** **

**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: March 31, 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)

 

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

 

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

 

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

 

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Indicate by check mark whetherthe 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 checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

As of  May 5, 2008, the registrant had38,502,987  shares of common stock, $0.01par value per share, outstanding.

 

 

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.(A DEVELOPMENT STAGE ENTITY)INDEXForm 10-Q**

 
| **PART I —  FINANCIAL INFORMATION (UNAUDITED)** |
|----------------------------------------------------------------|
| Item 1.                                                   | Consolidated  Financial Statements: |
|                                                           | Consolidated Balance  Sheets as of March 31, 2008 and December 31, 2007 |
|                                                           | Consolidated  Statements of Operations for the three months ended March 31, 2008 and  2007 and for the period from inception (January 1, 1999) through  March 31, 2008 |
|                                                           | Consolidated  Statements of Stockholders’ Equity for period from inception (January 1,  1999) through March 31, 2008 |
|                                                           | Consolidated  Statements of Cash Flows for the three months ended March 31, 2008 and  2007 and for the period from inception (January 1, 1999) through  March 31, 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 5.                                                        | Other Information |
| 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)**
| ** **                                                                                                                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                  |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                       |       | $                  | 12,589,640 |                  | $          | 18,324,991 |   |
| Prepaid  insurance                                                                                                                                                                               |       | 155,953            |       | 251,493               |       |
| Prepaid clinical  trial expenses                                                                                                                                                                 |       | —             |       | 926,168               |       |
| Other prepaid  expenses and deposits                                                                                                                                                             |       | 93,500             |       | 140,359               |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| Total current  assets                                                                                                                                                                            |       | 12,839,093         |       | 19,643,011            |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                          |       |               |       |                  |       |
| Furniture and  fixtures                                                                                                                                                                          |       | 227,825            |       | 221,417               |       |
| Laboratory  equipment                                                                                                                                                                            |       | 159,186            |       | 159,186               |       |
| Computer  software and equipment                                                                                                                                                                 |       | 245,812            |       | 242,707               |       |
| Leasehold  improvements                                                                                                                                                                          |       | 502,798            |       | 177,253               |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| Total property  and equipment—at cost                                                                                                                                                       |       | 1,135,621          |       | 800,563               |       |
| Less accumulated  depreciation                                                                                                                                                                   |       | (595,429           | )          | (542,032              | )          |
|                                                                                                                                                                                             |       |               |       |                  |       |
| Property and  equipment—net                                                                                                                                                                 |       | 540,192            |       | 258,531               |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| OTHER ASSETS:                                                                                                                                                                                    |       |               |       |                  |       |
| Other assets                                                                                                                                                                                     |       | 18,750             |       | 10,000                |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| Total other assets                                                                                                                                                                               |       | 18,750             |       | 10,000                |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                     |       | $                  | 13,398,035 |                  | $          | 19,911,542 |   |
|                                                                                                                                                                                             |       |               |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                   | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                                                                                             |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                             |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                 |       | $                  | 1,458,912  |                  | $          | 2,685,751 |   |
| Accrued clinical  trial expenses                                                                                                                                                                 |       | 754,402            |       | 2,776,543             |       |
| Other accrued  expenses                                                                                                                                                                          |       | 463,347            |       | 330,441               |       |
| Accrued interest  payable                                                                                                                                                                        |       | 21,070             |       | 22,756                |       |
| Short-term lease  payable                                                                                                                                                                        |       | 7,538              |       | 7,259                 |       |
| Short-term notes  payable - related party                                                                                                                                                        |       | 2,000,000          |       | —                |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| Total current  liabilities                                                                                                                                                                       |       | 4,705,269          |       | 5,822,750             |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| Long-term lease payable                                                                                                                                                                          |       | 10,824             |       | 12,818                |       |
| Long-term grant payable                                                                                                                                                                          |       | 500,000            |       | 500,000               |       |
| Long-term notes payable  - related party                                                                                                                                                         |       | —             |       | 2,000,000             |       |
| Notes payable                                                                                                                                                                                    |       | 3,915,000          |       | 3,915,000             |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| Total  liabilities                                                                                                                                                                               |       | 9,131,093          |       | 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 March 31, 2008; 38,502,987 shares issued and outstanding  at December 31, 2007 |       | 385,030            |       | 385,030               |       |
| Additional  paid-in capital                                                                                                                                                                      |       | 107,007,634        |       | 106,859,532           |       |
| Deficit  accumulated during the development stage                                                                                                                                                |       | (103,125,722       | )          | (99,583,588           | )          |
|                                                                                                                                                                                             |       |               |       |                  |       |
| Total  stockholders’ equity                                                                                                                                                                 |       | 4,266,942          |       | 7,660,974             |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                 |       | $                  | 13,398,035 |                  | $          | 19,911,542 |   |

 

Seenotes to unaudited consolidated financial statements.

