Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the Quarterly Period Ended: March 31, 2010**

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

 

**Commission File No: 000-51436**

 

**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of  May 6, 2010, the registrant had100,372,067 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

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Table of Contents

 

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

**Form 10-Q**

 
| **PART I —  FINANCIAL INFORMATION (UNAUDITED)** |
|----------------------------------------------------------------|
| Item 1.                                                   | Consolidated  Financial Statements: |
|                                                           | Consolidated  Balance Sheets as of March 31, 2010 and December 31, 2009 |
|                                                           | Consolidated  Statements of Operations for the three months ended March 31, 2010 and  2009 and for the period from inception (January 1, 1999) through  March 31, 2010 |
|                                                           | Consolidated  Statements of Total Equity (Deficit) for period from inception  (January 1, 1999) through March 31, 2010 |
|                                                           | Consolidated  Statements of Cash Flows for the three months ended March 31, 2010 and  2009 and for the period from inception (January 1, 1999) through  March 31, 2010 |
|                                                           | Notes to  Consolidated Financial Statements |
| Item 2.                                                   | Management’s Discussion  and Analysis of Financial Condition and Results of Operations |
| Item 3.                                                   | Quantitative  and Qualitative Disclosures About Market Risk |
| Item 4.                                                   | Controls and  Procedures |
| ** **                                                     | ** ** |
| **PART II — OTHER  INFORMATION**                |
| Item  1A.                                                      | Risk  Factors |
| Item 6.                                                   | Exhibits |
| Signatures                                                     |
| Exhibit Index                                             |

 

1

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Table of Contents

 

**PART I — FINANCIALINFORMATION**

 

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

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2010**           | ** ** | **2009**              | ** ** |
|                                                                                                                                                                                              |       |               |       |                  |       |
| **ASSETS**                                                                                                                                                                                        | ** ** | ** **         | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                        | ** ** | ** **         | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                   |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                  | 2,787,456  |                  | $          | 2,841,801 |   |
| Grant receivable                                                                                                                                                                                  |       | 283,526            |       | 530,219               |       |
| Prepaid insurance                                                                                                                                                                                 |       | 122,233            |       | 111,761               |       |
| Other prepaid expenses and deposits                                                                                                                                                               |       | 133,520            |       | 88,535                |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Total current assets                                                                                                                                                                              |       | 3,326,735          |       | 3,572,316             |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                           |       |               |       |                  |       |
| Furniture and fixtures                                                                                                                                                                            |       | 214,380            |       | 244,072               |       |
| Computer software and equipment                                                                                                                                                                   |       | 258,786            |       | 258,786               |       |
| Leasehold improvements                                                                                                                                                                            |       | 177,253            |       | 177,253               |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Total property and equipment—at cost                                                                                                                                                         |       | 650,419            |       | 680,111               |       |
| Less accumulated depreciation                                                                                                                                                                     |       | (606,019           | )          | (624,158              | )          |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Property and equipment—net                                                                                                                                                                   |       | 44,400             |       | 55,953                |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| OTHER ASSETS:                                                                                                                                                                                     |       |               |       |                  |       |
| Commercial launch materials                                                                                                                                                                       |       | 2,760,936          |       | 2,760,936             |       |
| Deferred offering and financing costs                                                                                                                                                             |       | 10,174             |       | 13,566                |       |
| Other long-term assets                                                                                                                                                                            |       | 25,000             |       | 25,000                |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Total other assets                                                                                                                                                                                |       | 2,796,110          |       | 2,799,502             |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                      |       | $                  | 6,167,245  |                  | $          | 6,427,771 |   |
|                                                                                                                                                                                              |       |               |       |                  |       |
| **LIABILITIES AND EQUITY (DEFICIT)**                                                                                                                                                              |       |               |       |                  |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                              |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                  |       | $                  | 549,023    |                  | $          | 604,334 |   |
| Accrued payroll                                                                                                                                                                                   |       | 416,896            |       | 664,436               |       |
| Other accrued expenses                                                                                                                                                                            |       | 362,265            |       | 661,504               |       |
| Accrued interest payable                                                                                                                                                                          |       | 73,194             |       | 73,194                |       |
| Short-term lease payable                                                                                                                                                                          |       | —             |       | 4,350                 |       |
| Line of credit                                                                                                                                                                                    |       | 3,000,000          |       | —                |       |
| Short-term grant payable                                                                                                                                                                          |       | 500,000            |       | —                |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Total current liabilities                                                                                                                                                                         |       | 4,901,378          |       | 2,007,818             |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Long-term grant payable                                                                                                                                                                           |       | —             |       | 500,000               |       |
| Long-term notes payable - related party                                                                                                                                                           |       | 2,000,000          |       | 2,000,000             |       |
| Line of credit                                                                                                                                                                                    |       | 7,000,000          |       | 10,000,000            |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Total liabilities                                                                                                                                                                                 |       | 13,901,378         |       | 14,507,818            |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                     |       |               |       |                  |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| EQUITY (DEFICIT):                                                                                                                                                                                 |       |               |       |                  |       |
| Common stock, $0.01 par value—120,000,000 shares  authorized; 100,372,067 issued and outstanding at March 31, 2010;  84,925,010 shares issued and outstanding at December 31, 2009 |       | 1,003,721          |       | 849,250               |       |
| Additional paid-in capital                                                                                                                                                                        |       | 124,789,598        |       | 122,621,392           |       |
| Deficit accumulated during the development stage                                                                                                                                                  |       | (133,527,452       | )          | (131,550,689          | )          |
| Noncontrolling interest in subsidiary                                                                                                                                                             |       | —             |       | —                |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Total equity (deficit)                                                                                                                                                                            |       | (7,734,133         | )          | (8,080,047            | )          |
|                                                                                                                                                                                              |       |               |       |                  |       |
| TOTAL LIABILITIES AND EQUITY (DEFICIT)                                                                                                                                                            |       | $                  | 6,167,245  |                  | $          | 6,427,771 |   |

 

See notes to unaudited consolidated financial statements.

