Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

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| **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, 2008**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**Commission File No: 000-51436**

 

**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                     | ** ** | **30-0296543**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  no.) |

 

**1440 Davey Road**

**Woodridge, IL 60517**

(Address, including zip code of registrantsprincipal executive offices)

 

Registrant’s telephone number:**(630) 739-6744**

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.    Yes  x    No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer.  See thedefinitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

| Large accelerated filer  o | Accelerated  filer o | Non-accelerated  filer o                       | Smaller  reporting company x |
|----------------------------|----------------------|------------------------------------------------|------------------------------|
|                       |                 | (Do not check if  a smaller reporting company) |                         |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes o     No x

 

As of November 3,2008, the registrant had 40,805,932 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

**(ADEVELOPMENT STAGE ENTITY)**

**INDEX**

**Form 10-Q**

 
| **PART I —  FINANCIAL INFORMATION (UNAUDITED)** |
|----------------------------------------------------------------|
| ** **                                                     |
| Item 1.                                                   | Consolidated  Financial Statements: |   |
|                                                           | Consolidated Balance Sheets as of September 30,  2008 and December 31, 2007 |   |
|                                                           | Consolidated Statements of Operations for the three  and nine months ended September 30, 2008 and 2007 and for the period  from inception (January 1, 1999) through September 30, 2008 |   |
|                                                           | Consolidated Statements of Stockholders’ Equity  (Deficit) for period from inception (January 1, 1999) through  September 30, 2008 |   |
|                                                           | Consolidated Statements of Cash Flows for the nine  months ended September 30, 2008 and 2007 and for the period from  inception (January 1, 1999) through September 30, 2008 |   |
|                                                           | Notes to Consolidated Financial Statements |   |
| Item 2.                                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                                                   | Quantitative  and Qualitative Disclosures About Market Risk |   |
| Item 4.                                                   | Controls and  Procedures |   |
| ** **                                                     | ** ** | ** ** |
| **PART II —  OTHER INFORMATION**                |
| ** **                                                     |
| Item  1A.                                                      | Risk Factors |   |
| Item 6.                                                   | Exhibits |   |
| Signatures                                                     |   |
| Exhibit Index                                             |   |

 

1

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**PART I — FINANCIALINFORMATION**

 

**Item 1.    *Consolidated Financial Statements (Unaudited)***

 

**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

 

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                            | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                                            | ** ** | ** **             | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                            | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                       |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                             |       | $                      | 7,766,597  |                  | $          | 18,324,991 |   |
| Grant receivable                                                                                                                                                                                      |       | 32,006                 |       | —                |       |
| Prepaid insurance                                                                                                                                                                                     |       | 329,363                |       | 251,493               |       |
| Prepaid clinical trial expenses                                                                                                                                                                       |       | —                 |       | 926,168               |       |
| Other prepaid expenses and deposits                                                                                                                                                                   |       | 211,874                |       | 140,359               |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| Total current assets                                                                                                                                                                                  |       | 8,339,840              |       | 19,643,011            |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                               |       |                   |       |                  |       |
| Furniture and fixtures                                                                                                                                                                                |       | 237,907                |       | 221,417               |       |
| Laboratory equipment                                                                                                                                                                                  |       | 159,186                |       | 159,186               |       |
| Computer software and equipment                                                                                                                                                                       |       | 253,851                |       | 242,707               |       |
| Leasehold improvements                                                                                                                                                                                |       | 502,798                |       | 177,253               |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| Total property and equipment—at cost                                                                                                                                                             |       | 1,153,742              |       | 800,563               |       |
| Less accumulated depreciation                                                                                                                                                                         |       | (717,249               | )          | (542,032              | )          |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| Property and equipment—net                                                                                                                                                                       |       | 436,493                |       | 258,531               |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| OTHER ASSETS:                                                                                                                                                                                         |       |                   |       |                  |       |
| Deferred financing costs                                                                                                                                                                              |       | 361,250                |       | —                |       |
| Other long-term assets                                                                                                                                                                                |       | 10,000                 |       | 10,000                |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| Total other assets                                                                                                                                                                                    |       | 371,250                |       | 10,000                |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                          |       | $                      | 9,147,583  |                  | $          | 19,911,542 |   |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                                  |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                      |       | $                      | 273,140    |                  | $          | 2,685,751 |   |
| Accrued milestone payable                                                                                                                                                                             |       | 10,000,000             |       | —                |       |
| Accrued clinical trial and NDA expenses                                                                                                                                                               |       | 801,679                |       | 2,776,543             |       |
| Other accrued expenses                                                                                                                                                                                |       | 1,411,523              |       | 330,441               |       |
| Accrued interest payable                                                                                                                                                                              |       | 20,391                 |       | 22,756                |       |
| Short-term lease payable                                                                                                                                                                              |       | 8,142                  |       | 7,259                 |       |
| Short-term notes payable - related party                                                                                                                                                              |       | 2,000,000              |       | —                |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| Total current liabilities                                                                                                                                                                             |       | 14,514,875             |       | 5,822,750             |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| Long-term lease payable                                                                                                                                                                               |       | 6,595                  |       | 12,818                |       |
| Long-term grant payable                                                                                                                                                                               |       | 500,000                |       | 500,000               |       |
| Long-term notes payable - related party                                                                                                                                                               |       | —                 |       | 2,000,000             |       |
| Line of credit                                                                                                                                                                                        |       | 3,915,000              |       | 3,915,000             |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| Total liabilities                                                                                                                                                                                     |       | 18,936,470             |       | 12,250,568            |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                         |       |                   |       |                  |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| MINORITY INTEREST                                                                                                                                                                                     |       | —                 |       | —                |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| STOCKHOLDERS’ EQUITY (DEFICIT):                                                                                                                                                                  |       |                   |       |                  |       |
| Common stock, $0.01 par value—60,000,000 shares  authorized;  40,805,932 issued and outstanding at September 30, 2008; 38,502,987   shares issued and outstanding at December 31, 2007 |       | 408,059                |       | 385,030               |       |
| Additional paid-in capital                                                                                                                                                                            |       | 109,416,354            |       | 106,859,532           |       |
| Deficit accumulated during the development stage                                                                                                                                                      |       | (119,613,300           | )          | (99,583,588           | )          |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| Total stockholders’ equity (deficit)                                                                                                                                                             |       | (9,788,887             | )          | 7,660,974             |       |
|                                                                                                                                                                                                  |       |                   |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                                                                             |       | $                      | 9,147,583  |                  | $          | 19,911,542 |   |

 

See notes to unauditedconsolidated financial statements.

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                                | ** **  | ** **                               | ** ** | ** **  | ** ** | ** **  | ** **  | **Period From**             | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|-------------|------------------------------------------|------------|-------------|------------|-------------|-------------|-----------------------------|------------|
| ** **                                                                  | ** ** | ** **                                | ** **  | ** **                               | ** ** | ** **  | ** ** | ** **  | ** **  | **Inception**               | ** ** |
| ** **                                                                  | ** ** | ** **                                | ** **  | ** **                               | ** ** | ** **  | ** ** | ** **  | ** **  | **(January 1, 1999)**  | ** ** |
| ** **                                                                  | ** ** | **Three months ended September 30,** | ** **  | **Nine months ended September 30,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2008**                                  | ** **  | **2007**                                 | ** ** | **2008**    | ** ** | **2007**    | ** **  | **September 30, 2008** | ** ** |
| Revenue:                                                                    |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Management fees                                                             |       | $                                         | —      |                                     | $          | —      |       | $           | —      |                        | $          | — |   | $ | 1,161,180 |   |
| Grants                                                                      |       | 32,006                                    |        | —                                   |       | 32,006      |       | —      |        | 1,067,577                   |       |
| Royalty—related  party                                                 |       | —                                    |        | —                                   |       | —      |       | —      |        | 45,238                      |       |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Total revenue                                                               |       | 32,006                                    |        | —                                   |       | 32,006      |       | —      |        | 2,273,995                   |       |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Expenses:                                                                   |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Research and  development                                                   |       | 11,240,032                                |        | 3,838,184                                |       | 14,798,173  |       | 21,722,174  |        | 89,669,281                  |       |
| Contracted  research and development—related party                     |       | —                                    |        | —                                   |       | —      |       | —      |        | 7,980,299                   |       |
| Selling, general  and administrative                                        |       | 1,828,607                                 |        | 2,004,357                                |       | 5,237,579   |       | 5,362,769   |        | 25,169,667                  |       |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Total expenses                                                              |       | 13,068,639                                |        | 5,842,541                                |       | 20,035,752  |       | 27,084,943  |        | 122,819,247                 |       |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Loss from  operations                                                       |       | (13,036,633                               | )           | (5,842,541                               | )          | (20,003,746 | )          | (27,084,943 | )           | (120,545,252                | )          |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Net other  (income) expense:                                                |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Interest income                                                             |       | (51,244                                   | )           | (117,332                                 | )          | (284,330    | )          | (638,396    | )           | (2,926,346                  | )          |
| Interest expense                                                            |       | 103,277                                   |        | 116,998                                  |       | 310,296     |       | 350,268     |        | 2,933,446                   |       |
| Gain on sale of  interest in Sarawak Medichem Pharmaceuticals joint venture |       | —                                    |        | —                                   |       | —      |       | —      |        | (939,052                    | )          |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Net other (income)  expense                                                 |       | 52,033                                    |        | (334                                     | )          | 25,966      |       | (288,128    | )           | (931,952                    | )          |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Net loss                                                                    |       | (13,088,666                               | )           | (5,842,207                               | )          | (20,029,712 | )          | (26,796,815 | )           | (119,613,300                | )          |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Less accumulated  preferred stock dividends of subsidiary for the period    |       | 43,750                                    |        | 43,750                                   |       | 131,250     |       | 131,250     |        | 1,626,042                   |       |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Net loss  available to common shareholders                                  |       | $                                         | (13,132,416 | )                                        | $          | (5,885,957  | )          | $           | (20,160,962 | )                           | $          | (26,928,065 | ) | $ | (121,239,342 | ) |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Net loss per  share available to common shareholders - basic and diluted    |       | $                                         | (0.34       | )                                        | $          | (0.21       | )          | $           | (0.52       | )                           | $          | (0.95 | ) |   |   |
|                                                                        |       |                                      |        |                                     |       |        |       |        |        |                        |       |
| Weighted average  shares outstanding - basic and diluted                    |       | 38,568,464                                |        | 28,294,677                               |       | 38,524,972  |       | 28,292,150  |        |                        |       |

 

See notes to unauditedconsolidated financial statements.