 

3

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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 March 31,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2008**                              | ** ** | **2007**    | ** ** | **March 31, 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                                                   |       | 1,868,054                             |       | 9,050,912   |       | 76,739,162                 |       |
| Contracted  research and development—related party                     |       | —                                |       | —      |       | 7,980,299                  |       |
| Selling, general  and administrative                                        |       | 1,726,366                             |       | 1,548,163   |       | 21,658,454                 |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Total expenses                                                              |       | 3,594,420                             |       | 10,599,075  |       | 106,377,915                |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Loss from operations                                                        |       | (3,594,420                            | )          | (10,599,075 | )          | (104,135,926               | )          |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net other income:                                                           |       |                                  |       |        |       |                       |       |
| Interest income                                                             |       | (156,641                              | )          | (306,569    | )          | (2,798,657                 | )          |
| Interest expense                                                            |       | 104,355                               |       | 116,434     |       | 2,727,505                  |       |
| Gain on sale of  interest in Sarawak Medichem Pharmaceuticals joint venture |       | —                                |       | —      |       | (939,052                   | )          |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net other income                                                            |       | (52,286                               | )          | (190,135    | )          | (1,010,204                 | )          |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net loss                                                                    |       | (3,542,134                            | )          | (10,408,940 | )          | (103,125,722               | )          |
|                                                                        |       |                                  |       |        |       |                       |       |
| Less accumulated  preferred stock dividends of subsidiary for the period    |       | 43,750                                |       | 43,750      |       | 1,538,542                  |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net loss available to  common shareholders                                  |       | $                                     | (3,585,884 | )           | $          | (10,452,690                | )          | $ | (104,664,264 | ) |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net loss per share  available to common shareholders - basic and diluted    |       | $                                     | (0.09      | )           | $          | (0.37                      | )          |   |   |
|                                                                        |       |                                  |       |        |       |                       |       |
| Weighted average shares  outstanding - basic and diluted                    |       | 38,502,987                            |       | 28,287,310  |       |                       |       |

 

Seenotes to unaudited consolidated financial statements.

 

4

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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 stock  related to option exercises                          |       | 41,685            |       | 6,563       |       |            |       |            |       |        |         |
| Compensation  expense related to stock options (December 2004)     |       | —            |       | —      |       | 20,701          |       | —          |       | 20,701      |         |
| 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   |         |
| Net loss (since  inception)                                             |       | —            |       | —      |       | —          |       | (40,274,293     | )          | (40,274,293 | )            |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| BALANCE—December 31,  2004                                    |       | 10,604,584        |       | 106,046     |       | 21,894,446      |       | (40,274,293     | )          | (18,273,801 | )            |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| Issuance of  common stock, net of offering costs (August 2005)     |       | 6,721,814         |       | 67,218      |       | 29,210,558      |       | —          |       | 29,277,776  |         |
| Issuance of stock  related to option exercises                          |       | 63,924            |       | 639         |       | 14,240          |       | —          |       | 14,879      |         |
| Compensation  expense related to stock options                          |       | —            |       | —      |       | 696,204         |       | —          |       | 696,204     |         |
| 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      |         |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| Net loss                                                                |       | —            |       | —      |       | —          |       | (6,444,246      | )          | (6,444,246  | )            |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| BALANCE—December 31,  2005                                    |       | 17,990,322        |       | 179,903     |       | 54,834,373      |       | (46,718,539     | )          | 8,295,737   |         |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| Issuance of  common stock, net of offering costs (March 2006)      |       | 10,233,464        |       | 102,335     |       | 33,266,653      |       | —          |       | 33,368,988  |         |
| Issuance of stock  related to option exercises                          |       | 58,891            |       | 589         |       | 8,656           |       | —          |       | 9,245       |         |
| Compensation  expense related to stock options                          |       | —            |       | —      |       | 261,171         |       | —          |       | 261,171     |         |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| Net loss                                                                |       | —            |       | —      |       | —          |       | (20,540,636     | )          | (20,540,636 | )            |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| BALANCE—December 31,  2006                                    |       | 28,282,677        |       | $           | 282,827    |            | $          | 88,370,853      |       | $           | (67,259,175  | ) | $ | 21,394,505 |   |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| Issuance of  common stock, net of offering costs (December 2007)   |       | 10,191,083        |       | 101,911     |       | 17,750,327      |       | —          |       | 17,852,238  |         |
| Issuance of stock  related to option exercises                          |       | 29,227            |       | 292         |       | 4,296           |       | —          |       | 4,588       |         |
| Compensation  expense related to stock options                          |       | —            |       | —      |       | 734,056         |       | —          |       | 734,056     |         |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| Net loss                                                                |       | —            |       | —      |       | —          |       | (32,324,413     | )          | (32,324,413 | )            |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| 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                          |       | —            |       | —      |       | 210,982         |       | —          |       | 210,982     |         |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| Net loss                                                                |       | —            |       | —      |       | —          |       | (3,542,134      | )          | (3,542,134  | )            |
|                                                                    |       |              |       |        |       |            |       |            |       |        |         |
| BALANCE—March 31,  2008                                       |       | 38,502,987        |       | $           | 385,030    |            | $          | 107,007,634     |       | $           | (103,125,722 | ) | $ | 4,266,942 |   |
|                                                                         |            |                   |            |             |            |                 |            |                 |            |             |              |  |  |  |  |  |  |

