##### 



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 September 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 number0-20713 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 November 9, 2004Common Stock $.01 Par Value
    
    
    37,175,215
 1




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##### 



ENTREMED, INC.
Table of Contents PAGEPART I. FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Balance Sheets
as of September 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of
Operations for the Three Months Ended
September 30, 2004 and 2003, and the Nine Months Ended
September 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash
Flows for the Nine Months Ended September 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  Controls and Procedures
    
    
    14Part II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    15Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3  Defaults upon Senior Securities
    
    
    15Item 4  Submission of Matters to a Vote of
Security Holders
    
    
    15Item 5  Other Information
    
    
    15Item 6  Exhibits
    
    
    15SIGNATURES
    
    
    16
 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®NCD, 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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##### 



PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS EntreMed, Inc.
Consolidated Balance Sheets September 30, 2004
    
    December 31, 2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,303,515
    
    
    $
    34,811,847Short-term investments
    
    
    15,097,918
    
    
    
    2,129,583Accounts receivable
    
    
    12,503
    
    
    
    428,979Interest receivable
    
    
    29,973
    
    
    
    262,192Prepaid expenses and other
    
    
    352,105
    
    
    
    528,190Total current assets
    
    
    23,796,014
    
    
    
    38,160,791Furniture and equipment, net
    
    
    1,441,052
    
    
    
    1,991,516Other assets
    
    
    1,306
    
    
    
    1,457Total assets
    
    $
    25,238,372
    
    
    $
    40,153,764LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,086,378
    
    
    $
    3,952,517Accrued liabilities
    
    
    812,457
    
    
    
    706,961Current portion of deferred revenue
    
    
    132,966
    
    
    
    95,495Total current liabilities
    
    
    2,031,801
    
    
    
    4,754,973Deferred revenue, less current portion
    
    
    190,988
    
    
    
    192,993Deferred rent
    
    
    326,640
    
    
    
    329,815Minority interest
    
    
    16,981
    
    
    
    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 September 30, 2004 and December 31, 2003
    
    
    3,350,000

    
    
    
    3,350,000Common stock, $.01 par value:90,000,000 shares authorized, 37,929,029 shares issued and
Outstanding at September 30, 2004 and December 31, 2003
    
    
    379,291
    
    
    
    378,480Additional paid-in capital
    
    
    272,151,510
    
    
    
    271,977,321Treasury stock, at cost: 874,999 shares held at September 30, 2004 and
December 31, 2003
    
    
    (8,034,244
    )
    
    
    (8,034,244
    )Accumulated deficit
    
    
    (245,174,595
    )
    
    
    (232,812,674
    )Total stockholders equity
    
    
    22,671,962
    
    
    
    34,858,883Total liabilities and stockholders equity
    
    $
    25,238,372
    
    
    $
    40,153,764
 See accompanying notes. 3




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##### 



EntreMed, Inc.
Consolidated Statements of Operations
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30,2004
    
    September 30,2003
    
    September 30,2004
    
    September 30,2003Revenues:Collaborative research and development
    
    $
    
    
    
    $
    216,536
    
    
    $
    
    
    
    $
    634,536Licensing
    
    
    132,966
    
    
    
    23,874
    
    
    
    362,534
    
    
    
    71,622Grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Royalties
    
    
    1,441
    
    
    
    
    
    
    
    4,969
    
    
    
    1,727Other
    
    
    8,331
    
    
    
    18,068
    
    
    
    12,581
    
    
    
    50,128142,738
    
    
    
    258,478
    
    
    
    380,084
    
    
    
    1,058,013Costs and expenses:Research and development
    
    
    2,553,494
    
    
    
    3,151,002
    
    
    
    8,094,890
    
    
    
    9,700,523General and administrative
    
    
    1,337,922
    
    
    
    1,748,055
    
    
    
    5,394,273
    
    
    
    5,049,7763,891,416
    
    
    
    4,899,057
    
    
    
    13,489,163
    
    
    
    14,750,299Investment income
    
    
    75,495
    
    
    
    43,485
    
    
    
    220,821
    
    
    
    145,677Gain on sale of securities
    
    
    520,000
    
    
    
    
    
    
    
    520,000
    
    
    
    Gain on sale of assets
    
    
    6,335
    
    
    
    
    
    
    
    6,335
    
    
    
    Net Loss
    
    
    (3,146,848
    )
    
    
    (4,597,094
    )
    
    
    (12,361,921
    )
    
    
    (13,546,609
    )Dividends on Series A convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (753,750
    )
    
    
    (753,750
    )Net loss attributable to common shareholders
    
    $
    (3,398,098
    )
    
