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** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

** **

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

 

**For the Quarterly Period Ended: March 31, 2009**

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post suchfiles).    Yes  o    No  o

 

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

 

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

 

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

 

As of May 7, 2009,the registrant had 45,992,160  shares ofcommon stock, $0.01 par 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, 2009 and December 31, 2008 |
|                                                           | Consolidated Statements of Operations for the three  months ended March 31, 2009 and 2008 and for the period from inception  (January 1, 1999) through March 31, 2009 |
|                                                           | Consolidated Statements of Stockholders’ Equity  (Deficit) for period from inception (January 1, 1999) through  March 31, 2009 |
|                                                           | Consolidated Statements of Cash Flows for the three  months ended March 31, 2009 and 2008 and for the period from inception  (January 1, 1999) through March 31, 2009 |
|                                                           | 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 1.                                                        | Legal Proceedings |
| Item  1A.                                                      | Risk  Factors |
| Item 2.                                                        | Unregistered  Sales of Equity Securities and Use of Proceeds |
| Item 6.                                                   | Exhibits |
| Signatures                                                     |   |
| Exhibit Index                                             |

 

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**PART I —FINANCIAL INFORMATION**

** **

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

 

**ADVANCED LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(A Development Stage Company)**

** **

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                      | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                 |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                       |       | $                        | 488,632    |                        | $          | 1,527,108 |   |
| Grant receivable                                                                                                                                                                                |       | 134,889                  |       | 63,444                      |       |
| Prepaid insurance                                                                                                                                                                               |       | 150,148                  |       | 227,313                     |       |
| Other prepaid expenses and deposits                                                                                                                                                             |       | 123,757                  |       | 143,808                     |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| Total current assets                                                                                                                                                                            |       | 897,426                  |       | 1,961,673                   |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                         |       |                     |       |                        |       |
| Furniture and fixtures                                                                                                                                                                          |       | 244,072                  |       | 244,072                     |       |
| Laboratory equipment                                                                                                                                                                            |       | —                   |       | 159,186                     |       |
| Computer software and equipment                                                                                                                                                                 |       | 258,786                  |       | 258,786                     |       |
| Leasehold improvements                                                                                                                                                                          |       | 505,804                  |       | 505,804                     |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| Total property and equipment–at cost                                                                                                                                                       |       | 1,008,662                |       | 1,167,848                   |       |
| Less accumulated depreciation                                                                                                                                                                   |       | (645,980                 | )          | (760,329                    | )          |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| Property and equipment–net                                                                                                                                                                 |       | 362,682                  |       | 407,519                     |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| OTHER ASSETS:                                                                                                                                                                                   |       |                     |       |                        |       |
| Deferred offering and financing costs                                                                                                                                                           |       | 210,066                  |       | 450,861                     |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| TOTAL ASSETS                                                                                                                                                                                    |       | $                        | 1,470,174  |                        | $          | 2,820,053 |   |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                         |       |                     |       |                        |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                                                                            |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                |       | $                        | 1,816,526  |                        | $          | 1,379,941 |   |
| Accrued clinical trial and NDA expenses                                                                                                                                                         |       | 112,452                  |       | 458,260                     |       |
| Accrued payroll                                                                                                                                                                                 |       | 735,890                  |       | 506,537                     |       |
| Other accrued expenses                                                                                                                                                                          |       | 340,259                  |       | 352,466                     |       |
| Accrued interest payable                                                                                                                                                                        |       | 98,770                   |       | 72,572                      |       |
| Short-term lease payable                                                                                                                                                                        |       | 8,812                    |       | 8,468                       |       |
| Short-term notes payable - related party                                                                                                                                                        |       | 2,000,000                |       | —                      |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| Total current liabilities                                                                                                                                                                       |       | 5,112,709                |       | 2,778,244                   |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| Long-term lease payable                                                                                                                                                                         |       | 2,013                    |       | 4,350                       |       |
| Long-term grant payable                                                                                                                                                                         |       | 500,000                  |       | 500,000                     |       |
| Long-term notes payable - related party                                                                                                                                                         |       | —                   |       | 2,000,000                   |       |
| Line of credit                                                                                                                                                                                  |       | 10,000,000               |       | 9,915,000                   |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| Total liabilities                                                                                                                                                                               |       | 15,614,722               |       | 15,197,594                  |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                   |       |                     |       |                        |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| STOCKHOLDERS’ EQUITY (DEFICIT):                                                                                                                                                            |       |                     |       |                        |       |
| Common stock, $0.01 par value–60,000,000 shares authorized; 43,259,241  issued and outstanding at March 31, 2009; 40,810,932 shares issued and  outstanding at December 31, 2008 |       | 432,592                  |       | 408,109                     |       |
| Additional paid-in capital                                                                                                                                                                      |       | 110,093,540              |       | 109,601,807                 |       |
| Deficit accumulated during the development stage                                                                                                                                                |       | (124,670,680             | )          | (122,387,457                | )          |
| Noncontrolling interest in subsidiary                                                                                                                                                           |       | —                   |       | —                      |       |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| Total stockholders’ equity (deficit)                                                                                                                                                       |       | (14,144,548              | )          | (12,377,541                 | )          |
|                                                                                                                                                                                            |       |                     |       |                        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                                                                       |       | $                        | 1,470,174  |                        | $          | 2,820,053 |   |

 

See notes to unaudited consolidated financial statements.

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **  | ** ** | **Period From  Inception  (January 1, 1999)** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------|------------|----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Three months ended March 31,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2009**                              | ** ** | **2008**    | ** ** | **March 31, 2009**                            | ** ** |
| Revenue:                                                                    |       |                                  |       |        |       |                                               |       |
| Management fees                                                             |       | $                                     | —     |        | $          | —                                             |       | $ | 1,161,180 |   |
| Grants                                                                      |       | 411,485                               |       | —      |       | 1,687,886                                          |       |
| Royalty–related  party                                                 |       | —                                |       | —      |       | 45,238                                             |       |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Total revenue                                                               |       | 411,485                               |       | —      |       | 2,894,304                                          |       |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Expenses:                                                                   |       |                                  |       |        |       |                                               |       |
| Research and  development                                                   |       | 934,769                               |       | 1,868,054   |       | 91,515,170                                         |       |
| Contracted  research and development— related party                    |       | —                                |       | —      |       | 7,980,299                                          |       |
| Selling, general  and administrative                                        |       | 1,508,953                             |       | 1,726,366   |       | 28,557,590                                         |       |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Total expenses                                                              |       | 2,443,722                             |       | 3,594,420   |       | 128,053,059                                        |       |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Loss from  operations                                                       |       | (2,032,237                            | )          | (3,594,420  | )          | (125,158,755                                       | )          |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Net other  (income) expense:                                                |       |                                  |       |        |       |                                               |       |
| Interest income                                                             |       | (1,732                                | )          | (156,641    | )          | (2,950,594                                         | )          |
| Interest expense                                                            |       | 252,718                               |       | 104,355     |       | 3,401,571                                          |       |
| Gain on sale of  interest in Sarawak Medichem Pharmaceuticals joint venture |       | —                                |       | —      |       | (939,052                                           | )          |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Net other  (income) expense                                                 |       | 250,986                               |       | (52,286     | )          | (488,075                                           | )          |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Net loss                                                                    |       | (2,283,223                            | )          | (3,542,134  | )          | (124,670,680                                       | )          |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Less net loss attributable  to the noncontrolling interest in subsidiary    |       | —                                |       | —      |       | —                                             |       |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Net loss  attributable to Advanced Life Sciences Holdings, Inc.        |       | (2,283,223                            | )          | (3,542,134  | )          | (124,670,680                                       | )          |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Less accumulated  preferred stock dividends of subsidiary for the period    |       | 43,750                                |       | 43,750      |       | 1,713,542                                          |       |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Net loss  available to common shareholders                                  |       | $                                     | (2,326,973 | )           | $          | (3,585,884                                         | )          | $ | (126,384,222 | ) |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Net loss per  share available to common shareholders - basic and diluted    |       | $                                     | (0.06      | )           | $          | (0.09                                              | )          |   |   |
|                                                                        |       |                                  |       |        |       |                                               |       |
| Weighted average  shares outstanding - basic and diluted                    |       | 41,779,634                            |       | 38,502,987  |       |                                               |       |