 

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**           | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                                         | ** ** | **Three months ended** | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **March 31,**     | ** ** | **Through**                | ** ** |
| ** **                                                                         | ** ** | **2008**               | ** ** | **2007**                   | ** ** | **March 31, 2008** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                   |       |                       |       |                    |       |
| Net loss                                                                           |       | $                      | (3,542,134 | )                          | $          | (10,408,940             | )          | $ | (103,125,722 | ) |
| Adjustments to  reconcile net loss to net cash flows used in operating activities: |       |                   |       |                       |       |                    |       |
| Depreciation and  amortization                                                     |       | 53,397                 |       | 52,091                     |       | 676,171                 |       |
| Non-cash  interest expense                                                         |       | 1,250                  |       | 9,442                      |       | 102,073                 |       |
| Stock  compensation expense                                                        |       | 210,982                |       | 189,394                    |       | 1,923,114               |       |
| 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                                                                   |       | —                 |       | 1,583                      |       | 13,294                  |       |
| Changes in  operating assets and liabilities:                                      |       |                   |       |                       |       |                    |       |
| Clinical  supplies                                                                 |       | —                 |       | —                     |       | 533,333                 |       |
| Prepaid expenses                                                                   |       | 1,068,567              |       | (334,503                   | )          | (258,001                | )          |
| Other assets                                                                       |       | —                 |       | —                     |       | (1,452                  | )          |
| Accounts payable                                                                   |       | (1,238,622             | )          | 4,224,747                  |       | 1,447,129               |       |
| Accrued expenses                                                                   |       | (1,889,235             | )          | 1,312,711                  |       | 1,217,749               |       |
| Licenses payable                                                                   |       | —                 |       | —                     |       | (11,000,000             | )          |
| Accrued interest  on debt                                                          |       | (1,686                 | )          | (22,756                    | )          | 599,133                 |       |
|                                                                               |       |                   |       |                       |       |                    |       |
| Net cash flows  from operating activities                                          |       | (5,337,481             | )          | (4,976,231                 | )          | (84,339,564             | )          |
|                                                                               |       |                   |       |                       |       |                    |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                   |       |                       |       |                    |       |
| Purchase of  property and equipment                                                |       | (323,275               | )          | (23,891                    | )          | (1,053,623              | )          |
| 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                                          |       | (323,275               | )          | (23,891                    | )          | (114,571                | )          |
|                                                                               |       |                   |       |                       |       |                    |       |
| 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                                             |       | —                 |       | 785                        |       | 35,275                  |       |
| Payments on  deferred financing                                                    |       | (10,000                | )          | —                     |       | (10,000                 | )          |
| Payments on  capital leases                                                        |       | (1,715                 | )          | (5,373                     | )          | (145,888                | )          |
|                                                                               |       |                   |       |                       |       |                    |       |
| Net cash flows  from financing activities                                          |       | (74,595                | )          | (4,588                     | )          | 97,043,775              |       |
|                                                                               |       |                   |       |                       |       |                    |       |
| NET (DECREASE) INCREASE  IN CASH                                                   |       | (5,735,351             | )          | (5,004,710                 | )          | 12,589,640              |       |
|                                                                               |       |                   |       |                       |       |                    |       |
| CASH—Beginning of  period                                                     |       | 18,324,991             |       | 27,054,947                 |       | —                  |       |
|                                                                               |       |                   |       |                       |       |                    |       |
| CASH—End of period                                                            |       | $                      | 12,589,640 |                       | $          | 22,050,237              |       | $ | 12,589,640 |   |
|                                                                               |       |                   |       |                       |       |                    |       |
| SUPPLEMENTAL DISCLOSURE  OF                                                        |       |                   |       |                       |       |                    |       |
| CASH FLOW  INFORMATION:                                                            |       |                   |       |                       |       |                    |       |
| Cash paid during  the period for interest                                          |       | $                      | 114,790    |                       | $          | 117,044                 |       | $ | 2,027,596 |   |
|                                                                               |       |                   |       |                       |       |                    |       |
| SUPPLEMENTAL DISCLOSURE  OF NONCASH TRANSACTIONS                                   |       |                   |       |                       |       |                    |       |
| Noncash  investment activity:                                                      |       |                   |       |                       |       |                    |       |
| Purchase of  property and equipment under capital leases                           |       | $                      | —     |                       | $          | 17,733                  |       | $ | 164,249 |   |
| Capital expenses  included in accounts payable                                     |       | 11,783                 |       | —                     |       | 11,783                  |       |
| 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.