 

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Tableof Contents

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **  | ** ** | **Period From**            | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **  | ** ** | **Inception**              | ** ** |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **  | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                  | ** ** | **Three months ended March 31,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2010**                              | ** ** | **2009**    | ** ** | **March 31, 2010**    | ** ** |
| Revenue:                                                                    |       |                                  |       |        |       |                       |       |
| Management fees                                                             |       | $                                     | —     |        | $          | —                     |       | $ | 1,161,180 |   |
| Grants                                                                      |       | 479,824                               |       | 411,485     |       | 4,549,416                  |       |
| Royalty—related party                                                  |       | —                                |       | —      |       | 45,238                     |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Total revenue                                                               |       | 479,824                               |       | 411,485     |       | 5,755,834                  |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Expenses:                                                                   |       |                                  |       |        |       |                       |       |
| Research and development                                                    |       | 864,204                               |       | 934,769     |       | 95,906,886                 |       |
| Contracted research and development—related party                      |       | —                                |       | —      |       | 7,980,299                  |       |
| Selling, general and administrative                                         |       | 1,341,829                             |       | 1,508,953   |       | 34,713,315                 |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Total expenses                                                              |       | 2,206,033                             |       | 2,443,722   |       | 138,600,500                |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Loss from operations                                                        |       | (1,726,209                            | )          | (2,032,237  | )          | (132,844,666               | )          |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net other (income) expense:                                                 |       |                                  |       |        |       |                       |       |
| Interest income                                                             |       | (5,435                                | )          | (1,732      | )          | (2,965,858                 | )          |
| Interest expense                                                            |       | 255,989                               |       | 252,718     |       | 4,441,604                  |       |
| Other (income) expense, net                                                 |       | —                                |       | —      |       | 146,092                    |       |
| Gain on sale of interest in Sarawak Medichem  Pharmaceuticals joint venture |       | —                                |       | —      |       | (939,052                   | )          |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net other (income) expense                                                  |       | 250,554                               |       | 250,986     |       | 682,786                    |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net loss                                                                    |       | (1,976,763                            | )          | (2,283,223  | )          | (133,527,452               | )          |
|                                                                        |       |                                  |       |        |       |                       |       |
| Less net loss attributable to the noncontrolling  interest in subsidiary    |       | —                                |       | —      |       | —                     |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net loss attributable to Advanced Life Sciences  Holdings, Inc.        |       | (1,976,763                            | )          | (2,283,223  | )          | (133,527,452               | )          |
|                                                                        |       |                                  |       |        |       |                       |       |
| Less accumulated preferred stock dividends of  subsidiary for the period    |       | 43,750                                |       | 43,750      |       | 1,888,542                  |       |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net loss available to common shareholders                                   |       | $                                     | (2,020,513 | )           | $          | (2,326,973                 | )          | $ | (135,415,994 | ) |
|                                                                        |       |                                  |       |        |       |                       |       |
| Net loss per share available to common shareholders  - basic and diluted    |       | $                                     | (0.02      | )           | $          | (0.06                      | )          |   |   |
|                                                                        |       |                                  |       |        |       |                       |       |
| Weighted average shares outstanding - basic and  diluted                    |       | 92,642,185                            |       | 41,779,634  |       |                       |       |

 

See notes 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 common stock under standby equity distribution agreements, net of offering  costs (2009) |       | 43,986,137        |       | 439,862     |       | 12,475,173      |       | —          |       | —             |         | 12,915,035   |       |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Issuance  of stock related to option exercises (since inception)                                      |       | 347,668           |       | 9,622       |       | 49,869          |       | —          |       | —             |         | 59,491       |       |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Compensation  expense related to stock options (since inception)                                      |       | —            |       | —      |       | 3,088,578       |       | —          |       | —             |         | 3,088,578    |       |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Net  loss (since inception)                                                                           |       | —            |       | —      |       | —          |       | (131,550,689    | )          | —             |         | (131,550,689 | )          |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE—December 31,  2009                                                                  |       | 84,925,010        |       | 849,250     |       | 122,621,392     |       | (131,550,689    | )          | —             |         | (8,080,047   | )          |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Issuance  of common stock under standby equity distribution agreements, net of offering  costs        |       | 15,447,057        |       | 154,471     |       | 2,092,529       |       | —          |       | —             |         | 2,247,000    |       |
| Compensation  expense related to stock options                                                        |       | —            |       | —      |       | 75,677          |       | —          |       | —             |         | 75,677       |       |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Net  loss                                                                                             |       | —            |       | —      |       | —          |       | (1,976,763      | )          | —             |         | (1,976,763   | )          |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE—March 31,  2010                                                                     |       | 100,372,067       |       | $           | 1,003,721  |            | $          | 124,789,598     |       | $                  | (133,527,452 | )            | $          | — |   | $ | (7,734,133 | ) |

 

See notes to unaudited consolidated financial statements.

 

