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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

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| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
|-------|------------|------------------------------------------------------------------------------------------------------------|

 

**For the Quarterly Period Ended: June 30, 2008**

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

 

**Commission File No: 000-51436**

 

**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**1440 Davey RoadWoodridge, IL 60517**

(Address, including zip code of registrantsprincipal executive offices)

 

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

 

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

 

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

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer o |   | Smaller reporting  company x |
|---------------------------|--------|---------------------|--------|-------------------------|--------|------------------------------|

 

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

 

As of  August 11, 2008, the registrant had38,521,987  shares of common stock, $0.01par value per share, outstanding.

 

 

 

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**ADVANCEDLIFE 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 June 30, 2008  and December 31, 2007 |   |
|                                                           | Consolidated  Statements of Operations for the three and six months ended June 30,  2008 and 2007 and for the period from inception (January 1, 1999)  through June 30, 2008 |   |
|                                                           | Consolidated  Statements of Stockholders’ Equity for period from inception (January 1,  1999) through June 30, 2008 |   |
|                                                           | Consolidated Statements of Cash Flows for the six  months ended June 30, 2008 and 2007 and for the period from inception  (January 1, 1999) through June 30, 2008 |   |
|                                                           | Notes to Consolidated Financial Statements |   |
| Item 2.                                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                                                   | Quantitative  and Qualitative Disclosures About Market Risk |   |
| Item 4.                                                   | Controls and  Procedures |   |
| ** **                                                     | ** ** | ** ** |
| **PART II —  OTHER INFORMATION**                |
| Item 4.                                                        | Submission  of Matters to a Vote of Security Holders |   |
| Item 6.                                                   | Exhibits |   |
| Signatures                                                     |   |
| Exhibit Index                                             |   |

 

2

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**PART I — FINANCIALINFORMATION**

 

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

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                            | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                       |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                            |       | $                 | 9,054,421  |                  | $          | 18,324,991 |   |
| Prepaid  insurance                                                                                                                                    |       | 48,527            |       | 251,493               |       |
| Prepaid clinical  trial expenses                                                                                                                      |       | —            |       | 926,168               |       |
| Other prepaid  expenses and deposits                                                                                                                  |       | 89,360            |       | 140,359               |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Total current  assets                                                                                                                                 |       | 9,192,308         |       | 19,643,011            |       |
|                                                                                                                                                  |       |              |       |                  |       |
| PROPERTY AND  EQUIPMENT:                                                                                                                              |       |              |       |                  |       |
| Furniture and  fixtures                                                                                                                               |       | 232,461           |       | 221,417               |       |
| Laboratory  equipment                                                                                                                                 |       | 159,186           |       | 159,186               |       |
| Computer  software and equipment                                                                                                                      |       | 250,104           |       | 242,707               |       |
| Leasehold  improvements                                                                                                                               |       | 502,798           |       | 177,253               |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Total property  and equipment–at cost                                                                                                            |       | 1,144,549         |       | 800,563               |       |
| Less accumulated  depreciation                                                                                                                        |       | (659,108          | )          | (542,032              | )          |
|                                                                                                                                                  |       |              |       |                  |       |
| Property and  equipment–net                                                                                                                      |       | 485,441           |       | 258,531               |       |
|                                                                                                                                                  |       |              |       |                  |       |
| OTHER ASSETS                                                                                                                                          |       | 23,018            |       | 10,000                |       |
|                                                                                                                                                  |       |              |       |                  |       |
| TOTAL ASSETS                                                                                                                                          |       | $                 | 9,700,767  |                  | $          | 19,911,542 |   |
|                                                                                                                                                  |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                        |       |              |       |                  |       |
|                                                                                                                                                  |       |              |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                                 |       |              |       |                  |       |
| Accounts payable                                                                                                                                      |       | $                 | 200,976    |                  | $          | 2,685,751 |   |
| Accrued clinical  trial and NDA expenses                                                                                                              |       | 1,144,749         |       | 2,776,543             |       |
| Other accrued  expenses                                                                                                                               |       | 811,925           |       | 330,441               |       |
| Accrued interest  payable                                                                                                                             |       | 20,391            |       | 22,756                |       |
| Short-term lease  payable                                                                                                                             |       | 7,832             |       | 7,259                 |       |
| Short-term notes  payable - related party                                                                                                             |       | 2,000,000         |       | —                |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Total current  liabilities                                                                                                                            |       | 4,185,873         |       | 5,822,750             |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Long-term lease  payable                                                                                                                              |       | 8,751             |       | 12,818                |       |
| Long-term grant  payable                                                                                                                              |       | 500,000           |       | 500,000               |       |
| Long-term notes  payable - related party                                                                                                              |       | —            |       | 2,000,000             |       |
| Line of credit                                                                                                                                        |       | 3,915,000         |       | 3,915,000             |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Total  liabilities                                                                                                                                    |       | 8,609,624         |       | 12,250,568            |       |
|                                                                                                                                                  |       |              |       |                  |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                        |       |              |       |                  |       |
|                                                                                                                                                  |       |              |       |                  |       |
| MINORITY  INTEREST                                                                                                                                    |       | —            |       | —                |       |
|                                                                                                                                                  |       |              |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                           |       |              |       |                  |       |
| Common stock,  $0.01 par value—60,000,000 shares authorized; 38,502,987 issued and  outstanding at June 30, 2008 and December 31, 2007 |       | 385,030           |       | 385,030               |       |
| Additional  paid-in capital                                                                                                                           |       | 107,230,747       |       | 106,859,532           |       |
| Deficit  accumulated during the development stage                                                                                                     |       | (106,524,634      | )          | (99,583,588           | )          |
|                                                                                                                                                  |       |              |       |                  |       |
| Total  stockholders’ equity                                                                                                                      |       | 1,091,143         |       | 7,660,974             |       |
|                                                                                                                                                  |       |              |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                      |       | $                 | 9,700,767  |                  | $          | 19,911,542 |   |

 

Seenotes to unaudited consolidated financial statements.