 

See notes to unaudited consolidated financial statements.

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**(Unaudited)**

 
| ** **                                                                                        | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional**  | ** ** | **Deficit  Accumulated  During the** | ** ** | **Noncontrolling** | ** **   | ** **   | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|-----------------|------------|--------------------------------------|------------|--------------------|--------------|--------------|------------|
| ** **                                                                                        | ** ** | **Common  Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | **Interest**                         | ** ** | ** **         | ** **   |
| ** **                                                                                        | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**                            | ** ** | **in  Subsidiary** | ** **   | **Total**    | ** ** |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| BALANCE–January 1,  1999 (inception)                                                    |       | —            |       | $           | —     |            | $          | —                               |       | $                  | —       |         | $          | — |   | $ | — |   |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| Issuance of stock  (at inception)                                                                 |       | 1,588,000         |       | 250,000     |       | —          |       | —                               |       | —             |         | 250,000      |       |
| Issuance of  common stock, net of offering costs (August 2005)                               |       | 6,721,814         |       | 67,218      |       | 29,210,558      |       | —                               |       | —             |         | 29,277,776   |       |
| Issuance of  common stock, net of offering costs (March 2006)                                |       | 10,233,464        |       | 102,335     |       | 33,266,653      |       | —                               |       | —             |         | 33,368,988   |       |
| Issuance of  common stock, net of offering costs (December 2007)                             |       | 10,191,083        |       | 101,911     |       | 17,700,186      |       | —                               |       | —             |         | 17,802,097   |       |
| Issuance of  common stock, net of offering costs (September 2008)                            |       | 1,888,606         |       | 18,886      |       | 1,634,193       |       | —                               |       | —             |         | 1,653,079    |       |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| Exchange of  shares under recapitalization (December 2004)                                   |       | (1,629,685        | )          | (256,563    | )          | —          |       | —                               |       | —             |         | (256,563     | )          |
| Issuance of  shares under recapitalization (December 2004)                                   |       | 9,482,015         |       | 94,820      |       | 161,743         |       | —                               |       | —             |         | 256,563      |       |
| Capital  contributions (December 2004)                                                       |       | —            |       | —      |       | 12,711,330      |       | —                               |       | —             |         | 12,711,330   |       |
| Issuance of  14,887 warrants (December 2004)                                                 |       | —            |       | —      |       | 11,898          |       | —                               |       | —             |         | 11,898       |       |
| Issuance of  common stock in exchange for licenses (December 2004)                           |       | 1,122,569         |       | 11,226      |       | 8,988,774       |       | —                               |       | —             |         | 9,000,000    |       |
| Issuance of  common stock in exchange for reduction of milestones payable  (August 2005)     |       | 600,000           |       | 6,000       |       | 3,000,000       |       | —                               |       | —             |         | 3,006,000    |       |
| Modification of  14,887 warrants (August 2005)                                               |       | —            |       | —      |       | 18,925          |       | —                               |       | —             |         | 18,925       |       |
| Issuance of  common stock as payment for commitment fees (September 2008)                    |       | 393,339           |       | 3,933       |       | 296,067         |       | —                               |       | —             |         | 300,000      |       |
| Issuance of  65,000 warrants (October 2008)                                                  |       | —            |       | —      |       | 7,445           |       | —                               |       | —             |         | 7,445        |       |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| Issuance of stock  related to option exercises (since inception)                                  |       | 219,727           |       | 8,343       |       | 31,014          |       | —                               |       | —             |         | 39,357       |       |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| Compensation  expense related to stock options (since inception)                                  |       | —            |       | —      |       | 2,563,021       |       | —                               |       | —             |         | 2,563,021    |       |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| Net loss (since  inception)                                                                       |       | —            |       | —      |       | —          |       | (122,387,457                         | )          | —             |         | (122,387,457 | )          |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| BALANCE—December 31,  2008                                                              |       | 40,810,932        |       | 408,109     |       | 109,601,807     |       | (122,387,457                         | )          | —             |         | (12,377,541  | )          |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| Issuance of  common stock under the standby equity distribution agreement, net of offering  costs |       | 2,448,309         |       | 24,483      |       | 322,878         |       | —                               |       | —             |         | 347,361      |       |
| Compensation  expense related to stock options                                                    |       | —            |       | —      |       | 168,855         |       | —                               |       | —             |         | 168,855      |       |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| Net loss                                                                                          |       | —            |       | —      |       | —          |       | (2,283,223                           | )          | —             |         | (2,283,223   | )          |
|                                                                                              |       |              |       |        |       |            |       |                                 |       |               |         |         |       |
| BALANCE—March 31,  2009                                                                 |       | 43,259,241        |       | $           | 432,592    |            | $          | 110,093,540                          |       | $                  | (124,670,680 | )            | $          | — |   | $ | (14,144,548 | ) |

 

See notes to unaudited consolidated financial statements.

 

