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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 September 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 [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [  ] No [X] As of October 31, 2004, 18,314,579 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 September 30, 2004 and December 31, 2003
    
    
    4Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2004
and 2003 and for the Period from Inception (May 13, 1994) through September 30, 2004
    
    
    5Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
and for the Period from Inception (May 13, 1994) through September 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
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    24Item 6. Exhibits and Reports on Form 8-K
    
    
    24Signatures
    
    
    25Exhibit IndexExhibit 31.1 Section 302 Certification of the Chief Executive OfficerExhibit 31.2 Section 302 Certification of the Chief Financial OfficerExhibit 32.1 Section 1350 Certifications of the Chief Executive Officer and the Chief Financial OfficerEX-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
 3




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PART I
FINANCIAL INFORMATION INHIBITEX, INC. (A DEVELOPMENT STAGE COMPANY)
 
 CONDENSED BALANCE SHEETS

(unaudited)
 September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,537,986
    
    
    $
    26,649,150Short-term investments
    
    
    20,702,120
    
    
    
    1,498,980Prepaid expenses and other current assets
    
    
    776,207
    
    
    
    569,667Accounts receivable
    
    
    20,453
    
    
    
    308,924Total current assets
    
    
    46,036,766
    
    
    
    29,026,721Property and equipment, net
    
    
    1,699,710
    
    
    
    1,635,544Total assets
    
    $
    47,736,476
    
    
    $
    30,662,265LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    966,350
    
    
    $
    1,385,972Accrued expenses
    
    
    1,580,693
    
    
    
    1,700,539Current portion of notes payable
    
    
    876,479
    
    
    
    889,523Current portion of capital lease obligations
    
    
    347,814
    
    
    
    330,408Current portion of deferred revenue
    
    
    191,667
    
    
    
    191,667Other current liabilities
    
    
    1,000,000
    
    
    
    1,000,000Total current liabilities
    
    
    4,963,003
    
    
    
    5,498,109Long-term liabilities:Notes payable, net of current portion
    
    
    705,710
    
    
    
    1,363,351Capital lease obligations, net of current portion
    
    
    388,991
    
    
    
    431,853Deferred revenue, net of current portion
    
    
    874,998
    
    
    
    987,498Total long-term liabilities
    
    
    1,969,699
    
    
    
    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 September 30, 2004; none
issued and outstanding
    
    
    
    
    
    
    Common stock, $.001 par value; 75,000,000 and
43,100,000 shares authorized at September 30,
2004 and December 31, 2003, respectively;
18,314,579 and 536,066 shares issued and
outstanding at September 30, 2004 and December
31, 2003, respectively
    
    
    18,315
    
    
    
    536Common stock warrants
    
    
    6,113,749
    
    
    
    Additional paid-in capital
    
    
    130,812,197
    
    
    
    1,797,798Deferred stock compensation
    
    
    (1,393,288
    )
    
    
    (804,310
    )Deficit accumulated during the development stage
    
    
    (94,747,199
    )
    
    
    (74,220,495
    )Total stockholders equity (deficit)
    
    
    40,803,774
    
    
    
    (73,226,255
    )Total liabilities, redeemable convertible
preferred stock and warrants and
stockholders equity (deficit)
    
    $
    47,736,476
    
    
    $
    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
    
    Nine Months Ended
    
    InceptionSeptember 30,
    
    September 30,
    
    (May 13, 1994)Through2004
    
    2003
    
    2004
    
    2003
    
    September 30, 2004Revenue:License fees and milestones
    
    $
    37,500
    
    
    $
    37,500
    
    
    $
    112,500
    
    
    $
    112,500
    
    
    $
    975,000Collaborative research and
development
    
    
    125,000
    
    
    
    145,833
    
    
    
    375,000
    
    
    
    520,833
    
    
    
    2,374,455Grant revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Total revenue
    
    
    162,500
    
    
    
    183,333
    
    
    
    487,500
    
    
    
    633,333
    
    
    
    3,649,455Operating expense:Research and development
    
    
    5,202,291
    
    
    
    5,134,301
    
    
    
    15,302,048
    
    
    
    13,912,767
    
    
    
    67,841,039General and administrative
    
    
    1,063,897
    
    
    
    1,047,227
    
    
    
    2,725,346
    
    
    
    3,612,689
    
    
    
    14,907,122Amortization of deferred
stock compensation
    
    
    124,188
    
    
    
    57,108
    
    
    
    349,101
    
    
    
    115,357
    
    
    
    525,336Total operating expense
    
    
    6,390,376
    
    
    
    6,238,636
    
    
    
