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: June 30, 2009**

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

 

**Commission File No: 000-51436**

 

**ADVANCEDLIFE SCIENCES HOLDINGS, INC.******(Exact name of registrant as specified in itscharter)

 

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

 

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

 

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

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post 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(Do not check if a  smaller reporting company) |   | Smaller  reporting company x |

 

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

 

As of August 6,2009, the registrant had 59,214,405 shares of common stock, $0.01 par value pershare, 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 June 30, 2009  and December 31, 2008                                                                                                           |   |
|                                                          | Consolidated Statements of Operations for the three  and six months ended June 30, 2009 and 2008 and for the period from  inception (January 1, 1999) through June 30, 2009 |   |
|                                                          | Consolidated Statements of Total Equity (Deficit) for  period from inception (January 1, 1999) through June 30, 2009                                                             |   |
|                                                          | Consolidated Statements of Cash Flows for the six  months ended June 30, 2009 and 2008 and for the period from inception  (January 1, 1999) through June 30, 2009           |   |
|                                                          | Notes to Consolidated Financial Statements                                                                                                                                                 |   |
| Item 2.                                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                |   |
| Item 3.                                                  | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                |   |
| Item 4.                                                  | Controls and Procedures                                                                                                                                                                    |   |
| ** **                                                    | ** **                                                                                                                                                                                 | ** ** |
| **PART II —  OTHER INFORMATION**               | ** **                                                                                                                                                                                 |
| Item 1.                                                       | Legal Proceedings                                                                                                                                                                          |   |
| Item  1A.                                                     | Risk  Factors                                                                                                                                                                              |   |
| Item 4.                                                       | Submission  of Matters to a Vote of Security Holders                                                                                                                                       |   |
| Item 6.                                                  | Exhibits                                                                                                                                                                                   |   |
| Signatures                                                    |                                                                                                                                                                                       |
| Exhibit Index                                            |                                                                                                                                                                                       |

 

1

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Table of Contents

 

**PART I — FINANCIALINFORMATION**

 

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

*** ***

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

**(A Development Stage Company)**

 

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **2009**          | ** ** | **2008**              | ** ** |
|                                                                                                                                                                                             |       |              |       |                  |       |
| **ASSETS**                                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                  |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                        |       | $                 | 998,912    |                  | $          | 1,527,108 |   |
| Grant receivable                                                                                                                                                                                 |       | 586,820           |       | 63,444                |       |
| Prepaid insurance                                                                                                                                                                                |       | 47,932            |       | 227,313               |       |
| Other prepaid expenses and  deposits                                                                                                                                                             |       | 35,281            |       | 143,808               |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total current assets                                                                                                                                                                             |       | 1,668,945         |       | 1,961,673             |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                          |       |              |       |                  |       |
| Furniture and fixtures                                                                                                                                                                           |       | 244,072           |       | 244,072               |       |
| Laboratory equipment                                                                                                                                                                             |       | —            |       | 159,186               |       |
| Computer software and equipment                                                                                                                                                                  |       | 258,786           |       | 258,786               |       |
| Leasehold improvements                                                                                                                                                                           |       | 505,804           |       | 505,804               |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total property and  equipment—at cost                                                                                                                                                       |       | 1,008,662         |       | 1,167,848             |       |
| Less accumulated  depreciation                                                                                                                                                                   |       | (677,543          | )          | (760,329              | )          |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Property and equipment—net                                                                                                                                                                  |       | 331,119           |       | 407,519               |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| OTHER ASSETS:                                                                                                                                                                                    |       |              |       |                  |       |
| Commercial launch materials                                                                                                                                                                      |       | 2,760,936         |       | —                |       |
| Deferred offering and  financing costs                                                                                                                                                           |       | 20,348            |       | 450,861               |       |
| Other long-term assets                                                                                                                                                                           |       | 25,006            |       | —                |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total other assets                                                                                                                                                                               |       | 2,806,290         |       | 450,861               |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                     |       | $                 | 4,806,354  |                  | $          | 2,820,053 |   |
|                                                                                                                                                                                             |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                         |       |              |       |                  |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                             |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                 |       | $                 | 4,387,982  |                  | $          | 1,379,941 |   |
| Accrued clinical trial and  NDA expenses                                                                                                                                                         |       | 112,514           |       | 458,260               |       |
| Accrued payroll                                                                                                                                                                                  |       | 451,243           |       | 506,537               |       |
| Other accrued expenses                                                                                                                                                                           |       | 611,095           |       | 352,466               |       |
| Accrued interest payable                                                                                                                                                                         |       | 136,256           |       | 72,572                |       |
| Short-term lease payable                                                                                                                                                                         |       | 8,131             |       | 8,468                 |       |
| Short-term notes payable -  related party                                                                                                                                                        |       | 2,000,000         |       | —                |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total current liabilities                                                                                                                                                                        |       | 7,707,221         |       | 2,778,244             |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Long-term lease payable                                                                                                                                                                          |       | 621               |       | 4,350                 |       |
| Long-term grant payable                                                                                                                                                                          |       | 500,000           |       | 500,000               |       |
| Long-term notes payable -  related party                                                                                                                                                         |       | —            |       | 2,000,000             |       |
| Line of credit                                                                                                                                                                                   |       | 10,000,000        |       | 9,915,000             |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total liabilities                                                                                                                                                                                |       | 18,207,842        |       | 15,197,594            |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                                   |       |              |       |                  |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY  (DEFICIT):                                                                                                                                                            |       |              |       |                  |       |
| Common stock, $0.01 par  value—120,000,000 shares authorized; 50,698,926 issued and outstanding at  June 30, 2009; 40,810,932 shares issued and outstanding at  December 31, 2008 |       | 506,989           |       | 408,109               |       |
| Additional paid-in capital                                                                                                                                                                       |       | 113,331,011       |       | 109,601,807           |       |
| Deficit accumulated during  the development stage                                                                                                                                                |       | (127,239,488      | )          | (122,387,457          | )          |
| Noncontrolling interest in  subsidiary                                                                                                                                                           |       | —            |       | —                |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total equity (deficit)                                                                                                                                                                           |       | (13,401,488       | )          | (12,377,541           | )          |
|                                                                                                                                                                                             |       |              |       |                  |       |
| TOTAL LIABILITIES AND  EQUITY (DEFICIT)                                                                                                                                                          |       | $                 | 4,806,354  |                  | $          | 2,820,053 |   |

 

Seenotes to unaudited consolidated financial statements.

 

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

**(A Development Stage Company)**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** **  | ** ** | ** ** | ** ** | **Period From**            | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|-------------|------------|------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** **  | ** ** | ** ** | ** ** | **Inception**              | ** ** |
| ** **                                                                  | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** **  | ** ** | ** ** | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                  | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009**    | ** ** | **2008**   | ** ** | **June 30, 2009**     | ** ** |
| Revenue:                                                                    |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Management  fees                                                            |       | $                                    | —     |                               | $          | —      |       | $          | —     |                       | $          | — |   | $ | 1,161,180 |   |
| Grants                                                                      |       | 706,814                              |       | —                             |       | 1,118,299   |       | —     |       | 2,394,700                  |       |
| Royalty—related  party                                                 |       | —                               |       | —                             |       | —      |       | —     |       | 45,238                     |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Total  revenue                                                              |       | 706,814                              |       | —                             |       | 1,118,299   |       | —     |       | 3,601,118                  |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Expenses:                                                                   |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Research  and development                                                   |       | 1,309,050                            |       | 1,690,088                          |       | 2,243,819   |       | 3,558,141  |       | 92,824,220                 |       |
| Contracted  research and development—related party                     |       | —                               |       | —                             |       | —      |       | —     |       | 7,980,299                  |       |
| Selling,  general and administrative                                        |       | 1,690,505                            |       | 1,682,604                          |       | 3,199,458   |       | 3,408,972  |       | 30,248,095                 |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Total  expenses                                                             |       | 2,999,555                            |       | 3,372,692                          |       | 5,443,277   |       | 6,967,113  |       | 131,052,614                |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Loss  from operations                                                       |       | (2,292,741                           | )          | (3,372,692                         | )          | (4,324,978  | )          | (6,967,113 | )          | (127,451,496               | )          |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net  other (income) expense:                                                |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Interest  income                                                            |       | (1,739                               | )          | (76,444                            | )          | (3,471      | )          | (233,086   | )          | (2,952,333                 | )          |
| Interest  expense                                                           |       | 258,211                              |       | 102,664                            |       | 510,929     |       | 207,019    |       | 3,659,782                  |       |
| Other  (income) expense, net                                                |       | 19,595                               |       | —                             |       | 19,595      |       | —     |       | 19,595                     |       |
| Gain  on sale of interest in Sarawak Medichem Pharmaceuticals joint venture |       | —                               |       | —                             |       | —      |       | —     |       | (939,052                   | )          |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net  other (income) expense                                                 |       | 276,067                              |       | 26,220                             |       | 527,053     |       | (26,067    | )          | (212,008                   | )          |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net  loss                                                                   |       | (2,568,808                           | )          | (3,398,912                         | )          | (4,852,031  | )          | (6,941,046 | )          | (127,239,488               | )          |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Less  net loss attributable to the noncontrolling interest in subsidiary    |       | —                               |       | —                             |       | —      |       | —     |       | —                     |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net  loss attributable to Advanced Life Sciences Holdings, Inc.        |       | (2,568,808                           | )          | (3,398,912                         | )          | (4,852,031  | )          | (6,941,046 | )          | (127,239,488               | )          |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Less  accumulated preferred stock dividends of subsidiary for the period    |       | 43,750                               |       | 43,750                             |       | 87,500      |       | 87,500     |       | 1,757,292                  |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net  loss available to common shareholders                                  |       | $                                    | (2,612,558 | )                                  | $          | (3,442,662  | )          | $          | (4,939,531 | )                          | $          | (7,028,546 | ) | $ | (128,996,780 | ) |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net  loss per share available to common shareholders - basic and diluted    |       | $                                    | (0.06      | )                                  | $          | (0.09       | )          | $          | (0.11      | )                          | $          | (0.18 | ) |   |   |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Weighted  average shares outstanding - basic and diluted                    |       | 47,077,869                           |       | 38,502,987                         |       | 44,443,387  |       | 38,502,987 |       |                       |       |

