Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

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| **x**                                                        | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|
|                                                         |       |                                                                                                       |
| **For the Quarterly Period Ended: September 30,  2009** |
|                                                         |       |                                                                                                       |
| **o**                                                        | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |

 

**CommissionFile No: 000-51436**

 

**ADVANCED LIFE SCIENCES HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

** **

**1440 DaveyRoadWoodridge, IL 60517**

(Address, including zip code of registrantsprincipal executive offices)

 

Registrant’stelephone number:**(630) 739-6744**

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.  Yes  x  No  o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyinteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes  o  No  o

 

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

 

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

 

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

 

As of November 5, 2009, the registrant had78,115,944 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

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

**Form 10-Q**

 
| **PART I —  FINANCIAL INFORMATION (UNAUDITED)** |
|----------------------------------------------------------------|
| Item 1.                                                   | Consolidated Financial Statements: |   |   |
|                                                           | Consolidated  Balance Sheets as of September 30, 2009 and December 31, 2008 |   |   |
|                                                           | Consolidated Statements of Operations for the three  and nine months ended September 30, 2009 and 2008 and for the period  from inception (January 1, 1999) through September 30, 2009 |   |   |
|                                                           | Consolidated Statements of Total Equity (Deficit) for  period from inception (January 1, 1999) through September 30, 2009 |   |   |
|                                                           | Consolidated Statements of Cash Flows for the nine  months ended September 30, 2009 and 2008 and for the period from  inception (January 1, 1999) through September 30, 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 6.                                                   | Exhibits |   |   |
| Signatures                                                     |   |   |
| Exhibit Index                                             |   |   |

 

1

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Tableof Contents

 

**PART I —FINANCIAL INFORMATION**

 

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

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **2009**               | ** ** | **2008**              | ** ** |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| **ASSETS**                                                                                                                                                                                           | ** ** | ** **             | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                           | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                      |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                            |       | $                      | 4,161,612  |                  | $          | 1,527,108 |   |
| Grant receivable                                                                                                                                                                                     |       | 334,885                |       | 63,444                |       |
| Prepaid insurance                                                                                                                                                                                    |       | 100,371                |       | 227,313               |       |
| Prepaid clinical trial expenses                                                                                                                                                                      |       | —                 |       | —                |       |
| Other prepaid expenses and deposits                                                                                                                                                                  |       | 114,045                |       | 143,808               |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total current assets                                                                                                                                                                                 |       | 4,710,913              |       | 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                                                                                                                                                                               |       | 177,253                |       | 505,804               |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total property and equipment–at cost                                                                                                                                                            |       | 680,111                |       | 1,167,848             |       |
| Less accumulated depreciation                                                                                                                                                                        |       | (612,042               | )          | (760,329              | )          |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| Property and equipment–net                                                                                                                                                                      |       | 68,069                 |       | 407,519               |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| OTHER ASSETS:                                                                                                                                                                                        |       |                   |       |                  |       |
| Commercial launch materials                                                                                                                                                                          |       | 2,760,936              |       | —                |       |
| Deferred offering and financing costs                                                                                                                                                                |       | 16,957                 |       | 450,861               |       |
| Other long-term assets                                                                                                                                                                               |       | 25,000                 |       | —                |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total other assets                                                                                                                                                                                   |       | 2,802,893              |       | 450,861               |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                         |       | $                      | 7,581,875  |                  | $          | 2,820,053 |   |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                                                                                                                             |       |                   |       |                  |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                                 |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                     |       | $                      | 1,721,745  |                  | $          | 1,379,941 |   |
| Accrued clinical trial and NDA expenses                                                                                                                                                              |       | 80,053                 |       | 458,260               |       |
| Accrued payroll                                                                                                                                                                                      |       | 873,039                |       | 506,537               |       |
| Other accrued expenses                                                                                                                                                                               |       | 685,470                |       | 352,466               |       |
| Accrued interest payable                                                                                                                                                                             |       | 97,771                 |       | 72,572                |       |
| Short-term lease payable                                                                                                                                                                             |       | 6,595                  |       | 8,468                 |       |
| Short-term notes payable - related party                                                                                                                                                             |       | 2,000,000              |       | —                |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total current liabilities                                                                                                                                                                            |       | 5,464,673              |       | 2,778,244             |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| Long-term lease payable                                                                                                                                                                              |       | —                 |       | 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                                                                                                                                                                                    |       | 15,964,673             |       | 15,197,594            |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                        |       |                   |       |                  |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| STOCKHOLDERS’ EQUITY (DEFICIT):                                                                                                                                                                 |       |                   |       |                  |       |
| Common stock, $0.01 par value–120,000,000 shares  authorized; 75,969,683 issued and outstanding at September 30, 2009;  40,810,932 shares issued and outstanding at December 31, 2008 |       | 759,697                |       | 408,109               |       |
| Additional paid-in capital                                                                                                                                                                           |       | 120,955,240            |       | 109,601,807           |       |
| Deficit accumulated during the development stage                                                                                                                                                     |       | (130,097,735           | )          | (122,387,457          | )          |
| Noncontrolling interest in subsidiary                                                                                                                                                                |       | —                 |       | —                |       |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total equity (deficit)                                                                                                                                                                               |       | (8,382,798             | )          | (12,377,541           | )          |
|                                                                                                                                                                                                 |       |                   |       |                  |       |
| TOTAL LIABILITIES AND EQUITY (DEFICIT)                                                                                                                                                               |       | $                      | 7,581,875  |                  | $          | 2,820,053 |   |

 

Seenotes to unaudited consolidated financial statements.

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** **  | ** ** | ** **  | ** ** | **Period  From**             | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|-------------|------------|-------------|------------|------------------------------|------------|
| ** **                                                                  | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** **  | ** ** | ** **  | ** ** | **Inception**                | ** ** |
| ** **                                                                  | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** **  | ** ** | ** **  | ** ** | **(January 1,  1999)**  | ** ** |
| ** **                                                                  | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009**    | ** ** | **2008**    | ** ** | **September 30,  2009** | ** ** |
| Revenue:                                                                    |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Management  fees                                                            |       | $                                          | —     |                                      | $          | —      |       | $           | —     |                         | $          | — |   | $ | 1,161,180 |   |
| Grants                                                                      |       | 616,940                                    |       | 32,006                                    |       | 1,735,239   |       | 32,006      |       | 3,011,640                    |       |
| Royalty–related  party                                                 |       | —                                     |       | —                                    |       | —      |       | —      |       | 45,238                       |       |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Total  revenue                                                              |       | 616,940                                    |       | 32,006                                    |       | 1,735,239   |       | 32,006      |       | 4,218,058                    |       |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Expenses:                                                                   |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Research  and development                                                   |       | 916,241                                    |       | 11,240,032                                |       | 3,160,061   |       | 14,798,173  |       | 93,740,462                   |       |
| Contracted  research and development–related party                     |       | —                                     |       | —                                    |       | —      |       | —      |       | 7,980,299                    |       |
| Selling,  general and administrative                                        |       | 2,201,684                                  |       | 1,828,607                                 |       | 5,401,142   |       | 5,237,579   |       | 32,449,779                   |       |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Total  expenses                                                             |       | 3,117,925                                  |       | 13,068,639                                |       | 8,561,203   |       | 20,035,752  |       | 134,170,540                  |       |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Loss  from operations                                                       |       | (2,500,985                                 | )          | (13,036,633                               | )          | (6,825,964  | )          | (20,003,746 | )          | (129,952,482                 | )          |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Net  other (income) expense:                                                |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Interest  income                                                            |       | (5,865                                     | )          | (51,244                                   | )          | (9,336      | )          | (284,330    | )          | (2,958,198                   | )          |
| Interest  expense                                                           |       | 263,272                                    |       | 103,277                                   |       | 774,201     |       | 310,296     |       | 3,923,054                    |       |
| Other  (income) expense, net                                                |       | 99,854                                     |       | —                                    |       | 119,449     |       | —      |       | 119,449                      |       |
| Gain  on sale of interest in Sarawak Medichem Pharmaceuticals joint venture |       | —                                     |       | —                                    |       | —      |       | —      |       | (939,052                     | )          |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Net  other (income) expense                                                 |       | 357,261                                    |       | 52,033                                    |       | 884,314     |       | 25,966      |       | 145,253                      |       |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Net  loss                                                                   |       | (2,858,246                                 | )          | (13,088,666                               | )          | (7,710,278  | )          | (20,029,712 | )          | (130,097,735                 | )          |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Less  net loss attributable to the noncontrolling interest in subsidiary    |       | —                                     |       | —                                    |       | —      |       | —      |       | —                       |       |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Net  loss attributable to Advanced Life Sciences Holdings, Inc.        |       | (2,858,246                                 | )          | (13,088,666                               | )          | (7,710,278  | )          | (20,029,712 | )          | (130,097,735                 | )          |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Less  accumulated preferred stock dividends of subsidiary for the period    |       | 43,750                                     |       | 43,750                                    |       | 131,250     |       | 131,250     |       | 1,801,042                    |       |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Net  loss available to common shareholders                                  |       | $                                          | (2,901,996 | )                                         | $          | (13,132,416 | )          | $           | (7,841,528 | )                            | $          | (20,160,962 | ) | $ | (131,898,777 | ) |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Net  loss per share available to common shareholders - basic and diluted    |       | $                                          | (0.05      | )                                         | $          | (0.34       | )          | $           | (0.15      | )                            | $          | (0.52 | ) |   |   |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
|                                                                        |       |                                       |       |                                      |       |        |       |        |       |                         |       |
| Weighted  average shares outstanding - basic and diluted                    |       | 62,715,539                                 |       | 38,568,464                                |       | 50,601,036  |       | 38,524,972  |       |                         |       |

 

Seenotes to unaudited consolidated financial statements.

