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 TOSECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended: September 30,2010**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission File No: 000-51436**

 

**ADVANCED LIFE SCIENCES HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**1440 Davey RoadWoodridge, IL 60517**(Address, including zip code of registrantsprincipal executive offices)

 

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

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post suchfiles).   Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer. See the definitions of  “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes o No x

 

Asof  November 11, 2010, theregistrant had 230,266,670 shares of common stock, $0.01 par value per share,outstanding.

 

 

 

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Table ofContents

 

**ADVANCED LIFE SCIENCES HOLDINGS, INC.(A DEVELOPMENT STAGE ENTITY)INDEX**

**Form 10-Q**

 
| **PART I —  FINANCIAL INFORMATION (UNAUDITED)** |
|----------------------------------------------------------------|
| Item 1.                                                   | Consolidated Financial  Statements: |
|                                                           | Consolidated  Balance Sheets as of September 30, 2010 and December 31, 2009 |
|                                                           | Consolidated Statements of Operations for the three  and nine months ended September 30, 2010 and 2009 and for the period  from inception (January 1, 1999) through September 30, 2010 |
|                                                           | Consolidated Statements of Total Equity (Deficit) for  period from inception (January 1, 1999) through September 30, 2010 |
|                                                           | Consolidated Statements of Cash Flows for the nine  months ended September 30, 2010 and 2009 and for the period from  inception (January 1, 1999) through September 30, 2010 |
|                                                           | 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 3.                                                        | Defaults  Upon Senior Securities |
| Item 6.                                                   | Exhibits |
| Signatures                                                     |
| Exhibit Index                                             |

 

1

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Table ofContents

 

**PART I —FINANCIAL INFORMATION**

 

**Item 1.    *Consolidated FinancialStatements (Unaudited)***

 

**ADVANCED LIFE SCIENCES HOLDINGS, INC. ANDSUBSIDIARY**

**(A Development Stage Company)**

 

**CONSOLIDATED BALANCE SHEETS **

**(Unaudited)**

 
| ** **                                                                                                                                                                                            | ** ** | **September 30,** | ** **      | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-----------------|-----------------------|------------|
| ** **                                                                                                                                                                                            | ** ** | **2010**               | ** **      | **2009**              | ** ** |
| ** **                                                                                                                                                                                            |       |                   |            |                  |       |
| **ASSETS**                                                                                                                                                                                            | ** ** | ** **             | ** **      | ** **            | ** ** |
| ** **                                                                                                                                                                                            | ** ** | ** **             | ** **      | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                       |       |                   |            |                  |       |
| Cash and cash equivalents                                                                                                                                                                             |       | $                      | 950,840         |                  | $          |  2,841,801 |   |
| Grant receivable                                                                                                                                                                                      |       | —                 |            | 530,219               |       |
| Prepaid insurance                                                                                                                                                                                     |       | 44,226                 |            | 111,761               |       |
| Other prepaid expenses                                                                                                                                                                                |       | 33,950                 |            | 88,535                |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| Total current assets                                                                                                                                                                                  |       | 1,029,016              |            | 3,572,316             |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                               |       |                   |            |                  |       |
| Furniture and fixtures                                                                                                                                                                                |       | 214,380                |            | 244,072               |       |
| Computer software and equipment                                                                                                                                                                       |       | 258,786                |            | 258,786               |       |
| Leasehold improvements                                                                                                                                                                                |       | 177,253                |            | 177,253               |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| Total property and equipment—at cost                                                                                                                                                             |       | 650,419                |            | 680,111               |       |
| Less accumulated depreciation                                                                                                                                                                         |       | (620,046               | )               | (624,158              | )          |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| Property and equipment—net                                                                                                                                                                       |       | 30,373                 |            | 55,953                |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| OTHER ASSETS:                                                                                                                                                                                         |       |                   |            |                  |       |
| Commercial launch materials                                                                                                                                                                           |       | 2,760,936              |            | 2,760,936             |       |
| Deferred offering and financing costs                                                                                                                                                                 |       | 414,972                |            | 13,566                |       |
| Other long-term assets                                                                                                                                                                                |       | 25,000                 |            | 25,000                |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| Total other assets                                                                                                                                                                                    |       | 3,200,908              |            | 2,799,502             |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| TOTAL ASSETS                                                                                                                                                                                          |       | $                      |  4,260,297 |                  | $          |  6,427,771 |   |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| **LIABILITIES AND EQUITY (DEFICIT)**                                                                                                                                                                  |       |                   |            |                  |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                                  |       |                   |            |                  |       |
| Accounts payable                                                                                                                                                                                      |       | $                      |  1,097,350 |                  | $          |  604,334 |   |
| Accrued payroll                                                                                                                                                                                       |       | 553,401                |            | 664,436               |       |
| Other accrued expenses                                                                                                                                                                                |       | 651,689                |            | 661,504               |       |
| Accrued interest payable                                                                                                                                                                              |       | 60,208                 |            | 73,194                |       |
| Short-term lease payable                                                                                                                                                                              |       | —                 |            | 4,350                 |       |
| Line of credit                                                                                                                                                                                        |       | 2,500,000              |            | —                |       |
| Short-term grant payable                                                                                                                                                                              |       | 500,000                |            | —                |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| Total current liabilities                                                                                                                                                                             |       | 5,362,648              |            | 2,007,818             |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| Long-term grant payable                                                                                                                                                                               |       | —                 |            | 500,000               |       |
| Long-term notes payable - related party                                                                                                                                                               |       | —                 |            | 2,000,000             |       |
| Line of credit                                                                                                                                                                                        |       | 6,000,000              |            | 10,000,000            |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| Total liabilities                                                                                                                                                                                     |       | 11,362,648             |            | 14,507,818            |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                         |       |                   |            |                  |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| EQUITY (DEFICIT):                                                                                                                                                                                     |       |                   |            |                  |       |
| Common stock, $0.01 par value—620,000,000 shares  authorized; 224,090,841 issued and outstanding at September 30, 2010;  84,925,010 shares issued and outstanding at December 31, 2009 |       | 2,240,908              |            | 849,250               |       |
| Additional paid-in capital                                                                                                                                                                            |       | 128,223,544            |            | 122,621,392           |       |
| Deficit accumulated during the development stage                                                                                                                                                      |       | (137,566,803           | )               | (131,550,689          | )          |
| Noncontrolling interest in subsidiary                                                                                                                                                                 |       | —                 |            | —                |       |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| Total equity (deficit)                                                                                                                                                                                |       | (7,102,351             | )               | (8,080,047            | )          |
|                                                                                                                                                                                                  |       |                   |            |                  |       |
| TOTAL LIABILITIES AND EQUITY (DEFICIT)                                                                                                                                                                |       | $                      |  4,260,297 |                  | $          |  6,427,771 |   |

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

 

**ADVANCED LIFE SCIENCES HOLDINGS, INC. ANDSUBSIDIARY**

**(A Development Stage Company)**

** **

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **  | ** ** | ** ** | ** ** | **Period From**             | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **  | ** ** | ** ** | ** ** | **Inception**                    | ** ** |
| ** **                                                                  | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **  | ** ** | ** ** | ** ** | **(January 1, 1999)**  | ** ** |
| ** **                                                                  | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010**    | ** ** | **2009**   | ** ** | **September 30, 2010** | ** ** |
| Revenue:                                                                    |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Management fees                                                             |       | $                                                        | —     |                                                    | $          | —      |       | $          | —     |                             | $          | — |   | $ | 1,161,180 |   |
| Grants                                                                      |       | —                                                   |       | 616,940                                                 |       | 752,853     |       | 1,735,239  |       | 4,822,445                        |       |
| Royalty—related party                                                  |       | —                                                   |       | —                                                  |       | —      |       | —     |       | 45,238                           |       |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Total revenue                                                               |       | —                                                   |       | 616,940                                                 |       | 752,853     |       | 1,735,239  |       | 6,028,863                        |       |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Expenses:                                                                   |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Research and development                                                    |       | 662,278                                                  |       | 916,241                                                 |       | 2,280,470   |       | 3,160,061  |       | 97,323,152                       |       |
| Contracted research and development—related party                      |       | —                                                   |       | —                                                  |       | —      |       | —     |       | 7,980,299                        |       |
| Selling, general and administrative                                         |       | 1,167,230                                                |       | 2,201,684                                               |       | 3,802,818   |       | 5,401,142  |       | 37,174,304                       |       |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Total expenses                                                              |       | 1,829,508                                                |       | 3,117,925                                               |       | 6,083,288   |       | 8,561,203  |       | 142,477,755                      |       |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Loss from operations                                                        |       | (1,829,508                                               | )          | (2,500,985                                              | )          | (5,330,435  | )          | (6,825,964 | )          | (136,448,892                     | )          |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Net other (income) expense:                                                 |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Interest income                                                             |       | (1,573                                                   | )          | (5,865                                                  | )          | (8,136      | )          | (9,336     | )          | (2,968,559                       | )          |
| Interest expense                                                            |       | 184,494                                                  |       | 263,272                                                 |       | 693,815     |       | 774,201    |       | 4,879,430                        |       |
| Other (income) expense, net                                                 |       | —                                                   |       | 99,854                                                  |       | —      |       | 119,449    |       | 146,092                          |       |
| Gain on sale of interest in Sarawak Medichem  Pharmaceuticals joint venture |       | —                                                   |       | —                                                  |       | —      |       | —     |       | (939,052                         | )          |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Net other (income) expense                                                  |       | 182,921                                                  |       | 357,261                                                 |       | 685,679     |       | 884,314    |       | 1,117,911                        |       |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Net loss                                                                    |       | (2,012,429                                               | )          | (2,858,246                                              | )          | (6,016,114  | )          | (7,710,278 | )          | (137,566,803                     | )          |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Less net loss attributable to the noncontrolling  interest in subsidiary    |       | —                                                   |       | —                                                  |       | —      |       | —     |       | —                           |       |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Net loss attributable to Advanced Life Sciences  Holdings, Inc.        |       | (2,012,429                                               | )          | (2,858,246                                              | )          | (6,016,114  | )          | (7,710,278 | )          | (137,566,803                     | )          |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Less accumulated preferred stock dividends of  subsidiary for the period    |       | 43,750                                                   |       | 43,750                                                  |       | 131,250     |       | 131,250    |       | 1,976,042                        |       |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Net loss available to common shareholders                                   |       | $                                                        | (2,056,179 | )                                                       | $          | (2,901,996  | )          | $          | (6,147,364 | )                                | $          | (7,841,528 | ) | $ | (139,542,845 | ) |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Net loss per share available to common  shareholders - basic and diluted    |       | $                                                        | (0.01      | )                                                       | $          | (0.05       | )          | $          | (0.05      | )                                | $          | (0.15 | ) |   |   |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
|                                                                        |       |                                                     |       |                                                    |       |        |       |       |       |                             |       |
| Weighted average shares outstanding - basic and  diluted                    |       | 182,022,584                                              |       | 62,715,539                                              |       | 125,339,679 |       | 50,601,036 |       |                             |       |

 

See notes to unaudited consolidated financial statements.