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

**(ADevelopment Stage Company)**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **                            | ** ** | ** **  | ** ** | **Inception**              | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | ** **                            | ** ** | ** **  | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **Three months ended March 31,** | ** ** | **Through** | ** ** |
| ** **                                                                         | ** ** | **2010**                              | ** ** | **2009**    | ** ** | **March 31, 2010**    | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                  |       |        |       |                       |       |
| Net loss                                                                           |       | $                                     | (1,976,763 | )           | $          | (2,283,223                 | )          | $ | (133,527,452 | ) |
| Adjustments to reconcile net loss to net cash flows  used in operating activities: |       |                                  |       |        |       |                       |       |
| Depreciation and amortization                                                      |       | 10,185                                |       | 34,344      |       | 958,662                    |       |
| Non-cash interest expense                                                          |       | 3,392                                 |       | 3,694       |       | 126,132                    |       |
| Stock compensation expense                                                         |       | 75,677                                |       | 168,855     |       | 3,164,255                  |       |
| Non-cash research and development                                                  |       | —                                |       | —      |       | 24,466,667                 |       |
| Non-cash settlement of milestone payment                                           |       | —                                |       | —      |       | 6,000                      |       |
| Gain on sale of interest in Sarawak Medichem  Pharmaceuticals (SMP)                |       | —                                |       | —      |       | (939,052                   | )          |
| (Gain) loss on disposal                                                            |       | (1,435                                | )          | 10,493      |       | 256,553                    |       |
| Changes in operating assets and liabilities:                                       |       |                                  |       |        |       |                       |       |
| Clinical supplies                                                                  |       | —                                |       | —      |       | 533,333                    |       |
| Accounts receivable                                                                |       | 246,693                               |       | (71,445     | )          | (283,526                   | )          |
| Prepaid expenses                                                                   |       | (55,457                               | )          | 97,216      |       | (264,301                   | )          |
| Commercial launch materials                                                        |       | —                                |       | —      |       | (2,760,936                 | )          |
| Other assets                                                                       |       | —                                |       | —      |       | (16,452                    | )          |
| Accounts payable                                                                   |       | (55,311                               | )          | 483,080     |       | 549,023                    |       |
| Accrued expenses                                                                   |       | (546,779                              | )          | (103,661    | )          | 779,163                    |       |
| Licenses payable                                                                   |       | —                                |       | —      |       | (11,000,000                | )          |
| Accrued interest on debt                                                           |       | —                                |       | 26,198      |       | 651,257                    |       |
|                                                                               |       |                                  |       |        |       |                       |       |
| Net cash flows from operating activities                                           |       | (2,299,798                            | )          | (1,634,449  | )          | (117,300,674               | )          |
|                                                                               |       |                                  |       |        |       |                       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                  |       |        |       |                       |       |
| Purchase of property and equipment                                                 |       | —                                |       | (5,466      | )          | (1,098,167                 | )          |
| Proceeds from the sale of SMP                                                      |       | —                                |       | —      |       | 939,052                    |       |
| Proceeds from the sales of investments                                             |       | —                                |       | —      |       | 31,557,158                 |       |
| Purchase of investments                                                            |       | —                                |       | —      |       | (31,557,158                | )          |
|                                                                               |       |                                  |       |        |       |                       |       |
| Net cash flows from investing activities                                           |       | —                                |       | (5,466      | )          | (159,115                   | )          |
|                                                                               |       |                                  |       |        |       |                       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                  |       |        |       |                       |       |
| Proceeds from issuance of common stock and capital  contributions                  |       | 2,247,000                             |       | 554,471     |       | 104,798,549                |       |
| 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                                              |       | —                                |       | —      |       | 59,491                     |       |
| Payments for financing fees                                                        |       | —                                |       | (36,039     | )          | (53,039                    | )          |
| Payments on capital leases                                                         |       | (1,547                                | )          | (1,993      | )          | (161,447                   | )          |
|                                                                               |       |                                  |       |        |       |                       |       |
| Net cash flows from financing activities                                           |       | 2,245,453                             |       | 601,439     |       | 120,247,245                |       |
|                                                                               |       |                                  |       |        |       |                       |       |
| NET (DECREASE) INCREASE IN CASH                                                    |       | (54,345                               | )          | (1,038,476  | )          | 2,787,456                  |       |
|                                                                               |       |                                  |       |        |       |                       |       |
| CASH—Beginning of period                                                      |       | 2,841,801                             |       | 1,527,108   |       | —                     |       |
|                                                                               |       |                                  |       |        |       |                       |       |
| CASH—End of period                                                            |       | $                                     | 2,787,456  |        | $          | 488,632                    |       | $ | 2,787,456 |   |
|                                                                               |       |                                  |       |        |       |                       |       |
| SUPPLEMENTAL DISCLOSURE OF                                                         |       |                                  |       |        |       |                       |       |
| CASH FLOW INFORMATION:                                                             |       |                                  |       |        |       |                       |       |
| Cash paid during the period for interest                                           |       | $                                     | 252,598    |        | $          | 224,179                    |       | $ | 3,666,769 |   |
|                                                                               |       |                                  |       |        |       |                       |       |
| SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS                                    |       |                                  |       |        |       |                       |       |
| Purchase of property and equipment under capital  leases                           |       | —                                |       | —      |       | 164,249                    |       |
| Noncash financing activity:                                                        |       |                                  |       |        |       |                       |       |
| Issuance of common shares for licenses                                             |       | —                                |       | —      |       | 9,000,000                  |       |
| Issuance of common shares for reduction of  milestone payment                      |       | —                                |       | —      |       | 3,000,000                  |       |
| Debt discount                                                                      |       | —                                |       | —      |       | 30,823                     |       |
| SEDA and financing related costs                                                   |       | —                                |       | —      |       | 337,445                    |       |

 

See notes to unaudited consolidated financial statements.

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**MARCH 31, 2010**

**(UNAUDITED)**

 

**1.**              Summary of SignificantAccounting Policies

** **

***Nature of Business-******Advanced***LifeSciences Holdings, Inc. and its subsidiary Advanced Life Sciences, Inc.(together, the “Company”) conduct new drug research and development in thefields of infectious disease, oncology and respiratory disease.  Since inception, the Company has devotedsubstantially all of its efforts to activities such as financial planning,capital raising and product development, and has not derived significantrevenues from its primary business activity. Accordingly, the Company is in the development stage, as defined by theaccounting principles generally accepted in the United States of America (“GAAP”)for development stage enterprises.

 

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

 

***Basis of Presentation-***Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared in accordance with GAAP and with the rules and regulationsof the Securities and Exchange Commission (“SEC”). Accordingly, they do not includeall of the information and footnotes required by GAAP 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, 2009 and notesthereto. The consolidated financial statements include the accounts of theAdvanced Life Sciences Holdings, Inc. and its wholly-owned subsidiaryAdvanced Life Sciences, Inc. (“ALS Inc.”)  All intercompany balances and transactionshave been eliminated.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations expected for the full year.

 

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

 

***Business and Credit Risks-***The Company is subject to risks and uncertainties common to drugdiscovery companies, including technological change, potential infringement onintellectual property of third parties, new product development, regulatoryapproval and market acceptance of its products, activities of competitors andits limited operating history.

 

TheCompany has incurred losses since its incorporation in January 1999 andhas funded its operations to date primarily from debt financings and capitalcontributions from its founder and Chief Executive Officer, proceeds from theinitial public offering and subsequent private placements, including issuancesof common stock under two Standby Equity Distribution Agreements.  In March 2010, the Company filed a RegistrationStatement on Form S-1 with the SEC relating to a proposed offering of commonstock and warrants.  If the Company issuccessful with an offering and raises additional capital by issuing equitysecurities, its shareholders could experience substantial dilution. Inaddition, as a result of the Company’s continued losses and current cash andfinancing position, realization of assets or liquidation of liabilities withoutsubstantial adjustments is uncertain. The accompanying financial statements donot include any adjustments that might result from the outcome of these uncertainties.Given this uncertainty, there is substantial doubt as to the Company’s abilityto continue as a going concern.