    18,376,495
    
    
    
    17,640,813
    
    
    
    83,273,497Loss from operations
    
    
    (6,227,876
    )
    
    
    (6,055,303
    )
    
    
    (17,888,995
    )
    
    
    (17,007,480
    )
    
    
    (79,624,042
    )Other income, net
    
    
    24,118
    
    
    
    8,395
    
    
    
    38,169
    
    
    
    25,302
    
    
    
    637,527Interest income (expense), net
    
    
    133,878
    
    
    
    (7,452
    )
    
    
    147,282
    
    
    
    74,594
    
    
    
    621,379Net loss
    
    
    (6,069,880
    )
    
    
    (6,054,360
    )
    
    
    (17,703,544
    )
    
    
    (16,907,584
    )
    
    
    (78,365,136
    )Dividends and accretion to
redemption value of redeemable
preferred stock
    
    
    
    
    
    
    (1,548,423
    )
    
    
    (2,823,160
    )
    
    
    (4,645,268
    )
    
    
    (16,382,063
    )Net loss attributable to
common stockholders
    
    $
    (6,069,880
    )
    
    $
    (7,602,783
    )
    
    $
    (20,526,704
    )
    
    $
    (21,552,852
    )
    
    $
    (94,747,199
    )Basic and diluted net loss
attributable to common
stockholders per
share
    
    $
    (0.33
    )
    
    $
    (14.35
    )
    
    $
    (2.60
    )
    
    $
    (41.10
    )Weighted average shares used
to compute basic and diluted
net loss attributable to
common stockholders per share
    
    
    18,268,314
    
    
    
    529,921
    
    
    
    7,883,424
    
    
    
    524,432
 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 fromInceptionNine Months Ended
    
    (May 13, 1994)September 30,
    
    throughSeptember 30,2004
    
    2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (17,703,544
    )
    
    $
    (16,907,584
    )
    
    $
    (78,365,136
    )Adjustments to reconcile net loss to
net cash used in operating activities:Depreciation and amortization
    
    
    604,016
    
    
    
    583,619
    
    
    
    3,248,772Amortization of deferred stock compensation
    
    
    349,101
    
    
    
    115,357
    
    
    
    525,336Loss on sale of equipment
    
    
    
    
    
    
    
    
    
    
    48,134Amortization of investment premium
    
    
    105,345
    
    
    
    42,365
    
    
    
    150,594Forgiveness 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
    
    
    (206,540
    )
    
    
    50,299
    
    
    
    (776,207
    )Accounts receivable
    
    
    288,471
    
    
    
    26,279
    
    
    
    (20,453
    )Accounts payable and other current liabilities
    
    
    (419,622
    )
    
    
    282,605
    
    
    
    1,966,350Accrued expenses
    
    
    (119,846
    )
    
    
    (16,228
    )
    
    
    1,580,693Deferred revenue
    
    
    (112,500
    )
    
    
    (133,331
    )
    
    
    1,066,665Net cash used in operating activities
    
    
    (17,159,124
    )
    
    
    (15,956,619
    )
    
    
    (70,143,694
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (427,418
    )
    
    
    (194,222
    )
    
    
    (3,038,777
    )Purchases of short-term investments
    
    
    (27,920,374
    )
    
    
    (14,056,323
    )
    
    
    (44,471,783
    )Proceeds from maturities of short-term investments
    
    
    8,600,000
    
    
    
    11,257,180
    
    
    
    23,607,180Net cash used in investing activities
    
    
    (19,747,792
    )
    
    
    (2,993,365
    )
    
    
    (23,903,380
    )Cash flows from financing activities:Proceeds from promissory notes and related warrants
    
    
    
    
    
    
    2,500,000
    
    
    
    3,013,492Payments on promissory notes and capital leases
    
    
    (936,905
    )
    
    
    (392,233
    )
    
    
    (2,652,337
    )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
    
    
    34,214,660
    
    
    
    15,134
    
    
    
    34,379,586Net cash provided by financing activities
    
    
    34,795,752
    
    
    
    2,122,901
    
    
    
    118,585,060Increase (decrease) in cash and cash equivalents
    
    
    (2,111,164
    )
    
    
    (16,827,083
    )
    
    
    24,537,986Cash and cash equivalents at beginning of period
    
    
    26,649,150
    
    
    
    28,658,078
    
    
    
    Cash and cash equivalents at end of period
    
    $
    24,537,986
    
    
    $
    11,830,995
    
    
    $
    24,537,986Supplemental cash flow information:Interest paid
    
    $
    157,265
    
    
    $
    104,881
    
    
    $
    740,442Supplemental non-cash investing and financing activities:Fixed assets capitalized using promissory notes and capital leases
    