 

See notes to unaudited consolidated financialstatements.

 

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*** ***

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

**(A Development Stage Company)**

 

**CONSOLIDATEDSTATEMENTS OF TOTAL EQUITY (DEFICIT)**

**(Unaudited)**

 
| ** **                                                                                       | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**     | ** ** | ** **         | ** **   | ** **   | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|--------------------|--------------|--------------|------------|
| ** **                                                                                       | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated** | ** ** | ** **         | ** **   | ** **   | ** ** |
| ** **                                                                                       | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | **During the**  | ** ** | **Noncontrolling** | ** **   | ** **   | ** ** |
| ** **                                                                                       | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | **Interest**    | ** ** | ** **         | ** **   |
| ** **                                                                                       | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**       | ** ** | **in Subsidiary**  | ** **   | **Total**    | ** ** |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE—January 1,  1999 (inception)                                                   |       | —           |       | $           | —     |            | $          | —          |       | $                  | —       |         | $          | — |   | $ | — |   |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Issuance of stock (at  inception)                                                                |       | 1,588,000        |       | 250,000     |       | —          |       | —          |       | —             |         | 250,000      |       |
| Issuance of common  stock, net of offering costs (August 2005)                              |       | 6,721,814        |       | 67,218      |       | 29,210,558      |       | —          |       | —             |         | 29,277,776   |       |
| Issuance of common  stock, net of offering costs (March 2006)                               |       | 10,233,464       |       | 102,335     |       | 33,266,653      |       | —          |       | —             |         | 33,368,988   |       |
| Issuance of common  stock, net of offering costs (December 2007)                            |       | 10,191,083       |       | 101,911     |       | 17,700,186      |       | —          |       | —             |         | 17,802,097   |       |
| Issuance of common  stock, net of offering costs (September 2008)                           |       | 1,888,606        |       | 18,886      |       | 1,634,193       |       | —          |       | —             |         | 1,653,079    |       |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Exchange of shares under  recapitalization (December 2004)                                  |       | (1,629,685       | )          | (256,563    | )          | —          |       | —          |       | —             |         | (256,563     | )          |
| Issuance of shares under  recapitalization (December 2004)                                  |       | 9,482,015        |       | 94,820      |       | 161,743         |       | —          |       | —             |         | 256,563      |       |
| Capital contributions  (December 2004)                                                      |       | —           |       | —      |       | 12,711,330      |       | —          |       | —             |         | 12,711,330   |       |
| Issuance of 14,887  warrants (December 2004)                                                |       | —           |       | —      |       | 11,898          |       | —          |       | —             |         | 11,898       |       |
| Issuance of common stock  in exchange for licenses (December 2004)                          |       | 1,122,569        |       | 11,226      |       | 8,988,774       |       | —          |       | —             |         | 9,000,000    |       |
| Issuance of common stock  in exchange for reduction of milestones payable (August 2005)     |       | 600,000          |       | 6,000       |       | 3,000,000       |       | —          |       | —             |         | 3,006,000    |       |
| Modification of 14,887  warrants (August 2005)                                              |       | —           |       | —      |       | 18,925          |       | —          |       | —             |         | 18,925       |       |
| Issuance of common stock  as payment for commitment fees (September 2008)                   |       | 393,339          |       | 3,933       |       | 296,067         |       | —          |       | —             |         | 300,000      |       |
| Issuance of 65,000  warrants (October 2008)                                                 |       | —           |       | —      |       | 7,445           |       | —          |       | —             |         | 7,445        |       |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Issuance of stock  related to option exercises (since inception)                                 |       | 219,727          |       | 8,343       |       | 31,014          |       | —          |       | —             |         | 39,357       |       |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Compensation expense  related to stock options (since inception)                                 |       | —           |       | —      |       | 2,563,021       |       | —          |       | —             |         | 2,563,021    |       |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Net loss (since  inception)                                                                      |       | —           |       | —      |       | —          |       | (122,387,457    | )          | —             |         | (122,387,457 | )          |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE—December 31,  2008                                                             |       | 40,810,932       |       | 408,109     |       | 109,601,807     |       | (122,387,457    | )          | —             |         | (12,377,541  | )          |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Issuance of common stock  under the standby equity distribution agreement, net of offering costs |       | 9,887,994        |       | 98,880      |       | 3,376,657       |       | —          |       | —             |         | 3,475,537    |       |
| Compensation expense  related to stock options                                                   |       | —           |       | —      |       | 352,547         |       | —          |       | —             |         | 352,547      |       |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| Net loss                                                                                         |       | —           |       | —      |       | —          |       | (4,852,031      | )          | —             |         | (4,852,031   | )          |
|                                                                                             |       |             |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE—June 30,  2009                                                                 |       | 50,698,926       |       | $           | 506,989    |            | $          | 113,331,011     |       | $                  | (127,239,488 | )            | $          | — |   | $ | (13,401,488 | ) |

 

Seenotes to unaudited consolidated financial statements.

 

