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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 
 FORM 10-Q   (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from       to Commission File No. 0-50772 INHIBITEX, INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    74-2708737
(I.R.S. Employer Identification No.)
 1165 Sanctuary Parkway
Suite 400
Alpharetta, Georgia 30004
(Address of principal executive offices) (678) 746-1100
(Registrants telephone number, including area code) Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)




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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 [  ] No [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [  ] No [X] As of July 31, 2004, 18,309,536 shares of the Registrants Common Stock were
outstanding. Inhibitex®, MSCRAMM®, Veronate®, and Aurexis® are registered trademarks
of Inhibitex, Inc. MSCRAMM is an acronym for Microbial Surface Components
Recognizing Adhesive Matrix Molecules. 2




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TABLE OF CONTENTS PAGEPART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    4Condensed Statements of Operations for the Three and Six Months Ended June 30, 2004
and 2003 and for the Period from Inception (May 13, 1994) through June 30, 2004
    
    
    5Condensed Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
and for the Period from Inception (May 13, 1994) through June 30, 2004
    
    
    6Notes to Condensed Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 6. Exhibits and Reports on Form 8-K
    
    
    23Signatures
    
    
    24Exhibit IndexEX-10.1 SECOND AMENDMENT TO FOURTH AMENDED AND RESTATED MASTER RIGHTS AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO/CFO/TREASURER
  3




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PART I
FINANCIAL INFORMATION INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY) 
 CONDENSED BALANCE SHEETS
 (unaudited)
 June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    34,982,214
    
    
    $
    26,649,150Short-term investments
    
    
    12,944,030
    
    
    
    1,498,980Prepaid expenses and other current assets
    
    
    1,143,768
    
    
    
    569,667Accounts receivable
    
    
    19,426
    
    
    
    308,924Total current assets
    
    
    49,089,438
    
    
    
    29,026,721Property and equipment, net
    
    
    1,682,592
    
    
    
    1,635,544Total assets
    
    $
    50,772,030
    
    
    $
    30,662,265LIABILITIES,
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS AND STOCKHOLDERS EQUITY
(DEFICIT)Current liabilities:Accounts payable
    
    $
    1,198,327
    
    
    $
    1,385,972Accrued expenses
    
    
    1,494,442
    
    
    
    1,700,539Current portion of notes payable
    
    
    875,733
    
    
    
    889,523Current portion of capital lease obligations
    
    
    379,563
    
    
    
    330,408Current portion of deferred revenue
    
    
    191,667
    
    
    
    191,667Other current liabilities
    
    
    1,000,000
    
    
    
    1,000,000Total current liabilities
    
    
    5,139,732
    
    
    
    5,498,109Long-term liabilities:Notes payable, net of current portion
    
    
    925,114
    
    
    
    1,363,351Capital lease obligations, net of current portion
    
    
    456,572
    
    
    
    431,853Deferred revenue, net of current portion
    
    
    912,498
    
    
    
    987,498Total long-term liabilities
    
    
    2,294,184
    
    
    
    2,782,702Redeemable convertible preferred stock
    
    
    
    
    
    
    89,542,242Preferred stock warrants
    
    
    
    
    
    
    6,065,467Stockholders equity (deficit):Series A convertible preferred stock
    
    
    
    
    
    
    216Preferred Stock, $.001 par value; 5,000,000
shares authorized at June 30, 2004; none issued
and outstanding
    
    
    
    
    
    
    Common stock, $.001 par value; 43,100,000 and
75,000,000 shares authorized at December 31,
2003 and June 30, 2004, respectively; 536,066
and 17,782,536 shares issued and outstanding at
December 31, 2003 and June 30, 2004,
respectively
    
    
    17,783
    
    
    
    536Common stock warrants
    
    
    6,113,747
    
    
    
    Additional paid-in capital
    
    
    127,401,378
    
    
    
    1,797,798Deferred stock compensation
    
    
    (1,517,475
    )
    
    
    (804,310
    )Deficit accumulated during the development stage
    
    
    (88,677,319
    )
    
    
    (74,220,495
    )Total stockholders equity (deficit)
    
    
    43,338,114
    
    
    
    (73,226,255
    )Total liabilities, redeemable convertible
preferred stock and warrants and
stockholders equity (deficit)
    
    $
    50,772,030
    
    
    $
    30,662,265
 The accompanying notes are
an integral part of these condensed financial statements. 4




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INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY) 
 CONDENSED STATEMENTS OF OPERATIONS
 (unaudited)
 Period fromThree Months Ended
    
    Six Months Ended
    
    InceptionJune 30,
    
    June 30,
    
    (May 13, 1994)Through2004
    
    2003
    
    2004
    
    2003
    
    June 30, 2004Revenue:License fees and milestones
    
    $
    37,500
    
    
    $
    37,500
    
    
    $
    75,000
    
    
    $
    75,000
    
    
    $
    937,500Collaborative research and
development
    
    
    125,000
    
    
    
    187,500
    
    
    
    250,000
    
    
    
    375,000
    
    
    
    2,249,455Grant revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Total revenue
    
    
    162,500
    
    
    
    225,000
    
    
    
    325,000
    
    
    
    450,000
    
    
    
    3,486,955Operating expense:Research and development
    
    
    6,061,771
    
    
    
    4,929,539
    
    
    
    10,099,756
    
    
    
    8,778,465
    
    
    
    62,638,747General and administrative
    
    
    818,937
    
    
    
    1,481,433
    
    
    
    1,661,448
    
    
    
    2,565,463
    
    
    
    13,843,224Amortization of deferred
stock compensation
    
    
    118,193
    
    
    
    49,976
    
    
    
    224,913
    
    
    
    58,249
    
    
    
    401,148Total operating expense
    
    
    6,998,901
    
    
    
    6,460,948
    
    
    
    11,986,117
    
    
    
    11,402,177
    
    
    
    76,883,119Loss from operations
    
    
    (6,836,401
    )
    
    
    (6,235,948
    )
    
    
    (11,661,117
    )
    
    
    (10,952,177
    )
    
    
    (73,396,164
    )Other income (expense), net
    
    
    14,050
    
    
    
    10,759
    
    
    
    14,050
    
    
    
    16,906
    
    
    
    613,408Interest income (expense), net
    
    
    10,255
    
    
    
    19,100
    
    
    
    13,403
    
    
    
    82,046
    
    
    
    487,500Net loss
    
    
    (6,812,096
    )
    
    
    (6,206,089
    )
    
    
    (11,633,664
    )
    
    
    (10,853,225
    )
    
    
    (72,295,256
    )Dividends and accretion to
redemption value of redeemable
preferred stock
    
    
    (1,221,822
    )
    
    
    (1,548,423
    )
    
    
    (2,823,160
    )
    
    
    (3,096,845
    )
    
    
    (16,382,063
    )Net loss attributable to
common stockholders
    
    $
    (8,033,918
    )
    
    $
    (7,754,512
    )
    
    $
    (14,456,824
    )
    
    $
    (13,950,070
    )
    
    $
    (88,677,319
    )Basic and diluted
net loss per share
attributable to common
stockholders
    
    $
    (1.72
    )
    
    $
    (14.78
    )
    
    $
    (5.49
    )
    
    $
    (26.74
    )Weighted average shares used
to compute basic and diluted
net loss per share attributable to
common stockholders
    
    
    4,669,950
    
    
    
    524,672
    
    
    
    2,633,918
    
    
    