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | ** **       | ** ** | ** **  | ** ** | **Deficit**     | ** ** | ** **     | ** ** | ** **  | ** **   |
|-----------------------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|--------------|
| ** **                                                                                    | ** ** | ** **       | ** ** | ** **  | ** ** | **Accumulated** | ** ** | ** **     | ** ** | ** **  | ** **   |
| ** **                                                                                    | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | **During the** | ** ** | ** **  | ** **   |
| ** **                                                                                    | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | ** **     | ** ** |
| ** **                                                                                    | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**      | ** ** | **Total**   | ** **   |
| BALANCE—January 1,  1999 (inception)                                                |       | —           |       | $           | —     |            | $          | —         |       | $           | —       |   | $ | — |   |
|                                                                                          |       |             |       |        |       |            |       |           |       |        |         |
| Issuance of stock  (at inception)                                                             |       | 1,588,000        |       | 250,000     |       | —          |       | —         |       | 250,000     |         |
| Issuance of  common stock, net of offering costs (August 2005)                           |       | 6,721,814        |       | 67,218      |       | 29,210,558      |       | —         |       | 29,277,776  |         |
| Issuance of  common stock, net of offering costs (March 2006)                            |       | 10,233,464       |       | 102,335     |       | 33,266,653      |       | —         |       | 33,368,988  |         |
| Issuance of  common stock, net of offering costs (December 2007)                         |       | 10,191,083       |       | 101,911     |       | 17,750,327      |       | —         |       | 17,852,238  |         |
|                                                                                          |       |             |       |        |       |            |       |           |       |        |         |
| Exchange of  shares under recapitalization (December 2004)                               |       | (1,629,685       | )          | (256,563    | )          | —          |       | —         |       | (256,563    | )            |
| Issuance of  shares under recapitalization (December 2004)                               |       | 9,482,015        |       | 94,820      |       | 161,743         |       | —         |       | 256,563     |         |
| Capital  contributions (December 2004)                                                   |       | —           |       | —      |       | 12,711,330      |       | —         |       | 12,711,330  |         |
| Issuance of  14,887 warrants (December 2004)                                             |       | —           |       | —      |       | 11,898          |       | —         |       | 11,898      |         |
| Issuance of  common stock in exchange for licenses (December 2004)                       |       | 1,122,569        |       | 11,226      |       | 8,988,774       |       | —         |       | 9,000,000   |         |
| Issuance of  common stock in exchange for reduction of milestones payable  (August 2005) |       | 600,000          |       | 6,000       |       | 3,000,000       |       | —         |       | 3,006,000   |         |
| Modification of  14,887 warrants (August 2005)                                           |       | —           |       | —      |       | 18,925          |       | —         |       | 18,925      |         |
|                                                                                          |       |             |       |        |       |            |       |           |       |        |         |
| Issuance of  stock related to option exercises (since inception)                              |       | 193,727          |       | 8,083       |       | 27,192          |       | —         |       | 35,275      |         |
|                                                                                          |       |             |       |        |       |            |       |           |       |        |         |
| Compensation  expense related to stock options (since inception)                              |       | —           |       | —      |       | 1,712,132       |       | —         |       | 1,712,132   |         |
|                                                                                          |       |             |       |        |       |            |       |           |       |        |         |
| Net loss (since  inception)                                                                   |       | —           |       | —      |       | —          |       | (99,583,588    | )          | (99,583,588 | )            |
|                                                                                          |       |             |       |        |       |            |       |           |       |        |         |
| BALANCE—December 31,  2007                                                          |       | 38,502,987       |       | 385,030     |       | 106,859,532     |       | (99,583,588    | )          | 7,660,974   |         |
|                                                                                          |       |             |       |        |       |            |       |           |       |        |         |
| Adjustment to  net offering costs (December 2007)                                        |       | —           |       | —      |       | (50,141         | )          | —         |       | (50,141     | )            |
| Issuance of  common stock, net of offering costs (September 2008)                        |       | 1,888,606        |       | 18,886      |       | 1,661,793       |       | —         |       | 1,680,679   |         |
| Issuance of  common stock as payment for commitment fees (September 2008)                |       | 393,339          |       | 3,933       |       | 296,067         |       | —         |       | 300,000     |         |
| Issuance of  stock related to option exercises                                                |       | 21,000           |       | 210         |       | 3,087           |       | —         |       | 3,297       |         |
| Compensation  expense related to stock options                                                |       | —           |       | —      |       | 646,016         |       | —         |       | 646,016     |         |
|                                                                                          |       |             |       |        |       |            |       |           |       |        |         |
| Net loss                                                                                      |       | —           |       | —      |       | —          |       | (20,029,712    | )          | (20,029,712 | )            |
|                                                                                          |       |             |       |        |       |            |       |           |       |        |         |
| BALANCE—September 30,  2008                                                         |       | 40,805,932       |       | $           | 408,059    |            | $          | 109,416,354    |       | $           | (119,613,300 | ) | $ | (9,788,887 | ) |

 

See notes to unauditedconsolidated financial statements.

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **             | ** **  | ** **                      | ** ** | **Inception**                    | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|-------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **Nine months ended**  | ** **  | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **September 30,** | ** **  | **Through**                     | ** ** |
| ** **                                                                         | ** ** | **2008**               | ** **  | **2007**                        | ** ** | **September 30, 2008** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                   |        |                            |       |                             |       |
| Net loss                                                                           |       | $                      | (20,029,712 | )                               | $          | (26,796,815                      | )          | $ | (119,613,300 | ) |
| Adjustments to reconcile net loss to net cash flows  used in operating activities: |       |                   |        |                            |       |                             |       |
| Depreciation and amortization                                                      |       | 175,219                |        | 157,072                         |       | 797,993                          |       |
| Non-cash interest expense                                                          |       | 3,750                  |        | 28,326                          |       | 104,573                          |       |
| Stock compensation expense                                                         |       | 646,016                |        | 549,476                         |       | 2,358,148                        |       |
| Non-cash research and development                                                  |       | —                 |        | —                          |       | 24,466,667                       |       |
| Non-cash settlement of milestone payment                                           |       | —                 |        | —                          |       | 6,000                            |       |
| Gain on sale of interest in Sarawak Medichem  Pharmaceuticals (SMP)                |       | —                 |        | —                          |       | (939,052                         | )          |
| Loss on disposal                                                                   |       | —                 |        | 1,761                           |       | 13,294                           |       |
| Changes in operating assets and liabilities:                                       |       |                   |        |                            |       |                             |       |
| Clinical supplies                                                                  |       | —                 |        | —                          |       | 533,333                          |       |
| Accounts receivable                                                                |       | (32,006                | )           | —                          |       | (32,006                          | )          |
| Prepaid expenses                                                                   |       | 776,783                |        | 368,563                         |       | (549,785                         | )          |
| Other assets                                                                       |       | —                 |        | —                          |       | (1,452                           | )          |
| Accounts payable                                                                   |       | (2,412,611             | )           | 2,487,884                       |       | 273,140                          |       |
| Accrued expenses                                                                   |       | (964,451               | )           | 2,652,309                       |       | 2,142,533                        |       |
| Accrued milestone payable                                                          |       | 10,000,000             |        | —                          |       | 10,000,000                       |       |
| Licenses payable                                                                   |       | —                 |        | —                          |       | (11,000,000                      | )          |
| Accrued interest on debt                                                           |       | (2,365                 | )           | (734                            | )          | 598,454                          |       |
|                                                                               |       |                   |        |                            |       |                             |       |
| Net cash flows from operating activities                                           |       | (11,839,377            | )           | (20,552,158                     | )          | (90,841,460                      | )          |
|                                                                               |       |                   |        |                            |       |                             |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                   |        |                            |       |                             |       |
| Purchase of property and equipment                                                 |       | (346,687               | )           | (58,436                         | )          | (1,077,035                       | )          |
| Proceeds from the sale of SMP                                                      |       | —                 |        | —                          |       | 939,052                          |       |
| Proceeds from the sales of investments                                             |       | —                 |        | —                          |       | 31,557,158                       |       |
| Purchase of investments                                                            |       | —                 |        | —                          |       | (31,557,158                      | )          |
|                                                                               |       |                   |        |                            |       |                             |       |
| Net cash flows from investing activities                                           |       | (346,687               | )           | (58,436                         | )          | (137,983                         | )          |
|                                                                               |       |                   |        |                            |       |                             |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                   |        |                            |       |                             |       |
| Proceeds from issuance of common stock and capital  contributions                  |       | 1,664,713              |        | —                          |       | 89,373,290                       |       |
| Proceeds from issuance of note payable and line of  credit                         |       | —                 |        | —                          |       | 12,933,691                       |       |
| Payments on line of credit                                                         |       | —                 |        | —                          |       | (3,915,000                       | )          |
| Proceeds from grants                                                               |       | —                 |        | —                          |       | 500,000                          |       |
| Proceeds from stock options exercised                                              |       | 3,297                  |        | 1,884                           |       | 38,572                           |       |
| Payments of deferred financing fees                                                |       | (35,000                | )           | —                          |       | (35,000                          | )          |
| Payments on capital leases                                                         |       | (5,340                 | )           | (16,753                         | )          | (149,513                         | )          |
|                                                                               |       |                   |        |                            |       |                             |       |
| Net cash flows from financing activities                                           |       | 1,627,670              |        | (14,869                         | )          | 98,746,040                       |       |
|                                                                               |       |                   |        |                            |       |                             |       |
| NET (DECREASE) INCREASE IN CASH                                                    |       | (10,558,394            | )           | (20,625,463                     | )          | 7,766,597                        |       |
|                                                                               |       |                   |        |                            |       |                             |       |
| CASH—Beginning of period                                                      |       | 18,324,991             |        | 27,054,947                      |       | —                           |       |
|                                                                               |       |                   |        |                            |       |                             |       |
| CASH—End of period                                                            |       | $                      | 7,766,597   |                            | $          | 6,429,484                        |       | $ | 7,766,597 |   |
|                                                                               |       |                   |        |                            |       |                             |       |
| SUPPLEMENTAL DISCLOSURE OF                                                         |       |                   |        |                            |       |                             |       |
| CASH FLOW INFORMATION:                                                             |       |                   |        |                            |       |                             |       |
| Cash paid during the period for interest                                           |       | $                      | 318,910     |                            | $          | 310,077                          |       | $ | 2,231,716 |   |
|                                                                               |       |                   |        |                            |       |                             |       |
| SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS                                    |       |                   |        |                            |       |                             |       |
| Noncash investment activity:                                                       |       |                   |        |                            |       |                             |       |
| Purchase of property and equipment under capital  leases                           |       | $                      | —      |                            | $          | —                           |       | $ | 164,249 |   |
| Capital expenses included in accrued expenses                                      |       | 6,494                  |        | —                          |       | 6,494                            |       |
| Noncash financing activity:                                                        |       |                   |        |                            |       |                             |       |
| Issuance of common shares for licenses                                             |       | —                 |        | —                          |       | 9,000,000                        |       |
| Issuance of common shares for reduction of milestone  payment                      |       | —                 |        | —                          |       | 3,000,000                        |       |
| Unpaid costs associated with the issuance of common  stock                         |       | 34,175                 |        | 34,175                          |       |                             |       |
| Debt discount                                                                      |       | —                 |        | —                          |       | 30,823                           |       |
| Deferred financing costs                                                           |       | $                      | 330,000     |                            | $          | —                           |       | $ | 360,000 |   |

 

See notes to unauditedconsolidated financial statements.