 

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Table ofContents

 

**ADVANCED LIFE SCIENCES HOLDINGS, INC. ANDSUBSIDIARY**

**(A Development Stage Company)**

 

**CONSOLIDATED STATEMENTS OF TOTAL EQUITY (DEFICIT)**

**(Unaudited)**

 
| ** **                                                                                            | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**         | ** ** | ** **             | ** **   | ** **   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|---------------------|------------|------------------------|--------------|--------------|------------|
| ** **                                                                                            | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated**     | ** ** | ** **             | ** **   | ** **   | ** ** |
| ** **                                                                                            | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | **During the** | ** ** | **Noncontrolling**     | ** **   | ** **   | ** ** |
| ** **                                                                                            | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | **Interest**        | ** ** | ** **             | ** **   |
| ** **                                                                                            | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**           | ** ** | **in Subsidiary** | ** **   | **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     |       | 17,700,186      |       | —              |       | —                 |         | 17,802,097   |       |
| Issuance  of common stock, net of offering costs (September 2008)                                |       | 1,888,606             |       | 18,886      |       | 1,634,193       |       | —              |       | —                 |         | 1,653,079    |       |
|                                                                                                  |       |                  |       |        |       |            |       |                |       |                   |         |         |       |
| 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 common stock as payment for commitment fees (September 2008)                        |       | 393,339               |       | 3,933       |       | 296,067         |       | —              |       | —                 |         | 300,000      |       |
| Issuance  of 65,000 warrants (October 2008)                                                      |       | —                |       | —      |       | 7,445           |       | —              |       | —                 |         | 7,445        |       |
| Issuance  of common stock under standby equity distribution agreements, net of offering  costs (2009) |       | 43,986,137            |       | 439,862     |       | 12,475,173      |       | —              |       | —                 |         | 12,915,035   |       |
|                                                                                                  |       |                  |       |        |       |            |       |                |       |                   |         |         |       |
| Issuance  of stock related to option exercises (since inception)                                      |       | 347,668               |       | 9,622       |       | 49,869          |       | —              |       | —                 |         | 59,491       |       |
|                                                                                                  |       |                  |       |        |       |            |       |                |       |                   |         |         |       |
| Compensation  expense related to stock options (since inception)                                      |       | —                |       | —      |       | 3,088,578       |       | —              |       | —                 |         | 3,088,578    |       |
|                                                                                                  |       |                  |       |        |       |            |       |                |       |                   |         |         |       |
| Net  loss (since inception)                                                                           |       | —                |       | —      |       | —          |       | (131,550,689        | )          | —                 |         | (131,550,689 | )          |
|                                                                                                  |       |                  |       |        |       |            |       |                |       |                   |         |         |       |
| BALANCE—December 31,  2009                                                                  |       | 84,925,010            |       | 849,250     |       | 122,621,392     |       | (131,550,689        | )          | —                 |         | (8,080,047   | )          |
|                                                                                                  |       |                  |       |        |       |            |       |                |       |                   |         |         |       |
| Issuance  of common stock under standby equity distribution agreements, net of offering  costs        |       | 15,447,057            |       | 154,471     |       | 2,092,529       |       | —              |       | —                 |         | 2,247,000    |       |
| Issuance  of common stock, net of offering costs (July 2010)                                     |       | 37,918,800            |       | 379,188     |       | 574,759         |       |                |       |                   |         | 953,947      |       |
| Issuance  of common stock - debt exchange (July 2010)                                            |       | 47,619,047            |       | 476,190     |       | 1,523,810       |       |                |       |                   |         | 2,000,000    |       |
| Issuance  of 1,000,000 warrants (September 2010)                                                 |       | —                |       | —      |       | 33,156          |       |                |       |                   |         | 33,156       |       |
| Issuance  of common stock as payment for commitment fees (September 2010)                        |       | 1,984,127             |       | 19,841      |       | 80,159          |       |                |       |                   |         | 100,000      |       |
| Issuance  of common stock for Unit Warrant Exercises, net of offering costs                           |       | 36,196,800            |       | 361,968     |       | 1,082,284       |       |                |       |                   |         | 1,444,252    |       |
| Compensation  expense related to stock options                                                        |       | —                |       | —      |       | 215,455         |       | —              |       | —                 |         | 215,455      |       |
|                                                                                                  |       |                  |       |        |       |            |       |                |       |                   |         |         |       |
| Net  loss                                                                                             |       | —                |       | —      |       | —          |       | (6,016,114          | )          | —                 |         | (6,016,114   | )          |
|                                                                                                  |       |                  |       |        |       |            |       |                |       |                   |         |         |       |
| BALANCE—September 30,  2010                                                                 |       | 224,090,841           |       | $           | 2,240,908  |            | $          | 128,223,544         |       | $                      | (137,566,803 | )            | $          | — |   | $ | (7,102,351 | ) |

 

See notes to unaudited consolidated financial statements.

 

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*** ***

**ADVANCED LIFE SCIENCES HOLDINGS, INC. ANDSUBSIDIARY**

**(A Development Stage Company)**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **                                              | ** ** | ** **  | ** ** | **Inception**                    | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | ** **                                              | ** ** | ** **  | ** ** | **(January 1, 1999)**  | ** ** |
| ** **                                                                         | ** ** | **Nine months ended September 30,** | ** ** | **Through** | ** ** |
| ** **                                                                         | ** ** | **2010**                                                | ** ** | **2009**    | ** ** | **September 30, 2010** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                                    |       |        |       |                             |       |
| Net loss                                                                           |       | $                                                       | (6,016,114 | )           | $          | (7,710,278                       | )          | $ | (137,566,803 | ) |
| Adjustments to reconcile net loss to net cash  flows used in operating activities: |       |                                                    |       |        |       |                             |       |
| Depreciation and amortization                                                      |       | 24,212                                                  |       | 94,792      |       | 972,689                          |       |
| Non-cash interest expense                                                          |       | 15,123                                                  |       | 10,474      |       | 137,863                          |       |
| Stock compensation expense                                                         |       | 215,455                                                 |       | 536,239     |       | 3,304,033                        |       |
| 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                         | )          |
| (Gain) loss on disposal                                                            |       | (1,435                                                  | )          | 244,659     |       | 256,553                          |       |
| Changes in operating assets and liabilities:                                       |       |                                                    |       |        |       |                             |       |
| Clinical supplies                                                                  |       | —                                                  |       | —      |       | 533,333                          |       |
| Accounts receivable                                                                |       | 530,219                                                 |       | (271,441    | )          | —                           |       |
| Prepaid expenses                                                                   |       | 122,120                                                 |       | 156,705     |       | (86,724                          | )          |
| Commercial launch materials                                                        |       | —                                                  |       | —      |       | (2,760,936                       | )          |
| Other assets                                                                       |       | —                                                  |       | (2,785,934  | )          | (16,452                          | )          |
| Accounts payable                                                                   |       | 121,666                                                 |       | 500,511     |       | 726,000                          |       |
| Accrued expenses                                                                   |       | (383,370                                                | )          | 346,300     |       | 942,572                          |       |
| Licenses payable                                                                   |       | —                                                  |       | —      |       | (11,000,000                      | )          |
| Accrued interest on debt                                                           |       | (12,986                                                 | )          | 25,199      |       | 638,271                          |       |
|                                                                               |       |                                                    |       |        |       |                             |       |
| Net cash flows from operating activities                                           |       | (5,385,110                                              | )          | (8,852,774  | )          | (120,385,986                     | )          |
|                                                                               |       |                                                    |       |        |       |                             |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                                    |       |        |       |                             |       |
| Purchase of property and equipment                                                 |       | —                                                  |       | (5,466      | )          | (1,098,167                       | )          |
| 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                                           |       | —                                                  |       | (5,466      | )          | (159,115                         | )          |
|                                                                               |       |                                                    |       |        |       |                             |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                                    |       |        |       |                             |       |
| Proceeds from issuance of common stock and capital  contributions                  |       | 5,000,411                                               |       | 11,449,259  |       | 107,551,960                      |       |
| Proceeds from issuance of note payable and line of  credit                         |       | —                                                  |       | 85,000      |       | 15,103,691                       |       |
| Proceeds from grants                                                               |       | —                                                  |       | —      |       | 500,000                          |       |
| Proceeds from stock options exercised                                              |       | —                                                  |       | 747         |       | 59,491                           |       |
| Payments for financing fees                                                        |       | (4,714                                                  | )          | (36,039     | )          | (57,753                          | )          |
| Payments of debt                                                                   |       | (1,500,000                                              | )          | —      |       | (1,500,000                       | )          |
| Payments on capital leases                                                         |       | (1,547                                                  | )          | (6,223      | )          | (161,447                         | )          |
|                                                                               |       |                                                    |       |        |       |                             |       |
| Net cash flows from financing activities                                           |       | 3,494,150                                               |       | 11,492,744  |       | 121,495,942                      |       |
|                                                                               |       |                                                    |       |        |       |                             |       |
| NET (DECREASE) INCREASE IN CASH                                                    |       | (1,890,961                                              | )          | 2,634,504   |       | 950,840                          |       |
|                                                                               |       |                                                    |       |        |       |                             |       |
| CASH—Beginning of period                                                      |       | 2,841,801                                               |       | 1,527,108   |       | —                           |       |
|                                                                               |       |                                                    |       |        |       |                             |       |
| CASH—End of period                                                            |       | $                                                       | 950,840    |        | $          | 4,161,612                        |       | $ | 950,840 |   |
|                                                                               |       |                                                    |       |        |       |                             |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  |       |                                                    |       |        |       |                             |       |
| Cash paid during the period for interest                                           |       | $                                                       | 635,188    |        | $          | 661,116                          |       | $ | 4,049,359 |   |
|                                                                               |       |                                                    |       |        |       |                             |       |
| SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS                                    |       |                                                    |       |        |       |                             |       |
| Noncash investment activity:                                                       |       |                                                    |       |        |       |                             |       |
| Purchase of property and equipment under capital  leases                           |       | —                                                  |       | —      |       | 164,249                          |       |
| Noncash financing activity:                                                        |       |                                                    |       |        |       |                             |       |
| Issuance of common shares for licenses                                             |       | —                                                  |       | —      |       | 9,000,000                        |       |
| Issuance of common shares for reduction of  milestone payment                      |       | —                                                  |       | —      |       | 3,000,000                        |       |
| Debt discount                                                                      |       | —                                                  |       | —      |       | 30,823                           |       |
| Unpaid costs associated with the issuance of  common stock                         |       | 390,031                                                 |       | —      |       | 390,031                          |       |
| SEDA and financing related costs                                                   |       | 381,709                                                 |       | —      |       | 719,154                          |       |
| Issuance of common shares for related party note  payable                          |       | 2,000,000                                               |       | —      |       | 2,000,000                        |       |