    
    240,764
    
    
    
    320,137
    
    
    
    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
    
    
    
    4,645,268
    
    
    
    16,382,063Unrealized loss on short-term investments
    
    
    11,889
    
    
    
    218
    
    
    
    11,592
 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. The Companys primary activities since incorporation have been
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, 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. This trial began in
February 2004. The Company intends to continue to finance its operations with equity or other
financings or proceeds from potential future collaborations or 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 any 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, which 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 nine month
periods ended September 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, testing and
manufacturing of the Companys product candidates. These expenses consist
principally of: payments to third-party service providers that monitor and
accumulate data related to the Companys clinical trials: fees paid to treat
patients enrolled in the Companys clinical trials; the costs to develop,
procure and manufacture materials used in clinical trials; salaries and related
expenses for personnel performing research and development activities; and
costs related to obtaining patents and license and research agreements. 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 Statement of Financial Accounting Standards,
or (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 8




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INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued) 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. 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss
attributable to
common
stockholders, as
reported
    
    $
    (6,069,880
    )
    
    $
    (7,602,783
    )
    
    $
    (20,526,704
    )
    
    $
    (21,552,852
    )Add: Amortization
of deferred stock
compensation
expense included in
net loss, as
reported
    
    
    124,188
    
    
    
    57,108
    
    
    
    349,101
    
    
    
    115,357Deduct: Stock-based
compensation
expense determined
under fair value
method
    
    
    (283,747
    )
    
    
    (130,766
    )
    
    
    (767,648
    )
    
    
    (270,261
    )Pro forma net loss
attributable to
common stockholders
    
    $
    (6,229,439
    )
    
    $
    (7,676,441
    )
    
    $
    (20,945,251
    )
    
    $
    (21,707,756
    )Net loss
attributable to
common stockholders
per share (basic
and diluted):As reported
    
    $
    (0.33
    )
    
    $
    (14.35
    )
    
    $
    (2.60
    )
    
    $
    (41.10
    )Pro forma
    
    $
    (0.34
    )
    
    $
    (14.49
    )
    
    $
    (2.66
    )
    
    $
    (41.39
    )
 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 initial
public offering with the following weighted average assumptions: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    3.51
    %
    
    
    3.37
    %
    
    
    3.23
    %
    
    
    3.05
    %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
    
    $
    2.23
    
    
    $
    2.07
    
    
    $
    2.06
    
    
    $
    1.51
 For purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the related vesting period. 9




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INHIBITEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS  (Continued Recent Accounting
Developments- On March 31, 2004, the FASB issued its
Exposure Draft, Share-Based Payment,
which is a proposed amendment to SFAS No.123, Accounting for Stock-Based
Compensation. The amendment would require all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. On October 13, 2004, the FASB decided that the final
amendment would be effective for public companies for any interim or annual
period beginning after June 15, 2005. 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 initial public offering (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.
Dilutive 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 loss per share
attributable to common stockholders for the three months ended September 30,
2004 include 481,174 shares that represent the weighted average effect during
the quarter of the issuance of 527,000 shares of common stock on July 8, 2004
in connection with the underwriters exercise of the over-allotment option.
The weighted average shares used in computing basic net loss per share
attributable to common stockholders for the nine months ended September 30,
2004 include 2,062,044 shares that represent the weighted average effect in
those nine months of the issuance of five million shares of common stock in
connection with the Companys IPO on June 3, 2004, and 161,562 shares that
represent the weighted average effect of common stock on July 8, 2004 in
connection with the underwriters exercise of the over-allotment option and
4,922,692 shares that represent the weighted average effect in those nine 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
September 30, 2004, the Company had 18,314,579 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 attributable to common stockholders per share: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003HistoricalNumerator:Net loss
attributable to
common
stockholders
    
    $
    (6,069,880
    )
    
    $
    (7,602,783
    )
    
    $
    (20,526,704
    )
    
    $
    (21,552,852
    )Denominator:Common stock
outstanding at
beginning of
period
    
    
    17,782,536
    
    
    
    528,081
    
    
    
    536,066
    
    
    
    513,198Weighted average
effect of the
conversion of
preferred stock
and dividends to
common stock
    
    
    
    
    
    
    
    
    
    
    4,922,692
    
    
    
    Weighted average
effect of the
issuance of
common stock in
initial public
offering
    
    
    
    
    
    
    
    
    
    
    2,062,044
    
    
    
    Weighted average
effect of the
issuance of
common stock
related to
underwriters
exercise of the
over-allotment
    
