 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. Disclosures regarding alternative fair values of measurement and
recognition methods prescribed by Statement of Accounting Standards No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosureand Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation(SFAS No. 123) are presented in Note 9 and in the table below. The
following table illustrates the effect on net loss if the Company had applied
the fair value recognition provisions of SFAS No. 123, to stock-based
compensation: 7




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Three months ended March 31,2004
    
    2003Net income (loss), as reported
    
    $
    (4,967,348
    )
    
    $
    (3,690,616
    )Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects
    
    
    (1,295,913
    )
    
    
    (2,309,130
    )Add: Stock-based non-employee
compensation included in net
income (loss)
    
    
    
    
    
    
    33,000Dividend on Series A convertible
stock preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )Pro forma net (loss) attributable
to common shareholders
    
    $
    (6,514,511
    )
    
    $
    (6,250,996
    )Net income (loss) per share:Basic and diluted  as reported
    
    $
    (0.14
    )
    
    $
    (0.16
    )Basic and diluted  pro forma
    
    $
    (0.18
    )
    
    $
    (0.26
    )
 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 options to be granted in future years. 6. 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. 8




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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 March 31,
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 to 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. Our research and development efforts are focused on the identification and
development of new chemical entities utilizing our understanding of the
interrelationships of cell cycle regulation, inflammation, coagulation and
angiogenesis  processes vital to the treatment of multiple diseases, including
cancer. In 2003 we reformulated our lead drug candidate
Panzem® and we are
evaluating various oral dosage forms. Our expenses will likely exceed our
revenues as we continue the development of Panzem® and bring other drug
candidates into clinical trials. 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. The items in our financial statements requiring significant
estimates and judgments are as follows:  -
    
    Grant Revenue  We receive a grant to support financially our Phase
II Endostatin clinical trial in patients with neuroendocrine tumors.
Grants are funded in specific amounts based on funding requests
submitted to the grantor. Grant revenues are recognized and realized at
the time that research and development activities are performed.-
    
    Collaborative Research Revenue  In 2003 the Company received
revenues for performance under commercial research and development
contracts. These contracts required that the Company provide services
directed toward specific objectives and include developmental
milestones and deliverables. These revenues were recognized at the
time that research and development activities were performed. Work on
these contracts was completed in 2003.-
    
    Licensing Revenue  The Company recognizes licensing revenues
resulting from a January 2002 alliance with Allergan to develop and
commercialize small molecule 9




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angiogenic inhibitors for treatment and prevention of diseases and
conditions of the eye. The initial net fee received is amortized to
revenue over the five-year license term. The Company also recognizes
licensing revenue from a February 2004 licensing agreement with
Alchemgen. Under this agreement Alchemgen was granted commercialization
rights to Endostatin and Angiostatin in Asia. The Companys obligations
under this agreement will be completed in 2004 and as such the initial
licensing fee is being amortized over the balance of 2004.-
    
    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.-
    
    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 that 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 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. We account for equity instruments issued to nonemployees in
accordance with SFAS No. 123 and EITF 96-18, Accounting for Equity
Instruments that are issued to other than employees for acquiring, or
in conjunction with selling goods or services. RESULTS OF OPERATIONS For the Three Months Ended March 31, 2004 and March 31, 2003. Revenues.Revenues decreased to $98,000 in the three month period ending
March 31, 2004 compared to $514,000 in the corresponding 2003 period. 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 $188,000 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 quarter of 2004. Licensing revenues during
the quarter ended March 31, 2004 increased to $97,000 from $24,000 in the
corresponding 2003 period. This increase is attributable to the recognition of
amortized licensing revenues from a February 2004 agreement with Alchemgen. 10




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Research and Development Expenses. From inception through March 31, 2004,
we have incurred research and development expenses of $213,688,000. Included
in this amount are the expenses related to our three product candidates,
Panzem®, Endostatin and Angiostatin. At March 31, 2004, the accumulated
expenses for each of these development projects are $25,352,000, $71,521,000
and $35,568,000, respectively. Project expenses for Panzem® of $1,209,000,
Endostatin of $222,000 and Angiostatin of $84,000 are reflected in our 2004 R&D
expenses totaling $3,057,000 for the three-month period ending March 31, 2004.
Research and development expenses for the corresponding 2003 period were
$2,631,000. As discussed below, the increase in 2004 reflects continuing
preclinical costs and the initiation of Phase I clinical trial to test various
dosing approaches for reformulated Panzem®. The 2004 increase also reflects
increased costs associated with further development of our pipeline drug
candidate, particularly our New Chemical Entities (NCE). These expenses,
however, were offset by decreased expenditures on Endostatin and Angiostatin,
as we are no longer responsible for further development of these compounds.
Pursuant to the Alchemgen licensing agreement we will be reimbursed for
Endostatin and Angiostatin costs incurred during transition of these programs
to Alchemgen and CMCC. Project costs for Panzem®, Endostatin and Angiostatin
were $496,000, $391,000 and $294,000, respectively, for the three-month period
ending March 31, 2003. 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. Prior to licensing Endostatin and Angiostatin in February
2004, we had three product candidates in various stages of clinical trials. As
of March 31, 2004, 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 11