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

**(A Development Stage Company)**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **                         | ** ** | ** **  | ** ** | **Inception**              | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|-------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | ** **                         | ** ** | ** **  | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **Six months ended June 30,** | ** ** | **Through** | ** ** |
| ** **                                                                         | ** ** | **2009**                           | ** ** | **2008**    | ** ** | **June 30, 2009**     | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |                               |       |        |       |                       |       |
| Net  loss                                                                          |       | $                                  | (4,852,031 | )           | $          | (6,941,046                 | )          | $ | (127,239,488 | ) |
| Adjustments  to reconcile net loss to net cash flows used in operating activities: |       |                               |       |        |       |                       |       |
| Depreciation  and amortization                                                     |       | 65,907                             |       | 117,076     |       | 907,477                    |       |
| Non-cash  interest expense                                                         |       | 7,084                              |       | 2,500       |       | 115,957                    |       |
| Stock  compensation expense                                                        |       | 352,547                            |       | 434,095     |       | 2,915,568                  |       |
| Non-cash  research and development                                                 |       | —                             |       | —      |       | 24,466,667                 |       |
| Non-cash  settlement of milestone payment                                          |       | —                             |       | —      |       | 6,000                      |       |
| Gain  on sale of interest in Sarawak Medichem Pharmaceuticals (SMP)                |       | —                             |       | —      |       | (939,052                   | )          |
| Loss  on disposal                                                                  |       | 10,493                             |       | —      |       | 23,822                     |       |
| Changes  in operating assets and liabilities:                                      |       |                               |       |        |       |                       |       |
| Clinical  supplies                                                                 |       | —                             |       | —      |       | 533,333                    |       |
| Accounts  receivable                                                               |       | (523,376                           | )          | —      |       | (586,820                   | )          |
| Prepaid  expenses                                                                  |       | 287,908                            |       | 1,174,615   |       | (91,761                    | )          |
| Other  assets                                                                      |       | (2,785,941                         | )          | —      |       | (2,777,393                 | )          |
| Accounts  payable                                                                  |       | 3,166,748                          |       | (2,488,202  | )          | 4,387,982                  |       |
| Accrued  expenses                                                                  |       | (165,535                           | )          | (1,150,310  | )          | 1,126,728                  |       |
| Licenses  payable                                                                  |       | —                             |       | —      |       | (11,000,000                | )          |
| Accrued  interest on debt                                                          |       | 63,684                             |       | (2,365      | )          | 714,319                    |       |
|                                                                               |       |                               |       |        |       |                       |       |
| Net  cash flows from operating activities                                          |       | (4,372,512                         | )          | (8,853,637  | )          | (107,436,661               | )          |
|                                                                               |       |                               |       |        |       |                       |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |                               |       |        |       |                       |       |
| Purchase  of property and equipment                                                |       | (5,466                             | )          | (340,559    | )          | (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                             | )          | (340,559    | )          | (159,115                   | )          |
|                                                                               |       |                               |       |        |       |                       |       |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                             |       |                               |       |        |       |                       |       |
| Proceeds  from issuance of common stock and capital contributions                  |       | 3,804,259                          |       | (62,880     | )          | 93,177,549                 |       |
| 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                                             |       | 628                                |       | —      |       | 39,985                     |       |
| Payments  of deferred offering and financing fees                                  |       | (36,039                            | )          | (10,000     | )          | (71,039                    | )          |
| Payments  on capital leases                                                        |       | (4,066                             | )          | (3,494      | )          | (155,498                   | )          |
|                                                                               |       |                               |       |        |       |                       |       |
| Net  cash flows from financing activities                                          |       | 3,849,782                          |       | (76,374     | )          | 108,594,688                |       |
|                                                                               |       |                               |       |        |       |                       |       |
| NET  (DECREASE) INCREASE IN CASH                                                   |       | (528,196                           | )          | (9,270,570  | )          | 998,912                    |       |
|                                                                               |       |                               |       |        |       |                       |       |
| CASH—Beginning  of period                                                     |       | 1,527,108                          |       | 18,324,991  |       | —                     |       |
|                                                                               |       |                               |       |        |       |                       |       |
| CASH—End  of period                                                           |       | $                                  | 998,912    |        | $          | 9,054,421                  |       | $ | 998,912 |   |
|                                                                               |       |                               |       |        |       |                       |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW  INFORMATION:                                |       |                               |       |        |       |                       |       |
| Cash  paid during the period for interest                                          |       | $                                  | 441,512    |        | $          | 216,883                    |       | $ | 2,832,153 |   |
|                                                                               |       |                               |       |        |       |                       |       |
| SUPPLEMENTAL  DISCLOSURE OF NONCASH TRANSACTIONS                                   |       |                               |       |        |       |                       |       |
| Noncash  investment activity:                                                      |       |                               |       |        |       |                       |       |
| Purchase  of property and equipment under capital leases                           |       | —                             |       | —      |       | 164,249                    |       |
| Capital  expenses included in accounts payable                                     |       | —                             |       | 4,293       |       | —                     |       |
| Noncash  financing activity:                                                       |       |                               |       |        |       |                       |       |
| Issuance  of common shares for licenses                                            |       | —                             |       | —      |       | 9,000,000                  |       |
| Issuance  of common shares for reduction of milestone payment                      |       | —                             |       | —      |       | 3,000,000                  |       |
| Debt  discount                                                                     |       | —                             |       | —      |       | 30,823                     |       |
| Deferred  offering and financing costs                                             |       | —                             |       | —      |       | 337,445                    |       |

 

Seenotes to unaudited consolidated financial statements.

 

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**JUNE 30, 2009**

**(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 byStatement of Financial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development Stage Enterprises*.

 

***Basis of Presentation-***Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared in accordance with accounting principles generally accepted inthe United States of America and with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Accordingly, they do not include allof the information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financialstatements.  However, in the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,unless otherwise noted herein, necessary to present fairly the results ofoperations, financial position and cash flows have been made.  Therefore, these consolidated financialstatements should be read in conjunction with the Company’s most recent auditedfinancial statements for the year ended December 31, 2008 and notesthereto. The consolidated financial statements include the accounts of theAdvanced Life Sciences Holdings, Inc. and its wholly-owned subsidiaryAdvanced Life Sciences, Inc. (“ALS Inc.”)  All intercompany balances and transactionshave been eliminated.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations expected for the full year.

 

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

 

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

 

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

 

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

 

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

 

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TheCompany has incurred losses since its incorporation in January 1999 andhas funded its operations to date primarily from debt financings and capitalcontributions from its founder and Chief Executive Officer, proceeds from theinitial public offering of its common stock, the subsequent sale of its commonstock in three private placements, including its commercial partnershipagreement with Wyeth Pharmaceuticals (“Wyeth”), and borrowings under its bankline of credit.  Inaddition, the Company has executed Standby Equity Distribution Agreements which allow theCompany to sell its common stock to an accredited investor pursuant to theterms of the agreements (see Note 2).  InApril 2009, the Company filed a shelf registration statement on Form S-3with the SEC and subsequently the shelf registration was declared effective bythe SEC.  The shelf registration willallow the Company to raise capital from time to time through the sale of commonstock, preferred stock and/or equity warrants. While the aggregate amount of the securities registered on the shelfregistration statement is $35.0 million, the Company’s ability to sellsecurities under the shelf registration statement in any given 12-month periodis subject to certain SEC volume limitations relative to its non-affiliatedmarket cap. If the Company raises additional capital by issuing equitysecurities, its shareholders could experience substantial dilution. The Companywill not be generating any product-based revenues or realizing cash flows fromoperations in the near term, if at all. The Company may not have sufficient cash or other funding available to completeits anticipated business activities during 2009.  In order to address its working capitalshortfall the Company intends to raise additional capital through the issuanceof equity securities and by licensing its lead compound, cethromycin, to additionalcommercial partners.  The Company believes,based upon current market conditions, additional commercial partnershipagreements would include a series of milestone payments, including up-frontmilestones that would fund the Company’s continued operations.  Although management believes the Companycould secure additional commercial partnerships, there can be no assurancesthat such partnerships will be available at terms acceptable to the Company, ifat all.

 

The Company received a notice on April 28, 2009 from the Nasdaq ListingQualifications Panel (the “Panel”) that the Panel has determined to delist theCompany’s common stock from The Nasdaq Capital Market unless the Nasdaq Listingand Hearing Review Council (the “Listing Council”) calls the matter for reviewand stays the delisting.  The Panel’s decision was based on the Company’sinability to evidence compliance with the $2.5 million shareholders’ equityrequirement or the $35.0 million market value of listed securities requirementof the Nasdaq Capital Market.  The Panelindicated that absent a stay by the Listing Council, the trading of the Company’scommon stock on The Nasdaq Capital Market will be suspended at the open oftrading on May 5, 2009.  The Company made a formal request that theListing Council issue such a stay but the request was not granted.  The Company’s common stock began trading onthe OTC Bulletin Board (“OTCBB”) on May 6, 2009.  Trading on the OTCBB still allows the Companyto sell shares of common stock under its SEDA facility (see Note 2).

 

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

 

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

 

In June 2009, the Company entered into a StandbyEquity Distribution Agreement (“SEDA”) with YA Global Master SPV Ltd. (“YAGlobal”), an affiliate of Yorkville Advisors, for the sale of up to $15.0million of shares of the Company’s common stock over a two-year commitmentperiod.  Under the terms of the SEDA, theCompany may from time to time, in its discretion, sell newly-issued shares ofits common stock to YA Global at a discount to the current market price of5%.  The amount of each advance under theSEDA is limited to the greater of $600,000 or the average trading volume forthe five trading days prior the advance notice date.  The Company is not obligated to utilize anyof the $15.0 million available under the SEDA and there are no minimumcommitments or minimum use penalties, nor does the agreement prohibit theCompany from entering into any other financing arrangements.  The Company entered into the SEDA with theconsent of its lender under the Company’s credit facility, which requires theCompany to maintain availability under the SEDA of at least $6.0 million at alltimes unless the bank otherwise consents. For the period of June 19, 2009 through June 30, 2009, therewere no shares issued under the SEDA. Between the period of July 1, 2009 and August 11, 2009, theCompany issued 8,515,479 shares to YA Global and received approximately $3.9million through the usage of the SEDA facility.

 

In June 2009,prior to entering into the SEDA, the Company and YA Global Investments, L.P. (“YAGlobal”), an affiliate of Yorkville Advisors, agreed to terminate the priorStandby Equity Distribution Agreement dated as of September 29, 2008 (“FormerSEDA”).  For the period of January 1,2009 through June 19, 2009, the Company issued 9,883,994 shares to YAGlobal and received approximately $3.9 million through the usage of the FormerSEDA facility.  In addition, in September 2008,the Company paid YA Global a commitment fee of $300,000 by issuing 393,339shares of the Company’s common stock.