 

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

**(ADevelopment Stage Company)**

 

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

**(Unaudited)**

 
| ** **                                                                                     | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**     | ** ** | ** **         | ** **   | ** **   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|--------------------|--------------|--------------|------------|
| ** **                                                                                     | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated** | ** ** | ** **         | ** **   | ** **   | ** ** |
| ** **                                                                                     | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | **During the**  | ** ** | **Noncontrolling** | ** **   | ** **   | ** ** |
| ** **                                                                                     | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | **Interest**    | ** ** | ** **         | ** **   |
| ** **                                                                                     | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**       | ** ** | **in Subsidiary**  | ** **   | **Total**    | ** ** |
|                                                                                           |       |             |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE–January 1,  1999 (inception)                                                 |       | —           |       | $           | —     |            | $          | —          |       | $                  | —       |         | $          | — |   | $ | — |   |
|                                                                                           |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Issuance  of stock (at inception)                                                              |       | 1,588,000        |       | 250,000     |       | —          |       | —          |       | —             |         | 250,000      |       |
| Issuance  of common stock, net of offering costs (August 2005)                            |       | 6,721,814        |       | 67,218      |       | 29,210,558      |       | —          |       | —             |         | 29,277,776   |       |
| Issuance  of common stock, net of offering costs (March 2006)                             |       | 10,233,464       |       | 102,335     |       | 33,266,653      |       | —          |       | —             |         | 33,368,988   |       |
| Issuance  of common stock, net of offering costs (December 2007)                          |       | 10,191,083       |       | 101,911     |       | 17,700,186      |       | —          |       | —             |         | 17,802,097   |       |
| Issuance  of common stock, net of offering costs (September 2008)                         |       | 1,888,606        |       | 18,886      |       | 1,634,193       |       | —          |       | —             |         | 1,653,079    |       |
|                                                                                           |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Exchange  of shares under recapitalization (December 2004)                                |       | (1,629,685       | )          | (256,563    | )          | —          |       | —          |       | —             |         | (256,563     | )          |
| Issuance  of shares under recapitalization (December 2004)                                |       | 9,482,015        |       | 94,820      |       | 161,743         |       | —          |       | —             |         | 256,563      |       |
| Capital  contributions (December 2004)                                                    |       | —           |       | —      |       | 12,711,330      |       | —          |       | —             |         | 12,711,330   |       |
| Issuance  of 14,887 warrants (December 2004)                                              |       | —           |       | —      |       | 11,898          |       | —          |       | —             |         | 11,898       |       |
| Issuance  of common stock in exchange for licenses (December 2004)                        |       | 1,122,569        |       | 11,226      |       | 8,988,774       |       | —          |       | —             |         | 9,000,000    |       |
| Issuance  of common stock in exchange for reduction of milestones payable  (August 2005)  |       | 600,000          |       | 6,000       |       | 3,000,000       |       | —          |       | —             |         | 3,006,000    |       |
| Modification  of 14,887 warrants (August 2005)                                            |       | —           |       | —      |       | 18,925          |       | —          |       | —             |         | 18,925       |       |
| Issuance  of common stock as payment for commitment fees (September 2008)                 |       | 393,339          |       | 3,933       |       | 296,067         |       | —          |       | —             |         | 300,000      |       |
| Issuance  of 65,000 warrants (October 2008)                                               |       | —           |       | —      |       | 7,445           |       | —          |       | —             |         | 7,445        |       |
|                                                                                           |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Issuance  of 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 standby equity distribution agreements, net of offering  costs |       | 35,154,293       |       | 351,543     |       | 10,816,491      |       | —          |       | —             |         | 11,168,034   |       |
| Issuance  of stock related to option exercises                                                 |       | 4,458            |       | 45          |       | 703             |       | —          |       | —             |         | 748          |       |
| Compensation  expense related to stock options                                                 |       | —           |       | —      |       | 536,239         |       | —          |       | —             |         | 536,239      |       |
|                                                                                           |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Net  loss                                                                                      |       | —           |       | —      |       | —          |       | (7,710,278      | )          | —             |         | (7,710,278   | )          |
|                                                                                           |       |             |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE–September 30,  2009                                                          |       | 75,969,683       |       | $           | 759,697    |            | $          | 120,955,240     |       | $                  | (130,097,735 | )            | $          | — |   | $ | (8,382,798 | ) |

 

Seenotes to unaudited consolidated financial statements.

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **                               | ** ** | ** **  | ** ** | **Inception**               | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | ** **                               | ** ** | ** **  | ** ** | **(January 1, 1999)**  | ** ** |
| ** **                                                                         | ** ** | **Nine months ended September 30,** | ** ** | **Through** | ** ** |
| ** **                                                                         | ** ** | **2009**                                 | ** ** | **2008**    | ** ** | **September 30, 2009** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                     |       |        |       |                        |       |
| Net loss                                                                           |       | $                                        | (7,710,278 | )           | $          | (20,029,712                 | )          | $ | (130,097,735 | ) |
| Adjustments to reconcile net loss to net cash flows  used in operating activities: |       |                                     |       |        |       |                        |       |
| Depreciation and amortization                                                      |       | 94,792                                   |       | 175,219     |       | 936,362                     |       |
| Non-cash interest expense                                                          |       | 10,474                                   |       | 3,750       |       | 119,347                     |       |
| Stock compensation expense                                                         |       | 536,239                                  |       | 646,016     |       | 3,099,260                   |       |
| 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                                                                   |       | 244,659                                  |       | —      |       | 257,988                     |       |
| Changes in operating assets and liabilities:                                       |       |                                     |       |        |       |                        |       |
| Clinical supplies                                                                  |       | —                                   |       | —      |       | 533,333                     |       |
| Accounts receivable                                                                |       | (271,441                                 | )          | (32,006     | )          | (334,885                    | )          |
| Prepaid expenses                                                                   |       | 156,705                                  |       | 776,783     |       | (222,964                    | )          |
| Other assets                                                                       |       | (2,785,934                               | )          | —      |       | (2,777,386                  | )          |
| Accounts payable                                                                   |       | 500,511                                  |       | (2,412,611  | )          | 1,721,745                   |       |
| Accrued expenses                                                                   |       | 346,300                                  |       | (964,451    | )          | 1,638,563                   |       |
| Accrued milestone payable                                                          |       | —                                   |       | 10,000,000  |       | —                      |       |
| Licenses payable                                                                   |       | —                                   |       | —      |       | (11,000,000                 | )          |
| Accrued interest on debt                                                           |       | 25,199                                   |       | (2,365      | )          | 675,834                     |       |
|                                                                               |       |                                     |       |        |       |                        |       |
| Net cash flows from operating activities                                           |       | (8,852,774                               | )          | (11,839,377 | )          | (111,916,923                | )          |
|                                                                               |       |                                     |       |        |       |                        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                     |       |        |       |                        |       |
| Purchase of property and equipment                                                 |       | (5,466                                   | )          | (346,687    | )          | (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                                   | )          | (346,687    | )          | (159,115                    | )          |
|                                                                               |       |                                     |       |        |       |                        |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                     |       |        |       |                        |       |
| Proceeds from issuance of common stock and capital  contributions                  |       | 11,449,259                               |       | 1,664,713   |       | 100,822,549                 |       |
| Proceeds from issuance of note payable and line of  credit                         |       | 85,000                                   |       | —      |       | 15,103,691                  |       |
| Proceeds from grants                                                               |       | —                                   |       | —      |       | 500,000                     |       |
| Proceeds from stock options exercised                                              |       | 747                                      |       | 3,297       |       | 40,104                      |       |
| Payments of deferred offering and financing fees                                   |       | (36,039                                  | )          | (35,000     | )          | (71,039                     | )          |
| Payments on capital leases                                                         |       | (6,223                                   | )          | (5,340      | )          | (157,655                    | )          |
|                                                                               |       |                                     |       |        |       |                        |       |
| Net cash flows from financing activities                                           |       | 11,492,744                               |       | 1,627,670   |       | 116,237,650                 |       |
|                                                                               |       |                                     |       |        |       |                        |       |
| NET (DECREASE) INCREASE IN CASH                                                    |       | 2,634,504                                |       | (10,558,394 | )          | 4,161,612                   |       |
|                                                                               |       |                                     |       |        |       |                        |       |
| CASH–Beginning of period                                                      |       | 1,527,108                                |       | 18,324,991  |       | —                      |       |
|                                                                               |       |                                     |       |        |       |                        |       |
| CASH–End of period                                                            |       | $                                        | 4,161,612  |        | $          | 7,766,597                   |       | $ | 4,161,612 |   |
|                                                                               |       |                                     |       |        |       |                        |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  |       |                                     |       |        |       |                        |       |
| Cash paid during the period for interest                                           |       | $                                        | 661,116    |        | $          | 318,910                     |       | $ | 3,051,757 |   |
|                                                                               |       |                                     |       |        |       |                        |       |
| SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS                                    |       |                                     |       |        |       |                        |       |
| Noncash investment activity:                                                       |       |                                     |       |        |       |                        |       |
| Purchase of property and equipment under capital  leases                           |       | —                                   |       | —      |       | 164,249                     |       |
| Capital expenses included in accounts payable                                      |       | —                                   |       | 6,494       |       | —                      |       |
| Noncash financing activity:                                                        |       |                                     |       |        |       |                        |       |
| Issuance of common shares for licenses                                             |       | —                                   |       | —      |       | 9,000,000                   |       |
| Issuance of common shares for reduction of  milestone payment                      |       | —                                   |       | —      |       | 3,000,000                   |       |
| Unpaid costs associated with the issuance of common  stock                         |       | —                                   |       | 34,175      |       | —                      |       |
| Debt discount                                                                      |       | —                                   |       | —      |       | 30,823                      |       |
| Deferred offering and financing costs                                              |       | —                                   |       | 330,000     |       | 337,445                     |       |

 

Seenotes to unaudited consolidated financial statements.