    $
    (4,848,344
    )
    
    $
    (13,115,671
    )
    
    $
    (14,300,359
    )Net loss per share (basic and diluted)
    
    $
    (0.09
    )
    
    $
    (0.15
    )
    
    $
    (0.35
    )
    
    $
    (0.51
    )Weighted average number of shares outstanding
(basic and diluted)
    
    
    37,054,030
    
    
    
    31,650,627
    
    
    
    37,004,355
    
    
    
    28,240,013
 See accompanying notes. 4




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##### 



EntreMed, Inc.
Consolidated Statements of Cash Flows
(Unaudited) NINE MONTH PERIOD ENDEDSEPTEMBER 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (12,361,921
    )
    
    $
    (13,546,609
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    632,871
    
    
    
    1,064,523Recognition of non-cash stock compensation
    
    
    174,999
    
    
    
    33,000Gain on sale of securities
    
    
    (520,000
    )
    
    
    Gain on sale of assets
    
    
    (6,335
    )
    
    
    Loss on sale of equipment
    
    
    
    
    
    
    9,679Minority interest
    
    
    (118
    )
    
    
    (79
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    416,476
    
    
    
    107,295Interest receivable
    
    
    232,219
    
    
    
    (30,341
    )Prepaid expenses and other
    
    
    176,236
    
    
    
    (105,104
    )Deferred rent
    
    
    (3,175
    )
    
    
    Accounts payable
    
    
    (2,866,139
    )
    
    
    (7,451,626
    )Accrued liabilities
    
    
    105,496
    
    
    
    (1,289,984
    )Deferred revenue
    
    
    35,466
    
    
    
    43,378Net cash used in operating activities
    
    
    (13,983,925
    )
    
    
    (21,165,868
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short term investments
    
    
    (12,968,335
    )
    
    
    (2,025,662
    )Reduction in ownership of MaxCytes Cash
    
    
    
    
    
    
    (418,108
    )Purchases of furniture and equipment
    
    
    (143,947
    )
    
    
    (26,525
    )Proceeds from sale of securities
    
    
    520,000
    
    
    
    Proceeds from sale of asset, net
    
    
    67,875
    
    
    
    Net cash used in investing activities
    
    
    (12,524,407
    )
    
    
    (2,470,295
    )CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds from sale of common stock
    
    
    
    
    
    
    18,320,737Payment of principle on note payable
    
    
    
    
    
    
    (65,424
    )Net cash provided by financing activities
    
    
    
    
    
    
    18,255,313Net decrease in cash and cash equivalents
    
    
    (26,508,332
    )
    
    
    (5,380,850
    )Cash and cash equivalents at beginning of year
    
    
    34,811,847
    
    
    
    24,067,045Cash and cash equivalents at end of period
    
    $
    8,303,515
    
    
    $
    18,686,195
 See accompanying notes. 5




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##### 



ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-month period ended September 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.
    
    Short-Term Investments Short-term investments consist of corporate debt and collateralized
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 September 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
September 30, 2004, the cost of the investments was $15,098,000. Realized
gains and losses have been insignificant.  3.
    
    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. 6




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##### 



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 September
    
    Nine months ended September30,
    
    30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (3,146,848
    )
    
    $
    (4,597,094
    )
    
    $
    (12,361,921
    )
    
    $
    (13,546,609
    )Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (1,084,547
    )
    
    
    (2,392,117
    )
    
    
    (3,830,393
    )
    
    
    (7,176,352
    )Add: Stock-based non-employee
compensation included in net
Loss
    
    
    
    
    
    
    
    
    
    
    174,999Dividend on Series A
convertible preferred stock
    
    
    (251,250
    )
    
    
    (251,250
    )
    
    
    (753,750
    )
    
    
    (753,750
    )Pro forma net loss
attributable to common
shareholders
    
    $
    (4,482,645
    )
    
    $
    (7,240,461
    )
    
    $
    (16,771,065
    )
    
    $
    (21,476,711
    )Net loss per share:Basic and diluted  as reported
    
    $
    (0.09
    )
    
    $
    (0.15
    )
    
    $
    (0.35
    )
    
    $
    (0.51
    )Basic and diluted  pro forma
    
    $
    (0.12
    )
    
    $
    (0.23
    )
    
    $
    (0.45
    )
    
    $
    (0.76
    )
 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.  4.
    