    
    481,174
    
    
    
    
    
    
    
    161,562
    
    
    
    Weighted average
effect of the
issuance of
common stock
pursuant to stock
option and
warrant exercises
    
    
    4,604
    
    
    
    1,840
    
    
    
    201,060
    
    
    
    11,234Weighted average
common shares
outstanding
    
    
    18,268,314
    
    
    
    529,921
    
    
    
    7,883,424
    
    
    
    524,432Basic and diluted
net loss per
share
attributable to
common
stockholders
    
    $
    (0.33
    )
    
    $
    (14.35
    )
    
    $
    (2.60
    )
    
    $
    (41.10
    )
 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. September 30,2004
    
    2003Redeemable convertible preferred stock and dividends
    
    
    
    
    
    
    9,313,517Common stock options
    
    
    1,260,476
    
    
    
    1,345,663Warrants
    
    
    1,850,127
    
    
    
    1,311,321Convertible preferred stock
    
    
    
    
    
    
    90,758Total
    
    
    3,110,603
    
    
    
    12,061,259
 11




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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. NOTE 5SUBSEQUENT EVENTS On November 10, 2004, the Company completed a private placement financing in
which it raised approximately $50 million through the sale, at a price of
$7.3775 per share, of 6,777,370 shares of its common stock and warrants to
purchase 2,033,211 shares of its common stock. The warrants, which become
exercisable on May 9, 2005 and expire November 10, 2009, have an exercise price
of $8.81 per share. The shares and warrants were offered and sold only to
institutional and accredited investors. The Company has agreed to file a
registration statement with the SEC in order to register the sale and resale of
the common stock issued in this private placement and issuable upon the
exercise of the related warrants. 12




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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:  
    
    increases in our research and development expenses, general and
administrative expenses and operating losses in the future;
    
    which product candidates we will advance and how much funding we will direct to them;
    
    future revenue from collaborative research agreements;
    
    our ability to generate product-related revenue in the future;
    
    the potential volatility of our quarterly and annual operating results;
    
    the potential to discover, develop or commercialize any product
candidates resulting from our collaboration with Dyax;
    
    the number of sites we intend to utilize in our ongoing clinical trials;
    
    the anticipated length of time to fully enroll our Phase III Veronate trial;
    
    our plans to commercialize our product candidates, particularly Veronate;
    
    the anticipated time frame to generate data from our Phase II Aurexis trial;
    
    our future financing requirements and how we expect to fund them;
    
    the number of months we anticipate that our current cash, cash
equivalents and short-term investments will allow us to operate;
    
    our anticipated financial results for the year ended December 31,
2004; and
    
    our intended use of the net proceeds from our initial public
offering, the exercise of the related over-allotment option and our
recently completed private placement. 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 appropriate safety and efficacy for our product candidates; our
use of third-party contract clinical research organizations, raw material
suppliers and manufacturers, who may not fulfill their contractual obligations
or otherwise perform satisfactorily in the future; maintaining sufficient
quantities of clinical trial material to complete our clinical trials; our
failure to obtain regulatory 13




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##### Table of Contents



approval to continue our clinical trials 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; that no viable product candidates result from
the collaboration with Dyax or product candidates from this collaboration do
not demonstrate any therapeutic benefit or an acceptable safety profile in
clinical trials; our collaborators do not fulfill their obligations under the
agreement in the future; the condition of the financial equity markets and our
ability to raise sufficient funding in such markets; our ability to manage our
current cash reserves to our operating plans; changes in related governmental
laws and regulations; and changes in general economic business or competitive
conditions; and other statements contained elsewhere in this Quarterly Report
on Form 10-Q and risk factors described in or referred to in greater detail in
the Risk Factors section of 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. 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. 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 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, 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 designation 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 60-patient
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 September 2004,
Aurexis was also granted Fast Track designation by the FDA. In addition to
Veronate and Aurexis, we have three preclinical product candidates under
development for the prevention and treatment of serious infections. One of our
preclinical programs is the subject of a collaboration and joint-development
agreement with Dyax to discover, develop and commercialize fully human
monoclonal antibodies against MSCRAMM proteins on enterococci and another is
the subject of a license and collaboration agreement with Wyeth to develop
human vaccines against staphylococcal organisms. Under the terms of the
agreement, we granted Wyeth a worldwide license to develop, manufacture and
commercialize any products resulting from the collaboration. We are a development stage company that has generated significant losses since
our inception in May 1994. 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
September 30, 2004, we had an accumulated deficit of $94.7 million. We expect
to continue 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. 14