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **  | ** ** | ** **  | ** ** | **Period From**            | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|-------------|------------|-------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **  | ** ** | ** **  | ** ** | **Inception**                   | ** ** |
| ** **                                                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **  | ** ** | ** **  | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                  | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008**    | ** ** | **2007**    | ** ** | **June 30, 2008**     | ** ** |
| Revenue:                                                                    |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Management fees                                                             |       | $                                                   | —     |                                              | $          | —      |       | $           | —     |                            | $          | — |   | $ | 1,161,180 |   |
| Grants                                                                      |       | —                                              |       | —                                            |       | —      |       | —      |       | 1,035,571                       |       |
| Royalty–related  party                                                 |       | —                                              |       | —                                            |       | —      |       | —      |       | 45,238                          |       |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Total revenue                                                               |       | —                                              |       | —                                            |       | —      |       | —      |       | 2,241,989                       |       |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Expenses:                                                                   |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Research and  development                                                   |       | 1,690,088                                           |       | 8,833,078                                         |       | 3,558,141   |       | 17,883,990  |       | 78,429,249                      |       |
| Contracted  research and development–related party                     |       | —                                              |       | —                                            |       | —      |       | —      |       | 7,980,299                       |       |
| Selling, general  and administrative                                        |       | 1,682,604                                           |       | 1,810,249                                         |       | 3,408,972   |       | 3,358,412   |       | 23,341,060                      |       |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Total expenses                                                              |       | 3,372,692                                           |       | 10,643,327                                        |       | 6,967,113   |       | 21,242,402  |       | 109,750,608                     |       |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Loss from  operations                                                       |       | (3,372,692                                          | )          | (10,643,327                                       | )          | (6,967,113  | )          | (21,242,402 | )          | (107,508,619                    | )          |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Net other  (income) expense:                                                |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Interest income                                                             |       | (76,444                                             | )          | (214,495                                          | )          | (233,086    | )          | (521,064    | )          | (2,875,102                      | )          |
| Interest expense                                                            |       | 102,664                                             |       | 116,836                                           |       | 207,019     |       | 233,270     |       | 2,830,169                       |       |
| Gain on sale of  interest in Sarawak Medichem Pharmaceuticals joint venture |       | —                                              |       | —                                            |       | —      |       | —      |       | (939,052                        | )          |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Net other  (income) expense                                                 |       | 26,220                                              |       | (97,659                                           | )          | (26,067     | )          | (287,794    | )          | (983,985                        | )          |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Net loss                                                                    |       | (3,398,912                                          | )          | (10,545,668                                       | )          | (6,941,046  | )          | (20,954,608 | )          | (106,524,634                    | )          |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Less accumulated  preferred stock dividends of subsidiary for the period    |       | 43,750                                              |       | 43,750                                            |       | 87,500      |       | 87,500      |       | 1,582,292                       |       |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Net loss  available to common shareholders                                  |       | $                                                   | (3,442,662 | )                                                 | $          | (10,589,418 | )          | $           | (7,028,546 | )                               | $          | (21,042,108 | ) | $ | (108,106,926 | ) |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Net loss per  share available to common shareholders - basic and diluted    |       | $                                                   | (0.09      | )                                                 | $          | (0.37       | )          | $           | (0.18      | )                               | $          | (0.74 | ) |   |   |
|                                                                        |       |                                                |       |                                              |       |        |       |        |       |                            |       |
| Weighted average  shares outstanding - basic and diluted                    |       | 38,502,987                                          |       | 28,294,380                                        |       | 38,502,987  |       | 28,290,865  |       |                            |       |

 

Seenotes to unaudited consolidated financial statements.

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**         | ** ** | ** **  | ** **   |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|---------------------|------------|-------------|--------------|
| ** **                                                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated**     | ** ** | ** **  | ** **   |
| ** **                                                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | **During the** | ** ** | ** **  | ** **   |
| ** **                                                                                    | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | ** **          | ** ** |
| ** **                                                                                    | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**           | ** ** | **Total**   | ** **   |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| BALANCE–January 1,  1999 (inception)                                                |       | —                |       | $           | —     |            | $          | —              |       | $           | —       |   | $ | — |   |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| Issuance of stock  (at inception)                                                             |       | 1,588,000             |       | 250,000     |       | —          |       | —              |       | 250,000     |         |
| Issuance of  common stock, net of offering costs (August 2005)                           |       | 6,721,814             |       | 67,218      |       | 29,210,558      |       | —              |       | 29,277,776  |         |
| Issuance of  common stock, net of offering costs (March 2006)                            |       | 10,233,464            |       | 102,335     |       | 33,266,653      |       | —              |       | 33,368,988  |         |
| Issuance of  common stock, net of offering costs (December 2007)                         |       | 10,191,083            |       | 101,911     |       | 17,750,327      |       | —              |       | 17,852,238  |         |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| Exchange of  shares under recapitalization (December 2004)                               |       | (1,629,685            | )          | (256,563    | )          | —          |       | —              |       | (256,563    | )            |
| Issuance of  shares under recapitalization (December 2004)                               |       | 9,482,015             |       | 94,820      |       | 161,743         |       | —              |       | 256,563     |         |
| Capital  contributions (December 2004)                                                   |       | —                |       | —      |       | 12,711,330      |       | —              |       | 12,711,330  |         |
| Issuance of  14,887 warrants (December 2004)                                             |       | —                |       | —      |       | 11,898          |       | —              |       | 11,898      |         |
| Issuance of  common stock in exchange for licenses (December 2004)                       |       | 1,122,569             |       | 11,226      |       | 8,988,774       |       | —              |       | 9,000,000   |         |
| Issuance of  common stock in exchange for reduction of milestones payable  (August 2005) |       | 600,000               |       | 6,000       |       | 3,000,000       |       | —              |       | 3,006,000   |         |
| Modification of  14,887 warrants (August 2005)                                           |       | —                |       | —      |       | 18,925          |       | —              |       | 18,925      |         |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| Issuance of stock  related to option exercises (since inception)                              |       | 193,727               |       | 8,083       |       | 27,192          |       | —              |       | 35,275      |         |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| Compensation  expense related to stock options (since inception)                              |       | —                |       | —      |       | 1,712,132       |       | —              |       | 1,712,132   |         |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| Net loss (since  inception)                                                                   |       | —                |       | —      |       | —          |       | (99,583,588         | )          | (99,583,588 | )            |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| BALANCE–December 31,  2007                                                          |       | 38,502,987            |       | 385,030     |       | 106,859,532     |       | (99,583,588         | )          | 7,660,974   |         |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| Issuance of  common stock, net of offering costs                                              |       | —                |       | —      |       | (62,880         | )          | —              |       | (62,880     | )            |
| Issuance of stock  related to option exercises                                                |       | —                |       | —      |       | —          |       | —              |       | —      |         |
| Compensation  expense related to stock options                                                |       | —                |       | —      |       | 434,095         |       | —              |       | 434,095     |         |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| Net loss                                                                                      |       | —                |       | —      |       | —          |       | (6,941,046          | )          | (6,941,046  | )            |
|                                                                                          |       |                  |       |        |       |            |       |                |       |        |         |
| BALANCE–June 30,  2008                                                              |       | 38,502,987            |       | $           | 385,030    |            | $          | 107,230,747         |       | $           | (106,524,634 | ) | $ | 1,091,143 |   |