 

See notes to unaudited consolidated financial statements.

 

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**ADVANCED LIFE SCIENCES HOLDINGS, INC.(A DEVELOPMENT STAGE COMPANY)**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2010**

**(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 respiratory disease.  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 by theaccounting principles generally accepted in the United States of America (“GAAP”).

 

***Basis of Presentation-***Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared in accordance with GAAP and with the rules and regulationsof the Securities and Exchange Commission (“SEC”). Accordingly, they do notinclude all of the information and footnotes required by GAAP for completefinancial statements.  However, in theopinion of management, all adjustments, consisting only of normal recurringadjustments, unless otherwise noted herein, necessary to present fairly theresults of operations, 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 included in the Company’s 10-K for the year ended December 31,2009 and notes thereto. The consolidated financial statements include the accountsof the Advanced Life Sciences Holdings, Inc. and its wholly-ownedsubsidiary Advanced 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 prepared on a goingconcern basis, which contemplates continuity of operations and the realizationof assets and liquidation of liabilities in the ordinary course ofbusiness.  However, as a result of theCompany’s continued losses and current business and financing position, therealization of assets, such as the Company’s commercial launch materials andother long-lived assets, or liquidation of liabilities without substantialadjustments is uncertain.  Given thisuncertainty, there is substantial doubt as to the Company’s ability to continueas a going concern.

 

***Business and Credit Risks-***The Company is subject to risks and uncertaintiescommon to drug discovery companies, including technological change, potentialinfringement on intellectual property of third parties, new productdevelopment, regulatory approval and market acceptance of its products,activities of competitors and its limited operating history.

 

TheCompany has incurred losses since its incorporation in January 1999 andhas funded its operations to date primarily from debt financings and capitalcontributions from its founder and Chief Executive Officer, proceeds from theinitial public offering and secondary public offering, and private placements,including issuances of common stock under two Standby Equity DistributionAgreements.

 

Inorder to continue its business activities during 2010, the Company intends toraise additional capital by issuing additional equity securities, continuingits efforts in applying for grant awards through various agencies and bylicensing its lead compound, cethromycin (RestanzaTM), to commercial partners.  The Company believes, based upon currentmarket conditions, commercial partnership agreements would include a series ofmilestone payments, including up-front milestones that would fund the Company’scontinued operations.  Althoughmanagement believes the Company could secure commercial partnerships, there canbe no assurances that such partnerships will be available at terms acceptableto the Company, if at all.

 

**2.****                ****EquityTransactions**

 

InMarch 2010, the Company and YA Global Master SPV Ltd. (“YA SPV”), anaffiliate of Yorkville Advisors, agreed to terminate the Standby EquityDistribution Agreement dated June 19, 2009 (the “2009 SEDA”).  TheCompany had sold to 

 

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YASPV 49,549,200 shares of its common stock and raised approximately $11.7million under the SEDA prior to its termination.  Shares of common stock sold under the 2009SEDA in excess of $9.0 million were sold with the consent of the Company’slender under the Company’s credit facility.

 

InJune 2009, the Company and YA Global Investments, L.P. (“YA Global”), anaffiliate of Yorkville Advisors, terminated a prior Standby Equity Distribution Agreement dated September 29,2008 (“2008 SEDA”).  For the period of January 1,2009 through the end of the 2008 SEDA, the Company issued 9,883,994 shares toYA Global and received approximately $3.9 million.  In addition, in September 2008, theCompany paid YA Global a commitment fee of $300,000 by issuing 393,339 sharesof the Company’s common stock.

 

On July 7, 2010, theCompany closed a registered public offering of units.  As part of theclosing, the Company issued 379,188 units at a public offering price of $4.20per unit, raising approximately $1.6 million in gross offering proceeds andapproximately $1.0 million in net proceeds to the Company after deductingplacement agent fees and offering expenses payable by the Company.

 

Each unit sold in theoffering consists of (i) 100 shares of the Company’s common stock,(ii) 100 stock warrants to purchase shares of common stock at an exerciseprice of $0.042 per share and (iii) one warrant to purchase an additionalunit, consisting of 100 shares of common stock and 100 stock warrants, at anexercise price of $4.20 per additional unit.  The stock warrants may beexercised at any time during the period commencing six months after the closingdate and ending on the fifth anniversary of the closing date.  Theexercise period for the unit warrants has expired. Prior to expiration, theCompany issued 36,196,800 shares of common stock and 36,196,800 additionalstock warrants through the exercise of unit warrants and received an additional$1.5 million in gross proceeds as a result of these exercises.

 

Dawson JamesSecurities, Inc. (“Dawson James”) acted as the placement agent for theoffering.  In addition to cash placement agent fees, the Company issued toDawson James a compensation warrant to purchase 1,516,752 shares of commonstock at an exercise price of $0.0672 per share.

 

In September 2010, theCompany entered into a new Standby Equity Distribution Agreement with YA GlobalMaster SPV Ltd. (“YA Master”) for the sale of up to $10.0 million of shares ofthe Company’s common stock over a two-year commitment period (the “2010SEDA”). Under the terms of the 2010 SEDA, the Company will sell, from time totime, in its discretion, newly-issued shares of its common stock to YAMaster at a discount to the current market price of 5%. The commitment does notimpose any restrictions on the Company’s operating activities. Additionally,the Company paid to YA Master a commitment fee of $100,000 by issuing 1,984,127shares of its common stock. Through November 11, 2010 the Company raised$0.2 million and issued 6,175,829 shares through the usage of the 2010 SEDAfacility.

 

The Company also has aneffective registration statement on file with the SEC for the purchase and saleof shares, with respect to common stock issuable under the agreement with YAMaster. The number of shares included in the registration statement was limitedto one-third of the then outstanding common stock held by non-affiliates, orapproximately 54 million shares.  Basedon the last reported share price of the Company’s common stock on November 10,2010, the Company would be able to raise approximately $1.6 million through theuse of the 2010 SEDA under this registration statement.

 

**3.****                ****RelatedParty Transactions**

 

The Company’s Chief Executive Officer, Michael T. Flavin Ph.D., loaned$2.0 million to the Company in 2001 (see Note 4).  During the three and nine months ended September 30,2010 the Company incurred interest expense of $13,000 and $91,000,respectively, compared to interest expense of $39,000 and $119,000 for thethree and nine months ended September 30, 2009, respectively.

 

InJuly 2010,  the Company, acting through the independent auditcommittee of the Company’s board of directors, entered into an agreement withDr. Flavin, providing that the Company’s $2.0 million promissory note withDr. Flavin would be exchanged for 47,619,047 shares of the Company’scommon stock.  The price of $0.042 per share used in the exchange was thesame price per share used in the Company’s July 2010 public equityoffering.  As a result of the exchange, the promissory note was cancelledand retired and accrued interest of $52,000 was deferred and is expected to bepaid later in the year.

 

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In September 2010, the Company entered into a Second Amended andRestated Business Loan Agreement with a financial institution.  As part of the amendment, the Company’s ChiefExecutive Officer will provide a $1.5 million personal guarantee to the loanfacility until the principal balance is reduced to $7.0 million (see Note 4).

 

The Company leases facilities from the BioStart Property Group, LLC (“BioStart”),a wholly-owned subsidiary of Flavin Ventures, LLC, which is owned by theCompany’s Chief Executive Officer.  Thelease, which commenced on October 1, 2009, is for a term of three yearsand provides the Company with 9,440 square feet of space at an annual rentalrate of $10.50 per square foot.  Therental rate increases by 2.5% for the second year and by 3.0% in the final yearof the lease term. The lease has a provision allowing the Company to negotiatean amendment to lease additional laboratory and office space should the needarise.  Lease expense totaledapproximately $104,000 and $220,000 for the nine months ended September 30,2010 and 2009, respectively.