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2009**

**(UNAUDITED)**

 

**1.      Summaryof Significant Accounting Policies**

 

***Nature ofBusiness-******Advanced***LifeSciences Holdings, Inc. and its subsidiary Advanced Life Sciences, Inc.(together, the “Company”) conduct new drug research and development in thefields of infectious disease, oncology and respiratory disease.  Since inception, the Company has devotedsubstantially all of its efforts to activities such as financial planning,capital raising and product development, and has not derived significantrevenues from its primary business activity. Accordingly, the Company is in the development stage, as defined by theGenerally Accepted Accounting Principles (“GAAP”) for Development StageEnterprises.

 

***Basis of Presentation-***Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared in accordance with accounting principles generally accepted inthe United States of America and with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  However, in the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,unless otherwise noted herein, necessary to present fairly the results ofoperations, financial position and cash flows have been made.  Therefore, these consolidated financialstatements should be read in conjunction with the Company’s most recent auditedfinancial statements for the year ended December 31, 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 consolidatedfinancial statements have been prepared on a going concern basis, whichcontemplates continuity of operations and the realization of assets andliquidation of liabilities in the ordinary course of business.  However, as a result of the Company’scontinued losses and current cash and financing position, such realization ofassets or liquidation of liabilities without substantial adjustments isuncertain.  Given this uncertainty, thereis substantial doubt as to the Company’s ability to continue as a goingconcern.

 

***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.

 

***FairValue of Financial Instruments-*** The carrying values of certain of the Company’sfinancial instruments, including cash equivalents and accounts payableapproximates fair value due to their short maturities.  The fair values of the Company’s long-termobligations (see Note 4) are based on assumptions concerning the amount andtiming of estimated future cash flows and assumed discount rates reflectingvarying degrees of risk.  The carryingvalues of the Company’s long-term obligations approximate their fair values.

 

***Commercial Launch Materials-***The Companymay scale-up and make commercial quantities of its product candidates prior tothe date when such products will receive final U.S. Food and DrugAdministration (“FDA”) approval.  Thescale-up and production of commercial launch materials involves the risk thatsuch products may not be approved for marketing by the FDA on a timely basis,if at all.  This risk notwithstanding,the Company plans to continue to scale-up and build commercial launch materialsof certain products that have not yet received final governmental approval whenthe Company believes that such action is appropriate in relation to thecommercial value of the product launch opportunity.   The cost of these commercial launchmaterials are capitalized as a non-current asset until the Company receives FDAapproval, at which time the materials would be classified as inventory.

 

***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.

 

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The Company has incurredlosses since its incorporation in January 1999 and has funded itsoperations to date primarily from debt financings and capital contributionsfrom its founder and Chief Executive Officer, proceeds from the initial publicoffering of its common stock, the subsequent sale of its common stock in threeprivate placements, including its commercial partnership agreement with WyethPharmaceuticals (“Wyeth”), and borrowings under its bank line of credit.  In addition, the Company hasexecuted StandbyEquity Distribution Agreements which allow the Company to sell its common stockto an accredited investor pursuant to the terms of the agreements (see Note2).  In April 2009, the Companyfiled a shelf registration statement on Form S-3 with the SEC andsubsequently the shelf registration was declared effective by the SEC.  The shelf registration will allow the Companyto raise capital from time to time through the sale of common stock, preferredstock and/or equity warrants.  While theaggregate amount of the securities registered on the shelf registrationstatement is $35.0 million, the Company’s ability to sell securities under theshelf registration statement in any given 12-month period is subject to certainSEC volume limitations relative to its non-affiliated market cap. If theCompany raises additional capital by issuing equity securities, itsshareholders could experience substantial dilution.

 

The Company will not begenerating any product-based revenues or realizing cash flows from operationsin the near term, if at all.  The Companybelieves it will have cash and cash equivalents sufficient to fund its existingand anticipated development commitments, indebtedness and general operatingexpenses through the first quarter of 2010. The Company may not have sufficient cash or other funding available tocomplete its anticipated business activities for the remainder of 2010.  In order to address its working capitalshortfall the Company intends to raise additional capital through the issuanceof equity securities and by licensing its lead compound, cethromycin, toadditional commercial partners.  TheCompany believes, based upon current market conditions, additional commercialpartnership agreements would include a series of milestone payments, includingup-front milestones that would fund the Company’s continued operations.  Although management believes the Companycould secure additional commercial partnerships, there can be no assurancesthat such partnerships will be available at terms acceptable to the Company, ifat all.

 

The Company received a noticeon April 28,2009 from the Nasdaq Listing Qualifications Panel (the “Panel”) that the Panelhas determined to delist the Company’s common stock from The Nasdaq CapitalMarket.  The Panel’s decision was based on the Company’s 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 Company’s commonstock on The Nasdaq Capital Market was suspended at the open of trading on May 5,2009.   The Company’s common stockbegan trading on the OTC Bulletin Board (“OTCBB”) on May 6, 2009.  Trading on the OTCBB still allows the Companyto sell shares of common stock under its SEDA facility (see Note 2). On August 20,2009, the Nasdaq Stock Market filed a Form 25 with the Securities andExchange Commission to complete the delisting.

 

The accompanying financialstatements do not include any adjustments that might result from the outcome ofany uncertainties discussed in the Company’s Business and Credit Risks summary.

 

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

 

In June 2009, theCompany entered into a Standby Equity Distribution Agreement (“SEDA”) with YAGlobal Master SPV Ltd. (“YA SPV”), an affiliate of Yorkville Advisors, for thesale of up to $15.0 million of shares of the Company’s common stock over atwo-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 SPV at a discount to the currentmarket price of 5%.  The amount of eachadvance under the SEDA is limited to the greater of $600,000 or the averagetrading volume for the five trading days prior to the advance notice date.  The Company is not obligated to utilize anyof the $15.0 million available under the SEDA and there are no minimumcommitments or minimum use penalties, nor does the agreement prohibit the Company from entering into any otherfinancing arrangements.  TheCompany entered into the SEDA with the consent of its lender under the Company’scredit facility, which requires the Company to maintain availability under theSEDA of at least $6.0 million at all times unless the bank otherwiseconsents.  From the inception of the SEDAthrough September 30, 2009, the Company issued 25,270,299 shares to YA SPVand received proceeds of approximately $7.7 million.  In addition, between the period of October 1,2009 and November 10, 2009, the Company raised $0.5 million and issued2,086,550 shares through the usage of the SEDA facility.  As of November 10, 2009 the Company hasthe ability to sell approximately $0.9 million of additional shares of itscommon stock under the SEDA without consent from its lender under the Company’scredit facility.

 

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In June 2009, prior to entering into the SEDA,the Company and YA Global Investments, L.P. (“YA Global”), an affiliate ofYorkville Advisors, agreed to terminate the prior Standby Equity DistributionAgreement dated as of September 29, 2008 (“Former SEDA”).  For the period of January 1, 2009through the end of the Former SEDA, the Company issued 9,883,994 shares to YAGlobal and received approximately $3.9 million. In addition, in September 2008, the Company paid YA Global acommitment fee of $300,000 by issuing 393,339 shares of the Company’s commonstock.

 

**3.     RelatedParty Transactions**

 

The Company’s Chief Executive Officer, Michael T.Flavin Ph.D., loaned $2.0 million to the Company in 2001 (seeNote 4).  Interest expense ofapproximately $119,000 and $116,000 was recorded related to the loan for thenine months ended September 30, 2009 and 2008, respectively.

 

The Company’s line of credit with a financialinstitution is secured by substantially all of the Company’s assets, exceptthat the collateral specifically excludes any rights that the Company has as aresult of its license agreement with Abbott Laboratories (“Abbott”) forcethromycin, and is further secured by 2.5 million shares of the Company’sstock held by ALS Ventures, LLC (see Note 4), which is beneficially ownedby the Company’s Chief Executive Officer.