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

**(ADevelopment Stage Company)**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **                            | ** ** | ** **  | ** ** | **Inception  (January 1, 1999)** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **Three months ended March 31,** | ** ** | **Through** | ** ** |
| ** **                                                                         | ** ** | **2009**                              | ** ** | **2008**    | ** ** | **March 31, 2009**               | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                                  |       |        |       |                                  |       |
| Net loss                                                                           |       | $                                     | (2,283,223 | )           | $          | (3,542,134                            | )          | $ | (124,670,680 | ) |
| Adjustments to  reconcile net loss to net cash flows used in operating activities: |       |                                  |       |        |       |                                  |       |
| Depreciation and  amortization                                                     |       | 34,344                                |       | 53,397      |       | 875,914                               |       |
| Non-cash  interest expense                                                         |       | 3,694                                 |       | 1,250       |       | 112,567                               |       |
| Stock  compensation expense                                                        |       | 168,855                               |       | 210,982     |       | 2,731,876                             |       |
| 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                                                                   |       | 10,493                                |       | —      |       | 23,822                                |       |
| Changes in  operating assets and liabilities:                                      |       |                                  |       |        |       |                                  |       |
| Clinical  supplies                                                                 |       | —                                |       | —      |       | 533,333                               |       |
| Accounts  receivable                                                               |       | (71,445                               | )          | —      |       | (134,889                              | )          |
| Prepaid expenses                                                                   |       | 97,216                                |       | 1,068,567   |       | (282,453                              | )          |
| Other assets                                                                       |       | —                                |       | —      |       | 8,548                                 |       |
| Accounts payable                                                                   |       | 483,080                               |       | (1,238,622  | )          | 1,704,314                             |       |
| Accrued expenses                                                                   |       | (103,661                              | )          | (1,889,235  | )          | 1,188,602                             |       |
| Licenses payable                                                                   |       | —                                |       | —      |       | (11,000,000                           | )          |
| Accrued interest  on debt                                                          |       | 26,198                                |       | (1,686      | )          | 676,833                               |       |
|                                                                               |       |                                  |       |        |       |                                  |       |
| Net cash flows  from operating activities                                          |       | (1,634,449                            | )          | (5,337,481  | )          | (104,698,598                          | )          |
|                                                                               |       |                                  |       |        |       |                                  |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                                  |       |        |       |                                  |       |
| Purchase of  property and equipment                                                |       | (5,466                                | )          | (323,275    | )          | (1,098,167                            | )          |
| Proceeds from  the sale of SMP                                                     |       | —                                |       | —      |       | 939,052                               |       |
| Proceeds from  the sales of investments                                            |       | —                                |       | —      |       | 31,557,158                            |       |
| Purchase of  investments                                                           |       | —                                |       | —      |       | (31,557,158                           | )          |
|                                                                               |       |                                  |       |        |       |                                  |       |
| Net cash flows  from investing activities                                          |       | (5,466                                | )          | (323,275    | )          | (159,115                              | )          |
|                                                                               |       |                                  |       |        |       |                                  |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                                  |       |        |       |                                  |       |
| Proceeds from  issuance of common stock and capital contributions                  |       | 554,471                               |       | (62,880     | )          | 89,927,761                            |       |
| Proceeds from  issuance of note payable and line of credit                         |       | 85,000                                |       | —      |       | 15,103,691                            |       |
| Proceeds from  grants                                                              |       | —                                |       | —      |       | 500,000                               |       |
| Proceeds from  stock options exercised                                             |       | —                                |       | —      |       | 39,357                                |       |
| Payments of  deferred offering and financing fees                                  |       | (36,039                               | )          | (10,000     | )          | (71,039                               | )          |
| Payments on  capital leases                                                        |       | (1,993                                | )          | (1,715      | )          | (153,425                              | )          |
|                                                                               |       |                                  |       |        |       |                                  |       |
| Net cash flows  from financing activities                                          |       | 601,439                               |       | (74,595     | )          | 105,346,345                           |       |
|                                                                               |       |                                  |       |        |       |                                  |       |
| NET (DECREASE)  INCREASE IN CASH                                                   |       | (1,038,476                            | )          | (5,735,351  | )          | 488,632                               |       |
|                                                                               |       |                                  |       |        |       |                                  |       |
| CASH—Beginning  of period                                                     |       | 1,527,108                             |       | 18,324,991  |       | —                                |       |
|                                                                               |       |                                  |       |        |       |                                  |       |
| CASH—End of  period                                                           |       | $                                     | 488,632    |        | $          | 12,589,640                            |       | $ | 488,632 |   |
|                                                                               |       |                                  |       |        |       |                                  |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                 |       |                                  |       |        |       |                                  |       |
| Cash paid during  the period for interest                                          |       | $                                     | 224,179    |        | $          | 114,790                               |       | $ | 2,614,820 |   |
|                                                                               |       |                                  |       |        |       |                                  |       |
| SUPPLEMENTAL  DISCLOSURE OF NONCASH TRANSACTIONS                                   |       |                                  |       |        |       |                                  |       |
| Noncash  investment activity:                                                      |       |                                  |       |        |       |                                  |       |
| Purchase of  property and equipment under capital leases                           |       | —                                |       | —      |       | 164,249                               |       |
| Capital expenses  included in accounts payable                                     |       | —                                |       | 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                             |       |
| Unpaid costs  associated with the issuance of common stock                         |       | —                                |       | —      |       | 38,746                                |       |
| Debt discount                                                                      |       | —                                |       | —      |       | 30,823                                |       |
| Deferred  offering and financing costs                                             |       | $                                     | —     |        | $          | —                                |       | $ | 410,911 |   |

 

See notes to unaudited consolidated financial statements.

 

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**MARCH 31, 2009**

**(UNAUDITED)**

 

**1.**                 Summaryof 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 respiratory disease.  Since inception, the Company has devotedsubstantially all of its efforts to activities such as financial planning,capital raising and product development, and has not derived significantrevenues from its primary business activity. Accordingly, the Company is in the development stage, as defined byStatement of Financial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development Stage Enterprises*.

 

***Basis of Presentation-***Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared in accordance with accounting principles generally accepted inthe United States of America and with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Accordingly, they do not include allof the information and footnotes required by accounting principles generallyaccepted 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, 2008 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 substantialadjustments is uncertain.  Given thisuncertainty, there is significant doubt as to the Company’s ability to continueas a going concern.

 

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

 

***Business and Credit Risks*****-**The Company is subject to risks anduncertainties common to drug discovery companies, including technologicalchange, potential infringement on intellectual property of third parties, newproduct development, regulatory approval and market acceptance of its products,activities of competitors and its limited operating history.

 

TheCompany has incurred losses since its incorporation in January 1999 andhas funded its operations to date primarily from debt financings and capitalcontributions from its founder and Chief Executive Officer, proceeds from theinitial public offering of its common stock, the subsequent sale of its commonstock in three private placements, including its commercial partnershipagreement with Wyeth Pharmaceuticals (“Wyeth”), and borrowings under its bankline of credit.  Inaddition, the Company executed a Standby Equity Distribution Agreement (“SEDA”) whichprovides for the sale of up to $15.0 million of its common stock to anaccredited investor, YA Global Investments, L.P. (“YA Global”), an affiliate ofYorkville Advisors (see Note 2).  In April 2009,the Company filed a shelf registration statement on Form S-3 with the SECand subsequently the shelf registration has been declared effective by theSEC.   The shelf registration will allowthe Company to raise capital from time to time through the sale of commonstock, preferred stock and/or equity warrants. While the aggregate amount of the securities registered on the shelfregistration statement is $35.0 million, the Company’s ability to sellsecurities under the shelf registration statement in any given 12-month periodis subject to certain SEC volume limitations relative to its non-affiliatedmarket cap. If the Company raises additional capital by issuing equitysecurities, its shareholders could experience substantial dilution. The Companywill not be generating any product-based revenues or realizing cash flows fromoperations in the near term, if at all. The Company may not have sufficient cash or other funding available tocomplete its anticipated 

 

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business activitiesduring 2009.  In order to address itsworking capital shortfall the Company intends to raise additional capitalthrough the issuance of equity securities and by licensing its lead compound,cethromycin, to additional commercial partners. The Company believes, based upon current market conditions, additionalcommercial partnership agreements would include a series of milestone payments,including up-front milestones that would fund the Company’s continuedoperations.  Although management believesthe Company could secure additional commercial partnerships, there can be noassurances that such partnerships will be available at terms acceptable to theCompany, if at all.