 

**4.****                ****DebtObligations**

 

In September 2001, the Company incurred indebtedness under a $2.0million promissory note with the Chief Executive Officer of the Company, whichbears interest at 7.75%.  On January 4,2010, the note was extended to January 5, 2012 and all other termsremained unchanged and in effect. Interest expense of $91,000 and $119,000 wasrecorded for the nine months ended September 30, 2010 and 2009,respectively.  In July 2010, the$2.0 million promissory note was exchanged for 47,619,047 shares of the Company’sstock and as a result of the exchange, the promissory note was cancelled andretired and accrued interest of $52,000 was deferred and is expected to be paidlater in the year. (see Note 3).

 

The Company has a revolving line of credit with a financial institutionunder which the Company had $8.5 million and $10.0 million outstanding as of September 30,2010 and December 31, 2009, respectively. In September 2010, theCompany entered into an amended loan agreement and related documents, with itslender, amending its existing loan facility to give effect to letter agreementsthe Company entered into in May and June 2010.  Among other things, the amendment extends theloan maturity by one year to January 1, 2012.  Under the terms of the agreement, the Companyrepaid $1.5 million of the outstanding loan balance and was required to furtherreduce the balance by an additional $1.5 million by October 1, 2010 and$1.0 million by April 1, 2011. The Company’s Chief Executive Officer,Michael T. Flavin, Ph.D., will provide a personal guarantee to the loanfacility until the principal balance is reduced to $7.0 million.  In addition, the interest rate on theoutstanding loan balance increased from 8.5% to 10.0% under the terms of theamended loan agreement. In connection with the amendment, the Company issued toits lender 500,000 warrants, which are exercisable at $0.042 per share, andwill issue an additional 500,000 warrants in September 2011. The Companyalso agreed that the line of credit is secured by substantially all of itsassets including, subject to Abbott Laboratories’ consent, its rights under itslicense agreement for cethromycin with Abbott Laboratories.  All other terms of the loan remainedunchanged.

 

In October 2010, the Company paid $420,000 in aprincipal reduction to its commercial lender toward a mandatory prepayment of$1.5 million that was due on October 1, 2010.  The Company is engaged in substantivediscussions with the lender regarding an agreement that would defer the balanceof this prepayment to January 2011. Until agreement on such a deferral isreached or until the balance of the prepayment is made, the Company is subjectto the default provisions of the loan documents including acceleration ofpayment. As of September 30, 2010, $2.5 million of the outstanding loanbalance is classified as a current liability and $6.0 million a long-termliability on the balance sheet.

 

**5.****                ****FairValue of Financial Instruments**

 

The carrying values of certain of the Company’s financial instruments,including cash equivalents and accounts payable, approximate fair value due totheir short maturities.  The fair valuesof the Company’s long-term obligation is based on assumptions concerning theamount and timing of estimated future cash flows and assumed discount ratesreflecting varying degrees of risk, including credit risk related to theCompany’s ability to meet its payment obligations with its lender (see Note4).  As of September 30, 2010, theCompany estimates that the fair value of its $8.5 million (carrying value)revolving line of credit is approximately $7.9 million.

 

**6.****                ****DeferredOffering and Financing Costs**

 

In September 2010, the Company entered into a SEDA with YA Masterfor the sale of up to $10.0 million of shares of the Company’s common stockover a two-year commitment period. In connection with this agreement, the Company incurred deferredoffering costs which included legal, accounting and commitment fees ofapproximately $250,000.  These costswhich are attributable to a proposed offering of securities, were deferred andwill be ratably allocated against gross proceeds of future offerings under theSEDA. Also in September 2010, the Company entered into an amended loanagreement with its lender.  Deferredfinancing costs of approximately $170,000 related to legal and other closingfees were incurred.  These costs werecapitalized and will be amortized over the life of the remaining term.

 

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**7.      Commitments**

 

***Vendor Contracts-***The Companyadministers its cethromycin program largely under contracts with thirdparties.  Through September 30, 2010,contracts totaling $47.3 million have been executed related to the cethromycinprogram, which includes the development, commercialization, regulatory reviewand pre-launch activities associated with cethromycin as well asanthrax-related studies.  To date theCompany has paid $47.1 million under these contracts and the remaining balanceof $0.2 million is expected to be paid by the end of the year.  Subcontractor arrangements in connection withthe Defense Threat Reduction Agency (“DTRA”) award grant were approximately$3.0 million over a two-year period which began in August 2008.  Through September 30, 2010 the Companyhas paid $2.9 million related to these agreements.  The commencement of clinical trials to studyALS-357 as a topical treatment for patients with metastatic melanoma has beendelayed and as such the Company has terminated a $0.9 million contract with auniversity to study ALS-357.  Through September 30,2010 the Company has paid $0.3 million in other contracts related to theALS-357 program. In July 2010, the Company entered into a sponsoredresearch and option agreement with The University of British Columbia (“UBC”)to develop several antimicrobial peptides. Under the terms of the agreementwith UBC, the Company paid an option fee upon execution of the agreement andwill make additional payments based on the completion of specific milestones.In return, UBC granted the Company the exclusive option to evaluate thetechnology and obtain a worldwide, exclusive license to manufacture, distributeand market products emanating from the program.

 

***Grant Payable-*** In April 2005, theCompany was awarded a $500,000 grant from the State of Illinois to fundexpansion of its 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”).  Under the current terms of the agreement, ifthe Company does not create the specified number of full-time jobs, it isrequired to repay the grant proceeds on a pro-rata basis of actual jobs createdcompared to the total defined in the grant within 45 days of the expiration ortermination of the agreement.  The entiregrant has been spent and therefore the $500,000 has been classified as acurrent liability as the Company must create and maintain positions createdduring the Grant Period through December 31, 2010.    Through September 30, 2010, four newjobs have been created and retained since the grant was awarded.

 

**8.      Stock Option Grants**

 

For the nine months ended September 30,2010 and 2009, the Company granted stock options to purchase up to 2,996,027and 673,200 shares of common stock, respectively, to certain employees anddirectors.  The exercise price of theoptions was the market price of the Company’s common stock on the date ofgrant.  The Company recognizedcompensation expense totaling approximately $215,000 and $536,000 for the ninemonths ended September 30, 2010 and 2009, respectively.

 

**9.     Net Loss Per Share**

 

Basic loss per share is computed by dividing net loss by the number ofweighted average common shares outstanding during the reporting period.  Diluted loss per share is calculated to giveeffect to all potentially dilutive common shares that were outstanding duringthe reporting period.  The computation ofdiluted shares outstanding for the periods ended September 30, 2010 and2009 excludes incremental shares of 92,688,929 and 13,850,870 respectively,related to outstanding employee stock options and warrants.  These shares are excluded due to theiranti-dilutive effect as a result of the Company’s net losses for the periodsended September 30, 2010 and 2009.

 

**10.  Recent AccountingPronouncements**

 

In April 2010, the FASB issued ASU 2010-17, which establishes arevenue recognition model for contingent consideration that is payable upon theachievement of an uncertain future event, referred to as a milestone.  The scope of this guidance is limited toresearch or development arrangements and requires an entity to record themilestone payment in its entirety in the period received if the milestone meetsall the necessary criteria to be considered substantive.  An entity would not be precluded from makingan accounting policy election to apply another appropriate accounting policythat results in the deferral of some portion of the arrangementconsideration.  The statement iseffective for fiscal years (and interim periods within those fiscal years)beginning on or after June 15, 2010. The Company does not expect the adoption of ASU 2010-17 will have amaterial impact on its statements of financial position, results of operationsand cash flows.

 

In January 2010, the FASB issued updated accounting guidancerelated to the accounting for fair value measurements and disclosures, whichare included in ASC Update No. 2010-06, “Improving Disclosures About FairValue Measurements”.   The updaterequires new disclosures and clarifies existing disclosure requirements aboutfair value measurement as set forth 

 

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in ASC 820. The objective is to improve these disclosures and, thus,increase the transparency in financial reporting. The statement is effectivefor interim and annual reporting periods beginning after December 15,2009. The adoption of the provisions did not have a material impact on theCompany’s statements of financial position, results of operations and cashflows.

 

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**Item 2. *Management’s Discussionand Analysis of Financial Condition and Results of Operations***

 

*You should read the following discussion of our financialcondition and results of operations in conjunction with our consolidatedfinancial statements and the related notes included elsewhere in this quarterlyreport. This discussion contains forward-looking statements that involve risksand uncertainties. Our actual results may differ materially from thoseanticipated in these forward-looking statements.*

 

**Overview**

 

We are a biopharmaceutical company focused on the discovery,development and commercialization of novel drugs in the areas of infectiousdisease, oncology and respiratory disease. Using our internal discoverycapabilities and our network of pharmaceutical and academic partners, we haveassembled a promising pipeline of clinical and preclinical product candidates.  Our most advanced product candidate,cethromycin (RestanzaTM), is a novelonce-a-day oral antibiotic that completed two pivotal Phase III clinical trialsin community acquired bacterial pneumonia (“CABP”).  We have an exclusive worldwide license(excluding Japan) from Abbott Laboratories to develop and commercializecethromycin. Cethromycin is also being developed as a biodefense agent for usein the treatment of anthrax, plague and tularemia.  We also have product candidates in earlierstages of development for the treatment of indications including malignantmelanoma and respiratory distress caused by inflammation-related tissue damage.

 

None of our product candidates have been approved by the U.S. Food andDrug Administration  (“FDA”) or anycomparable foreign agencies, and we have not generated any significant revenuesto date. Our ability to generate revenues in the future will depend on ourability to meet development or regulatory milestones under any licenseagreements that trigger payments to us, to enter into new license agreementsfor other products or territories and to receive regulatory approvals for, andsuccessfully commercialize, our product candidates either directly or throughcommercial partners.

 

**CethromycinCABP Program Update**

 

In late June 2010 we submitted a final Special Protocol Assessment(“SPA”) with the FDA for the proposed Phase III clinical program of cethromycinin the treatment of patients with CABP. We have been engaged in the SPA processwith the FDA over the last year to establish the clinical trial design neededto gain approval in CABP.  As filed, theSPA incorporates written and oral comments from the FDA’s Division ofAnti-Infective and Ophthalmology Products.