 

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**3.****     ****Related Party Transactions**

 

The Company’sChief Executive Officer, Michael T. Flavin Ph.D., loaned $2.0 million to theCompany in 2001 (see Note 4). Interest expense of approximately $78,000 was recorded for the sixmonths ended June 30, 2009 and 2008, related to the loan.

 

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

 

The Company leasesfacilities from the BioStart Property Group (“BioStart”), a wholly-ownedsubsidiary of Flavin Ventures, which is owned by the Company’s Chief ExecutiveOfficer.  The operating lease expired in September of2008 and pursuant to the terms of the lease and pending agreement on a leaserenewal, the Company is currently leasing the facilities on a month-to-monthbasis. Because of the ownership interest in BioStart held by Flavin Ventures,the Company’s audit committee, acting on behalf of the board, has overseen alllease negotiations on behalf of the Company and will approve the final terms ofthe Company’s lease renewal. The Company and BioStart currently have anunderstanding to defer the Company’s lease payments pending their agreement ona lease renewal. Lease obligations amounted to $152,000 relating to the sixmonths ended June 30, 2009 of which $129,000 were deferred and areexpected to be paid later in the year. Lease payments totaled approximately $148,000 for the six months ended June 30,2008.

 

**4.**      Debt Obligations

** **

In September 2001,the Company incurred indebtedness under a $2.0 million promissory note with theChief Executive Officer of the Company, which bears interest at 7.75%.  Principal plus any accrued interest was duein a lump sum on January 5, 2009. On January 5, 2009, the note was extended to January 5, 2010,all other terms remained unchanged and in effect. Interest expense of $78,000was recorded for the six months ended June 30, 2009, of which $65,000 wasdeferred and is expected to be paid later in the year.  As of June 30, 2009 and December 31,2008, the Company had $2.0 million outstanding under the note.

 

The Company has a $10.0million revolving line of credit with a financial institution with a maturitydate of January 1, 2011, and a fixed interest rate of 8.5%.  The line of credit is secured bysubstantially all of the Company’s assets, except that the collateralspecifically excludes any rights that the Company may have as a result of itslicense agreement with Abbott for cethromycin, and is further secured by 2.5million shares of the Company’s common stock held by ALS Ventures, LLC.  The credit agreement contains a materialadverse change clause, which is subject to the judgment of the lender and, iftriggered, can accelerate the payment of the debt.  The Company entered into the SEDA with theconsent of its lender under the Company’s credit facility, which requires theCompany to maintain availability under the SEDA of at least $6.0 million at alltimes unless the bank otherwise consents. In October 2008, the Company issued warrants for the purchase of65,000 shares of its common stock at an exercise price of $1.00 per share tothe lender as a closing fee.  Thewarrants became exercisable upon issuance and will expire five years from thedate of the grant.  As of June 30,2009 and December 31, 2008, the Company had outstanding under the note$10.0 million and $9.9 million, respectively.

 

**5.****      Restructuring**

 

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

 

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**6.****      Commitments**

 

***Vendor Contracts-***The Company administers its cethromycin programlargely under contracts with third parties. Through June 30, 2009, contracts totaling $48.0 million have beenexecuted related to the cethromycin program, which includes the development,commercialization, regulatory review and pre-launch activities associated withcethromycin as well as anthrax-related studies. To date the Company has paid $42.9 million under these contracts and theremaining balance of $5.1 million is expected to be paid over the next twoyears.  Subcontractor arrangements inconnection with the DTRA award grant are expected to be approximately $3.1million over a two-year period which began in August 2008.  Through June 30, 2009 the Company haspaid $377,000 related to these agreements. In addition, to date the Company has executed $1.2 million in contractsrelated to the ALS-357 program.  Theremaining balance of $888,000 would be paid over the life of the program whichthe Company estimates to be two to three years. The commencement of clinical trials to study ALS-357 as a topicaltreatment for patients with metastatic melanoma may be delayed due toinsufficient patient enrollment, which is a function of many factors, includingthe size of the patient population, the nature of the protocol, the proximityof patients to clinical sites, the availability of effective treatments for therelevant disease, and the eligibility criteria for the clinical trial.

 

***GrantPayable-*** In April 2005, the Company was awarded a$500,000 grant from the State of Illinois to fund expansion of its corporateheadquarters in Woodridge, Illinois. Under the terms of the grant, the Company is to create 100 full-timejobs at its corporate headquarters between January 31, 2005 and December 31,2010 (“grant period”).  If the Companydoes not create the specified number of full-time jobs, it is required to repaythe grant proceeds on a pro-rata basis of actual jobs created compared to thetotal defined in the grant.  The entiregrant has been spent or obligated and therefore the $500,000 has beenclassified as a long-term liability as the Company must create and maintainpositions created during the grant period through December 31, 2010.    Through June 30, 2009, five new jobshave been created and retained since the grant was awarded.

 

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

 

For the six months ended June 30,2009 and 2008, the Company granted stock options to purchase up to 673,200 and713,800 shares of common stock, respectively, to certain employees anddirectors.  The exercise price of theoptions was the market price of the Company’s common stock on the date ofgrant.  The Company recognizedcompensation expense totaling approximately $353,000 and $434,000 for the sixmonths ended June 30, 2009 and 2008, respectively in accordance with SFAS No. 123(R), *Share-Based Payment*.

 

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

 

Basic loss per share iscomputed by dividing net loss by the number of weighted average common sharesoutstanding during the reporting period. Diluted loss per share is calculated to give effect to all potentially dilutivecommon shares that were outstanding during the reporting period.  The computation of diluted shares outstandingfor the periods ended June 30, 2009 and 2008 excludes incremental sharesof 14,016,924 and 12,669,673 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 June 30, 2009 and 2008.

 

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**RecentAccounting Pronouncements**

 

In June 2009,the FASB issued SFAS No. 168, “The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles (“GAAP”) - areplacement of FASB Statement No. 162,” which will become the source ofauthoritative US GAAP recognized by the FASB to be applied to nongovernmentalentities. It is effective for financial statements issued for interim andannual periods ending after September 15, 2009. The Company does not believethat this statement will have a material impact on the Company’s statements offinancial position, results of operations and cash flows.

 

InMay, 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165prescribes the period after the balance sheet date during which managementshould evaluate transactions for potential recognition, the circumstances underwhich an entity should recognize events or transactions occurring after thebalance sheet date and the required disclosures an entity should make abouttransactions or events occurring after the balance sheet date. This statementis effective for interim or annual periods ending after June 15, 2009. Theadoption of SFAS 165 did not have a material impact on the Company’s statementsof financial position, results of operations and cash flows. The Companyevaluated subsequent events through the date the accompanying financialstatements were issued, which was August 11, 2009.

 

In April 2009,the FASB issued FASB Staff Position No. 107-1 and APB 28-1, *Interim Disclosures about Fair Value of FinancialInstruments*, (“FSP FAS 107-1”). FSP FAS 107-1 amends FASB Statement No. 107,*Disclosures about Fair Value of FinancialInstruments*, to require disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements. This FSP also amends APB Opinion No. 28,*Interim Financial Reporting*, torequire those disclosures in summarized financial information at interimreporting periods. FSP FAS 107-1 is effective for interim reporting periodsending after June 15, 2009. The adoption of FSP FAS 107-1 did not have amaterial impact on the Company’s statements of financial position, results ofoperations and cash flows.

 

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

 

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

** **

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

 

**Overview**

 

We are a biopharmaceuticalcompany focused on the discovery, development and commercialization of noveldrugs in the areas of infectious disease, oncology and respiratory disease.Using our internal discovery capabilities and our network of pharmaceutical andacademic partners, we have assembled a promising pipeline of clinical andpreclinical product candidates.  Our mostadvanced product candidate, cethromycin, is a novel once-a-day oral antibioticthat completed two pivotal Phase III clinical trials in community acquiredpneumonia (“CAP”).  We have an exclusiveworldwide license (excluding Japan) from Abbott Laboratories to develop andcommercialize cethromycin (pending trade name RestanzaTM). Cethromycin is alsobeing developed as a bio-defense agent for use in the treatment of anthrax andother potential broad-spectrum medical countermeasures.  We also have product candidates in earlierstages of development for the treatment of indications including respiratorydistress caused by inflammation-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**

 

On July 31, 2009 wereceived a complete response letter from the FDA regarding our New DrugApplication (“NDA”) for cethromycin for the outpatient treatment of adults withmild-to-moderate CAP.  In its letter, the FDA indicated that they cannotapprove the application for cethromycin in its current form and that, to gainapproval, additional clinical data is required to demonstrate efficacy. Wesubmitted the NDA in September, 2008 based on the results of 53 clinicalstudies including 2 pivotal Phase 3 studies in CAP and a safety database ofover 5,000 patients.