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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. 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. 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.
At September 30, 2004, we had approximately 18.3 million shares of common stock
outstanding. On November 10, 2004 we completed a private placement financing in which we
raised approximately $50 million through the sale, at a price of $7.3775 per
share, of 6,777,370 shares of our common stock and warrants to purchase
2,033,211 shares of its common stock. The warrants, which become exercisable
on May 9, 2005 and expire November 10, 2009, have an exercise price of $8.81
per share. The shares and warrants were offered and sold only to institutional
and accredited investors. We have agreed to file a registration statement with
the SEC covering the resale of the common stock issued in this private
placement and issuable upon the exercise of the related warrants. In May 2004, we commenced enrolling patients in a Phase III clinical trial for
Veronate, our lead product candidate. As of October 31, 2004, we had initiated
66 sites that are qualified to enroll patients in this trial. In September
2004, we received approval from Health Canada to conduct this Phase III trial
at sites within Canada. We plan to ultimately conduct this trial at between
80-100 sites in the United States, Canada and possibly Europe, and anticipate
that the enrollment of this trial should be completed near the end of 2005. In
October, at the 11th annual International Symposium on Staphylococci and
Staphylococcal Infections (ISSSI) held in Charleston, South Carolina, we
presented the full data and additional analyses from our 512-patient Phase II
trial for Veronate, which was completed earlier this year. We continued to enroll patients in a Phase II clinical trial for Aurexis, our
second product candidate. We have enrolled 55 patients in this trial as of
this filing. We anticipate full enrollment will be completed near the end of
this year and results from this trial are expected to be available early in the
second quarter of 2005. In September, Aurexis was granted Fast Track
designation by the FDA. In October, after we had enrolled 40 patients in the
Phase II trial, the Data Safety Monitoring Board (DSMB) met to review
available data and based upon their review, notified us that it had unanimously
agreed the trial should proceed as designed. In October, at the 44th annual
Interscience Conference on Antimicrobial Agents and Chemotherapy (ICCAC) held
in Washington, DC, we presented an update on our Aurexis clinical program,
including both a poster and oral presentation of the results from our
pre-clinical studies and our Phase I clinical trial. We expect to commence an
8-patient Phase I clinical trial of Aurexis in patients with end-stage renal
disease (ESRD) this November. In October, we entered into an agreement with Dyax Corp. to collaborate on the
discovery, development, and commercialization of fully human monoclonal
antibodies against MSCRAMM proteins on enterococci. Under the terms of the
agreement, we and Dyax will jointly develop product candidates that may be
identified during the collaboration and will share in the costs to develop any
resulting product candidates and the commercialization rights and profits from
any marketed products. In July, we reached a settlement with Auxeris Therapeutics, Inc. whereby it
agreed, no later than November 30, 2004, to cease using the word Auxeris in any
trademark or service mark, any company, trade or domain name or in any product
name, advertisements, promotional or any collateral materials worldwide. In
December 2003 we had filed a Notice of Opposition before the Unites States
Patent and Trademark Office opposing the applications of Auxeris Therapeutics,
Inc. to register Auxeris as a trademark. 15




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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, if ever.
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. In 2003, the
Company received a grant from the FDAs Office of Orphan Drug Development,
which was not renewed in 2004. 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 treat
patients enrolled in our clinical trials; fees paid to third-party service
providers for monitoring, accumulating and evaluating the related clinical
trial data; salaries and related expenses for personnel; the cost of raw
materials contract manufacturing services and supplies used in research and
development activities; consulting, license and sponsored research fees paid to
third parties; and facilities costs. In the near-term, particularly during the
last quarter of 2004 and through the end of 2005, 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.
However, largely due to uneven rates of enrollment in the clinical trials for
these product candidates, expenditures are likely to fluctuate in these
periods. Although we are currently focused primarily on advancing Veronate
through a 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 ongoing basis in response to their
respective scientific and clinical needs or success. From inception through
September 30, 2004, we have incurred approximately $67.8 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 personnel-related costs for 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 Veronate. From inception through September 30, 2004,
we have incurred approximately $14.9 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 September 30, 2004, we had approximately $1.4 million of deferred
stock compensation that will be amortized over the remaining vesting periods of
the related stock options. Results of Operations Three Months Ended September 30, 2004 and 2003 Revenue.Revenue decreased to $163,000 for the three months ended September
30, 2004 from $183,000 for the comparable quarter in 2003. This decrease of
$21,000, or 11%, 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. 16