    Sale of Securities In September 2004, we sold certain securities of an independent private
biotechnology company. The securities were acquired in 1996 through 1999 and
accounted for using the equity method. The cost of these securities was
written off in prior periods and we had no residual cost basis in the
securities when sold. As such, we have recorded a gain on the sale equal to the
sale proceeds of $520,000. 7




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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 September 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 for the treatment of certain
diseases utilizing our understanding of the interrelationships of angiogenesis,
cell cycle regulation, and inflammation  processes vital to the treatment of
multiple diseases, including cancer. Currently, our main focus is on the
reformulation of 2ME2, 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 refer to the liquid product format as Panzem®NCD and 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 next
generation 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 programs with
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. With Panzem®NCD moving into the clinic and other pipeline candidates
moving towards IND, we are progressing from a fundamentally research
organization to that of a product development and commercialization
organization. We have already begun de-emphasizing early discovery activities
and are reducing certain operating expenses in order to devote more
resources to key preclinical 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. 8




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RESULTS OF OPERATIONS For the Three and Nine Months Ended September 30, 2004 and September 30, 2003. Revenues.Revenues decreased to $143,000 in the three-month period ended
September 30, 2004 compared to $258,000 in the corresponding 2003 period. For
the nine-month period ended September 30, 2004, revenues decreased 64% to
$380,000 from $1,058,000 for the 2003 nine-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 $635,000 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 nine months of
2004. Licensing revenues during the first nine-month period ended September
30, 2004 increased to $363,000 from $72,000 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 pharmaceutical
company developing therapeutic candidates for the treatment of cancer and
inflammatory diseases. Our development programs are focused on drug candidates
with antiproliferative, and anti-inflammatory properties  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 September 30, 2004,
accumulated direct project expenses for Panzem® totaled $26,929,000.
Reflected in our 2004 R&D expenses totaling $8,095,000 for the nine-month
period ended September 30, 2004 are direct project expenses for Panzem® of
$2,561,000 and $1,358,000 related to our 2ME2 analog program. Also reflected in our 2004 R&D expenses are project costs of $334,000
related to the Endostatin and Angiostatin compounds, programs that have been
discontinued and will not be funded in the future. The balance of our R&D
expenditures includes facilities costs and other departmental overhead, and
expenditures related to the advancement of our pre-clinical pipeline. 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 $9,701,000,
including direct project costs for Panzem®, Endostatin and Angiostatin of
$3,734,000, $782,000 and $578,000, respectively. For the three-month period
ended September 30, 2004, research and development expenses totaled $2,553,000,
a decrease from $3,151,000 for the comparable 2003 period. Included in the 2004
three-month period are expenses related to Panzem® of $714,000 versus
$1,063,000 in 2003. The higher 2003 amounts for Panzem® reflect reformulation
activities including material acquisition, animal testing and sample analysis. The expenditures that will be necessary to execute our business plan are
subject to numerous uncertainties, which may adversely affect our liquidity and
capital resources. As of September 30, 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. 9




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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. 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 for our product candidates, 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. An important element of our business strategy is to pursue the research
and development of a range of product candidates for a variety of oncology and
non-oncology indications. This allows us to diversify the risks associated
with our research and development expenditures. As a result, we intend to
pursue development of our existing product candidates internally or through
development partnerships, as well as through the acquisition and subsequent
development of promising 10




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##### 



candidates. The goal is to align our capital requirements with multiple
product candidates so as to increase the likelihood that our future financial
success is not substantially dependent on any one product candidate. To the
extent we are unable to maintain a broad range of product candidates, our
dependence on the success of one or a few product candidates would increase. Furthermore, our business strategy includes the option of entering into
collaborative arrangements with third parties to complete the development and
commercialization of our products. In the event that third parties take over
the clinical trial process for one of our product candidates, the estimated
completion date would largely be under the control of that third party rather
than us. We cannot forecast with any degree of certainty which proprietary
products or indications, if any, will be subject to future collaborative
arrangements, in whole or in part, and how such arrangements would affect our
capital requirements. As a result of the uncertainties discussed above, among others, we are
unable to estimate the duration and completion costs of our research and
development projects. Our inability to complete our research and development
projects in a timely manner or our failure to enter into collaborative
agreements, when appropriate, could significantly increase our capital
requirements and could adversely impact our liquidity. These uncertainties
could force us to seek additional, external sources of financing from time to
time in order to continue with our business strategy. There 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 nine months ended September 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 September 30, 2004, we expended $513,000
on these activities versus $698,000 in the same 2003 period. For the
nine-month period ended September 30, 2004 outside services decreased to
$1,247,000 from $1,448,000 for the comparable 2003 period. The higher
2003 expenses reflect our focus on reformulating Panzem® while our 2004
efforts have been directed towards optimizing Panzem®NCD and selecting a
lead 2ME2 analog candidate.-
    