 

Seenotes to unaudited consolidated financial statements.

 

5

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **                     | ** ** | ** **                      | ** ** | **Inception**               | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **Six months ended** | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **June 30,**              | ** ** | **Through**                     | ** ** |
| ** **                                                                         | ** ** | **2008**                       | ** ** | **2007**                        | ** ** | **June 30, 2008** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                           |       |                            |       |                        |       |
| Net loss                                                                           |       | $                              | (6,941,046 | )                               | $          | (20,954,608                 | )          | $ | (106,524,634 | ) |
| Adjustments to  reconcile net loss to net cash flows used in operating activities: |       |                           |       |                            |       |                        |       |
| Depreciation and  amortization                                                     |       | 117,076                        |       | 105,088                         |       | 739,850                     |       |
| Non-cash  interest expense                                                         |       | 2,500                          |       | 18,884                          |       | 103,323                     |       |
| Stock  compensation expense                                                        |       | 434,095                        |       | 365,504                         |       | 2,146,227                   |       |
| Non-cash  research and development                                                 |       | —                         |       | —                          |       | 24,466,667                  |       |
| Non-cash  settlement of milestone payment                                          |       | —                         |       | —                          |       | 6,000                       |       |
| Gain on sale of  interest in Sarawak Medichem Pharmaceuticals (SMP)                |       | —                         |       | —                          |       | (939,052                    | )          |
| Loss on disposal                                                                   |       | —                         |       | 1,761                           |       | 13,294                      |       |
| Changes in  operating assets and liabilities:                                      |       |                           |       |                            |       |                        |       |
| Clinical supplies                                                                  |       | —                         |       | —                          |       | 533,333                     |       |
| Prepaid expenses                                                                   |       | 1,174,615                      |       | 354,392                         |       | (151,953                    | )          |
| Other assets                                                                       |       | —                         |       | —                          |       | (1,452                      | )          |
| Accounts payable                                                                   |       | (2,488,202                     | )          | 3,028,893                       |       | 197,549                     |       |
| Accrued expenses                                                                   |       | (1,150,310                     | )          | 3,543,288                       |       | 1,956,674                   |       |
| Licenses payable                                                                   |       | —                         |       | —                          |       | (11,000,000                 | )          |
| Accrued interest  on debt                                                          |       | (2,365                         | )          | (9,839                          | )          | 598,454                     |       |
|                                                                               |       |                           |       |                            |       |                        |       |
| Net cash flows  from operating activities                                          |       | (8,853,637                     | )          | (13,546,637                     | )          | (87,855,720                 | )          |
|                                                                               |       |                           |       |                            |       |                        |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                           |       |                            |       |                        |       |
| Purchase of  property and equipment                                                |       | (340,559                       | )          | (48,464                         | )          | (1,070,907                  | )          |
| 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                                          |       | (340,559                       | )          | (48,464                         | )          | (131,855                    | )          |
|                                                                               |       |                           |       |                            |       |                        |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                           |       |                            |       |                        |       |
| Proceeds from  issuance of common stock and capital contributions                  |       | (62,880                        | )          | —                          |       | 87,645,697                  |       |
| Proceeds from  issuance of notes payable                                           |       | —                         |       | —                          |       | 12,933,691                  |       |
| Payments on notes  payable                                                         |       | —                         |       | —                          |       | (3,915,000                  | )          |
| Proceeds from  grants                                                              |       | —                         |       | —                          |       | 500,000                     |       |
| Proceeds from  stock options exercised                                             |       | —                         |       | 1,884                           |       | 35,275                      |       |
| Payments on  deferred financing                                                    |       | (10,000                        | )          | —                          |       | (10,000                     | )          |
| Payments on  capital leases                                                        |       | (3,494                         | )          | (10,954                         | )          | (147,667                    | )          |
|                                                                               |       |                           |       |                            |       |                        |       |
| Net cash flows  from financing activities                                          |       | (76,374                        | )          | (9,070                          | )          | 97,041,996                  |       |
|                                                                               |       |                           |       |                            |       |                        |       |
| NET (DECREASE)  INCREASE IN CASH                                                   |       | (9,270,570                     | )          | (13,604,171                     | )          | 9,054,421                   |       |
|                                                                               |       |                           |       |                            |       |                        |       |
| CASH–Beginning  of period                                                     |       | 18,324,991                     |       | 27,054,947                      |       | —                      |       |
|                                                                               |       |                           |       |                            |       |                        |       |
| CASH–End of  period                                                           |       | $                              | 9,054,421  |                            | $          | 13,450,776                  |       | $ | 9,054,421 |   |
|                                                                               |       |                           |       |                            |       |                        |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                 |       |                           |       |                            |       |                        |       |
| Cash paid during  the period for interest                                          |       | $                              | 216,883    |                            | $          | 211,594                     |       | $ | 2,129,689 |   |
|                                                                               |       |                           |       |                            |       |                        |       |
| SUPPLEMENTAL  DISCLOSURE OF NONCASH TRANSACTIONS                                   |       |                           |       |                            |       |                        |       |
| Noncash  investment activity:                                                      |       |                           |       |                            |       |                        |       |
| Purchase of  property and equipment under capital leases                           |       | $                              | —     |                            | $          | —                      |       | $ | 164,249 |   |
| Capital expenses  included in accounts payable                                     |       | 4,293                          |       | 4,046                           |       | 4,293                       |       |
| 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                      |       |
| Deferred  financing costs                                                          |       | $                              | —     |                            | $          | —                      |       | $ | 30,000 |   |

 

Seenotes to unaudited consolidated financial statements.