 

An SPA is a written agreement between the FDA and a drug sponsorconcerning the clinical trial design, clinical endpoints and other clinicaltrial issues that can be used to support regulatory approval of a drugcandidate. The process is intended to provide assurance that if the agreed uponclinical trial protocols are followed, the clinical trial endpoints areachieved and there is a favorable risk benefit profile, the data may serve asthe primary basis of an efficacy claim in support of a New Drug Application (“NDA”).

 

InAugust 2010 we reached an agreement with the FDA, under the SPA process,on the design of our planned Phase III study of cethromycin to treat CABP.  The trial is the first prospectively designedsuperiority study to be conducted in CABP.

 

Thedouble-blind pivotal superiority study will compare the efficacy and safety ofonce-daily oral administration of 300 milligrams of cethromycin over seven daysof treatment to azithromycin. The primary efficacy endpoint will be theclinical cure rate in a macrolide-resistant *Streptococcus pneumoniae*population. The protocol also includes several unique features, such as theinclusion of patient-reported outcome measures, which have the potential togenerate a more robust demonstration of effectiveness and establish cethromycinas a new standard of care in treating pneumonia.

 

With reported resistance rates as high as 40 percent tostandard-of-care macrolide antibiotics in the U.S., there is a pressing medicalneed for new drugs to treat CABP. Based on the data we have accumulated in ourextensive pre-clinical and clinical program to date, coupled with a thoroughreview of published literature on the clinical relevance of macrolideresistance, we believe that cethromycin has the potential to show a superiorefficacy advantage in patients who are resistant to marketed macrolide drugs.

 

The cost to complete the SPA is significant.  In order to advance the CABP program we areseeking a partner to assist in the funding of the program. We continue to haveongoing discussions with potential commercial partners focused on geographicalmarkets such as the European Union and the United States as well as variousgovernment agencies.

 

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* *

*Background*

 

We submitted the cethromycin NDA in September, 2008 based on theresults of 53 clinical studies including 2 pivotal Phase III studies whereincethromycin demonstrated non-inferiority to Biaxin® inmild-to-moderate CABP.

 

On June 2, 2009, the FDA Anti-Infective Drugs AdvisoryCommittee  (“AIDAC”) reviewed thecethromycin NDA. The AIDAC voted that cethromycin demonstrated safety for theoutpatient treatment of adults with mild-to-moderate CABP, but voted thatcethromycin did not demonstrate efficacy in the treatment of CABP in light ofthe new FDA draft CABP guidance which was published in March of 2009.

 

On July 31, 2009 the FDA provided a complete response letter to usindicating that further clinical work would be required for the approval ofcethromycin in CABP. Our pivotal Phase III program was designed and conductedunder prior FDA guidance and before the new draft guidance document wasreleased.

 

Over the past two years, the FDA has been conducting public workshopsand advisory panels to discuss clinical trial design issues in CABP culminatingin a draft guidance document published in March of 2009. Public commentswere received in response to the draft guidance and an AIDAC meeting was heldin December of 2009 to further discuss and resolve the CABP clinicaldesign issues.

 

In March 2010, we met with officials from the FDA’sAnti-Infectives Division to gain clarity on the registration pathway forcethromycin. This meeting followed the December 9, 2009 FDA AIDAC meetingwhich discussed clinical trial design issues for CABP relative to the earlier, March 2009,FDA CABP guidance document. In the meeting, the FDA guided that, to assess theapprovability for cethromycin to treat CABP, we should establish a SPA using asuperiority clinical trial design comparing cethromycin to a marketed macrolideantibiotic in two clinical trials. In light of this guidance, we worked withthe FDA to finalize a SPA using a superiority design for the outpatient CABPindication.

 

**CethromycinBiodefense Program Update**

 

In  April 2010, we announcedpositive results from an in vitro study assessing the efficacy of cethromycinagainst 30 strains of *Burkholderia pseudomallei*(melioidosis), a serious, life-threatening bacterial pathogen. Cethromycinshowed significant in vitro activity against clinical and environmental strainsof B. pseudomallei as measured by minimal inhibitory concentration (“MIC”), thelowest concentration of an antimicrobial that will inhibit the visible growthof a microorganism after 24 hours of incubation. Cethromycin demonstratedantibacterial activity with MIC values ranging from 0.5—8 ug/ml and MIC90 of 4ug/ml. Most notably, cethromycin also demonstrated positive activity againststrains that were resistant to a commonly used antibiotic, azithromycin, forwhich MIC values were all greater than 64 ug/ml. In a separate study,cethromycin also demonstrated in vitro activity against 30 strains ofBurkholderia mallei with MIC values ranging from 0.06—1 ug/ml and MIC90 of 0.5ug/ml, which are comparable to azithromycin.

 

In March 2010, we announced that we received notice from theBiomedical Advanced Research and Development Authority (“BARDA”) of the U.S.Department of Health and Human Services that it has completed its initialtechnical evaluation of our funding proposal for advanced development ofcethromycin as a biodefense countermeasure and identified it as ascientifically and technically sound proposal important to program goals andobjectives that may require further development and may be recommended foracceptance subject to funds availability. We were invited to submit additionalinformation to allow BARDA to make a final determination on the appropriatenessof the proposal to enter into contract negotiations. The Company is engaged inongoing discussions with BARDA in light of recent amendments to the BroadAgency Announcement that would fund the development of cethromycin, if awarded.

 

Related to this development, we also gained clarity from the FDA on thebiodefense regulatory package required for submission in light of recent AIDACmeetings discussing the use of the FDA’s Animal Rule for approval ofbiodefense therapeutics. As anticipated, the FDA recommended that, in parallelwith pivotal animal studies demonstrating efficacy under 

 

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FDA’sAnimal Rule, we should complete the CABP clinical program and submit a completeresponse to the CABP NDA prior to submitting an amended NDA for the biodefenseindications.

 

**IV Formulation Program Update**

 

In July 2010 we announced positive results from preclinicaltoxicology and pharmacokinetic studies of an intravenous (“IV”) formulation forcethromycin that support its use in a hospital setting. Cethromycin IV wasadministered as a single dose up to 60 mg/kg/day, the highest dose tested.Results demonstrated cethromycin IV was well tolerated and generated 10-foldgreater plasma exposure compared to oral administration. The studies wereconducted in rats in accordance with good laboratory practices. The increasedbioavailability of cethromycin IV may allow for the treatment of serioushospital infections as well as the treatment of bioterror pathogens, such asanthrax, plague and tularemia after signs and symptoms are present.

 

**Antimicrobial Peptide Program**

 

In July 2010 we announced that we entered into a sponsoredresearch and option agreement with The University of British Columbia (“UBC”)to develop several antimicrobial peptides. These peptides exhibit bactericidalproperties and kill both Gram-positive and Gram-negative organisms rapidly anddirectly. They have shown activity against clinically important resistantbacteria, such as vancomycin-resistant enterococci, a pathogen that is mostcommonly acquired by patients while hospitalized, and methicillin-resistant *Staphylococcus aureus*. Also, thesepeptides are expected to have significant activity against biodefense pathogenssuch as *Bacillus anthracis*.

 

Under the terms of the agreement with UBC, we paid an option fee uponexecution of the agreement and will make additional payments based on thecompletion of specific milestones. In return, UBC granted us the exclusiveoption to evaluate the technology and obtain a worldwide, exclusive license tomanufacture, distribute and market products emanating from the program.

 

**FinancialTransactions Update**

 

Since our inception, we have incurred net losses each year. Our netloss for the nine months ended September 30, 2010 was $6.0 million.  As of September 30, 2010, we had anaccumulated deficit of $137.6 million. We have funded operations to dateprimarily from debt financings and capital contributions from our founder andChief Executive Officer, proceeds from an initial public offering, andsubsequent private placements, including issuances of common stock under twoStandby Equity Distribution Agreements.

 

In October 2010, we were awarded a $245,000 cash grant under theQualifying Therapeutic Discovery Project which was created by Congress as partof the Patient Protection and Affordable Care Act of 2010. In July 2010,we applied for the grant to help fund the development of cethromycin for thetreatment of CABP.

 

In September 2010, weentered into a new Standby Equity Distribution Agreement with YA Global MasterSPV Ltd. (“YA Master”) for the sale of up to $10.0 million of shares of ourcommon stock over a two-year commitment period (the “2010 SEDA”). Underthe terms of the 2010 SEDA, we will sell, from time to time, in our discretion,newly-issued shares of our common stock to YA Master at a discount to thecurrent market price of 5%. The commitment does not impose any restrictions onthe Company’s operating activities. Additionally, we paid to YA Master a commitment fee of $100,000 byissuing 1,984,127 shares of our common stock. Through November 11, 2010 weraised $0.2 million and issued 6,175,829 shares through the usage of the 2010SEDA facility.

 

We also have an effectiveregistration statement on file with the Securities and Exchange Commission forthe purchase and sale of shares, with respect to common stock issuable underthe agreement with YA Master. The number of shares included in the registrationstatement was limited to one-third of the then outstanding common stock held bynon-affiliates, or approximately 54 million shares. Based on the last reportedshare price of our common stock on November 10, 2010, we would be able toraise approximately $1.6 million through the use of the 2010 SEDA under thisregistration statement.

 

On July 7, 2010, weclosed a registered public offering of units.  As part of the closing, weissued 379,188 units at a public offering price of $4.20 per unit, raisingapproximately $1.6 million in gross offering proceeds and approximately $1.0 

 

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million in net proceedsafter deducting placement agent fees and offering expenses payable by us.

 

Each unit sold in theoffering consists of (i) 100 shares of our common stock, (ii) 100stock warrants to purchase shares of common stock at an exercise price of$0.042 per share and (iii) one warrant to purchase an additional unit,consisting of 100 shares of common stock and 100 stock warrants, at an exerciseprice of $4.20 per additional unit.  The stock warrants may be exercisedat any time during the period commencing six months after the closing date andending on the fifth anniversary of the closing date.  The exercise periodfor the unit warrants has expired.  Priorto expiration, we issued 36,196,800 shares of common stock and 36,196,800additional stock warrants through the exercise of unit warrants and received anadditional $1.5 million in gross proceeds as a result of these exercises.