 

The Company leases facilities from the BioStartProperty Group (“BioStart”), a wholly-owned subsidiary of Flavin Ventures,which is owned by the Company’s Chief Executive Officer.  The operating lease expired in September of2008 and pursuant to the terms of the lease and pending agreement on a leaserenewal, the Company leased the facilities on a month-to-month basis.  In October 2009, the Company renewed itslease with BioStart. Because of the ownership interest in BioStart held byFlavin Ventures, the Company’s audit committee, acting on behalf of the board,has overseen all lease negotiations on behalf of the Company and the board hasapproved the final terms of the Company’s lease renewal.   The lease, which commenced on October 1,2009, is for a term of three years and provides the Company with 9,440 squarefeet of space at a rental rate of $10.50 per square foot.  This rate is comparable with surroundingprices for office space.  The rental rateincreases by 2.5% for the second year and by 3.0% in the final year of thelease term. The lease has a provision allowing the Company to negotiate anamendment to lease additional laboratory and office space should the needarise. In addition, the Company and BioStart agreed to defer the Company’slease payments pending their final agreement on a lease renewal. Upon agreementof the lease renewal, the Company made a payment of $197,000 to BioStartrelated to the deferred lease payments. Lease payments totaled approximately $197,000 and $216,000 for the ninemonths ended September 30, 2009 and 2008, respectively.

 

In connection with its lease renewal with BioStart,the Company discontinued the rental of the laboratory and certain officespace.  In the three months ended September 30,2009, the Company recorded a non-cash charge of approximately $234,000 toexpense capitalized leasehold improvements related to the space no longerleased.

 

**4.**   Debt Obligations

** **

In September 2001, the Company incurredindebtedness under a $2.0 million promissory note with the Chief ExecutiveOfficer 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 $119,000 was recorded forthe nine months ended September 30, 2009. Interest payments of $106,000 which had been deferred were paid in October 2009.  As of September 30, 2009 and December 31,2008, the Company had $2.0 million outstanding under the note.

 

The Company has a $10.0 million revolving line ofcredit 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 the Company’sassets, except that the collateral specifically excludes any rights that theCompany may have as a result of its license agreement with Abbott forcethromycin, and is further secured by 2.5 million shares of the Company’s commonstock held by ALS Ventures, LLC.  Thecredit agreement contains a material adverse change clause, which is subject tothe judgment of the lender and, if triggered, can accelerate the payment of thedebt.  The Company entered into the SEDAwith the consent of its lender under the Company’s credit facility, whichrequires the Company to maintain availability under the SEDA of at least $6.0million at all times unless the bank otherwise consents.  In October 2008, the Company issued tothe lender as a closing fee warrants for the purchase of 65,000 shares of itscommon stock at an exercise price of $1.00 per share.  The warrants became exercisable upon issuanceand will expire five years from the date of the grant.  As of September 30, 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 arestructuring plan that resulted in the reduction of 30% of the Company’sworkforce.  In connection with therestructuring plan, the Company will focus its resources on the cethromycinprogram.  In the first quarter ended March 31,2009, the Company incurred restructuring charges of approximately $60,000,primarily associated with personnel-related termination costs.  In addition, the Company discontinued itslaboratory operations and recorded a non-cash charge of approximately $10,000to retire laboratory equipment.

 

**6.      Commitments**

 

***Vendor Contracts-***The Company administers its cethromycinprogram largely under contracts with third parties.  Through September 30, 2009, contractstotaling $46.9 million have been executed related to the cethromycin program,which includes the development, commercialization, regulatory review andpre-launch activities associated with cethromycin as well as anthrax-relatedstudies.  To date the Company has paid$45.4 million under these contracts and the remaining balance of $1.5 millionis expected to be substantially paid by the end of the year.  Subcontractor arrangements in connection withthe DTRA award grant are expected to be approximately $3.1 million over atwo-year period which began in August 2008.  Through September 30, 2009 the Companyhas paid $0.9 million related to these agreements.  In addition, to date the Company has executed$1.2 million in contracts related to the ALS-357 program.  Through September 30, 2009 the Companyhas paid $0.3 million related to these contracts and the remaining balance of$0.9 million would be paid over the life of the program which the Companyestimates to be two to three years.  Thecommencement of clinical trials to study ALS-357 as a topical treatment forpatients with metastatic melanoma may be delayed due to insufficient patientenrollment, which is a function of many factors, including the size of thepatient population, 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.

 

***Grant Payable-***In April 2005, the Company was awarded a $500,000 grant from the State ofIllinois to fund expansion of its corporate headquarters in Woodridge,Illinois.  Under the terms of the grant,the Company is to create 100 full-time jobs at its corporate headquartersbetween January 31, 2005 and December 31, 2010 (“grant period”).  If the Company does not create the specifiednumber of full-time jobs, it is required to repay the grant proceeds on apro-rata basis of actual jobs created compared to the total defined in thegrant.  The entire grant has been spentand therefore the $500,000 has been classified as a long-term liability as theCompany must create and maintain positions created during the grant periodthrough December 31, 2010.   Through September 30, 2009, four new jobs have been created andretained since the grant was awarded.

 

**7.      StockOption Grants**

 

For the nine months endedSeptember 30, 2009 and 2008, the Company granted stock options to purchaseup to 673,200 and 713,800 shares of common stock, respectively, to certainemployees and directors.  The exerciseprice of the options was the market price of the Company’s common stock on thedate of grant.  The Company recognizedcompensation expense totaling approximately $536,000 and $646,000 for the ninemonths ended September 30, 2009 and 2008, related to such grants.

 

**8.     NetLoss Per Share**

 

Basic loss per share is computed by dividing net lossby the number of weighted average common shares outstanding during thereporting period.  Diluted loss per shareis calculated to give effect to all potentially dilutive common shares thatwere outstanding during the reporting period. The computation of diluted shares outstanding for the periods ended September 30,2009 and 2008 excludes incremental shares of 13,850,870 and 12,643,993respectively, related to outstanding employee stock options and warrants.  These shares are excluded due to theiranti-dilutive effect as a result of the Company’s net losses for the periodsended September 30, 2009 and 2008.

 

**9.**      **Litigation**

 

As previously disclosed in a Form 8-K filed withthe SEC on March 30, 2009, Advanced Life Sciences Holdings, Inc. (“ADLS”)alleged in a notice of dispute delivered to Abbott Laboratories that Abbott hadbreached its obligations under the

 

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License Agreementfor cethromycin entered into between the ADLS and Abbott on December 13,2004 (as amended, the “License Agreement”).  Subsequent to delivering thenotice of dispute, ADLS initiated arbitration proceedings againstAbbott under the alternative dispute resolution provisions of the LicenseAgreement.

 

On September 30, 2009, prior to the completion ofarbitration proceedings, ADLS and Abbott entered into a binding term sheet insettlement of the dispute.  The binding term sheet provides for certainamendments to the License Agreement, summarized as follows:

 

·                      Section 6.2(a)(i) of theLicense Agreement was amended to reduce the royalty due from ADLS to Abbott bytwo (2) percentage points in each tier, such that ADLS would owe Abbott15% on net sales of $200.0 million and above; 16% on net sales of $100.0million to $200.0 million and; 17% on net sales of cethromycin of up to $100.0million.

 

·                      Section 6.1 of the License Agreementwas amended to restructure the $30.0 million lump sum milestone payment duefrom ADLS to Abbott upon U.S. regulatory approval of cethromycin, such that$20.0 million is payable within twenty days of U.S. regulatory approval, $5.0million is payable within 6 months of U.S. regulatory approval and $5.0 millionis payable within 12 months of U.S. regulatory approval.

 

The binding termsheet was entered into without any admission of liability by either partyand provides for the mutual release of any existing claims that the parties mayhave against one another in connection with the License Agreement.

 

**10.   RecentAccounting Pronouncements**

 

In June 2009, the Financial Accounting StandardsBoard (“FASB”) issued “The FASB Accounting Standards Codification (“ASC”) andthe Hierarchy of GAAP” which will become the source of authoritative US GAAPrecognized by the FASB to be applied to nongovernmental entities. Theprovisions are included in ASC subtopic 105 and are effective for financialstatements issued for interim and annual periods ending after September 15,2009.  The principal effect of thisguidance is a change in the referencing of accounting standards andpronouncements from FASB Statements, FASB Interpretations, EITF Abstracts andother sources of official accounting standards to the new codified standards.The adoption of the provisions did not have a material impact on the Company’sstatements of financial position, results of operations and cash flows.

 

In May, 2009, the FASB issued guidance related tosubsequent events, which is included in ASC subtopic 855, “Subsequent Events.”The provisions require Company management to evaluate events or transactionsoccurring subsequent to the balance sheet date but prior to the issuance of thefinancial statements for potential recognition or disclosure in the financialstatements and to disclose the results of management’s findings in thefinancial statements.  In addition, theprovisions identify the circumstances under which an entity shall recognizeevents or transactions occurring after the balance sheet date in its financialstatements and the required disclosures of such events. This statement iseffective for interim or annual periods ending after June 15, 2009. Theadoption of the provisions did not have a material impact on the Company’sstatements of financial position, results of operations and cash flows. TheCompany evaluated subsequent events through the date the accompanying financialstatements were issued, which was November 10, 2009.

 

In April 2009, the FASB issued additionaldisclosure requirements related to fair values, which are included in ASCsubtopic 820,  “*Interim Disclosures about Fair Value of FinancialInstruments.”*. The provisions require disclosures about fair valueof financial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements. The required disclosureswere effective for interim reporting periods ending after June 15, 2009.The adoption of the provisions did not have a material impact on the Company’sstatements of financial position, results of operations and cash flows.

 

In December 2007, the FASB issued new accountingguidance related to the accounting for noncontrolling interests in consolidatedfinancial statements, which are included in ASC subtopic 810, “*Noncontrolling Interests in Consolidated Financial Statements”*.  This guidance changes the accounting andreporting for minority interests, which includes retrospective adjustments torecharacterize noncontrolling interests and classification as a component ofequity.  The new guidance was effectivebeginning the first fiscal quarter of 2009. The adoption of this guidance did not have a material impact on theCompany’s statements of financial position, results of operations and cashflows.