 

We intend to comply withthe Agency’s recommendations and continue to pursue approval of cethromycin inCAP. We believe that an additional well-controlled clinical study designed todemonstrate efficacy in a more severe CAP population will likely be requiredfor the approval of cethromycin.  In parallel, we will continue to advancecethromycin as a biodefense agent against anthrax, plague and tularemia.

 

On June 2, 2009, theFDA Anti-Infective Drugs Advisory Committee (“AIDAC”) reviewed the cethromycinNDA. The AIDAC voted that cethromycin demonstrated safety for the outpatient treatmentof adults with mild-to-moderate CAP, but voted that cethromycin did notdemonstrate efficacy in the treatment of CAP. The committee’s negative vote onthe drug candidate’s efficacy followed a discussion that the cethromycin NDAincluded data on patients with mild-to-moderate disease and that the new draftguidance for developing treatments for CAP, released in March, 2009, requiresthe enrollment of moderate-to-severe CAP patients for approval in themild-to-moderate CAP indication. Our pivotal Phase 3 program included in theNDA was designed and conducted under prior FDA guidance and before the newdraft guidance was released.

 

We are movingexpeditiously to develop a protocol for an additional Phase 3 trial that isdesigned to satisfy the FDA’s request for additional efficacy information. Weintend to meet with and work closely with the Agency to design and establish aprotocol under a Special Protocol Assessment. We anticipate that initiation ofthe additional Phase 3 program could take place in the first half of 2010. Weare working collaboratively on these clinical plans with Wyeth Pharmaceuticals(“Wyeth”), our development and commercialization partner in the Asia Pacificregion (excluding Japan).

 

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We believe thatcethromycin has significant therapeutic and commercial potential as a novelagent to combat CAP as well as other lethal pathogens that represent seriousbioterror threats to public health, and we intend to explore all avenues thatcan lead to success.  We expect key data to be available and reported fromour ongoing pivotal studies in plague and tularemia by the end of 2009. We plan to submit an NDA amendment seeking marketing approval for thebiodefense indications in the first quarter of 2010.

 

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 Wyeth, in the Asia Pacific region (excluding Japan). We will retainexclusive rights to cethromycin in the rest of the world, including NorthAmerica and Europe excluding Japan.  Inaddition to future royalty payments, we would receive milestone and regulatorypayments based on successful achievement of clinical, regulatory and commercialobjectives in specific markets. We will collaborate with Wyeth to developadditional clinical data in the Asia Pacific region to support regulatoryfilings in that region.   Discussionswith other potential commercial partners focused on other geographical marketssuch as the European Union and the United States are ongoing.

 

In August 2008,we signed a letter of intent with DSM Pharma Chemicals North America (“DSM”), Inc.to proceed with a proposal to purchase raw materials to produce commercialquantities of cethromycin.  Our intent isconditional upon the parties entering into a formal supply agreement which willgovern the terms and conditions including but not limited to the timing ofproduction and the milestone payment schedule. While these conditions are pending, the parties recognize that there arelengthy lead times for the raw materials needed to be used to complete theproduction described in the proposal. Therefore, we authorized DSM to procure the necessary raw materials tobe used to complete the production in anticipation of entering into the formalsupply agreement.

 

In June 2009, weannounced that a second non-human primate study involving its novel,once-a-day, oral antibiotic cethromycin, showed that a 14-day course ofcethromycin achieved a 100% survival rate against an inhaled lethal dose ofanthrax. All of the animals in the study that received 16 mg/kg once-a-day (thehuman equivalent dose of 300 mg) of cethromycin within 24 hours after exposureto anthrax survived while none of the animals that received placebo survived.The study was supported by the National Institute of Allergy and InfectiousDiseases (“NIAID”), an institute of the National Institutes of Health (“NIH”),which is a component of the Department of Health and Human Services (“HHS”), anagency of the U.S. Government.

 

We are developingcethromycin for the post-exposure prophylactic treatment of inhalation anthraxto help protect against human infection from anthrax. In studies conducted bythe U.S. Army Medical Research Institute of Infectious Diseases (“USAMRIID”),cethromycin was shown to be highly active *invitro*against 30 strains of anthrax. In May 2007, a non-humanprimate study showed that a 30-day course of oral cethromycin was 100%protective against a lethal dose of inhaled anthrax as compared to the standardof care, Cipro® (ciprofloxacin), which demonstrated 90% protection. The FDA hasdesignated cethromycin as an orphan drug for the post-exposure prophylactictreatment of inhalation anthrax, but the FDA has not yet approved the drug formarketing in this or any other indication.

 

In August 2008,we announced that the Defense Threat Reduction Agency (“DTRA”) of the U.S.Department of Defense (“DoD”) awarded us a two-year contract worth up to $3.8million to further study cethromycin as a potential broad-spectrum medicalcountermeasure. The contract, part of the agency’s Transformational MedicalTechnologies Initiative (“TMTI”), will fund NDA-enabling studies evaluatingcethromycin’s efficacy in combating Category A and B bioterror agents such as *Fransicella tularensis* (tularemia), *Yersiniapestis* (plague) and *Burkholderia pseudomallei*(melioidosis).

 

**Financial Update**

 

Since ourinception, we have incurred net losses each year. Our net loss for the sixmonths ended June 30, 2009 was $4.9 million.  As of June 30, 2009, we had anaccumulated deficit of $127.2 million. We have funded operations to date primarilyfrom debt financings and capital contributions from our founder and ChiefExecutive Officer, proceeds from the initial public offering of our commonstock, the subsequent sale of our common stock in three private placements,including our commercial partnership agreement with Wyeth and borrowings underour bank line of credit.  In addition, we executed

 

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Standby EquityDistribution Agreements which allow us to sell our common stock to anaccredited investor pursuant to the terms of the agreements (see below).

 

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

 

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

 

Wereceived a notice on April 28,2009 from the Nasdaq Listing Qualifications Panel (the “Panel”) that the Panelhas determined to delist our common stock from The Nasdaq Capital Market unlessthe Nasdaq Listing and Hearing Review Council (the “Listing Council”) calls thematter for review and stays the delisting.  The Panel’s decision was basedon our inability to evidence compliance with the $2.5 million shareholders’equity requirement or the $35.0 million market value of listed securitiesrequirement of the Nasdaq Capital Market. The Panel indicated that absent a stay by the Listing Council, thetrading of our common stock on The Nasdaq Capital Market will be suspended atthe open of trading on May 5, 2009.  We made a formal request thatthe Listing Council issue such a stay but the request was not granted.  Our common stock began trading on the OTCBulletin Board (“OTCBB”) on May 6, 2009. Trading on the OTCBB still allows us to sell shares of common stockunder our SEDA facility.

 

In June 2009,we entered into a Standby Equity Distribution Agreement (“SEDA”) with YA GlobalMaster SPV Ltd. (“YA SPV”), an affiliate of Yorkville Advisors, for the sale ofup to $15.0 million of shares of our common stock over a two-year commitmentperiod.  Under the terms of the SEDA, wemay from time to time, in our discretion, sell newly-issued shares of ourcommon stock to YA SPV at a discount to the current market price of 5%.  The amount of each advance under the SEDA islimited to the greater of $600,000 or the average trading volume for the fivetrading days prior the advance notice date. We are not obligated to utilize any of the $15.0 million available underthe SEDA and there are no minimum commitments or minimum use penalties, nordoes the agreement prohibit the Company from entering into any other financingarrangements.  We entered into the SEDAwith the consent of our lender under our credit facility, which requires us tomaintain availability under the SEDA of at least $6.0 million at all timesunless the bank otherwise consents.  Forthe period of June 19, 2009 through June 30, 2009, there were noshares issued under the SEDA.  Betweenthe period of July 1, 2009 and August 11, 2009, we issued 8,515,479shares to YA SPV and received approximately $3.9 million through the usage ofthe SEDA facility.

 

In June 2009, priorto entering into the SEDA, the Company and YA Global Investments, L.P. (“YAGlobal”), an affiliate of Yorkville Advisors, agreed to terminate the priorStandby Equity Distribution Agreement dated as of September 29, 2008 (“FormerSEDA”).  For the period of January 1,2009 through June 19, 2009, we issued 9,883,994 shares to YA Global andreceived approximately $3.9 million through the usage of the Former SEDAfacility.  In addition, in September 2008,we paid YA Global a commitment fee of $300,000 by issuing 393,339 shares of ourcommon stock.