    521,642
 The accompanying notes are
an integral part of these condensed financial statements. 5




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INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY) 
 CONDENSED STATEMENTS OF CASH FLOWS
 (unaudited)
 Period fromInceptionSix Months Ended
    
    (May 13, 1994)June 30,
    
    throughJune 30,2004
    
    2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (11,633,664
    )
    
    $
    (10,853,225
    )
    
    $
    (72,295,256
    )Adjustments to reconcile net loss to
net cash used in operating activities:Depreciation and amortization
    
    
    397,532
    
    
    
    378,850
    
    
    
    3,042,288Amortization of deferred stock compensation
    
    
    224,913
    
    
    
    58,249
    
    
    
    401,148Loss on sale of equipment
    
    
    
    
    
    
    
    
    
    
    48,134Amortization of investment premium
    
    
    77,962
    
    
    
    28,113
    
    
    
    123,211Forgiveness of receivables from stockholders
    
    
    
    
    
    
    
    
    
    
    28,695Amortization of warrants and discount on debt
    
    
    53,685
    
    
    
    
    
    
    
    176,477Stock issued for interest
    
    
    2,310
    
    
    
    
    
    
    
    126,886Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    99,500Changes in operating assets and liabilities:Prepaid expenses and other assets
    
    
    (574,101
    )
    
    
    (45,729
    )
    
    
    (1,143,768
    )Accounts receivable
    
    
    289,498
    
    
    
    35,814
    
    
    
    (19,426
    )Accounts payable and other current liabilities
    
    
    (187,645
    )
    
    
    485,403
    
    
    
    2,198,327Accrued expenses
    
    
    (206,097
    )
    
    
    (47,882
    )
    
    
    1,494,442Deferred revenue
    
    
    (75,000
    )
    
    
    (71,414
    )
    
    
    1,104,165Net cash used in operating activities
    
    
    (11,630,607
    )
    
    
    (10,031,821
    )
    
    
    (64,615,177
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (203,816
    )
    
    
    (260,774
    )
    
    
    (2,815,175
    )Purchases of short-term investments
    
    
    (17,117,359
    )
    
    
    (12,547,818
    )
    
    
    (33,668,768
    )Proceeds from maturities of short-term investments
    
    
    5,600,000
    
    
    
    7,007,180
    
    
    
    20,607,180Net cash used in investing activities
    
    
    (11,721,175
    )
    
    
    (5,801,412
    )
    
    
    (15,876,763
    )Cash flows from financing activities:Proceeds from promissory notes and related warrants
    
    
    
    
    
    
    2,500,000
    
    
    
    3,013,492Payments on promissory notes and capital leases
    
    
    (618,917
    )
    
    
    (149,851
    )
    
    
    (2,334,349
    )Proceeds from bridge loan and related warrants
    
    
    
    
    
    
    
    
    
    
    2,220,000Net proceeds from the issuance of preferred stock and warrants
    
    
    1,517,997
    
    
    
    
    
    
    
    81,624,319Proceeds from the
issuance of common stock, net of issuance costs
    
    
    30,785,766
    
    
    
    9,693
    
    
    
    30,950,692Net cash provided by financing activities
    
    
    31,684,846
    
    
    
    2,359,842
    
    
    
    115,474,154Increase (decrease) in cash and cash equivalents
    
    
    8,333,064
    
    
    
    (13,473,391
    )
    
    
    34,982,214Cash and cash equivalents at beginning of period
    
    
    26,649,150
    
    
    
    28,658,078
    
    
    
    Cash and cash equivalents at end of period
    
    $
    34,982,214
    
    
    $
    15,184,687
    
    
    $
    34,982,214Supplemental cash flow information:Interest paid
    
    $
    108,106
    
    
    $
    44,258
    
    
    $
    691,283Supplemental non-cash investing and financing activities:Fixed assets capitalized using promissory notes and capital leases
    
    
    240,764
    
    
    
    99,282
    
    
    
    1,957,839Conversion of bridge loans and interest payable into Series C
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    2,124,576Preferred stock dividends and accretion of preferred stock to
redemption value
    
    
    2,823,160
    
    
    
    3,096,845
    
    
    
    16,382,063Unrealized gain on short-term investments
    
    
    5,653
    
    
    
    (787
    )
    
    
    4,866
 The accompanying notes are
an integral part of these condensed financial statements. 6




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INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY) 
 NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
 NOTE 1   BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Inhibitex, Inc. (Inhibitex or the Company) was incorporated in the state of
Delaware in May 1994. Inhibitex is a biopharmaceutical company committed to
the discovery, development and commercialization of novel antibody-based
products for the prevention and treatment of serious bacterial and fungal
infections in the hospital setting. The Companys primary activities since
incorporation have been establishing its offices, recruiting personnel,
conducting research, conducting preclinical and clinical trials, performing
business and financial planning, and raising capital. Accordingly, the Company
is considered to be in the development stage for financial reporting purposes. The Company has incurred operating losses since inception and expects such
losses to continue for the foreseeable future. These losses have largely been
the result of research and development expenses, including those related to the
Companys lead product candidates, and to a lesser extent, general and
administrative expenses. Veronate, the Companys lead product candidate, is
the subject of an ongoing 2,000-patient, pivotal Phase III clinical trial that
the Company initiated in May 2004. Veronate is being developed for the
prevention of hospital-associated infections in premature, very low birth
weight infants. Aurexis, the Companys second product candidate, is currently
being evaluated in a Phase II clinical trial as a first-line therapy to be used
in combination with antibiotics to treat serious, life-threatening
Staphylococcus aureus,or S. aureus,bloodstream infections in hospitalized
patients The Company intends to continue to finance its operations with equity or other
financings or proceeds from potential future partnerships. The Companys
ability to continue its operations is dependent, in the near term, upon the
successful execution of such financings and ultimately upon achieving
profitable operations. There can be no assurance that additional funds will be
available on terms acceptable to the Company, if at all, or that the Company
will become profitable. Basis of Presentation- The accompanying unaudited condensed financial
statements reflect, in the opinion of management, all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of
Inhibitexs financial position, results of operations and cash flows for each
period presented in accordance with accounting principles generally accepted in
the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted from the accompanying statements. These interim
financial statements should be read in conjunction with the audited financial
statements and related notes thereto, which are included in the Companys
prospectus that forms part of its registration statement on Form S-1, which,
as amended, was declared effective by the Securities and Exchange Commission
(SEC) on June 3, 2004. Operating results for the three month and six month
periods ended June 30, 2004 are not necessarily indicative of future results
that may be expected for the year ending December 31, 2004. Use of Estimates- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimated. Revenue Recognition -To date, the Company has not generated any revenues from
the sale of products. Revenues represent the amortization of an up-front
license fee, collaborative research and development 7