 

In order to continue itsbusiness activities during 2010, the Company intends to raise additionalcapital by issuing additional common shares and by licensing its lead compound,cethromycin (RestanzaTM), to commercial partners.  The Company believes, based upon currentmarket conditions, additional commercial partnership agreements would include a

 

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series of milestonepayments, including up-front milestones that would fund the Company’s continuedoperations.  Although management believesthe Company could secure additional commercial partnerships, there can be noassurances that such partnerships will be available at terms acceptable to theCompany, if at all.

 

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

 

In March 2010, theCompany and YA Global Master SPV Ltd. (“YA SPV”), an affiliate ofYorkville Advisors, agreed to terminate the Standby Equity DistributionAgreement dated June 19, 2009 (the “SEDA”).  The Company had sold toYA SPV 49,549,200 million shares of its common stock and raised approximately$11.7 million under the SEDA prior to its termination.  Shares of common stock sold under the SEDA inexcess of $9.0 million were sold with the consent of the Company’s lender underthe Company’s credit facility.

 

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

 

**3.**           Related PartyTransactions

** **

The Company’sChief Executive Officer, Michael T. Flavin Ph.D., loaned $2.0 million to theCompany in 2001 (see Note 4). Interest expense of approximately $39,000 was recorded related to theloan for the three months ended March 31, 2010 and 2009.  In May 2010, Michael T. Flavin Ph.D. agreedto exchange this outstanding indebtedness for newly-issued units, at the same priceper unit as those sold in the proposed offering of common stock and warrants.This exchange is contingent upon the Company receiving at least $10.0 million ingross proceeds from the public offering. The promissory note would be cancelledand retired upon effectiveness of the exchange.

 

In May 2010, theCompany amended its loan agreement with a financial institution.  As part of the amendment, the Company’s ChiefExecutive Officer provided a $1.5 million personal guarantee to the loanfacility and will be released of his guarantee upon receipt of a $1.5 millionpayment from the Company to the lender by July 1, 2010 (see Note 4).

 

The Company leasesfacilities from the BioStart Property Group (“BioStart”), a wholly-ownedsubsidiary of Flavin Ventures, which is owned by the Company’s Chief ExecutiveOfficer.  The 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 an annual rental rate of $10.50 per square foot.  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 aprovision allowing the Company to negotiate an amendment to lease additionallaboratory and office space should the need arise.  Lease obligations totaled approximately$40,000 and $84,000 for the three months ended March 31, 2010 and 2009,respectively.

 

**4.**           Debt Obligations

** **

In September 2001,the Company incurred indebtedness under a $2.0 million promissory note with theChief Executive Officer of the Company, which bears interest at 7.75%.  On January 4, 2010, the note wasextended to January 5, 2012 and is therefore classified as a long-termliability in the financial statements. All other terms remained unchanged andin effect.  As of March 31, 2010 andDecember 31, 2009, the Company had $2.0 million outstanding under thenote.

 

The Company has arevolving line of credit with a financial institution under which the Companyhad $10.0 million outstanding as of March 31, 2010 and December 31,2009. In May 2010, the Company received a commitment to extend the loanmaturity by one year to January 1, 2012, under its loan facility with itslender in exchange for the Company taking the following steps.  The Company has reduced the outstanding loanbalance to $8.5 million and will further reduce the balance by an additional$1.5 million by July 1, 2010.  TheCompany’s Chief Executive Officer, Michael T. Flavin, Ph.D., will provide apersonal guarantee to the loan facility and will be released of his guarantee uponreceipt of a $1.5 million payment from the Company to the lender by July 1,2010.  Accordingly, $3.0 million of theoutstanding loan balance is classified as a current liability and $7.0 milliona long-term liability on the March 31, 2010 balance sheet.  The Company has also agreed to further reducethe loan balance by an additional $1.0 million no later than April 1,2011.  In addition, the interest rate onthe outstanding loan balance will increase from 8.5% to 10.0%. The Company willalso issue 500,000 warrants priced upon closing of the loan documents and anadditional 500,000 warrants will be issued and priced one year after theclosing.  The Company also agreed thatthe line of credit is secured by substantially all of its assets.  All other terms of the loan remainedunchanged.

 

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**5.****              Fair Value ofFinancial Instruments**

 

The carrying values ofcertain of the Company’s financial instruments, including cash equivalents andaccounts payable, approximate 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.  As of March 31,2010, the Company estimates that the fair value of its $10.0 million (carryingvalue) revolving line of credit is approximately $9.6 million and that the fairvalue of its $2.0 million (carrying value) promissory note is approximately$1.9 million.

 

**6.****              Commitments**

 

***VendorContracts-***TheCompany administers its cethromycin program largely under contracts with thirdparties.  Through March 31, 2010,contracts totaling $47.2 million have been executed related to the cethromycinprogram, which includes the development, commercialization, regulatory reviewand pre-launch activities associated with cethromycin as well asanthrax-related studies.  To date theCompany has paid $46.9 million under these contracts and the remaining balanceof $0.3 million is expected to be paid by the end of the year.  Subcontractor arrangements in connection withthe Defense Threat Reduction Agency (“DTRA”) award grant are expected to beapproximately $2.7 million over a two-year period which began in August 2008.  Through March 31, 2010 the Company haspaid $2.4 million related to these agreements. In addition, to date the Company has executed $1.2 million in contractsrelated to the ALS-357 program.  Through March 31,2010 the Company has paid $0.3 million related to these contracts and theremaining balance of $0.9 million would be paid over the life of the programwhich the Company estimates to be two to three years.  The commencement of clinical trials to studyALS-357 as a topical treatment for patients with metastatic melanoma may bedelayed due to insufficient patient enrollment, which is a function of manyfactors, including the size of the patient population, the nature of theprotocol, the proximity of patients to clinical sites, the availability ofeffective treatments for the relevant disease, and the eligibility criteria forthe clinical trial.

 

***GrantPayable-*** In April 2005, the Company was awarded a$500,000 grant from the State of Illinois to fund expansion of its corporateheadquarters in Woodridge, Illinois. Under the terms of the grant, the Company is to create 100 full-timejobs at its corporate headquarters between January 31, 2005 and December 31,2010 (“grant period”).  Under the currentterms of the agreement, if the Company does not create the specified number offull-time jobs, it is required to repay the grant proceeds on a pro-rata basisof actual jobs created compared to the total defined in the grant within 45days of the expiration or termination of the agreement.  The entire grant has been spent and thereforethe $500,000 has been classified as a current liability as the Company mustcreate and maintain positions created during the grant period through December 31,2010.    Through March 31, 2010,four new jobs have been created and retained since the grant was awarded.