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC( A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**JUNE 30, 2008**

**(UNAUDITED)**

 

**1.   Summaryof Significant Accounting Policies**

 

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

 

***         Basis ofPresentation-***The accompanying unauditedconsolidated financial statements of the Company have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and with the rules and regulations of the Securities andExchange Commission (“SEC”). Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.  However, in the opinion of management, alladjustments, consisting only of normal recurring adjustments, unless otherwisenoted herein, necessary to present fairly the results of operations, financialposition and cash flows have been made. Therefore, these consolidated financial statements should be read inconjunction with the Company’s most recent audited financial statements for theyear ended December 31, 2007 and notes thereto. The consolidated financialstatements include the accounts of the Advanced Life Sciences Holdings, Inc.and its wholly-owned subsidiary 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.

 

         Theconsolidated financial statements have been prepared on a going concern basis,which contemplates continuity of operations and the realization of assets andliquidation of liabilities in the ordinary course of business.  However, as a result of the Company’scontinued losses and current cash and financing position, such realization ofassets or liquidation of liabilities, without substantial adjustments isuncertain.  Given this uncertainty, thereis significant doubt as to the Company’s ability to continue as a goingconcern.

 

***         Business and Credit Risks*****-**The Company is subject to risks anduncertainties common to drug discovery companies, including technologicalchange, potential infringement on intellectual property of third parties, newproduct development, regulatory approval and market acceptance of its products,activities of competitors and its limited operating history.  The Company has incurred losses since itsincorporation in January 1999.  TheCompany has funded its operations to date primarily from debt financings andcapital contributions from its founder and Chief Executive Officer, proceedsfrom the initial public offering of its common stock, the subsequent sale ofits common stock in two private placements and borrowings under its bank lineof credit.  The Company will not begenerating any product-based revenues or realizing cash flows from operationsin the near term, and will require additional financing to meet its milestoneobligation that is trigged upon filing the NDA for cethromycin.  The Company is involved in active discussionswith several potential commercial partners and anticipates securing a partnerduring 2008.  The Company believes, basedupon current market conditions, a commercial partnership agreement wouldinclude a series of milestone payments, including up-front milestones, thatwould fund the Company’s milestone payments to Abbott Laboratories that are dueupon filing the NDA and approval, if any, of the NDA by the FDA.  Although management believesthe Company could secure a commercial partnership, there can be no assurancesthat such partnership will be available at terms acceptable to the Company, ifat all.  The accompanying financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

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**2.   PrivatePlacement**

 

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

 

**3.   RelatedParty Transactions**

 

         The Company’s Chief Executive Officer,Michael T. Flavin Ph.D., loaned $2.0 million to the Company in 2001 (seeNote 4).  Interest expense of$78,000 was recorded for the six months ended June 30, 2008 and 2007,related to the loan.

 

         The Company’s $4.0 million line ofcredit is secured by substantially all of the Company’s assets, except that thecollateral specifically excludes any rights that the Company has as a result ofits license agreement with Abbott Laboratories for cethromycin, and is furthersecured by 2.5 million shares of the Company’s stock held by ALS Ventures, LLC(see Note 4), which is beneficially owned by the Company’s Chief ExecutiveOfficer.

 

         The Company leases facilities from theBioStart Property Group, LLC. (“BioStart”), a wholly-owned subsidiary of FlavinVentures, which is owned by the Company’s Chief Executive Officer.  Lease payments totaled approximately $148,000and $119,000 for the six months ended June 30, 2008 and 2007,respectively.

 

**4.   DebtObligations**

 

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

 

         The Company has a $4.0 million revolving line of credit witha financial institution with a maturity date of January 1, 2010.  Borrowings under the line bear interest atthe prevailing Prime rate, less 75 basis points.  The interest rate cannot be lower than 6.25%nor can the rate exceed 8.00%.    Theline of credit is secured by substantially all of the Company’s assets, exceptthat the collateral specifically excludes any rights that the Company may haveas a result of its license agreement with Abbott Laboratories for cethromycin,and is further secured by 2.5 million shares of the Company’s common stock heldby ALS Ventures, LLC.  The creditagreement contains a material adverse change clause, which is subject to thejudgment of the lender and, if triggered, can accelerate the payment of thedebt.  As of June 30, 2008 and December 31,2007, the Company had $3.9 million outstanding under the line of credit.

 

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**5.      Commitments**

 

***         Vendor Contracts-***TheCompany administers its cethromycin development program largely under contractswith third parties.  To date, contractstotaling $42.5 million, net of expected savings of $3.2 million, have beenexecuted related to the cethromycin program, which includes anthrax-relatedstudies.  The remaining balance of $2.1million is expected to be paid over the next nine months.  In addition, to date the Company has executed$1.2 million in contracts related to the ALS-357 program, of whichapproximately a quarter of the remaining balance of $890,000 is expected to bepaid in 2008 with the balance to be paid beyond 2008.  The Company executed a letter of intenttotaling $4.2 million during the third quarter of 2008 to synthesize rawmaterials that will be used in the production of commercial grade cethromycin.  Payments associated with this agreement arenot expected to be made until the first quarter of 2009.

 

***         Grant Payable-*** InApril 2005, the Company was awarded a $500,000 grant from the State ofIllinois to fund expansion of its corporate headquarters in Woodridge,Illinois.  Under the terms of the grant,the Company is to create 100 full-time jobs at its corporate headquartersbetween January 31, 2005 and December 31, 2010 (“grant period”).  If the Company does not create the specifiednumber of full-time jobs, it is required to repay the grant proceeds on a pro-ratabasis of actual jobs created compared to the total defined in the grant.  As of December 31, 2007, the entiregrant had been spent or obligated and therefore the $500,000 has beenclassified as a long-term liability as the Company must create and maintainpositions created during the grant period through January 31, 2010.    Through June 30, 2008, fifteen newjobs have been created and retained since the grant was awarded.