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##### Table of Contents



Research and Development Expense.Research and development expense increased
to $5.2 million during the three months ended September 30, 2004 from $5.1
million for the same period in 2003. This increase of $68,000 or 1%, resulted
primarily from increases of $395,000, $154,000 and $84,000 in clinical trial
costs, salary and other personnel-related expenses and legal fees associated
with intellectual property and patents, respectively, offset largely by
decreases in license fees and facility-related expenses of $491,000, and
$64,000, respectively. Clinical trial costs increased due to the ongoing
expenses associated with the Aurexis Phase II trial and the Veronate Phase III
clinical trial. Salaries and other personnel-related expenses increased due to
the hiring of additional personnel needed to support the Aurexis Phase II trial
and the Veronate Phase III trial, as well as increased salaries. Legal fees
associated with intellectual property and patents increased due to expenses
associated with the prosecution and maintenance of patents that had been
historically paid by a third-party partner for which, as of June 2004, we are
responsible for on an ongoing basis. The decrease in license fees was the
result of no significant license fees being paid in the third quarter of 2004,
whereas in the same period in 2003, a $500,000 payment was made related to the
licensing of a manufacturing-related patent. The reduction in facility-related
expenses was largely due to project management fees being expensed in 2003
related to planning for our new facility that were capitalized in 2004. The following table summarizes the components of our research and development
expense for the three months ended September 30, 2004 and 2003. Three Months EndedSeptember 30,2004
    
    2003(in thousands)Clinical and manufacturing-related expense
    
    $
    2,763
    
    
    $
    2,402Personnel related expense
    
    
    1,324
    
    
    
    1,170License fees and other expense
    
    
    748
    
    
    
    1,160Depreciation and facility-related expense
    
    
    367
    
    
    
    402Total research and development expense
    
    $
    5,202
    
    
    $
    5,134
 General and Administrative Expense.General and administrative expense
increased to $1.1 million for the three months ended September 30, 2004 from
$1.0 million for the comparable quarter in 2003. The increase of $17,000, or
2%, was primarily the result of an increase in directors fees, salaries and
other personnel-related costs, directors and officers insurance premiums and
other professional fees of $65,000, $56,000, $51,000 and $45,000, respectively,
which was largely offset by a decrease in litigation-related legal fees of
approximately $206,000. Directors fees increased due to our adoption of
retainers for all non-officer directors subsequent to our IPO in June 2004.
Salaries and other personnel related costs increased largely due to salary
increases. Our directors and officers insurance premiums and professional fees
also increased due to our IPO in June 2004. Amortization of Deferred Stock Compensation.Amortization of deferred stock
compensation increased to $124,000 for the three months ended September 30,
2004 from $57,000 for the comparable quarter in 2003. This increase of
$67,000, or 118%, was primarily the result of amortization related to
approximately $948,000 of deferred stock compensation recorded from October
2003 through May 2004 and to a lesser extent, the full quarter effect in the
third quarter of 2004 of amortization related to $170,000 of deferred stock
compensation recorded during the third quarter of 2003. Of the amortization
expense for the three months ended September 30, 2004, $66,000 related to
employees in general and administrative positions while $58,000 related to
employees engaged in research and development activities. Of the amortization
expense for the three months ended September 30, 2003, $32,000 related to
employees in general and administrative positions while $25,000 related to
employees engaged in research and development activities. Interest Income (Expense), net.Interest income (expense), net, increased to
income of $134,000 for the three months ended September 30, 2004 from an
expense of $7,000 for the comparable quarter in 2003. 17