 

The Company received a notice on April 28, 2009 from the Nasdaq ListingQualifications Panel (the “Panel”) that the Panel has determined to delist theCompany’s common stock from The Nasdaq Stock Market unless the Nasdaq Listingand Hearing Review Council (the “Listing Council”) calls the matter for reviewand stays the delisting.  The Panel’s decision was based on the Company’sinability to evidence compliance with the $2.5 million shareholders’ equityrequirement or the $35.0 million market value of listed securities requirementof the Nasdaq Capital Market.  The Panelindicated that absent a stay by the Listing Council, the trading of the Company’scommon stock on The Nasdaq Stock Market will be suspended at the open oftrading on May 5, 2009.  The Company made a formal request that theListing Council issue such a stay but the request was not granted.  The Company’s common stock began trading onthe OTC Bulletin Board (“OTCBB”) on May 6, 2009.  Trading on the OTCBB will allow the Companyto sell shares of common stock under its SEDA with YA Global. The Company’scommon stock was eligible for trading on the Pink Sheets beginning on May 5,2009.

 

The accompanying financial statements do notinclude any adjustments that might result from the outcome of any uncertaintiesdiscussed in the Company’s Business and Credit Risks summary.

 

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**2.****                ****Private Placements**

 

In September 2008, the Company entered into aSEDA, with YA Global, for the sale of up to $15.0 million of shares of theCompany’s common stock over a two-year commitment period.   Under theterms of the SEDA, the Company may from time to time, in its discretion, sellnewly-issued shares of its common stock to YA Global at a discount to thecurrent market price of 5%. The amount of each advance is limited to the greaterof $400,000 or the average trading volume for the five trading days prior theadvance notice date.  The Company is notobligated to utilize any of the $15.0 million available under the SEDA andthere are no minimum commitments or minimum use penalties.  The Company’s restructured credit facilitywith its lender (see Note 4) also contains a covenant limiting the Company’sutilization of the SEDA to $9.0 million without the bank’s prior consent. Forthe three months ended March 31, 2009, the Company had issued 2,448,309shares to YA Global and received approximately $0.6 million through the usageof the SEDA facility.

 

**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 $39,000 was recorded for the three months ended March 31,2009 and 2008, related to the loan.

 

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

 

The Company leasesfacilities from the BioStart Property Group (“BioStart”), a wholly-ownedsubsidiary of Flavin Ventures, which is owned by the Company’s Chief ExecutiveOfficer.  The operating lease expired in September of2008 and the Company is currently leasing the facilities on a month-to-monthbasis.  Lease obligations amounting to$84,000 relating to the three months ended March 31, 2009 were deferredand are expected to be paid later in the year. Lease payments totaled approximately $79,000 for the three months ended March 31,2008.

 

**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 was duein a lump sum on January 5, 2009. On January 5, 2009, the note was extended to January 5, 2010,all other terms remained unchanged and in effect. Interest expense of $39,000was recorded for the three months ended March 31, 2009, of which $26,000was deferred and is expected to be paid later in the year.  As of March 31, 2009 and December 31,2008, the Company had $2.0 million outstanding under the note.

 

The Company has a $10.0million revolving line of credit with a financial institution with a maturitydate of January 1, 2011, and a fixed interest rate of 8.5%.  The line of credit is secured bysubstantially all of the Company’s assets, except that the collateralspecifically excludes any rights that the Company may have as a result of itslicense agreement with Abbott for cethromycin, and is further secured by 2.5million shares of the Company’s common stock held by ALS Ventures, LLC.  The credit agreement contains a materialadverse change clause, which is subject to the judgment of the lender and, iftriggered, can accelerate the payment of the debt.  The terms also include a covenant limitingthe use of the SEDA to $9.0 million without the bank’s priorconsent.   In October 2008, theCompany issued warrants for the purchase of 65,000 shares of its common stockat an exercise price of $1.00 per share to the lender as a closing fee.  The warrants became exercisable upon issuanceand will expire five years from the date of the grant.  As of March 31, 2009 and December 31,2008, the Company had outstanding under the note $10.0 million and $9.9million, respectively.

 

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**5.****                ****Restructuring**

 

On February 6,2009, the Company committed to a restructuring plan that resulted in thereduction of 30% of the Company’s workforce. In connection with the restructuring plan, the Company will focus itsresources on the cethromycin program.  Inthe first quarter ended March 31, 2009, the Company incurred restructuringcharges of approximately $60,000, primarily associated with personnel-relatedtermination costs.  In addition, theCompany discontinued its laboratory operations and recorded a non-cash chargeof approximately $10,000 to retire laboratory equipment.

 

**6.****                 Commitments**

 

***Vendor Contracts-***The Company administers its cethromycin programlargely under contracts with third parties.  Through March 31, 2009, contractstotaling $47.5 million have been executed related to the cethromycin program,which includes the development, commercialization and pre-launch activitiesassociated with cethromycin as well as anthrax-related studies.  To date the Company has paid $42.1 millionunder these contracts and the remaining balance of $5.4 million is expected tobe paid over the next two years. Subcontractor arrangements in connection with the DTRA award grant areexpected to be approximately $3.1 million over a two-year period which began inAugust 2008.  In addition, to datethe Company has executed $1.2 million in contracts related to the ALS-357program, of which the remaining balance of $888,000 is expected to be paid overthe next three years.  The commencementof clinical trials to study ALS-357 as a topical treatment for patients withmetastatic melanoma may be delayed due to insufficient patient enrollment,which is a function of many factors, including the size of the patientpopulation, the nature of the protocol, the proximity of patients to clinicalsites, the availability of effective treatments for the relevant disease, andthe eligibility criteria for the clinical trial.

 

***GrantPayable-*** In April 2005, the Company was awarded a$500,000 grant from the State of Illinois to fund expansion of its corporateheadquarters in Woodridge, Illinois. Under the terms of the grant, the Company is to create 100 full-timejobs at its corporate headquarters between January 31, 2005 and December 31,2010 (“grant period”).  If the Companydoes not create the specified number of full-time jobs, it is required to repaythe grant proceeds on a pro-rata basis of actual jobs created compared to thetotal defined in the grant.  The entiregrant has been spent or obligated and therefore the $500,000 has beenclassified as a long-term liability as the Company must create and maintainpositions created during the grant period through January 31, 2010.    Through March 31, 2009, five new jobshave been created and retained since the grant was awarded.

 

**7.****                ****Stock Option Grants**

 

The Company did not grant stock options during thethree months ended March 31, 2009. For the three months ended March 31, 2008, the Company grantedstock options to purchase up to 708,800 shares of common stock to certainemployees and directors. The exercise price of the options was the market priceof the Company’s common stock on the date of grant.  The Company recognized compensation expensetotaling approximately $169,000 and $211,000 for the three months ended March 31,2009 and 2008, respectively in accordance with SFAS No. 123 (R), *Share-Based Payment*.