 

**6.      Stock Option Grants**

 

        For the six months ended June 30,2008 and 2007, the Company granted stock options to purchase up to 713,800 and724,300 shares of common stock, respectively, to certain employees anddirectors. The exercise price of the options was the market price of theCompany’s common stock on the date of grant. The Company recognized compensation expense totaling approximately$434,000 and $366,000 for the six months ended June 30, 2008 and 2007,respectively in accordance with SFAS No. 123 (R), *Share-Based Payment*.

 

**7.      Net Loss Per Share**

 

         Basic loss per share is computed by dividing net loss by thenumber of weighted average common shares outstanding during the reportingperiod.  Diluted loss per share iscalculated to give effect to all potentially dilutive common shares that wereoutstanding during the reporting period. The computation of diluted shares outstanding for the quarters ended June 30,2008 and 2007 excludes incremental shares of 12,669,673 and 6,988,180respectively, related to employee stock options and warrants.  These shares are excluded due to their anti-dilutiveeffect as a result of the Company’s losses for the quarters ended June 30,2008 and 2007.

 

**8.      Recent Accounting Pronouncements**

 

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

 

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

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS 159”).  SFAS 159 permits an entity to irrevocablyelect fair value on a contract-by-contract basis as the initial and subsequentmeasurement attribute for many financial assets and liabilities and certainother items including 

 

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insurance contracts.  Entities electing the fair value option wouldbe required to recognize changes in fair value in earnings and to expenseupfront cost and fees associated with the item for which the fair value optionis elected.  The adoption of SFAS 159 didnot have a material impact on the Company’s statements of financial position,results of operations and cash flows.

 

InMarch, 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (“SFAS 161”).SFAS 161 requires qualitative disclosures about objectives and strategies forusing derivatives, quantitative disclosures about fair value amounts of andgains and losses on derivative instruments, and disclosures aboutcredit-risk-related contingent features in derivative agreements. Theapplication of SFAS 161 is required for fiscal years and interim periodsbeginning after November 15, 2008. The Company does not expect theadoption of SFAS 161 to have a material impact on its statements of financialposition, results of operations and cash flows.

 

In2007, the Emerging Issues Task Force (“EITF”) issued EITF 07-03, “Accounting for Advance Payments for Goods orServices to Be Used in Future Research and Development” and the FASBratified the tentative conclusion.  EITF07-03 addresses the diversity which exists with respect to the accounting forthe non-refundable portion of a payment made by a research and developmententity for future research and development activities. Under this conclusion,an entity would defer and capitalize non-refundable advance payments made forresearch and development activities until the related goods are delivered orthe related services are performed. EITF 07-03 was effective for interim orannual reporting periods in fiscal years beginning after December 15,2007. The adoption of EITF 07-03 did not have a material impact on the Company’sstatements of financial position, results of operations and cash flows.

 

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

** **

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

 

**Overview**

 

       Weare a biopharmaceutical company focused on the discovery, development andcommercialization of novel drugs in the areas of infectious disease, oncologyand inflammation. Using our internal discovery capabilities and our network ofpharmaceutical and academic partners, we have assembled a promising pipeline ofclinical and preclinical product candidates. Our most advanced productcandidate, cethromycin, is a novel once-a-day oral antibiotic that recentlycompleted two pivotal Phase III clinical trials in community acquired pneumonia(“CAP”) and is in Phase III clinical development for the treatment of otherrespiratory tract infections. We also have product candidates in earlier stagesof development for the treatment of indications including inflammation-relatedtissue damage and malignant melanoma.

 

       Noneof our product candidates have been approved by the FDA or any comparableforeign agencies, and we have not generated any significant revenues to date.Our ability to generate revenues in the future will depend on our ability tomeet development or regulatory milestones under any license agreements thattrigger payments to us, to enter into new license agreements for other productsor territories and to receive regulatory approvals for, and successfullycommercialize, our product candidates either directly or through commercialpartners.

 

       Sinceour inception, we have incurred net losses each year. Our net loss for the sixmonths ended June 30, 2008 was $6.9 million.  As of June 30, 2008, we had anaccumulated deficit of $106.5 million. Our operations to date have been fundedprincipally through proceeds from our initial public offering, our privateplacements in March 2006 and December 2007, debt and capitalcontributions made principally by our founder and Chief Executive Officer andborrowings under our bank line of credit. We currently do not have sufficient cash or other funding available tocomplete our anticipated business activities during 2008 if we submit ourcethromycin NDA without securing a commercial partnership that providesadditional capital.  As a result, thereis significant doubt about our ability to continue as a going concern.

 

       InDecember 2007, we raised approximately $17.8 million, net of underwritingdiscounts and offering expenses, in connection with the issuance of 10,191,083shares and warrants to purchase 5,095,542 shares of our common stock at $1.96per share.  The exercise price of thewarrants is $2.15 per share and they expire in December 2012.

 

       InDecember 2005, we initiated two pivotal Phase III clinical trials forcethromycin which compared cethromycin with standard of care therapies for CAPin the United States, Canada, Europe, South America and South Africa.  Each trial sought to demonstrate statisticalnon-inferiority to a comparator using a 95% confidence interval.  Clinical cure rate served as the primary endpointin each trial with bacteriological eradication serving as the secondaryendpoint.

 

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We completed the two pivotalPhase III clinical trials during 2007. In each trial, cethromycin was evaluated using a 300 mg once-dailydosing regimen compared to 250 mg twice-daily dosing for Biaxin ®, both over a seven-day course oftherapy.  Cethromycin achievednon-inferiority in its primary endpoint of per protocol clinical cure ratecompared to Biaxin ® (clarithromycin)in CAP.  No drug-related serious adverseevents were observed in any study subject.  Liver function tests andelectrocardiogram monitoring demonstrated no significant differences betweensubjects receiving cethromycin and subjects receiving Biaxin ®, consistent with the hepatic andcardiac side effect profile reported in cethromycin’s previous clinical trials.