 

6

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**MARCH 31, 2008**

**(UNAUDITED)**

 

**1.     Summary of Significant Accounting Policies**

 

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

 

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

 

The consolidated financial statements have beenprepared on a going concern basis, which contemplates continuity of operationsand the realization of assets and liquidation of liabilities in the ordinarycourse of business.  However, as a resultof the Company’s continued losses and current cash and financing position, suchrealization of assets or liquidation of liabilities, without substantial adjustmentsis uncertain.  Given this uncertainty,there is significant doubt as to the Company’s ability to continue as a goingconcern.

 

***Business and CreditRisks*****-**TheCompany is subject to risks and uncertainties common to drug discoverycompanies, including technological change, potential infringement onintellectual property of third parties, new product development, regulatoryapproval and market acceptance of its products, activities of competitors andits limited operating history.  TheCompany has incurred losses since its incorporation in January 1999.  The Company has funded its operations to dateprimarily from debt financings and capital contributions from its founder andChief Executive Officer, proceeds from the initial public offering of its commonstock and the subsequent sale of its common stock in two privateplacements.  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 Abbott milestone payments due upon filing the NDA and approval,if any, of the NDA by the FDA.  Althoughmanagement believes the Company could secure a commercial partnership, therecan be no assurances that such partnership will be available at termsacceptable to the Company, if at all. The accompanying financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

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**2.     Private Placement**

 

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

 

**3.     Related Party Transactions**

 

The Company’sChief Executive Officer, Michael T. Flavin Ph.D., loaned $2.0 million to theCompany in 2001 (see Note 4). Interest expense of $38,750 and $38,750 was recorded for the threemonths ended March 31, 2008 and 2007, respectively, related to the note.

 

The Company’s lineof credit is secured by substantially all of the Company’s assets, except thatthe collateral specifically excludes any rights that the Company has as aresult of its license agreement with Abbott Laboratories for cethromycin, andis further secured by 2.5 million shares of the Company’s stock held by ALSVentures, LLC (see Note 4), which is beneficially owned by the Company’sChief Executive Officer.

 

The Company leasesfacilities from the BioStart Property Group, LLC. (“BioStart”), a wholly-ownedsubsidiary of Flavin Ventures, which is owned by the Company’s Chief ExecutiveOfficer.  Lease payments totaledapproximately $79,000  and $74,000 forthe three months ended March 31, 2008 and 2007, respectively.

 

**4.     Debt Obligations**

 

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

 

The Company had a $4.0 million straight line of credit with a financialinstitution with a fixed interest rate of 6.75% per annum and a maturity dateof January 1, 2008.  On December 21,2007, the Company reached an agreement to restructure the line by extending thematurity date to January 1, 2010, changing the form of the line to arevolving line of credit and changing the fixed interest rate to a floatingrate indexed to the Prime rate. Borrowings under the line will bear interest at the prevailing Primerate, less 75 basis points.  The interestrate cannot be lower than 6.25% nor can the rate exceed 8.00%.  The new note was executed on January 31,2008.  The line of credit is secured bysubstantially all of the Company’s assets, except that the collateralspecifically excludes any rights that the Company may have as a result of itslicense agreement with Abbott Laboratories for cethromycin, and is furthersecured by 2.5 million shares of the Company’s common stock held by ALSVentures, LLC.  The credit agreementcontains a material adverse change clause, which is subject to the judgment ofthe lender and, if triggered, can accelerate the payment of the debt.  As of March 31, 2008 and December 31,2007, the Company had $3.9 million outstanding under the note.

 

8

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**5.     Commitments**

 

***VendorContracts-***TheCompany administers its cethromycin development program largely under contractswith third parties.  To date, contractstotaling $42.3 million, net of expected savings of $2.8 million, have beenexecuted related to the cethromycin program, which includes anthrax relatedstudies.  The remaining balance of $3.7million is expected to be paid over the next six months.  In addition, to date the Company has executed$323,000 in contracts related to the ALS-357 program, of which the majority ofthe remaining balance of $27,000 is expected to be paid in 2008.