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This increase was the result of an increase in interest income of $141,000,
which was principally due to higher average cash balances and to a lesser
extent, higher interest rates, in the third quarter of 2004 as compared to the
same quarter in 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 zero for the three months ended September 30, 2004
from $1.5 million for the comparable quarter in 2003. The decrease was due to
the elimination of $1.5 million in related charges associated with redeemable
preferred stock that was converted into common stock upon completion of our
initial public offering in June 2004. No dividends or accretion to redemption
value were recorded after that date. Dividends and accretion to redemption
value were recorded for the entire second quarter of 2003, during which the
related redeemable preferred stock was outstanding. Nine Months Ended September 30, 2004 and 2003 Revenue.Revenue decreased to $488,000 for the nine months ended September
June 30, 2004 from $633,000 for the same nine month period in 2003. This
decrease of $146,000, or 23%, resulted from a reduction in collaborative
research and development support fees from Wyeth. The collaborative research
and development support fees we receive from Wyeth are based on the number of
our employees that support the related 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 $15.3 million during the nine months ended September 30, 2004 from $13.9
million for the same period in 2003. This increase of $1.4 million, or 10%,
resulted primarily from increases in salaries and other personnel-related
expenses, clinical trial costs, manufacturing-related costs, legal fees
associated with intellectual property and patents, depreciation expense and
license fees of $415,000, $367,000, $244,000, $214,000, $103,000 and $90,000,
respectively, offset in part by a decrease in facility-related expenses of
$144,000. Salaries and other personnel-related expenses increased due to the
hiring of additional personnel required to support our two ongoing clinical
trials, increased salaries and relocation expenses. Clinical trial costs
increased largely due to the expenses associated with the Aurexis Phase II
trial, which was not ongoing in 2003. Manufacturing-related costs increased
primarily due to $660,000 of additional purchases of the raw material and
manufacturing expenses related to Veronate, offset in part by a reduction of
$416,000 related to the manufacturing of Aurexis. Legal fees associated with
intellectual property and patents increased due to expenses associated with
obtaining additional patents and 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 for on an ongoing basis. Depreciation expense
increased as a result of internally developed software that we began amortizing
in August 2003. License fees increased primarily due to our in-licensing of
additional patent rights related to one of our MSCRAMM targets. The following table summarizes the components of our research and development
expense for the nine months ended September 30, 2004 and 2003. Nine Months EndedSeptember 30,2004
    
    2003(in thousands)Clinical and manufacturing-related expense
    
    $
    7,561
    
    
    $
    6,911Personnel related expense
    
    
    3,939
    
    
    
    3,524License fees and other expense
    
    
    2,688
    
    
    
    2,323Depreciation and facility related expense
    
    
    1,114
    
    
    
    1,155Total research and development expense
    
    $
    15,302
    
    
    $
    13,913
 General and Administrative Expense.General and administrative expense
decreased to $2.7 million for the nine months ended September 30, 2004 from
$3.6 million for the same period in 2003. This decrease 18




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of $887,000, or 25%, resulted primarily from a decrease in litigation-related
legal fees of approximately $1.2 million, which was offset, in part, by
increases in salaries and benefits of approximately $167,000 associated with an
increase in personnel and increased salaries, and an increase in directors and
officers insurance premiums and directors fees of $73,000 and $61,000,
respectively. Directors fees increased due to our adoption of retainers for
all non-officer directors subsequent to our IPO in June 2004. Our directors
and officers insurance premiums and professional fees also increased due to our
IPO. Amortization of Deferred Stock Compensation.Amortization of deferred stock
compensation increased to $349,000 for the nine months ended September 30, 2004
from $115,000 for the same period in 2003. This increase of $234,000, or 203%,
was primarily the result of amortization related to $948,000 of deferred stock
compensation recorded from October 2003 through May 2004, and to a lesser
extent, the full nine month effect in 2004 of the amortization related to
$971,000 of deferred stock compensation that we recorded pursuant to stock
options granted during the first nine months of 2003. Of the amortization
expense for the nine months ended September 30, 2004, $193,000 related to
employees in general and administrative positions while $156,000 related to
employees engaged in research and development activities. Of the amortization
expense for the nine months ended September 30, 2003, $60,000 related to
employees in general and administrative positions while $55,000 related to
employees engaged in research and development activities. Interest Income (Expense), net.Interest income (expense), net, increased to
$147,000 for the nine months ended September 30, 2004 from $75,000 for the same
period in 2003. This increase of $73,000, or 97%, was primarily due to an
increase in interest income of $127,000, which was the result of generally
higher average cash balances and to a lesser extent, higher interest rates, in
2004 as compared to 2003. This increase in interest income was offset in part
by an increase in interest expense of $54,000, which was principally the result
of a $2.5 million credit facility that we borrowed in June 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 nine months ended September
30, 2004 from $4.6 million in the same period in 2003. This decrease of $1.8
million, or 39%, resulted from dividends and the accretion to redemption value
being recorded in 2004 only through June 9, 2004, the closing date of our IPO,
when all of the related redeemable preferred stock was converted to common
stock. Dividends and accretion to redemption value were recorded for the entire
nine month period ended September 30, 2003, during which the related redeemable
preferred stock was outstanding. Liquidity and Capital Resources Liquidity Since our inception in May 1994 through September 30, 2004, we have funded our
operations primarily with $ 118.2 million raised from a series of five private
equity financings and net proceeds from our initial public offering. We have
also borrowed a total of $5.0 million under several notes payable, a credit
facility with a commercial bank and capital leases, and have received
approximately $5.7 million in license fees, collaborative research payments and
grants, of which $1.1 million is recorded as deferred revenue as of September
30, 2004. At September 30, 2004, our cash, cash equivalents and short-term investments
were $45.2 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. On November 10, 2004 we completed a private placement financing in which we
raised approximately $50 million through the sale, at a price of $7.3775 per
share, of 6,777,370 shares of our common stock and 19