 

In February 2008, weannounced the results from Trial CL07-001, a thorough QT study ofcethromycin.  This study was conducted toevaluate the cardiac safety of cethromycin. The FDA usually requires thorough QT studies for all new chemicalentities because prolongation in QT interval (corrected for changes in heartrate, or QTc) may signify an increased risk of developing cardiacarrhythmias.  Trial CL07-001 evaluatedthe potential of cethromycin to cause a prolongation in electrocardiographic QTinterval in accordance with FDA and ICH E14 guidance.  At the therapeutic and supratherapeuticdoses, cethromycin shows no signal of any electrocardiographic effects andhence supported its favorable cardiac safety profile.

 

Cethromycin has alsodemonstrated significant *in vitro*activity against over 30 anthrax (*Bacillus anthracis*)strains.  During the third quarter of2007, we concluded a study testing cethromycin’s efficacy in treatinginhalation anthrax post-exposure for prophylaxis in non-human primates. Results from this study demonstrated that a thirty (30) day course of oralcethromycin at a 16 mg/kg of once-daily dosing (the human equivalent doseof 300 mg) was 100% protective against a lethal dose of inhaled *B. anthracis* Ames strain spores.   We are collaborating with the NationalInstitute of Allergy and Infectious Diseases to evaluate cethromycin’spotential in preventing inhalational anthrax and other high-priority bioterroragents.

 

In April 2008, the FDA Anti-Infective DrugsAdvisory Committee met to discuss product development and clinical trial designfor antibiotics that treat CAP.  TheAdvisory Committee voted in favor of the use of non-inferiority trials for mildto moderate or outpatient CAP and for moderate to severe or inpatient CAP.  Also in April, we had a pre-NDA meeting withFDA officials and agreed to submit the NDA for cethromycin in the CAPindication when available, which is expected to occur during the third quarterof this year.

 

There can be no assurancethat the FDA will file our NDA application when submitted, or that once filed, itwill be approved.  In addition, we do notexpect to receive FDA approval for commercialization of cethromycin until 2009at the earliest.  As of June 30,2008, we estimate that our cethromycin development program will require anadditional $42.1 million in research and development expenditures whichincludes $40.0 million in additional milestone payments to Abbott, $300,000 tocomplete the cethromycin clinical trials and $1.8 million for the preparationof the cethromycin NDA and other commercialization-related costs.  Our $10.0 million and $30.0 million Abbottmilestone payments are triggered upon submitting an NDA and receiving FDAapproval, respectively.  Developmenttimelines and related costs are difficult to estimate and may varysignificantly from our current estimates.

 

If cethromycin isapproved for marketing by the FDA, we plan to sell cethromycin using acommercial partner to access the primary care physician market and to build andutilize a focused internal sales force that will market directly to earlyadopters such as, but not limited to, pulmonary medicine and infectious diseasephysicians; however, while discussions with potential commercial partners areongoing, we have not yet secured a commercial partnership.

 

**Results of Operations**

 

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

* *

*Revenue.***The Company had no revenue in the three month periods endedJune 30, 2008 and 2007.

 

*Research and development expense.*  Research and development expense decreased$7.1 million to $1.7 million for the three months ended June 30,2008.  The largest component of the totaldecline was cethromycin clinical trial expenses which ended the quarter $4.3million lower than the same period last year. Data from the second of two pivotal Phase III clinical trials wasreleased in November of 2007 effectively bringing the trials to theirnatural conclusion.  Expenses incurred tocompile our NDA totaled $0.9 million for the three months ended June 30,2008 and represented a decline of $3.0 million when compared to the same periodlast year.  

 

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The majority of this decrease is attributable to ourcethromycin bulk-scale manufacturing program which was successfully concludedduring the third quarter of 2007. Expenses related to our study testing cethromycin’s efficacy in treatinginhalation anthrax post-exposure for the prophylaxis in non-human primatesdeclined $0.1 million to zero for the three months ended June 30, 2008 ascompared to the same period last year. This study was completed during the third quarter of 2007.  Manufacturing expenses incurred in relationto process optimization activities of cethromycin totaled $0.3 million for thesecond quarter of 2008 and were entirely incremental to the same period in theprevious year.

 

*Generaland administrative expense.*** General and administrative expenses declined$0.1 million to $1.7 million for the three months ended June 30,2008.  The decrease was attributable to adecline in legal and accounting expenses as we brought our Sarbanes-Oxleycompliance program largely in-house as compared to last year.

 

*Interest income.*  Interest income declined $0.1 million to $0.1million for the three months ended June 30, 2008, the result of a loweraverage cash balance and associated interest rates in the second quarter of2008 as compared to the same period in 2007.

 

*Interest expense.* Interestexpense declined $14,000 in the three months ended June 30, 2008 ascompared to the same period last year, the result of a renewal of our line ofcredit at a lower interest rate.

 

*Six months ended June 30,2008 compared to the six months ended June 30, 2007*

 

*Revenue.***The Company had no revenue in the six month period ended June 30,2008 and 2007.

 

*Research and development expense.*  Research and development expense decreased$14.3 million to $3.6 million for the six months ended June 30, 2008 ascompared to the same period in 2007.  Thelargest component of the total decline was cethromycin clinical trial expenseswhich ended the quarter $9.4 million lower than the same period last year.  Data from the second of two pivotal Phase IIIclinical trials was released in November of 2007 effectively bringing thetrials to their natural conclusion. Expenses incurred to compile our NDA totaled $1.5 million for the sixmonths ended June 30, 2008 and represented a decline of $4.6 million whencompared to the same period last year. The majority of this decrease is attributable to our cethromycinbulk-scale manufacturing program which was successfully concluded during thethird quarter of 2007.  Expenses relatedto our study testing cethromycin’s efficacy in treating inhalation anthrax post-exposurefor the prophylaxis in non-human primates declined $0.9 million to zero for thesix months ended June 30, 2008 as compared to the same period lastyear.  The reasons for the declines inthe year to date amounts are the same as for the second quarter results.  Manufacturing expenses incurred in relationto process optimization activities of cethromycin totaled $0.6 million for thesecond quarter of 2008 and were entirely incremental to the same period in theprevious year.