 

***GrantPayable-*** In April 2005,the Company was awarded a $500,000 grant from the State of Illinois to fundexpansion of its corporate headquarters in Woodridge, IL.  Under the terms of the grant, the Company isto utilize or obligate the funds for construction costs associated withexpanding its corporate headquarters between January 31, 2005 and December 31,2007 (“construction period”) and create 100 full-time jobs at the same locationbetween January 31, 2005 and December 31, 2010 (“grant period”).  Funds that are not expended in a manner consistentwith the grant award are to be repaid at the end of the constructionperiod.  In addition, if the Company doesnot create the specified number of full-time jobs, it is required to repay thegrant proceeds on a pro-rata basis of actual jobs created compared to the totaldefined in the grant.  As of December 31,2007, the entire grant had been spent or obligated and therefore the $500,000has been classified as a long-term liability as the Company must create andmaintain positions created during the grant period through January 31,2010.  If the Company does not create andmaintain the 100 positions, it will owe the State of Illinois grant proceedsequal to a pro-rata share of the positions that were created and retained ascompared to the total created during the grant period.  Through March 31, 2008, fifteen new jobshave been created and retained since the grant was awarded.

 

**6.     Stock Option Grants**

 

For the threemonths ended March 31, 2008 and 2007, the Company granted stock options topurchase up to 708,800 and 667,600 shares of common stock, respectively, tocertain employees and directors. The exercise price of the options was themarket price of the Company’s common stock on the date of grant.  The Company recognized compensation expensetotaling approximately $211,000 and $189,000 for the three months ended March 31,2008 and 2007, respectively in accordance with SFAS No. 123 (R), *Share based Payment*.

 

**7.     Net Loss Per Share**

 

Basic loss per share iscomputed by dividing net loss by the number of weighted average common sharesoutstanding during the reporting period. Diluted loss per share is calculated to give effect to all potentiallydilutive common shares that were outstanding during the reporting period.  The computation of diluted shares outstandingfor the quarters ended March 31, 2008 and 2007 excludes incremental sharesof 12,780,851 and 6,936,901, respectively, related to employee stock optionsand warrants.  These shares are excludeddue to their anti-dilutive effect as a result of the Company’s losses for thequarters ended March 31, 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 

 

9

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initial and subsequentmeasurement attribute for many financial assets and liabilities and certainother items including insurance contracts. Entities electing the fair value option would be required to recognizechanges in fair value in earnings and to expense upfront cost and feesassociated with the item for which the fair value option is elected.  The adoption of SFAS 159 did not have amaterial impact on the Company’s statements of financial position, results ofoperations and cash flows.

 

On March 19,2008, the FASB issued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities* (“SFAS 161”). SFAS 161requires qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair value amounts of and gains andlosses on derivative instruments, and disclosures about credit-risk-relatedcontingent features in derivative agreements. The application of SFAS 161 isrequired for fiscal years and interim periods beginning after November 15,2008. The Company does not expect the adoption of SFAS 161 to have a materialimpact on its statements of financial position, results of operations and cashflows.

 

In March 2007,the Emerging Issues Task Force (“EITF”) issued a tentative conclusion on EITF07-03, “Accounting for AdvancePayments for Goods or Services to Be Used in Future Research and Development “and the FASB ratified the tentative conclusion. EITF 07-03 addresses the diversity which exists with respect to theaccounting for the non-refundable portion of a payment made by a research anddevelopment entity for future research and development activities. Under thisconclusion, an entity would defer and capitalize non-refundable advancepayments made for research and development activities until the related goodsare delivered or the related services are performed. EITF 07-03 is effectivefor interim or annual reporting periods in fiscal years beginning after December 15,2007. The Company does not expect the adoption of EITF 07-03 to have a materialimpact on its statements of financial position, results of operations and cashflows.

 

**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**

 

We are abiopharmaceutical 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 recently completedpivotal phase III clinical trials in community acquired pneumonia (“CAP”) andis in Phase III clinical development for the treatment of respiratory tractinfections. We also have product candidates in earlier stages of developmentfor the treatment of indications including inflammation-related tissue damageand malignant melanoma.

 

None of our productcandidates have been approved by the FDA or any comparable foreign agencies,and we have not generated any significant revenues to date. Our ability togenerate revenues in the future will depend on our ability to meet developmentor regulatory milestones under any license agreements that trigger payments tous, to enter into new license agreements for other products or territories andto receive regulatory approvals for, and successfully commercialize, ourproduct candidates either directly or through commercial partners.

 

Since ourinception, we have incurred net losses each year. Our net loss for the threemonths ended March 31, 2008 was $3.5 million.  As of March 31, 2008, we had anaccumulated deficit of $103.1 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 capital contributionsmade principally by our founder and Chief Executive Officer and borrowingsunder our bank line of credit.  Wecurrently do not have sufficient cash or other funding available to completeour anticipated business activities during 2008 if we submit our cethromycinNDA without securing a commercial partnership that provides additionalcapital.  As a result, there issignificant doubt about our ability to continue as a going concern.