 

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

 

The Company did not grantstock options during the three months ended March 31, 2010 and 2009.  The Company recognized compensation expensetotaling approximately $76,000 and $169,000 for the three months ended March 31,2010 and 2009, respectively.

 

**8.****             ****Net Loss Per Share**

 

Basic loss per share iscomputed by dividing net loss by the number of weighted average common sharesoutstanding during the reporting period. Diluted loss per share is calculated to give effect to all potentially dilutivecommon shares that were outstanding during the reporting period.  The computation of diluted shares outstandingfor the periods ended March 31, 2010 and 2009 excludes incremental sharesof 13,560,550 and 13,356,138 respectively, related to outstanding employeestock options and warrants.  These sharesare excluded due to their anti-dilutive effect as a result of the Company’s netlosses for the periods ended March 31, 2010 and 2009.

 

**9.****             ****Recent Accounting Pronouncements**

 

In January 2010,the FASB issued updated accounting guidance related to the accounting for fairvalue measurements and disclosures, which are included in ASC Update No. 2010-06,“Improving Disclosures About Fair Value Measurements”.   The update requires new disclosures andclarifies existing disclosure requirements about fair value measurement as setforth in ASC 820. The objective is to improve these disclosures and, thus,increase the transparency in financial reporting. The statement is effectivefor interim and annual reporting periods beginning after December 15,2009. The adoption of the provisions did not have a material impact on theCompany’s statements of financial position, results of operations and cashflows.

 

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

** **

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

 

**Overview**

 

We are abiopharmaceutical company focused on the discovery, development andcommercialization of novel drugs in the areas of infectious disease, oncologyand respiratory disease. Using our internal discovery capabilities and ournetwork of pharmaceutical and academic partners, we have assembled a promisingpipeline of clinical and preclinical product candidates.  Our most advanced product candidate,cethromycin (RestanzaTM), is a novel once-a-day oral antibioticthat completed two pivotal Phase III clinical trials in community acquiredbacterial pneumonia (“CABP”).  We have anexclusive worldwide license (excluding Japan) from Abbott Laboratories todevelop and commercialize cethromycin. Cethromycin is also being developed as abio-defense agent for use in the treatment of anthrax and other potentialbroad-spectrum medical countermeasures. We also have product candidates in earlier stages of development for thetreatment of indications including respiratory distress caused byinflammation-related tissue damage and malignant melanoma.

 

None of ourproduct candidates have been approved by the U.S. Food and DrugAdministration  (“FDA”) or any comparableforeign agencies, and we have not generated any significant revenues to date.Our ability to generate revenues in the future will depend on our ability tomeet development or regulatory milestones under any license agreements thattrigger payments to us, to enter into new license agreements for other productsor territories and to receive regulatory approvals for, and successfullycommercialize, our product candidates either directly or through commercialpartners.

 

**Development Update — CethromycinCABP Program**

 

In March 2010,we met with officials from the FDA’s Anti-Infectives Division to gain clarityon the registration pathway for cethromycin. This meeting followed the December 9,2009 FDA Anti-Infective Drugs Advisory Committee (“AIDAC”) meeting whichdiscussed clinical trial design issues for CABP relative to the earlier, March 2009,FDA CABP guidance document. In the meeting, the FDA guided that, to assess theapprovability for cethromycin to treat CABP, we should establish a specialprotocol assessment (“SPA”) using a superiority clinical trial design comparingcethromycin to a marketed macrolide antibiotic in two clinical trials.

 

In light of thisguidance, we are working with the FDA to finalize a SPA using a superioritydesign for the outpatient CABP indication. Clinical cure rate in amacrolide-resistant *Streptococcus pneumoniae*(“MRSP”) population will be the primary endpoint.

 

*Background*

 

We submitted thecethromycin NDA in September, 2008 based on the results of 53 clinical studiesincluding 2 pivotal phase III studies wherein cethromycin demonstratednon-inferiority to Biaxin® in mild-to-moderate CABP.

 

On June 2,2009, the FDA AIDAC reviewed the cethromycin NDA. The AIDAC voted thatcethromycin demonstrated safety for the outpatient treatment of adults withmild-to-moderate CABP, but voted that cethromycin did not demonstrate efficacyin the treatment of CABP in light of the new FDA draft CABP guidance which waspublished in March of 2009.

 

On July 31,2009 the FDA provided a complete response letter to us indicating that furtherclinical work would be required for the approval of cethromycin in CABP. Ourpivotal phase III program was designed and conducted under prior FDA guidanceand before the new draft guidance document was released.

 

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Over the past twoyears, the FDA has been conducting public workshops and advisory panels todiscuss clinical trial design issues in CABP culminating in a draft guidance documentpublished in March of 2009. Public comments were received in response tothe draft guidance and an AIDAC meeting was held in December of 2009 tofurther discuss and resolve the CABP clinical design issues.

 

Ifcethromycin is approved for marketing by the FDA, we plan to sell cethromycinusing commercial partners to access the primary care physician market and tobuild and utilize a focused internal sales force that will market directly toearly adopters such as, but not limited to, pulmonary medicine and infectiousdisease physicians.  In September 2008,we entered into a development and commercialization agreement for cethromycinwith Pfizer in the Asia Pacific region (excluding Japan). We will retainexclusive rights to cethromycin in the rest of the world (excluding Japan),including North America and Europe.  Inaddition to future royalty payments, we would receive milestone and regulatorypayments based on successful achievement of clinical, regulatory and commercialobjectives in specific markets. We will collaborate with Pfizer to developadditional clinical data in the Asia Pacific region to support regulatoryfilings in that region.   Discussionswith other potential commercial partners focused on other geographical marketssuch as the European Union and the United States are ongoing.

 

**DevelopmentUpdate — Cethromycin Biodefense Program**

 

In March 2010,we announced that we received notice from the Biomedical Advanced Research andDevelopment Authority (“BARDA”) of the U.S. Department of Health and HumanServices that it has completed its initial technical evaluation of our $15.0million funding proposal for advanced development of cethromycin as abiodefense countermeasure and identified it as a scientifically and technicallysound proposal important to program goals and objectives that may requirefurther development and may be recommended for acceptance subject to fundsavailability. We were invited to submit additional information to allow BARDAto make a final determination on the appropriateness of the proposal to enterinto contract negotiations.