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warrants to purchase 2.033,211 shares of its common stock. The warrants, which
become exercisable on May 9, 2005 and expire November 10, 2009, have an
exercise price of $8.81 per share. The shares and warrants were offered and
sold only to institutional and accredited investors. The Company has agreed to
file a registration statement with the SEC covering the resale of the common
stock issued in this private placement and issuable upon the exercise of the
related warrants. Cash Flows For the nine months ended September 30, 2004, cash, cash equivalents and short
term investments increased by $17.1 million, from $28.1 million to $45.2
million. This increase resulted primarily from the net proceeds we received in
connection with our IPO in June 2004, offset in part by cash used for operating
activities, capital expenditures and the repayment of capital lease obligations
and notes payable. Net cash used in operating activities was $17.2 million for the nine months
ended September 30, 2004, primarily reflecting the net loss for this nine month
period of $17.7 million, which after adjusting for non-cash charges including
depreciation and amortization of $604,000, the amortization of deferred stock
compensation of $349,000 and the amortization of warrants and an investment
premium of $159,000, resulted in a use of cash of $16.6 million. 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. Net cash used in operating activities also included a
decrease in accounts payable and accrued liabilities of $539,000, resulting
from a $660,000 decrease in payables associated with manufacturing-related
expenses offset in part by a $213,000 increase in payables associated with
clinical trial expenses; an increase in prepaid expenses of $207,000 associated
with increased directors and officers insurance premiums; and a reduction in
deferred revenue of $113,000 as a result of nine months of amortization related
to the upfront license fee from Wyeth, offset in part by a reduction in
accounts receivable of $300,000 related to the collection of a receivable
related to the sale of excess raw materials. We used approximately $19.7 million of cash for investing activities during the
nine months ended September 30, 2004, which consisted of net purchases of
short-term investments of $19.3 million and the purchase of laboratory and
computer equipment and software of $427,000. We received net cash of $34.8 million from financing activities during the nine
months ended September 30, 2004, which consisted of $34.2 million primarily
from the net proceeds from our IPO, including the underwriters exercise of the
over-allotment option, and an additional $1.5 million we received from a
subscription receivable related to the issuance of convertible preferred stock
and warrants in connection with our Series E financing in late 2003, offset in
part by the repayment of capital lease and debt obligations of $937,000. 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; obtaining regulatory approvals for our product candidates, if
ever; the number of new product candidates we may advance into clinical
development, future 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 additional 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. Based upon our current business and operating plans, we believe that our
existing cash, cash equivalents and short-term investments of $45.2 million as
of September 30, 2004, plus the net proceeds we received from the private
placement financing we completed on November 10, 2004, will enable us to
operate for a period of approximately 24 months. We currently do not have any
commitments for future funding, nor do we anticipate that we will generate
revenue from the sale of any products for a number of years. Therefore, 20




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in order to meet our anticipated liquidity needs beyond 24 months, we will need
to raise additional capital. We expect to continue to fund our operations
primarily through the 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 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 21




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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 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 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 of $26 million to $28 million; and  Cash, cash equivalents and short-term investments of approximately
$83 to $85 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 September 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. 
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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 September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. 23




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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 On June 9, 2004, we closed the sale of five million shares of Common Stock in
our initial public offering (the Offering), and 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.
In connection with the exercise of the over-allotment, we received net proceeds
of $3.4 million after deducting underwriters discounts and commissions of
$258,000. To date, we have not used any of the net proceeds from the Offering for
operational purposes, but intend to use the proceeds from the Offering as
outlined in our final prospectus. 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. 
 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.
    
    Description31.1
    
    Section 302 Certification of the Chief Executive Officer31.2
    
    Section 302 Certification of the Chief Financial Officer32.1
    
    Section 1350 Certifications of the Chief Executive Officer and the Chief Financial Officer
 (b) Reports on Form 8-K.  (i)
    
    Report on Form 8-K dated July 7, 2004(ii)
    
    Report on Form 8-K dated August 4, 2004 24




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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:
November 15, 2004
    
    INHIBITEX, INC/s/ Russell H. PlumbRussell H. PlumbVice President, Finance and Administration,Chief Financial Officer
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EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    Section 302 Certification of the Chief Executive Officer31.2
    
    Section 302 Certification of the Chief Financial Officer32.1
    
    Section 1350 Certifications of the Chief Executive Officer and the Chief Financial Officer
 26