 

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

 

10

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In December 2005,we initiated two pivotal Phase III clinical trials for cethromycin whichcompared cethromycin with standard of care therapies for CAP in the UnitedStates, 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 primaryendpoint in each trial with bacteriological eradication serving as the secondaryendpoint.

 

We completed the twopivotal Phase III clinical trials during 2007. In each trial, cethromycin achieved non-inferiority in its primaryendpoint of per protocol clinical cure rate compared to Biaxin ® (clarithromycin) in CAP. Cethromycin was evaluated using a 300 mg once-daily dosing regimen compared to250 mg twice-daily dosing for Biaxin ®,both over a seven-day course of therapy.  No drug-related serious adverseevents were observed in any study subject.  Liver function tests and electrocardiogrammonitoring demonstrated no significant differences between subjects receivingcethromycin and subjects receiving Biaxin®, consistent with the hepatic and cardiac side effect profile reportedin 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 also beendemonstrated to have 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.  Resultsfrom this study demonstrated that a thirty (30) day course of oral cethromycinat a 16 mg/kg of once-daily dosing (the human equivalent dose of 300 mg)was 100% protective against a lethal dose of inhaled *B. anthracis*Ames strain spores.   We are collaboratingwith the National Institute of 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 community acquired pneumonia.  The Advisory Committee voted in favor of theuse of non-inferiority trials for mild to moderate or outpatient CAP and formoderate to severe or inpatient CAP. Also in April, we had a pre-NDA meeting with FDA officials and agreed tosubmit the NDA for cethromycin in the community acquired pneumonia indicationforthwith.  The submission is expected tooccur during the third quarter of this year.

 

There can be no assurancethat the FDA will file our NDA application when submitted or that once filed,it will be approved.  In addition, we donot expect to receive FDA approval for commercialization of cethromycin until2009 at the earliest.  As of March 31,2008, we estimate that our cethromycin development program will require anadditional $43.7 million in research and development expenditures whichincludes $40.0 million in additional milestone payments to Abbott, $1.5 millionto complete the cethromycin clinical trials and $2.2 million for thepreparation of the cethromycin NDA and other commercialization-relatedcosts.  Our $10.0 million and $30.0million Abbott milestone payments are triggered upon submitting an NDA andreceiving FDA approval, respectively. Development timelines and related costs are difficult to estimate andmay vary significantly 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 March 31,2008 compared to three months ended March 31, 2007*

* *

*Revenue.***The Company had no revenue in the three month periods endedMarch 31, 2008 and 2007.

 

*Research and development expense.*  Research and development expense decreased$7.2 million to $1.9 million for the three months ended March 31,2008.  The largest component of the totaldecline was cethromycin clinical trial expenses which ended the quarter $5.0million lower than the same period last year. We incurred $0.5 million and $5.5 million of clinical trial expenseduring the first quarter of 2008 and 2007, respectively.

 

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Data from the second of two Pivotal Phase III clinicaltrials was released in November of 2007 effectively bringing the trials totheir natural conclusion.  The expensesincurred during the first quarter of 2008 represent the remainder of theexpenses we expect to incur under these trials. Expenses incurred to compile our NDA totaled $0.5 million for the threemonths ended March 31, 2008 and represented a decline of $1.6 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 anthraxpost-exposure for the prophylaxis in non-human primates declined $0.8 millionfor the three months ended March 31, 2008 as compared to the same periodlast year.  This study was completedduring the third quarter of 2007. Manufacturing expenses incurred in relation to process optimization activitiesof cethromycin totaled $0.3 million for the first quarter of 2008 and wereentirely incremental to the same period in the previous year.

 

*Generaland administrative expense.***Generaland administrative expenses increased $0.2 million to $1.7 million for thethree months ended March 31, 2008. The increase was equally attributable to our national cethromycinadvisory board and higher compensation and benefit expenses of the existingstaff.

 

*Interest income.*  Interest income declined $0.1 million to $0.2million for the three months ended March 31, 2008.

 

*Interest expense.*Interest expense was $0.1 million for the three months ended March 31,2008 and was consistent with the same period last year.

 

**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$103.1 million as of March 31, 2008 and we expect to incursignificant operating losses for the foreseeable future.  Cash and cash equivalents was $12.6 millionas of March 31, 2008.  Since our inceptionin 1999 to August 2005, we financed our operations primarily through debtand capital contributions from our founder and controlling stockholder andborrowings under our bank line of credit. In August 2005 we completed our initial public offering in which weraised $28.7 million, net of underwriters discount and offering costs.  In March 2006 we completed a privateplacement in which we raised $33.4 million, net of underwriters discount andoffering costs.  In December 2007 wecompleted a second private placement in which we raised $17.8 million, net ofunderwriters discount and offering costs.  As of March 31, 2008 we had a workingcapital of $8.1 million.