 

Related to thisdevelopment, we also gained clarity from the FDA on the biodefense regulatorypackage required for submission in light of recent AIDAC meetings discussingthe use of the FDA’s Animal Rule for approval of biodefense therapeutics.As anticipated, the FDA recommended that, in parallel with pivotal animalstudies demonstrating efficacy under FDA’s Animal Rule, we should complete theCABP clinical program and submit a complete response to the CABP new drugapplication (“NDA”) prior to submitting an amended NDA for the biodefenseindications.

 

**Financial Update**

 

Since ourinception, we have incurred net losses each year. Our net loss for the threemonths ended March 31, 2010 was $2.0 million.  As of March 31, 2010, we had anaccumulated deficit of $133.5 million. We have funded operations to dateprimarily from debt financings and capital contributions from our founder andChief Executive Officer, proceeds from an initial public offering and subsequentprivate placements, including issuances of common stock under two StandbyEquity Distribution Agreements.

 

In May 2010, we receiveda commitment to extend the loan maturity by one year to January 1, 2012, underour loan facility with our lender in exchange for us taking the following steps.  We have reduced the outstanding loan balanceto $8.5 million and will further reduce the balance by an additional $1.5million by July 1, 2010.  Our ChiefExecutive Officer, Michael T. Flavin, Ph.D., will provide a personal guaranteeto the loan facility and will be released of his guarantee upon receipt of a $1.5million payment from us to the lender by July 1, 2010.  Accordingly, $3.0 million of the outstandingloan balance is classified as a current liability and $7.0 million a long-termliability on the March 31, 2010 balance sheet.  We have also agreed to further reduce theloan balance by an additional $1.0 million no later than April 1,2011.  In addition, the interest rate onthe outstanding loan balance will increase from 8.5% to 10.0%. We will alsoissue 500,000 warrants priced upon closing of the loan documents and anadditional 500,000 warrants will be issued and priced one year after theclosing.  We have also agreed that theline of credit is secured by substantially all of our assets.  All other terms of the loan remainedunchanged.

 

In May 2010, Michael T. Flavin Ph.D. agreed toexchange this outstanding indebtedness for newly-issued units, at the sameprice per unit as those sold in the proposed offering of common stock andwarrants. This exchange is contingent upon the Company receiving at least $10.0 millionin gross proceeds from the public offering. The promissory note would becancelled and retired upon effectiveness of the exchange.

 

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In April 2010,our shareholders approved an amendment to our articles of incorporation toincrease the number of authorized shares from 125,000,000 to 625,000,000including an increase in the number of authorized shares of common stock from120,000,000 to 620,000,000.  As of March 31,2010, 100,372,067 shares of common stock were issued and outstanding and16,556,577 shares are reserved for issuance under options and warrants.  Accordingly, out of the 620,000,000 shares ofcommon stock authorized, 503,071,356 remain available for future issuance.

 

In March 2010,we filed a Registration Statement on Form S-1 with the SEC relating to aproposed offering of common stock and warrants. A successful capital raise could provide us the required financing tocomplete the protocol design for the additional clinical data needed under aSPA with the FDA and initiate the clinical requirements for regulatory approvaland commercialization of cethromycin for the treatment of CABP.  In addition to pursuing regulatory approvaland commercialization of cethromycin for the treatment of CABP, we intend toevaluate opportunities for cethromycin in the treatment of other respiratorytract infections.

 

In March 2010, theCompany and YA Global Master SPV Ltd. (“YA SPV”), an affiliate ofYorkville Advisors, agreed to terminate the Standby Equity DistributionAgreement dated as of June 19, 2009 (the “SEDA”).  We sold to YA SPV49,549,200 million shares of our common stock and raised approximately $11.7million under the SEDA prior to its termination.  Shares of common stock sold under the SEDA inexcess of $9.0 million were sold with the consent of our lender under ourcredit facility.

 

In June 2009, theCompany and YA Global Investments, L.P. (“YA Global”), an affiliate ofYorkville Advisors,  terminated a priorStandby Equity Distribution Agreement dated as of September 29, 2008 (“FormerSEDA”).  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.

 

A discussion of ourability to continue as a going concern can be found in Note 1 to theconsolidated financial statements and in the liquidity and capital resourcessection of this management discussion and analysis.

 

**Results of Operations**

 

*Three months ended March 31,2010 compared to three months ended March 31, 2009*

* *

*Revenue.**  * We reported revenue of $480,000 for thethree months ended March 31, 2010 compared to $411,000 for the threemonths ended March 31, 2009. Revenue was derived from a grant awarded by the Defense Threat ReductionAgency (“DTRA”) of the U.S. Department of Defense (“DoD”).  The contract award of $3.8 million is over atwo year period which began in August 2008.  Since the beginning of the contract wereported revenue of approximately $3.5 million. We estimate that the remaining $0.3 million of revenue will berecognized by the end of the contract.

 

*Research and development expense.*    Research and development expensedecreased $0.1 million to $0.9 million for the three months ended March 31,2010.  In conjunction with work performedunder the grant awarded by DTRA, costs incurred increased $0.1 million in thequarter ended March 31, 2010 and were offset by lower salary, benefit andincentive compensation costs of approximately $0.2 million.

 

*Generaland administrative expense.**  * General and administrative expenses were $1.3million for the three months ended March 31, 2010, a decrease of $0.2million compared to the first quarter last year.  This result reflects lower salary, benefitand incentive compensation costs of $0.1 million and decreased facilityexpenses of $0.1 million as a result of renewing our lease agreement at a lowerrate per square foot and reduced amount of space.

 

*Interestincome.*   Interest income increased $4,000 to $5,000 for the three months ended March 31,2010 as compared to the same period last year.

 

*Interestexpense.  * Interest expense of $256,000 increased $3,000in the three months ended March 31, 2010 as compared to the same periodlast year.