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INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS  (Continued) support payments and a grant received from the U.S. Food and Drug
Administration (FDA) Office of Orphan Products Development. The Company
follows the revenue recognition criteria outlined in Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements(SAB No. 101) as
amended by SAB 104 Revenue Recognition, and Emerging Issues Task Force (EITF)
Issue 00-21, Revenue Arrangements with Multiple Deliverables(EITF Issue
00-21). Accordingly, up-front, non-refundable license fees under agreements
where the Company has an ongoing research and development commitment are
amortized, on a straight-line basis, over the term of such commitment. Revenues
received for ongoing research and development activities under collaborative
arrangements are recognized as these activities are performed pursuant to the
terms of the related agreements. Any amounts received in advance of
performance are recorded as deferred revenue until earned. Revenue related to
grant awards is recognized as related research and development expenses are
incurred. Research and
Development Expense- Research and development expense primarily
consists of expenses incurred in the discovery, development, and manufacturing
of the Companys product candidates. These expenses consist primarily of (i)
fees paid to physicians and third-party service providers to treat patients and
monitor and accumulate data related to the Companys clinical trials, (ii)
costs related to obtaining patents and license and research agreements, (iii)
the costs to develop, procure and manufacture materials used in clinical
trials, and (iv) salaries and related expenses for personnel. These costs are
charged to expense as incurred. Reclassifications- Certain reclassifications have been made to prior period
amounts to conform to the current year presentation. Stock-based Compensation- The Company accounts for employee stock options
using the intrinsic-value method in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees(APB No.
25), and Financial Accounting Standards Board Interpretation (FIN) No. 44
(FIN 44), Accounting for Certain Transactions Involving Stock Compensation,
an Interpretation of APB No. 25, and Related Interpretationsand has adopted
the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation(SFAS No. 123), as amended. The Company accounts for equity
instruments issued to non-employees in accordance with the provisions of the
SFAS No. 123, EITF Issue No. 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.In December 2002, the Financial Accounting Standards Board
issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure(SFAS No. 148). SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 and APB No. 28,
Interim Financial Reporting, to require disclosure in the summary of
significant accounting policies of the effects of an entitys accounting policy
with respect to employee stock compensation on reported net loss. The Company
has adopted the disclosure requirements of SFAS No. 148. Under APB No. 25, if the exercise price of the Companys employee and director
stock options equals or exceeds the estimated fair value of the underlying
stock on the date of grant, no compensation expense is recognized. In the
event that stock options are granted with an exercise price below the estimated
fair value of the Companys common stock on the date of such grant, APB No. 25
requires that the difference between the estimated fair value and the exercise
price be recorded as deferred compensation and amortized over the related
vesting period. The Company has elected to continue to follow the intrinsic
value method of accounting as prescribed by APB No. 25. The information
regarding net loss as required by SFAS No. 123 has been determined as if the
Company had accounted for its stock-based compensation under the fair value
method of that Statement. 8




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INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS   (Continued) The following table illustrates the effect on net loss attributable to common
stockholders and basic and diluted net loss per share attributable to common
stockholders had the Company applied the fair value provisions of SFAS No. 123
to employee stock-based compensation: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
attributable to
common
stockholders, as
reported
    
    $
    (8,033,918
    )
    
    $
    (7,754,512
    )
    
    $
    (14,456,824
    )
    
    $
    (13,950,070
    )Add: Amortization
of deferred stock
compensation
expense included in
net loss, as
reported
    
    
    118,193
    
    
    
    49,974
    
    
    
    224,913
    
    
    
    58,249Deduct: Stock-based
compensation
expense determined
under fair value
method
    
    
    (269,552
    )
    
    
    (109,420
    )
    
    
    (483,901
    )
    
    
    (139,495
    )Pro forma net loss
attributable to
common stockholders
    
    $
    (8,185,277
    )
    
    $
    (7,813,958
    )
    
    $
    (14,715,812
    )
    
    $
    (14,031,316
    )Net loss
per share attributable to
common stockholders
(basic
and diluted):As reported
    
    $
    (1.72
    )
    
    $
    (14.78
    )
    
    $
    (5.49
    )
    
    $
    (26.74
    )Pro forma
    
    $
    (1.75
    )
    
    $
    (14.89
    )
    
    $
    (5.59
    )
    
    $
    (26.90
    )
 The fair value of each stock option was estimated at the date of grant using
the minimum value option-pricing model for stock options granted prior to the
Companys initial public offering (IPO) in June 2004 and the Black-Scholes
option-pricing model for stock options granted after the
Companys IPO with the following weighted average assumptions: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    3.62
    %
    
    
    2.98
    %
    
    
    3.23
    %
    
    
    3.01
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Volatility factors
    
    
    .43
    
    
    
    
    
    
    
    .43
    
    
    
    Expected life of options (years)
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0Weighted average fair value of
options granted
    
    
    2.13
    
    
    
    1.69
    
    
    
    2.06
    
    
    
    1.43
 For purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the related vesting period. Recent Accounting Developments  In March 2004, the Financial Accounting
Standards Board (FASB) issued proposed exposure draft SFAS No. 123,
Share-Based Payment, and amendment of FASB Statements Nos. 123 and 95
(Exposure Draft). The Exposure Draft would eliminate the ability to account
for share-based compensation transactions using APB Opinion No. 25, and
generally would require such transactions be 9




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INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS  (Continued) accounted for using a fair-value based method and the resulting cost recognized
in the financial statements.
The Company is closely monitoring developments related to the Exposure Draft
and will adopt the final standards upon issuance. Comprehensive Loss-The Company has adopted the provisions of SFAS No. 130,
Comprehensive Income,(SFAS 130). SFAS 130 establishes standards for the
reporting and display of comprehensive loss and its components for general
purpose financial statements. For all periods presented, there were no
significant differences between net loss and comprehensive loss. NOTE 2  INITIAL PUBLIC OFFERING On June 3, 2004, Inhibitex
completed an IPO of five
million shares of its common stock at an initial offering price to the public
of $7.00 per share, resulting in net proceeds of $31.0 million after deducting
underwriters commissions and related expenses. Upon the closing of the IPO,
all outstanding shares of preferred stock, and accrued dividends thereon, were
converted into 11,936,438 shares of common stock. On July 8, 2004, the Company
received an additional $3.4 million in net proceeds in connection with the
underwriters exercise of their over-allotment option for the purchase of
527,000 shares at $7.00 per share. NOTE 3  BASIC AND DILUTED NET LOSS PER SHARE The Company calculates net loss per share in accordance with SFAS No. 128,
Earnings Per Share(SFAS No. 128) and SEC Staff Accounting Bulletin No. 98
(SAB No. 98). Under the provisions of SFAS No. 128 and SAB No. 98, basic net
loss per share is computed by dividing the net loss attributable to common
stockholders for the period by the weighted average number of common shares
outstanding for the period. Diluted net loss per share attributable to common
stockholders is computed by dividing the net loss attributable to common
stockholders by the weighted average number of common shares and dilutive
common stock equivalents then outstanding. Common stock equivalents consist of
common shares issuable upon the exercise of stock options and warrants.
Diluted earnings per share are the same as basic earnings per share since
common stock equivalents are excluded from the calculation, due to their effect
being anti-dilutive. The weighted average shares used in computing basic net income per share
attributable to common stockholders for the three months ended June 30, 2004
include 1,153,846 shares that represent the weighted average effect during the
quarter of the issuance of five million shares of common stock in connection
with the Companys IPO and 2,754,563 shares, which represent
the weighted average effect during the quarter of the issuance of 11,936,438
shares for the conversion of all preferred stock and accrued dividends thereon,
into common stock at the closing of the IPO. The weighted average shares used
in computing basic net loss per share attributable to common stockholders for
the six months ended June 30, 2004 include 576,923 shares that represent the
weighted average effect in those six months of the issuance of five million
shares of common stock in connection with the Companys IPO and 1,377,281 shares that represent the weighted average effect in those six
months of the issuance of 11,936,438 shares for the conversion of all preferred
stock and accrued dividends thereon, into common stock at the closing of the
IPO. At June 30, 2004, the Company had 17,782,536 shares of common stock
outstanding. 10