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**SEPTEMBER 30, 2008**

**(UNAUDITED)**

 

**1.**                 Summary of SignificantAccounting Policies

 

***Nature of Business-******Advanced***LifeSciences Holdings, Inc. and its subsidiary Advanced Life Sciences, Inc.(together, the “Company”) conduct new drug research and development in thefields of infectious disease, oncology and inflammation.  Since inception, the Company has devotedsubstantially all of its efforts to activities such as financial planning,capital raising and product development, and has not derived significantrevenues from its primary business activity. Accordingly, the Company is in the development stage, as defined byStatement of Financial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development Stage Enterprises*.

 

***Basis of Presentation-***Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared in accordance with accounting principles generally accepted inthe United States of America and with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  However, in the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,unless otherwise noted herein, necessary to present fairly the results ofoperations, financial position and cash flows have been made.  Therefore, these consolidated financialstatements should be read in conjunction with the Company’s most recent auditedfinancial statements for the year ended December 31, 2007 and notesthereto. The consolidated financial statements include the accounts of theAdvanced Life Sciences Holdings, Inc. and its wholly-owned subsidiaryAdvanced Life Sciences, Inc. (“ALS Inc.”)  All intercompany balances and transactionshave been eliminated.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations expected for the full year.

 

The consolidated financial statements have been preparedon a going concern basis, which contemplates continuity of operations and therealization of assets and liquidation of liabilities in the ordinary course ofbusiness.  However, as a result of theCompany’s continued losses and current cash and financing position, suchrealization of assets or liquidation of liabilities, without substantialadjustments is uncertain.  Given thisuncertainty, there is significant doubt as to the Company’s ability to continueas a going concern.

 

***Revenue and Income Recognition-*** Revenue related to award grants fromvarious government agencies is recognized as the related research anddevelopment costs are incurred and services performed are in accordance withthe terms of the grant agreements.

 

***Business and Credit Risks*****-**The Company is subject to risks anduncertainties common to drug discovery companies, including technologicalchange, potential infringement on intellectual property of third parties, newproduct development, regulatory approval and market acceptance of its products,activities of competitors and its limited operating history.  The Company has incurred losses since itsincorporation in January 1999.  TheCompany has funded its operations to date primarily from debt financings andcapital contributions from its founder and Chief Executive Officer, proceedsfrom the initial public offering of its common stock, the subsequent sale ofits common stock in three private placements, including its commercialpartnership agreement with Wyeth Pharmaceuticals (“Wyeth”) (See Note 2), andborrowings under its bank line of credit. The Company will not be generating any product-based revenues orrealizing cash flows from operations in the near term, if at all, and may nothave sufficient cash or other funding available to complete its anticipatedbusiness activities during 2009.  Inorder to address its working capital shortfall the Company intends to raiseadditional capital by licensing its lead compound, cethromycin, to additional commercialpartners.  The Company believes, basedupon current market conditions, additional commercial partnership agreementswould include a series of milestone payments, including up-front milestonesthat would fund the Company’s continued operations.  Although management believes the Companycould secure additional commercial partnerships, there can be no assurancesthat such partnerships will be available at terms acceptable to the Company, ifat all.   In addition, theCompany has executed a StandbyEquity Distribution Agreement (“SEDA”) which provides for the sale of up to$15.0 million of its common stock to an accredited investor, YA GlobalInvestments, L.P. (“YA”), an affiliate of Yorkville Advisors (See Note 2).  Under the terms of the SEDA, the Company isnot able to utilize the facility after receipt of a delisting notice from theprincipal trading market on which its common stock is traded.  The Company is currently working with YA toobtain a waiver to this covenant.  If theCompany raises 

 

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additional capital by issuing equity securities, itsshareholders could experience substantial dilution.

 

On October 1, 2008, the Company received noticefrom the Nasdaq Listing Qualifications Department stating that the market valueof its listed securities was below $35.0 million for 10 consecutive days, andthat the Company was in violation of the requirement for continued listing onthe Nasdaq Capital Market under Marketplace Rule 4310(c)(3)(B) (the“Rule”).  Nasdaq also informed the Company that it is not in compliancewith either of Marketplace Rules 4310(c)(3)(A) or 4310(c)(3)(C),which together require either minimum stockholders’ equity of $2.5 million ornet income from continuing operations of $500,000 in the most recentlycompleted fiscal year or in two of the last three most recently completedfiscal years for listing eligibility. The Company was not compliant with the Rule by the deadline of October 31,2008 and received notice from the Nasdaq Listing Qualifications Departmentstating that it is in violation of the requirement for continued listing on theNasdaq Capital Market.   The Company intends to appeal this decisionwith the Nasdaq Listing Qualifications Department.  The Company’ssecurities will remain listed on the Nasdaq Capital Market throughout theappeal process.  While the Companyintends to appeal the determination by the Nasdaq staff to delist its commonstock to a Nasdaq Listing Qualifications Panel, the Company may not besuccessful in its appeal, in which case its common stock will be delisted. In the event of delisting, trading, if any, would be conducted in theover-the-counter market in the so-called “pink sheets” or on the OTC BulletinBoard.  Should this occur, existing stockholders will suffer decreasedliquidity.

 

The accompanyingfinancial statements do not include any adjustments that might result from theoutcome of any uncertainties discussed in the Company’s Business and CreditRisks Summary.

 

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**2.****                 PrivatePlacements**

 

In September 2008, the Company and Wyeth enteredinto a development and commercialization agreement for cethromycin in the AsiaPacific region excluding Japan. The Company will retain exclusive rights tocethromycin in the rest of the world, including North America and Europe andexcluding Japan.  In addition to futureroyalty payments, the Company would receive milestone and regulatory paymentsbased on successful achievement of clinical, regulatory and commercialobjectives in specific markets. The Company and Wyeth will collaborate todevelop additional clinical data in the Asia Pacific region to supportregulatory filings in that region.  It is not anticipated that Wyeth wouldfile for regulatory approval in the Asia Pacific region prior to the Companyobtaining U.S. approval for cethromycin from the Food and Drug Administration (“FDA”).

 

In connection with the Company’s entry into adevelopment and commercialization agreement, the Company entered into a stockpurchase agreement with Wyeth.  Under theterms of the agreement, Wyeth made an up-front investment in the Company bypurchasing 1,888,606 shares of its common stock at a price of $0.908 per sharefor approximately $1.7 million, net of offering expenses, representingapproximately 4.9% of the Company’s total outstanding shares.

 

In September 2008, the Company also entered intoa SEDA, with YA, for the sale of up to $15.0 million of shares of the Company’scommon stock over a two-year commitment period.   In connection withentering into the SEDA, the Company also entered into a Registration RightsAgreement with YA. Under the terms of the SEDA, the Company may from time totime, in its discretion, sell newly-issued shares of its common stock to YA ata discount to market of 5%. The amount of each advance is limited to thegreater of $400,000 or the average trading volume for the five trading daysprior the advance notice date.  TheCompany is not obligated to utilize any of the $15.0 million available underthe SEDA and there are no minimum commitments or minimum use penalties. Basedupon the Company’s currently outstanding shares of common stock, and optionsand warrants to purchase common stock, the aggregate number of shares that theCompany may sell under the SEDA without stockholder approval is currentlylimited to approximately 4.5 million shares. Unless stockholder approval issought and obtained, the total amount of funds that ultimately can be raisedunder the SEDA over the two-year term will depend on the then-current price forthe Company’s stock and the number of shares actually sold. The Company’s restructuredcredit facility with its lender (See Note 4) also contains a covenant limitingthe Company’s utilization of the SEDA to $9.0 million without the bank’s priorconsent. In addition, under the terms of the SEDA, the Company is not able toutilize the facility after receipt of a delisting notice from the principaltrading market on which its common stock is being traded, which was received onOctober 1, 2008.  The Company iscurrently working with YA to obtain a waiver to this covenant.  In the event a waiver cannot be obtained, theCompany will not be able to utilize this facility unless and until it meetscertain listing requirements.  Pursuantto the terms of the SEDA, the Company paid to YA a commitment fee of $300,000by issuing 393,339 shares of the Company’s common stock, and incurred $55,000of other closing fees.

 

In December 2007,the Company raised approximately $17.8 million, net of underwriting discountsand offering expenses, in connection with the issuance of 10,191,083 shares andwarrants to purchase 5,095,542 shares of its common stock at $1.96 pershare.  The exercise price of thewarrants is $2.15 per share and they expire in December 2012.

 

**3.****                 Related PartyTransactions**

 

The Company’sChief Executive Officer, Michael T. Flavin Ph.D., loaned $2.0 million to theCompany in 2001 (see Note 4). Interest expense of $116,000 was recorded for the nine months ended September 30,2008 and 2007, related to the loan.

 

The Company’s lineof credit with a financial institution is secured by substantially all of theCompany’s assets, except that the collateral specifically excludes any rightsthat the Company has as a result of its license agreement with AbbottLaboratories (“Abbott”) for cethromycin, and is further secured by 2.5 millionshares of the Company’s stock held by ALS Ventures, LLC (See Note 4),which is beneficially owned by the Company’s Chief Executive Officer.