 

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**Item 2. *Management’s 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 a biopharmaceutical company focused on thediscovery, development and commercialization of novel drugs in the areas ofinfectious disease, oncology and respiratory disease. Using our internaldiscovery capabilities and our network of pharmaceutical and academic partners,we have assembled a promising pipeline of clinical and preclinical productcandidates.  Our most advanced productcandidate, cethromycin, is a novel once-a-day oral antibiotic that completedtwo pivotal Phase III clinical trials in community acquired pneumonia (“CAP”).  We have an exclusive worldwide license(excluding Japan) from Abbott Laboratories to develop and commercializecethromycin. Cethromycin is also being developed as a bio-defense agent for usein the treatment of anthrax and other potential broad-spectrum medicalcountermeasures.  We also have product candidatesin earlier stages of development for the treatment of indications includingrespiratory distress caused by inflammation-related tissue damage and malignantmelanoma.

 

None of our product candidates have been approved bythe U.S. Food and Drug Administration (“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.

 

**DevelopmentUpdate — Cethromycin CAP Program**

 

On July 31, 2009 we received a complete responseletter from the FDA regarding cethromycin New Drug Application (“NDA”) for theoutpatient treatment of adults with mild-to-moderate CAP.  In its letter,the FDA indicated that they cannot approve the application for cethromycin inits current form and that, to gain approval, additional clinical data isrequired to demonstrate efficacy. We submitted the NDA in September, 2008 basedon the results of 53 clinical studies including 2 pivotal Phase 3 studies inCAP and a safety database of over 5,000 patients.

 

On June 2, 2009, the FDA Anti-Infective DrugsAdvisory Committee (“AIDAC”) reviewed the cethromycin NDA. The AIDAC voted thatcethromycin demonstrated safety for the outpatient treatment of adults with mild-to-moderateCAP, but voted that cethromycin did not demonstrate efficacy in the treatmentof CAP. The committee’s negative vote on the drug candidate’s efficacy followeda discussion that the cethromycin NDA included data on patients withmild-to-moderate disease and that the new draft guidance for developingtreatments for CAP, released in March, 2009, requires the enrollment of moresevere CAP patients for approval in the outpatient CAP indication. Our pivotalPhase 3 program included in the NDA was designed and conducted under prior FDAguidance and before the new draft guidance was released.

 

We are engaged in ongoing discussions with the FDA toidentify the scope and protocol design for the additional clinical data thatwould be required to satisfy the FDA’s request for additional efficacyinformation and to complete the CAP clinical development program for successfulapproval in the future. We are working closely with the FDA to identify thescope and protocol design for the additional clinical data needed under aSpecial Protocol Assessment.  We areworking collaboratively on these clinical plans with Wyeth Pharmaceuticals (“Wyeth”),our development and commercialization partner in the Asia Pacific region(excluding Japan). In parallel, we will continue to advance cethromycin asa biodefense agent against anthrax, plague and tularemia.

 

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If cethromycin is approvedfor marketing by the FDA, we plan to sell cethromycin using commercial partnersto access the primary care physician market and to build and utilize a focusedinternal sales force that will market directly to early adopters such as, butnot limited to, pulmonary medicine and infectious disease physicians.  In September 2008, we entered into adevelopment and commercialization agreement for cethromycin with Wyeth, in theAsia Pacific region (excluding Japan). We will retain exclusive rights tocethromycin in the rest of the world (excluding Japan), including North Americaand Europe.  In addition to futureroyalty payments, we would receive milestone and regulatory payments based onsuccessful achievement of clinical, regulatory and commercial objectives inspecific markets. We will collaborate with Wyeth to develop additional clinicaldata in the Asia Pacific region to support regulatory filings in thatregion.   Discussions with otherpotential commercial partners focused on other geographical markets such as theEuropean Union and the United States are ongoing.

 

In August 2008, wesigned 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.

 

We believe thatcethromycin has significant therapeutic and commercial potential as a novelagent to combat CAP as well as other lethal pathogens that represent seriousbioterror threats to public health, and we intend to explore all avenues thatcan lead to success.

 

**Development Update — Cethromycin BiodefenseProgram**

 

In September 2009,we announced positive top-line results from a pivotal, non-human primate studyinvolving cethromycin demonstrating statistical significance at a 90% survivalrate against an inhaled lethal dose of plague. The study tested cethromycin’sprotective efficacy at various doses up to 64 mg/kg, where nine out of tenanimals in the study that received a 14-day course of cethromycin initiatedwithin 24 hours after exposure to a lethal dose of plague survived while onlyone out of ten of the animals that received placebo survived.  In weaponized form, plague could beengineered to resist antibiotic intervention and to be widely spread throughhuman transmission. *Yersinia pestis*,the causative agent of plague, is classified by the Centers for Disease Controlas a Category A Bioterrorism Agent and is prioritized by the Department ofDefense (“DoD”) and Department of Health and Human Services (“HHS”) as one ofthe most serious biological weapons, along with anthrax and tularemia.  Unlike anthrax, there is no FDA-approvedvaccine available to protect against plague, and the only antibiotic treatmentscurrently available for improving survival in the event of a plague outbreakare older agents, such as tetracycline and doxycycline.

 

In September 2009,the FDA granted Orphan Drug Designation to cethromycin for the prophylactictreatment of plague and tularemia. Both tularemia and plague are classified bythe Centers for Disease Control as Category A Bioterrorism Agents, which is thehighest priority classification. High-priority agents include organisms thatpose a risk to national security because they can be easily disseminated ortransmitted, result in high mortality rates and have the potential for majorpublic health impact, might cause public panic and social disruption, andrequire special action for public health preparedness.

 

In August 2009, we announced positive resultsfrom an animal study involving cethromycin that was conducted to measurecethromycin’s therapeutic efficacy in treating inhalation anthrax aftersymptoms of infection had developed. The results of the placebo-controllednon-human primate study showed that a 14-day course of cethromycin achieved upto a 60% survival rate when administered after animals demonstrated clinicalsymptoms of anthrax infection as a result of an inhaled dose of aerosolizedanthrax spores that was 200 times the median lethal dose of anthrax. None ofthe animals that received placebo survived. Due to the extreme lethality ofanthrax infection once symptoms appear, cethromycin’s ability to achieve a 60%survival rate is clinically and statistically significant. The study wassupported by the National Institute of Allergy and Infectious Diseases (“NIAID”),an institute of the National Institutes of Health (“NIH”), which is a componentof the HHS.  The results of this pivotalstudy complement previously reported (see below) efficacy results from twonon-human primate

 

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studies showingthat cethromycin is highly effective in protecting animals from death afterbeing infected with inhalation anthrax (post-exposure prophylaxis before theonset of symptoms).

 

We are developing cethromycin for the post-exposureprophylactic treatment of inhalation anthrax to help protect against humaninfection from anthrax.  In June 2009,we announced that a second non-human primate study involving cethromycin,showed that a 14-day course of cethromycin achieved a 100% survival rateagainst an inhaled lethal dose of anthrax. All of the animals in the study thatreceived 16 mg/kg once-a-day (the human equivalent dose of 300 mg) ofcethromycin within 24 hours after exposure to anthrax survived while none ofthe animals that received placebo survived. The study was also supported by theNIAID.

 

In studies conducted by the U.S. Army Medical ResearchInstitute of Infectious Diseases (“USAMRIID”), cethromycin was shown to behighly active *in vitro*against 30strains of anthrax. In May 2007, a non-human primate study showed that a30-day course of oral cethromycin was 100% protective against a lethal dose ofinhaled anthrax as compared to the standard of care, Cipro® (ciprofloxacin),which demonstrated 90% protection. The FDA has designated cethromycin as anorphan drug for the post-exposure prophylactic treatment of inhalation anthrax,but the FDA has not yet approved the drug for marketing in this or any otherindication.

 

In August 2008, weannounced that the Defense Threat Reduction Agency (“DTRA”) of the DoD awardedus a two-year contract worth up to $3.8 million to further study cethromycin asa potential broad-spectrum medical countermeasure. The contract, part of theagency’s Transformational Medical Technologies Initiative (“TMTI”), will fundNDA-enabling studies evaluating cethromycin’s efficacy in combating Category A andB bioterror agents such as *Fransicella tularensis*(tularemia), *Yersinia pestis* (plague) and *Burkholderia pseudomallei* (melioidosis).

 

We expect additional keydata to be available and reported from our pivotal animal studies in plague andtularemia by the end of 2009. If these studies continue to confirm the productprofile of cethromycin as a potent broad spectrum medical countermeasure forbiodefense, we plan to meet with the FDA to finalize the biodefense regulatoryplan for cethromycin, with the goal of submitting an NDA amendment seekingmarketing approval for the biodefense indications of anthrax, tularemia, andplague in the first part of 2010.

 

**FinancialUpdate**

 

Since our inception, we have incurred net losses eachyear. Our net loss for the nine months ended September 30, 2009 was $7.7million.  As of September 30, 2009,we had an accumulated deficit of $130.1 million. We have funded operations todate primarily from debt financings and capital contributions from our founderand Chief Executive Officer, proceeds from the initial public offering of ourcommon stock, the subsequent sale of our common stock in three privateplacements, including our commercial partnership agreement with Wyeth andborrowings under our bank line of credit.  In addition, we executed Standby Equity Distribution Agreementswhich allow us to sell our common stock to an accredited investor pursuant tothe terms of the agreements (see below).