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INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS  (Continued) The following table sets forth the computation of historical and pro forma
basic and diluted net loss per share attributable to common stockholders: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Historical
    
    2004
    
    2003
    
    2004
    
    2003Numerator:Net loss
attributable to
common
stockholders
    
    $
    (8,033,918
    )
    
    $
    (7,754,512
    )
    
    $
    (14,456,824
    )
    
    $
    (13,950,070
    )Denominator:Common stock
outstanding at
beginning of
period
    
    
    667,098
    
    
    
    522,460
    
    
    
    536,014
    
    
    
    513,164Weighted average
effect of the
conversion of
preferred stock
and dividends to
common stock
    
    
    2,754,563
    
    
    
    
    
    
    
    1,377,281
    
    
    
    Weighted average
effect of the
issuance of
common stock in
initial public
offering
    
    
    1,153,846
    
    
    
    
    
    
    
    576,923
    
    
    
    Weighted average
effect of the
issuance of
common stock
pursuant to stock
option and
warrant exercises
    
    
    94,443
    
    
    
    2,212
    
    
    
    143,700
    
    
    
    8,478Weighted average
common shares
outstanding
    
    
    4,669,950
    
    
    
    524,672
    
    
    
    2,633,918
    
    
    
    521,642Basic and diluted
net loss per
share
attributable to
common
stockholders
    
    $
    (1.72
    )
    
    $
    (14.78
    )
    
    $
    (5.49
    )
    
    $
    (26.74
    )
 The following table outlines potentially dilutive common stock equivalents
outstanding that are not included in the above historical calculations as the
effect of their inclusion was anti-dilutive. June 30,2004
    
    2003Redeemable convertible preferred stock and dividends
    
    
    
    
    
    
    9,169,511Common stock options
    
    
    1,268,101
    
    
    
    1,318,899Warrants
    
    
    1,829,118
    
    
    
    1,857,040Convertible preferred stock
    
    
    
    
    
    
    90,758Total
    
    
    3,097,219
    
    
    
    12,436,208
 NOTE 4  STOCK SPLIT On May 21, 2004, the Company effected a 2.38-for-1 reverse stock split of its
common stock. All common stock share and per share amounts in these condensed
financial statements have been adjusted retroactively to reflect this stock
split. 11




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##### Table of Contents



INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS  (Continued) NOTE 5  2004 STOCK INCENTIVE PLAN In February 2002, the Board of Directors approved the 2002 Stock Incentive
Plan, which provides for the grant of incentive stock options, non-qualified
stock options and other equity related awards to employees, contractors and
consultants of the Company. At that time, the Company also adopted the 2002
Non-Employee Directors Stock Option Plan (the Director Plan) which provided
for the grant of non-qualified stock options to non-employee members of the
Board of Directors. On February 20, 2004, the Board of Directors amended the
2002 Stock Incentive Plan whereby it was renamed the 2004 Stock Incentive Plan,
(the 2004 Plan). Such amendment also provided for option grants to
non-employee directors and the addition of 1,428,572 shares of common stock to
the number of reserved shares. Upon the adoption of the 2004 Plan, no further
options were authorized to be granted from the Director Plan. As of June 30,
2004, there were outstanding options to purchase 1,007,060 shares of the
Companys common stock and 1,419,935 shares were available for grant under the
2004 Plan. In addition, there were outstanding options to purchase 194,237 and
66,804 shares of the Companys common stock under the Companys 1998 Equity
Ownership Plan, as amended and restated, and the Directors Plan. 12




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##### Table of Contents



ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. In some cases, you can
identify forward-looking statements by terms such as may, will, should,
could, would, expect, plan, intend, anticipate, believe,
estimate, project, predict, forecast, potential, likely or
possible, as well as the negative of such expressions, and similar
expressions intended to identify forward-looking statements. These
forward-looking statements include, without limitation, statements relating to:  w
    
    increases in our research and development expenses, general and
administrative expenses and operating losses in the future;w
    
    which product candidates we will advance and how much funding we will direct to them;w
    
    future revenue from collaborative research agreements;w
    
    the volatility of our quarterly and annual operating results;w
    
    the anticipated length of time to fully enroll our Phase III Veronate trial;w
    
    our plans to commercialize our product candidates, particularly Veronate;w
    
    the anticipated time frame to generate data from our Phase II Aurexis trial;w
    
    our future financing requirements and how we expect to fund them;w
    
    the number of months we anticipate that our current cash, cash
equivalents and short-term investments will allow us to operate; andw
    
    our ability to generate product-related revenue in the future. These statements reflect our current views with respect to future events and
are based on assumptions and subject to risks and uncertainties including,
without limitation, Wyeth terminating our license and collaborative research
agreement; our ability to contract with a sufficient number of clinical trial
sites to perform our clinical trials; the rate at which investigators at such
sites can recruit patients into our clinical trials; our clinical trials not
demonstrating safety and efficacy; our use of third-party contract clinical
research organizations, raw material suppliers and manufacturers who may not
perform satisfactorily in the future; failing to obtain regulatory approval to
continue our clinical trial or to market our product candidates; our ability to
protect and maintain our proprietary intellectual property rights from
unauthorized use by others; our successful development of a marketing, sales
and corporate infrastructure capable of supporting the commercialization of
Veronate; the condition of the financial equity markets and our ability to
raise sufficient funding in such markets; changes in related governmental laws
and regulations; changes in general economic business or competitive
conditions; and other statements contained elsewhere in this Quarterly Report
on Form 10-Q. Given these uncertainties, you should not place undue reliance
on these forward-looking statements, which apply only as of the date of this
Quarterly Report on Form 10-Q. In addition, our prospectus, which forms part
of our registration statement on Form S-1, which, as amended, was declared
effective by the Securities and Exchange Commission or SEC on June 3, 2004,
discusses many of these and other risks in greater detail under the heading
Risk Factors.. There may be events in the future that we are unable to predict accurately, or
over which we have no control. Our business, financial condition, results of
operations, and prospects may change. We may not 13