 

The Company leasesfacilities from the BioStart Property Group, LLC. (“BioStart”), a wholly-ownedsubsidiary of Flavin Ventures, which is owned by the Company’s Chief ExecutiveOfficer.  The operating lease expired in September of2008 and the Company is currently in negotiations to renew the lease.  Following the expiration of the lease inSeptember, the Company is making payments equal to its last payment under theprevious agreement.  Lease paymentstotaled approximately $216,000 and $206,000 for the nine months ended September 30,2008 and 2007, respectively.

 

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**4.****                 Debt Obligations**

 

In September 2001,the Company incurred indebtedness under a $2.0 million promissory note with theChief Executive Officer of the Company, which bears interest at 7.75%.  Principal plus any accrued interest is due ina lump sum on January 5, 2009. As of September 30, 2008 and December 31,2007, the Company had $2.0 million outstanding under the note.

 

The Company has arevolving line of credit with a financial institution under which the Companyhad $3.9 million outstanding as of September 30, 2008 and December 31,2007.  In October 2008, the Companyrestructured its line of credit.  Theterms of the new line of credit increased the availability under the facilityfrom $4.0 million to $10.0 million, extended the maturity date one year to January 1,2011, and changed the floating rate to a fixed interest rate of 8.5%.  The line of credit is secured bysubstantially all of the Company’s assets, except that the collateralspecifically excludes any rights that the Company may have as a result of itslicense agreement with Abbott for cethromycin, and is further secured by 2.5million shares of the Company’s common stock held by ALS Ventures, LLC.  The credit agreement contains a materialadverse change clause, which is subject to the judgment of the lender and, iftriggered, can accelerate the payment of the debt.  The terms also include a covenant limitingthe use of the SEDA to $9.0 million without the bank’s consent.   The Company issued warrants for the purchaseof 65,000 shares of its common stock at an exercise price of $1.00 per share tothe lender as a closing fee.  Thewarrants became exercisable upon issuance and will expire five years from thedate of the grant.  The Company borrowed$6.0 million on its new line of credit in October 2008, to partially fundthe Abbott milestone payment made in October.

 

**5.****                 Commitments**

 

***Vendor Contracts-***The Company administers itscethromycin program largely under contracts with third parties.  Through September 30, 2008, contractstotaling $47.2 million, net of expected savings of $3.2 million, have beenexecuted related to the cethromycin program, which includes the development,commercialization and marketing of cethromycin as well as anthrax-relatedstudies.  To date the Company has paid$41.5 million under these contracts and the remaining balance of $5.7 millionis expected to be paid over the next nine months.  In October 2008, the Company enteredinto subcontractor arrangements to further study cethromycin as a potentialbroad-spectrum medical countermeasure. These costs are expected to be approximately $1.5 million over anine-month base period and $1.6 million for an option period that would extendthe arrangements for an additional 15 months. In addition, to date the Company has executed $1.2 million in contractsrelated to the ALS-357 program, of which the remaining balance of $882,000 isexpected to be paid beyond 2008.

 

***Grant Payable-*** In April 2005, the Companywas awarded a $500,000 grant from the State of Illinois to fund expansion ofits corporate headquarters in Woodridge, Illinois.  Under the terms of the grant, the Company isto create 100 full-time jobs at its corporate headquarters between January 31,2005 and December 31, 2010 (“grant period”).  If the Company does not create the specifiednumber of full-time jobs, it is required to repay the grant proceeds on apro-rata basis of actual jobs created compared to the total defined in thegrant.  As of December 31, 2007, theentire grant had been spent or obligated and therefore the $500,000 has beenclassified as a long-term liability as the Company must create and maintainpositions created during the grant period through January 31, 2010.    Through September 30, 2008, eighteennew jobs have been created and retained since the grant was awarded.

 

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**6.****                 Stock OptionGrants**

 

For the nine months ended September 30, 2008 and2007, the Company granted stock options to purchase up to 713,800 and 739,300shares of common stock, respectively, to certain employees and directors. Theexercise price of the options was the market price of the Company’s commonstock on the date of grant.  The Companyrecognized compensation expense totaling approximately $646,000 and $549,000for the nine months ended September 30, 2008 and 2007, respectively inaccordance with SFAS No. 123 (R), *Share-BasedPayment*.

 

**7.****                 Net Loss PerShare**

 

Basic loss per share iscomputed by dividing net loss by the number of weighted average common sharesoutstanding during the reporting period. Diluted loss per share is calculated to give effect to all potentially dilutivecommon shares that were outstanding during the reporting period.  The computation of diluted shares outstandingfor the periods ended September 30, 2008 and 2007 excludes incrementalshares of 12,643,993 and 6,995,119 respectively, related to employee stockoptions and warrants.  These shares areexcluded due to their anti-dilutive effect as a result of the Company’s lossesfor the periods ended September 30, 2008 and 2007.

 

**8.****                 Recent AccountingPronouncements**

 

In September 2006,the FASB issued SFAS No. 157 *Fair Value Measurements*(“SFAS 157”).  SFAS 157 provides adefinition of fair value, establishes acceptable methods of measuring fairvalue and expands disclosures for fair value measurements.  The principles apply under accountingpronouncements which require measurement of fair value.  The adoption of SFAS 157 did not have amaterial impact on the Company’s statements of financial position, results ofoperations and cash flows.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007)  *Business Combinations*(“SFAS141R”) and SFAS No. 160 *Noncontrolling Interestsin Consolidated Financial Statements, an amendment of Accounting ResearchBulleting No. 51*(“SFAS 160”). SFAS 141R will change howbusiness acquisitions are accounted for and will impact financial statementsboth on the acquisition date and in subsequent periods.  SFAS 160 will change the accounting andreporting for minority interests, which will be recharacterized asnoncontrolling interest and classified as a component of equity.  SFAS 141R and SFAS 160 are effectivebeginning the first fiscal quarter of 2010. Early adoption is not permitted. The Company does not expect the adoption of either SFAS 141R or SFAS 160will have a material impact on its statements of financial position, results ofoperations and cash flows.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS 159”).  SFAS 159 permits an entity to irrevocablyelect fair value on a contract-by-contract basis as the initial and subsequentmeasurement attribute for many financial assets and liabilities and certainother items including insurance contracts. Entities electing the fair value option would be required to recognizechanges in fair value in earnings and to expense upfront cost and feesassociated with the item for which the fair value option is elected.  The adoption of SFAS 159 did not have amaterial impact on the Company’s statements of financial position, results ofoperations and cash flows.

 

In March 2008, theFASB issued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities* (“SFAS 161”). SFAS 161requires qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair value amounts of and gains andlosses on derivative instruments, and disclosures about credit-risk-relatedcontingent features in derivative agreements. The application of SFAS 161 isrequired for fiscal years and interim periods beginning after November 15,2008. The Company does not expect the adoption of SFAS 161 to have a materialimpact on its statements of financial position, results of operations and cashflows.

 

In 2007, the EmergingIssues Task Force (“EITF”) issued EITF 07-03, “Accounting for Advance Payments for Goods or Services to Be Used inFuture Research and Development” and the FASB ratified the tentativeconclusion.  EITF 07-03 addresses thediversity which exists with respect to the accounting for the non-refundableportion of a payment made by a research and development entity for futureresearch and development activities. Under this conclusion, an entity woulddefer and capitalize non-refundable advance payments made for research anddevelopment activities until the related goods are delivered or the relatedservices are performed. EITF 07-03 was effective for interim or annualreporting periods in fiscal years beginning after December 15, 2007. Theadoption of EITF 07-03 did not have a material impact on the Company’sstatements of financial position, results of operations and cash flows.

 

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**Item 2. *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations***

 

*Youshould read the following discussion of our financial condition and results ofoperations in conjunction with our consolidated financial statements and therelated notes included elsewhere in this quarterly report. This discussioncontains forward-looking statements that involve risks and uncertainties. Ouractual results may differ materially from those anticipated in theseforward-looking statements.*

 

**Overview**

 

Weare a biopharmaceutical company focused on the discovery, development andcommercialization of novel drugs in the areas of infectious disease, oncologyand inflammation. Using our internal discovery capabilities and our network ofpharmaceutical and academic partners, we have assembled a promising pipeline ofclinical and preclinical product candidates. Our most advanced productcandidate, cethromycin, is a novel once-a-day oral antibiotic that recentlycompleted two pivotal Phase III clinical trials in community acquired pneumonia(“CAP”) and a new drug application (“NDA”) of cethromycin has recently beensubmitted to the Food and Drug Administration (“FDA”). Cethromycin is alsobeing developed as a bio-defense agent for use in the treatment of anthrax andother potential broad-spectrum medical countermeasures.  We also have product candidates in earlierstages of development for the treatment of indications including respiratorydistress caused by inflammation-related tissue damage and malignant melanoma.

 

None of our productcandidates has been approved by the FDA or any comparable foreign agencies, andwe have not generated any significant revenues to date. Our ability to generaterevenues in the future will depend on our ability to meet development orregulatory milestones under any license agreements that trigger payments to us,to enter into new license agreements for other products or territories and to receiveregulatory approvals for, and successfully commercialize, our productcandidates either directly or through commercial partners.

 

**Development Update**

 

In September 2008,we submitted a NDA for cethromycin.  The NDA submission is based on a fullclinical development and manufacturing program for cethromycin. The program twoglobal Phase III pivotal studies for the treatment of mild-to-moderate CAP inwhich cethromycin was dosed at 300 milligrams once daily for seven dayscompared to the standard of care therapy, Biaxin, which was dosed at 250milligrams twice daily for seven days. The data from these trials showed thatcethromycin was non-inferior to Biaxin with a similar safety profile. The mostcommon adverse reactions for cethromycin were taste disturbance, diarrhea,nausea and headache.  No visual disturbances, loss of consciousness,exacerbation of myasthenia gravis and hepatotoxicity were reported from thesestudies.  More than 5,000 patients havebeen treated with cethromycin in 53 clinical trials to date. We hold the rightsto cethromycin under an exclusive worldwide license (except in Japan) fromAbbott Laboratories (“Abbott”).

 

There can be no assurancethat the FDA will file our NDA application which has recently been submitted,or that once filed, it will be approved. In addition, we do not expect to receive FDA approval forcommercialization of cethromycin until 2009 at the earliest.  As of September 30, 2008, we estimatethat our cethromycin development program will require an additional $41.3million in expenditures which includes $40.0 million in additional milestonepayments to Abbott, of which $10.0 million was expensed in September 2008and paid in October 2008 upon submitting our NDA application, $300,000 tocomplete the cethromycin clinical trials and $1.0 million for the preparationof the cethromycin NDA and other pre-commercialization related costs.  The additional $30.0 million Abbott milestonepayment is triggered upon receiving FDA approval for cethromycin.  Development timelines and related costs aredifficult to estimate and may vary significantly from our current estimates.