 

Dawson JamesSecurities, Inc. (“Dawson James”) acted as the placement agent for theoffering.  In addition to cash placement agent fees, we issued to DawsonJames a compensation warrant to purchase 1,516,752 shares of common stock at anexercise price of $0.0672 per share.

 

InSeptember 2010, we entered into a Second Amended and Restated BusinessLoan Agreement and related loan documents with our lender, amending ourexisting loan facility to give effect to letter agreements entered into in May andJune 2010.  Among other things, theamendment extends the loan maturity by one year to January 1, 2012.  Under the terms of the agreement, we repaid$1.5 million of the outstanding loan balance and were required to furtherreduce the balance by an additional $1.5 million by October 1, 2010 and$1.0 million by April 1, 2011.  OurChief Executive Officer, Michael T. Flavin, Ph.D., will provide a personalguarantee to the loan facility until the principal balance is reduced to $7.0million.  In addition, the interest rateon the outstanding loan balance increased from 8.5% to 10.0% under the terms ofthe amended loan agreement. In connection with the amendment, we issued 500,000warrants, which are exercisable at $0.042 per share, and will an additional500,000 warrants in September 2011. We have also agreed that the line ofcredit is secured by substantially all of our assets including, subject toAbbott Laboratories’ consent, our rights under our license agreement forcethromycin with Abbott Laboratories.  Allother terms of the loan remained unchanged.

 

InOctober 2010, we paid $420,000 in a principal reduction to our commerciallender toward a mandatory prepayment of $1.5 million that was due on October 1,2010.  We are engaged in substantivediscussions with the lender regarding an agreement that would defer the balanceof this prepayment to January 2011. Until agreement on such a deferral isreached or until the balance of the prepayment is made, we are subject to thedefault provisions of the loan documents including acceleration of payment.

 

In July 2010, the Company, acting through the independentaudit committee of our board of directors, entered into an agreement withDr. Flavin, providing that our $2.0 million promissory note withDr. Flavin would be exchanged for 47,619,047 shares of our commonstock.  The price of $0.042 per share used in the exchange was the sameprice per share used in our public equity offering.  As a result of theexchange, the promissory note was cancelled and retired and accrued interest of$52,000 was deferred and is expected to be paid later in the year.

 

In April 2010, our shareholders approved an amendment to ourarticles of incorporation to increase the number of authorized shares from125,000,000 to 625,000,000 including an increase in the number of authorizedshares of common stock from 120,000,000 to 620,000,000.

 

InMarch 2010, the Company and YA Global Master SPV Ltd. (“YA SPV”), anaffiliate of Yorkville Advisors, agreed to terminate the Standby EquityDistribution Agreement dated as of June 19, 2009 (the “2009 SEDA”). We sold to YA SPV 49,549,200 shares of our common stock and raisedapproximately $11.7 million under the 2009 SEDA prior to its termination.  Shares of common stock sold under the SEDA inexcess of $9.0 million were sold with the consent of our lender under ourcredit facility.

 

InJune 2009, the Company and YA Global Investments, L.P. (“YA Global”), anaffiliate of Yorkville Advisors, terminated a prior Standby Equity Distribution Agreement dated as of September 29,2008 (“2008 SEDA”).  For the period of January 1,2009 through the end of the 2008 SEDA, we issued 9,883,994 shares to YA Globaland received approximately $3.9 million. In addition, in September 2008, we paid YA Global a commitment feeof $300,000 by issuing 393,339 shares of our common stock.

 

Thereis uncertainty as to our ability to continue as a going concern, and adiscussion of this uncertainty can be found in Note 1 to the consolidatedfinancial statements and in the liquidity and capital resources section of thismanagement discussion and analysis.

 

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**Resultsof Operations**

 

*Three months ended September 30, 2010 compared to three monthsended September 30, 2009*

 

*Revenue.*** We did not generate revenue during the threemonths ended September 30, 2010 compared to $617,000 of revenue recognizedfor the three months ended September 30, 2009.  Revenue in the three months ended September 30,2009 was derived from a grant awarded by the Defense Threat Reduction Agency (“DTRA”)of the U.S. Department of Defense (“DoD”). The contract award of $3.8 million was over a two year period whichbegan in August 2008.  The revenuefrom this grant was fully recognized as of June 30, 2010.

 

*Research and development expense.* Research and development expensedecreased $0.3 million to $0.7 million for the three months ended September 30,2010 as the costs associated with work performed under the grant awarded byDTRA decreased $0.3 million in the quarter ended September 30, 2010.

 

*General and administrative expense.*** General and administrative expenses were $1.2million for the three months ended September 30, 2010, a decrease of $1.0million compared to the third quarter last year.  This result reflects a decrease in legal andother professional services of $0.4 million and lower salary and benefit costsof $0.4 million primarily the result of severance expense incurred in the thirdquarter of last year.  In addition, inthe three months ended September 30, 2009 we recorded a non-cash charge of$0.2 million to expense capitalized leasehold improvements which no longer areused in our operations.

 

*Interest income.* Interest income decreased $4,000 to $2,000 forthe three months ended September 30, 2010 as compared to the same period lastyear.

 

*Interest expense.  * Interest expense of $184,000 decreased $79,000in the three months ended September 30, 2010 as compared to the sameperiod last year.  This result reflectsthe retirement of our $2.0 million promissory note with Dr. Flavin inexchange for 47,619,047 shares of our common stock in July 2010 and therepayment of $1.5 million of our outstanding loan balance with our lender in April 2010.

 

*Other (income) expense, net.   *For the threemonths ended September 30, 2009 we recorded a $100,000 currencytransaction loss related to the procurement of commercial launch materials.

 

*Nine months ended September 30, 2010 compared to nine months endedSeptember 30, 2009*

 

*Revenue.*** We recognized revenue of $753,000 for the ninemonths ended September 30, 2010 compared to $1.7 million for the ninemonths ended September 30, 2009. Revenue was derived from a grant awarded by the Defense Threat ReductionAgency of the U.S. Department of Defense. The contract award of $3.8 million was over a two year period whichbegan in August 2008.  The revenuefrom this grant was fully recognized as of June 30, 2010.

 

*Research and development expense.* Research and development expensedecreased $0.9 million to $2.3 million for the nine months ended September 30,2010.  In conjunction with work performedunder the grant awarded by DTRA, costs incurred decreased $0.5 million in thenine months ended September 30, 2010. Expenses incurred for IV formulationstudies of $0.2 million were offset by lower salary, benefit and incentivecompensation costs of approximately $0.2 million in the nine months ended September 30,2010.  Research and development expensesrelated to the FDA review of cethromycin including the June 2, 2009 AIDACmeeting, were $0.4 million for the nine months ended September 30, 2009.

 

*General and administrative expense.*** General and administrative expenses were $3.8million for the nine months ended September 30, 2010, a decrease of $1.6million compared to the same period last year. This result reflects lower salary, benefit and incentive compensationcosts of $0.6 million and decreased facility expenses of $0.2 million as aresult of renewing our lease agreement at a lower rate per square foot andreduced amount of space.  In addition,legal services and other administrative costs were approximately $0.6 millionlower for the nine months ended September 30, 2010 compared to the sameperiod previous year and in the three months ended September 30, 2009 werecorded a non-cash charge of $0.2 million to expense capitalized leaseholdimprovements which no longer are used in our operations..

 

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*Interest income.* Interest income decreased $1,000 to $8,000 forthe nine months ended September 30, 2010 as compared to the same periodlast year.

 

*Interest expense.  * Interest expense of $694,000 decreased $80,000for the nine months ended September 30, 2010 as compared to the sameperiod last year. This result reflects the retirement of our $2.0 millionpromissory note with Dr. Flavin in exchange for 47,619,047 shares of ourcommon stock in July 2010 and the repayment of $1.5 million of ouroutstanding loan balance with our lender in April 2010.

 

*Other (income) expense, net.   *For the ninemonths ended September 30, 2009 we recorded a $119,000 currencytransaction loss related to the procurement of commercial launch materials.

 

**Liquidity and Capital Resources**

 

Wehave devoted substantially all of our cash resources to research anddevelopment and general and administrative expenses.  To date, we have not generated any revenuesfrom the sale of products, and we do not expect to generate any such revenuesin the near term, if at all.  As aresult, we have incurred an accumulated deficit of $137.6 million as of September 30,2010 and we expect to incur significant operating losses for the foreseeablefuture.  As of September 30, 2010 wehad negative working capital of $4.3 million and cash and cash equivalents were$1.0 million.  Since our inception in1999 to August 2005, we financed our operations primarily through debt andcapital contributions from our founder and controlling stockholder andborrowings under our bank line of credit. In August 2005 we completed our initial public offering in which weraised $28.7 million, net of underwriters discount and offering costs.  Since that time, we have completed threeprivate placements in which we raised $52.8 million, net of underwriters’discounts and offering costs and raised additional debt financing through our$10.0 million bank line of credit. Between January 2009 and March 2010 we raised $15.6 millionunder two Standby Equity Distribution Agreements.  And in July 2010 we completed asecondary public offering and raised approximately $2.5 million (including theexercise of unit warrants issued as part of that offering), net of placementagent fees and offering expenses payable by us.

 

In September 2001, we incurred indebtedness under a $2.0 millionpromissory note with the Chief Executive Officer of the Company, which bearsinterest at 7.75%.  InJuly 2010, the Company, acting through the independent auditcommittee of our board of directors, entered into an agreement providing thatour $2.0 million promissory note with Dr. Flavin would be exchanged for47,619,047 shares of our common stock.  The price of $0.042 per share usedin the exchange was the same price per share used in our public equityoffering.  As a result of the exchange, the promissory note was cancelledand retired and accrued interest of $52,000 was deferred and is expected to bepaid later in the year.