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update these forward-looking statements, even though our situation may change
in the future, unless we have obligations under the Federal securities laws to
update and disclose material developments related to previously disclosed
information. We qualify all of the information presented in this Form 10-Q,
and particularly our forward-looking statements, by these cautionary
statements. The following discussion should be read in conjunction with the condensed
financial statements and the notes thereto included in Item 1 of this Quarterly
Report on Form 10-Q. Overview We are a biopharmaceutical company committed to the discovery, development and
commercialization of novel antibody-based products for the prevention and
treatment of serious bacterial and fungal infections. We currently have two
product candidates in late-stage clinical development. Veronate, our lead
product candidate, is the subject of an ongoing 2,000-patient, pivotal Phase
III clinical trial that we initiated in May 2004. We are developing Veronate
for the prevention of hospital-associated infections in premature, very low
birth weight, or VLBW, infants. Veronate has been granted Fast Track and
Orphan Drug status by the U.S. Food and Drug Administration, or FDA. Our
second product candidate, Aurexis, is currently being evaluated in a Phase II
clinical trial as a first-line therapy to be used in combination with
antibiotics to treat serious, life-threatening Staphylococcus aureus,or S.
aureus,bloodstream infections in hospitalized patients. In addition, we have
three preclinical product candidates that are being developed to prevent and
treat serious infections, one of which is the subject of a partnership with
Wyeth. We are a development stage company that has generated significant losses since
our inception in May 1994. We expect to incur substantial and increasing
losses for at least the next several years as we plan to continue the clinical
development of Veronate and Aurexis, continue our other research and
development activities and establish a commercial infrastructure. We currently
do not have any commercialization capabilities, and it is possible that we may
never successfully commercialize any of our product candidates. To date, we have devoted substantially all of our efforts towards research and
development activities related to our product candidates, which are all based
on our expertise in MSCRAMM proteins. As of June 30, 2004, we had an
accumulated deficit of $88.7 million. We anticipate that, for the foreseeable
future, our quarterly and annual results of operations will fluctuate due to
several factors, including the pace of our research and development efforts,
the timing and outcome of regulatory approvals, if any, and payments made or
received pursuant to existing or future licensing or collaboration agreements.
Therefore, meaningful predictions of our future operations are difficult to
make. In 2001, we entered into a license and collaboration agreement with Wyeth to
develop human vaccines against staphylococcal organisms using our MSCRAMM
protein platform. Under the terms of the agreement, we granted Wyeth a
worldwide license to develop, manufacture and commercialize any products
resulting from the collaboration. Recent Developments On June 3, 2004, we completed an initial public offering, or IPO, of five
million shares of common stock at an initial offering price to the public of
$7.00 per share, resulting in net proceeds of $31.0 million after underwriters
commissions and offering expenses. Upon the closing of our IPO, all
outstanding shares of our preferred stock, and all accrued dividends thereon,
were converted into 11,936,438 shares of common stock. At June 30, 2004, we
had 17,782,636 shares of common stock outstanding. On July 8, 2004, we
received an additional $3.4 million in net proceeds in connection with the
underwriters exercise of their over-allotment option for the purchase of
527,000 shares at $7.00 per share. In May 2004, we
commenced the enrollment of patients in a pivotal Phase III
clinical trial for Veronate, our lead product candidate, for the prevention of
hospital-associated infections in very low birth weight, or VLBW, infants. The
trial is designed to include 2,000 VLBW infants that weigh between 500 and
1,250 grams at birth, who are randomized to receive either Veronate (750 mg/kg)
or placebo. The primary endpoint of this trial is to demonstrate efficacy in
the prevention of hospital-associated infections due to 14




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##### Table of Contents



Staphylococcus aureus. Secondary end-points include a reduction in the
frequency of hospital-associated infections due to Candidaspecies (fungus) and
Coagulase-negative staphylococci, and a reduction in the mortality rate among
these infants. As of July 31, 2004, we had initiated 45 sites that are
eligible to enroll patients, and had another 38 sites that were engaged in
various stages of the initiation process. We plan to conduct this trial at
between 70-100 sites in the United States and possibly Canada, and anticipate
that enrollment of the trial may be completed in approximately 18 months. We continue to initiate additional trial sites and enroll patients in a Phase
II clinical trial for Aurexis, our second product candidate. As of July 31,
2004, we had 15 trial sites eligible to enroll patients in this trial. Aurexis
is a humanized monoclonal antibody being developed as a first-line therapy, in
combination with standard of care antibiotics, for serious, life-threatening
Staphylococcus aureus, or S. aureusbloodstream infections in hospitalized
patients. The Phase II trial is a 60-patient, multi-center, double-blind,
placebo-controlled study. Patients are randomized to receive either standard
of care antibiotic therapy combined with either Aurexis or placebo. The Phase
II trial is designed to evaluate the preliminary efficacy, safety, and
pharmacokinetics of Aurexis. Results from this trial are expected during the
first half of 2005. In July 2004, we received a letter from the Data Safety
Monitoring Board, or DSMB, for Aurexis, indicating that the DSMB had unanimously
agreed that there were no reasons to discontinue the Phase II trial based on
the data reviewed and that the trial should proceed as scheduled. In May 2004, we licensed intellectual property to Xenotope Diagnostics, Inc.,
of San Antonio, TX, for the development of a point-of-care diagnostic test for
fungal infections. This represented the first license of our MSCRAMM protein
platform for a diagnostic application. The agreement provides for us to
receive a royalty on the sale of any diagnostic tests developed by Xenotope
that utilize the licensed intellectual property. Financial Operations Overview Revenue.Since our inception, we have not generated any revenue from the sale
of products and do not expect product-related revenues until we obtain
regulatory approval for and commercialize a product candidate. Currently, our
revenues generally represent the amortization of an up-front license fee,
quarterly research and development support payments received in connection with
a license and collaboration agreement with Wyeth and a grant received from the
FDAs Office of Orphan Products Development. Research and Development Expense.Research and development expense consists of
costs incurred in discovering, developing, testing and manufacturing our
product candidates. These expenses consist primarily of fees paid to
physicians and third-party service providers in conjunction with treating
patients enrolled in our clinical trials and monitoring, accumulating and
evaluating the related data; salaries and related expenses for personnel; the
cost of raw materials; contract manufacturing services; supplies used in
research and development activities; consulting, license and sponsored research
fees paid to third parties and facilities costs. In the near-term, we expect
our research and development expenses to increase as we expend greater
resources on the development of our two most advanced product candidates,
Veronate and Aurexis. Due to the progress and timing of these clinical trials,
such expenditures are likely to be uneven in future periods. Although we are
currently focused primarily on advancing Veronate through a pivotal Phase III
clinical trial and Aurexis through Phase II clinical trials, we will make
determinations as to which product candidates to advance and how much funding
to direct to each on an on-going basis in response to their respective
scientific and clinical needs or success. From inception through June 30,
2004, we have incurred approximately $62.6 million in research and development
expense, excluding the amortization of deferred stock compensation expense. General and Administrative Expense.General and administrative expense
consists primarily of salaries and other related costs for personnel in
executive, finance, accounting, information technology and human resource
functions. Other significant costs include professional fees for legal,
accounting, market research and other consulting services. We expect our
general and administrative expenses to increase in the future as we continue to
add personnel, comply with the reporting and regulatory obligations applicable
to publicly-held companies and plan for the commercialization of our product
candidates, particularly 15




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Veronate. From inception through June 30, 2004, we have incurred approximately
$13.8 million in general and administrative expenses, excluding the
amortization of deferred stock compensation. Deferred Stock Compensation. Deferred stock compensation for stock options
granted to employees has been determined as the difference between the deemed
fair value of our common stock for financial reporting purposes on the date
such options were granted and the applicable exercise price. Such amount is
recorded as a reduction of stockholders equity and is being amortized on the
straight-line basis over the related vesting period, which is generally four
years. At June 30, 2004, we had approximately $1.5 million of deferred stock
compensation still to be amortized over the remaining vesting periods of the
related stock options. Results of Operations Three Months Ended June 30, 2004 and 2003 Revenue.Revenue decreased to $163,000 for the three months ended June 30,
2004 from $225,000 for the comparable quarter in 2003. This decrease of
$63,000, or 28%, resulted from a reduction in quarterly collaborative research
and development support fees from Wyeth. The collaborative research and
development support fees from Wyeth are based on the number of our employees
that support the program, which during the second half of 2003, were reduced to
the minimum annual level. We do not expect this amount to decrease any further
in the future. Research and Development Expense.Research and development expense increased
to $6.1 million during the three months ended June 30, 2004 from $4.9 million
for the same period in 2003. This increase of $1.1 million, or 22%, resulted
primarily from increases in license fees, manufacturing-related costs, salaries
and benefits, clinical trial costs and legal fees associated with intellectual
property and patents of $351,000, $348,000, $210,000, $122,000 and $101,000,
respectively. License fees increased due to our in-licensing of additional
patent rights for one of our MSCRAMM targets and for a manufacturing-related
patent. Manufacturing-related costs increased primarily due to additional
purchases of the raw material used to manufacture Veronate. Clinical trial
costs increased primarily due to the ongoing Aurexis Phase II trial and upfront
costs related to the initiation of the Veronate Phase III clinical trial, which
began enrollment in May 2004. Salaries and benefits increased due to the
hiring of additional personnel and increased relocation costs. Legal fees
increased due to expenses associated with the prosecution and maintenance of
patents that had historically been paid by a third-party partner for which, as
of June 2004, we are responsible on an ongoing basis. The following table summarizes the components of our research and development
expenses for the three months ended June 30, 2004 and 2003: Three Months EndedJune 30,2004
    