 

In September 2001,our Chief Executive Officer made a $2.0 million loan to us. The loan accruesinterest at the rate of 7.75%, and is due and payable on January 5, 2009.   The balance of the loan was $2.0 million asof March 31, 2008.

 

We have a $4.0 million line of credit with a localfinancial institution.  As of March 31,2008, the line of credit had an outstanding balance of $3.9 million bearinginterest at a floating rate based upon prime, minus 75 basis points.  The rate cannot be lower than 6.25% or exceed8.0%.  As of March 31, 2008 the ratewas 6.25%.  The line of credit is securedby substantially 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 Flavin Ventures. See Note 3 to theconsolidated financial statements.

 

During the three months ended March 31, 2008,cash used in operating activities totaled $5.3 million.  Approximately $3.8 million was used for thedevelopment of cethromycin, $200,000 for Anthrax trials, $94,000 for researchactivities related to our proprietary portfolio of compounds and $1.2 millionfor general operations net of $162,000 in interest income.

 

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*Contractual Obligations*

* *

As of March 31, 2008, the annual amounts offuture minimum payments under debt obligations, interest, lease obligations andother long term liabilities consisting of executed research, development andlicense agreements are as follows:

 
| ** **                                 | ** ** | **Payments Due by December 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2008**                              | ** ** | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Total** | ** ** |
| Notes payable                              |       | $                                     | —     |       | $          | 2,000,000 |   | $ | 3,915,000 |   | $ | — |   | $ | — |   | $ | 5,915,000 |   |
| Interest                                   |       | 301,797                               |       | 246,321    |       | 304 |   | — |   | — |   | 548,422 |   |
| Cethromycin  clinical & NDA costs |       | 3,427,502                             |       | —     |       | — |   | — |   | — |   | 3,427,502 |   |
| ALS-357 clinical  supplies                 |       | 26,665                                |       | —     |       | — |   | — |   | — |   | 26,665 |   |
| Operating leases                           |       | 100,405                               |       | —     |       | — |   | — |   | — |   | 100,405 |   |
| Capital leases                             |       | 5,545                                 |       | 8,468      |       | 4,350 |   | — |   | — |   | 18,363 |   |
|                                       |       |                                  |       |       |       |   |   |   |   |   |   |   |   |
| Total                                      |       | $                                     | 3,861,914  |       | $          | 2,254,789 |   | $ | 3,919,654 |   | $ | — |   | $ | — |   | $ | 10,036,357 |   |

 

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.

 

In the first four months of 2008 we executedcethromycin-related contracts totaling $722,000.  Of the total contracts executed, $490,000related to process optimization of our commercial manufacturing program,$65,000 related to the development of an intravenous formulation forcethromycin, $69,000 related to exploring biodefense uses of cethromycin and$98,000 related to the compilation of our cethromycin NDA and NDA directedstudies.

 

We anticipate executing 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.  If executed, the contract isexpected to total approximately $867,000 which represents the upper limit ofcost if the maximum number of patients are enrolled.  To the extent fewer patients are required asdetermined by the protocol; expenses related to the trial could be lower.  Enrollment will be based upon a number offactors which are difficult to forecast and therefore we cannot reasonablyestimate the true cost of the trial beyond what is defined as the maximum limitper the contract.

 

We believe the proceedsreceived from the 2007 private placement are sufficient to fund our existingand anticipated development commitments, indebtedness and general operatingexpenses through the end of 2008, however we do not have sufficient liquidityto make any milestone payments that become due to Abbott upon the filing of anNDA.  We anticipate securing a commercialpartner(s) for cethromycin during 2008. We believe such an agreement would include a series of milestones, includingup-front milestones, that would fund the Abbott milestone payments due uponfiling the NDA 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;

 

·                                          our abilityto raise additional capital through the sale of common stock 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 and analysis of our financial conditionand results of operations are based on our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America.  Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities and expensesand related disclosure of contingent assets and liabilities.  We review our estimates on an ongoingbasis.  We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.  While oursignificant accounting policies are described in more detail in the notes toour financial statements included in this quarterly report, we believe thefollowing accounting policies to be critical to the judgments and estimatesused in the preparation of our financial statements.

 

*Research and Development*

 

Research and development expenses consist of internalresearch costs and fees paid for contract research in conjunction with theresearch and development of our proprietary product portfolio.  All such costs are expensed as incurred.  Clinical trial costs incurred by thirdparties are expensed as the contracted work is performed.  We estimate both the total cost and timeperiod of the trials and the percent completed as of that accounting date.  We believe that the estimates made as of March 31,2008 are reflective of the actual expenses incurred as of that date.