 

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

 

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**Results of Operations**

 

*Three months ended June 30,2009 compared to three months ended June 30, 2008*

* *

*Revenue.*** We reported revenue of $707,000 for the threemonths ended June 30, 2009 compared to no revenues for the three monthsended June 30, 2008.  Revenue in2009 was derived from a grant awarded by the DTRA of the U.S. Department ofDefense.  The contract award of $3.8million is over a two year period which began in August 2008. Since thebeginning of the contract we reported revenue of approximately $1.4million.  We estimate revenue will be inthe $1.5 million to $2.0 million range in the second half of the year.

 

*Research and development expense.*  Research and development expense decreased$0.4 million to $1.3 million for the three months ended June 30,2009.    Expenses related to cethromycinclinical trials and the compilation and FDA review of cethromycin totaled $0.1million for the three months ended June 30, 2009 compared to $0.7 millionfor the same period last year.  Therewere no manufacturing expenses incurred in relation to process optimizationactivities of cethromycin for the quarter ended June 30, 2009 compared to$0.3 million in the same period in the previous year.  In conjunction with work performed under thegrant awarded by DTRA, we incurred costs of $0.5 million in the quarter ended June 30,2009.  Expenses related to the FDA’s June 2,2009 AIDAC meeting were $0.2 million in the current quarter and were partiallyoffset by lower salary and benefit costs of approximately $0.1 million.

 

*Generaland administrative expense.*** General and administrative expenses were $1.7million for the three months ended June 30, 2009, approximately the sameamount incurred in the second quarter last year.  This result reflects increased legal andother professional services of $247,000 that were offset by $91,000 of expensesincurred in a certain marketing program in the same period of the prior year,decreased facilities and other administrative costs of $66,000 and $55,000 oflower salary and benefit costs..

 

*Interest income.*  Interest income declined $75,000 to $2,000 forthe three months ended June 30, 2009, resulting from a decrease of cash,which was used for the continued development and funding of cethromycin.

 

*Interest expense.* Interest expense increased $156,000 in thethree months ended June 30, 2009 as compared to the same period lastyear.  The increase is the result ofborrowing an additional $6.0 million on our line of credit in October 2008for the continued development and funding of cethromycin and a higher interestrate.

 

*Other (income) expense, net. *For the three months ended June 30,2009 we recorded a $20,000 currency transaction loss related to the procurementof commercial launch materials.

 

*Six months ended June 30,2009 compared to six months ended June 30, 2008*

* *

*Revenue.*** We reported revenue of $1.1 million for thesix months ended June 30, 2009 compared to no revenues for the six monthsended June 30, 2008.  Revenue in2009 was derived from a grant awarded by the DTRA of the U.S. Department ofDefense.  The contract award of $3.8million is over a two year period which began in August 2008.

 

*Research and development expense.*  Research and development expense decreased$1.3 million to $2.2 million for the six months ended June 30, 2009.  Cethromycin clinical trial expenses for thesix months ended June 30, 2009 were not material compared to $0.3 millionin the same period last year.  Expensesrelated to compilation and FDA review of cethromycin totaled $0.2 million forthe six months ended June 30, 2009 compared to $1.5 million for the sameperiod last year.  There were nomanufacturing expenses incurred in relation to process optimization activitiesof cethromycin for the six months ended June 30, 2009 compared to $0.5million in the same period in the previous year.  In conjunction with work performed under thegrant awarded by DTRA, we incurred costs of $0.8 million in the six monthsended June 30, 2009.  Expensesrelated to the FDA’s June 2, 2009 AIDAC meeting were $0.2 million for thesix months ended June 30, 2009 and were offset by lower salary and benefitcosts.

 

*Generaland administrative expense.*** General and administrative expenses declined$0.2 million to $3.2 million for the six months ended June 30, 2009.  This result reflects $249,000 of costsincurred in the same period of the prior year related to a certain marketingprogram, lower salary and benefit costs of $144,000, decreased facilities andother 

 

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administrative costs of $78,000, and reduced spendingin our investor relations program of $58,000. These reductions were partially offset by increased legal and otherprofessional services of $334,000.

 

*Interest income.*  Interest income declined $230,000 to $3,000for the six months ended June 30, 2009, resulting from a decrease of cash,which was used for the continued development and funding of cethromycin.

 

*Interest expense.*  Interest expense increased $304,000 in the sixmonths ended June 30, 2009 as compared to the same period last year.  The increase is the result of borrowing anadditional $6.0 million on our line of credit in October 2008 for thecontinued development and funding of cethromycin and a higher interest rate.

 

*Other (income) expense, net. *For the six months ended June 30,2009 we recorded a $20,000 currency transaction loss related to the procurementof commercial launch materials.

 

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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 $127.2 million as of June 30, 2009 and we expect to incursignificant operating losses for the foreseeable future.  As of June 30, 2009 we had negativeworking capital of $6.0 million.  Cashand cash equivalents were $1.0 million as of June 30, 2009.  Since our inception in 1999 to August 2005,we financed our operations primarily through debt and capital contributionsfrom our founder and controlling stockholder and borrowings under our bank lineof credit.  In August 2005 wecompleted our initial public offering in which we raised $28.7 million, net ofunderwriters discount and offering costs. Since that time, we have completed three private placements in which weraised $52.8 million, net of underwriters’ discounts and offering costs andraised additional debt financing through our $10.0 million bank line of credit.

 

In June 2009, weentered into a Standby Equity Distribution Agreement (“SEDA”) with YA GlobalMaster SPV Ltd. (“YA SPV”), an affiliate of Yorkville Advisors, for the sale ofup to $15.0 million of shares of our common stock over a two-year commitmentperiod.  Under the terms of the SEDA, wemay from time to time, in our discretion, sell newly-issued shares of ourcommon stock to YA SPV at a discount to the current market price of 5%.  The amount of each advance under the SEDA islimited to the greater of $600,000 or the average trading volume for the fivetrading days prior the advance notice date. We are not obligated to utilize any of the $15.0 million available underthe SEDA and there are no minimum commitments or minimum use penalties, nordoes the agreement prohibit the Company from entering into any other financingarrangements.  We entered into the SEDAwith the consent of our lender under our credit facility, which requires us tomaintain availability under the SEDA of at least $6.0 million at all timesunless the bank otherwise consents.  Forthe period of June 19, 2009 through June 30, 2009, there were noshares issued under the SEDA.  Betweenthe period of July 1, 2009 and August 11, 2009, we issued 8,515,479shares to YA SPV and received approximately $3.9 million through the usage ofthe SEDA facility.

 

In June 2009, priorto entering into the SEDA, the Company and YA Global Investments, L.P. (“YAGlobal”), an affiliate of Yorkville Advisors, agreed to terminate the priorStandby Equity Distribution Agreement dated as of September 29, 2008 (“FormerSEDA”).  For the period of January 1,2009 through June 19, 2009, we issued 9,883,994 shares to YA Global andreceived approximately $3.9 million through the usage of the Former SEDA facility.  In addition, in September 2008, we paidYA Global a commitment fee of $300,000 by issuing 393,339 shares of our commonstock.

 

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

 

We have a $10.0 millionrevolving line of credit with a financial institution with a maturity date of January 1,2011, and a fixed interest rate of 8.5%. The line of credit is secured by substantially all of our assets, exceptthat the collateral specifically excludes any rights that we may have as aresult of our license agreement with Abbott for cethromycin, and is furthersecured by 2.5 million shares of our common stock held by ALS Ventures,LLC.  The credit agreement contains amaterial adverse change clause, which is subject to the judgment of the lenderand, if triggered, can accelerate the payment of the debt.  We entered into the SEDA with the consent ofour lender under our credit facility, which requires us to maintain availabilityunder the SEDA of at least $6.0 million at all times unless the bank otherwiseconsents.   In October 2008, weissued warrants for the purchase of 65,000 shares of common stock at anexercise price of $1.00 per share to the lender as a closing fee.  The warrants became exercisable upon issuanceand will expire five years from the date of the grant.  As of June 30, 2009 the line of credithad an outstanding balance of $10.0 million.

 

During the six monthsended June 30, 2009, cash used in operating activities totaled $4.4million.   Net of DTRA grant award funds,approximately $1.6 million was used for the development of cethromycin and $2.8million for general operations.  Cashprovided from financing activities totaled $3.9 million during the six monthsended June 30, 2009, reflecting proceeds for the sale of 9,883,994 sharesto YA Global through the Former SEDA facility.