    2003(in thousands)Clinical and manufacturing-related expenses
    
    $
    3,151
    
    
    $
    2,681Personnel related expenses
    
    
    1,335
    
    
    
    1,157License fees and other expenses
    
    
    1,186
    
    
    
    715Depreciation and facility related expenses
    
    
    390
    
    
    
    377Total research and development expense
    
    $
    6,062
    
    
    $
    4,930
 General and Administrative Expense.General and administrative expense
decreased to $819,000 for the three months ended June 30, 2004 from $1.5
million for the comparable quarter in 2003. This decrease of $662,000, or
44.1%, resulted primarily from a decrease in litigation-related legal fees of
approximately $728,000. 16




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##### Table of Contents



Amortization of Deferred Stock
Compensation.Amortization of deferred stock
compensation increased to $118,000 for the three months ended June 30, 2004
from $50,000 for the comparable quarter in 2003. This
increase of $68,000, or 135%, was primarily the result of amortization related
to the approximately $1.1 million of deferred stock compensation
that we recorded from July 2003 through May 2004, and to a much lesser extent, the full
quarter effect in 2004 of the amortization related to $655,000 of deferred
stock compensation that was recorded pursuant to stock options granted in April
and May of 2003. Of the amortization expense for the three months ended June
30, 2004, $62,000 related to general and administrative employees while $56,000
related to employees engaged in research and development expenses. Of the
amortization expense for the three months ended June 30, 2003, $26,000 related
to general and administrative employees while $24,000 related to employees
engaged in research and development. Dividends and Accretion to Redemption Value of Redeemable Preferred Stock.
Dividends on preferred stock and accretion to redemption value of redeemable
preferred stock decreased to $1.2 million for the three months ended June 30,
2004 from $1.5 million for the comparable quarter in 2003. The decrease of
$327,000, or 21.1%, resulted from the dividends and accretion to redemption
value only being recorded in the second quarter of 2004 through June 9, 2004,
the closing date of our IPO, whereas such dividends and accretion were recorded
for the entire second quarter of 2003. This decrease was offset in part by
additional accretion to redemption value that was recorded in the second
quarter of 2004 related to warrants issued in connection with our Series E
financing in December, 2003. Six Months Ended June 30, 2004 and 2003 Revenue.Revenue decreased to $325,000 for the six months ended June 30, 2004
from $450,000 for the comparable quarter in 2003. This decrease of $125,000,
or 27.8%, resulted from a reduction in quarterly collaborative research and
development support fees from Wyeth. The collaborative research and
development support fees from Wyeth are based on the number of our employees
that support the program, which during the second half of 2003, were reduced to
the minimum annual level. We do not expect this amount to decrease any further
in the future. Research and Development Expense.Research and development expense increased
to $10.1 million during the six months ended June 30, 2004 from $8.8 million
for the same period in 2003. This increase of $1.3 million, or 14.8%, resulted
primarily from increases in license fees, salaries and benefits,
manufacturing-related costs, and legal fees associated with intellectual
property and patents of $598,000, $329,000, $304,000 and $144,000,
respectively. License fees increased primarily due to our in-licensing of
additional patent rights for one of our MSCRAMM targets and for a
manufacturing-related patent. Salaries and benefits
increased due to an increase in personnel, salary increases and increased
relocation costs. Manufacturing-related costs increased primarily due to
additional purchases of the raw material used to manufacture Veronate. Legal
fees increased due to expenses associated with the prosecution and maintenance
of patents that had been historically been paid by a third-party partner for
which, as of June 2004, we are responsible on an ongoing basis. The following table summarizes the components of our research and development
expenses for the six months ended June 30, 2004 and 2003: Six Months EndedJune 30,2004
    
    2003(in thousands)Clinical and manufacturing related expenses
    
    $
    4,582
    
    
    $
    4,306Personnel related expenses
    
    
    2,615
    
    
    
    2,353License fees and other expenses
    
    
    2,156
    
    
    
    1,366Depreciation and facility related expenses
    
    
    747
    
    
    
    753Total research and development expense
    
    $
    10,100
    
    
    $
    8,778
 17




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##### Table of Contents



General and Administrative Expense.General and administrative expense
decreased to $1.7 million for the six months ended June 30, 2004 from $2.6
million for the same period in 2003. This decrease of $900,000, or 34.6%,
resulted primarily from a decrease in litigation-related legal fees of
approximately $1.0 million. This decrease in legal fees was offset, in part, by increases
in salaries and benefits of approximately $111,000, due to an increase in
personnel and increased salaries. Amortization of Deferred Stock Compensation.Amortization of deferred stock
compensation increased to $225,000 for the six months ended June 30, 2004 from
$58,000 for the same period in 2003. This increase of $167,000, or 288%, was
primarily the result of amortization related to the approximately $1.1 million
of deferred stock compensation that we recorded from July 2003 through
May 2004, and to a lesser extent, the full six month effect in 2004 of the
amortization related to the $801,000 of deferred stock compensation that was
recorded pursuant to stock options granted during the first six months of 2003.
Of the amortization expense for the six months ended June 30, 2004, $127,000
related to general and administrative employees while $98,000 related to
employees engaged in research and development. Of the amortization expense for
the six months ended June 30, 2003, $28,000 related to general and
administrative employees while $31,000 related to employees engaged in research
and development. Interest Income (Expense), net.Interest income (expense), net, decreased to
$13,000 for the six months ended June 30, 2004 from $82,000 for the same period
in 2003. This decrease of $69,000, or 84.1%, resulted primarily from an
increase in interest expense of $55,000, which was primarily the result of a
$2.5 million line of credit that we fully drew down in June 2003, and a decrease in
interest income of $14,000 due to lower average cash balances in 2004 as
compared to 2003. Dividends and Accretion to Redemption Value of Redeemable Preferred Stock.
Dividends on preferred stock and accretion to redemption value of redeemable
preferred stock decreased to $2.8 million for the six months ended June 30,
2004 from $3.1 million in the same period in 2003. This decrease of $274,000,
or 8.8%, resulted from dividends and the accretion to redemption value being
recorded in 2004 through June 9, 2004, the closing date of our IPO, whereas
such dividends and accretion were recorded for the entire six month period in
2003. This decrease was offset in part by additional accretion to redemption
value that was recorded in the first six months of 2004 related to warrants
issued in connection with our Series E financing in December, 2003. Liquidity and Capital Resources Liquidity Since our inception in May 1994 through June 30, 2004, we have funded our
operations primarily with $115.5 million raised from a series of five private
equity financings and net proceeds from our IPO. During
this time we have borrowed a total of $5.0 million under notes payable, a
credit facility with Silicon Valley Bank and capital leases and have received
approximately $5.6 million in license fees, collaborative research payments and
grants, of which $1.1 million is recorded as deferred revenue as of June 30,
2004. At June 30, 2004, cash, cash equivalents and short-term investments were $47.9
million and we held no investments with a maturity greater than 12 months. Our
cash, cash equivalents and short-term investments are generally held in a
variety of interest-bearing instruments, generally consisting of United States
government and agency securities, high-grade United States corporate bonds,
asset-backed securities, commercial paper and money market accounts. 18