 

In April 2009, our shareholders approved anamendment to our articles of incorporation to increase the number of authorizedshares from 65,000,000 to 125,000,000 including an increase in the number ofauthorized shares of common stock from 60,000,000 to 120,000,000.  The availability of additional shares ofcommon stock for issuance will afford us flexibility in acting upon financingtransactions to strengthen our financial position and/or commercial partnershipopportunities that may arise as we advance our cethromycin commercializationprogram.

 

In April 2009, we filed a shelf registrationstatement on Form S-3 with the Securities and Exchange Commission (“SEC”)and the shelf registration was subsequently declared effective by the SEC.   The shelf registration will allow us toraise capital from time to time through the sale of common stock, preferredstock and/or equity warrants.  While theaggregate amount of the securities registered on the shelf registrationstatement is $35.0 million, our ability to sell securities under the shelfregistration statement in any given 12-month period is subject to certain SECvolume limitations relative to our non-affiliated market cap.

 

We received a notice on April 28, 2009 from the NasdaqListing Qualifications Panel (the “Panel”) that the Panel has determined todelist our common stock from The Nasdaq Capital.  The Panel’s decision wasbased on our inability to evidence compliance with the $2.5 millionshareholders’ equity requirement or the $35.0 million market value of listedsecurities requirement of the Nasdaq Capital Market.  The trading of our common stock on The NasdaqCapital Market was

 

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suspended at theopen of trading on May 5, 2009.  Our common stock began trading onthe OTC Bulletin Board (“OTCBB”) on May 6, 2009.  Trading on the OTCBB still allows us to sellshares of common stock under our SEDA facility. On August 20, 2009, the Nasdaq Stock Market filed a Form 25with the Securities and Exchange Commission to complete the delisting.

 

In June 2009, we entered into a Standby EquityDistribution Agreement (“SEDA”) with YA Global Master SPV Ltd. (“YA SPV”), anaffiliate of Yorkville Advisors, for the sale of up to $15.0 million of sharesof our common stock over a two-year commitment period.  Under the terms of the SEDA, we may from timeto time, in our discretion, sell newly-issued shares of our common stock to YASPV at a discount to the current market price of 5%.  The amount of each advance under the SEDA islimited to the greater of $600,000 or the average trading volume for the fivetrading days prior to the advance notice date. We are not obligated to utilize any of the $15.0 million available underthe SEDA and there are no minimum commitments or minimum use penalties, nordoes the agreement prohibit the Companyfrom entering into any other financing arrangements.  We entered into the SEDA with the consent ofour lender under our credit facility, which requires us to maintainavailability under the SEDA of at least $6.0 million at all times unless thebank otherwise consents. From the inception of the SEDA through September 30,2009, we issued 25,270,299 shares to YA SPV and received proceeds ofapproximately $7.7 million.  In addition,between the period of October 1, 2009 and November 10, 2009, weraised $0.5 million and issued 2,086,550 shares through the usage of the SEDAfacility.  As of November 10, 2009the Company has the ability to sell approximately $0.9 million of additionalshares of its common stock under the SEDA without consent from its lender underthe Company’s credit facility.

 

In June 2009, prior to entering into the SEDA,the Company and YA Global Investments, L.P. (“YA Global”), an affiliate ofYorkville Advisors, agreed to terminate the prior Standby Equity DistributionAgreement dated as of September 29, 2008 (“Former SEDA”).  For the period of January 1, 2009through the end of the Former SEDA, we issued 9,883,994 shares to YA Global andreceived approximately $3.9 million.  Inaddition, in September 2008, we paid YA Global a commitment fee of$300,000 by issuing 393,339 shares of our common stock.

 

A discussion of our ability to continue as a goingconcern can be found in Note 1 to the consolidated financial statements.

 

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**Resultsof Operations**

 

*Three months ended September 30, 2009 compared tothree months ended September 30, 2008*

* *

*Revenue.*** Wereported revenue of $617,000 for the three months ended September 30, 2009compared to $32,000 for the three months ended September 30, 2008.  Revenue was derived from a grant awarded bythe DTRA of the U.S. Department of Defense. The contract award of $3.8 million is over a two year period which beganin August 2008.  Since the beginningof the contract we reported revenue of approximately $1.8 million.  We estimate revenue will be in the $0.8million to $1.2 million range in the fourth quarter of the year.

 

*Research and developmentexpense.*  Research and development expensedecreased $10.3 million to $0.9 million for the three months ended September 30,2009.    Included in the prior yearamount is a $10.0 million milestone expense incurred under our licenseagreement for cethromycin with Abbott. The milestone was triggered upon submission of the cethromycin NDA tothe FDA, which occurred on September 30, 2008.  Additionally, expenses related to thecompilation and FDA review of cethromycin totaled $0.6 million for the threemonths ended September 30, 2008.  Inconjunction with work performed under the grant awarded by DTRA, costs incurredincreased $0.5 million in the quarter ended September 30, 2009 and werepartially offset by lower salary and benefit costs of approximately $0.2million.

 

*General andadministrative expense.*** General and administrative expenses were $2.2million for the three months ended September 30, 2009, an increase of $0.4million compared to the third quarter last year.  This result reflects increased legal andother professional services expenses of $0.3 million, a non-cash charge of $0.2million to expense capitalized leasehold improvements which will no longer beused in our operations, and higher salary and benefit costs of $0.2 million.  These increases were partially offset by $0.3million of expenses incurred in a marketing program in the same period of theprior year.

 

*Interest income.*  Interest income declined $45,000 to $6,000 forthe three months ended September 30, 2009, resulting from a decrease ofcash, which was used for the continued development and funding of cethromycin.

 

*Interest expense.  * Interest expense increased $160,000 in thethree months ended September 30, 2009 as compared to the same period lastyear.  The increase is the result ofborrowing an additional $6.0 million on our line of credit in October 2008for the continued development and funding of cethromycin and a higher interestrate.

 

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

 

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* *

*Nine months ended September 30, 2009 compared tonine months ended September 30, 2008*

* *

*Revenue.*** Wereported revenue of $1.7 million for the nine months ended September 30,2009 compared to $32,000 for the nine months ended September 30,2008.  Revenue was derived from a grantawarded by the DTRA of the U.S. Department of Defense.  The contract award of $3.8 million is over atwo year period which began in August 2008.

 

*Research and developmentexpense.*  Research and development expensedecreased $11.6 million to $3.2 million for the nine months ended September 30,2009.  As previously mentioned, includedin the prior year amount is a $10.0 million milestone expense incurred underour license agreement for cethromycin with Abbott.  The milestone was triggered upon submissionof the cethromycin NDA to the FDA, which occurred on September 30,2008.  In addition, for the nine monthsended September 30, 2008, we incurred cethromycin clinical trial expensesof $0.3 million and manufacturing expenses in relation to process optimizationactivities of $0.6 million.  Expensesrelated to the compilation and FDA review of cethromycin totaled $0.2 millionfor the nine months ended September 30, 2009 compared to $2.0 million forthe same period last year.  Inconjunction with work performed under the grant awarded by DTRA, costs incurredincreased $1.3 million in the nine months ended September 30, 2009.  Lower salary and benefit costs of $0.4million for the nine months ended September 30, 2009 were partially offsetby expenses related to the FDA’s June 2, 2009 AIDAC meeting which wereapproximately $0.2 million.

 

*General andadministrative expense.*** General and administrative expenses increased$0.2 million to $5.4 million for the nine months ended September 30,2009.  This result reflects increasedlegal and other professional services of $0.7 million and a non-cash charge of$0.2 million to expense capitalized leasehold improvements which will no longerbe used in our operations.  Theseincreases were partially offset by $0.5 million of costs incurred in the sameperiod of the prior year related to a various marketing programs, decreasedfacilities and other administrative costs of $0.1 million, and reduced spendingin our investor relations program of $0.1 million.

 

*Interest income.*  Interest income declined $275,000 to $9,000for the nine months ended September 30, 2009, resulting from a decrease ofcash, which was used for the continued development and funding of cethromycin.

 

*Interest expense.*Interest expense increased $464,000 in the nine months ended September 30,2009 as compared to the same period last year. The increase is the result of borrowing an additional $6.0 million onour line of credit in October 2008 for the continued development andfunding of cethromycin and a higher interest rate.

 

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

 

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**Liquidity and 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 $130.1 million as of September 30, 2009 and we expect to incur significantoperating losses for the foreseeable future. As of September 30, 2009 we had negative working capital of $0.8million.  Cash and cash equivalents were$4.2 million as of September 30, 2009. Since our inception in 1999 to August 2005, we financed ouroperations primarily through debt and capital contributions from our founderand controlling stockholder and borrowings under our bank line of credit.  In August 2005 we completed our initialpublic offering in which we raised $28.7 million, net of underwriters discountand offering costs.  Since that time, wehave completed three private placements in which we raised $52.8 million, netof underwriters’ discounts and offering costs and raised additional debtfinancing through our $10.0 million bank line of credit.