 

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**Liquidityand Capital Resources**

 

We have devotedsubstantially all of our cash resources to research and development and generaland administrative expenses.  To date, wehave not generated any revenues from the sale of products, and we do not expectto generate any such revenues in the near term, if at all.  As a result, we have incurred an accumulateddeficit of $133.5 million as of March 31, 2010 and we expect to incursignificant operating losses for the foreseeable future.  As of March 31, 2010 we had negativeworking capital of $1.6 million.  Cashand cash equivalents were $2.8 million as of March 31, 2010.  Since our inception in 1999 to August 2005,we financed our operations primarily through debt and capital contributionsfrom our founder and controlling stockholder and borrowings under our bank lineof credit.  In August 2005 we completedour initial public offering in which we raised $28.7 million, net ofunderwriters discount and offering costs. Since that time, we have completed three private placements in which weraised $52.8 million, net of underwriters’ discounts and offering costs andraised additional debt financing through our $10.0 million bank line ofcredit.  Between January 2009 and March 2010we raised $15.6 million under two Standby Equity Distribution Agreements.

 

In September 2001,we incurred indebtedness under a $2.0 million promissory note with the ChiefExecutive Officer of the Company, which bears interest at 7.75%.  On January 4, 2010, the note wasextended to January 5, 2012, all other terms remained unchanged and ineffect.  In May 2010, Michael T. FlavinPh.D. agreed to exchange this outstanding indebtedness for newly-issued units,at the same price per unit as those sold in the proposed offering of commonstock and warrants. This exchange is contingent upon the Company receiving atleast $10.0 million in gross proceeds from the public offering. The promissorynote would be cancelled and retired upon effectiveness of the exchange.

 

We have a revolving lineof credit with a financial institution under which we had $10.0 millionoutstanding as of March 31, 2010 and December 31, 2009. In May 2010,we received a commitment to extend the loan maturity by one year to January 1,2012, under our loan facility with our lender in exchange for us taking thefollowing steps.  We have reduced theoutstanding loan balance to $8.5 million and will further reduce the balance byan additional $1.5 million by July 1, 2010.  Our Chief Executive Officer, Michael T.Flavin, Ph.D., will provide a personal guarantee to the loan facility and willbe released of his guarantee upon receipt of a $1.5 million payment from us tothe lender by July 1, 2010. Accordingly, $3.0 million of the outstanding loan balance is classifiedas a current liability and $7.0 million a long-term liability on the March 31,2010 balance sheet.  We have also agreedto further reduce the loan balance by an additional $1.0 million no later than April 1,2011.  In addition, the interest rate onthe outstanding loan balance will increase from 8.5% to 10.0%. We will alsoissue 500,000 warrants priced upon closing of the loan documents and anadditional 500,000 warrants will be issued and priced one year after theclosing.  We have also agreed that theline of credit is secured by substantially all of our assets.  All other terms of the loan remainedunchanged.

 

Net cash used inoperating activities was $2.3 million for the three months ended March 31,2010 compared to $1.6 million for the three months ended March 31,2009.  Approximately $0.6 million of cashused in the three months ended March 31, 2010 and 2009 was used for in ourcethromycin programs.  These amounts arenet of DTRA grant award funds, which reimburse us for certain research anddevelopment expenses associated with the grant. Cash used for general corporate purposes was $1.7 million in the threemonths ended March 31, 2010 compared to $1.0 million for the three monthsended March 31, 2009.

 

Cash provided fromfinancing activities was $2.2 million for three months ended March 31,2010 compared to $0.6 million in 2009. For three months ended March 31, 2010, we received approximately$2.2 million, net of offering expenses, for the sale of 15,447,057 shares underthe SEDA facility compared to $0.6 million for the sale of 2,448,309 shares forthe three months ended March 31, 2009.

 

*Contractual Obligations*

* *

As of March 31,2010, the annual amounts of future minimum payments under debt obligations,interest, lease obligations and other long term liabilities consisting ofexecuted research and development, and license agreements are as follows:

 

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| ** **                             | ** ** | **Payments Due by  December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2010**                               | ** ** | **2011**   | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **Total** | ** ** |
| Notes  payable and bank line of credit |       | $                                      | 3,000,000  |       | $          | 1,000,000 |   | $ | 8,000,000 |   | $ | — |   | $ | — |   | $ | 12,000,000 |   |
| Interest                               |       | 753,870                                |       | 1,005,000  |       | 155,000 |   | 1,722 |   | — |   | 1,915,592 |   |
| CABP  program related costs            |       | 246,766                                |       | —     |       | — |   | — |   | — |   | 246,766 |   |
| ALS-357  clinical program              |       | 237,299                                |       | 422,550    |       | 207,494 |   | — |   | — |   | 867,343 |   |
| Biodefense  program related costs      |       | 285,877                                |       | —     |       | — |   | — |   | — |   | 285,877 |   |
| Grant  payable                         |       | —                                 |       | 500,000    |       | — |   | — |   | — |   | 500,000 |   |
| Operating  leases                      |       | 82,070                                 |       | 111,840    |       | 87,965 |   | 9,480 |   | 2,370 |   | 293,725 |   |
|                                   |       |                                   |       |       |       |   |   |   |   |   |   |   |   |
| Total                                  |       | $                                      | 4,605,882  |       | $          | 3,039,390 |   | $ | 8,450,459 |   | $ | 11,202 |   | $ | 2,370 |   | $ | 16,109,303 |   |

 

The above table does notinclude the potential $30.0 million product based milestone payment under ourlicense agreement with Abbott which we will owe Abbott if cethromycin isapproved for marketing by the FDA.  Underthe terms of the amended license agreement, $20.0 million is payable within 20business days after receipt of U.S. regulatory approval, $5.0 million ispayable within 6 months of U.S. regulatory approval and $5.0 million is payablewithin 12 months of U.S. regulatory approval.  Thereafter, we would owe Abbott an additional $2.5 million upon reaching$200.0 million in aggregate net sales of cethromycin and $5.0 million uponreaching $400.0 million in aggregate net sales. The periods in which milestone obligations become payable, if at all, areonly estimates due to uncertainties associated with the completion orachievement of the milestone.

 

In the third quarter of2008, we signed a letter of intent with DSM to procure raw materials to be usedto produce commercial quantities of cethromycin.  The lead times for acquiring these rawmaterials needed to be used to complete production are lengthy.  As of March 31, 2010 the cost of rawmaterials actually purchased was approximately $2.8 million.  The agreement allows for us to purchaseadditional raw materials at a later time.