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##### 



-
    
    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, 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. Our inability to raise
additional capital, or to do so on terms reasonably acceptable to us, would
jeopardize the future success of our business. There is no assurance
that such additional capital would be available to us if needed. 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 12




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##### 



costs of manufacturing the product candidates, and facilities expenses.
Research and development expenses increased to $3,057,000 in the quarter ended
March 31, 2004 from $2,631,000 for the corresponding period in 2003. The
increase in 2004 reflects continuing preclinical costs and the initiation of a
Phase I clinical trial to test various dosing approaches for reformulated
Panzem®. The 2004 amount also reflects increased costs associated with
further development of our pipeline drug candidate, particularly our New
Chemical Entities (NCE). These expenses, however, were offset by decreased
expenditures on Endostatin and Angiostatin versus the corresponding period of
2003. The increase in R&D expenses during the quarter ended March 31, 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 March 31, 2004, we expended $365,000
on these activities versus $128,000 in the same 2003 period. The
increase results from continued in vivo work with Panzem® and
preclinical work in our NCE programs.-
    
    Collaborative Research Agreements We made payments to our
collaborators of $265,000 and $67,000 for the three months ended March
31, 2004 and 2003 respectively. Sponsored research payments to academic
collaborators include payments to Childrens Hospital, Boston of
$75,000 in 2004. Our 2004 collaborative efforts are primarily directed
towards further exploration of Panzem mechanism-of-action (MOA) and
non-oncology applications.-
    
    Clinical Trial CostsClinical costs decreased slightly to $454,000
in the three months ended March 31, 2004, from $489,000 in the
three-month period
ending March 31, 2003. The net decrease reflects less overall clinical
activity as result of our decision to focus on small molecule
candidates, while we maintained the open trials for Endostatin and
Angiostatin. However, the 2004 amount reflects the initiation Phase I
clinical trial to test various dosing approaches for reformulated
Panzem®. Costs of such trials include the clinical investigator site
fees, monitoring costs and data management costs. In addition, we
contribute Panzem® clinical material under our Collaborative Research
and Development Agreement (CRADA) to the NCI who 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 finish services and product
release costs. Contract manufacturing costs for the three months ended
March 31 increased to $295,000 in 2004 from $156,000 in 2003. The
increase reflects the additional encapsulation costs for Panzem® to
support ongoing clinical trials and the manufacture of reformulated
Panzem® clinical material for the Phase I trial initiated in 2004. Also reflected in our 2004 research and development expenses are personnel
costs of $819,000, patent costs of $112,000 and facility and related expenses
of $382,000. In the 13




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corresponding 2003 period, these expenses totaled $820,000, $234,000 and
$470,000, respectively. The 2004 decrease in patent cost reflects our shift in
focus to small molecules, which resulted in the elimination of some programs
and corresponding patent coverage. General and Administrative Expenses. General and administrative expenses
increased to $2,093,000 in the three-month period ended March 31, 2004 from
$1,627,000 in the corresponding 2003 period. The 2004 difference resulted
primarily from costs associated with settling certain disputes. Investment income. Investment income increased by 58% in the period ending
March 31, 2004 to $85,000 from $54,000 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 periods ended March 31, 2004 and 2003 reflect a
dividend of $251,250 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. 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. At March 31, 2004, we had cash and short term investments of approximately
$30,699,000 with working capital of approximately $28,566,000. 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
operating plans, expenditures on development activities are expected to be
approximately $21,000,000, 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 such milestone
payments under these agreements in 2004. Based on our assessment of our current capital resources and the actions
discussed below, and in the absence of additional financing, we believe that we
will have adequate resources to 14




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fund operations into 2005. Our estimate may change, however, based on our
decisions with respect to future clinical trials related to
Panzem®,
developments in our business including the acquisition of additional
intellectual property and other investments in new or complimentary technology
and our success in executing our current business plan. 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. 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 March 31, 2004. 
 ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES Under the supervision and with the participation of the Companys
President and Chief Operating 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 Operating Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures are effective as of March 31, 2004.
There were no significant changes in our internal control over financial
reporting during the quarter ended March 31, 2004 that have materially
affected, or are reasonably likely to materially affect, the internal control
over financial reporting. 15




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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 AND USE OF PROCEEDS Not applicable. 
 Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 
 Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not applicable. 
 Item 5. OTHER INFORMATION Not applicable 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.50 Employment Agreement between EntreMed and Neil J. Campbell effective January 1, 2004 31.1 Rule 13a-14(a) Certification of President and Chief Operating Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32.1 Rule 13a-14(b) Certification of Equivalent of Chief Executive Officer 32.2 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: May 5, 2004
    
    /s/ Neil J. CampbellNeil J. CampbellPresident and Chief Operating OfficerDate: May 5, 2004
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 17