 

Wehave a revolving line of credit with a financial institution under which we had$8.5 million and $10.0 million outstanding as of September 30, 2010 and December 31,2009, respectively.  In September 2010,we entered into a Second Amended and Restated Business Loan Agreement andrelated loan documents with our lender to give effect to letter agreements weentered into in May and June 2010. Among other things, the amendment extends the loan maturity by one yearto January 1, 2012. Under the terms of the agreement, we repaid $1.5million of the outstanding loan balance and were required to further reduce thebalance by an additional $1.5 million by October 1, 2010 and $1.0 millionby April 1, 2011.  Our ChiefExecutive Officer, Michael T. Flavin, Ph.D., will provide a personal guaranteeto the loan facility until the principal balance is reduced to $7.0 million.  In addition, the interest rate on theoutstanding loan balance increased from 8.5% to 10.0% under the terms of theamended loan agreement. In connection with the amendment, we also issued to ourlender 500,000 warrants, which are exercisable at $0.042 per share, and will anadditional 500,000 warrants in September 2011.  We have also agreed that the line of creditis secured by substantially all of our assets including, subject to AbbottLaboratories’ consent, our rights under the license agreement for cethromycinwith Abbott Laboratories.  All other termsof the loan remained unchanged.

 

InOctober 2010, we paid $420,000 in a principal reduction to our commerciallender toward a mandatory prepayment of $1.5 million that was due on October 1,2010.  We are engaged in substantivediscussions with the lender regarding an agreement that would defer the balanceof this prepayment to January 2011. Until agreement on such a deferral isreached or until the balance of the prepayment is made, we are subject to thedefault provisions of the loan documents including acceleration of payment.

 

Netcash used in operating activities was $5.4 million for the nine months ended September 30,2010 compared to $8.9 million for the nine months ended September 30,2009.  Approximately $1.3 million of cashwas used in our cethromycin programs in the nine months ended September 30,2010, compared to $4.4 million in the same period last year.  These amounts are net of DTRA grant awardfunds, which reimburse us for certain research and development expensesassociated with the grant.  Cash used forgeneral corporate purposes was $4.1 million in the nine months ended September 30,2010 compared to $4.5 million for the nine months ended September 30,2009.

 

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Cashprovided from financing activities was $3.5 million for nine months ended September 30,2010 compared to $11.5 million in 2009. In July 2010 we closed our public offering and received approximately$1.3 million net of fees paid through September 30, 2010 and through theexercise of unit warrants received an additional $1.5 million in net proceedsas a result of these exercises.  For thenine months ended September 30, 2010, we received approximately $2.2million, net of offering expenses, for the sale of 15,447,057 shares under the2009 SEDA facility compared to $11.4 million reflecting the sale of 35,154,293shares for the nine months ended September 30, 2009.  Additionally, under the terms of the new loanagreement, we repaid $1.5 million of our outstanding loan balance in the secondquarter of 2010.

 

*Contractual Obligations*

 

Asof September 30, 2010, the annual amounts of future minimum payments underdebt obligations, interest, lease obligations and other long term liabilitiesconsisting of executed research and development, and license agreements are asfollows:

 
| ** **                            | ** ** | **Payments Due by December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2010**                                             | ** ** | **2011**   | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **Total** | ** ** |
| Notes payable and bank line of credit |       | $                                                    | 1,500,000  |       | $          | 1,000,000 |   | $ | 6,000,000 |   | $ | — |   | $ | — |   | $ | 8,500,000 |   |
| Interest                              |       | 266,768                                              |       | 626,895    |       | — |   | — |   | — |   | 893,663 |   |
| CABP program related costs            |       | 227,088                                              |       | —     |       | — |   | — |   | — |   | 227,088 |   |
| Biodefense program related costs      |       | 135,797                                              |       | —     |       | — |   | — |   | — |   | 135,797 |   |
| Grant payable                         |       | —                                               |       | 500,000    |       | — |   | — |   | — |   | 500,000 |   |
| Operating leases                      |       | 27,770                                               |       | 111,840    |       | 87,965 |   | 9,480 |   | 2,370 |   | 239,425 |   |
|                                  |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Total                                 |       | $                                                    | 2,157,423  |       | $          | 2,238,735 |   | $ | 6,087,965 |   | $ | 9,480 |   | $ | 2,370 |   | $ | 10,495,973 |   |

 

Theabove table does not include the potential $30.0 million product based milestonepayment under our license agreement with Abbott which we will owe Abbott ifcethromycin is approved for marketing by the FDA.  Under the terms of the amended licenseagreement, $20.0 million is payable within 20 business days after receipt ofU.S. regulatory approval, $5.0 million is payable within 6 months of U.S.regulatory approval and $5.0 million is payable within 12 months of U.S.regulatory approval.   Thereafter, wewould owe Abbott an additional $2.5 million upon reaching $200.0 million in aggregatenet sales of cethromycin and $5.0 million upon reaching $400.0 million inaggregate net sales.  The periods inwhich milestone obligations become payable, if at all, are only estimates dueto uncertainties associated with the completion or achievement of themilestone.

 

Inthe third quarter of 2008, we signed a letter of intent with DSM to procure rawmaterials to be used to produce commercial quantities of cethromycin.  The lead times for acquiring these rawmaterials needed to be used to complete production are lengthy.  As of September 30, 2010 the cost of rawmaterials actually purchased was approximately $2.8 million.  The agreement allows for us to purchaseadditional raw materials at a later time.

 

InAugust 2008, the DTRA of the DoD awarded us a two-year contract worth upto $3.8 million to further study cethromycin as a potential broad-spectrummedical countermeasure. In conjunction with the grant awarded by the DTRA, weentered into subcontractor arrangements to further study cethromycin as apotential broad-spectrum medical countermeasure.  The subcontractors’ costs were approximately$3.0 million over about a two-year period which began in August 2008.

 

Ourcommitments under operating leases consist of payments made to a related partyrelating to our facilities lease in Woodridge, Illinois, which expires on October 1,2012.  Additionally, we rent certainoffice equipment under operating leases.

 

Wewill not be generating any product-based revenues or realizing cash flows fromoperations in the near term, if at all. We may not have sufficient cash or other funding available to completeour anticipated business activities for the remainder of 2010.  In order to continue our business activitiesduring 2010, we intend to raise additional capital through the issuance ofequity securities and continue our efforts in applying for grant awards throughvarious agencies and licensing our lead compound, cethromycin, to commercialpartners.  We believe, based upon currentmarket conditions, commercial partnership agreements would include a series ofmilestone payments, including up-front milestones that would fund our continuedoperations.  Although management believeswe could secure commercial partnerships, there can be no assurances that suchpartnerships will be available at terms acceptable to us, if at all. In September 2010,we entered into the 2010 SEDA with YA Master for the sale of up to $10.0million of shares of our common stock over a two-year commitment period.Under the 

 

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termsof the 2010 SEDA, we will sell, from time to time, in our discretion,newly-issued shares of our common stock to YA Master at a discount to thecurrent market price of 5% (see Note 2 to the consolidated financialstatements). If we raise additional capital by issuing equity securities, ourshareholders could experience substantial dilution.  As a result of our current financialsituation and the uncertainty in our ability to obtain needed financing throughequity offerings, commercial partnerships and grant awards or other means,there is substantial doubt about our ability to continue as a going concern.

 

Our future capital uses and requirements depend on numerousforward-looking factors.  These factorsinclude, but are not limited to, the following:

 

·                                          progress in ourclinical development programs, as well as the magnitude of these programs;

 

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

 

·                                       our ability toraise additional debt or equity financing or the receipt of milestone paymentsthat would be paid to us as a result of our entering into a commercialpartnership for cethromycin, or a combination of both;

 

·                                       our ability torepay our indebtedness and other obligations;

 

·                                          our ability toestablish and maintain additional collaborative arrangements;

 

·                                          the resources,time and costs required to successfully initiate and complete our preclinicaland clinical trials, obtain regulatory approvals, protect our intellectualproperty and obtain and maintain licenses to third-party intellectual property;

 

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

 

·                                          the timing, receipt and amount of sales androyalties, if any, from our potential products.

 

If, at any time, our prospects for financing our clinical developmentprograms are limited, we may decide to reduce research and development expensesby delaying or discontinuing certain programs.

 

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**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of our financial condition and results ofoperations are based on our financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities and expenses and related disclosureof contingent assets and liabilities.  Wereview our estimates on an ongoing basis. We base our estimates on historical experience and on various otherassumptions that we believe 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.

 

*Stock-based Compensation*

 

We account for stock-based awards to employees and non-employees usingthe fair value based method to determine compensation for all arrangementswhere shares of stock or equity instruments are issued for compensation.  We use a Black-Scholes-Merton options-pricingmodel to determine the fair value of each option grant as of the date of grantfor expense incurred.  TheBlack-Scholes-Merton model requires inputs for risk-free interest rate,dividend yield, volatility and expected lives of the options.  Expected volatility is based on historicalvolatility of our stock since August 5, 2005, the date our stock began totrade publicly.  The risk-free rate forperiods within the contractual life of the option is based on theU.S. Treasury yield curve in effect at the time of the grant.  The expected lives for options grantedrepresents the period of time that options granted are expected to beoutstanding and is derived from the contractual terms of the optionsgranted.  We estimate future forfeituresof options based upon historical forfeiture rates.

 

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**Forward-Looking Statements and Risk Factors**

 

ThisQuarterly Report on Form 10-Q, including Management’s Discussion and Analysisof Financial Condition and Results of Operations, contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.   Forward-lookingstatements often are proceeded by words such as “believes,” “expects,” “may,” “anticipates,”“plans,” “intends,” “assumes,” “will” or similar expressions. Forward-looking statements reflect management’s current expectations, as of thedate of this report, and involve certain risks and uncertainties.   Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result ofvarious factors.   Some of thefactors that could cause future results to materially differ from the recentresults or those projected in forward-looking statements include the “RiskFactors” described in our Annual Report on Form 10-K.