 

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

 

In August 2008, theDTRA of the DoD awarded us a two-year contract worth up to $3.8 million tofurther study cethromycin as a potential broad-spectrum medical countermeasure.In conjunction with the grant awarded by the DTRA, we entered intosubcontractor arrangements to further study cethromycin as a potentialbroad-spectrum medical countermeasure. The subcontractors’ costs are expected to be approximately $2.7 millionover a two-year period which began in August 2008.

 

Our commitments underoperating leases consist of payments made to a related party relating to ourfacilities lease in Woodridge, Illinois, which expires on October 1,2012.  Additionally, we rent certainoffice equipment under operating leases.

 

We will not be generatingany product-based revenues or realizing cash flows from operations in the nearterm, if at all.  We may not havesufficient cash or other funding available to complete our anticipated businessactivities for the remainder of 2010.  Inorder to continue our business activities during 2010, we intend to raiseadditional capital through the issuance of equity securities, and by licensingour lead compound, cethromycin, to commercial partners.  We believe, based upon current marketconditions, additional commercial partnership agreements would include a seriesof milestone payments, including up-front milestones that would fund ourcontinued operations.  Althoughmanagement believes we could secure additional commercial partnerships, therecan be no assurances that such partnerships will be available at termsacceptable to us, if at all.  In March 2010,we filed a Registration Statement on Form S-1 with the SEC relating to aproposed offering of common stock and warrants. If we are successful with an offering and raise additional capital byissuing equity securities, our shareholders could experience substantialdilution.  As a result of theseuncertainties, there is substantial doubt about our ability to continue as agoing concern.

 

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

 

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

 

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

 

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

 

·                                          ourability to establish and maintain additional collaborative arrangements;

 

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

 

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

 

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

 

If, at any time, ourprospects for financing our clinical development programs are limited, we maydecide to reduce research and development expenses by delaying or discontinuingcertain programs.

 

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**CriticalAccounting Policies and Estimates**

 

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

 

*Stock-basedCompensation*

 

We account forstock-based awards to employees and non-employees using the fair value basedmethod to determine compensation for all arrangements where shares of stock orequity instruments are issued for compensation. We use a Black-Scholes-Merton options-pricing model to determine thefair value of each option grant as of the date of grant for expenseincurred.  The Black-Scholes-Merton modelrequires inputs for risk-free interest rate, dividend yield, volatility andexpected lives of the options.  Expectedvolatility is based on historical volatility of our stock since August 5,2005, the date our stock began to trade publicly.  The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curvein effect at the time of the grant.  Theexpected lives for options granted represents the period of time that optionsgranted are expected to be outstanding and is derived from the contractualterms of the options granted.  Weestimate future forfeitures of options based upon historical forfeiture rates.

 

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**Forward-LookingStatements and Risk Factors**

 

This Quarterly Report on Form 10-Q,including Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, 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 materiallyfrom those anticipated in these forward-looking statements as a result ofvarious factors.   Some of thefactors that could cause future results to materially differ from the recentresults or those projected in forward-looking statements include the “RiskFactors” described in our Annual Report on Form 10-K.

 

**Item 3. *Quantitative andQualitative Disclosures About Market Risk***

 

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

 

We are subject toforeign currency exchange rate risk on certain contract manufacturingagreements.  For the three months ended March 31,2010, we did not incur any exchange losses and have no outstanding obligationsor commitments denominated in foreign currencies.  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.

** **

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

 

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

 

**Changes in Internal Control**

 

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

 

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** **

**PART II — OTHER INFORMATION**

** **

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

 

Our business, financialcondition, operating results and cash flows may be impacted by a number offactors, including those set forth in Item 1A of Part I of our AnnualReport on Form 10-K for the fiscal year ended December 31, 2009.  Set forth below are material changes in ourrisk factors since the 2009 Form 10-K. The information presented below updates, and should be read inconjunction with, the risk factors and other information disclosed in our 2009 Form 10-Kand this Quarterly Report on Form 10-Q.

 

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

 

Our independentregistered public accounting firm included an explanatory paragraph in thereport on our 2009 financial statements related to the uncertainty in ourability to continue as a going concern. The paragraph stated that we do nothave sufficient cash on-hand or other funding available to meet our obligationsand sustain our operations, which raises substantial doubt about our ability tocontinue as a going concern. We will not be generating any product-basedrevenues or realizing cash flows from operations in the near term, if at all.We may not have sufficient cash or other funding available to complete ouranticipated business activities for the remainder of 2010. In order to address ourworking capital shortfall we intend to raise additional capital by accessingthe capital markets and by licensing our lead product candidate, cethromycin,to commercial 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. 

 

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**Item 6. *Exhibits***

 

The following is a list of exhibits filed as part ofthis Form 10-Q:

 
| **Number** | ** ** | **Description**                                                                                                                                                            |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                       |
| 3.1*       |       | Third Amended and  Restated Certificate of Incorporation of Advanced Life Sciences  Holdings, Inc.                                                                    |
|       |       |                                                                                                                                                                       |
| 10.1       |       | Amended 2005 Stock  Incentive Plan of Advanced Life Sciences Holdings, Inc. (as filed in our  Current Report on Form 8-K as exhibit 10.1 on April 13, 2010) |
|       |       |                                                                                                                                                                       |
| 31.1*      |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                 |
|       |       |                                                                                                                                                                       |
| 31.2*      |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                 |
|       |       |                                                                                                                                                                       |
| 32.1*      |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.             |
|       |       |                                                                                                                                                                       |
| 32.2*      |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.             |

 

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*  Filed herewith.

 

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** **

**SIGNATURES**

 

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

 

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

 

 

Dated: May 10, 2010

 

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** **

**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                                            |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                       |
| 3.1*       |       | Third Amended and  Restated Certificate of Incorporation of Advanced Life Sciences  Holdings, Inc.                                                                    |
|       |       |                                                                                                                                                                       |
| 10.1       |       | Amended 2005 Stock  Incentive Plan of Advanced Life Sciences Holdings, Inc. (as filed in our  Current Report on Form 8-K as exhibit 10.1 on April 13, 2010) |
|       |       |                                                                                                                                                                       |
| 31.1*      |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                 |
|       |       |                                                                                                                                                                       |
| 31.2*      |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                 |
|       |       |                                                                                                                                                                       |
| 32.1*      |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.             |
|       |       |                                                                                                                                                                       |
| 32.2*      |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.             |

 

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*  Filed herewith.

 

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