 

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* *

*Contractual Obligations*

* *

As of June 30, 2009, the annual amounts of futureminimum payments under debt obligations, interest, lease obligations and otherlong term liabilities consisting of executed research, development and licenseand commercialization agreements are as follows:

 
| ** **                                   | ** ** | **Payments Due by  December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2009**                               | ** ** | **2010**   | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Total** | ** ** |
| Notes  payable and bank line of credit       |       | $                                      | —     |       | $          | 2,000,000 |   | $ | 10,000,000 |   | $ | — |   | $ | — |   | $ | 12,000,000 |   |
| Interest                                     |       | 568,572                                |       | 852,026    |       | — |   | — |   | — |   | 1,420,598 |   |
| Cethromycin  NDA & regulatory costs |       | 428,965                                |       | —     |       | — |   | — |   | — |   | 428,965 |   |
| Commercialization  costs                     |       | 3,160,101                              |       | 1,452,646  |       | — |   | — |   | — |   | 4,612,747 |   |
| ALS-357  clinical program                    |       | 155,119                                |       | 417,509    |       | 315,652 |   | — |   | — |   | 888,280 |   |
| DTRA  grant related costs                    |       | 2,032,548                              |       | 652,034    |       | — |   | — |   | — |   | 2,684,582 |   |
| Operating  leases                            |       | 129,179                                |       | —     |       | — |   | — |   | — |   | 129,179 |   |
| Capital  leases                              |       | 4,401                                  |       | 4,350      |       | — |   | — |   | — |   | 8,751 |   |
|                                         |       |                                   |       |       |       |   |   |   |   |   |   |   |   |
| Total                                        |       | $                                      | 6,478,885  |       | $          | 5,378,565 |   | $ | 10,315,652 |   | $ | — |   | $ | — |   | $ | 22,173,102 |   |

 

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.  Under the current contract terms, the $30.0 million payment would be duewithin 20 business days after receipt of regulatory approval.  Thereafter, we would owe Abbott an additional$2.5 million upon reaching $200.0 million in aggregate net sales of cethromycinand $5.0 million upon reaching $400.0 million in aggregate net sales.  The periods in which milestone obligationsbecome payable, if at all, are only estimates due to uncertainties associatedwith the completion or achievement of the milestone.

 

In the first seven months of 2009, we executedcontracts totaling $0.5 million related to the regulatory review ofcethromycin.

 

In the third quarter of2008, we signed a letter of intent with DSM to procure raw materials to be usedto produce commercial quantities of cethromycin.  The lead times for acquiring these rawmaterials needed to be used to complete production are lengthy.  As of June 30, 2009 the cost of rawmaterials actually purchased was $2.8 million. The costs of these raw materials as well as the procurement ofadditional raw materials are subject to changes in the Euro/US Dollar exchangerate.   As of June 30, 2009 the costof all raw materials expected to be purchased under this agreement was $4.2million.

 

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

 

Our commitments under operating leases consist ofpayments made to a related party relating to our facilities lease in Woodridge,Illinois.  The operating lease expired inSeptember of 2008 and we are leasing the facilities on a month-to-monthbasis.  Lease obligations amounted to$152,000 relating to the six months ended June 30, 2009 of which $129,000were deferred and are expected to be paid later in the year.

 

In August 2008, weannounced that the DTRA of the DoD awarded us a two-year contract worth up to$3.8 million to further study cethromycin as a potential broad-spectrum medicalcountermeasure. Under the terms of the contract, $1.8 million of DTRA funds areavailable over a nine-month base period beginning in August 2008 and theremaining $2.0 million may be awarded over the ensuing 15 months to completethe project.  In March 2009, wereceived notice from the DoD that it has exercised its option to award us $2.0million under the previously announced contract. In conjunction with the grantawarded by the DTRA, we entered into subcontractor arrangements to furtherstudy cethromycin as a potential 

 

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broad-spectrum medicalcountermeasure.  The subcontractors’costs are expected to be approximately $3.1 million over a two-year periodwhich began in August 2008.

 

We will not begenerating any product-based revenues or realizing cash flows from operationsin the near term, if at all.  In order tocontinue our business activities during 2009, we intend to raise additionalcapital through the issuance of equity securities and by licensing our leadcompound, cethromycin, to commercial partners. We believe, based upon current market conditions, additional commercialpartnership agreements would include a series of milestone payments, includingup-front milestones that would fund our continued operations.  Although management believes we could secureadditional commercial partnerships, there can be no assurances that suchpartnerships will be available at terms acceptable to us, if at all.   We have executed Standby EquityDistribution Agreements which allow us to sell our common stock to anaccredited investor pursuant to the terms of the agreements (see Note 2 to theconsolidated financial statements).  In April 2009,we filed a shelf registration statement on Form S-3 with the Securitiesand Exchange Commission (“SEC”) and the shelf registration was subsequentlydeclared effective by the SEC.   Theshelf registration will allow us to raise capital from time to time through thesale of common stock, preferred stock and/or equity warrants.  While the aggregate amount of the securitiesregistered on the shelf registration statement is $35.0 million, our ability tosell securities under the shelf registration statement in any given 12-monthperiod is subject to certain SEC volume limitations relative to ournon-affiliated market cap.  If we raiseadditional capital by issuing equity securities, our shareholders couldexperience substantial dilution.  As aresult of these uncertainties, there is substantial doubt about our ability tocontinue as a going concern.

 

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

 

·              progress in ourclinical development programs and regulatory review, as well as the magnitudeof these programs;

 

·              the timing, receiptand 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;

 

·              our ability toestablish and maintain additional collaborative arrangements;

 

·              the resources, timeand costs required to successfully initiate and complete our preclinical andclinical trials, obtain regulatory approvals, protect our intellectual propertyand obtain and maintain licenses to third-party intellectual property;

 

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

 

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

 

*Research and Development*

 

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

 

*Stock-based Compensation*

 

We account forstock-based awards to employees and non-employees using the accountingprovisions of Statement of Financial Accounting Standards No. 123(R) *Share-Based Payments* which provides for the use of the fairvalue based method to determine compensation for all arrangements where sharesof stock or equity instruments are issued for compensation.  We use a Black-Scholes options-pricing modelto determine the fair value of each option grant as of the date of grant forexpense incurred.  The Black-Scholesmodel requires inputs for risk-free interest rate, dividend yield, volatilityand expected lives of the options. Expected volatility is based on historical volatility of our stock sinceAugust 5, 2005, the date our stock began to trade publicly.  The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curvein effect at the time of the grant.  Theexpected lives for options granted represents the period of time that optionsgranted are expected to be outstanding and is derived from the contractualterms of the options granted.  Weestimate future forfeitures of options based upon historical forfeiture rates.

 

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**Forward-LookingStatements and Risk Factors**

 

ThisQuarterly Report on Form 10-Q, including Management’s Discussion andAnalysis of Financial Condition and Results of Operations, containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Forward-looking statements often are proceeded by words such as “believes,”“expects,” “may,” “anticipates,” “plans,” “intends,” “assumes,” “will” orsimilar expressions.  Forward-looking statements reflect management’scurrent expectations, as of the date of this report, and involve certain risksand uncertainties.   Our actualresults could differ materially from those anticipated in these forward-lookingstatements as a result of various factors.   Some of the factors that could cause futureresults to materially differ from the recent results or those projected inforward-looking statements include the “Risk Factors” described in our AnnualReport on Form 10-K.

 

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

** **

Our exposure tomarket risk is currently confined to our cash, cash equivalents, 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 primarily due certain contractmanufacturing agreements.  Our exchangeloss for the six months ended June 30, 2009 was $20,000, which is includedin other (income) expense, net.  To date,we have not entered into any foreign currency forward exchange contracts orother derivative financial instruments to hedge the effects of fluctuations inforeign currency exchange rates.  Thefluctuation in the exchange rate between the U.S. Dollar and the Euro couldaffect amounts due under these contract manufacturing agreements.  A hypothetical increase in the exchange ratebetween the Euro and the U.S. Dollar as of June 30, 2009 of ten percentwould increase total contract manufacturing costs by approximately $423,000.

 

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

** **

Ourmanagement, under the supervision and with the participation of our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluatedthe effectiveness of our disclosure 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**

 

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

 

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** **

**PART II — OTHERINFORMATION**

** **

**Item1. Legal Proceedings**

** **

There have been nomaterial changes in our legal proceedings from those disclosed in our QuarterlyReport on Form 10-Q filed on May 12, 2009.