 

*Generaland administrative expense.*** General and administrative expense increased$0.1 million to $3.4 million for the six months ended June 30, 2008 ascompared to the same period in 2007. Minor increases in salary and benefit, facilities and marketing expenseswere offset by decreases in legal and insurance expenses resulting in a netincrease of $0.1 million.

 

*Interest income.*  Interest income declined $0.3 million to $0.2million for the six months ended June 30, 2008, the result of a loweraverage cash balance and associated interest rates in the first half of 2008 ascompared to the same period in 2007.

 

*Interest expense.*  Interest expense declined $26,000 in the sixmonths ended June 30, 2008 as compared to the same period last year, theresult of a renewal of our line of credit at a lower interest rate.

 

**Liquidityand Capital Resources**

 

We have devoted substantially all of our cashresources to research and development and general and administrativeexpenses.  To date, we have not generatedany revenues from the sale of products, and we do not expect to generate anysuch revenues for a number of years, if at all. As a result, we have incurred an accumulated deficit of $106.5 millionas of June 30, 2008 and we expect to incur significant operating lossesfor the foreseeable future.  Cash andcash equivalents was $9.0 million as of June 30, 2008.  Since our inception in 1999 to August 2005,we financed our operations primarily through debt and capital contributionsfrom our founder and controlling stockholder and borrowings under our bank lineof credit.  In August 2005 wecompleted our initial public offering in which we raised $28.7 million, net ofunderwriters discount and offering costs. Since that time, we have completed two private placements in which weraised $51.2 million, net of underwriters discounts and offering costs.  As of June 30, 2008 we had workingcapital of $5.0 million.

 

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

 

We have a $4.0 million line of credit with a localfinancial institution with a maturity date of January 1, 2010.  As of June 30, 2008, the line of credithad an outstanding balance of $3.9 million bearing interest at a floating ratebased upon prime, minus 75 basis points. The rate cannot be lower than 6.25% or exceed 8.0%.  As of June 30, 2008 the rate was6.25%.  The line of credit is secured bysubstantially all of our assets, excluding any rights that we may have asresult of our license agreement with Abbott Laboratories for cethromycin.  The line of credit is also secured by 2.5million shares of our common stock held by ALS Ventures. See Note 3 to theconsolidated financial statements.

 

During the six months ended June 30, 2008, cashused in operating activities totaled $8.9 million.  Approximately $5.9 million was used for thedevelopment of cethromycin, $0.2 million for Anthrax trials, $0.2 million forresearch activities related to our proprietary portfolio of compounds and $2.5million for general operations net of $0.2 million in interest income.

 

*Contractual Obligations*

 

As of June 30, 2008, the annual amounts of futureminimum payments under debt obligations, interest, lease obligations and otherlong term liabilities consisting of executed research, development and licenseagreements are as follows:

 
| ** **                                 | ** ** | **Payments Due by December 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2008**                                             | ** ** | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Total** | ** ** |
| Notes payable                              |       | $                                                    | —     |       | $          | 2,000,000 |   | $ | 3,915,000 |   | $ | — |   | $ | — |   | $ | 5,915,000 |   |
| Interest                                   |       | 201,129                                              |       | 246,321    |       | 304 |   | — |   | — |   | 447,754 |   |
| Cethromycin  clinical & NDA costs |       | 1,861,607                                            |       | 193,958    |       | — |   | — |   | — |   | 2,055,565 |   |
| ALS-357 clinical  trial                    |       | 209,875                                              |       | 679,677    |       | — |   | — |   | — |   | 889,552 |   |
| Operating leases                           |       | 40,162                                               |       | —     |       | — |   | — |   | — |   | 40,162 |   |
| Capital leases                             |       | 3,765                                                |       | 8,468      |       | 4,350 |   | — |   | — |   | 16,583 |   |
|                                       |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Total                                      |       | $                                                    | 2,316,538  |       | $          | 3,128,424 |   | $ | 3,919,654 |   | $ | — |   | $ | — |   | $ | 9,364,616 |   |

 

The above table does not include certain potentialproduct based milestones under our license agreement with Abbott.  We will owe Abbott $10.0 million if we submitan NDA for cethromycin and $30.0 million if and when the FDA approves the NDA,which we estimate will occur in 2008 and 2009, respectively.   Thereafter, we would owe Abbott anadditional $2.5 million upon reaching $200 million in aggregate net sales ofcethromycin and $5.0 million upon reaching $400 million in aggregate netsales.  The periods in which milestoneobligations become payable, if at all, are only estimates due to uncertaintiesassociated with the completion of the clinical studies and related regulatoryfilings.

 

Our commitments under operating leases shown aboveconsist of payments made to a related party relating to our facility lease inWoodridge, Illinois, which expires in September of 2008.  Under the terms of the lease, a lease extensioncan be obtained 60 days prior to the original lease expiration.  We are currently in negotiations with ourcurrent landlord to renew the lease prior to its expiration.

 

In the first seven months of 2008 we executedcethromycin-related contracts totaling $1.4 million.  Of the total contracts executed, $0.7 millionrelated to the compilation of our cethromycin NDA and NDA directed studies,$0.5 million related to process optimization of our commercial manufacturingprogram, $0.1 million related to the development of an intravenous formulationfor cethromycin and $0.1 million related to exploring biodefense uses ofcethromycin.

 

We also executed acontract during the second quarter to initiate a Phase I/II clinical trial ofour anti-melanoma compound ALS-357.  Thistrial will assess the safety, tolerability, and preliminary efficacy of ALS-357when administered topically to patients with cutaneous metastaticmelanoma.  The contract totalsapproximately $0.9 million which represents the upper limit of cost if themaximum number of patients is enrolled.  

 

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To the extent fewerpatients are required as determined by the protocol; expenses related to thetrial could be lower.  Enrollment will bebased upon a number of factors which are difficult to forecast and therefore wecannot reasonably estimate the true cost of the trial beyond what is defined asthe maximum limit per the contract.