 

In June 2009,we entered into a SEDA with YA SPV, for the sale of up to $15.0 million ofshares of our common stock over a two-year commitment period.  Under the terms of the SEDA, we may from timeto time, in our discretion, sell newly-issued shares of our common stock to YASPV at a discount to the current market price of 5%.  The amount of each advance under the SEDA islimited to the greater of $600,000 or the average trading volume for the five tradingdays prior to the advance notice date. We are not obligated to utilize any of the $15.0 million available underthe SEDA and there are no minimum commitments or minimum use penalties, nordoes the agreement prohibit the Companyfrom entering into any other financing arrangements.  We entered into the SEDA with the consent ofour lender under our credit facility, which requires us to maintainavailability under the SEDA of at least $6.0 million at all times unless thebank otherwise consents.  From theinception of the SEDA through September 30, 2009, we issued 25,270,299shares to YA SPV and received proceeds of approximately $7.7 million.  In addition, between the period of October 1,2009 and November 10, 2009, we raised $0.5 million and issued 2,086,550shares through the usage of the SEDA facility. As of November 10, 2009 the Company has the ability to sellapproximately $0.9 million of additional shares of its common stock under theSEDA without consent from its lender under the Company’s credit facility.

 

In June 2009,prior to entering into the SEDA, the Company and YA Global, agreed to terminatethe prior Standby Equity Distribution Agreement dated as of September 29,2008 (“Former SEDA”).  For the period of January 1,2009 through the end of the Former SEDA, we issued 9,883,994 shares to YAGlobal and received approximately $3.9 million. In addition, in September 2008, we paid YA Global a commitment feeof $300,000 by issuing 393,339 shares of our common stock.

 

In September 2001, we incurred indebtedness undera $2.0 million promissory note with the Chief Executive Officer of the Company,which bears interest at 7.75%.  Principalplus any accrued interest was due in a lump sum on January 5, 2009.    On January 5, 2009, the note wasextended to January 5, 2010, all other terms remained unchanged and ineffect.

 

We have a $10.0 million revolving line of credit witha financial institution with a maturity date of January 1, 2011, and afixed interest rate of 8.5%.  The line ofcredit is secured by substantially all of our assets, except that thecollateral specifically excludes any rights that we may have as a result of ourlicense agreement with Abbott for cethromycin, and is further secured by 2.5million 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.  We entered into the SEDA with the consent ofour lender under our credit facility, which requires us to maintainavailability under the SEDA of at least $6.0 million at all times unless thebank otherwise consents.   In October 2008,we issued warrants to the lender as a closing fee for the purchase of 65,000shares of common stock at an exercise price of $1.00 per share.  The warrants became exercisable upon issuanceand will expire five years from the date of the grant.  As of September 30, 2009 the line ofcredit had an outstanding balance of $10.0 million.

 

During the ninemonths ended September 30, 2009, cash used in operating activities totaled$8.9 million.   Net of DTRA grant awardfunds, approximately $4.4 million was used for in our cethromycin programs and$4.5 million for general operations. Cash provided from financing activities totaled $11.5 million duringthe nine months ended September 30, 2009, reflecting proceeds for the saleof 35,154,293 shares to YA Global and YA SPV through the SEDA facilities.

 

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* *

*ContractualObligations*

* *

As of September 30,2009, the annual amounts of future minimum payments under debt obligations,interest, and other long term liabilities consisting of executed research,development and license 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                                    |       | 359,371                                |       | 853,222    |       | — |   | — |   | — |   | 1,212,593 |   |
| Cethromycin NDA & regulatory costs |       | 78,175                                 |       | 103,050    |       | — |   | — |   | — |   | 181,225 |   |
| Commercialization costs                     |       | 1,295,853                              |       | —     |       | — |   | — |   | — |   | 1,295,853 |   |
| ALS-357 clinical program                    |       | —                                 |       | 470,771    |       | 417,509 |   | — |   | — |   | 888,280 |   |
| DTRA grant related costs                    |       | 1,337,260                              |       | 864,399    |       | — |   | — |   | — |   | 2,201,659 |   |
| Capital leases                              |       | 2,245                                  |       | 4,350      |       | — |   | — |   | — |   | 6,595 |   |
|                                        |       |                                   |       |       |       |   |   |   |   |   |   |   |   |
| Total                                       |       | $                                      | 3,072,904  |       | $          | 4,295,792 |   | $ | 10,417,509 |   | $ | — |   | $ | — |   | $ | 17,786,205 |   |

 

The above tabledoes not include the potential $30.0 million product based milestone paymentunder our license agreement with Abbott which we will owe Abbott if cethromycinis approved for marketing by the FDA. Under the terms of the amended license agreement, $20.0 million ispayable within 20 business days after receipt of U.S. regulatory approval, $5.0million is payable within 6 months of U.S. regulatory approval and $5.0 millionis payable within 12 months of U.S. regulatory approval.   Thereafter, we would owe Abbott anadditional $2.5 million upon reaching $200.0 million in aggregate net sales ofcethromycin and $5.0 million upon reaching $400.0 million in aggregate netsales.  The periods in which milestoneobligations become payable, if at all, are only estimates due to uncertaintiesassociated with the completion or achievement of the milestone.

 

In the first tenmonths of 2009, we executed new contracts totaling $0.5 million related to thefurther study and regulatory review of cethromycin.

 

In the third quarter of 2008, we signed a letter ofintent with DSM to procure raw materials to be used to produce commercialquantities of cethromycin.  The leadtimes for acquiring these raw materials needed to be used to completeproduction are lengthy.  As of September 30,2009 the cost of raw materials actually purchased was $2.9 million.  The agreement allows for us to purchaseadditional raw materials at a later time. The costs of the raw materials purchased as well as the procurement ofadditional raw materials are subject to changes in the Euro/US Dollar exchangerate.

 

We executed a contract during the second quarter of2008 to initiate a Phase I/II clinical trial of our anti-melanoma compoundALS-357.  This trial will assess thesafety, tolerability, and preliminary efficacy of ALS-357 when administeredtopically to patients with cutaneous metastatic melanoma.  The contract totals approximately $0.9million which represents the upper limit of cost if the maximum number ofpatients is enrolled.  To the extentfewer patients are required as determined by the protocol; expenses related tothe trial could be lower.  Enrollmentwill be based upon a number of factors which are difficult to forecast andtherefore we cannot reasonably estimate the true cost of the trial beyond whatis defined as the maximum limit per the contract.

 

Our commitments underoperating leases consist of payments made to a related party relating to ourfacilities lease in Woodridge, Illinois. The operating lease expired in September of 2008 and pursuant tothe terms of the lease and pending agreement on a lease renewal, the Companyleased the facilities on a month-to-month basis.  In October 2009, the Company renewed itslease with BioStart. Because of the ownership interest in BioStart held byFlavin Ventures, our audit committee, acting on behalf of the board, hasoverseen all lease negotiations on our behalf and the board has approved thefinal terms of our lease renewal. The lease, which commenced on October 1,2009, is for a term of three years and provides us with 9,440 square feet ofspace at a rental rate of $10.50 per square foot. This rate is comparable withsurrounding prices for office space. The rental rate increases by 2.5% for thesecond year and by 3.0% in the final year of the lease term.  The lease has a provision allowing us tonegotiate an amendment to lease additional laboratory and office space shouldthe need arise.  In addition, we agreedwith BioStart to defer our lease payments pending our final agreement on alease renewal. Upon agreement of the lease renewal, we made a payment of$197,000 to BioStart related to the deferred lease payments.

 

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In August 2008, we announced that the DTRA of theDoD awarded us a two-year contract worth up to $3.8 million to further studycethromycin as a potential broad-spectrum medical countermeasure. Under theterms of the contract, $1.8 million of DTRA funds are available over anine-month base period beginning in August 2008 and the remaining $2.0million may be awarded 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. In conjunction with the grant awarded by theDTRA, we entered into subcontractor arrangements to further study cethromycinas a potential broad-spectrum medical countermeasure.  The subcontractors’ costs are expected to beapproximately $3.1 million over a two-year period which began in August 2008.

 

We will not be generating any product-based revenuesor realizing cash flows from operations in the near term, if at all.  We believe we will have cash and cashequivalents sufficient to fund our existing and anticipated developmentcommitments, indebtedness and general operating expenses through the firstquarter of 2010.  In order to continueour business activities during 2010, 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 Standby EquityDistribution Agreements which allow us to sell our common stock to anaccredited investor pursuant to the terms of the agreements (see Note 2 to theconsolidated financial statements).  In April 2009,we filed a shelf registration statement on Form S-3 with the Securities andExchange 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.  If we raiseadditional capital by issuing equity securities, our shareholders couldexperience substantial dilution.  As aresult of these uncertainties, there is substantial doubt about our ability tocontinue as a going concern.

 

Our future capital uses and requirements depend onnumerous forward-looking factors.  Thesefactors include, but are not limited to, the following:

 

·                                          progressin our clinical development programs and regulatory review, as well as themagnitude of these programs;

 

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

 

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

 

·                                          ourability to establish and maintain additional collaborative arrangements;

 

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

 

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

 

*Research and Development*

 

Research and development expenses consist of internalresearch costs and fees paid for contract research in conjunction with theresearch and development of our proprietary product portfolio.  All such costs are expensed as incurred.  Clinical trial costs incurred by thirdparties are expensed as the contracted work is performed.  We estimate both the total cost and timeperiod of the trials and the percent completed as of that accounting date.  We believe that the estimates made as of September 30,2009 are reflective of the actual expenses incurred as of that date.