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Cash Flows For the six months ended
June 30, 2004, cash, cash equivalents and short-term
investments increased by $19.8 million, from $28.1 million to $47.9 million.
This increase resulted primarily from the net proceeds we received in
connection with our IPO in June 2004, offset in part by
operating activities and other capital expenses. Net cash used in operating
activities was $11.6 million for the six months ended June 30, 2004, primarily
reflecting the net loss for this period of $11.6 million adjusted for non-cash
charges including depreciation and amortization of $398,000, and the
amortization of deferred stock compensation of $225,000. These non-cash
charges were mostly offset by an increase in prepaid expenses of $574,000
associated with the Phase III Veronate trial and our IPO.
The net loss was the result of funding the clinical trials associated with our
lead product candidates, research and development activities and ongoing
general and administrative expenses. We used approximately $11.7 million of
cash for investing activities during the six months ended June 30, 2004, which
consisted of purchases of property and equipment of $204,000 and net purchases
of short-term investments of $11.5 million. We received $31.7 million from
financing activities during the six months ended June 30, 2004, which consisted
primarily of $31.0 million in net proceeds from our IPO and to a lesser extent,
$1.5 million from a subscription receivable related to the issuance of
convertible preferred stock and warrants in connection with our Series E
financing, offset in part by the net repayment of capital lease obligations and
notes payable of $619,000. Funding Requirements Our future funding requirements are difficult to determine and will depend on a
number of factors, including the timing and costs involved in conducting
clinical trials and obtaining regulatory approvals for our product candidates;
the number of product candidates we advance into clinical development,
payments received or made under existing or future license or collaboration
agreements; our ability and the time and cost it takes for us to develop, if
ever, a corporate infrastructure to commercialize our products; the cost of
filing, prosecuting and enforcing patent and other intellectual property
claims; and the need to acquire licenses to or acquire new products or
compounds. We may also need additional funds for possible future strategic
acquisitions of businesses, products or technologies complementary to our
business, although none are currently anticipated. We believe that our existing cash, cash equivalents and short-term investments
of $47.9 million as of June 30, 2004 will enable us to operate for a period of
at least 14 months. We do not currently have any commitments for future
external funding nor do we anticipate that we will generate revenue from the
sale of any products for a number of years. Therefore, in order to meet our
anticipated liquidity needs beyond 14 months, we will need to raise additional
sources of capital. We expect to continue to fund our operations primarily
through the future sale of additional common stock or other equity securities
and to a lesser extent, strategic collaborations or debt financing. These
funds may not be available to us on acceptable terms, if at all, and our
failure to raise such funds could have a material adverse impact on our
business strategy, plans, financial condition and results of operations. If
adequate funds are not available to us in the future, we may be required to
delay, reduce the scope of, or eliminate one or more of our research and
development programs, delay or curtail our clinical trial or commercialization
efforts or obtain funds through collaborative arrangements that may require us
to relinquish rights to certain product candidates that we might otherwise
choose to develop or commercialize independently. Additional equity financings
may be dilutive to holders of our common stock and debt financing, if
available, may involve significant payment obligations and restrictive
covenants that restrict how we operate our business. Critical Accounting Policies and Estimates We believe the following critical accounting policies are important in
understanding our financial statements and operating results: Use of Estimates.The preparation of our financial statements in conformance
with generally accepted accounting principles in the United States requires us
to make estimates and judgments with respect to the 19




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selection and application of accounting policies that affect the reported
amounts of assets, liabilities, revenues and expenses, and the disclosures of
contingent assets and liabilities. We base our estimates on historical
experience and various other assumptions that we believe are reasonable under
the circumstances at the time, the results of which form the basis for making
judgments about the carrying values of certain assets and liabilities. Actual
future results may differ from these estimates under different assumptions or
conditions. Revenue Recognition.We recognize revenue primarily under licensing and other
collaborative research and development agreements as we perform services or
meet contractual obligations. Accordingly, up-front, non-refundable license
fees under agreements where we have an ongoing research and development
commitment are amortized, on a straight-line basis, over the term of our
ongoing obligations under the agreement. Revenues received for ongoing
research and development activities under collaborative arrangements are
recognized as the research and development activities are performed pursuant to
the terms of the related agreements. In the event we receive milestone
payments in the future, we will recognize such payments when all of the terms
of such milestone are achieved. Our revenue recognition policies are in
compliance with the Securities and Exchange Commissions, or SECs, Staff
Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial
Statements,SAB No. 104, Revenue Recognition,and Emerging Issues Task Force
No. 00-21, Revenue Arrangements with Multiple Deliverables. Accrued Expenses.The preparation of our financial statements requires us to
estimate expenses that we believe we have incurred, but for which we have not
yet received invoices from our vendors. This process involves identifying
services and activities that have been performed by third-party vendors on our
behalf and estimating the level to which they have been performed and the
associated cost incurred for such service as of each balance sheet date.
Examples of expenses for which we accrue based on estimates include fees for
services, such as those provided by certain clinical research and data
management organizations and investigators in conjunction with clinical trials
and fees owed to contract manufacturers in conjunction with the manufacture of
materials for our clinical trials. In order to estimate costs incurred to
date, but not yet invoiced, we analyze the progress of the clinical trial and
related activities, invoices received and budgeted costs when evaluating the
adequacy of the accrued liability for these related costs. We make these
estimates based upon the facts and circumstances known to us at the time and in
accordance with generally accepted accounting principles. Stock-Based Compensation.We have elected to follow Accounting Principles
Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees,and
related interpretations, in accounting for our stock-based compensation plans,
rather than the alternative fair value accounting method provided for under
Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for
Stock-Based Compensation.Accordingly, we have not recorded stock-based
compensation expense related to stock options issued to employees if the
exercise prices of the options are equal to or greater than the fair value of
the underlying common stock on the date of grant. In the notes to our
financial statements we provide pro forma disclosures in accordance with SFAS
No. 123 and related pronouncements. Prior to our initial public offering in June 2004, the determination of the
fair value of our common stock for purposes of stock option grants involved
significant judgment on our part because our shares were not publicly traded.
In determining the fair value of our common stock from time to time, our board
of directors considered the price at which we sold shares of convertible
preferred stock to investors, comparative values of public companies discounted
for the risk and limited liquidity provided for in the shares we have issued,
prior valuations of our common stock and the impact of events or milestones
that had occurred since. As a public company, the determination of the fair
market value of our common stock will be based upon the trading price of our
common stock. 2004 Financial Guidance Financial guidance involves a high level of uncertainty and is subject to
numerous assumptions and factors. These factors include, but are not limited
to, the variability, timing and costs associated with conducting clinical
trials and the enrollment rates in such trials, the results of these clinical
trials, the funding requirements of preclinical research programs, the cost of filing, prosecuting
and enforcing patents or other 20