 

**8.****                ****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 periods ended March 31, 2009 and 2008 excludes incremental sharesof 13,356,138 and 12,780,851 respectively, related to outstanding employeestock options and warrants.  These sharesare excluded due to their anti-dilutive effect as a result of the Company’s netlosses for the periods ended March 31, 2009 and 2008.

 

**Recent Accounting Pronouncements**

 

In December 2007,the FASB issued SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements, an amendment of Accounting ResearchBulleting No. 51*(“SFAS 160”). SFAS 160 changes the accountingand reporting for minority interests, which includes retrospective adjustmentsto recharacterize noncontrolling interests and classification as a component ofequity.  SFAS 160 was effective beginningthe first fiscal quarter of 2009.  Theadoption of SFAS 160 did not have a material impact on the Company’s statementsof financial position, results of operations and cash flows.

 

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

** **

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

 

**Overview**

 

We are abiopharmaceutical company focused on the discovery, development andcommercialization of novel drugs in the areas of infectious disease, oncologyand respiratory disease. Using our internal discovery capabilities and ournetwork of pharmaceutical and academic partners, we have assembled a promisingpipeline of clinical and preclinical product candidates. Our most advancedproduct candidate, cethromycin, is a novel once-a-day oral antibiotic thatrecently completed two pivotal Phase III clinical trials in community acquiredpneumonia (“CAP”) and a new drug application (“NDA”) of cethromycin hasrecently been submitted to the Food and Drug Administration (“FDA”).Cethromycin is also being developed as a bio-defense agent for use in thetreatment of anthrax and other potential broad-spectrum medicalcountermeasures.  We also have productcandidates in earlier stages of development for the treatment of indicationsincluding respiratory distress caused by inflammation-related tissue damage andmalignant melanoma.

 

None of ourproduct candidates have been approved by the FDA or any comparable foreignagencies, and we have not generated any significant revenues to date. Ourability to generate revenues in the future will depend on our ability to meetdevelopment or regulatory milestones under any license agreements that triggerpayments to us, to enter into new license agreements for other products orterritories and to receive regulatory approvals for, and successfullycommercialize, our product candidates either directly or through commercialpartners.

 

**Development Update**

 

In February 2009,we received notice from the FDA that the agency’s Anti-infective Drugs AdvisoryCommittee (“AIDAC”) is scheduled to meet on June 2, 2009, and will discussthe NDA for cethromycin oral tablets for the proposed indication of outpatienttreatment of adults with mild-to-moderate community acquired pneumonia (“CAP”).The anticipated target Prescription Drug User Fee Act (“PDUFA”) date of thecethromycin NDA is July 31, 2009.

 

As of March 31,2009, we estimate that our cethromycin development program will require anadditional $30.9 million in expenditures which includes $30.0 million inadditional milestone payments to Abbott and $900,000 of payments related toclinical and manufacturing contracts. The $30.0 million Abbott milestone payment is triggered upon receivingFDA approval for cethromycin.  Under thecurrent contract terms, the $30.0 million payment would be due within 20 businessdays after receipt of regulatory approval.

 

Ifcethromycin is approved for marketing by the FDA, we plan to sell cethromycinusing commercial partners to access the primary care physician market and tobuild and utilize a focused internal sales force that will market directly toearly adopters such as, but not limited to, pulmonary medicine and infectiousdisease physicians.  While we enteredinto a development and commercialization agreement for cethromycin with WyethPharmaceuticals (“Wyeth”), in the Asia Pacific region, excluding Japan,discussions with other potential commercial partners focused on othergeographical markets such as the European Union and the United States areongoing.

 

In September 2008,we entered into a development and commercialization agreement for cethromycinwith Wyeth, in the Asia Pacific region excluding Japan. We will retainexclusive rights to cethromycin in the rest of the world, including NorthAmerica and Europe excluding Japan.  Inaddition to future royalty payments, we would receive milestone and regulatorypayments based on successful achievement of clinical, regulatory and commercialobjectives in specific markets. We will collaborate with Wyeth to developadditional clinical data in the Asia Pacific region to support regulatoryfilings in that region.

 

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In August 2008,we signed a letter of intent with DSM Pharma Chemicals North America (“DSM”), Inc.to proceed with a proposal to purchase raw materials to produce commercialquantities of cethromycin.  Our intent isconditional upon the parties entering into a formal supply agreement which willgovern the terms and conditions including but not limited to the timing ofproduction and the milestone payment schedule. While these conditions are pending, the parties recognize that there arelengthy lead times for the raw materials needed to be used to complete theproduction described in the proposal. Therefore, we authorized DSM to procure the necessary raw materials tobe used to complete the production in anticipation of entering into the formalsupply agreement.  Upon execution of thisagreement, we issued a purchase order to DSM for the necessary raw materials ata hypothetical cost of $4.2 million based on the exchange rates in effect atthat time.  As of March 31, 2009, wehave not purchased any raw materials and anticipate that some raw materialcomponents will be acquired in the second quarter.  The costs of these raw materials are subjectto price increases and changes in the Euro/US Dollar exchange rate. Thehypothetical cost of these raw materials at March 31, 2009 was $4.1million.

 

In August 2008,we announced that the Defense Threat Reduction Agency (“DTRA”) of the U.S.Department of Defense (“DoD”) awarded us a two-year contract worth up to $3.8million to further study cethromycin as a potential broad-spectrum medicalcountermeasure. The contract, part of the agency’s Transformational MedicalTechnologies Initiative (“TMTI”), will fund NDA-enabling studies evaluatingcethromycin’s efficacy in combating Category A and B bioterror agents such as *Fransicella tularensis* (tularemia), *Yersiniapestis* (plague) and *Burkholderia pseudomallei*(melioidosis).  Under the terms of thecontract, $1.8 million of DTRA funds are available over a nine-month baseperiod beginning in August 2008 and the remaining $2.0 million may beawarded over the ensuing 15 months to complete the project.  In March 2009, we received notice fromthe DoD that it has exercised its option to award us $2.0 million under thepreviously announced contract.

 

**Financial Update**

 

Since ourinception, we have incurred net losses each year. Our net loss for the three monthsended March 31, 2009 was $2.3 million. As of March 31, 2009, we had an accumulated deficit of $124.7million. We have funded operations to date primarily from debt financings andcapital contributions from our founder and Chief Executive Officer, proceedsfrom the initial public offering of our common stock, the subsequent sale ofour common stock in three private placements, including our commercialpartnership agreement with Wyeth and borrowings under our bank line of credit. Inaddition, we executed a StandbyEquity Distribution Agreement (“SEDA”) which provides for the sale of up to$15.0 million of our common stock to an accredited investor, YA GlobalInvestments, L.P. (“YA Global”), an affiliate of Yorkville Advisors (seebelow).

 

In April 2009,our shareholders approved an amendment to our articles of incorporation toincrease the number of authorized shares from 65,000,000 to 125,000,000including an increase in the number of authorized shares of common stock from60,000,000 to 120,000,000.  Theavailability of additional shares of common stock for issuance will afford usflexibility in acting upon financing transactions to strengthen our financialposition and/or commercial partnership opportunities that may arise as weadvance our cethromycin commercialization program.