 

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If cethromycinis approved for marketing by the FDA, we plan to sell cethromycin usingcommercial partners to access the primary care physician market and to buildand utilize a focused internal sales force that will market directly to earlyadopters such as, but not limited to, pulmonary medicine and infectious diseasephysicians.  While we recently enteredinto a development and commercialization agreement for cethromycin with WyethPharmaceuticals, (“Wyeth”) in the Asia Pacific region, excluding Japan (See below),discussions with other potential commercial partners focused on othergeographical markets such as the European Union and the United States areongoing.

 

In February 2008,we announced the results from Trial CL07-001, a thorough QT study of cethromycin.  This study was conducted to evaluate thecardiac safety of cethromycin.  The FDAusually requires thorough QT studies for all new chemical entities becauseprolongation in QT interval (corrected for changes in heart rate, or QTc) maysignify an increased risk of developing cardiac arrhythmias.  Trial CL07-001 evaluated the potential ofcethromycin to cause a prolongation in electrocardiographic QT interval inaccordance with FDA and ICH E14 guidance. At the therapeutic and supratherapeutic doses, cethromycin shows nosignal of any electrocardiographic effects and hence supported its favorablecardiac safety profile.

 

Inaddition to its use in the treatment of CAP, cethromycin has also demonstratedsignificant *in vitro* activity against over 30anthrax (*Bacillus anthracis*) strains.  During the third quarter of 2007, weconcluded a study testing cethromycin’s efficacy in treating inhalation anthraxpost-exposure for prophylaxis in non-human primates.  Results from thisstudy demonstrated that a thirty (30) day course of oral cethromycin at a16 mg/kg of once-daily dosing (the human equivalent dose of 300 mg) was 100%protective against a lethal dose of inhaled *B. anthracis*Ames strain spores.   We arecollaborating with the National Institute of Allergy and Infectious Diseases toevaluate cethromycin’s potential in preventing inhalational anthrax and otherhigh-priority bioterror agents.

 

In September 2008,we entered into a development and commercialization agreement for cethromycinwith Wyeth, in the Asia Pacific region excluding Japan. We will retainexclusive rights to cethromycin in the rest of the world, including NorthAmerica and Europe and excluding Japan. In addition to future royalty payments, we would receive milestone andregulatory payments based on successful achievement of clinical, regulatory andcommercial objectives in specific markets. We will collaborate with Wyeth todevelop additional clinical data in the Asia Pacific region to supportregulatory filings in that region.  It is not anticipated that Wyeth wouldfile for regulatory approval in the Asia Pacific region prior to us obtainingU.S. approval for cethromycin from the FDA.

 

In August 2008,we signed a letter of intent with DSM Pharma Chemicals North America (“DSM”), Inc.to proceed with a proposal to purchase raw materials to produce commercialquantities of cethromycin.  Our intent isconditional upon the parties entering into a formal supply agreement which willgovern the terms and conditions including but not limited to the timing ofproduction and the milestone payment schedule. While these conditions are pending, the parties recognize that there arelengthy lead times for the raw materials needed to be used to complete theproduction described in the proposal. Therefore, we authorized DSM to procure the necessary raw materials tobe used to complete the production in anticipation of entering into the formalsupply agreement.  Upon execution of thisagreement, we agreed to issue a purchase order to DSM for the necessary rawmaterials at an estimated cost of $4.2 million. The cost of these raw materials are subject to changes in the Euro/USDollar exchange rate. The hypothetical cost of these raw materials at September 30,2008 was $3.9 million.

 

In August 2008,we announced that the Defense Threat Reduction Agency (“DTRA”) of the U.S.Department of Defense awarded us a two-year contract worth up to $3.8 millionto further study cethromycin as a potential broad-spectrum medicalcountermeasure. The contract, part of the agency’s Transformational MedicalTechnologies Initiative (“TMTI”), will fund NDA-enabling studies evaluatingcethromycin’s efficacy in combating Category A and B bioterror agents such as *Fransicella tularensis* (tularemia), *Yersiniapestis* (plague) and *Burkholderia pseudomallei*(melioidosis). Under the terms of the contract, $1.8 million of DTRA funds areavailable over a nine-month base period beginning in August 2008, toinitiate NDA-enabling studies measuring cethromycin’s efficacy in treatingtularemia and plague as well as studies to measure cethromycin’s efficacy intreating melioidosis. The remaining $2.0 million may be awarded over theensuing 15 months to complete the project.

 

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**Financial Update**

 

Sinceour inception, we have incurred net losses each year. Our net loss for the ninemonths ended September 30, 2008 was $20.0 million.  As of September 30, 2008, we had an accumulateddeficit of $119.6 million. We have funded operations to date primarily fromdebt financings and capital contributions from our founder and Chief ExecutiveOfficer, proceeds from the initial public offering of our common stock, thesubsequent sale of our common stock in three private placements, including ourcommercial partnership agreement with Wyeth (See Note 2 of the consolidatedfinancial statements) and borrowings under our bank line of credit.  We will not be generating any product-basedrevenues or realizing cash flows from operations in the near term, and may nothave sufficient cash or other funding available to complete our anticipatedbusiness activities during 2009.  Inorder to address our working capital shortfall we intend to raise additionalcapital by licensing our lead compound, cethromycin, to commercialpartners.  We believe, based upon currentmarket conditions, additional commercial partnership agreements would include aseries of milestone payments, including up-front milestones that would fund ourcontinued operations.  Althoughmanagement believes we could secure additional commercial partnerships, therecan be no assurances that such partnerships will be available at termsacceptable to us, if at all.   In addition, we have executed a StandbyEquity Distribution Agreement (“SEDA”) which provides for the sale of up to$15.0 million of our common stock to an accredited investor, YA GlobalInvestments, L.P. (“YA”), an affiliate of Yorkville Advisors, subject tocertain terms and conditions (See Note 2 of the consolidated financialstatements).  If we raise additionalcapital by issuing equity securities, our shareholders could experiencesubstantial dilution.  As a result ofthese uncertainties, there is significant doubt about our ability to continueas a going concern.

 

In September 2008,we raised approximately $1.7 million, net of offering expenses, through a stockpurchase agreement in connection with our entry into a development andcommercialization agreement with Wyeth. We issued 1,888,606 shares of common stock at a price of $0.908 pershare.

 

In September 2008,we entered into a SEDA, with YA, for the sale of up to $15.0 million of sharesof our common stock over a two-year commitment period.   Inconnection with entering into the SEDA, we also entered into a RegistrationRights Agreement with YA. Under the terms of the SEDA, we may from time totime, in our discretion, sell newly-issued shares of our common stock to YA ata discount to market of 5%. The amount of each advance is limited to thegreater of $400,000 or the average trading volume for the five trading daysprior to the advance notice date.  We are not obligated to utilize any ofthe $15.0 million available under the SEDA and there are no minimum commitmentsor minimum use penalties.  Based upon our currently outstanding shares ofcommon stock, and options and warrants to purchase common stock, the aggregatenumber of shares that we may sell under the SEDA without stockholder approvalis currently limited to approximately 4.5 million shares. Unless stockholderapproval is sought and obtained, the total amount of funds that ultimately canbe raised under the SEDA over the two-year term will depend on the then-currentprice for our stock and the number of shares actually sold.  The amendmentto our credit facility contains a covenant limiting our utilization of the SEDAto $9.0 million without the bank’s prior consent. In addition, under the termsof the SEDA, we are not able to utilize the facility after receipt of adelisting notice from the principal trading market on which our common stock isbeing traded, which was received on October 1, 2008.  We are currently working with YA to obtain awaiver to this covenant.  In the event awaiver cannot be obtained, we will not be able to utilize this facility unlessand until we meet certain listing requirements. Pursuant to the terms of the SEDA, we paid to YA a commitment fee of$300,000 by issuing 393,339 shares of our common stock, and incurred $55,000 ofother closing costs.

 

In October 2008, werestructured our line of credit.  Theterms of the new line of credit increased the availability under the facilityfrom $4.0 million to $10.0 million, extended the maturity date one year to January 1,2011, and changed the floating rate to a fixed interest rate of 8.5%.  The line of credit is secured bysubstantially all of our assets, except that the collateral specificallyexcludes any rights that we may have as a result of our license agreement withAbbott for cethromycin, and is further secured by 2.5 million shares of ourcommon stock held by ALS Ventures, LLC. The credit agreement contains a material adverse change clause, which issubject to the judgment of the lender and, if triggered, can accelerate thepayment of the debt.  The terms alsoinclude a covenant limiting the use of the SEDA to $9.0 million without thebank’s consent.   We have issuedwarrants for the purchase of 65,000 shares of our common stock at an exerciseprice of $1.00 per share to the lender as a closing fee.  The warrants became exercisable upon issuanceand will expire five years from the date of the grant.  We borrowed $6.0 million on our new line ofcredit in October 2008, to partially fund the Abbott milestone paymentmade in October.

 

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On October 1,2008, we received notice from the Nasdaq Listing Qualifications Departmentstating that the market value of our listed securities was below $35.0 millionfor 10 consecutive days, and that we were in violation of the requirement forcontinued listing on the Nasdaq Capital Market under Marketplace Rule 4310(c)(3)(B) (the“Rule”).  Nasdaq also informed us that we are not in compliance witheither of Marketplace Rules 4310(c)(3)(A) or 4310(c)(3)(C), whichtogether require either minimum stockholders’ equity of $2.5 million or netincome from continuing operations of $500,000 in the most recently completedfiscal year or in two of the last three most recently completed fiscal yearsfor listing eligibility.

 

We were not compliantwith the Rule by the deadline of October 31, 2008 and received noticefrom the Nasdaq Listing Qualifications Department stating that we are inviolation of the requirement for continued listing on the Nasdaq CapitalMarket.   We intend to appeal this decision with the Nasdaq ListingQualifications Department.  Our securities will remain listed on theNasdaq Capital Market throughout the appeal process.  While we intend to appeal the determinationby the Nasdaq staff to delist our common stock to a Nasdaq ListingQualifications Panel, we may not be successful in our appeal, in which case ourcommon stock will be delisted.  In the event of delisting, trading, ifany, would be conducted in the over-the-counter market in the so-called “pinksheets” or on the OTC Bulletin Board.  Should this occur, existingstockholders will suffer decreased liquidity.