 

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

 

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

 

***We may not be able to continue as a going concern or fundour existing capital needs.***

 

Our independentregistered public accounting firm included an explanatory paragraph in thereport on our 2008 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,and may not have sufficient cash or other funding available to complete our anticipatedbusiness activities during 2009.  In order to address our working capitalshortfall we intend to raise additional capital by accessing the capitalmarkets and licensing our lead product candidate, cethromycin, to commercialpartners.  There can be no assurances that we will be successful inaccessing the capital markets on terms acceptable to us, if at all, or thatsuch partnerships will be available on terms acceptable to us, if at all.

 

***We will require additional funding to satisfy our future capitalneeds, and future financing strategies may adversely affect holders of ourcommon stock.***

 

Our operations willrequire significant additional funding due to the absence of any meaningfulrevenues in the near future.  We do not know whether additional financingwill be available to us on favorable terms or at all. If we cannot raiseadditional funds, we may be required to reduce our capital expenditures, scaleback product development or programs, reduce our workforce and license toothers products or technologies that we may otherwise be able tocommercialize.  To the extent we raise additional capital by issuingequity securities, our stockholders could experience substantial dilution. Anyadditional equity securities we issue may have rights, preferences orprivileges senior to those of existing holders of stock. To the extent that weraise additional funds through collaboration and licensing arrangements, we maybe required to relinquish some rights to our technologies or productcandidates, or grant licenses on terms that are not favorable to us.

 

Any shares of our commonstock that we sell pursuant to the SEDA will have a dilutive impact on ourstockholders. The SEDA terms provide that YA SPV may promptly resell the shareswe issue to them under the SEDA, and such resales could cause the market priceof our common stock to decline significantly with advances under the SEDA. Tothe extent of any such decline, any subsequent advances would require us toissue a greater number of shares of common stock to YA SPV in exchange for eachdollar of the advance. Under these circumstances our existing stockholderswould experience greater dilution. The sale of our common stock under the SEDAcould encourage short sales by third parties, which could contribute to thefurther decline of our stock price.  As of the date of this quarterlyreport, we have issued an aggregate of 18,792,812 shares, which includes393,339 shares issued as an initial commitment fee, to YA Global and receivedan aggregate of $7.8 million in proceeds through the usage of our SEDAfacilities.  There can be no assurance that we will be able to obtainadequate capital funding in the future, under the SEDA or otherwise, tocontinue operations and implement our strategy. As a result of these uncertainties,there is substantial doubt about our ability to continue as a going concern.

 

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

 

Our ability to generateany significant product revenues in the near future will depend solely on thesuccessful development and commercialization of cethromycin, our most advancedproduct candidate.  The FDA may notapprove in a timely manner, or at all, any NDA that we submit.  If any NDA we submit is not approved by theFDA, we will be unable to commercialize that product in the United States andour business will be materially harmed. The FDA can and does reject NDAs, andoften requires additional clinical trials, even when product candidatesperformed well or achieved favorable results in large-scale Phase III clinicaltrials. The FDA imposes substantial requirements on the introduction ofpharmaceutical products through lengthy and detailed laboratory and clinicaltesting procedures, sampling activities and other costly and time-consumingprocedures. Satisfaction of these requirements typically takes several yearsand may vary substantially based upon the type and complexity of thepharmaceutical product. A number of our product candidates are novel compounds,which may further increase the period of time required for satisfactory testingprocedures.

 

On July 31, 2009, wereceived a complete response letter from the FDA regarding the NDA forcethromycin for the outpatient treatment of adults with mild-to-moderateCAP.  In its letter, the FDA indicated that they cannot approve theapplication for cethromycin in its current form and that, to gain approval,additional clinical data is required to demonstrate efficacy. We intend tocomply with the Agency’s recommendations and continue to pursue approval ofcethromycin in CAP. Though we believe that an additional well-controlledclinical study designed to demonstrate efficacy in a more severe CAP populationwill likely be required for the approval of cethromycin, we cannot be assuredthat the FDA will not require additional clinical trials.

 

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

 

Since being delisted fromNasdaq, trading in our common stock is conducted on the OTC Bulletin Board andin the over-the-counter market in the so-called “pink sheets.”  Because ofthis, you may not be able to sell as many securities as you desire, you mayexperience delays in the execution of your transactions and our securities maytrade at a lower market price than they otherwise would.  In addition, oursecurities could become subject to the SEC’s “penny stock rules.” These rules wouldimpose additional requirements on broker-dealers who effect trades in oursecurities, other than trades with their established customers and accreditedinvestors. Consequently, the delisting of our securities and the applicabilityof the penny stock rules may adversely affect the ability ofbroker-dealers to sell our securities, which may adversely affect your abilityto resell our securities. The delisting of our securities from Nasdaq couldalso have other negative results, including the potential loss of confidence byemployees and others, the loss of institutional investor interest and fewerbusiness development and commercial partnership opportunities.

 

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** **

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

** **

**The following matters were submitted to a vote ofsecurity holders at the Company’s annual meeting held on April 1, 2009:**

** **

**Proposal 1: Election of Directors**

 
| **Name**                   | ** ** | **For**    | ** ** | **Withheld** |
|----------------------------|------------|------------|------------|--------------|
| Dr. Theron E. Odlaug  |       | 34,161,509 |       | 2,920,437    |
| Dr. Terry W. Osborn   |       | 34,151,366 |       | 2,930,580    |
| Dr. Israel Rubinstein |       | 34,154,706 |       | 2,927,240    |

** **

**Proposal 2: Ratification of Deloitte &Touche LLP as the Company’s independent registered public accounting firm forthe fiscal year ended December 31, 2009**

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 36,517,156 |       | 382,668     |       | 182,124     |       |

 

**Proposal 3: Authorization to amend the Company’sarticles of incorporation to increase the number of authorized shares from65,000,000 to 125,000,000 including an increase in the number of AuthorizedShares of common stock from 60,000,000 to 120,000,000.**

 
| **For**        | ** ** | **Against**   | ** ** | **Abstain** | ** ** |
|----------------|------------|---------------|------------|-------------|------------|
| **34,072,790** | ** ** | **2,964,027** | ** ** | **45,129**  |       |

 

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**Item 6. *Exhibits***

** **

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

 
| **Number** | ** ** | **Description** |
|------------|------------|-----------------|
|       |       |            |
| 3.1        |       |            | Second Amended and Restated Certificate of  Incorporation of Advanced Life Sciences Holdings, Inc. (as filed in our  Registration Statement on Form S-3 as exhibit 4.1 on April 8, 2009) |
|       |       |            |   |
| 4.1        |       |            | Standby Equity Distribution Agreement, dated  June 19, 2009, by and between the Company and YA Global Master SPV Ltd.  (as filed in our current report on Form 8-K as exhibit 4.1 on  June 19, 2009) |
|       |       |            |   |
| 31.1       | *          |            | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |       |            |   |
| 31.2       | *          |            | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |       |            |   |
| 32.1       | *          |            | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|       |       |            |   |
| 32.2       | *          |            | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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*  Filed herewith.

 

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** **

**SIGNATURES**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                        |     |                                       |                               |
|-----------------------------|----------|--------------------------------------------|------------------------------------|
|                        |     | Advanced Life Sciences Holdings, Inc. |
|                        |     |                                       |                               |
|                        |     | By:                                        | /s/ Michael T.  Flavin, Ph.D. |
|                        |     |                                       |                               |
|                        |     |                                       | Michael T.  Flavin, Ph.D.     |
| * *                    | * * | * *                                   | *Chairman  of the Board*           |
| * *                    | * * | * *                                   | *and  Chief Executive Officer*     |
|                        |     |                                       |                               |
|                        |     | By:                                        | /s/ John L. Flavin                 |
|                        |     |                                       |                               |
|                        |     |                                       | John L. Flavin                     |
| * *                    | * * | * *                                   | *President  and*                   |
| * *                    | * * | * *                                   | *Chief  Financial Officer*         |
| * *                    | * * | * *                                   | * *                           |
| Dated: August 11, 2009 | * * | * *                                   | * *                           |

** **

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** **

**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description** |
|------------|------------|-----------------|
|       |       |            |
| 3.1        |       |            | Second Amended and Restated Certificate of  Incorporation of Advanced Life Sciences Holdings, Inc. (as filed in our  Registration Statement on Form S-3 as exhibit 4.1 on April 8, 2009) |
|       |       |            |   |
| 4.1        |       |            | Standby Equity Distribution Agreement, dated  June 19, 2009, by and between the Company and YA Global Master SPV Ltd.  (as filed in our current report on Form 8-K as exhibit 4.1 on  June 19, 2009) |
|       |       |            |   |
| 31.1       | *          |            | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |       |            |   |
| 31.2       | *          |            | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |       |            |   |
| 32.1       | *          |            | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|       |       |            |   |
| 32.2       | *          |            | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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*  Filed herewith.

 

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