 

In April 2009,we filed a shelf registration statement on Form S-3 with the Securitiesand Exchange Commission (“SEC”) and the shelf registration was subsequentlydeclared effective by the SEC.   Theshelf registration will allow us to raise capital from time to time through thesale of common stock, preferred stock and/or equity warrants.  While the aggregate amount of the securitiesregistered on the shelf registration statement is $35.0 million, our ability tosell securities under the shelf registration statement in any given 12-monthperiod is subject to certain SEC volume limitations relative to ournon-affiliated market cap.

 

In September 2008,we entered into a SEDA with YA Global for the sale of up to $15.0 million of sharesof our common stock over a two-year commitment period.   Under theterms of the SEDA, we may from time to time, in our discretion, sellnewly-issued shares of our common stock to YA Global at a discount to thecurrent market price of 5%. The amount of each advance is limited to thegreater of $400,000 or the average trading volume for the five trading daysprior to the advance notice date.  We are not obligated to utilize any ofthe $15.0 million available under the SEDA and there are no minimum commitmentsor minimum use penalties.  The amendment to our credit facility, discussedbelow, contains a covenant limiting our utilization of the SEDA to $9.0 millionwithout the bank’s prior consent.  Forthe three months ended March 31, 2009, we had issued 2,448,309 shares toYA Global and received approximately $0.6 million through the usage of the SEDAfacility.

 

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We  received a notice on April 28, 2009 from the Nasdaq ListingQualifications Panel (the “Panel”) that the Panel has determined to delist ourcommon stock from The Nasdaq Stock Market unless the Nasdaq Listing and HearingReview Council (the “Listing Council”) calls the matter for review and staysthe delisting.  The Panel’s decision was based on our inability toevidence compliance with the $2.5 million shareholders’ equity requirement orthe $35.0 million market value of listed securities requirement of the NasdaqCapital Market.  The Panel indicated thatabsent a stay by the Listing Council, the trading of our common stock on TheNasdaq Stock Market will be suspended at the open of trading on May 5,2009.  We made a formal request that the Listing Council issue such a staybut the request was not granted.  Ourcommon stock began trading on the OTC Bulletin Board (“OTCBB”) on May 6, 2009.  Trading on the OTCBB will allow us to sellshares of common stock under our SEDA with YA Global. Our common stock waseligible for trading on the Pink Sheets beginning on May 5, 2009.

 

A discussion of ourability to continue as a going concern can be found in Note 1 to theconsolidated financial statements.

 

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**Results of Operations**

 

*Three months ended March 31,2009 compared to three months ended March 31, 2008*

* *

*Revenue.*** We reported revenue of $411,000 for the threemonths ended March 31, 2009 compared to no revenues for the three monthsended March 31, 2008.  Revenue in2009 was derived from a grant awarded by the DTRA of the U.S. Department ofDefense.  The contract award of $3.8million is over a two year period which began in August 2008.

 

*Research and development expense.*  Research and development expense was $0.9million for the three months ended March 31, 2009, approximately one-halfthe amount incurred in the first quarter last year.  There were no cethromycin clinical trial expensesin the quarter compared to $0.5 million in the same period last year.  Expenses related to compilation and FDAreview of cethromycin totaled $0.1 million for the three months ended March 31,2009 compared to $0.5 million for the same period last year.  Manufacturing expenses incurred in relationto process optimization activities of cethromycin were not material for thequarter ended March 31, 2009 compared to $0.2 million in the same periodin the previous year.  In conjunctionwith work performed under the grant awarded by DTRA, we incurred costs of $0.2million in the quarter ended March 31, 2009.

 

*Generaland administrative expense.*** General and administrative expenses declined$0.2 million to $1.5 million for the three months ended March 31, 2009.  This result reflects lower salary and benefitcosts, decreased spending in our investor relations program and costs incurredin the same period of the prior year related to a certain marketing program.  These reductions were partially offset byincreases in legal and other professional services.

 

*Interest income.*  Interest income declined $155,000 to $2,000for the three months ended March 31, 2009, resulting from a decrease ofcash, which was used for the continued development and funding of cethromycin.

 

*Interest expense.* Interestexpense increased $148,000 in the three months ended March 31, 2009 ascompared to the same period last year. In October 2008, we borrowed an additional $6.0 million on our lineof credit for the continued development and funding of cethromycin.

 

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** **

**Liquidityand Capital Resources**

 

We have devotedsubstantially all of our cash resources to research and development and generaland administrative expenses.  To date, wehave not generated any revenues from the sale of products, and we do not expectto generate any such revenues in the near term, if at all.  As a result, we have incurred an accumulateddeficit of $124.7 million as of March 31, 2009 and we expect to incursignificant operating losses for the foreseeable future.  As of March 31, 2009 we had negativeworking capital of $4.2 million.  Cashand cash equivalents were $0.5 million as of March 31, 2009.  Since our inception in 1999 to August 2005,we financed our operations primarily through debt and capital contributionsfrom our founder and controlling stockholder and borrowings under our bank lineof credit.  In August 2005 we completedour initial public offering in which we raised $28.7 million, net ofunderwriters discount and offering costs. Since that time, we have completed three private placements in which weraised $52.8 million, net of underwriters’ discounts and offering costs andraised additional debt financing through our $10.0 million bank line of credit.In addition, weexecuted a SEDA which provides for the sale of up to $15.0 million ofour common stock to an accredited investor, YA Global, an affiliate ofYorkville Advisors (see Note 2 to the consolidated financial statements). Forthe three months ended March 31, 2009, we had issued 2,448,309 shares toYA Global and received approximately $0.6 million through the usage of the SEDAfacility.   Through May 7, 2009 we issuedan additional 2,732,919 shares to YA Global and received approximately $0.9million in cash proceeds.

 

In September 2001,we incurred indebtedness under a $2.0 million promissory note with the ChiefExecutive Officer of the Company, which bears interest at 7.75%.  Principal plus any accrued interest was duein a lump sum on January 5, 2009.   On January 5, 2009, the note was extended to January 5, 2010,all other terms remained unchanged and in effect.

 

We have a $10.0 millionrevolving line of credit with a financial institution with a maturity date of January 1,2011, and a fixed interest rate of 8.5%. The line of credit is secured by substantially all of our assets, exceptthat the collateral specifically excludes any rights that we may have as a resultof our license agreement with Abbott for cethromycin, and is further secured by2.5 million shares of our common stock held by ALS Ventures, LLC.  The credit agreement contains a materialadverse change clause, which is subject to the judgment of the lender and, iftriggered, can accelerate the payment of the debt.  The terms also include a covenant limitingthe use of the SEDA to $9.0 million without the bank’s priorconsent.   In October 2008, weissued warrants for the purchase of 65,000 shares of common stock at anexercise price of $1.00 per share to the lender as a closing fee.  The warrants became exercisable upon issuanceand will expire five years from the date of the grant.  As of March 31, 2009 the line of credithad an outstanding balance of $10.0 million.

 

During the three monthsended March 31, 2009, cash used in operating activities totaled $1.6million.   Net of DTRA grant award funds,approximately $0.6 million was used for the development of cethromycin and $1.0million for general operations.  Cashprovided from financing activities totaled $0.6 million during the threemonths ended March 31, 2009, reflecting proceeds for the sale of 2,448,309shares to YA Global through the SEDA facility.