 

In December 2007, weraised approximately $17.8 million, net of underwriting discounts and offeringexpenses, in connection with the issuance of 10,191,083 shares and warrants topurchase 5,095,542 shares of our common stock at $1.96 per share.  The exercise price of the warrants is $2.15per share and they expire in December 2012.

 

**Results of Operations**

 

*Three months ended September 30,2008 compared to three months ended September 30, 2007*

* *

*Revenue.*  TheCompany reported revenue of $32,006 for the three months ended September 30,2008 compared to $0 for the three months ended September 30, 2007.  Revenue in 2008 was derived from a grantawarded by the DTRA of the U.S. Department of Defense.  The terms of the grant agreement include anine-month base period, beginning in August 2008, totaling $1.8 millionand an option period totaling $2.0 million that would extend the grant for anadditional 15 months.

 

*Research and development expense.*  Researchand development expense increased $7.4 million to $11.2 million for the threemonths ended September 30, 2008. The entire increase is attributable to costs incurred for ourcethromycin development program. Included in this amount is a $10.0 million milestone expense incurredunder our license agreement for cethromycin with Abbott.  The milestone was triggered upon submissionof the cethromycin NDA to the FDA, which occurred on September 30,2008.  Clinical trial expenses declined$2.6 million when compared to the same period last year, the result of thecompletion of our second clinical trial in November 2007.

 

*Generaland administrative expense.*  General andadministrative expenses declined $0.2 million to $1.8 million for the threemonths ended September 30, 2008. The decrease was attributable to marketing expenses incurred inconnection with our attendance at the annual meeting of the InterscienceConference of Antimicrobial Agents and Chemotherapy (“ICAAC”) which was held inthe third quarter in 2007 and the fourth quarter in 2008.  The Company will be in attendance this yearand expects to incur a similar level of marketing expenses related to theconference during the fourth quarter.

 

*Interestincome.*  Interest income declined $0.1million to $0.1 million for the three months ended September 30, 2008, theresult of a lower average cash balance and associated interest rates in thethird quarter of 2008 as compared to the same period in 2007.

 

*Interestexpense.*  Interest expense declined $14,000in the three months ended September 30, 2008 as compared to the sameperiod last year, the result of a renewal of our line of credit at a lowerinterest rate.

 

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*Nine months ended September 30,2008 compared to the nine months ended September 30, 2007*

 

*Revenue.*  Revenuefor the nine months ended September 30, 2008 was $32,006 compared to $0for the nine months ended September 30, 2007.  Revenue in 2008 was derived from a grantawarded by the DTRA of the U.S. Department of Defense.   The terms of the grant agreement include anine-month base period, beginning in August 2008, totaling $1.8 millionand an option period totaling $2.0 million that would extend the grant for anadditional 15 months.

 

*Research and development expense.*  Researchand development expense decreased $6.9 million to $14.8 million for the ninemonths ended September 30, 2008 as compared to the same period in2007.  Included in the 2008 amount is a$10.0 million milestone expense incurred under our license agreement forcethromycin with Abbott.  The largestcomponent of the total decline was cethromycin clinical trial expenses which were$12.0 million lower than the same period last year.  Data from the second of two pivotal Phase IIIclinical trials was released in November of 2007 effectively bringing thetrials to their natural conclusion. Expenses incurred to compile our NDA totaled $2.0 million for the ninemonths ended September 30, 2008 and represented a decline of $4.5 millionwhen compared to the same period last year. The majority of this decrease is attributable to our cethromycinbulk-scale manufacturing program that was successfully concluded during thethird quarter of 2007.  Manufacturingexpenses incurred in relation to process optimization activities of cethromycintotaled $0.6 million for the nine months ended September 30, 2008 and wereentirely incremental to the same period in the previous year. Expenses relatedto our study testing cethromycin’s efficacy in treating inhalation anthraxpost-exposure for the prophylaxis in non-human primates declined $1.1 millionto $0 for the nine months ended September 30, 2008 as compared to the sameperiod last year.  This study wascompleted during the third quarter of 2007.

 

*Generaland administrative expense.*  General andadministrative expense decreased $0.1 million to $5.2 million for the ninemonths ended September 30, 2008 as compared to the same period in2007.  Minor increases in salary andbenefit, facilities and marketing expenses were offset by decreases inmarketing and insurance expenses resulting in a net decrease of $0.1 million.

 

* Interestincome.*  Interest income declined $0.4million to $0.3 million for the nine months ended September 30, 2008, theresult of a lower average cash balance and associated interest rates in thefirst half of 2008 as compared to the same period in 2007.

 

*Interest expense.*  Interestexpense declined $40,000 in the nine months ended September 30, 2008 ascompared to the same period last year, the result of a renewal of our line ofcredit at a lower interest rate.

 

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**Liquidityand Capital Resources**

 

We have devoted substantially all of our cashresources to research and development and general and administrativeexpenses.  To date, we have not generatedany revenues from the sale of products, and we do not expect to generate anysuch revenues in the near term, if at all. As a result, we have incurred an accumulated deficit of $119.6 millionas of September 30, 2008 and we expect to incur significant operatinglosses for the foreseeable future.  Cashand cash equivalents were $7.8 million as of September 30, 2008.  Since our inception in 1999 to August 2005,we financed our operations primarily through debt and capital contributionsfrom our founder and controlling stockholder and borrowings under our bank lineof credit.  In August 2005 wecompleted our initial public offering in which we raised $28.7 million, net ofunderwriters discount and offering costs. Since that time, we have completed three private placements in which weraised $52.8 million, net of underwriters’ discounts and offering costs.  As of September 30, 2008 we had negativeworking capital of $6.2 million, the result of the $10.0 million milestoneobligation payable to Abbott upon submission of our NDA for cethromycin.   We funded this obligation in October 2008using our existing cash resources and borrowings under our restructured line ofcredit (See Note 4 to the consolidated financial statements).

 

In September 2001, our Chief Executive Officermade a $2.0 million loan to us. The loan accrues interest at the rate of7.75%, and is due and payable on January 5, 2009.  The balance of the loan was $2.0 million asof September 30, 2008.

 

We have a line of credit with a local financialinstitution under which we had $3.9 million outstanding as ofSeptember 30, 2008.  In October 2008,we restructured our line of credit.  Theterms of the new line of credit increased the availability under the facilityfrom $4.0 million to $10.0 million, extended the maturity date one year to January 1,2011, and changed the floating rate to a fixed interest rate of 8.5%.  The line of credit is secured bysubstantially all of our assets, except that the collateral specificallyexcludes any rights that we may have as a result of our license agreement withAbbott for cethromycin, and is further secured by 2.5 million shares of ourcommon stock held by ALS Ventures, LLC. The credit agreement contains a material adverse change clause, which issubject to the judgment of the lender and, if triggered, can accelerate thepayment of the debt.  The terms alsoinclude a covenant limiting the use of the SEDA to $9.0 million without thebank’s consent.   We issued warrantsfor the purchase of 65,000 shares of common stock at an exercise price of $1.00per share to the lender as a closing fee. The warrants became exercisable upon issuance and will expire five yearsfrom the date of the grant.  We borrowed$6.0 million on our new line of credit in October 2008, to partially fundthe Abbott milestone payment made in October.

 

During the nine months ended September 30, 2008,cash used in operating activities totaled $11.8 million.  Approximately $7.1 million was used for thedevelopment of cethromycin, $0.3 million for anthrax trials, $0.3 million forresearch activities related to our proprietary portfolio of compounds and $4.1million for general operations net of $0.3 million in interest income.

 

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*Contractual Obligations*

 

As of September 30, 2008, the annual amounts offuture minimum payments under debt obligations, interest, lease obligations andother long term liabilities consisting of executed research, development,license and commercialization agreements are as follows:

 
| ** **                                 | ** ** | **Payments Due by December 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2008**                                             | ** ** | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Total** | ** ** |
| Notes payable                              |       | $                                                    | —     |       | $          | 2,000,000 |   | $ | 3,915,000 |   | $ | — |   | $ | — |   | $ | 5,915,000 |   |
| Interest                                   |       | 100,529                                              |       | 246,321    |       | 304 |   | — |   | — |   | 347,154 |   |
| Abbott milestone  payment                  |       | 10,000,000                                           |       | —     |       | — |   | — |   | — |   | 10,000,000 |   |
| Cethromycin  clinical & NDA costs |       | 462,717                                              |       | 853,827    |       | — |   | — |   | — |   | 1,316,544 |   |
| Commercialization  costs                   |       | 27,459                                               |       | 4,385,154  |       | — |   | — |   | — |   | 4,412,613 |   |
| ALS-357 clinical  trial                    |       | 12,018                                               |       | 869,965    |       | — |   | — |   | — |   | 881,983 |   |
| Capital leases                             |       | 1,918                                                |       | 8,468      |       | 4,350 |   | — |   | — |   | 14,736 |   |
|                                       |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Total                                      |       | $                                                    | 10,604,641 |       | $          | 8,363,735 |   | $ | 3,919,654 |   | $ | — |   | $ | — |   | $ | 22,888,030 |   |

 

In October 2008, we restructured our line ofcredit.  The terms of the new line ofcredit increased the availability under the facility from $4.0 million to $10.0million, extended the maturity date one year to January 1, 2011, andchanged the floating rate to a fixed interest rate of 8.5%. The line of creditis secured by substantially all of our assets, except that the collateralspecifically excludes any rights that we may have as a result of our licenseagreement with Abbott for cethromycin, and is further secured by 2.5 millionshares of our common stock held by ALS Ventures, LLC.  The credit agreement contains a materialadverse change clause, which is subject to the judgment of the lender and, iftriggered, can accelerate the payment of the debt. The terms also include acovenant limiting the use of the SEDA to $9.0 million without the bank’sconsent.   We issued warrants forthe purchase of 65,000 shares of common stock at an exercise price of $1.00 pershare to the lender as a closing fee. The warrants became exercisable uponissuance and will expire five years from the date of the grant.  We borrowed $6.0 million on our new line ofcredit in October 2008, to partially fund the Abbott milestone paymentmade in October.  The table abovereflects our existing line of credit as of September 30, 2008.