    Collaborative Research Agreements We made payments to our collaborators
of $78,000 and $30,000 for the three months ended September 30, 2004 and
2003 respectively, and $466,000 and $153,000 for the nine months ended
September 30, 2004 and 2003, respectively. Sponsored research payments to
academic collaborators include payments to 11




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Childrens Hospital, Boston of $225,000 in 2004. Our 2004 collaborative
efforts are primarily directed towards further exploration of Panzem®
mechanism-of-action (MOA), in-vivo testing of therapeutic combination
studies, and non-oncology applications.-
    
    Clinical Trial CostsClinical trial costs decreased to $256,000 in the
three months ended September 30, 2004, from $278,000 in the three-month
period ended September 30, 2003. Clinical trial costs for the nine-month
period ended September 30, 2004 decreased to $874,000 from $1,017,000 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 Company 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 September 30, 2004 increased to $366,000 from
$187,000 during the same period in 2003. This increase results primarily
from our initiation of Panzem®NCD clinical supply manufacturing activities
with Elan. For the nine-month period ended September 30, 2004
manufacturing costs have decreased to $926,000 from $1,453,000 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 September 30, 2004 are personnel costs of $800,000,
patent costs of $119,000 and facility and related expenses of $243,000. In the
corresponding 2003 period, these expenses totaled $662,000, $263,000 and
$266,000, respectively. For the nine-month period ended September 30, 2004,
personnel costs were $2,409,000, patent costs were $341,000 and facility and
related expenses were $701,000. In the corresponding 2003 period, these
expenses totaled $2,261,000, $703,000 and $710,000, 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. Other items contributing to the decrease in research and development
expenses for the three-month period ended September 30, 2004 are reduced
depreciation expense of $154,000 and the receipt of reimbursements for
expenditures relating to the transition of Endostatin and Angiostatin totaling
$209,000. In the corresponding 2003 period we did not record any
reimbursements and depreciation expense totaled $280,000. Also reflected in
the 2003 three month period were subcontract costs relating to our Malaria
contract of $268,000. For the nine-month period ended September 30, 2004,
there were no subcontract costs, depreciation expense was $507,000 and we
received expense reimbursements of $226,000. In the corresponding 2003 period,
subcontract costs were $499,000, depreciation expense was $843,000 with no
reimbursements. General and Administrative Expenses. General and administrative expenses
decreased to $1,338,000 in the three-month period ended September 30, 2004 from
$1,748,000 in the 12




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corresponding 2003 period, reflecting the impact of personnel reductions
and the elimination of certain expenditures beginning in the third quarter. For
the nine-month period general and administrative expenses increased in 2004 to
$5,394,000 from $5,050,000 for the corresponding 2003 period. The 2004
nine-month increase results from increased costs for professional services
related to Sarbanes-Oxley Act, Nasdaq and SEC compliance, executive management
changes and costs associated with settling certain disputes. Investment income. Investment income increased by 51% in the nine-month
period ended September 30, 2004 to $221,000 from $146,000 in the corresponding
2003 period as a result of higher invested balances and higher yields 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 nine-month periods ended September 30, 2004 and
2003 reflect a dividend of $753,750 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. The Company has no plans to pay any
dividends in the foreseeable future. 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 license agreement for 2ME2,
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 nine 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 September 30, 2004, we had cash and
short-term investments of approximately $23,401,000 with working capital of
approximately $21,764,000. We invest our capital resources with the primary
objective of capital preservation. As a result of trends in interest rates
in 2004 we have invested in some securities with maturity dates of more than 90
days to enhance our investment yields. As such, some of our invested balances
are classified as short-term investments rather than cash equivalents in our
financial statements. To accomplish our business plans, we will be required to continue to
conduct substantial development activities for some or all of our proposed
products. Under our current plans, results of operations are expected to
reflect a loss of approximately $18,000,000 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 13




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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®, 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. 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 invested capital.
Due to the short-term nature of our investment holdings, a 10%
movement in market interest rates would not materially impact on the total fair
market value of our portfolio as of September 30, 2004. ITEM 4. 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 September 30,
2004. There were no significant changes in our internal control over financial
reporting during the quarter ended September 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable. Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. Item 5. OTHER INFORMATION Not applicable Item 6. EXHIBITS (a) Exhibits 10.52
    
    Employment Agreement between EntreMed and Dane
Saglio effective July 1, 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. 15




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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: November 9, 2004
    
    /s/ James S. BurnsJames S. BurnsPresident and Chief Executive OfficerDate: November 9, 2004
    
    /s/ Dane R. SaglioDane R. SaglioChief Financial Officer
 16