 

*Contractual Obligations*

* *

As of March 31, 2009, the annual amounts offuture minimum payments under debt obligations, interest, lease obligations andother long term liabilities consisting of executed research, development andlicense and commercialization agreements are as follows:

 
| ** **                                 | ** ** | **Payments Due by December 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2009**                              | ** ** | **2010**   | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Total** | ** ** |
| Notes payable  and bank line of credit     |       | $                                     | —     |       | $          | 2,000,000 |   | $ | 10,000,000 |   | $ | — |   | $ | — |   | $ | 12,000,000 |   |
| Interest                                   |       | 767,852                               |       | 852,026    |       | — |   | — |   | — |   | 1,619,878 |   |
| Cethromycin  clinical & NDA costs |       | 850,931                               |       | —     |       | — |   | — |   | — |   | 850,931 |   |
| Commercialization  costs                   |       | 3,171,013                             |       | 1,346,420  |       | — |   | — |   | — |   | 4,517,433 |   |
| ALS-357 clinical  program                  |       | 256,974                               |       | 417,509    |       | 213,796 |   | — |   | — |   | 888,279 |   |
| DTRA grant  related costs                  |       | 2,132,558                             |       | 792,270    |       | — |   | — |   | — |   | 2,924,828 |   |
| Capital leases                             |       | 6,474                                 |       | 4,350      |       | — |   | — |   | — |   | 10,824 |   |
|                                       |       |                                  |       |       |       |   |   |   |   |   |   |   |   |
| Total                                      |       | $                                     | 7,185,802  |       | $          | 5,412,575 |   | $ | 10,213,796 |   | $ | — |   | $ | — |   | $ | 22,812,173 |   |

 

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The above table does not include the potential $30.0million product based milestone payment under our license agreement with Abbottwhich we will owe Abbott if and when the FDA approves the NDA, which weestimate will occur in 2009.   Under thecurrent contract terms, the $30.0 million payment would be due within 20business days after receipt of regulatory approval.  Thereafter, we would owe Abbott an additional$2.5 million upon reaching $200.0 million in aggregate net sales of cethromycinand $5.0 million upon reaching $400.0 million in aggregate net sales.  The periods in which milestone obligationsbecome payable, if at all, are only estimates due to uncertainties associatedwith the completion or achievement of the milestone.

 

In the first four months of 2009, we executedcontracts totaling $0.4 million related to the regulatory review ofcethromycin.

 

In the third quarter of2008, we signed a letter of intent with DSM to procure raw materials to be usedto produce commercial quantities of cethromycin.  The lead times for acquiring these rawmaterials needed to be used to complete production are lengthy.  As of March 31, 2009, we have notpurchased any raw materials and anticipate that some raw material componentswill be acquired in the second quarter. As of March 31, 2009, the total hypothetical cost of acquiring allraw materials is $4.1 million (reflected in the table above).  Payments related to these raw materials areexpected to be made over the next two years.

 

We executed a contractduring the second quarter of 2008 to initiate a Phase I/II clinical trial ofour anti-melanoma compound ALS-357.  Thistrial will assess the safety, tolerability, and preliminary efficacy of ALS-357when administered topically to patients with cutaneous metastaticmelanoma.  The contract totalsapproximately $0.9 million which represents the upper limit of cost if themaximum number of patients is enrolled. To the extent fewer patients are required as determined by the protocol;expenses related to the trial could be lower. Enrollment will be based upon a number of factors which are difficult toforecast and therefore we cannot reasonably estimate the true cost of the trialbeyond what is defined as the maximum limit per the contract.

 

Our commitments under operating leases consist ofpayments made to a related party relating to our facilities lease in Woodridge,Illinois.  The operating lease expired inSeptember of 2008 and we are leasing the facilities on a month-to-monthbasis.  Lease obligations amounting to$84,000 relating to the three months ended March 31, 2009 were deferred and areexpected to be paid later in the year.

 

In conjunction with thegrant awarded by the DTRA, we entered into subcontractor arrangements tofurther study cethromycin as a potential broad-spectrum medicalcountermeasure.  The subcontractors’costs are expected to be approximately $3.1 million over a two-year periodwhich began in August 2008.

 

We will not be generatingany product-based revenues or realizing cash flows from operations in the nearterm, if at all.  In order to continueour business activities during 2009, we intend to raise additional capitalthrough the issuance of equity securities and by licensing our lead compound,cethromycin, to commercial partners.  Webelieve, based upon current market conditions, additional commercialpartnership agreements would include a series of milestone payments, includingup-front milestones that would fund our continued operations.  Although management believes we could secureadditional commercial partnerships, there can be no assurances that suchpartnerships will be available at terms acceptable to us, if at all.   We have executed a SEDA which providesfor the sale of up to $15.0 million of our common stock to an accreditedinvestor, YA Global, subject to certain terms and conditions (see Note 2 to theconsolidated financial statements).  In April 2009,we filed a shelf registration statement on Form S-3 with the Securitiesand Exchange Commission (“SEC”) and the shelf registration was subsequently declaredeffective by the SEC.   The shelfregistration will allow us to raise capital from time to time through the saleof common stock, preferred stock and/or equity warrants.  While the aggregate amount of the securitiesregistered on the shelf registration statement is $35.0 million, our ability tosell securities under the shelf registration statement in any given 12-monthperiod is subject to certain SEC volume limitations relative to ournon-affiliated market cap.  If we raiseadditional capital by issuing equity securities, our shareholders couldexperience substantial dilution.  As aresult of these uncertainties, there is significant doubt about our ability tocontinue as a going concern.

 

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;

 

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

 

·                                          ourability to establish and maintain additional collaborative arrangements;

 

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

 

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

 

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

 

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

 

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**CriticalAccounting Policies and Estimates**

 

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

 

*Researchand Development*

* *

Research anddevelopment expenses consist of internal research costs and fees paid forcontract research in conjunction with the research and development of ourproprietary product portfolio.  All suchcosts are expensed as incurred.  Clinicaltrial costs incurred by third parties are expensed as the contracted work isperformed.  We estimate both the totalcost and time period of the trials and the percent completed as of thataccounting date.  We believe that theestimates made as of March 31, 2009 are reflective of the actual expensesincurred as of that date.

 

*Stock-basedCompensation*

* *

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

 

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** **

**Forward-LookingStatements and Risk Factors**

 

This Quarterly Report on Form 10-Q,including Management’s Discussion and Analysis of Financial Condition andResults of Operations, contains forward-looking statements within the meaningof the Private Securities Litigation Reform Act of 1995.   Forward-looking statements often areproceeded by words such as “believes,” “expects,” “may,” “anticipates,” “plans,”“intends,” “assumes,” “will” or similar expressions.  Forward-lookingstatements reflect management’s current expectations, as of the date of thisreport, and involve certain risks and uncertainties.   Our actual results could differ materially fromthose anticipated in these forward-looking statements as a result of variousfactors.   Some of the factors thatcould cause future results to materially differ from the recent results orthose projected in forward-looking statements include the “Risk Factors”described in our Annual Report on Form 10-K.

 

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

** **

Our exposure to market risk is currently confined toour cash, cash equivalents, line of credit and certain contract manufacturingagreements. 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.