 

*Stock-based Compensation*

 

We account for stock-based awards to employees and non-employees usingthe accounting provisions of Statement of Financial Accounting Standards No. 123(R) *Share-based Payments*which provides for the use of the fair value based method to determine compensation for allarrangements where shares of stock or equity instruments are issued forcompensation.  We use a Black-Scholesoptions-pricing model to determine the fair value of each option grant as ofthe date of grant for expense incurred. The Black-Scholes model requires inputs for risk-free interest rate,dividend yield, volatility and expected lives of the options.  Since we have a limited history of stockactivity, 

 

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expected volatility is based on historical volatility of our stock since August 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.  We estimate future forfeits ofoptions 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, containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Forward-looking statements often are proceeded by words such as“believes,” “expects,” “may,” “anticipates,” “plans,” “intends,” “assumes,”“will” or similar expressions.  Forward-looking statements reflectmanagement’s current expectations, as of the date of this report, and involvecertain risks and uncertainties.  Our actual results could differ materially from those anticipated inthese forward-looking statements as a result of various factors.   Some of the factors that could cause futureresults to materially differ from the recent results or those projected inforward-looking statements include the “Risk Factors” described in our AnnualReport on Form 10-K.

 

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

 

Our exposure tomarket risk is currently confined to our cash, cash equivalents and line ofcredit. We currently do not hedge interest rate exposure. We have not usedderivative financial instruments for speculation or trading purposes. Becauseof the short-term maturities of our cash and cash equivalents, we do notbelieve that an increase in market rates would have any significant impact ontheir 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.

 

 

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

 

Ourmanagement, under the supervision and with the participation of our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated theeffectiveness of our disclosure controls and procedures as defined in SEC Rules 13a-15(e) and15d-15(e) as of the end of the period covered by this report.  Based upon that evaluation, management hasconcluded that our disclosure controls and procedures are effectively designedto ensure that information we are required to disclose in reports that we fileor submit under the Securities Exchange Act of 1934 is accumulated andcommunicated to management, including the CEO and CFO, as appropriate to allow timelydecisions regarding required disclosure and is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms.

 

**Changes in Internal Control**

 

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

 

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**PART II — OTHERINFORMATION**

 

**Item5. Other Information**

 

On May 1, 2008,the Company conducted its annual meeting of shareholders.  At the meeting,the shareholders elected Dr. Michael T. Flavin and Messrs. Scott F. Meadow andThomas V. Thornton to the Company's Board of Directors each for a term of threeyears and ratified the appointment of Deloitte & Touche LLP as theCompany's independent registered public accounting firm for fiscal year 2008.The shareholders also approved the amendment of the 2005 Advanced Life SciencesHoldings, Inc. Stock Incentive Plan to provide 1,900,000 additional stockoptions for grant under the Plan.

 

**On May 2, 2008, the Company appointed MichaelJ. Cogan as Vice President and Chief Accounting Officer, effectiveimmediately.  Mr. Cogan was formerlyVice President and Controller of the Company.**

 

Mr. Cogan, 37,joined ADLS in October 2004 as Director of Finance and Controller.  He was promoted to Vice President andController in February 2007.  Priorto joining the Company, Mr. Cogan served as the Corporate Controller forthe PRIMIS Marketing Group, a venture-backed direct marketing firm located inChicago, Illinois.  From 1996 to 2003 Mr. Coganserved as the Corporate Controller for MediChem Life Sciences where he directedthe accounting and finance functions through several rounds of privatefinancing, an initial public offering and multiple acquisitiontransactions.  Mr. Cogan earned hisC.P.A. after graduating from the University of Illinois with a B.S. inaccounting and a B.S. in Finance.  Healso holds an M.B.A. from DePaul University.

 

 

**Item 6. *Exhibits***

 

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

 
| **Number** | ** ** | **Description**                                                                                                                                                |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                           |
| 10.1       |       | Amended and Restated Employment agreement, dated  May 2, 2008 between Advanced Life Sciences, Inc. and Michael J.  Cogan.                            |
|       |       |                                                                                                                                                           |
| 10.2       |       | Advanced Life Sciences Holdings, Inc. 2005 Stock  Incentive Plan (as Amended)                                                                                  |
|       |       |                                                                                                                                                           |
| 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: May 7, 2008

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                                |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                           |
| 10.1       |       | Amended and Restated Employment agreement, dated  May 2, 2008 between Advanced Life Sciences, Inc. and Michael J.  Cogan.                            |
|       |       |                                                                                                                                                           |
| 10.2       |       | Advanced Life Sciences Holdings, Inc. 2005 Stock  Incentive Plan (as Amended)                                                                                  |
|       |       |                                                                                                                                                           |
| 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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