 

**Item 3. *Quantitativeand Qualitative Disclosures About Market Risk***

 

Our exposure to market risk is currently confined to our cash, cashequivalents, line of credit and certain contract manufacturing agreements. Wecurrently do not hedge interest rate exposure. We have not used derivativefinancial instruments for speculation or trading purposes. Because of theshort-term maturities of our cash and cash equivalents, we do not believe thatan increase in market rates would have any significant impact on their realizedvalue.

 

We may be subject to foreign currency exchange rate risk on certaincontract manufacturing agreements.  Forthe nine months ended September 30, 2010, we did not incur any exchangelosses and have no outstanding obligations or commitments denominated inforeign currencies.  To date, we have notentered into any foreign currency forward exchange contracts or otherderivative financial instruments to hedge the effects of fluctuations inforeign currency exchange rates.

 

**Item 4. *Controls andProcedures***

 

Ourmanagement, under the supervision and with the participation of our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluatedthe effectiveness of our disclosure 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.

 

**Changesin 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 —OTHER INFORMATION**

 

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

 

Ourbusiness, financial condition, operating results and cash flows may be impactedby a number of factors, including those set forth in Item 1A of Part I ofour Annual Report on Form 10-K for the fiscal year ended December 31,2009.  Set forth below are materialchanges in our risk factors since the 2009 Form 10-K.  The information presented below updates, andshould be read in conjunction with, the risk factors and other informationdisclosed in our 2009 Form 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.***

 

Ourindependent registered public accounting firm included an explanatory paragraphin the report on our 2009 financial statements related to the uncertainty inour ability to continue as a going concern. The paragraph stated that we do nothave sufficient cash on-hand or other funding available to meet our obligationsand sustain our operations, which raises substantial doubt about our ability tocontinue as a going concern. We will not be generating any product-basedrevenues or realizing cash flows from operations in the near term, if at all.We may not have sufficient cash or other funding available to complete ouranticipated business activities for the remainder of 2010. In order to addressour working capital shortfall we intend to raise additional capital byaccessing the capital markets. There can be no assurances that we will besuccessful in accessing the capital markets on terms acceptable to us, if atall, or that such partnerships will be available on terms acceptable to us, ifat all.

 

Inorder to provide access to needed capital, we executed a Standby EquityDistribution Agreement (“2010 SEDA”) that allows us to sell shares of ourcommon stock to an accredited investor, YA Global Master SPV Ltd. (“YA Master”),subject to certain terms and conditions. Although we have not yet done so, anyshares of our common stock that we determine to sell pursuant to the 2010 SEDAwill have a dilutive impact on our stockholders. The 2010 SEDA terms do notrestrict YA Master’s ability to re-sell the shares we issue to them, andsuch re-sales could cause the market price of our common stock to declinesignificantly with advances under the 2010 SEDA. To the extent of any suchdecline, any subsequent advances would require us to issue a greater number ofshares of common stock to YA Master in exchange for each dollar of the advance.Under these circumstances our existing stockholders would experience greaterdilution. The sale of our common stock under the 2010 SEDA could encourageshort sales by third parties, which could contribute to the further decline ofour stock price. There can be no assurance that we will be able to obtainadequate capital funding in the future, under the 2010 SEDA or otherwise, tocontinue operations and implement our strategy. As a result of theseuncertainties, there is significant doubt about our ability to continue as agoing concern.

 

***We are currently in payment default underthe terms of our loan facility***

 

InOctober 2010, the Company paid $420,000 in a principal reduction to itscommercial lender toward a mandatory prepayment of $1.5 million that was due onOctober 1, 2010.  The Company is engaged in substantive discussionswith the lender regarding an agreement that would defer the balance of thisprepayment to January 2011. However, until agreement on such a deferral isreached or until the balance of the prepayment is made, the Company is subjectto the default provisions of the loan documents including acceleration of loanrepayment.

 

**Item 3.*Defaults Upon Senior Securities***

 

In October 2010, theCompany paid $420,000 in a principal reduction to its commercial lender towarda mandatory prepayment of $1.5 million that was due on October 1, 2010.  The Company is engaged in substantivediscussions with the lender regarding an agreement that would defer the balanceof this prepayment to January 2011. Until agreement on such a deferral is reachedor until the balance of the prepayment is made, the Company is subject to thedefault provisions of the loan documents including acceleration of payment.

 

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**Item 6. *Exhibits***

 

Thefollowing is a list of exhibits filed as part of this Form 10-Q:

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                      |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                 |
| 3.1        |       | Third  Amended and Restated Certificate of Incorporation of Advanced Life Sciences  Holdings, Inc. (as filed in our Quarterly Report on Form 10-Q as  exhibit 3.1 on May 10, 2010)                                                                    |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.1       |       | Amended  2005 Stock Incentive Plan of Advanced Life Sciences Holdings, Inc. (as  filed in our Current Report on Form 8-K as exhibit 10.1 on  April 13, 2010)                                                                                          |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.2       |       | Second  Amended and Restated Business Loan Agreement between Advanced Life  Sciences, Inc. and The Leaders Bank, dated as of September 9, 2010  (as filed in our Registration Statement on Form S-1 as exhibit 10.16 on  September 29, 2010)     |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.3       |       | Amended  and Restated Guaranty by Advanced Life Sciences Holdings, Inc. to and  for the benefit of The Leaders Bank, dated as of September 9, 2010 (as  filed in our Registration Statement on Form S-1 as exhibit 10.17 on  September 29, 2010) |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.4       |       | Amended  and Restated Security Agreement between Advanced Life Sciences  Holdings, Inc. and The Leaders Bank, dated as of September 9, 2010  (as filed in our Registration Statement on Form S-1 as exhibit 10.18 on  September 29, 2010)        |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.5       |       | Amended  and Restated Security Agreement between Advanced Life Sciences, Inc. and  The Leaders Bank, dated as of September 9, 2010 (as filed in our  Registration Statement on Form S-1 as exhibit 10.19 on  September 29, 2010)                 |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.6       |       | Guaranty  by Michael T. Flavin to and for the benefit of The Leaders Bank, dated as of  September 9, 2010 (as filed in our Registration Statement on  Form S-1 as exhibit 10.21 on September 29, 2010)                                                |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.7       |       | Standby  Equity Distribution Agreement between Advanced Life Sciences  Holdings, Inc. and YA Global Master SPV Ltd., dated September 27,  2010 (as filed in our Registration Statement on Form S-1 as exhibit  10.26 on September 29, 2010)      |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.8       |       | Letter  agreement with Dawson James Securities, Inc. dated February 26,  2010, as amended on May 27, 2010 (as filed in our Registration Statement  on Form S-1 as exhibit 10.29 on May 29, 2010)                                            |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.9       |       | Second  Amended and Restated Debt Exchange Agreement between Advanced Life Sciences  Holdings, Inc. and Michael T. Flavin, Ph.D. dated as of July 22,  2010 (as filed in our Current Report on Form 8-K as exhibit 10.1  on July 22, 2010)       |
|       |       |                                                                                                                                                                                                                                                                 |
| 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.                                                                                                       |

 

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*  Filed herewith.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   |     |                                        |
|--------|----------|---------------------------------------------|
|   |     | 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 12, 2010

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                      |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                 |
| 3.1        |       | Third  Amended and Restated Certificate of Incorporation of Advanced Life Sciences  Holdings, Inc. (as filed in our Quarterly Report on Form 10-Q as  exhibit 3.1 on May 10, 2010)                                                                    |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.1       |       | Amended  2005 Stock Incentive Plan of Advanced Life Sciences Holdings, Inc. (as  filed in our Current Report on Form 8-K as exhibit 10.1 on April 13,  2010)                                                                                          |
|       |       |                                                                                                                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.2       |       | Second  Amended and Restated Business Loan Agreement between Advanced Life  Sciences, Inc. and The Leaders Bank, dated as of September 9, 2010  (as filed in our Registration Statement on Form S-1 as exhibit 10.16 on  September 29, 2010)     |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.3       |       | Amended  and Restated Guaranty by Advanced Life Sciences Holdings, Inc. to and  for the benefit of The Leaders Bank, dated as of September 9, 2010 (as  filed in our Registration Statement on Form S-1 as exhibit 10.17 on  September 29, 2010) |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.4       |       | Amended  and Restated Security Agreement between Advanced Life Sciences  Holdings, Inc. and The Leaders Bank, dated as of September 9, 2010  (as filed in our Registration Statement on Form S-1 as exhibit 10.18 on  September 29, 2010)        |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.5       |       | Amended  and Restated Security Agreement between Advanced Life Sciences, Inc. and  The Leaders Bank, dated as of September 9, 2010 (as filed in our  Registration Statement on Form S-1 as exhibit 10.19 on  September 29, 2010)                 |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.6       |       | Guaranty  by Michael T. Flavin to and for the benefit of The Leaders Bank, dated as of  September 9, 2010 (as filed in our Registration Statement on  Form S-1 as exhibit 10.21 on September 29, 2010)                                                |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.7       |       | Standby  Equity Distribution Agreement between Advanced Life Sciences  Holdings, Inc. and YA Global Master SPV Ltd., dated September 27,  2010 (as filed in our Registration Statement on Form S-1 as exhibit  10.26 on September 29, 2010)      |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.8       |       | Letter  agreement with Dawson James Securities, Inc. dated February 26,  2010, as amended on May 27, 2010 (as filed in our Registration Statement  on Form S-1 as exhibit 10.29 on May 29, 2010)                                            |
|       |       |                                                                                                                                                                                                                                                                 |
| 10.9       |       | Second  Amended and Restated Debt Exchange Agreement between Advanced Life Sciences  Holdings, Inc. and Michael T. Flavin, Ph.D. dated as of July 22,  2010 (as filed in our Current Report on Form 8-K as exhibit 10.1  on July 22, 2010)       |
|       |       |                                                                                                                                                                                                                                                                 |
| 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.                                                                                                       |

 

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*  Filed herewith.

 

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