 

Thefluctuation in the exchange rate between the U.S. Dollar and the Euro couldaffect amounts due under certain contract manufacturing agreements.  A hypothetical increase in the exchange ratebetween the Euro and the U.S. Dollar as of March 31, 2009 of ten percentwould increase contract manufacturing costs by approximately $135,000.

 

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

** **

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

 

**Changes in Internal Control**

 

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

 

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** **

**PART II — OTHERINFORMATION**

** **

**Item1. Legal Proceedings**

** **

On March 27, 2009,Advanced Life Sciences Holdings, Inc. (the “Company”) provided AbbottLaboratories with written notice of a dispute alleging that Abbott breached itsobligations under the License Agreement for cethromycin entered into betweenthe Company and Abbott on December 13, 2004 (the “ License Agreement“).  The Company and Abbott had been involved in business discussions toaddress this dispute but have been unable to reach a satisfactory resolution.The notice indicates that the Company’s purpose for raising the dispute is torecover financial damages for the value that was lost as a result of Abbott’sconduct in the matters outlined below.

 

The Company’s notice ofdispute alleged that Abbott breached the License Agreement by its failure toprosecute and maintain the patent application for cethromycin in India and itsfailure to disclose to the Company that Abbott was engaged in litigationrelevant to cethromycin at the time that the License Agreement was negotiatedand executed.  In the notice, the Company also alleged that, followingnegotiations between Abbott and the Company to address Abbott’s breach, Abbottrepresented to the Company that it had approved an amendment to the LicenseAgreement that would alter the Company’s milestone payments to Abbott due uponthe submission and approval of a New Drug Application (“ NDA “) forcethromycin to the US Food and Drug Administration (“ FDA “).  TheCompany further alleged in the notice that it reasonably relied upon Abbott’srepresentation to its detriment when it submitted its NDA to the FDA, and thatthe Company’s financial condition was significantly impacted when Abbottretracted its approval following the Company’s NDA submission.

 

Per the AlternativeDispute Resolution provisions of the License Agreement, the Company and Abbotthave twenty-eight (28) calendar days after such notice is received to resolvethe dispute through good faith business negotiations after which time anAlternative Dispute Resolution proceeding may be initiated.  The Companyindicated in its letter to Abbott that, in the event the matter is not resolvedwithin the time period stated above, the Company will pursue AlternativeDispute Resolution under the terms of the Agreement.  The matter was notresolved within the time period stated above and the Company has providedAbbott with notice that it will pursue Alternative Dispute Resolution.  The Alternative Dispute Resolution provisionsof the License Agreement provide for an expedited arbitration process, whichthe Company currently anticipates should be resolved within six (6) monthsfrom the date of commencement.

 

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

** **

Our business, financialcondition, operating results and cash flows may be impacted by a number offactors, including those set forth in Item 1A of Part I of our AnnualReport on Form 10-K for the fiscal year ended December 31, 2008.  Set forth below are material changes in ourrisk factors since the 2008 Form 10-K. The information presented below updates, and should be read inconjunction with, the risk factors and other information disclosed in our 2008 Form 10-Kand this Quarterly Report on Form 10-Q.

 

***Due to Nasdaq’s determination todelist our common stock, you may have difficulty trading our securities and oursecurities may trade at a lower market price than they otherwise would.***

 

Since being delisted fromNasdaq, trading in our common stock is conducted on the OTC Bulletin Board and inthe over-the-counter market in the so-called “pink sheets.” Because of this,you may not be able to sell as many securities as you desire, you mayexperience delays in the execution of your transactions and our securities maytrade at a lower market price than they otherwise would.  In addition, our securities could becomesubject to the SEC’s “penny stock rules.” These rules would impose additionalrequirements on broker-dealers who effect trades in our securities, other thantrades with their established customers and accredited investors. Consequently,the delisting of our securities and the applicability of the penny stock rulesmay adversely affect the ability of broker-dealers to sell our securities,which may adversely affect your ability to resell our securities. The delistingof our securities from Nasdaq could also have other negative results, includingthe potential loss of confidence by employees and others, the loss of institutionalinvestor interest and fewer business development and commercial partnershipopportunities.

 

**Item 2.  *Unregistered Sales ofEquity Securities and Use of Proceeds***

 

In September 2008, the Company entered into a SEDAwith YA Global for the sale of up to $15.0 million of shares of the Company’scommon stock over a two-year commitment period. Under the terms of the SEDA, the Company may from time to time, in itsdiscretion, sell newly-issued shares of its common stock to YA Global at adiscount to the current market price of 5%. As previously disclosed in its 2008 Annual Report on Form 10-K and Form8-K filed on April 10, 2009, the Company issued an aggregate of 3,099,633shares to YA Global through April 6, 2009 and received an aggregate of $0.7million in proceeds through the usage of the SEDA facility.

 

Between April 7, 2009 and May 7, 2009, the Companyissued an additional 2,081,595 shares to YA Global through the SEDA.  As a result of these issuances, the Companyreceived an additional $0.8 million in net proceeds that were used for workingcapital and other general corporate purposes. The shares were issued in reliance on the exemption from registrationcontained in Section 4(2) of the Securities Act of 1933.

 

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** **

**Item 6. *Exhibits***

** **

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

 
| **Number** | ** ** | **Description** |
|------------|------------|-----------------|
|       |       |            |   |
| 3.         | 1          |            | Second Amended and Restated Certificate of  Incorporation of Advanced Life Sciences Holdings, Inc. (as filed in our  Registration Statement on Form S-3 as exhibit 4.1 on April 8, 2009) |
|       |       |            |   |
| 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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 *  Filedherewith.

 

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** **

**SIGNATURES**

** **

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

 

 
|                          |     | Advanced Life Sciences Holdings, Inc. |
|--------------------------|----------|--------------------------------------------|
|                     |     |                                       |
|                     |     | By:                                        | /s/ Michael T.  Flavin, Ph.D. |
|                     |     |                                       |   |
|                     |     |                                       | Michael T.  Flavin, Ph.D. |
| * *                 | * * | * *                                   | *Chairman  of the Board* |
| * *                 | * * | * *                                   | *and  Chief Executive Officer* |
|                     |     |                                       |   |
|                     |     | By:                                        | /s/ John L.  Flavin |
|                     |     |                                       |   |
|                     |     |                                       | John L. Flavin |
| * *                 | * * | * *                                   | *President  and* |
| * *                 | * * | * *                                   | *Chief  Financial Officer* |
| * *                 | * * | * *                                   |
| * *                 | * * | * *                                   |
| Dated: May 12, 2009 | * * | * *                                   |

 

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** **

**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description** |
|------------|------------|-----------------|
|       |       |            |   |
| 3.         | 1          |            | Second Amended and Restated Certificate of  Incorporation of Advanced Life Sciences Holdings, Inc. (as filed in our  Registration Statement on Form S-3 as exhibit 4.1 on April 8, 2009) |
|       |       |            |   |
| 31.        | 1*         |            | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |       |            |   |
| 31.        | 2*         |            | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |       |            |   |
| 32.        | 1*         |            | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|       |       |            |   |
| 32.        | 2*         |            | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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*  Filed herewith.

 

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