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intellectual property rights, the level of
general and administrative expenses needed to develop a corporate
infrastructure to support our strategy and the potential that we may enter into
new licensing agreements or strategic collaborations in the future. We intend
to further update our financial guidance for 2004 when the financial results
for our third quarter are released, or upon the announcement of any events that
could materially change any prior guidance we may have provided. We currently
believe that our financial results for the year ending December 31, 2004 should
reflect the following:  
    
    Total revenue from existing collaboration agreements of
approximately $600,000 to $700,000;
    
    Total operating expenses, excluding the amortization of deferred
stock compensation, of $28 million to $30 million; and
    
    Cash, cash equivalents and short-term investments of approximately
$34 to $36 million at December 31, 2004. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary exposure to market risk relates to changes in interest rates on our
cash, cash equivalents, and short-term investments. The objective of our
investment activities is to preserve principal. To achieve this objective, we
invest in highly liquid and high-quality investment grade debt instruments of
financial institutions, corporations and United States government securities
with a weighted average maturity of no longer than 12 months. Due to the
relatively short-term nature of these investments, we believe that we are not
subject to any material market risk exposure, and as a result, the estimated
fair value of our cash, cash equivalents and short-term investments
approximates their principal amounts. If market interest rates were to
increase immediately and uniformly by 10% from levels at June 30, 2004, we
estimate that the fair value of our investment portfolio would decline by an
immaterial amount. We do not have any foreign currency or other derivative
financial instruments and we do not have significant interest rate risk
associated with our debt obligations. We generally have the ability to hold
our fixed income investments until maturity, and therefore we would not expect
our operating results or cash flows to be affected to any significant degree by
the effect of a change in market interest rates on our investments. 
 ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation under the supervision and with the participation
of our management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (Exchange Act), as of the end of the period
covered by this report. Based on that evaluation, the CEO and CFO have
concluded that our disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by us in our
periodic reports under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is accumulated and
communicated to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure. It should be noted that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and can therefore only provide
reasonable, not absolute, assurance that the design will succeed in achieving
its stated goals. In addition, there have been no 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, our internal control over
financial reporting. 21




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PART II
OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES During the three month period ended June 30, 2004, we issued and sold 171,641
shares of our common stock, $.001 par value per share (the Common Stock) that
were not registered under the Securities Act of 1933, as amended (the
Securities Act), to our employees upon the exercise of options for cash
consideration with an aggregate exercise price of $141,094. During the same
period, we granted options to purchase 79,152 shares of Common Stock at
exercise prices ranging from $7.03-$9.38 per share. No underwriters were
involved in the foregoing stock or option issuances. The issuance of these
securities was exempt from registration under the Securities Act in reliance on
Rule 701 promulgated under the Securities Act as transactions by an issuer
under compensatory benefit plans and contracts relating to compensation within
the parameters required by Rule 701. On June 9, 2004, we closed the sale of five million shares of Common Stock in
our initial public offering (the Offering), and subsequent to the end of the
quarter, on July 8, 2004, we closed the sale of an additional 527,000 shares of
our Common Stock pursuant to the exercise, by our underwriters, of their
over-allotment option. Post-effective Amendment No. 3 to our Registration
Statement on Form S-1 (Reg. No. 333-113243), which we filed to register our
Common Stock in the Offering, was declared effective by the Securities and
Exchange Commission on June 3, 2004. The Offering commenced as of June 3,
2004. The Offering did not terminate before any securities were sold. As of
the date of the filing of this report, the Offering has terminated and
5,527,000 shares out of 5,750,000 shares of Common Stock (including 750,000
shares solely to cover over-allotments) registered were sold at an offering
price of $7.00 per share. The managing underwriters in the Offering were
Thomas Weisel Partners LLC, Lazard Freres & Co., LLC and Harris Nesbitt Corp.
We registered shares of our Common Stock in the Offering under the Securities
Act. The aggregate purchase price of the Offering amount registered was $40,250,000.
The gross Offering proceeds we received, including the over-allotment, were
$38.7 million. We incurred expenses in connection with the offering of $4.3
million, which consisted of direct payments of: (i) $1.4 million in legal,
accounting and printing fees; (ii) $2.7 million in underwriters discounts,
fees and commissions; and (iii) $214,000 in filing fees and other miscellaneous
expenses. No payments for such expenses were made directly or indirectly to
(i) any of our directors, officers or their associates, (ii) any person(s)
owning 10% or more of any class of our equity securities or (iii) any of our
affiliates. The net Offering proceeds to us, after deducting total expenses,
were $34.4 million. The net Offering proceeds have been invested into
short-term investment-grade securities. Since the Offering, we have used, and intend to continue to use, the proceeds
from the Offering as outlined in our final prospectus. This use of proceeds
primarily includes costs associated with conducting ongoing clinical trials for
our lead product candidates, Veronate and Aurexis; to further develop our
existing preclinical product candidates; to expand our research and development
capabilities; for capital expenditures and for general corporate purposes. The
amount and timing of our expenditures will depend upon a number of factors,
including the rate of enrollment in and status of our clinical trials, the
advancement of our preclinical product candidates and the timing and extent of
hiring new employees. We retain broad discretion as to the ultimate allocation
and use of proceeds of the Offering, and may change our intended use at any
time. 22




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In May 2004, we sent a written consent to our stockholders requesting the
taking of the following actions in connection with the initial public offering
of our common stock: (i) the approval and adoption of an amendment to our
Seventh Amended and Restated Certificate of Incorporation to change the
definition of Qualified Public Offering and (ii) the approval and adoption of
a Second Amendment to our Fourth Amended and Restated Master Rights Agreement
to change the definition of Initial Public Offering. Such action was
effected pursuant to a written consent of our stockholders obtained on May 27,
2004 in compliance with Section 228 of the Delaware General Corporation Law.
On an as-converted basis, a total of 9,785,554 shares of our stock out of
12,822,222 shares issued and outstanding, including 9,182,898 shares out of
11,983,498 shares of our Series A, Series B, Series C, Series D and Series E
preferred stock issued and outstanding, voted in favor of the matter described
in clause (i) above. On an as-converted basis a total of 9,694,798 shares of
our stock out of 12,731,465 shares issued and outstanding, including 9,092,142
shares out of 11,892,742 shares of our Series B, Series C, Series D and Series
E preferred stock issued and outstanding, voted in favor of the matter
described in clause (ii) above. ITEM 5. OTHER INFORMATION None 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following is a list of exhibits filed as part of this Report: Exhibit No.
    
    Description10.1
    
    Second Amendment to Fourth Amended and Restated Master Rights Agreement dated May 27, 200431.1
    
    Section 302 Certification of the Chief Executive Officer31.2
    
    Section 302 Certification of the Chief Financial Officer32.1
    
    Section 906 Certifications of the Chief Executive Officer and the Chief Financial Officer
 (b) Reports on Form 8-K. None. 23




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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. Date:
August 16, 2004
       INHIBITEX, INC/s/ Russell H. PlumbRussell H. PlumbVice President, Finance and Administration,
Chief Financial Officer  24




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EXHIBIT INDEX Exhibit No.
    
    Description10.1
    
    Second Amendment to Fourth Amended and Restated Master Rights
Agreement dated May 27, 200431.1
    
    Section 302 Certification of the Chief Executive Officer31.2
    
    Section 302 Certification of
the Chief Financial Officer and32.1
    
    Section 906 Certifications of
the Chief Executive Officer and the Chief Financial Officer
 25