 

In October 2008, we made a $10.0 millionmilestone payment to Abbott triggered by our NDA submission for cethromycin.The above table does not include the potential $30.0 million product basedmilestone payment under our license agreement with Abbott which we will oweAbbott if and when the FDA approves the NDA, which we estimate will occur in2009.   Thereafter, we would owe Abbottan additional $2.5 million upon reaching $200.0 million in aggregate net salesof cethromycin and $5.0 million upon reaching $400.0 million in aggregate netsales.  The periods in which milestoneobligations become payable, if at all, are only estimates due to uncertaintiesassociated with the completion of the clinical studies and related regulatoryfilings.

 

In the first ten months of 2008 we executedcethromycin development-related contracts totaling $1.5 million.  Of the total contracts executed, $0.8 millionrelated to the compilation of our cethromycin NDA and NDA directed studies,$0.6 million related to process optimization of our commercial manufacturingprogram, and $0.1 million related to the development of an intravenousformulation for cethromycin.

 

In the third quarter of2008, we entered into contracts totaling $4.4 million related to thecommercialization and marketing of cethromycin. This includes a letter of intent for the procurement and synthesis ofraw materials to be used in the commercial scale production of cethromycin.    The lead time for acquiring these rawmaterials is expected to be six to eight months, therefore we do not expectcash payment associated with this agreement to be made until the second quarterof 2009.  The cost of these raw materialsare subject to changes in the Euro/US Dollar exchange rate. The hypotheticalcost of these raw materials (reflected in the table above) at September 30,2008 was $3.9 million.  The remaining$0.5 million of contracts executed related to the marketing of cethromycin.

 

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We also executed acontract during the second quarter to initiate a Phase I/II clinical trial ofour anti-melanoma compound ALS-357.  Thistrial will assess the safety, tolerability, and preliminary efficacy of ALS-357when administered topically to patients with cutaneous metastaticmelanoma.  The contract totalsapproximately $0.9 million which represents the upper limit of cost if themaximum number of patients is enrolled. To the extent fewer patients are required as determined by the protocol;expenses related to the trial could be lower. Enrollment will be based upon a number of factors which are difficult toforecast and therefore we cannot reasonably estimate the true cost of the trialbeyond what is defined as the maximum limit per the contract.

 

Our commitments under operating leases consist ofpayments made to a related party relating to our facility lease in Woodridge,Illinois, which expired in September of 2008.  We are currently in negotiations with ourcurrent landlord to renew the lease and therefore have not reflected any leasecommitments as of September 30, 2008. Following the expiration of the lease in September, we are making paymentsequal to our last payment under the previous agreement.

 

In conjunction with thegrant awarded by the DTRA, we entered into subcontractor arrangements tofurther study cethromycin as a potential broad-spectrum medicalcountermeasure.  These costs, which arenot included in the table above, are expected to be approximately $1.5 millionover a nine-month base period and $1.6 million for an option period that wouldextend the arrangements for an additional 15 months.  The subcontractor arrangements were enteredinto in the fourth quarter of 2008.

 

In October 2008, werestructured our line of credit in order to increase the amount available underthe facility.  We also borrowed $6.0million on our new line of credit in October 2008.  This, along with existing cash resourcesfunded the $10.0 million milestone payment to Abbott made in October 2008,triggered upon submission of the cethromycin NDA to the FDA. We believe ourcurrent cash and cash equivalents are sufficient to fund our existing andanticipated development commitments, indebtedness and general operatingexpenses through the end of 2008.  Wewill not be generating any product-based revenues or realizing cash flows fromoperations in the near term, if at all, and may not have sufficient cash or otherfunding available to complete our anticipated business activities during 2009.In order to address our working capital shortfall we intend to raise additionalcapital by licensing our lead compound, cethromycin, to commercial partners.  We believe, based upon current marketconditions, additional commercial partnership agreements would include a seriesof milestone payments, including up-front milestones that would fund ourcontinued operations.  Although managementbelieves we could secure additional commercial partnerships, there can be noassurances that such partnerships will be available at terms acceptable to us,if at all.   In addition, we have executed a SEDAwhich provides for the sale of up to $15.0 million of our common stock to anaccredited investor, YA, subject to certain terms and conditions (See Note 2 ofthe consolidated financial statements). If we raise additional capital by issuing equity securities, ourshareholders could experience substantial dilution.  As a result of these uncertainties, there issignificant doubt about our ability to continue as a going concern.

 

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Our future capital uses andrequirements depend on numerous forward-looking factors.  These factors include, but are not limitedto, the following:

 

·                                          progressin our clinical development programs, as well as the magnitude of theseprograms;

 

·                                          thetiming, receipt and amount of milestone and other payments, if any, from present and future collaborators;

 

·                                          our abilityto raise additional debt or equity financing or the receipt of milestonepayments that would be paid to us as a result of our entering into a commercialpartnership for cethromycin, or a combination of both;

 

·                                          ourability to establish and maintain additional collaborative arrangements;

 

·                                          theresources, time and costs required to successfully initiate and complete ourpreclinical and clinical trials, obtain regulatory approvals, protect ourintellectual property and obtain and maintain licenses to third-partyintellectual property;

 

·                                          thecost of preparing, filing,prosecuting, maintaining and enforcing patent claims; and

 

·                                          thetiming, receipt and amount ofsales and royalties, if any, from our potential products.

 

If, at any time, our prospects for financing ourclinical development programs are limited, we may decide to reduce research anddevelopment expenses by delaying or discontinuing certain programs.

 

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**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities and expenses and related disclosure of contingent assetsand liabilities.  We review our estimateson an ongoing basis.  We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.  While our significant accounting policies aredescribed in more detail in the notes to our financial statements included inthis quarterly report, we believe the following accounting policies to becritical to the judgments and estimates used in the preparation of ourfinancial statements.

 

*Researchand Development*

 

Research anddevelopment expenses consist of internal research costs and fees paid forcontract research in conjunction with the research and development of ourproprietary product portfolio.  All suchcosts are expensed as incurred.  Clinicaltrial costs incurred by third parties are expensed as the contracted work isperformed.  We estimate both the totalcost and time period of the trials and the percent completed as of thataccounting date.  We believe that theestimates made as of September 30, 2008 are reflective of the actualexpenses incurred as of that date.

 

*Stock-basedCompensation*

 

We account forstock-based awards to employees and non-employees using the accountingprovisions of Statement of Financial Accounting Standards No. 123(R) *Share-Based Payments* which provides for the use of the fairvalue based method to determine compensation for all arrangements where sharesof stock or equity instruments are issued for compensation.  We use a Black-Scholes options-pricing modelto determine the fair value of each option grant as of the date of grant forexpense incurred.  The Black-Scholesmodel requires inputs for risk-free interest rate, dividend yield, volatilityand expected lives of the options. Expected volatility is based on historical volatility of our stock sinceAugust 5, 2005, the date our stock began to trade publicly.  The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curvein effect at the time of the grant.  Theexpected lives for options granted represents the period of time that optionsgranted are expected to be outstanding and is derived from the contractualterms of the options granted.  Weestimate future forfeitures of options based upon historical forfeiture rates.

 

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**Forward-LookingStatements and Risk Factors**

 

ThisQuarterly Report on Form 10-Q, including Management’s Discussion andAnalysis of Financial Condition and Results of Operations, containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Forward-looking statements often are proceeded by words such as “believes,”“expects,” “may,” “anticipates,” “plans,” “intends,” “assumes,” “will” orsimilar expressions.  Forward-looking statements reflect management’scurrent expectations, as of the date of this report, and involve certain risksand uncertainties.   Our actualresults could differ materially from those anticipated in these forward-lookingstatements as a result of various factors.   Some of the factors that could cause futureresults to materially differ from the recent results or those projected inforward-looking statements include the “Risk Factors” described in our AnnualReport on Form 10-K.

 

**Item 3. *Quantitative and Qualitative Disclosures About Market Risk***

 

Our exposure tomarket risk is currently confined to our cash, cash equivalents, line of creditand certain contract manufacturing agreements. We currently do not hedgeinterest rate exposure. We have not used derivative financial instruments forspeculation or trading purposes. Because of the short-term maturities of ourcash and cash equivalents, we do not believe that an increase in market rateswould have any significant impact on their realized value.

 

Our most liquidassets are cash and cash equivalents. Because of their liquidity, these assetsare not directly affected by inflation. We also believe that we have intangibleassets in the value of our intellectual property. In accordance with generallyaccepted accounting principles, we have not capitalized the value of thisintellectual property on our balance sheet. Due to the nature of thisintellectual property, we believe that these intangible assets are not affectedby inflation. Because we intend to retain and continue to use our equipment,furniture and fixtures and leasehold improvements, we believe that theincremental inflation related to replacement costs of such items will notmaterially affect our operations. However, the rate of inflation affects ourexpenses, such as those for employee compensation and contract services, whichcould increase our level of expenses and the rate at which we use ourresources.  The fluctuation in theexchange rate between the U.S. Dollar and the Euro could affect amounts dueunder certain contract manufacturing agreements.  A hypothetical increase in the exchange ratebetween the Euro and the U.S. Dollar as of September 30, 2008 of tenpercent, would increase contract manufacturing costs $391,000.

 

**Item 4. *Controls and Procedures***

 

Our management, under thesupervision and with the participation of our Chief Executive Officer (“CEO”)and Chief Financial Officer (“CFO”), has evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report.  Based onthat evaluation, our CEO and CFO have concluded that the Company’s disclosurecontrols and procedures were effective as of the end of the period covered bythis report.

 

**Changes in Internal Control**

 

Duringthe period covered by this report, there have been no changes in our internalcontrol over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II — OTHERINFORMATION**

 

**Item 1A. *Risk Factors***

*** ***

Our business, financialcondition, operating results and cash flows may be impacted by a number offactors, including those set forth in Item 1A of Part I of our Annual Report onForm 10-K for the fiscal year ended December 31, 2007.  Set forth below are material changes in ourrisk factors since the 2007 Form 10-K. The information presented below updates, and should be read inconjunction with, the risk factors and other information disclosed in our 2007Form 10-K and this Quarterly Report on Form 10-Q.