 

In the third quarter of2008 we executed a letter of intent totaling $4.2 million, at the currentEuro/U.S. Dollar exchange rate, for the procurement and synthesis of  raw materials to be used in the commercialscale production of cethromycin.  Thelead time for acquiring these raw materials is expected to be six to eightmonths, therefore we do not expect cash payment associated with this agreementto be made until the first quarter of 2009.

 

We believe our currentcash and cash equivalents are sufficient to fund our existing and anticipateddevelopment commitments, indebtedness and general operating expenses throughthe end of 2008, however we do not have sufficient liquidity to make anymilestone payments that become due to Abbott upon the filing of an NDA.  We anticipate securing a commercial partner(s)for cethromycin during 2008.  We believesuch an agreement would include a series of milestones, including up-frontmilestones, that would fund the Abbott milestone payments due upon filing theNDA and approval, if any, of the NDA by the FDA.  Based upon current market conditions anddiscussions with potential commercial partners, we believe sufficient funds canbe raised in 2008 to continue our development of cethromycin and fund our otherresearch and corporate expenditures through the expected approval of ourcethromycin NDA.  Although we believe wecan secure a commercial partnership and obtain sufficient financing, there canbe no assurances that such a partnership and financing will be available in thefuture at terms acceptable to us.  As aresult, there is significant doubt about our ability to continue as a goingconcern.   

 

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

 

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

 

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

 

·                                          ourability to raise additional debt or equity financing or the receipt ofmilestone payments that would be paid to us as a result of our entering into acommercial partnership for cethromycin, or a combination of both;

 

·                                          ourability to establish and maintain additional collaborative arrangements;

 

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

 

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

 

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

 

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

 

**CriticalAccounting Policies and Estimates**

 

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

 

*Researchand Development*

* *

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

 

*Stock-basedCompensation*

* *

We account forstock-based awards to employees and non-employees using the accountingprovisions of Statement of Financial Accounting Standards No. 123(R) *Share-Based Payments* which provides for the use of the fairvalue based method to determine compensation for all arrangements where sharesof stock or equity instruments are issued for compensation.  We use a Black-Scholes options-pricing modelto determine the fair value of each option grant as of the date of grant forexpense incurred.  The Black-Scholesmodel requires inputs for risk-free interest rate, dividend yield, volatilityand expected lives of the options. Expected volatility is based on historical volatility

 

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of our stock sinceAugust 5, 2005, the date our stock began to trade publicly.  The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curvein effect at the time of the grant.  Theexpected lives for options granted represents the period of time that optionsgranted are expected to be outstanding and is derived from the contractualterms of the options granted.  Weestimate future forfeits of options based upon historical forfeit rates.

 

**Forward-LookingStatements and Risk Factors**

 

ThisQuarterly Report on Form 10-Q, including Management’s Discussion andAnalysis of 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. *Quantitative and Qualitative Disclosures About Market Risk***

** **

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

 

Our most liquidassets are cash and cash equivalents. Because of their liquidity, these assetsare not directly affected by inflation. We also believe that we have intangibleassets in the value of our intellectual property. In accordance with generallyaccepted accounting principles, we have not capitalized the value of thisintellectual property on our balance sheet. Due to the nature of thisintellectual property, we believe that these intangible assets are not affectedby inflation. Because we intend to retain and continue to use our equipment,furniture and fixtures and leasehold improvements, we believe that theincremental inflation related to replacement costs of such items will notmaterially affect our operations. However, the rate of inflation affects ourexpenses, such as those for employee compensation and contract services, whichcould increase our level of expenses and the rate at which we use ourresources.  The fluctuation in the Primerate could affect the interest we pay under of line of credit.  A hypothetical interest rate increase of onepercent, which under the current terms of the line cannot be lower than 6.25%nor can the rate exceed 8.00%, would raise interest expense by $39,000.    The fluctuation in the exchange ratebetween the U.S. Dollar and the Euro could affect amounts due under certaincontract manufacturing agreements.  Ahypothetical increase in the exchange rate between the Euro and the U.S. Dollaras of June 30, 2008 of ten percent, would increase contract manufacturingcosts $419,000.

 

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

** **

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

 

**Changes in Internal Control**

 

During the period coveredby this report, there have been no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II — OTHERINFORMATION**

 

**Item4. Submission of Matters to a Vote of Security Holders**

 

**The following matters were submitted to a vote ofsecurity holders at the Company’s annual meeting held on May 1, 2008:**

** **

**Proposal 1: Election of Directors**

 
| **Name**                    | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-----------------------------|------------|------------|------------|--------------|------------|
| Dr. Michael  T. Flavin |       | 30,556,693 |       | 2,222,912    |       |
| Scott F. Meadow             |       | 32,270,378 |       | 509,227      |       |
| Thomas V.  Thornton         |       | 32,271,056 |       | 508,549      |       |

 

**Proposal 2: Ratification of Deloitte &Touche LLP as the Company’s independent registered public accounting firm forthe fiscal year ended December 31, 2008**

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 32,368,605 |       | 267,147     |       | 143,853     |       |

 

**Proposal 3: Amend the 2005 Advanced Life SciencesHolding, Inc. Stock Incentive Plan (the “2005 Stock Incentive Plan”) toprovide 1,900,000 additional stock options for grant under the 2005 StockIncentive Plan**

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 20,093,849 |       | 2,971,827   |       | 62,073      |       |

 

**Item 6. *Exhibits***

 

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

 
| **Number** | ** ** | **Description**                                                                                                                                                                      |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                 |
| 10.1       |       | Letter of intent to proceed with purchase of raw  materials to produce 1,750 Kg of Cethromycin between Advanced Life  Sciences, Inc. and DSM Pharmaceutical Products, Inc. |
|       |       |                                                                                                                                                                                 |
| 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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**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: August 14, 2008 | * * | * *                                   | * * |

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                                                      |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                 |
| 10.1       |       | Letter of intent to proceed with purchase of raw  materials to produce 1,750 Kg of Cethromycin between Advanced Life  Sciences, Inc. and DSM Pharmaceutical Products, Inc. |
|       |       |                                                                                                                                                                                 |
| 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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