 

*Stock-based Compensation*

 

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

 

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**Forward-LookingStatements and Risk Factors**

 

This Quarterly Report on Form 10-Q, includingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, contains forward-looking statements within the meaning of thePrivate 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.

 

We are subject to foreign currency exchange rate riskprimarily due certain contract manufacturing agreements.  Our exchange loss for the nine months ended September 30,2009 was $119,000, which is included in other expense.  To date, we have not entered into any foreigncurrency forward exchange contracts or other derivative financial instrumentsto hedge the effects of fluctuations in foreign currency exchange rates.  The fluctuation in the exchange rate betweenthe U.S. Dollar and the Euro could affect amounts due under these contractmanufacturing agreements.  A hypotheticalincrease in the exchange rate between the Euro and the U.S. Dollar as of September 30,2009 of ten percent would increase total contract manufacturing costs for rawmaterials purchased by approximately $118,000.

 

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

** **

Our management, under the supervision and with theparticipation of our Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”), has evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) as of the end of the period covered bythis report.  Based on that evaluation,our CEO and CFO have concluded that the Company’s disclosure controls andprocedures were effective as of the end of the period covered by this report.

 

**Changesin Internal Control**

 

During the period covered by this report, there havebeen no changes in our internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II — OTHERINFORMATION**

 

**Item 1. Legal Proceedings**

** **

Refer to Note 9 — “Litigation” in Notes toConsolidated Financial Statements of this Form 10-Q for information onlegal proceedings.

 

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

 

Our business, financial condition, operating resultsand cash flows may be impacted by a number of factors, including those setforth in Item 1A of Part I of our Annual Report on Form 10-K for thefiscal year ended December 31, 2008. Set forth below are material changes in our risk factors since the 2008 Form 10-K.  The information presented below updates, andshould be read in conjunction with, the risk factors and other informationdisclosed in our 2008 Form 10-K and this Quarterly Report on Form 10-Q.

 

***We may not be ableto continue as a going concern or fund our existing capital needs.***

 

Our independent registered public accounting firmincluded an explanatory paragraph in the report on our 2008 financialstatements related to the uncertainty in our ability to continue as a goingconcern. The paragraph stated that we do not have sufficient cash on-hand orother funding available to meet our obligations and sustain our operations,which raises substantial doubt about our ability to continue as a goingconcern. We will not be generating any product-based revenues or realizing cashflows from operations in the near term, if at all. We believe we will have cashand cash equivalents sufficient to fund our existing and anticipateddevelopment commitments, indebtedness and general operating expenses throughthe first quarter of 2010.  We may nothave sufficient cash or other funding available to complete our anticipatedbusiness activities for the remainder of 2010.  In order to address ourworking capital shortfall we intend to raise additional capital by accessingthe capital markets and licensing our lead product candidate, cethromycin, tocommercial partners.  There can be no assurances that we will be successfulin accessing the capital markets on terms acceptable to us, if at all, or thatsuch partnerships will be available on terms acceptable to us, if at all.

 

***We will require additional funding to satisfy our futurecapital needs, and future financing strategies may adversely affect holders ofour common stock.***

 

Our operations will require significant additionalfunding due to the absence of any meaningful revenues in the near future. We do not know whether additional financing will be available to us on favorableterms or at all. If we cannot raise additional funds, we may be required toreduce our capital expenditures, scale back product development or programs,reduce our workforce and license to others products or technologies that we mayotherwise be able to commercialize.  To the extent we raise additionalcapital by issuing equity securities, our stockholders could experiencesubstantial dilution. Any additional equity securities we issue may haverights, preferences or privileges senior to those of existing holders of stock.To the extent that we raise additional funds through collaboration andlicensing arrangements, we may be required to relinquish some rights to ourtechnologies or product candidates, or grant licenses on terms that are notfavorable to us.

 

Any shares of our common stock that we sell pursuantto the SEDA will have a dilutive impact on our stockholders. The SEDA termsprovide that YA SPV may promptly resell the shares we issue to them under theSEDA, and such resales could cause the market price of our common stock todecline significantly with advances under the SEDA. To the extent of any suchdecline, any subsequent advances would require us to issue a greater number ofshares of common stock to YA SPV in exchange for each dollar of the advance.Under these circumstances our existing stockholders would experience greaterdilution. The sale of our common stock under the SEDA could encourage shortsales by third parties, which could contribute to the further decline of ourstock price.  As of the date of this quarterly report, we have issued anaggregate of 37,634,182 shares, which includes 393,339 shares issued as aninitial commitment fee to YA Global and received an aggregate of $12.1 millionin proceeds through the usage of our SEDA facilities.  There can be noassurance that we will be able to obtain adequate capital funding in thefuture, under the SEDA or otherwise, to continue operations and implement ourstrategy. As a result of these uncertainties, there is substantial doubt aboutour ability to continue as a going concern.

 

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***Our business would be materially harmed if we fail to obtainFDA approval of a new drug application for cethromycin.***

 

Our ability to generate any significant productrevenues in the near future will depend solely on the successful developmentand commercialization of cethromycin, our most advanced product candidate.   The FDA may not approve in a timely manner,or at all, any NDA that we submit.  Ifany NDA we submit is not approved by the FDA, we will be unable tocommercialize that product in the United States and our business will bematerially harmed. The FDA can and does reject NDAs, and often requiresadditional clinical trials, even when product candidates performed well orachieved favorable results in large-scale Phase III clinical trials. The FDAimposes substantial requirements on the introduction of pharmaceutical productsthrough lengthy and detailed laboratory and clinical testing procedures,sampling activities and other costly and time-consuming procedures.Satisfaction of these requirements typically takes several years and may varysubstantially based upon the type and complexity of the pharmaceutical product.A number of our product candidates are novel compounds, which may furtherincrease the period of time required for satisfactory testing procedures.

 

On July 31, 2009, we received a complete responseletter from the FDA regarding the NDA for cethromycin for the outpatienttreatment of adults with mild-to-moderate CAP.  In its letter, the FDAindicated that they cannot approve the application for cethromycin in itscurrent form and that, to gain approval, additional clinical data is requiredto demonstrate efficacy. We are engaged in ongoing discussions with the FDA toidentify the scope and protocol design for the additional clinical data thatwould be required to satisfy the FDA’s request for additional efficacyinformation and to complete the CAP clinical development program for successfulapproval in the future. We are working closely with the Agency to identify thescope and protocol design for the additional clinical data needed under a SpecialProtocol Assessment. We are working collaboratively on these clinical planswith Wyeth our development and commercialization partner in the Asia Pacificregion (excluding Japan). In parallel, we will continue to advancecethromycin as a biodefense agent against anthrax, plague and tularemia.

 

***Due to the delisting of our common stock from Nasdaq, youmay have difficulty trading our securities and our securities may trade at alower market price than they otherwise would.***

 

Since being delisted from Nasdaq, trading in ourcommon stock is conducted on the OTC Bulletin Board and in the over-the-countermarket in the so-called “pink sheets.”  Because of this, you may not beable to sell as many securities as you desire, you may experience delays in theexecution of your transactions and our securities may trade at a lower marketprice than they otherwise would.  In addition, our securities could becomesubject to the SEC’s “penny stock rules.” These rules would imposeadditional requirements on broker-dealers who effect trades in our securities,other than trades with their established customers and accredited investors.Consequently, the delisting of our securities and the applicability of thepenny stock rules may adversely affect the ability of broker-dealers tosell our securities, which may adversely affect your ability to resell oursecurities. The delisting of our securities from Nasdaq could also have othernegative results, including the potential loss of confidence by employees andothers, the loss of institutional investor interest and fewer businessdevelopment and commercial partnership opportunities.

 

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**Item 6. *Exhibits***

** **

The following is alist of 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) |
|       |       |            |   |
| 4.1        |       |            | Standby Equity  Distribution Agreement, dated June 19, 2009, by and between Advanced  Life Sciences Holdings, Inc. and YA Global Master SPV Ltd. (as filed in  our Current Report on Form 8-K as exhibit 4.1 on June 19, 2009) |
|       |       |            |   |
| 10.1*      |       |            | Binding Term  Sheet, dated September 30, 2009, by and between Abbott Laboratories and  Advanced Life Sciences Holdings, Inc. |
|       |       |            |   |
| 10.2       |       |            | New Lease  Agreement, dated October 29, 2009, by and between Advanced Life  Sciences, Inc. and BioStart Property Group, LLC (as filed in our Current  Report on Form 8-K as exhibit 10.1 on November 2, 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 the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

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

 

 

Dated: November 10,2009

 

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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) |
|       |       |            |   |
| 4.1        |       |            | Standby Equity Distribution Agreement, dated  June 19, 2009, by and between Advanced Life Sciences Holdings, Inc.  and YA Global Master SPV Ltd. (as filed in our Current Report on  Form 8-K as exhibit 4.1 on June 19, 2009) |
|       |       |            |   |
| 10.1*      |       |            | Binding Term Sheet, dated September 30, 2009,  by and between Abbott Laboratories and Advanced Life Sciences Holdings, Inc. |
|       |       |            |   |
| 10.2       |       |            | New Lease Agreement, dated October 29, 2009, by  and between Advanced Life Sciences, Inc. and BioStart Property Group,  LLC (as filed in our Current Report on Form 8-K as exhibit 10.1 on  November 2, 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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