*** ***

***We may not be able to continue as a going concern or fund our existingcapital needs.***

 

Our independentregistered public accounting firm included an explanatory paragraph in thereport on our 2007 financial statements related to the uncertainty in ourability to continue as a going concern. The paragraph stated that we do not have sufficient cash on-hand orother funding available to meet our obligations and sustain our operations,which raises substantial doubt about our ability to continue as a goingconcern.   We currently believe that ourcurrent cash and cash equivalents are only sufficient to fund our existing andanticipated development commitments, indebtedness and general operatingexpenses through the end of 2008.  Wewill not be generating any product-based revenues or realizing cash flows fromoperations in the near term, if at all, and may not have sufficient cash orother funding available to complete our anticipated business activities during2009.  In order to address our workingcapital shortfall we intend to raise additional capital by licensing our leadcompound, cethromycin, to commercial partners. There can be no assurances that such partnerships will be available onterms acceptable to us, if at all.  

 

In order to provideaccess to needed capital, we executed a Standby Equity Distribution Agreement (“SEDA”)that allows us to sell shares of our common stock to an accredited investor, YAGlobal Investments, L.P. (“YA”), subject to certain terms and conditions.  Although we have not yet done so, any sharesof our common stock that we determine to sell pursuant to the SEDA will have adilutive impact on our stockholders. The SEDA terms also provide that YA maypromptly re-sell the shares we issue to them under the SEDA and such re-salescould cause the market price of our common stock to decline significantly withadvances under the SEDA. To the extent of any such decline, any subsequentadvances would require us to issue a greater number of shares of common stockto YA in exchange for each dollar of the advance. Under these circumstances ourexisting stockholders would experience greater dilution. The sale of our commonstock under the SEDA could encourage short sales by third parties, which couldcontribute to the further decline of our stock price.  There can be no assurance that we will beable to obtain adequate capital funding in the future, under the SEDA orotherwise, to continue operations and implement our strategy.  As a result of these uncertainties, there issignificant doubt about our ability to continue as a going concern.

 

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**Item 6. *Exhibits***

 

The following is a listof exhibits filed as part of this Form 10-Q:

 
| Number                 | ** ** | **Description**                                                                                                                                                                                           |
|------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |       |                                                                                                                                                                                                      |
| 3.1          |       | Amended and Restated Certificate of Incorporation of  Advanced Life Sciences Holdings, Inc. (as filed in our Registration Statement  on Form S-1/A as exhibit 3.2 on July 1, 2005)                        |
|                   |       |                                                                                                                                                                                                      |
| 3.2          |       | Certificate of Incorporation of Advanced Life  Sciences, Inc. (as filed in our Amended Registration Statement on  Form S-1/A as exhibit 3.1 on June 3, 2005)                                              |
|                   |       |                                                                                                                                                                                                      |
| 3.3          |       | Amended By-laws of Advanced Life Sciences Holdings,  Inc. (as filed in our Annual Report on Form 10-K as exhibit  3.3 on February 19, 2008)                                                          |
|                   |       |                                                                                                                                                                                                      |
|   4.1*  |       | Warrant issued to The Leaders Group, Inc. to  purchase 65,000 shares of Advanced Life Sciences Holdings Common stock at $1  per share, dated as of October 23, 2008.                            |
|                   |       |                                                                                                                                                                                                      |
| 10.1*             |       | Amended and Restated Business Loan Agreement between  Advanced Life Sciences, Inc. and The Leaders Bank, dated as of  October 23, 2008.                                                         |
|                   |       |                                                                                                                                                                                                      |
| 10.2*             |       | Amended and Restated Promissory Note between  Advanced Life Sciences, Inc. and The Leaders Bank, dated as of  October 23, 2008.                                                                 |
|                   |       |                                                                                                                                                                                                      |
| 10.3*             |       | Commercial Pledge Agreement between Advanced Life  Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008.                                                                           |
|                   |       |                                                                                                                                                                                                      |
| 10.4*             |       | Commercial Guaranty between Advanced Life Sciences  Holdings, Inc. and The Leaders Bank, dated as of October 23, 2008.                                                                          |
|                   |       |                                                                                                                                                                                                      |
| 10.5*             |       | Commercial Security Agreement between Advanced Life  Sciences Holdings, Inc. and The Leaders Bank, dated as of  October 23, 2008.                                                               |
|                   |       |                                                                                                                                                                                                      |
| 10.6*             |       | Amended and Restated Commercial Security Agreement  between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23,  2008                                                    |
|                   |       |                                                                                                                                                                                                      |
| 10.7*             |       | Intellectual Property Security Agreement between  Advanced Life Sciences, Inc. and The Leaders Bank, dated as of  October 23, 2008.                                                             |
|                   |       |                                                                                                                                                                                                      |
| 10.8*             |       | Commercial Guaranty between Advanced Life Sciences  Holdings Inc. and The Leaders Bank, dated as of October 23, 2008.                                                                                |
|                   |       |                                                                                                                                                                                                      |
| 10.9*             |       | Amended and Restated Commercial Pledge Agreement  between ALS Ventures, LLC, Advanced Life Sciences, Inc. and The Leaders  Bank, dated as of October 23, 2008.                                  |
|                   |       |                                                                                                                                                                                                      |
| 10.10*            |       | Agreement to Provide Insurance between Advanced Life  Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008.                                                                        |
|                   |       |                                                                                                                                                                                                      |
| 10.11*+                |       | Development and Commercialization Agreement by and  between Wyeth acting through its Wyeth Pharmaceuticals Division and Advanced  Life Sciences Holdings, Inc., dated as of September 23, 2008. |
|                   |       |                                                                                                                                                                                                      |
| 31.1*             |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                 |
|                   |       |                                                                                                                                                                                                      |
| 31.2*             |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                 |
|                   |       |                                                                                                                                                                                                      |
| 32.1*             |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                            |
|                   |       |                                                                                                                                                                                                      |
| 32.2*             |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                            |

----

*  Filed herewith.

+  Certaininformation in this exhibit has been omitted and filed separately with the SECpursuant to a confidential treatment request under Rule 24b-2 of theExchange Act. Omitted portions are indicated in this exhibit with [***].

 

23

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Tableof Contents

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|          |     | Advanced Life Sciences Holdings, Inc. |
|----------|----------|--------------------------------------------|
|     |     |                                       |
|     |     | By:                                        | /s/ Michael T.  Flavin, Ph.D. |
|     |     |                                       |   |
|     |     |                                       | Michael T.  Flavin, Ph.D. |
| * * | * * | * *                                   | *Chairman  of the Board* |
| * * | * * | * *                                   | *and  Chief Executive Officer* |
|     |     |                                       |   |
|     |     | By:                                        | /s/ John L.  Flavin |
|     |     |                                       |   |
|     |     |                                       | John L. Flavin |
| * * | * * | * *                                   | *President  and* |
| * * | * * | * *                                   | *Chief  Financial Officer* |

 

 

Dated: November 6,2008

 

24

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Tableof Contents

 

**EXHIBIT INDEX**

 
| **Number**             | ** ** | **Description**                                                                                                                                                                                           |
|------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |       |                                                                                                                                                                                                      |
| 3.1          |       | Amended and Restated Certificate of Incorporation of  Advanced Life Sciences Holdings, Inc. (as filed in our Registration Statement  on Form S-1/A as exhibit 3.2 on July 1, 2005)                        |
|                   |       |                                                                                                                                                                                                      |
| 3.2          |       | Certificate of Incorporation of Advanced Life  Sciences, Inc. (as filed in our Amended Registration Statement on  Form S-1/A as exhibit 3.1 on June 3, 2005)                                              |
|                   |       |                                                                                                                                                                                                      |
| 3.3          |       | Amended By-laws of Advanced Life Sciences Holdings,  Inc. (as filed in our Annual Report on Form 10-K as exhibit 3.3 on  February 19, 2008)                                                          |
|                   |       |                                                                                                                                                                                                      |
|   4.1*  |       | Warrant issued to The Leaders Group, Inc. to  purchase 65,000 shares of Advanced Life Sciences Holdings Common stock at $1  per share, dated as of October 23, 2008.                            |
|                   |       |                                                                                                                                                                                                      |
| 10.1*             |       | Amended and Restated Business Loan Agreement between  Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23,  2008.                                                         |
|                   |       |                                                                                                                                                                                                      |
| 10.2*             |       | Amended and Restated Promissory Note between  Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23,  2008.                                                                 |
|                   |       |                                                                                                                                                                                                      |
| 10.3*             |       | Commercial Pledge Agreement between Advanced Life  Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008.                                                                           |
|                   |       |                                                                                                                                                                                                      |
| 10.4*             |       | Commercial Guaranty between Advanced Life Sciences  Holdings, Inc. and The Leaders Bank, dated as of October 23, 2008.                                                                          |
|                   |       |                                                                                                                                                                                                      |
| 10.5*             |       | Commercial Security Agreement between Advanced Life  Sciences Holdings, Inc. and The Leaders Bank, dated as of October 23,  2008.                                                               |
|                   |       |                                                                                                                                                                                                      |
| 10.6*             |       | Amended and Restated Commercial Security Agreement  between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23,  2008                                                    |
|                   |       |                                                                                                                                                                                                      |
| 10.7*             |       | Intellectual Property  Security Agreement between Advanced Life Sciences, Inc. and The Leaders  Bank, dated as of October 23, 2008.

                                                      |
| 10.8*             |       | Commercial Guaranty between Advanced Life Sciences  Holdings Inc. and The Leaders Bank, dated as of October 23, 2008.                                                                                |
|                   |       |                                                                                                                                                                                                      |
| 10.9*             |       | Amended and Restated Commercial Pledge Agreement  between ALS Ventures, LLC, Advanced Life Sciences, Inc. and The Leaders  Bank, dated as of October 23, 2008.                                  |
|                   |       |                                                                                                                                                                                                      |
| 10.10*            |       | Agreement to Provide Insurance between Advanced Life  Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008.                                                                        |
|                   |       |                                                                                                                                                                                                      |
| 10.11*+                |       | Development and Commercialization Agreement by and  between Wyeth acting through its Wyeth Pharmaceuticals Division and Advanced  Life Sciences Holdings, Inc., dated as of September 23, 2008. |
|                   |       |                                                                                                                                                                                                      |
| 31.1*             |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                 |
|                   |       |                                                                                                                                                                                                      |
| 31.2*             |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                 |
|                   |       |                                                                                                                                                                                                      |
| 32.1*             |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                            |
|                   |       |                                                                                                                                                                                                      |
| 32.2*             |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                            |

----

*  Filed herewith.

+  Certain informationin this exhibit has been omitted and filed separately with the SEC pursuant toa confidential treatment request under Rule 24b-2 of the Exchange Act.Omitted portions are indicated in this exhibit with [***].

 

25

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